As filed with the Securities and Exchange Commission on September 8, 2014
Registration No. 333-195900
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 3
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CITIZENS FINANCIAL GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 6021 | 05-0412693 | ||
(State or Other Jurisdiction of Incorporation or Organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification Number) |
One Citizens Plaza
Providence, RI 02903
(401) 456-7000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrants Principal Executive Offices)
Stephen T. Gannon
General Counsel and Chief Legal Officer
Citizens Financial Group, Inc.
One Citizens Plaza
Providence, RI 02903
(401) 456-7000
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)
Copies to:
Nicholas A. Kronfeld
Luigi L. De Ghenghi
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Leslie N. Silverman Derek M. Bush Cleary Gottlieb Steen & Hamilton LLP One Liberty Plaza New York, NY 10006 (212) 225-2000 |
Approximate date of commencement of proposed sale to the public : As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
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 | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Securities to Be Registered |
Amount to Be
Registered |
Proposed Maximum Offering Price |
Proposed Maximum Aggregate Offering Price |
Amount of Registration Fee (3) |
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Common Stock, par value $0.01 per share |
161,000,000 (1) | $25.00 (2) | $4,025,000,000 | $518,420.00 | ||||
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(1) | Includes shares which the underwriters have the right to purchase to cover over-allotments. |
(2) | Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933. |
(3) | A registration fee in the amount of $12,880 was previously paid in connection with a prior filing of this Registration Statement on May 12, 2014. Pursuant to Rule 457(a) under the Securities Act of 1933, an additional filing fee of $505,540 is being paid in connection with this amendment to the Registration Statement. |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
PROSPECTUS (Subject to Completion)
Issued September 8, 2014
140,000,000 SHARES
COMMON STOCK
The selling stockholders are offering 140,000,000 shares of common stock of Citizens Financial Group, Inc. We will not receive any of the proceeds from the sale of shares of common stock by the selling stockholders. This is our initial public offering and no public market exists for our shares. We anticipate that the initial public offering price will be between $23.00 and $25.00 per share.
We have applied to list our shares of common stock on the New York Stock Exchange (the NYSE) under the symbol CFG.
Investing in our common stock involves risks. See Risk Factors beginning on page 16.
PRICE $ A SHARE
Price to Public |
Underwriting Discounts and Commissions (1) |
Proceeds to Selling Stockholders |
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Per Share |
$ | $ | $ | |||||||||
Total |
$ | $ | $ |
(1) | The selling shareholders have also agreed to reimburse the underwriters for certain expenses related to review and qualification of this offering by the Financial Industry Regulatory Authority, Inc. See Underwriting. |
The selling stockholders have granted the underwriters the right to purchase an additional 21,000,000 shares of common stock to cover over-allotments.
The underwriters expect to deliver the shares of common stock to purchasers on , 2014.
Neither the Securities and Exchange Commission (the SEC) nor any state securities commission has approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Joint Global Coordinators
Morgan Stanley | Goldman, Sachs & Co. |
Joint Book-Running Managers
J.P. Morgan
Barclays |
Citigroup | Deutsche Bank Securities | RBS | Wells Fargo Securities |
Co-Managers
Credit Suisse |
UBS Investment Bank |
Jefferies |
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Keefe, Bruyette & Woods
A Stifel Company |
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Oppenheimer & Co. |
RBC Capital Markets | Sandler ONeill + Partners, L.P. |
Evercore |
ING | Sanford C. Bernstein | Guggenheim Securities | Lebenthal Capital Markets | The Williams Capital Group, L.P. |
Prospectus dated , 2014.
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Our Relationship with the RBS Group and Certain Other Related Party Transactions |
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F-1 |
CERTAIN IMPORTANT INFORMATION
In this prospectus, we, us, our and CFG refer to Citizens Financial Group, Inc. together with its consolidated subsidiaries, CBNA means Citizens Bank, N.A., CBPA means Citizens Bank of Pennsylvania, our banking subsidiaries means CBNA and CBPA, RBS means The Royal Bank of Scotland Group plc and the RBS Group means RBS together with its subsidiaries (other than CFG). Unless otherwise noted, when we refer to our peers or peer regional banks, we refer to BB&T, Comerica, Fifth Third, KeyCorp, M&T, PNC, Regions, SunTrust and U.S. Bancorp. When we refer to our approximately 18,050 employees, we include the full-time equivalent of our approximately 17,400 full-time employees, 760 part-time employees, including employees on leave, and 575 positions filled by temporary employees.
We and the selling stockholders have not authorized anyone to provide any information other than that contained or incorporated by reference in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. The selling stockholders are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where such offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock.
Until , 2014 (25 days after commencement of this offering), all dealers that effect transactions in our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealers obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
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We have proprietary rights to trademarks, trade names and service marks appearing in this prospectus that are important to our business. This prospectus also contains additional trade names, trademarks and service marks belonging to the RBS Group. Solely for convenience, the trademarks, service marks and trade names referred to in this prospectus are without the ® and symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and trade names. All trademarks, service marks and trade names appearing in this prospectus are the property of their respective owners.
Within this prospectus, we reference certain industry and sector information and statistics. We have obtained this information and statistics from various independent third-party sources, including independent industry publications, reports by market research firms and other independent sources. Nothing in the data used or derived from third-party sources should be construed as advice. The SNL Financial LC, or SNL Financial, data included in this prospectus excludes all non-retail bank holding companies. The scope of non-retail banks is subject to the discretion of SNL Financial, but typically includes: industrial bank and non-depository trust charters, institutions with over 20% brokered deposits (of total deposits), institutions with over 20% credit card loans (of total loans) and institutions deemed not to broadly participate in the banking services market. Some data and other information are also based on our good faith estimates, which are derived from our review of internal surveys and independent sources. We believe that these external sources and estimates are reliable, but have not independently verified them.
Percentage changes, per share amounts, and ratios presented in this prospectus are calculated using whole dollars.
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This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. Therefore, you should read the entire prospectus carefully, including the section entitled Risk Factors, as well the consolidated financial statements and related notes included in this prospectus, before making an investment decision to invest in our common stock.
Company Overview
We are the 13th largest retail bank holding company in the United States according to SNL Financial with $130.3 billion of total assets as of June 30, 2014. Headquartered in Providence, Rhode Island, we deliver a broad range of retail and commercial banking products and services to more than five million individuals, institutions and companies. Our approximately 18,050 employees strive to meet the financial needs of customers and prospects through approximately 1,230 branches and approximately 3,215 ATMs operated in an 11-state footprint across the New England, Mid-Atlantic and Midwest regions and through our online, telephone and mobile banking platforms. We have 90 retail and commercial non-branch offices located both in our geographic footprint and in nine states and the District of Columbia outside our branch footprint. Our 11-state branch banking footprint contains approximately 29.9 million households and 3.1 million businesses according to SNL Financial.
As of June 30, 2014, we had loans of $88.8 billion, deposits of $91.7 billion and stockholders equity of $19.6 billion, and we generated revenues of $5.0 billion for the twelve months ended June 30, 2014. We operate our business through two operating segments: Consumer Banking and Commercial Banking. As of June 30, 2014, the contributions of Consumer Banking and Commercial Banking to the loans in our operating segments were approximately 56% and 44%, respectively.
Consumer Banking serves retail customers and small businesses with annual revenues of up to $25 million. Consumer Banking products and services include deposit products, mortgage and home equity lending, student loans, auto financing, credit cards, business loans and wealth management and investment services. Product strengths and significant growth developments in Consumer Banking include:
| Home equity lines of credit (HELOCs) : With $16.2 billion in HELOC loans outstanding as of June 30, 2014, we ranked sixth nationally according to SNL Financial; |
| Auto financing : Through a network of over 6,500 automotive dealerships in 43 states, auto finance represented $11.0 billion of loans as of June 30, 2014, ranking 12th nationally among regulated depository institutions according to SNL Financial; |
| Mortgage lending : We have improved our mortgage origination capabilities from an unranked position as of December 31, 2009, to 27th among retail originators nationally as of June 30, 2014 according to Inside Mortgage Finance; and |
| Private student lending : We launched our education finance business in 2009 and have expanded to partner with over 1,200 higher education schools in all 50 states, which resulted in loan origination volume more than doubling to $253 million in 2013 from $112 million in 2010. Loan origination volume was $147 million during the first six months of 2014. |
Commercial Banking primarily targets companies and institutions with annual revenues of $25 million to $2.5 billion. Commercial Banking offers a broad complement of financial products and solutions, including lending and leasing, trade financing, deposit and treasury management, foreign
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exchange and interest rate risk management, corporate finance and debt and equity capital markets capabilities. Product strengths and significant growth developments in Commercial Banking products include:
| Commercial and industrial loans : We generated an 11% compound annual growth rate in our commercial and industrial loan portfolio from year-end 2009 through the second quarter of 2014; |
| Capital markets : We have built out our capital markets capabilities over the past few years and now offer broad, multifaceted financial solutions to meet our clients more sophisticated needs. These capabilities include expertise in areas like debt syndication which enhances our ability to meet the growing capital needs of clients while limiting balance sheet risk and better positioning us to compete for other banking products. Since 2010, we have completed 409 syndicated bookrunner transactions, including 186 lead-left roles; |
| Franchise finance : Through our franchise finance business we provide financing to owners of franchised and chain restaurants, such as premier brands like McDonalds, Taco Bell, Applebees, Wendys and Dunkin Donuts, as well as convenience stores and gas stations on a national basis; and |
| Commercial real estate : Following the recent cycle of real estate market stress, we took steps to reposition our commercial real estate business, which represented $6.8 billion in loans at June 30, 2014, to enhance our focus on originating higher-quality assets in more attractive segments including institutional developers and real estate investment trusts. |
The following tables present certain financial information for our segments as of and for the six months ended June 30, 2014 and as of and for the year ended December 31, 2013:
As of and for the Six Months
Ended June 30, 2014 |
As of and for the Year Ended
December 31, 2013 |
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Consumer
Banking |
Commercial
Banking |
Other (1) | Consolidated |
Consumer
Banking |
Commercial
Banking |
Other (1) | Consolidated | |||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Total loans and leases and loans held for sale (average) |
$ | 46,876 | $ | 36,997 | $ | 4,527 | $ | 88,400 | $ | 45,106 | $ | 34,647 | $ | 6,044 | $ | 85,797 | ||||||||||||||||
Total deposits and deposits held for sale (average) |
70,473 | 17,901 | 3,509 | 91,883 | 72,158 | 17,516 | 3,662 | 93,336 | ||||||||||||||||||||||||
Net interest income |
1,083 | 520 | 38 | 1,641 | 2,176 | 1,031 | (149 | ) | 3,058 | |||||||||||||||||||||||
Noninterest income |
455 | 214 | 329 | 998 | 1,025 | 389 | 218 | 1,632 | ||||||||||||||||||||||||
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Total revenue |
$ | 1,538 | $ | 734 | $ | 367 | $ | 2,639 | $ | 3,201 | $ | 1,420 | $ | 69 | $ | 4,690 | ||||||||||||||||
Net Income (loss) (2) |
76 | 282 | 121 | 479 | 242 | 514 | (4,182 | ) | (3,426 | ) |
(1) | Includes the financial impact of non-core, liquidating loan portfolios and other non-core assets, our treasury activities, wholesale funding activities, securities portfolio, community development assets and other unallocated assets, liabilities, revenues, provision for credit losses and expenses not attributed to our Consumer Banking or Commercial Banking segments. For a description of non-core assets, see Managements Discussion and Analysis of Financial Condition and Results of OperationAnalysis of Financial Condition. |
(2) | Includes a goodwill impairment charge of $4.4 billion ($4.1 billion after tax) in the second quarter of 2013. For more information, see Managements Discussion and Analysis of Financial Condition and Results of OperationsResults of OperationsYear Ended December 31, 2013 Compared with Year Ended December 31, 2012Net Income (Loss), Note 8 Goodwill to our audited consolidated financial statements and Note 5 Goodwill to our unaudited interim consolidated financial statements included elsewhere in this prospectus. |
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History and Recent Strategic Initiatives
Our history dates back to High Street Bank, founded in 1828, which established Citizens Savings Bank in 1871. By 1981, we had grown to 29 branches in Rhode Island with approximately $1.0 billion of assets, and in 1988 we became a wholly owned subsidiary of the RBS Group. Over the following two decades, we grew substantially through a series of over 25 strategic bank acquisitions, including the purchase of the Bank of New York Mellons retail branch network in 2001, which included $14.4 billion in deposits, and the 2004 acquisition of Charter One, which had $41.3 billion in assets. These acquisitions greatly expanded our footprint throughout New England and into the Mid-Atlantic and the Midwest, transforming us from a local retail bank into one of the largest retail U.S. bank holding companies with nearly $170.0 billion in assets at the start of the global financial crisis.
Following this period of expansion and the subsequent global financial crisis, we took a number of decisive steps to begin repositioning and strengthening our business profile, including:
| Transformed business mix : Refocused our efforts to transform our business model toward a more balanced and diversified platform with a greater emphasis on higher-growth, higher-return businesses. As of June 30, 2014, we had expanded the contribution of Commercial Banking relative to Consumer Banking to approximately 44% and 56% of the loans in our operating segments, respectively, as compared to 36% and 64%, respectively, as of December 31, 2009; |
| Improved deposit mix : Increased lower cost and more stable demand, checking, money market and savings accounts to 89% from 74% of total deposits at June 30, 2014 compared to December 31, 2009. This improvement in our core deposit funding mix, as well as our efforts to aggressively lower the rates paid on our time deposits, resulted in a more beneficial cost of total deposits, which decreased to 0.16% for the first half of 2014 from 0.23% for the year ended December 31, 2013 and 1.32% for the year ended December 31, 2009; |
| Reduced reliance on wholesale funding : Since the start of the financial crisis in 2009, we have aggressively worked to reduce the higher cost wholesale funding component of our balance sheet. We reduced wholesale borrowings from $23.7 billion as of December 31, 2009 to $16.2 billion as of June 30, 2014 and as of that date the balances were principally lower cost and more stable secured Federal Home Loan Bank and repurchase agreement borrowings; |
| Improved strategic focus : Identified and began running down certain non-core assets deemed to be inconsistent with our strategic goals, generally as a result of geographic location, industry, product type or risk level. The non-core portfolio decreased to $3.5 billion at June 30, 2014 from $20.5 billion when it was designated on June 30, 2009; |
| Optimized our geographic footprint : Exited certain geographies where we had underperforming market share positions and redeployed the capital into businesses with more attractive growth and return characteristics. In 2008, we sold 18 branches in the New York Adirondacks region, and in 2009, we sold our Indiana branch franchise, which consisted of 65 branches. In 2012, we sold 57 mostly in-store branches in Long Island and Westchester County, New York, and on June 20, 2014, we closed the sale of our 103 Chicago retail branches along with certain assets and deposits. Additionally, we have routinely sought to optimize the branch footprint through a process of consolidation and rationalization, which has resulted in the closure of another 232 branches since the beginning of 2009; |
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Refined our branch service delivery model : Proactively addressed evolving consumer preferences for banking interactions through expansion of alternative distribution channels. We have reduced our branch footprint while building out self-service channels through online and mobile banking including remote deposit capture and person-to-person payments. Our |
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mobile banking channel has experienced rapid growth with a 40% increase in active mobile customers since year-end 2012. We have continued to optimize the distribution network by migrating staffing in our branches toward a universal banker model, which involves training bankers to handle both teller and traditional banker functions, with a goal of further improving the efficiency of our network and allowing frontline employees to become more sales and solutions oriented; and |
| Increased infrastructure investment : Invested more than $1.0 billion in infrastructure and technology from 2009 to year end 2013, with an additional $250 million planned for each of 2014 and 2015. These investments, intended to lower our costs and improve our customer experience, include significant programs to enhance our information technology resiliency, upgrade customer-facing technology and streamline operations. Significant investments included the 2013 launch of our new teller system, new commercial loan platform and new auto loan platform and the 2013 upgrade of the majority of our ATM network, including by equipping more than 1,450 ATMs with advanced deposit-taking functionality. These investments also involved spending to prepare for the planned rollout of our new mortgage platform. |
These steps have helped provide a strong foundation for our ongoing transformation from a wholly owned subsidiary of a global financial group into a stand-alone U.S. regional bank. We have brought together a seasoned management team with an average of over 20 years of banking experience at large international financial institutions. The team was bolstered by the May 2013 announcement of Bruce Van Sauns appointment as our Chairman and CEO. The team is focused on delivering improved returns, through implementation of growth and efficiency initiatives, along with a more disciplined allocation of capital and resources. This performance-driven culture is designed to enhance our competitiveness by rigorously analyzing the risk-return profiles of our diversified businesses and selectively investing in those that are well positioned to gain market share, improve efficiency and generate long-term growth and sustainable profitability. In prior years, many of our strategies around risk management, capital and investments were heavily influenced by our status as a subsidiary of a larger global financial institution.
Our Competitive Strengths
Our long operating history, through a range of challenging economic cycles, forms the basis for our competitive strengths. From our community bank roots, we bring a commitment to strong customer relationships, local service and an active involvement in the communities we serve. Our acquisitions enabled us to develop material scale in highly desirable markets and broad product capabilities. The actions taken since the global financial crisis have resulted in a business model with solid asset quality, a stable core deposit mix and a superior capital position. In particular, we believe that the following strengths differentiate us from our competitors and provide a strong foundation from which to execute our strategy to deliver enhanced growth, profitability and returns.
| Significant Scale with Strong Market Penetration in Attractive Geographic Markets : We believe our market share and scale in our footprint is central to our success and growth. With approximately 1,230 branches and 90 non-branch offices, approximately 3,215 ATMs and 18,050 employees, as well as our online, telephone and mobile banking platforms, we serve more than five million individuals, institutions and companies. As of June 30, 2013, we ranked second by deposit market share in the New England region 1 and in the top five in nine of our key metropolitan statistical areas, or MSAs, including Boston, Providence, Philadelphia, Pittsburgh and Cleveland according to SNL Financial. We believe this strong market share in |
1 | The New England region consists of the states of Maine, New Hampshire, Vermont, Massachusetts, Rhode Island and Connecticut. |
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our core regions, which have relatively diverse economies and affluent demographics, will help us achieve our long-term growth objectives. The following table sets forth information regarding our competitive position in our principal MSAs. |
MSA |
Total
Branches |
Deposits
($ in Millions) |
Market
Rank (1) |
Market
Share (%) (1) |
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Boston, MA |
212 | $ | 28,343 | 2 | 16.4 | % | ||||||||||
Philadelphia, PA |
188 | 17,012 | 4 | 8.1 | ||||||||||||
Providence, RI |
100 | 12,854 | 1 | 34.6 | ||||||||||||
Pittsburgh, PA |
131 | 7,130 | 2 | 8.8 | ||||||||||||
Detroit, MI |
95 | 4,563 | 6 | 4.6 | ||||||||||||
Cleveland, OH |
64 | 4,105 | 5 | 7.9 | ||||||||||||
Manchester, NH |
28 | 4,014 | 1 | 38.7 | ||||||||||||
Albany, NY |
29 | 1,590 | 4 | 7.1 | ||||||||||||
Buffalo, NY |
43 | 1,573 | 4 | 4.8 | ||||||||||||
Rochester, NY |
34 | 1,540 | 4 | 10.3 |
(1) | Source: FDIC, June 2013. Excludes non-retail banks as defined by SNL Financial. See Certain Important Information. |
| Strong Customer Relationships : We focus on building strong customer relationships by delivering a consistent, high quality level of service supported by a wide range of products and services. We believe that we provide a distinctive customer experience characterized by the personal touch of a local bank with the product selection of a larger financial institution. Our Consumer Banking cross-sell efforts have improved to 4.9 products and services per retail household as of June 30, 2014 compared to 4.2 products and services as of December 31, 2009. Additionally, Consumer Banking improved overall customer satisfaction as measured by J.D. Power and Associates by 5% from 2012 to 2013, while the industry average score improved by 3% during the same period. Our ability to provide a unique customer experience is also evidenced by our Commercial Banking middle market team ranking among the top five in customer and lead bank penetration, with a 10% market penetration in our footprint based on Greenwich Associates rolling four-quarter data as of June 30, 2014. |
| Stable, Low-Cost Core Deposit Base : We have a strong funding profile, with $91.7 billion of total deposits as of June 30, 2014, consisting of 29% in noninterest-bearing deposits and 71% in interest-bearing deposits. Noninterest-bearing deposits provide a lower-cost funding base, and we grew this base to $26.7 billion at June 30, 2014, up 40% from $19.0 billion at December 31, 2009. For the six months ended June 30, 2014, our total average cost of deposits was 0.16%, down from 0.23% for the year ended December 31, 2013, 0.40% for the year ended December 31, 2012 and 1.32% for the year ended December 31, 2009. |
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Superior Capital Position : We are among the most well capitalized large regional banks in the United States, with a Tier 1 common equity ratio of 13.3% as of June 30, 2014, ranking highest among peer regional banks (listed under Certain Important Information), which had an average Tier 1 common equity ratio of 10.3% at that date according to SNL Financial. Our Common Equity Tier 1 ratio at June 30, 2014 under Basel III rules was 13.0% (on a fully phased-in basis). Our strong capital position provides us the financial flexibility to continue to invest in our businesses and execute our strategic growth initiatives. Through recent capital optimization efforts, we have sought to better align our Tier 1 common equity capital base with peer regional banks, while maintaining a solid total capital position, by reducing Tier 1 common equity capital and increasing other Tier 1 and Tier 2 capital. On August 1, 2014, we exchanged $333 million of Tier 1 common equity for Tier 2 subordinated debt, and we plan to continue our strategy of capital optimization by |
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issuing to RBS $334 million of preferred stock and concurrently repurchasing $334 million of shares of our common stock from RBS in the fourth quarter of 2014, subject to regulatory approval and assuming completion of this offering. Pro forma for these exchanges, our Tier 1 common equity ratio would have been 12.6% as of June 30, 2014. See Our Relationship with the RBS Group and Certain Other Related Party TransactionsRelationship with the RBS GroupOther for further details of the planned fourth quarter exchange transaction. We plan to repurchase approximately $500 million of shares of our common stock and $250 million of shares of our common stock in 2015 and 2016, respectively, with proceeds from the issuance of subordinated debt or another lesser form of capital, subject to regulatory approval. |
| Solid Asset Quality Throughout a Range of Credit Cycles : Our experienced credit risk professionals and conservative credit culture, combined with centralized processes and consistent underwriting standards across all business lines, have allowed us to maintain strong asset quality through a variety of business cycles. As a result, we weathered the global financial crisis better than our peers: for the two-year period ending December 31, 2009, net charge-offs averaged 1.63% of average loans compared to a peer average of 1.76% according to SNL Financial. More recently, the credit quality of our loan portfolio has continued to improve; nonperforming assets as a percentage of total assets were 0.95% at June 30, 2014 compared to 1.20% and 1.55% as of December 31, 2013 and 2012, respectively. Net charge-offs declined substantially to an annualized 0.36% of average loans in the six months ended June 30, 2014 versus 0.60% for the six months ended June 30, 2013. Our allowance for loan and lease losses was 1.36% of total loans at June 30, 2014. We believe the high quality of our loan portfolio provides us with significant capacity to prudently seek to add more attractive, higher yielding risk-adjusted returns while still maintaining appropriate risk discipline and solid asset quality. |
| Experienced Management Team Supported by a High-Performing, Talented Workforce : Our leadership team of seasoned industry professionals is supported by a highly motivated, diverse set of managers and employees committed to delivering a strong customer value proposition. Our highly experienced and talented executive management team, whose members have more than 20 years of banking experience on average, provide strong leadership to deliver on our overall business objectives. We have recently made selective additions to our management team and added key business line leaders, including the Head of Distribution and Head of Everyday Banking in Consumer Banking, as well as the Head of Technology Lending and Head of Loan Trading for Commercial Banking. Bruce Van Saun, who was announced as our Chairman and CEO in May 2013, has more than 30 years of financial services experience including four years as the RBS Group Finance Director. Earlier in his career, Mr. Van Saun held a number of senior positions at The Bank of New York Mellon, Deutsche Bank, Wasserstein Perella Group and Kidder Peabody & Co. |
| Commitment to Communities : Community involvement is one of our principal values and we strive to contribute to a better quality of life by serving the communities across our footprint through employee volunteer efforts, a foundation that funds a range of non-profit organizations and executives that provide board leadership to community organizations. These efforts contribute to a culture that seeks to promote positive employee morale and provide differentiated brand awareness in the community relative to peer banks, while also making a positive difference within the communities we serve. Employee engagement increased during 2013 as highlighted by a 27% increase in employee volunteerism to more than 76,000 hours companywide. In addition, employees serve on approximately 480 community boards across our footprint. We believe our strong commitment to our communities provides a competitive advantage by strengthening customer relationships and increasing loyalty. |
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Business Strategy
Building on our core strengths, we intend to become a top-performing regional bank as viewed through the lenses of our five major stakeholders: customers, investors, regulators, colleagues and communities. We have identified a series of fundamental strategic initiatives designed to maximize the full potential of our business and drive sustainable growth and enhanced profitability. The core measure of our success in executing our strategic initiatives will be our ability to deliver higher Return on Average Tangible Common Equity, or ROTCE. We aim for our strategic initiatives to increase our ROTCE from 5% in 2013, excluding our $4.1 billion after-tax goodwill impairment charge, to a run-rate target of greater than 10% over a two- to three-year period. 2 We plan to accomplish this goal through: (a) driving revenue growth in both the Consumer Banking and Commercial Banking segments; (b) enhancing cost reduction efforts across the company; (c) leveraging capital actions aimed at better aligning our capital structure with those of regional bank peers; and (d) the beneficial impact of a rising interest rate environment on our asset-sensitive balance sheet. We also expect these efforts to result in a targeted run-rate efficiency ratio (noninterest expense divided by the sum of net interest income and noninterest income) in the 60% range over a two- to three-year period.
| Revenue Growth : We are committed to generating profitable revenue growth in a disciplined manner by placing greater emphasis on reallocating resources toward businesses that will further increase and diversify our revenue base in order to deliver more attractive risk-adjusted returns to stockholders. |
Increasing Loan Origination We expect to prudently expand our balance sheet and drive increased loan origination volume. In our Consumer business, we plan to hire more than 550 sales professionals in mortgage, small business and auto finance over a two- to three-year period. In our Commercial business, we will continue to build out industry-focused teams, expand our origination efforts in mid-corporate with geographic expansion and grow in franchise finance.
Focus on Higher Return Assets Given our scale, expertise and current geographic reach, we believe we are well positioned to further diversify our asset base by prudently seeking higher yielding risk-adjusted assets with a more balanced mix of commercial and consumer loans and appropriate risk discipline.
Driving Additional Fee Income We also intend to transition to a more balanced revenue profile by taking steps to further grow our noninterest income through an expansion of our wealth management, capital markets and cash management services to reduce our overall reliance on net interest income.
Our target is to increase our run-rate ROTCE in a two- to three-year period by approximately 160 to 200 basis points through these revenue growth initiatives.
| Cost Initiatives : We are focused on streamlining our processes and improving our cost structures. As a result of the initiative launched in late 2013 to improve efficiency and effectiveness, we expect to generate aggregate annualized expense savings of approximately $200 million over a two- to three-year period. Noninterest expense savings from this initiative are targeted to benefit our run-rate ROTCE in a two- to three-year period by approximately 90 to 100 basis points and to achieve a targeted efficiency ratio in the 60% range. |
2 | For information regarding the calculation of ROTCE and efficiency ratio, see Managements Discussion and Analysis of Financial Condition and Results of OperationPrincipal Components of Operations and Key Performance Metrics Used By ManagementKey Performance Metrics and Non-GAAP Financial Measures. |
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| Reduction of Tier 1 Common Equity Ratio : Given the elevated level of common equity in our capital structure compared to peers, we intend to continue to pursue various capital actions, subject to regulatory approval, that are expected to reduce our Tier 1 common equity ratio to a level that is more consistent with that of other peer regional banks. We expect lower levels of tangible common equity to facilitate a 70 to 80 basis point improvement to our run- rate ROTCE over a two- to three-year period. |
| Rising Interest Rate Environment : Net interest income growth has been challenged by the relatively persistent low interest rate environment. We remain well positioned for a rising rate environment, which would be beneficial to our net interest margin because our asset sensitive balance sheet would react favorably to an increase in both short-term and long-term rates. As of June 30, 2014, the estimated impact on our net interest income over the next twelve months based on a 200 basis point gradual increase in rates would be 6.6%. See Managements Discussion and Analysis of Financial Condition and Results of OperationsRisk Governance and Quantitative and Qualitative Disclosures About RiskMarket RiskNon-Trading Risk for further details. Based on managements expectations, which utilized the market implied forward rates based on the yield curve as of February 28, 2014, the benefit to our net interest income from a gradually rising rate environment would be expected to increase our run-rate ROTCE in a two- to three-year period by 130 to 160 basis points. |
While our strategic plan and our ROTCE target and its components are presented with numerical specificity, and we believe such targets to be reasonable as of the date of this prospectus, given the uncertainties surrounding our assumptions, including possible regulatory restrictions on activities we intend to pursue, there are significant risks that these assumptions may not be realized and thus our goals may not be achieved. Accordingly, our actual results may differ from these targets and the differences may be material and adverse, particularly if actual events adversely differ from one or more of our key assumptions. We caution investors not to place undue reliance on any of these assumptions or targets. See Special Note Regarding Forward-Looking Statements, Risk Factors and BusinessBusiness Strategy.
Customer Focus
In addition to the strategies outlined above, we strive to develop stronger and higher value customer relationships through an intense focus on delivering a differentiated experience across all of our distribution platforms, including our robust online, telephone and mobile banking platforms. We expect this focus to continue to drive improved customer loyalty across our businesses and distinguish us from our competitors. As an example of our approach, in January 2014, we launched our new One Deposit Checking product and our $5 Overdraft Pass offering, which exemplify our Consumer Bankings new Simple. Clear. Personal. value proposition. We believe this approach will enable us to win, retain and expand customer relationships, as well as increase cross-sell and share of wallet penetration across our business segments.
Our Parent and Selling Stockholders
Prior to the completion of this offering, we are a wholly owned subsidiary of RBS. We became a wholly owned subsidiary of RBS in 1988. RBS is the holding company of a large global banking and financial services group. Headquartered in Edinburgh, RBS operates in the United Kingdom, the United States and internationally through its two principal subsidiaries, The Royal Bank of Scotland plc and National Westminster Bank Plc (NatWest), both of which are major U.K. clearing banks. Globally, the RBS Group has a diversified customer base and provides a wide range of products and services to personal, commercial and large corporate and institutional customers. RBS acquired all of our
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outstanding common stock in 1988 and owns all of our outstanding common stock through two wholly owned subsidiaries, RBSG International Holdings Limited, a private limited company organized under the laws of Scotland, and RBS CBFM North America Corporation, a Delaware corporation, which are selling 135,363,704 shares and 4,636,296 shares, respectively, of our common stock in this offering or 156,363,704 and 4,636,296 shares, respectively, if the underwriters exercise their option to purchase additional shares in full. The selling stockholders acquired all our outstanding common stock in the ordinary course of business and, at the time of acquisition, neither selling stockholder had any agreement or understanding, directly or indirectly, with any person to distribute the shares of our common stock. RBS also holds approximately $1.3 billion of our outstanding subordinated indebtedness as of June 30, 2014. See Managements Discussion and Analysis of Financial Condition and Results of OperationsCapital.
Following completion of this offering, we expect that RBS will indirectly own, through RBSG International Holdings Limited, approximately 75.0% of our common stock, assuming no exercise by the underwriters of their option to purchase additional shares, and approximately 71.2% of our common stock if the underwriters exercise their option to purchase additional shares in full. As part of its obligations under the European Commissions State Aid Amendment Decision of April 9, 2014, RBS has committed to dispose of its remaining ownership of our common stock by December 31, 2016, with an automatic 12-month extension depending on market conditions. RBSs current intention for disposal of its remaining ownership of our common stock is to sell, over time, such remaining shares in a series of tranches, subject to market conditions and the terms of the lock-up provisions discussed under Underwriting.
As a result of RBSs continued ownership of our common stock following completion of this offering, RBS will continue to have significant control of our business. We and RBS intend to enter into, or have entered into, certain agreements that will provide a framework for our ongoing relationship with the RBS Group. For further information about risks relating to our separation from the RBS Group, including RBSs control over us, see Risk FactorsRisks Related to Our Separation from the RBS Group. For more information regarding the agreements setting out the framework for our ongoing relationship with the RBS Group, see Our Relationship with the RBS Group and Certain Other Related Party Transactions.
Following completion of this offering and as part of our transition to a stand-alone company, we expect to incur one-time expenditures of approximately $55 million, including capitalized costs of $18 million, as well as ongoing incremental expenses of approximately $34 million per year. We expect these ongoing costs will include higher local charges associated with exiting worldwide vendor relationships and incremental expenses to support information technology, corporate governance, compliance, regulatory, financial and risk infrastructure that are necessary to enable us to operate as a fully stand-alone public company. For more information regarding incremental expenses relating to our separation from the RBS Group, see Risk FactorsRisks Related to Our Separation from the RBS GroupOur separation from the RBS Group could adversely affect our business and profitability due to the RBS Groups recognizable brand and reputation and Managements Discussion and Analysis of Financial Condition and Results of OperationsFactors Affecting Comparability of Our ResultsOperating expenses to operate as a fully independent public company.
Risks
An investment in shares of our common stock involves substantial risks and uncertainties that may adversely affect our business, financial condition and results of operations. Some of the more significant challenges and risks relating to an investment in our common stock include:
| We may not be able to successfully execute our strategic plan or achieve our performance targets; |
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| Supervisory requirements and expectations, our need to make improvements and devote resources to various aspects of our controls, processes, policies and procedures, and any regulator-imposed limits on our activities, could limit our ability to implement our strategic plan, expand our business, improve our financial performance and make distributions to our stockholders; |
| A continuation of the current low interest rate environment or subsequent movements in interest rates may have an adverse effect on our profitability; |
| We could fail to attract or retain senior management, other key employees or members of our board of directors, which would adversely affect our business; |
| RBS will be our controlling stockholder and its interests may conflict with ours or yours in the future; |
| As of June 30, 2014, RBS was 79.5% owned by the UK government and its interests may conflict with ours or yours in the future; |
| The RBS Group may face the risk of full nationalization or other resolution procedures under the UK Banking Act 2009, as amended by the UK Financial Services (Banking Reform) Act 2013, which could impact the RBS Groups contractual arrangements with us or result in other material effects on us; |
| Any deterioration in national economic conditions could have a material adverse effect on our business, financial condition and results of operations; |
| We operate in an industry that is highly competitive, which could result in losing business or margin declines and have a material adverse effect on our business, financial condition and results of operations; |
| Volatility in the global financial markets continued throughout 2013 as a result of the Eurozone crisis and any recurrence of such volatility could have a material adverse effect on our business, financial condition and results of operations; |
| As a financial holding company and a bank holding company, we are subject to comprehensive regulation that could have a material adverse effect on our business and results of operations; |
| We may be unable to disclose some restrictions or limitations on our operations imposed by our regulators; |
| We are subject to capital adequacy and liquidity standards, and if we fail to meet these standards, our financial condition and results of operations would be adversely affected; |
| Our stock price could decline due to the large number of outstanding shares of our common stock eligible for future sale, and RBS has committed to sell its remaining beneficial ownership of our common stock by the end of 2016 with a possible 12 month extension in certain circumstances. The exact timing of such sale or sales remains uncertain; and |
| If RBS sells a controlling interest in our company to a third party in a private transaction, you may not realize any change-of-control premium on shares of our common stock and we may become subject to the control of a presently unknown third party. |
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Other Information
We are subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (Federal Reserve Board). We are distinct from and independent of the RBS Groups other businesses in the United States and have our own board of directors (Board) and executive management team. Our principal executive offices are located at One Citizens Plaza in Providence, Rhode Island, and our telephone number is (401) 456-7000.
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The offering |
140,000,000 common stock offered by the selling stockholders. |
Common stock outstanding |
559,998,324 shares. |
Option to purchase additional shares of common stock to cover over-allotments |
21,000,000 shares from the selling stockholders. |
Voting rights |
Each holder of our common stock will be entitled to one vote per share with respect to all matters on which stockholders generally are entitled to vote, except as otherwise required by law. |
Use of proceeds |
We will not receive any proceeds from the sale of common stock in the offering; the selling stockholders will receive all of the proceeds from the sale of shares of our common stock. |
Dividend policy |
We intend to pay quarterly cash dividends on our common stock at an initial amount of approximately $0.10 per share, although any declaration of dividends will be at the discretion of our Board and will depend on our financial condition, earnings, cash needs, regulatory constraints, capital requirements (including requirements of our subsidiaries) and any other factors that our Board deems relevant in making such a determination. We are not currently permitted to increase our capital distributions above 2013 levels because the Federal Reserve Board objected to our capital plan, owing to identified deficiencies in our capital planning processes. See Regulation and SupervisionDividends for more information. Therefore, there can be no assurance that we will pay any dividends to holders of our common stock, or as to the amount of any such dividends. |
Dividends from our banking subsidiaries are the principal source of funds for the payment of dividends on our common stock. Our banking subsidiaries are subject to certain restrictions that may limit their ability to pay dividends to us. See Dividend Policy for more information. |
Risk factors |
See Risk Factors for a discussion of risks you should carefully consider before deciding to invest in our common stock. |
Controlling stockholder |
Prior to the completion of this offering, we are an indirect wholly owned subsidiary of RBS, and have been a part of the RBS Groups consolidated business operations. Upon completion of this offering, RBS will beneficially own approximately 75.0% of our outstanding shares of common stock (71.2% if the underwriters over-allotment option is exercised in full). |
For further information regarding our relationship with the RBS Group in the past and following the offering, see Our Relationship with the RBS Group and Certain Other Related Party Transactions. |
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Directed share program |
At our request, the underwriters have reserved approximately 2% of the shares of common stock to be offered by this prospectus for sale, at the initial public offering price, to directors, officers, employees and business associates of the Company. The number of shares of common stock available for sale to the general public will be reduced to the extent these individuals purchase such reserved shares. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus. |
Preemptive and other rights |
Purchasers of the shares sold in this offering will not have any preemptive rights. Our common stock is not subject to redemption. |
Listing |
We have applied to list our shares of common stock on the NYSE under the symbol CFG. |
Conflicts of Interest |
Because RBS Securities Inc., an underwriter for this offering, is under common control with us and the selling stockholders and because affiliates of RBS Securities Inc. will receive at least 5% of the proceeds of this offering, a conflict of interest under Financial Industry Regulatory Authority, Inc. (FINRA) Rule 5121 is deemed to exist. Accordingly, this offering will be conducted in accordance with that rule. See UnderwritingConflicts of Interest. |
All share information, including historical financial results, reflects a 165,582-for-1 forward stock split effective on August 22, 2014. Unless we specifically state otherwise, the information in this prospectus does not take into account the:
| 5,087,770 shares (based principally on the midpoint of the range set forth on the cover page of this prospectus) of common stock underlying CFG equity awards following the conversion of (i) outstanding RBS deferred share awards, (ii) outstanding RBS long-term incentive awards (assuming maximum achievement of the performance conditions applicable to the long-term incentive awards) and (iii) special IPO awards, in each case, into awards on shares of our common stock upon completion of this offering. For further details, see Compensation Discussion and Analysis; or |
| 62,112,029 shares of common stock that may be granted under our new equity compensation plans (including our employee stock purchase plan) following this offering. |
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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
We derived the summary consolidated operating data for the years ended December 31, 2013, 2012 and 2011 and the summary consolidated balance sheet data as of December 31, 2013 and 2012 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the summary consolidated balance sheet data as of December 31, 2011 from our consolidated financial statements, which are not included in this prospectus. We derived the summary consolidated operating data for the six months ended June 30, 2014 and 2013 and the summary consolidated balance sheet data as of June 30, 2014 from our unaudited interim consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results expected for any future period.
In our opinion, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the information set forth herein. Our operating results for the six months ended June 30, 2014 are not necessarily indicative of those to be expected for the year ending December 31, 2014 or for any future period. You should read the following summary consolidated financial data in conjunction with the sections of this prospectus entitled Selected Consolidated Financial Data, Managements Discussion and Analysis of Financial Condition and Results of Operations and Selected Statistical Information and our consolidated financial statements and the notes thereto included elsewhere in this prospectus.
For the Six
Months Ended June 30, |
For the Year Ended
December 31, |
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2014 | 2013 | 2013 | 2012 | 2011 | ||||||||||||||||
(dollars in millions, except per share amounts) | ||||||||||||||||||||
Operating Data: |
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Net interest income |
$ | 1,641 | $ | 1,509 | $ | 3,058 | $ | 3,227 | $ | 3,320 | ||||||||||
Noninterest income |
998 | 870 | 1,632 | 1,667 | 1,711 | |||||||||||||||
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Total revenue |
2,639 | 2,379 | 4,690 | 4,894 | 5,031 | |||||||||||||||
Provision for credit losses |
170 | 202 | 479 | 413 | 882 | |||||||||||||||
Noninterest expense |
1,758 | 6,073 | 7,679 | 3,457 | 3,371 | |||||||||||||||
Noninterest expense, excluding goodwill impairment (1) |
1,758 | 1,638 | 3,244 | 3,457 | 3,371 | |||||||||||||||
Income (loss) before income tax expense (benefit) |
711 | (3,896 | ) | (3,468 | ) | 1,024 | 778 | |||||||||||||
Income tax expense (benefit) |
232 | (174 | ) | (42 | ) | 381 | 272 | |||||||||||||
Net income (loss) |
479 | (3,722 | ) | (3,426 | ) | 643 | 506 | |||||||||||||
Net income, excluding goodwill impairment (1) |
479 | 358 | 654 | 643 | 506 | |||||||||||||||
Net income (loss) per average common sharebasic and diluted (2) |
0.86 | (6.65 | ) | (6.12 | ) | 1.15 | 0.90 | |||||||||||||
Net income per average common sharebasic and diluted, excluding goodwill impairment (1) (2) |
0.86 | 0.64 | 1.17 | 1.15 | 0.90 | |||||||||||||||
Other Operating Data: |
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Return on average common equity (3) (12) |
4.96 | % | (13.87 | )% | (15.69 | )% | 2.69 | % | 2.19 | % | ||||||||||
Return on average common equity, excluding goodwill impairment (1)(12) |
4.96 | % | 2.98 | % | 3.00 | % | 2.69 | % | 2.19 | % | ||||||||||
Return on average tangible common equity (1)(12) |
7.45 | % | (24.96 | )% | (25.91 | )% | 4.86 | % | 4.18 | % | ||||||||||
Return on average tangible common equity, excluding goodwill impairment (1)(12) |
7.45 | % | 5.37 | % | 4.95 | % | 4.86 | % | 4.18 | % | ||||||||||
Return on average total assets (4)(12) |
0.77 | % | (2.73 | )% | (2.83 | )% | 0.50 | % | 0.39 | % | ||||||||||
Return on average total assets, excluding goodwill impairment (1)(12) |
0.77 | % | 0.59 | % | 0.54 | % | 0.50 | % | 0.39 | % | ||||||||||
Return on average total tangible assets (1)(12) |
0.81 | % | (2.99 | )% | (3.05 | )% | 0.55 | % | 0.43 | % | ||||||||||
Return on average total tangible assets, excluding goodwill impairment (1)(12) |
0.81 | % | 0.64 | % | 0.58 | % | 0.55 | % | 0.43 | % | ||||||||||
Efficiency ratio (1) |
66.58 | % | 255.24 | % | 163.73 | % | 70.64 | % | 67.00 | % | ||||||||||
Efficiency ratio, excluding goodwill impairment (1) |
66.58 | % | 68.80 | % | 69.17 | % | 70.64 | % | 67.00 | % | ||||||||||
Net interest margin (5)(12) |
2.88 | % | 2.83 | % | 2.85 | % | 2.89 | % | 2.97 | % |
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As of
June 30, 2014 |
As of
December 31, |
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2013 | 2012 | 2011 | ||||||||||||||
(dollars in millions) | ||||||||||||||||
Balance Sheet Data: |
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Total assets |
$ | 130,279 | $ | 122,154 | $ | 127,053 | $ | 129,654 | ||||||||
Loans and leases (6) |
88,829 | 85,859 | 87,248 | 86,795 | ||||||||||||
Allowance for loan and lease losses |
1,210 | 1,221 | 1,255 | 1,698 | ||||||||||||
Total securities |
24,823 | 21,245 | 19,417 | 23,352 | ||||||||||||
Goodwill |
6,876 | 6,876 | 11,311 | 11,311 | ||||||||||||
Total liabilities |
110,682 | 102,958 | 102,924 | 106,261 | ||||||||||||
Deposits (7) |
91,656 | 86,903 | 95,148 | 92,888 | ||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
6,807 | 4,791 | 3,601 | 4,152 | ||||||||||||
Other short-term borrowed funds |
7,702 | 2,251 | 501 | 3,100 | ||||||||||||
Long-term borrowed funds |
1,732 | 1,405 | 694 | 3,242 | ||||||||||||
Stockholders equity |
19,597 | 19,196 | 24,129 | 23,393 | ||||||||||||
Other Balance Sheet Data: |
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Asset Quality Ratios: |
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Allowance for loan and lease losses as a percentage of total loans and leases |
1.36 | % | 1.42 | % | 1.44 | % | 1.96 | % | ||||||||
Allowance for loan and lease losses as a percentage of nonperforming loans and leases |
101 | % | 86 | % | 67 | % | 95 | % | ||||||||
Nonperforming loans and leases as a percentage of total loans and leases |
1.35 | % | 1.65 | % | 2.14 | % | 2.06 | % | ||||||||
Capital ratios: |
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Tier 1 capital ratio (8) |
13.3 | % | 13.5 | % | 14.2 | % | 13.9 | % | ||||||||
Total capital ratio (9) |
16.2 | % | 16.1 | % | 15.8 | % | 15.1 | % | ||||||||
Tier 1 common equity ratio (10) |
13.3 | % | 13.5 | % | 13.9 | % | 13.3 | % | ||||||||
Leverage ratio (11) |
11.1 | % | 11.6 | % | 12.1 | % | 11.6 | % |
(1) | These measures are not recognized under generally accepted accounting principles in the United States, or GAAP. For more information on the computation of these non-GAAP financial measures, see Managements Discussion and Analysis of Financial Condition and Results of OperationsPrincipal Components of Operations and Key Performance Metrics Used By ManagementKey Performance Metrics and Non-GAAP Financial Measures. |
(2) | Earnings per share information reflects a 165,582-for-1 forward stock split effective on August 22, 2014. |
(3) | We define Return on average common equity as net income (loss) divided by average common equity. |
(4) | We define Return on average total assets as net income (loss) divided by total average assets. |
(5) | We define Net interest margin as net interest income divided by average total interest-earning assets. |
(6) | Excludes loans held for sale of $262 million, $1.3 billion, $646 million, and $564 million as of June 30, 2014 and December 31, 2013, 2012 and 2011, respectively. |
(7) | Excludes deposits held for sale of $5.3 billion as of December 31, 2013. |
(8) | We define Tier 1 capital ratio as Tier 1 capital balance divided by total risk-weighted assets as defined under Basel I. |
(9) | We define Total capital ratio as total capital balance divided by total risk-weighted assets as defined under Basel I. |
(10) | We define Tier 1 common equity ratio as Tier 1 capital balance, minus preferred stock, divided by total risk-weighted assets as defined under Basel I. |
(11) | We define Leverage ratio as Tier 1 capital balance divided by quarterly average total assets as defined under Basel I. |
(12) | Operating ratios for the periods ended June 30, 2014 and 2013 are presented on an annualized basis. |
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We are subject to a number of risks potentially impacting our business, financial condition, results of operations and cash flows. As a financial services organization, certain elements of risk are inherent in our transactions and operations and are present in the business decisions we make. We, therefore, encounter risk as part of the normal course of our business and we design risk management processes to help manage these risks. Our success is dependent on our ability to identify, understand and manage the risks presented by our business activities so that we can appropriately balance revenue generation and profitability. These risks include, but are not limited to, credit risk, market risks, liquidity risks, operational risks, model risks, technology, regulatory and legal risks and strategic and reputational risks. We discuss our principal risk management processes and, in appropriate places, related historical performance in the Managements Discussion and Analysis of Financial Condition and Results of Operations section of this prospectus.
You should carefully consider the following risk factors that may affect our business, future operating results and financial condition, as well as the other information set forth in this prospectus before making a decision to invest in our common stock. If any of the following risks actually occur, our business, financial condition or results of operations would likely be materially adversely affected. In such case, the trading price of our common stock would likely decline due to any of these risks, and you may lose all or part of your investment. The following risks are not the only risks we face. Additional risks that are not presently known or that we presently deem to be immaterial also could have a material adverse effect on our financial condition, results of operations and business.
Risks Related to Our Business
We may not be able to successfully execute our strategic plan or achieve our performance targets.
Our strategic plan, which we began to implement in the second half of 2013, involves four principal elements: (a) increasing revenue in both Consumer Banking and Commercial Banking; (b) enhancing cost reduction efforts across the company; (c) leveraging capital actions aimed at better aligning our capital structure with those of regional bank peers; and (d) the beneficial impact of a rising interest rate environment on our asset-sensitive balance sheet. Our future success and the value of our stock will depend, in part, on our ability to effectively implement our strategic plan. There are risks and uncertainties, many of which are not within our control, associated with each element of our plan discussed further below.
In addition, certain of our key initiatives require regulatory approval, which may not be obtained on a timely basis, if at all. Moreover, even if we do obtain required regulatory approval, it may be conditioned on certain organizational changes, such as those discussed below, that could reduce the profitability of those initiatives.
Revenue Generation Component of Strategic Plan, Assumptions and Associated Risks. Our plans to increase revenue involve reallocating resources toward business that will further increase and diversify our revenue base, including by prudently growing higher-return earning assets, identifying and capitalizing on more fee income opportunities and selectively expanding our balance sheet through increased loan origination volume principally in mortgage, small business and auto. Our revenue growth plans are based on a number of assumptions, many of which involve factors that are outside our control. Our key assumptions include:
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that we will be able to attract and retain the requisite number of skilled and qualified personnel required to increase our loan origination volume in mortgage, business banking, auto and wealth. The marketplace for skilled personnel is competitive, which means hiring, training and |
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retaining skilled personnel is costly and challenging and we may not be able to increase the number of our loan professionals sufficiently to achieve our loan origination targets successfully; |
| that we will be able to grow higher-return earning assets with acceptable risk performance and increase fee income in part by means of increased management discipline, industry focus, expansion of target markets, focus on higher-return yielding assets and increased origination efforts; |
| that we will be able to fund asset growth by growing deposits with our cost of funds increasing at a rate consistent with our expectations; |
| that we will be able to successfully identify and purchase high-quality interest-earning assets that perform over time in accordance with our projected models; |
| that our expansion into specialized industries, as well as our efforts to expand nationally in the mid-corporate space, will not materially alter our risk profile from existing business operations in ways that our existing risk models cannot effectively or accurately model; |
| that there will be no material change in competitive dynamics, including as a result of our seeking to increase market share and enter into new markets (as discussed below, we operate in a highly competitive industry and any change in our ability to retain deposits or attract new customers in line with our current expectations would adversely affect our ability to grow our revenue); and |
| that software we have recently licensed and implemented throughout our business, including an automated loan origination platform, will function consistent with our expectations. |
If one or more of our assumptions prove incorrect, we may not be able to successfully execute our strategic plan, we may never achieve our indicative performance targets and any shortfall may be material.
Cost Savings and Efficiency Component of Strategic Plan and Associated Risks. In order for us to execute our strategic plan successfully, we must implement a number of cost reduction and efficiency improvement initiatives, including streamlining processes, reducing redundancy and improving cost structures, which we believe will allow us to reduce overall expenses. There may be unanticipated difficulties in implementing our efficiency initiatives, and there can be no assurance that we will fully realize our target expense reductions, or be able to sustain any annual cost savings achieved by our efficiency initiative. Reducing costs may prove difficult in light of our efforts to establish and maintain our stand-alone operational and infrastructural capabilities as a banking institution fully separate from the RBS Group, including our rebranding efforts associated with our separation from the RBS Group. Reducing our structural costs also may be difficult owing to our efforts to make organizational improvements in risk management and various policies and procedures in order to comply with new regulations, as well as requirements imposed by and guidance from our regulators. In addition, any significant unanticipated or unusual charges, provisions or impairments, including as a result of any ongoing legal and regulatory proceedings or industry regulatory changes, would adversely affect our ability to reduce our cost structure in any particular period. If we are unable to reduce our cost structure as we anticipate, we may not be able to successfully execute our strategic plan, we may never achieve our indicative performance targets and any shortfall may be material.
Reduction of Our Tier 1 Common Equity Ratio. Our strategic plan requires us to complete capital initiatives that would result in a lower overall Tier 1 common equity ratio. Because our capital structure is subject to extensive regulatory scrutiny, including under the Federal Reserve Boards Comprehensive Capital Analysis and Review, or CCAR, process, we may not able to consummate the capital initiatives required to bring our Tier 1 common equity ratio in line with our expectations. This
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could prevent us from achieving our ROTCE targets. For more information about risks relating to our ability to obtain the requisite approval from the Federal Reserve Board, see Supervisory requirements and expectations on us as a financial holding company and a bank holding company, our need to make improvements and devote resources to various aspects of our controls, processes, policies and procedures, and any regulator-imposed limits on our activities, could limit our ability to implement our strategic plan, expand our business, improve our financial performance and make capital distributions to our stockholders.
Rising Interest Rate Environment. Net interest income growth has been challenged by the relatively persistent low interest rate environment. Our strategic plan includes assumptions about rising interest rates in the coming periods. In particular, our strategic plan assumes that interest rates will evolve consistent with the market implied forward rates based on the yield curve as of February 28, 2014. We do not control interest rates and there is no guarantee that interest rates will rise consistent with our expectations. If the current low interest rate environment were to continue or if interest rates do not rise as much or as quickly as we expect, then we may not be able to achieve our ROTCE targets. For further information about our interest rate sensitivity, see Managements Discussion and Analysis of Financial Condition and Results of OperationsRisk Governance and Quantitative and Qualitative Disclosures About RiskMarket Risk.
In addition to the four principal elements of our strategic plan, we also anticipate that our ROTCE will be affected by a number of additional factors. We anticipate a benefit to our ROTCE from runoff of our non-core portfolio and existing pay-fixed interest rate swaps, which we expect will be offset by the negative impact on our ROTCE of some deterioration in the credit environment as they return to historical levels and a decline in gains on investments in securities. We do not control many aspects of these factors (or others) and actual results could differ from our expectations materially, which could impair our ability to achieve our strategic ROTCE goals.
Supervisory requirements and expectations on us as a financial holding company and a bank holding company, our need to make improvements and devote resources to various aspects of our controls, processes, policies and procedures, and any regulator-imposed limits on our activities, could limit our ability to implement our strategic plan, expand our business, improve our financial performance and make capital distributions to our stockholders.
As a result of and in addition to new legislation aimed at regulatory reform, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), and the increased capital and liquidity requirements introduced by the U.S. implementation of the Basel III framework, the federal banking agencies, such as the Federal Reserve Board, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC), as well as the Consumer Financial Protection Bureau (CFPB), have taken a stricter approach to supervising and regulating financial institutions and financial products and services over which they exercise their respective supervisory authorities. We, our two banking subsidiaries and our products and services are all subject to greater supervisory scrutiny and enhanced supervisory requirements and expectations and face significant challenges in meeting them. We expect to continue to face greater supervisory scrutiny and enhanced supervisory requirements in the foreseeable future.
Our two banking subsidiaries are currently subject to consent orders issued by the OCC and the FDIC in connection with their findings of deceptive marketing and implementation of some of our checking account and funds transfer products and services. Among other things, the consent orders require us to remedy deficiencies and develop stronger compliance controls, policies and procedures. We have made progress and continue to make progress in addressing these requirements, but the consent orders remain in place and we are unable to predict when they may be terminated. CBNA is also making improvements to its compliance management systems, fair lending compliance, risk management, deposit reconciliation practices and overdraft fees in order to address deficiencies in
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those areas. CBPA is making improvements to address deficiencies in its deposit reconciliation practices, overdraft fees, identity theft add-on products, third-party payment processor activities, oversight of third-party service providers, compliance program, policies, procedures and training, consumer complaints process and anti-money laundering controls. These efforts require us to make investments in additional resources and systems and also require a significant commitment of managerial time and attention.
The OCC recently determined that CBNA currently does not meet the conditionnamely, that CBNA must be both well capitalized and well managed, as those terms are defined in applicable regulations, based on certain minimum capital ratios and supervisory ratings, respectivelyto own a financial subsidiary. A financial subsidiary is permitted to engage in a broader range of activities, similar to those of a financial holding company, than those permissible for a national bank. CBNA has two financial subsidiaries, Citizens Securities, Inc., a registered broker-dealer, and RBS Citizens Insurance Agency, Inc., a dormant entity, although it continues to collect commissions on certain outstanding policies. CBNA has entered into an agreement with the OCC (the OCC Agreement) pursuant to which it must develop a remediation plan, which must be submitted to the OCC, setting forth the specific actions it will take to bring itself back into compliance with the condition to own a financial subsidiary and the schedule for achieving that objective. Until CBNA satisfactorily addresses the deficiencies, it will be subject to restrictions on its ability to acquire control of or hold an interest in any new financial subsidiary and to commence new activities in any existing financial subsidiary, without the prior consent of the OCC. If CBNA fails to remediate the deficiencies within 180 days from March 13, 2014, or such longer period as the OCC may permit, it may have to divest itself of its financial subsidiaries and comply with any additional limitations or conditions on its conduct as the OCC may impose. CBNA has implemented a comprehensive enterprise-wide program that seeks to address these deficiencies.
In March 2014, the Federal Reserve Board objected on qualitative grounds to our capital plan submitted as part of the CCAR process. In its public report entitled Comprehensive Capital Analysis and Review 2014: Assessment Framework and Results, the Federal Reserve Board cited significant deficiencies in our capital planning processes, including inadequate governance, weak internal controls and deficiencies in our practices for estimating revenues and losses under a stress scenario and for ensuring the appropriateness of loss estimates across our business lines in a specific stress scenario. Although the Federal Reserve Board acknowledged that bank holding companies such as ours that are new to the CCAR process are subject to different expectations, our weaknesses were considered serious enough to warrant the Federal Reserve Boards objection based on its qualitative assessment of our capital planning process. As a result, we are not permitted to increase our capital distributions above 2013 levels until a new capital plan is approved by the Federal Reserve Board. The deadline for our next capital plan submission is January 5, 2015, and we cannot assure you that the Federal Reserve Board will not object to our next capital plan or that, even if it does not object to it, our planned capital distributions will not be significantly modified from 2013 levels.
We are also required to make improvements to our overall compliance and operational risk management programs and practices in order to comply with enhanced supervisory requirements and expectations and to address weaknesses in retail credit risk management, liquidity risk management, model risk management, outsourcing and vendor risk management and related oversight and monitoring practices and tools. Our and our banking subsidiaries consumer compliance program and controls also require improvement, particularly with respect to deposit reconciliation processes, fair lending and mortgage servicing. In addition to all of the foregoing, as part of our and our banking subsidiaries regular examination process, from time to time we and our banking subsidiaries may become, and currently are, subject to prudential restrictions on our activities. The restrictions that apply to CBNA are described above. Similarly, under the Bank Holding Company Act of 1956 (the Bank Holding Company Act), currently we may not be able to engage in certain categories of new activities or acquire shares or control of other companies other than in connection with internal reorganizations.
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In order to remedy these weaknesses and meet these regulatory and supervisory challenges, we need to make substantial improvements to our compliance, risk management and other processes, systems and controls. We expect to continue to dedicate significant resources and managerial time and attention and to make significant investments in enhanced compliance, risk management and other processes, systems and controls. We also expect to make restitution payments to our banking subsidiaries customers, which could be significant, arising from certain of the consumer compliance deficiencies described above and may be required to pay civil money penalties in connection with certain of these deficiencies. We have established reserves in respect of these future payments, but the amounts that we are ultimately obligated to pay could be in excess of our reserves.
The remediation efforts and other matters described above will increase our operational costs and may limit our ability to implement aspects of our strategic plan or otherwise pursue certain business opportunities. Moreover, if we are unsuccessful in remedying these weaknesses and meeting the enhanced supervisory requirements and expectations that apply to us and our banking subsidiaries, we could remain subject to existing restrictions or become subject to additional restrictions on our activities, informal (non-public) or formal (public) supervisory actions or public enforcement actions, including the payment of civil money penalties. Any such actions or restrictions, if and in whatever manner imposed, would likely increase our costs and could limit our ability to implement our strategic plans and expand our business, and as a result could have a material adverse effect on our business, results of operations or financial condition.
A continuation of the current low interest rate environment or subsequent movements in interest rates may have an adverse effect on our profitability.
Historically, and in the near-to-medium term, we anticipate that net interest income will remain a significant component of our total revenue. This is due to the fact that a high percentage of our assets and liabilities have been and will likely continue to be in the form of interest-bearing or interest-related instruments. Our net interest income was $1.6 billion for the six months ended June 30, 2014 and $3.1 billion for the year ended December 31, 2013. Changes in interest rates can have a material effect on many areas of our business, including the following:
Net Interest Income. In recent years, it has been the policy of the Federal Reserve Board and the U.S. Treasury to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of U.S. Treasury and mortgage-backed securities. As a result, yields on securities we have purchased, and market rates on the loans we have originated, have been at levels lower than were available prior to 2008. Consequently, the average yield on our interest-earning assets has decreased during the recent low interest rate environment. If a low interest rate environment persists, our net interest income may further decrease. This would be the case because our ability to lower our interest expense has been limited at these interest rate levels, while the average yield on our interest-earning assets has continued to decrease. Moreover, if our floating rate interest-earning assets do not reprice faster than our interest-bearing liabilities, our net interest income could be adversely affected. If our net interest income further decreases, this could have an adverse effect on our profitability.
Deposit Costs. Our net interest margin would narrow if our cost of funding increases without a correlative increase in the interest we earn from loans and investments. Because we rely extensively on deposits to fund our operations, our cost of funding would increase if there is an increase in the interest rate we are required to pay our customers to retain their deposits. This could occur, for instance, if we are faced with competitive pressures to increase rates on deposits. In addition, if the interest rates we are required to pay for other sources of funding (for example, in the interbank or capital markets) increases, our cost of funding would increase. If any of the foregoing risks occurs, our net interest margin would narrow unless there was a correlative increase in the interest we earn from our loans and investments. Although our assets currently reprice faster than our liabilities (which would result in a benefit to net interest income as interest rates rise), the benefit from rising rates could be less than we assume, which may have an adverse effect on our profitability.
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Loan Volume and Delinquency. Increases in interest rates may decrease customer demand for loans as the higher cost of obtaining credit may deter customers from new loans. Further, higher interest rates might also lead to an increased number of delinquent loans and defaults, which would impact the value of our loans.
Value of Our Mortgage Servicing Rights. As a residential mortgage servicer, we have a portfolio of mortgage servicing rights (MSRs). MSRs are subject to interest rate risk in that their fair value will fluctuate as a result of changes in the interest rate environment. When interest rates fall, borrowers are generally more likely to prepay their mortgage loans by refinancing them at a lower rate. As the likelihood of prepayment increases, the fair value of MSRs can decrease. Decrease in the fair value below the carrying value of MSRs will reduce earnings in the period in which the decrease occurs.
We cannot control or predict with certainty changes in interest rates. Global, national, regional and local economic conditions, competitive pressures and the policies of regulatory authorities, including monetary policies of the Federal Reserve Board, affect interest income and interest expense. Although we have policies and procedures designed to manage the risks associated with changes in market interest rates, as further discussed under Managements Discussion and Analysis of Financial Condition and Results of OperationsRisk Governance, changes in interest rates still may have an adverse effect on our profitability.
If our assumptions regarding borrower behavior are wrong or overall economic conditions are significantly different than we anticipate, then our risk mitigation may be insufficient to protect against interest rate risk and our net income would be adversely affected.
We could fail to attract, retain or motivate highly skilled and qualified personnel, including our senior management, other key employees or members of our Board, which could impair our ability to successfully execute our strategic plan and otherwise adversely affect our business.
A key cornerstone of our strategic plan involves the hiring of a large number of highly skilled and qualified personnel. Accordingly, our ability to implement our strategic plan and our future success depends on our ability to attract, retain and motivate highly skilled and qualified personnel, including our senior management and other key employees and directors, competitively with our peers. The marketplace for skilled personnel is becoming more competitive, which means the cost of hiring, incentivizing and retaining skilled personnel may continue to increase. The failure to attract or retain a sufficient number of appropriately skilled personnel could place us at a significant competitive disadvantage and prevent us from successfully implementing our strategy, which could impair our ability to implement our strategic plan successfully, achieve our performance targets and otherwise have a material adverse effect on our business, financial condition and results of operations.
Governmental scrutiny with respect to matters relating to compensation and other business practices in the financial services industry has increased dramatically in the past several years and has resulted in more aggressive and intense regulatory supervision and the application and enforcement of more stringent standards. For example, in June 2010, the Federal Reserve Board and other federal banking regulators jointly issued comprehensive final guidance designed to ensure that incentive compensation policies do not undermine the safety and soundness of banking organizations by encouraging employees to take imprudent risks. The recent financial crisis and the current political and public sentiment regarding financial institutions has resulted in a significant amount of adverse press coverage, as well as adverse statements or charges by regulators and elected officials. Future legislation or regulation or government views on compensation may result in us altering compensation practices in ways that could adversely affect our ability to attract and retain talented employees.
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In addition to complying with U.S. laws relating to compensation, we are also required to comply with United Kingdom (UK) and European Union (EU) remuneration requirements for so long as we remain subject to the supervision of the UK Prudential Regulatory Authority (PRA), which supervision will continue until the PRA determines that RBS Group ceases to control us. As a result of the implications of the EU Capital Requirements Directive IV (CRD IV), certain of our most senior employees, including our CEO, may not receive variable compensation in excess of 100% of fixed compensation (200% with shareholder approval) starting with performance year 2014. Because shareholder approval was not sought by RBS, a 100% limitation applies for 2014. We intend to maintain competitive total compensation levels for affected employees, although it is possible that the structure of our compensation packages may not be considered in line with our peers.
Our ability to meet our obligations, and the cost of funds to do so, depend on our ability to access sources of liquidity and the particular sources available to us.
Liquidity risk is the risk that we will not be able to meet our obligations, including funding commitments, as they come due. This risk is inherent in our operations and can be heightened by a number of factors, including an over-reliance on a particular source of funding (including, for example, short-term and overnight funding), changes in credit ratings or market-wide phenomena such as market dislocation and major disasters. Like many banking groups, our reliance on customer deposits to meet a considerable portion of our funding has grown over recent years, and we continue to seek to increase the proportion of our funding represented by customer deposits. However, these deposits are subject to fluctuation due to certain factors outside our control, such as a loss of confidence by customers in us or the banking sector generally, increasing competitive pressures for retail or corporate customer deposits, changes in interest rates and returns on other investment classes, which could result in a significant outflow of deposits within a short period of time. To the extent that in the future there is heavy competition among U.S. banks for retail customer deposits, this competition may increase the cost of procuring new deposits and otherwise negatively affect our ability to grow our deposit base. An inability to grow, or any material decrease in, our deposits could have a material adverse effect on our ability to satisfy our liquidity needs.
In addition, volatility in the interbank funding market can negatively impact our ability to fund our operations. For example, funding in the interbank markets, a traditional source of unsecured short-term funding, was severely disrupted throughout the global economic and financial crisis. If market disruption or significant volatility returns to the interbank or wholesale funding market, our ability to access capital in these funding markets could be materially impaired. Additionally, other factors outside our control, such as an operational problem that affects third parties, could impair our ability to access capital markets or create an unforeseen outflow of cash or deposits. Our inability to access adequate funding, whether from bank deposits, the interbank funding market or capital markets, would constrain our ability to make new loans, to meet our existing lending commitments and ultimately jeopardize our overall liquidity and capitalization.
Maintaining a diverse and appropriate funding strategy for our assets consistent with our wider strategic plan remains challenging, and any tightening of credit markets could have a material adverse impact on us. In particular, there is a risk that corporate and financial institution counterparties may seek to reduce their credit exposures to banks and other financial institutions (for example, reflected in reductions in unsecured deposits supplied by these counterparties), which may cause funding from these sources to no longer be available. Under these circumstances, we may need to seek funds from alternative sources, potentially at higher costs than has previously been the case, or may be required to consider disposals of other assets not previously identified for disposal to reduce our funding commitments.
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A reduction in our credit ratings, which are based on a number of factors, including the credit ratings of RBS or other members of the RBS Group, could have a material adverse effect on our business, financial condition and results of operations.
Credit ratings affect the cost and other terms upon which we are able to obtain funding. Rating agencies regularly evaluate us, and their ratings are based on a number of factors, including our financial strength. Other factors considered by rating agencies include the financial strength of and other factors relating to RBS and the RBS Group, as well as conditions affecting the financial services industry generally. Any downgrade in our ratings would likely increase our borrowing costs and could limit our access to capital markets and adversely affect our business. For example, a ratings downgrade could adversely affect our ability to sell or market in the capital markets certain of our securities, including subordinated debt, engage in certain longer-term and derivatives transactions and retain our customers, particularly corporate customers who need a minimum rating threshold in order to invest or deposit. In addition, under the terms of certain of our derivatives contracts, we may be required to maintain a minimum credit rating or have to post additional collateral or terminate such contracts. Any of these results of a rating downgrade could increase our cost of funding, reduce our liquidity and have adverse effects on our business, financial condition and results of operations.
Any downgrade in the credit rating of RBS, which will own 75.0% of our stock after completion of this offering (or 71.2% if the underwriters option to purchase additional shares of common stock is exercised in full), or other members of the RBS Group may negatively impact the rating agencies evaluation of us and our business which could ultimately result in a downgrade of our credit ratings. The credit ratings of RBS and other members of the RBS Group, along with a number of other European financial institutions, were downgraded during the course of the last three years as part of the rating agencies rating methodology changes, review of systemic support assumptions incorporated into bank ratings and the likelihood, in the case of banks located in the United Kingdom, that the UK government is more likely in the future to make greater use of its regulatory tools to allow burden sharing among bank creditors. Rating agencies continue to evaluate the rating methodologies applicable to European financial institutions, including RBS and other members of the RBS Group, and any change in such methodologies could ultimately impact our credit ratings. Separately, adverse changes in the credit ratings of the United Kingdom could adversely affect the credit ratings of RBS or other members of the RBS Group which may ultimately have an adverse impact on our credit ratings. In December 2012, Standard & Poors placed the United Kingdoms AAA credit rating on credit watch, with negative outlook and, in February 2013, Moodys downgraded the United Kingdoms credit rating one notch to Aa1.
On November 29, 2011, Standard & Poors lowered its long-term debt rating of RBS to A- and, at the same time, lowered our long-term debt rating to A. On June 22, 2012, Moodys downgraded the long-term bank deposit rating of our banking subsidiaries to A3 following its downgrade of RBS on June 21, 2012. On November 11, 2013, Standard & Poors lowered its ratings on 20 of CBNAs letter of credit-backed U.S. public finance issues. This action followed Standard & Poors November 7, 2013 downgrade of the long-term debt of RBS to BBB+ and its simultaneous lowering of our long-term debt rating to BBB+. On November 3, 2013, Fitch downgraded our long-term debt rating to BBB+ following RBSs announcement of its intention to fully divest us by 2016. On August 21, 2014, Fitch affirmed our long-term debt rating of BBB+. Although Moodys confirmed the long-term bank deposit rating of our banking subsidiaries on March 13, 2014, its ratings outlook is negative. On May 7, 2014, Standard & Poors lowered our stand-alone credit profile to a- from a. These ratings could be further downgraded as a result of a number of factors, such as our financial strength and economic conditions generally. Under current rating methodologies, the ratings could also be further downgraded due to RBSs continued ownership interest in us, reflecting the potential adverse effects of challenges faced by the RBS Group, including uncertainty around political developments in the United Kingdom and Europe, or in connection with our separation from the RBS Group, if the rating agencies perceive that
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we would not benefit from the support of the RBS Group. Any further reductions in our credit ratings or those of our banking subsidiaries could adversely affect our access to liquidity, our competitive position, increase our funding costs or otherwise have a material adverse effect on our business, financial condition and results of operations.
We are subject to certain risks related to originating and selling mortgages and we may be required to repurchase mortgage loans or indemnify mortgage loan purchasers, which could adversely impact our business, financial condition and results of operations.
We originate and often sell mortgage loans. When we sell mortgage loans, whether as whole loans or pursuant to a securitization, we are required to make customary representations and warranties to the purchaser about the mortgage loans and the manner in which they were originated. Our loan sale agreements require us to repurchase or substitute mortgage loans in the event of certain breaches of these representations or warranties. In addition, we may be required to repurchase mortgage loans as a result of borrower fraud or in the event of early payment default of the borrower on a mortgage loan. Likewise, we are required to repurchase or substitute mortgage loans if we breach certain representations or warranties in connection with our securitizations, whether or not we were the originator of the loan. While in many cases we may have a remedy available against certain parties, often these may not be as broad as the remedies available to a purchaser of mortgage loans against us, and we face the further risk that such parties may not have the financial capacity to satisfy remedies that may be available to us. Therefore, if a purchaser enforces its remedies against us, we may not be able to recover our losses from third parties. We have received repurchase and indemnity demands from purchasers in the past, which have resulted in an increase in the amount of losses for repurchases. In particular, between January 1, 2009 and June 30, 2014, we received approximately $146 million in repurchase demands and $97 million in indemnification payment requests in respect of loans originated, for the most part, since 2003. Of those claims presented, $81 million was paid to repurchase residential mortgage loans, and $32 million was incurred in indemnification costs to make investors whole. We repurchased mortgage loans totaling $35 million and $13 million for the years ended December 31, 2013 and 2012, respectively, and $17 million and $26 million for the six months ended June 30, 2014 and 2013, respectively. We incurred indemnification costs of $12 million and $5 million for the years ended December 31, 2013 and 2012, respectively, and $7 million and $6 million for the six months ended June 30, 2014 and 2013, respectively. We have also been responding to subpoenas issued by the Office of the Inspector General for the Federal Housing Authority Agency seeking information about loans sold to The Federal National Mortgage Association and The Federal Home Loan Mortgage Corporation from 2003 to 2011. We cannot estimate what the future level of repurchase demands will be or our ultimate exposure, and cannot give any assurance that the historical experience will or will not continue in the future. It is possible that the volume of repurchase demands will increase, which could have a material adverse effect on our business, financial condition and results of operations.
We face risks as a servicer of loans. We may be terminated as a servicer or master servicer, be required to repurchase a mortgage loan or reimburse investors for credit losses on a mortgage loan, or incur costs, liabilities, fines and other sanctions if we fail to satisfy our servicing obligations, including our obligations with respect to mortgage loan foreclosure actions.
We act as servicer or master servicer for mortgage loans included in securitizations and for unsecuritized mortgage loans owned by investors. As a servicer or master servicer for those loans, we have certain contractual obligations to the securitization trusts, investors or other third parties, including, in our capacity as a servicer, foreclosing on defaulted mortgage loans or, to the extent consistent with the applicable securitization or other investor agreement, considering alternatives to foreclosure (such as loan modifications, short sales and deed-in-lieu of foreclosures), and, in our capacity as a master servicer, overseeing the servicing of mortgage loans by the servicer. Generally,
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our servicing obligations as a servicer or master servicer described above are set by contract, for which we receive a contractual fee. However, the costs to perform contracted-for services has been increasing, which reduces our profitability. In addition, we serve as a servicer for government sponsored enterprises (GSEs) under servicing guides. The GSEs can amend their servicing guides, which can increase the scope or costs of the services we are required to perform without any corresponding increase in our servicing fee. Further, the CFPB has issued two regulations that amended the mortgage servicing provisions of Regulation Z and Regulation X, which became effective on January 10, 2014 and which may further increase the scope and costs of services we are required to perform, including as it relates to servicing loans that we own. In addition, there has been a significant increase in state laws that impose additional servicing requirements that increase the scope and cost of our servicing obligations.
If we commit a material breach of our obligations as servicer or master servicer, we may be subject to termination if the breach is not cured within a specified period of time following notice, which can generally be given by the securitization trustee or a specified percentage of security holders, causing us to lose servicing income. In addition, we may be required to indemnify the securitization trustee against losses from any failure by us, as a servicer or master servicer, to perform our servicing obligations or any act or omission on our part that involves willful misfeasance, bad faith or gross negligence. For certain investors and/or certain transactions, we may be contractually obligated to repurchase a mortgage loan or reimburse the investor for credit losses incurred on the loan as a remedy for servicing errors with respect to the loan. If we experience increased repurchase obligations because of claims that we did not satisfy our obligations as a servicer or master servicer, or increased loss severity on such repurchases, we may have to materially increase our repurchase reserve.
We rely on the mortgage secondary market and GSEs for some of our liquidity.
We sell most of the mortgage loans we originate to reduce our credit risk and to provide funding for additional loans. We rely on GSEs to purchase loans that meet their conforming loan requirements. Strategically, we may originate and hold nonconforming loans on-balance sheet for investment purposes, or from time to time, we will rely on other capital markets investors to purchase nonconforming loans (i.e., loans that do not meet GSE requirements). Since the onset of the global economic and financial crisis, investor demand for nonconforming loans has fallen sharply, increasing credit spreads and reducing the liquidity of those loans. In response to the reduced liquidity in the capital markets, we may retain more nonconforming loans, negatively impacting reserves, or we may originate fewer mortgages, which would negatively impact revenue. When we retain a loan not only do we keep the credit risk of the loan but we also do not receive any sale proceeds that could be used to generate new loans. However, we receive net interest margin as our income stream as loan payments are received on a monthly basis in lieu of sale proceeds. Depending on balance sheet capacity, a persistent lack of liquidity could limit our ability to fund and thus originate new mortgage loans, reducing the fees we earn from originating and servicing loans. In addition, we cannot provide assurance that GSEs will not materially limit their purchases of conforming loans due to capital constraints or change their criteria for conforming loans (e.g., maximum loan amount or borrower eligibility). We note that proposals have been presented to reform the housing finance market in the United States, including the role of the GSEs in the housing finance market. The extent and timing of any such regulatory reform regarding the housing finance market and the GSEs, as well as any effect on our business and financial results, are uncertain.
We are subject to increased risk of credit losses associated with HELOCs originated prior to the global financial and economic crisis.
During the years prior to the global financial and economic crisis, financial institutions, including us, originated a significant number of HELOCs. The terms of HELOCs generally provided for the
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deferral of borrowers obligations to begin to repay principal until a specified future date. As of June 30, 2014, approximately 33% of our $16.2 billion HELOC portfolio, or $5.3 billion in drawn balances, and $4.5 billion in undrawn balances, were subject to a payment reset or balloon payment between July 1, 2014 and December 31, 2017, including $350 million in balloon balances where full payment is due at the end of a ten-year interest only draw period. Although we launched a program in September 2013 to manage the exposure by providing heightened outreach to borrowers, there remains a risk of increased credit losses as borrowers become obligated to make principal and interest payments. For further information regarding the expected HELOC payment shock, see Managements Discussion and Analysis of Financial Condition and Results of OperationsKey Factors Affecting Our BusinessHELOC Payment Shock.
Our financial performance may be adversely affected by deteriorations in borrower credit quality, particularly in the New England, Mid-Atlantic and Midwest regions, where our operations are concentrated.
We have exposure to many different industries and risks arising from actual or perceived changes in credit quality and uncertainty over the recoverability of amounts due from borrowers is inherent in our businesses. For example, we have exposure to certain business sectors and geographic markets that were weakened by the global economic and financial crisis. Our exposure may be exacerbated by the geographic concentration of our operations, which are predominately located in the New England, Mid-Atlantic and Midwest regions. The credit quality of our borrowers may deteriorate for a number of reasons that are outside our control, including as a result of prevailing economic and market conditions and asset valuation. The trends and risks affecting borrower credit quality, particularly in the New England, Mid-Atlantic and Midwest regions, have caused, and in the future may cause, us to experience impairment charges, increased repurchase demands, higher costs, additional write-downs and losses and an inability to engage in routine funding transactions, which could have a material adverse effect on our business, financial condition and results of operations.
Our framework for managing risks may not be effective in mitigating risk and loss and our use of models presents risks to our risk management framework.
Our risk management framework is made up of various processes and strategies to manage our risk exposure. The framework to manage risk, including the frameworks underlying assumptions, may not be effective under all conditions and circumstances. If the risk management framework proves ineffective, we could suffer unexpected losses and could be materially adversely affected.
One of the main types of risks inherent in our business is credit risk. An important feature of our credit risk management system is to employ an internal credit risk control system through which we identify, measure, monitor and mitigate existing and emerging credit risk of our customers. As this process involves detailed analyses of the customer or credit risk, taking into account both quantitative and qualitative factors, it is subject to human error. In exercising their judgment, our employees may not always be able to assign an accurate credit rating to a customer or credit risk, which may result in our exposure to higher credit risks than indicated by our risk rating system.
In addition, we have undertaken a strategic initiative to enhance our credit policies and guidelines to address potential risks associated with particular industries or types of customers, as discussed in more detail under Managements Discussion and Analysis of Financial Condition and Results of OperationsRisk Governance and Quantitative and Qualitative Disclosures About Risk. However, we may not be able to effectively implement these initiatives, or consistently follow and refine our credit risk management system. If any of the foregoing were to occur, it may result in an increase in the level of nonperforming loans and a higher risk exposure for us, which could have a material adverse effect on us.
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Some of our tools and metrics for managing risk are based upon our use of observed historical market behavior. We rely on quantitative models to measure risks and to estimate certain financial values. Models may be used in such processes as determining the pricing of various products, grading loans and extending credit, measuring interest rate and other market risks, predicting losses, assessing capital adequacy and calculating regulatory capital levels, as well as estimating the value of financial instruments and balance sheet items. Poorly designed or implemented models present the risk that our business decisions based on information incorporating such models will be adversely affected due to the inadequacy of that information. Moreover, our models may fail to predict future risk exposures if the information used in the model is incorrect, obsolete or not sufficiently comparable to actual events as they occur. We seek to incorporate appropriate historical data in our models, but the range of market values and behaviors reflected in any period of historical data is not at all times predictive of future developments in any particular period and the period of data we incorporate into our models may turn out to be inappropriate for the future period being modeled. In such case, our ability to manage risk would be limited and our risk exposure and losses could be significantly greater than our models indicated. For example, we experienced certain technical issues relating to our market risk measurement processes when we began incorporating trade level detail for foreign exchange contracts in 2013. Despite rigorous pilot testing of our processes, during the initial phase of implementation our processes failed to incorporate certain positions we maintained to offset client exposure, which led to an immaterial overstatement of foreign exchange currency rate risk positions during 2013 compared to our position at year end. We have adjusted our processes and have experienced no further issues. In addition, if existing or potential customers believe our risk management is inadequate, they could take their business elsewhere. This could harm our reputation as well as our revenues and profits. Finally, information we provide to our regulators based on poorly designed or implemented models could also be inaccurate or misleading. Some of the decisions that our regulators make, including those related to capital distributions to our stockholders, could be affected adversely due to their perception that the quality of the models used to generate the relevant information is insufficient.
The preparation of our financial statements requires the use of estimates that may vary from actual results. Particularly, various factors may cause our allowance for loan and lease losses to increase.
The preparation of consolidated financial statements in conformity with GAAP requires management to make significant estimates that affect the financial statements. Our most critical accounting estimate is the allowance for loan and lease losses. The allowance for loan and lease losses is a reserve established through a provision for loan and lease losses charged to expense and represents our estimate of losses within the existing portfolio of loans. The allowance is necessary to reserve for estimated loan and lease losses and risks inherent in the loan portfolio. The level of the allowance reflects our ongoing evaluation of industry concentrations, specific credit risks, loan and lease loss experience, current loan portfolio quality, present economic, political and regulatory conditions and incurred losses inherent in the current loan portfolio.
The determination of the appropriate level of the allowance for loan and lease losses inherently involves a degree of subjectivity and requires that we make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, the stagnation of certain economic indicators that we are more susceptible to, such as unemployment and real estate values, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside our control, may require an increase in the allowance for loan and lease losses. In addition, bank regulatory agencies periodically review our allowance for loan and lease losses and may require an increase in the allowance for loan and lease losses or the recognition of further loan charge-offs, based on judgments that can differ from those of our own management. In addition, if charge-offs in future periods exceed the allowance for loan and lease lossesthat is, if the allowance for loan and lease losses is inadequatewe will need
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additional loan and lease loss provisions to increase the allowance for loan and lease losses. Should such additional provisions become necessary, they would result in a decrease in net income and capital and may have a material adverse effect on us.
We could also sustain credit losses that are significantly higher than the amount of our allowance for loan and lease losses, and therefore have an adverse impact on earnings. Higher credit losses could arise for a variety of reasons. A severe downturn in the economy would generate increased charge-offs and a need for higher reserves. In particular, a severe decrease in housing prices or spike in unemployment would cause higher losses and a larger allowance for loan and lease losses, particularly in the residential real estate secured portfolios. Within the residential real estate portfolios, we have HELOCs for which the end of draw is happening over the next two years. If there is a spike in interest rates, these customers will not only have to deal with an increased or first time principal payment but also an increase in interest payments, potentially leading to larger losses and allowance for loan and lease losses. For more information about risks related to HELOCs, see We are subject to increased risk of credit losses associated with HELOCs originated prior to the global financial and economic crisis. While we believe that our allowance for loan and lease losses was adequate on June 30, 2014, there is no assurance that it will be sufficient to cover all incurred loan and lease credit losses, particularly if economic conditions worsen. In the event of deterioration in economic conditions, we may be required to increase reserves in future periods, which would reduce our earnings.
The value of certain financial instruments recorded at fair value is determined using financial models incorporating assumptions, judgments and estimates that may change over time or may ultimately not turn out to be accurate.
Under GAAP, we recognize at fair value: (i) financial instruments classified as held for trading or designated at fair value through profit or loss; (ii) financial assets classified as available for sale; and (iii) derivatives. Generally, to establish the fair value of these instruments, we rely on quoted market prices. If such market prices are not available, we rely on internal valuation models that utilize observable market data and/or independent third-party pricing. For example, observable market data may not be available for certain individual financial instruments or classes of financial instruments, such as venture capital investments. In such circumstances, we utilize complex internal valuation models to establish fair value; these models require us to make assumptions, judgments and estimates regarding matters that are inherently uncertain. When practical, we would supplement internal models using independent price verification in order to lessen the uncertainties in our models. These assumptions, judgments and estimates are periodically updated to reflect changing facts, trends and market conditions. The resulting change in the fair values of the financial instruments may have a material adverse effect on our earnings and financial condition.
Operational risks are inherent in our businesses.
Our operations depend on our ability to process a very large number of transactions efficiently and accurately while complying with applicable laws and regulations. Operational risk and losses can result from internal and external fraud; errors by employees or third parties; failure to document transactions properly or to obtain proper authorization; failure to comply with applicable regulatory requirements and conduct of business rules; equipment failures, including those caused by natural disasters or by electrical, telecommunications or other essential utility outages; business continuity and data security system failures, including those caused by computer viruses, cyber-attacks or unforeseen problems encountered while implementing major new computer systems or upgrades to existing systems; or the inadequacy or failure of systems and controls, including those of our suppliers or counterparties. Although we have implemented risk controls and loss mitigation actions, and substantial resources are devoted to developing efficient procedures, identifying and rectifying weaknesses in existing procedures and training staff, it is not possible to be certain that such actions have been or will be
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effective in controlling each of the operational risks faced by us. Any weakness in these systems or controls, or any breaches or alleged breaches of such laws or regulations, could result in increased regulatory supervision, enforcement actions and other disciplinary action, and have an adverse impact on our business, applicable authorizations and licenses, reputation and results of operations.
The financial services industry, including the banking sector, is undergoing rapid technological changes as a result of competition and changes in the legal and regulatory framework, and we may not be able to compete effectively as a result of these changes.
The financial services industry, including the banking sector, is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. In addition, new, unexpected technological changes could have a disruptive effect on the way banks offer products and services. We believe our success depends, to a great extent, on our ability to use technology to offer products and services that provide convenience to customers and to create additional efficiencies in our operations. However, we may not be able to, among other things, keep up with the rapid pace of technological changes, effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. As a result, our ability to compete effectively to attract or retain new business may be impaired, and our business, financial condition or results of operations may be adversely affected.
In addition, changes in the legal and regulatory framework under which we operate require us to update our information systems to ensure compliance. Our need to review and evaluate the impact of ongoing rule proposals, final rules and implementation guidance from regulators further complicates the development and implementation of new information systems for our business. Also, recent regulatory guidance has focused on the need for financial institutions to perform increased due diligence and ongoing monitoring of third-party vendor relationships, thus increasing the scope of management involvement and decreasing the efficiency otherwise resulting from our relationships with third-party technology providers. Given the significant number of ongoing regulatory reform initiatives, it is possible that we incur higher than expected information technology costs in order to comply with current and impending regulations. See Supervisory requirements and expectations on us as a financial holding company and a bank holding company, our need to make improvements and devote resources to various aspects of our controls, processes, policies and procedures, and any regulator-imposed limits on our activities, could limit our ability to implement our strategic plan, expand our business, improve our financial performance and make capital distributions to our stockholders.
Cyber-attacks, distributed denial of service attacks and other cyber-security matters, if successful, could adversely affect how we conduct our business.
We are under continuous threat of loss due to cyber-attacks, especially as we continue to expand customer capabilities to utilize the Internet and other remote channels to transact business. Two of the most significant cyber-attack risks that we face are e-fraud and loss of sensitive customer data. Loss from e-fraud occurs when cybercriminals breach and extract funds directly from customers or our accounts. We have been subject to a number of attacks historically. The attempts to breach sensitive customer data, such as account numbers and social security numbers, are less frequent but could present significant reputational, legal and regulatory costs to us if successful.
Recently, there has been a series of distributed denial of service attacks on financial services companies, including us. Distributed denial of service attacks are designed to saturate the targeted online network with excessive amounts of network traffic, resulting in slow response times, or in some cases, causing the site to be temporarily unavailable. Generally, these attacks are conducted to interrupt or suspend a companys access to Internet service. The attacks can adversely affect the performance of a companys website and in some instances prevent customers from accessing a
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companys website. We are implementing certain technology protections such as Customer Profiling and Step-Up Authentication to be in compliance with the Federal Financial Institutions Examination Council (FFIEC) Authentication in Internet Banking Environment (AIBE) guidelines. However, cyber threats are rapidly evolving and we may not be able to anticipate or prevent all such attacks. In the event that a cyber-attack is successful, our business, financial condition or results of operations may be adversely affected.
We rely heavily on communications and information systems to conduct our business.
We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. Although we have established policies and procedures designed to prevent or limit the effect of the possible failure, interruption or security breach of our information systems, there can be no assurance that these policies and procedures will be successful and that any such failure, interruption or security breach will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failure, interruption or security breach of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability.
We rely on third parties for the performance of a significant portion of our information technology.
We rely on third parties for the performance of a significant portion of our information technology functions and the provision of information technology and business process services. For example, (i) certain components and services relating to our online banking system rely on data communications networks operated by unaffiliated third parties, (ii) many of our applications are hosted or maintained by third parties, including our Commercial Loan System, which is hosted and maintained by Automated Financial Systems, Inc. and (iii) our core deposits system is maintained by Fidelity Information Services, Inc. The success of our business depends in part on the continuing ability of these (and other) third parties to perform these functions and services in a timely and satisfactory manner. If we experience a disruption in the provision of any functions or services performed by third parties, we may have difficulty in finding alternate providers on terms favorable to us and in reasonable timeframes. If these services are not performed in a satisfactory manner, we would not be able to serve our customers well. In either situation, our business could incur significant costs and be adversely affected.
We are exposed to reputational risk and the risk of damage to our brands and the brands of our affiliates, including the RBS Group.
Our success and results depend, in part, on our reputation and the strength of our brands. We are vulnerable to adverse market perception as we operate in an industry where integrity, customer trust and confidence are paramount. We are exposed to the risk that litigation, employee misconduct, operational failures, the outcome of regulatory or other investigations or actions, press speculation and negative publicity, among other factors, could damage our brands or reputation. Our brands and reputation could also be harmed if we sell products or services that do not perform as expected or customers expectations for the product are not satisfied.
Negative publicity could result, for example, from an allegation or determination that we have failed to comply with regulatory or legislative requirements, from failure in business continuity or performance of our information technology systems, loss of customer data or confidential information, fraudulent activities, unsatisfactory service and support levels or insufficient transparency or disclosure of information. Negative publicity adversely affecting our brands or reputation could also result from
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misconduct or malpractice by partners or other third parties with whom we have relationships. In particular, because of our relationship with the RBS Group, negative publicity about the RBS Group could have a negative effect on us. Adverse publicity, governmental scrutiny, any pending future investigations by regulators or law enforcement agencies involving us, any of our affiliates or the RBS Group can also have a negative impact on our reputation and business, which could adversely affect our results of operations.
Any damage to our brands or reputation could cause existing customers or other third parties to terminate their business relationships with us and potential customers or other third parties to be reluctant to do business with us. Such damage to our brands or reputation could cause disproportionate damage to our business, even if the negative publicity is factually inaccurate or unfounded. Furthermore, negative publicity could result in greater regulatory scrutiny and influence market or rating agencies perceptions of us, which could make it more difficult for us to maintain our credit rating. The occurrence of any of these events could have an adverse effect on our business, financial condition and results of operations.
We may be adversely affected by unpredictable catastrophic events or terrorist attacks and our business continuity and disaster recovery plans may not adequately protect us from serious disaster.
The occurrence of catastrophic events such as hurricanes, tropical storms, tornadoes and other large-scale catastrophes and terrorist attacks could adversely affect our business, financial condition or results of operations if a catastrophe rendered both our production data center in East Providence, Rhode Island, and our recovery data center in Medford, Massachusetts unusable. The distance between the data center locations (approximately 45 miles) provides diversity in resources, but not sufficient diversity in the event of a catastrophe as described above. Although we are building a new, out-of-region backup data center in North Carolina, scheduled for completion in 2015, we do not currently have a backup data center outside New England.
Our principal communications and information systems are housed in the East Providence primary datacenter and our operations are concentrated in the New England, Mid-Atlantic and Midwest regions. If a natural disaster, severe weather, power outage or other event were to occur in New England or if we were subject to a terrorist attack prior to the opening of the North Carolina recovery data center that prevented us from using all or a significant portion of our communications and information systems, damaged critical infrastructure or otherwise disrupted our operations, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial period of time. Although we have implemented disaster recovery and business continuity plans, these plans may prove inadequate in the event of a disaster or similar event that seriously compromises our information systems. We may incur substantial expenses as a result of any limitations relating to our disaster recovery and business continuity plans, which, particularly when taken together with the geographic concentration of our operations, could have a material adverse effect on our business.
An inability to realize the value of our deferred tax assets could adversely affect operating results.
Our net deferred tax assets (DTAs) are subject to an evaluation of whether it is more likely than not that they will be realized for financial statement purposes. In making this determination, we consider all positive and negative evidence available, including the impact of recent operating results, as well as potential carryback of tax to prior years taxable income, reversals of existing taxable temporary differences, tax planning strategies and projected earnings within the statutory tax loss carryover period. We have determined that the DTAs are more likely than not to be realized at June 30, 2014 (except for $134 million related to state DTAs for which a valuation allowance was established). If
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we were to conclude that a significant portion of the DTAs were not more likely than not to be realized, the required valuation allowance could adversely affect our financial condition and results of operations.
We maintain a significant investment in projects that generate tax credits, which we may not be able to fully utilize, or, if utilized, may be subject to recapture or restructuring.
At June 30, 2014, we maintained an investment of approximately $277 million in entities for which we receive allocations of tax credits, which we utilize to offset our taxable income. We accrued $13 million and $14 million in credits for the six months ended June 30, 2014 and the year ended December 31, 2013, respectively. As of June 30, 2014, all tax credits have been utilized to offset taxable income. Substantially all of these tax credits are related to development projects that are subject to ongoing compliance requirements over certain periods of time to fully realize their value. If these projects are not operated in full compliance with the required terms, the tax credits could be subject to recapture or restructuring. Further, we may not be able to utilize any future tax credits. If we are unable to utilize our tax credits or, if our tax credits are subject to recapture or restructuring, it could have a material adverse effect on our business, financial condition and results of operations.
We may have exposure to greater than anticipated tax liabilities.
The tax laws applicable to our business activities, including the laws of the United States and other jurisdictions, are subject to interpretation. The taxing authorities in the jurisdictions in which we operate may challenge our tax positions, which could increase our effective tax rate and harm our financial position and results of operations. In addition, our future income taxes could be adversely affected by earnings being lower than anticipated in jurisdictions that have lower statutory tax rates and higher than anticipated in jurisdictions that have higher statutory tax rates, or by changes in tax laws, regulations, or accounting principles. We are subject to regular review and audit by U.S. federal and state tax authorities. Any adverse outcome of such a review or audit could have a negative effect on our financial position and results of operations. In addition, the determination of our provision for income taxes and other tax liabilities requires significant judgment by management. Although we believe that our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.
If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected.
We are required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. As a subsidiary of RBS, we are currently subject to the requirements of the Sarbanes-Oxley Act, and as a U.S. bank holding company, we are also subject to the FDIC Part 363 Annual Report rules, which incorporates certain items from the Sarbanes-Oxley Act Section 404 into FDICIA requirements. In addition, beginning with our second annual report on Form 10-K, we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act. Our independent registered public accounting firm is required to express an opinion as to the effectiveness of our internal control over financial reporting beginning with our second annual report on Form 10-K. The process of designing, implementing and testing the internal control over financial reporting required to comply with this obligation is time consuming, costly and complicated. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is
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unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.
We depend on the accuracy and completeness of information about clients and counterparties.
In deciding whether to extend credit or enter into other transactions with clients and counterparties, we rely on information furnished by or on behalf of clients and counterparties, including financial statements and other financial information. We also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. If any of such information is incorrect, then the creditworthiness of our clients and counterparties may be misrepresented, which would increase our credit risk and expose us to possible write-downs and losses.
We may not be able to successfully manage our intellectual property and may be subject to infringement claims.
We rely on a combination of owned and licensed trademarks, service marks, trade names, logos and other intellectual property rights. Third parties may challenge, invalidate, infringe or misappropriate our intellectual property, or such intellectual property may not be sufficient to provide us with competitive advantages, which could result in costly redesign efforts, discontinuance of certain services or other competitive harm. For example, words contained in our trademarks and trade names (including the word Citizens) are also found in the trade names of a significant number of third parties, including other banks. This has resulted in, and may in the future result in, challenges to our ability to use our trademarks and trade names in particular geographical areas or lines of business. Such challenges could impede our future expansion into new geographic areas or lines of business and could limit our ability to realize the full value of our trademarks and trade names. We may have to litigate to enforce or determine the scope and enforceability of our intellectual property rights, which is expensive, could cause a diversion of resources and may not prove successful. Existing use by others of trademarks and trade names that are similar to ours could limit our ability to challenge third parties when their use of such marks or names may cause consumer confusion, negatively affect consumers perception of our brand and products or dilute our brand identity. In addition, certain aspects of our business and our services rely on technologies licensed by third parties, and we may not be able to obtain or continue to obtain licenses and technologies from these third parties on reasonable terms or at all. The loss or diminution of our intellectual property protection or the inability to obtain third party intellectual property could harm our business and ability to compete.
We may also be subject to costly litigation in the event our services infringe upon or otherwise violate a third partys proprietary rights. Third parties may have, or may eventually be granted, intellectual property rights, including trademarks, that could be infringed by our services or other aspects of our business. Third parties have made, and may make, claims of infringement against us with respect to our services or business. As we rebrand CFG and our banking subsidiaries following the consummation of this offering and expand our business, the likelihood of receiving third party challenges or claims of infringement related to our intellectual property may increase. Any claim from third parties may result in a limitation on our ability to use the intellectual property subject to these claims. Even if we believe that intellectual property related claims are without merit, defending against such claims is time consuming and expensive and could result in the diversion of the time and attention of our management and employees. Claims of intellectual property infringement also might require us to redesign affected services, enter into costly settlement or license agreements, pay costly damage
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awards, or face a temporary or permanent injunction prohibiting us from marketing or selling certain of our services. Any intellectual property related dispute or litigation could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Separation from the RBS Group
RBS will be our controlling stockholder and its interests may conflict with ours or yours in the future.
Immediately following this offering, RBS will beneficially own approximately 75.0% of our common stock (or 71.2% if the underwriters option to purchase additional shares of common stock is exercised in full). As a result, the RBS Group will have significant power to control our affairs and policies including with respect to the election of directors (and through the election of directors the appointment of management), the entering into of mergers, sales of substantially all of our assets and other extraordinary transactions. In particular, under the separation and shareholder agreement that we intend to enter into with RBS in connection with this offering (the Separation Agreement), for so long as RBS maintains beneficial ownership of our outstanding common stock in excess of certain thresholds, we will be required to obtain the consent of RBS to complete certain significant transactions, including our merger or consolidation, entrance into joint ventures in excess of certain thresholds or similar corporate transactions, issuance of common stock (other than pursuant to our equity incentive plans), issuance or the guarantee of indebtedness in excess of certain thresholds, the termination or appointment of a replacement of our Chief Executive Officer, Chief Financial Officer or Chief Risk Officer and certain other significant transactions. The interests of the RBS Group may not align with our or your interests and we may not be able to manage our business in a manner that is in your best interests, which could cause the price of our stock to decline.
As of June 30, 2014, RBS was 79.5% owned by the UK government and its interests may conflict with ours or yours in the future.
Following placing and open offers in December 2008 and in April 2009, Her Majestys Treasury (HM Treasury) owned approximately 70.3% of the enlarged ordinary share capital of RBS. In December 2009, RBS issued a further £25.5 billion of new capital to HM Treasury. This new capital took the form of B shares, which do not generally carry voting rights at general meetings of ordinary stockholders but are convertible into ordinary shares. Following the issuance of the B shares, HM Treasurys holding of ordinary shares of the company remained at 70.3%, although its economic interest rose to 84.4%. As of June 30, 2014, HM Treasury held 62.9% of the voting rights in RBS and had an economic interest of 79.5%.
HM Treasurys stockholder relationship with RBS is managed on its behalf by UK Financial Investments Limited (UKFI) and, although HM Treasury has indicated that it intends to respect the commercial decisions of RBS and that RBS will continue to have its own independent board of directors and management team determining its own strategy, should its current intentions change, HM Treasurys position as a majority stockholder (and UKFIs position as manager of this stockholding) means that HM Treasury or UKFI may be able to exercise a significant degree of influence over RBS. The manner in which HM Treasury or UKFI exercises HM Treasurys rights as majority stockholder could give rise to conflict between the interests of HM Treasury and the interests of our stockholders, and RBS may make decisions impacting our operations and the value of our common stock based on UK policy imperatives rather than traditional stockholder economic considerations. We cannot accurately predict whether any restrictions and limitations imposed on RBS on account of HM Treasurys ownership position, or the implementation of RBSs restructuring plan agreed to with HM Treasury, will have a negative effect on our businesses and financial flexibility or result in conflicts between the interests of RBS and our interests. In addition, it is difficult for us to predict whether any
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changes to, or termination of, HM Treasurys current relationship with RBS will have any effect on our business. We also note that we cannot predict the possible effect of RBS not satisfying its commitment to divest CFG as agreed with HM Treasury, for instance, by having a remaining ownership interest in CFG and its subsidiaries beyond any deadline agreed with HM Treasury.
The RBS Group and its UK bank subsidiaries are subject to the provisions of the UK Banking Act 2009, as amended by the UK Financial Services (Banking Reform) Act 2013, which includes special resolution powers including nationalization and bail-in.
Under the Banking Act 2009, substantial powers have been granted to UK banking regulators as part of a special resolution regime. These powers enable such regulators to deal with and stabilize certain deposit-taking UK incorporated institutions that are failing, or are likely to fail, to satisfy the FSMA threshold conditions (within the meaning of section 41 of the Financial Services and Markets Act 2000, or the FSMA, which are the conditions that a relevant entity must satisfy in order to obtain its authorization to perform regulated activities). The special resolution regime consists of three stabilization options: (i) transfer of all or part of the business of the relevant entity and/or the securities of the relevant entity to a private sector purchaser, (ii) transfer of all or part of the business of the relevant entity to a bridge bank wholly owned by the Bank of England and (iii) temporary public ownership (nationalization) of the relevant entity. If the UK regulators determine that the RBS Group has failed, or is likely to fail, to satisfy the FSMA threshold conditions, then HM Treasury could decide to take the RBS Group into temporary public ownership pursuant to the powers granted under the Banking Act 2009, and it may then take various actions in relation to any securities without the consent of holders of the securities. In each case, the UK banking regulators would have the authority to modify contractual arrangements of the RBS Group and disapply or modify laws (with possible retrospective effect) to enable their powers under UK law to be used effectively.
Among the changes introduced by the Financial Services (Banking Reform) Act 2013, the Banking Act 2009 was amended to insert a bail-in option as part of the powers of the UK regulators. This option will come into force on such date as shall be stipulated by HM Treasury (HM Treasury has indicated an intention to apply the bail-in provisions from January 1, 2015, which is ahead of the deadline of January 1, 2016 that is set out in the European Bank Recovery and Resolution Directive (BRRD)). The bail-in option will be introduced as an additional power available to the Bank of England to enable it to recapitalize a failed institution by allocating losses first to its shareholders and then to eligible unsecured creditors in a manner that seeks to respect the hierarchy of claims in liquidation. The bail-in option includes the power to cancel a liability, to modify the form of a liability (including the power to convert a liability from one form to another) or to provide that a contract under which the institution has a liability is to have effect as if a specified right had been exercised under it, each for the purposes of reducing, deferring or canceling the liabilities of the bank under resolution, as well as to transfer a liability. The Financial Services (Banking Reform) Act 2013 is consistent with the range of tools that European Member States will be required to make available to their resolution authorities under the BRRD, although some amendments are expected to the current UK bail-in provisions to ensure that they are fully compliant with the requirements of the BRRD.
If the UK regulators were to take such stabilization actions with respect to the RBS Group due to a failure, or likely failure, by the RBS Group to satisfy the FSMA threshold conditions, it could result in the creation, modification or canceling of certain of our contractual arrangements that we intend to enter into with the RBS Group prior to the completion of this offering, including the Transitional Services Agreement and Separation Agreement. In addition, the UK regulators could seek to impose additional obligations on us, including the provision of services to third parties who may purchase some or all of the RBS Groups assets. The UK regulators could also materially modify the RBS Groups restructuring efforts, including the acceleration of its disclosed intention to sell its remaining shares of
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our common stock. Any of these actions could have a material adverse effect on our business, contractual obligations and the value of our common stock.
Conflicts of interest and disputes may arise between the RBS Group and us that could be resolved in a manner unfavorable to us.
Questions relating to conflicts of interest and actual disputes may arise between the RBS Group and us in a number of areas relating to our past and ongoing relationships. Areas in which conflicts of interest or disputes between the RBS Group and us could arise include, but are not limited to, the following:
| Competing business activities. The RBS Group is a large global banking and financial services group principally engaged in the business of providing banking and financial services. In the ordinary course of its business activities, the RBS Group may engage in activities where their interests conflict with our interests or those of our stockholders. Our amended and restated certificate of incorporation will provide that none of the RBS Group, any of its affiliates or any director who is not employed by us or his or her affiliates will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. See Description of Capital Stock. The RBS Group also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. As a result, our future competitive position and growth potential could be adversely affected. |
| Cross officerships, directorships and stock ownership. The ownership interests of our directors or executive officers in the common stock of RBS or service as a director or officer of both RBS and us could create, or appear to create, conflicts of interest when directors and executive officers are faced with decisions that could have different implications for the two companies. For example, these decisions could relate to (i) the nature, quality and cost of services rendered to us by the RBS Group, (ii) disagreement over the desirability of a potential business or acquisition opportunity or business plans, (iii) employee retention or recruiting or (iv) our dividend policy. |
| Separation Agreement . We will enter into a Separation Agreement immediately prior to the completion of this offering that will govern the relationship between the RBS Group and us following this offering. The Separation Agreement will provide the RBS Group with certain governance rights over our business, as well as obligate us to comply with certain covenants including certain information rights, access privileges and confidentiality matters. Disagreements regarding the rights and obligations of the RBS Group or us under the Separation Agreement could create conflicts of interest for certain of our directors and officers, as well as actual disputes that may be resolved in a manner unfavorable to us. See Our Relationship with the RBS Group and Certain Other Related Party TransactionsRelationship with the RBS GroupSeparation and Shareholder Agreement. |
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Transitional Services Agreement. We will enter into a Transitional Services Agreement with the RBS Group for the continued provision of certain services by the RBS Group to us (including specified information technology, operations, compliance, business continuity, legal, human resources, back office and web services) and by us to the RBS Group. The services that are to be provided under the Transitional Services Agreement generally will continue to be provided until December 31, 2016, although certain services may have an earlier termination date or be terminated prior to that time. Interruptions to or problems with services provided under the Transitional Services Agreement could result in conflicts between us and the RBS Group that increase our costs both for the processing of business and the potential remediation of disputes. See Our Relationship with the RBS Group and Certain |
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Other Related Party TransactionsRelationship with the RBS GroupTransitional Services Agreement. |
| Commercial Matters. In addition to the agreements that we intend to enter into as part of our separation from the RBS Group, we expect to continue certain of our commercial relationships with the RBS Group for which we intend to continue or enter into one or more commercial matters agreements. The principal commercial activities to be covered by such agreements include certain swap agreements and foreign exchange risk contracts with the RBS Group for the purpose of reducing our exposure to interest rate fluctuations or to meet the financing needs of our customers, as well as commercial and referral arrangements related to transaction services, debt capital markets transactions, underwriting of loan syndications, commercial mortgage securitization transactions, mortgage servicing, asset finance and loan syndications and corporate credit card services. Despite our current expectation, there is no guarantee that the RBS Group will continue to provide such commercial services to us or that the prices at which they are willing to provide such services will remain consistent with historical periods. If the RBS Group were to terminate any of these arrangements, our financial results may be adversely affected. Moreover, disagreements may arise between us and the RBS Group regarding the provision or quality of any such services rendered, which may materially adversely affect this portion of our business. See Our Relationship with the RBS Group and Certain Other Related Party TransactionsRelationship with the RBS GroupCommercial Matters. |
| Business opportunities. Our directors nominated by RBS and the RBS Group may have or make investments in other companies that may compete with us. Our Amended and Restated Certificate of Incorporation will provide that, to the fullest extent permitted by law, none of RBS or any of its affiliates or any director who is not employed by us or his or her affiliates will have any duty to refrain from (i) engaging in a corporate opportunity in the same or similar lines of business in which we or our affiliates now engage or propose to engage or (ii) otherwise competing with us or our affiliates. As a result of these charter provisions, our future competitive position and growth potential could be adversely affected. See Description of Capital Stock. |
Our separation from the RBS Group could adversely affect our business and profitability due to the RBS Groups recognizable brand and reputation.
Prior to the completion of this offering, as a wholly owned indirect subsidiary of RBS, we have marketed our products and services using the RBS brand name and logo. We believe the association with the RBS Group has provided us with preferred status among certain of our customers, vendors and other persons due to the RBS Groups globally recognized brand, perceived high-quality products and services and strong capital base and financial strength.
Our separation from the RBS Group could adversely affect our ability to attract and retain customers, which could result in reduced sales of our products. In connection with this offering, although we expect to enter into a trademark license agreement pursuant to which we will be granted a limited license to use certain RBS trademarks (including the daisywheel logo) for an initial term of 5 years, and, at our option, up to 10 years, following the completion of the offering, we will be required under the agreement to remove the RBS brand name from all of our products and services by the time RBS beneficially owns less than 50% of our outstanding common stock (but in no event earlier than October 1, 2015), and we will lose the right to use the RBS trademarks in connection with the marketing of any product or service once we rebrand and cease using RBS trademarks in connection with such product or service. See Our Relationship with the RBS Group and Certain Other Related Party TransactionsRelationship with the RBS GroupTrademark License Agreement. After the consummation of this offering, we intend to change the legal names of any of our subsidiaries that continue to include RBS and to continue operational and legal work to rebrand CFG and its banking
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subsidiaries. The process of changing all marketing materials, operational materials, signage, systems, and legal entities containing RBS to our new brand name will take approximately 14 months and cost approximately $14 million, excluding any incremental advertising and customer communication expenses. We expect to shift the majority of our advertising and marketing budget to our new brand progressively as the different legal entities complete their individual brand name changes; we expect the shift in advertising and marketing investment to be completed no later than July 31, 2015. As a result of this rebranding, some of our existing customers may choose to stop doing business with us, which could increase customer withdrawals. In addition, other potential customers may decide not to purchase our products and services because we no longer will be a part of the RBS Group. We may also receive decreased referrals of business from the RBS Group. Our separation from the RBS Group could prompt some third parties to reprice, modify or terminate their distribution or vendor relationships with us. We cannot accurately predict the effect that our separation from the RBS Group will have on our business, customers or employees.
The risks relating to our separation from the RBS Group could materialize or evolve at any time, including:
| immediately upon the completion of this offering, when RBSs beneficial ownership in our common stock will decrease to approximately 75.0% (approximately 71.2% if the underwriters option to purchase additional shares is exercised in full); |
| when RBS reduces its beneficial ownership in our common stock to a level below 50%; and |
| when we cease using the RBS name or the daisywheel logo in our sales and marketing materials, particularly when we deliver notices to our distributors and customers that the names of some of our subsidiaries will change. |
Any failure by us to successfully replicate or replace certain functions, systems and infrastructure provided by the RBS Group prior to this offering could have a material adverse effect on us.
We will need to replicate or replace certain functions, systems and infrastructure to which we will no longer have the same access after this offering, including services we will receive pursuant to the Transitional Services Agreement. We will also need to make infrastructure investments in order to operate without the same access to the RBS Groups existing operational and administrative infrastructure. Any failure to successfully implement these initiatives or to do so in a timely manner could have an adverse effect on us.
The RBS Group currently performs or supports certain corporate functions for our operations, including investor relations, advertising and brand management, corporate audit, certain risk management functions, corporate insurance, corporate governance and other services. There is no assurance that, following the completion of this offering, these services will be sustained at the same levels as when we were receiving such services from the RBS Group or that we will obtain the same benefits. When we begin to operate these functions independently, if we do not have our own adequate systems and business functions in place, or are unable to obtain them from other providers, we may not be able to operate our business effectively or at comparable costs and our profitability may decline.
Also, we expect to make an investment of approximately $25 million in our systems to complete the migration of technological services following our separation from the RBS Group. In particular, we will separate our shared global network and where services such as corporate risk, back office, audit and human resources are being provided by the RBS Group, we will establish those services for CFG. These initiatives may not be completed on the expected timetable or within the expected budget and
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may not provide the system functionality or performance levels required to support the current and future needs of our business. Further, the systems and services provided to us by the RBS Group under the Transitional Services Agreement will need to be replaced on or before the date of the expiration of the Transitional Services Agreement. The terms on which we purchase these new systems and services, or the functionality of the systems themselves, may be inferior to those of the systems provided by the RBS Group or those available elsewhere in the market and, in relation to third-party suppliers, may be on terms that are less favorable than the terms on which services were previously provided by third parties to the RBS Group, and from which we have historically benefited and will continue to benefit during the period of the Transitional Services Agreement. For more information regarding the Transitional Services Agreement, see Our Relationship with the RBS Group and Certain Other Related Party TransactionsRelationship with the RBS GroupTransitional Services Agreement.
Any failure by the RBS Group to deliver the services to be provided under the Transitional Services Agreement could have a material adverse effect on our business, financial condition and results of operations.
In connection with our separation from the RBS Group, we intend to enter into a Transitional Services Agreement with the RBS Group for the continued provision of certain services to us for a specified period. Services provided for under the Transitional Services Agreement include certain information technology, operations, compliance, business continuity, legal, human resources, back office and web services. In particular, we will rely on the RBS Group to provide hosting, support and maintenance services that are critical to maintaining the level of support for the ongoing needs of our business. Although the majority of the systems run under the Transitional Services Agreement are independent of the RBS Groups other systems, any technical problems occurring within the RBS Group could have an adverse effect on us. As with all of our systems, interruptions to or problems with our systems and services provided under the Transitional Services Agreement or as a result of migration from the RBS Group infrastructure could cause material damage to our business and reputation. If the RBS Group fails to provide or procure the services envisaged or provide them in a timely manner, it could have a material adverse effect on our business, financial condition and results of operations.
The RBS Group maintains a number of defined benefit pension schemes under which we could be subject to liability.
The RBS Group maintains a number of defined benefit pension schemes for certain former and current employees, and as of December 31, 2013, had a reported net pension deficit of approximately £3 billion under certain international financial reporting standards assumptions. The UK Pensions Regulator has the powers to require that CFG, as an employer connected with the RBS Group, make a contribution to a UK defined benefit pension scheme if there has been an act or failure to act, one of the main purposes of which was to avoid or reduce the RBS Groups statutory obligations under the scheme or if the UK Pensions Regulator considers that an act or omission is materially detrimental to the likelihood of a member receiving their accrued scheme benefits.
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Risks Related to Our Industry
Any deterioration in national economic conditions could have a material adverse effect on our business, financial condition and results of operations.
Our business is affected by national economic conditions, as well as perceptions of those conditions and future economic prospects. Changes in such economic conditions are not predictable and cannot be controlled. Adverse economic conditions that could affect us include:
| reduced consumer spending; |
| lower wage income levels; |
| declines in the market value of residential or commercial real estate; |
| inflation or deflation; |
| fluctuations in the value of the U.S. dollar; |
| volatility in short-term and long-term interest rates; and |
| higher bankruptcy filings. |
These scenarios could require us to charge off a higher percentage of loans and increase provision for credit losses, which would reduce our net income and otherwise have a material adverse effect on our business, financial condition and results of operations. For example, our business was significantly affected by the global economic and financial crisis that began in 2008. The falling home prices, increased rate of foreclosure and high levels of unemployment in the United States triggered significant write-downs by us and other financial institutions. These write-downs adversely impacted our financial results in material respects. Although the U.S. economy continues to recover, an interruption or reversal of this recovery would adversely affect the financial services industry and banking sector. In particular, although the ongoing general economic recovery has positively impacted the real estate market, the fundamentals within the real estate sector, including asset values, high vacancy rates and rent values, remain relatively weak compared to prior to the global economic and financial crisis. Should the recovery of real estate asset values, reduction in vacancies and improvement in rents be interrupted for an extended period of time, it could have a material adverse effect on our business, financial condition and results of operations.
We operate in an industry that is highly competitive, which could result in losing business or margin declines and have a material adverse effect on our business, financial condition and results of operations.
We operate in a highly competitive industry. The industry could become even more competitive as a result of reform of the financial services industry resulting from the Dodd-Frank Act and other legislative, regulatory and technological changes, as well as continued consolidation. We face aggressive competition from other domestic and foreign lending institutions and from numerous other providers of financial services, including the following:
| Non-banking financial institutions. The ability of these institutions to offer services previously limited to commercial banks has intensified competition. Because non-banking financial institutions are not subject to the same regulatory restrictions as banks and bank holding companies, they can often operate with greater flexibility and lower cost structures. |
| Securities firms and insurance companies. These companies, if they elect to become financial holding companies, can offer virtually any type of financial service. This may significantly change the competitive environment in which we conduct our business. |
|
Competitors that have greater financial resources. Some of our larger competitors, including certain national and international banks that have a significant presence in our market area, |
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may have greater capital and resources, higher lending limits and may offer products, services and technology that we do not. We cannot predict the reaction of our customers and other third parties with respect to our financial or commercial strength relative to our competition, including our larger competitors. |
As a result of these and other sources of competition, we could lose business to competitors or be forced to price products and services on less advantageous terms to retain or attract clients, either of which would adversely affect our profitability and business.
Volatility in the global financial markets resulting from relapse of the Eurozone crisis, geopolitical developments in Eastern Europe or otherwise could have a material adverse effect on our business, financial condition and results of operations.
Volatility in the global financial markets could have an adverse effect on the economic recovery in the United States and could result from a number of causes, including a relapse in the Eurozone crisis, geopolitical developments in Eastern Europe or otherwise. The effects of the Eurozone crisis, which began in late 2009 as part of the global economic and financial crisis, continued to impact the global financial markets through 2013. Numerous factors continued to fuel the Eurozone crisis, including continued high levels of government debt, the undercapitalization and liquidity problems of many banks in the Eurozone and relatively low levels of economic growth. These factors made it difficult or impossible for some countries in the Eurozone to repay or refinance their debt without the assistance of third parties. As a combination of austerity programs, debt write-downs and the European Central Banks commitment to restore financial stability to the Eurozone and the finalization of the primary European Stability Mechanism bailout fund, in 2013 and into 2014 interest rates began to fall and stock prices began to increase. Although these trends have helped to stabilize the effects of the Eurozone crisis, the underlying causes of the crisis have not been completely eliminated. In particular, Italy slid into recession for the third time since 2008 in the second quarter of 2014, underscoring the residual weakness of certain Eurozone economies. If other economies experience similar trends in the coming periods, volatility in the global financial markets could return to levels seen in the peak of the Eurozone crisis. In addition, Russian intervention in Ukraine during 2014 significantly increased regional geopolitical tensions. In response to Russian actions, U.S. and European governments have imposed sanctions on a limited number of Russian individuals and business entities. The situation remains fluid with potential for further escalation of geopolitical tensions, increased severity of sanctions against Russian interests, and possible Russian counter-measures. Further economic sanctions could destabilize the economic environment and result in increased volatility. Should the economic recovery in the United States be adversely impacted by a return in volatility in the global financial markets caused by a relapse in the Eurozone crisis or developments in respect of the Russian sanctions or for any other reason, loan and asset growth and liquidity conditions at U.S. financial institutions, including us, may deteriorate. Moreover, until RBS divests its interest in us, adverse trends in the Eurozone and Eastern Europe could increase investor concern or, even if not accurate, stimulate perceptions of funding difficulties for our business because RBS is based in the United Kingdom and has significant exposure to European economies. If any of these factors were to materialize, it could have a material adverse effect on our business, financial condition and results of operations.
Further downgrades to the U.S. governments credit rating, or the credit rating of its securities, by one or more of the credit ratings agencies could have a material adverse effect on general economic conditions, as well as our operations, earnings and financial condition.
On August 5, 2011, Standard & Poors cut the U.S. governments sovereign credit rating of long-term U.S. federal debt from AAA to AA+ while also keeping its outlook negative. Moodys also lowered its outlook to Negative on August 2, 2011, and Fitch lowered its outlook to Negative on November 28, 2011. During 2013, both Moodys and Standard & Poors revised their outlook from
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Negative to Stable, and on March 21, 2014, Fitch revised its outlook from Negative to Stable. Further downgrades of the U.S. governments sovereign credit rating, and the perceived creditworthiness of U.S. government-related obligations, could impact our ability to obtain funding that is collateralized by affected instruments. Such downgrades could also affect the pricing of funding when it is available. A downgrade may also adversely affect the market value of such instruments. A downgrade of the sovereign credit ratings of the U.S. government or the credit ratings of related institutions, agencies or instrumentalities would significantly exacerbate the other risks to which we are subject and any related adverse effects on its business, financial condition and results of operations.
The conditions of other financial institutions or of the financial services industry could adversely affect our operations and financial conditions.
Financial services institutions that deal with each other are interconnected as a result of trading, investment, liquidity management, clearing, counterparty and other relationships. Within the financial services industry, the default by any one institution could lead to defaults by other institutions. Concerns about, or a default by, one institution could lead to significant liquidity problems and losses or defaults by other institutions, as the commercial and financial soundness of many financial institutions are closely related as a result of these credit, trading, clearing and other relationships. Even the perceived lack of creditworthiness of, or questions about, a counterparty may lead to market-wide liquidity problems and losses or defaults by various institutions. This systemic risk may adversely affect financial intermediaries, such as clearing agencies, banks and exchanges with which we interact on a daily basis, or key funding providers such as the Federal Home Loan Banks (FHLBs), any of which could have a material adverse effect on our access to liquidity or otherwise have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Regulations Governing Our Industry
As a financial holding company and a bank holding company, we are subject to comprehensive regulation that could have a material adverse effect on our business and results of operations.
As a financial holding company and a bank holding company, we are subject to comprehensive regulation, supervision and examination by the Federal Reserve Board. In addition, CBNA is subject to comprehensive regulation, supervision and examination by the OCC and CBPA is subject to comprehensive regulation, supervision and examination by the FDIC and the PA Banking Department. Our regulators supervise us through regular examinations and other means that allow the regulators to gauge managements ability to identify, assess and control risk in all areas of operations in a safe and sound manner and to ensure compliance with laws and regulations. In the course of their supervision and examinations, our regulators may require improvements in various areas. If we are unable to implement and maintain any required actions in a timely and effective manner, we could become subject to informal (non-public) or formal (public) supervisory actions and public enforcement orders that could lead to significant restrictions on our existing business or on our ability to engage in any new business. Such forms of supervisory action could include, without limitation, written agreements, cease and desist orders, and consent orders and may, among other things, result in restrictions on our ability to pay dividends, requirements to increase capital, restrictions on our activities, the imposition of civil monetary penalties, and enforcement of such action through injunctions or restraining orders. We could also be required to dispose of certain assets and liabilities within a prescribed period. The terms of any such supervisory or enforcement action could have a material adverse effect on our business, financial condition and results of operations.
We are a bank holding company that has elected to become a financial holding company pursuant to the Bank Holding Company Act. As such, we are allowed to engage in certain financial activities in
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which a bank holding company is not otherwise permitted to engage. However, to maintain our financial holding company status, we (and all of our subsidiaries) must be well capitalized and well managed. If we cease to meet these capital and management requirements, there are many penalties we would be faced with, including (i) the Federal Reserve Board may impose limitations or conditions on the conduct of our activities, and (ii) we may not undertake any of the broader financial activities permissible for financial holding companies or acquire a company engaged in such financial activities without prior approval of the Federal Reserve Board. If a company does not return to compliance within 180 days, which period may be extended, the Federal Reserve Board may require divestiture of that companys depository institutions.
We may be unable to disclose some restrictions or limitations on our operations imposed by our regulators.
From time to time, bank regulatory agencies take supervisory actions that restrict or limit a financial institutions activities. In some instances, we are not permitted to publicly disclose these actions. In addition, as part of our regular examination process, our and our banking subsidiaries respective regulators may advise us or our banking subsidiaries to operate under various restrictions as a prudential matter. Any such actions or restrictions, if and in whatever manner imposed, could adversely affect our costs and revenues. Moreover, efforts to comply with any such nonpublic supervisory actions or restrictions may require material investments in additional resources and systems, as well as a significant commitment of managerial time and attention. As a result, such supervisory actions or restrictions, if and in whatever manner imposed, could have a material adverse effect on our business and results of operations; and, in certain instances, we may not be able to publicly disclose these matters.
The regulatory environment in which we operate could have a material adverse effect on our business and earnings.
We are heavily regulated by bank and other regulatory agencies at the federal and state levels. This regulatory oversight is established to protect depositors, the FDICs Deposit Insurance Fund, and the banking system as a whole, not security holders. Changes to statutes, regulations, rules or policies including the interpretation or implementation of statutes, regulations, rules or policies could affect us in substantial and unpredictable ways including limiting the types of financial services and other products we may offer, limiting our ability to pursue acquisitions and increasing the ability of third parties to offer competing financial services and products.
We are subject to capital adequacy and liquidity standards, and if we fail to meet these standards our financial condition and operations would be adversely affected.
We are subject to several capital adequacy and liquidity standards. To the extent that we are unable to meet these standards, our ability to make distributions of capital will be limited and we may be subject to additional supervisory actions and limitations on our activities. The capital adequacy and liquidity standards that we must meet include the following:
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Current capital requirements. Under regulatory capital adequacy guidelines and other regulatory requirements, CFG and its banking subsidiaries must meet guidelines that include quantitative measures of assets, liabilities and certain off-balance sheet items, subject to qualitative judgments by regulators about components of qualifying capital, risk weightings and other factors. We are regulated as a bank holding company and subject to consolidated regulatory capital requirements administered by the Federal Reserve. Our banking subsidiaries are subject to similar capital requirements, administered by the OCC in the case of CBNA and by the FDIC in the case of CBPA. Failure by us or one of our banking |
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subsidiaries to maintain its status as adequately capitalized would lead to regulatory sanctions and limitations and could lead the federal banking agencies to take prompt corrective action. Furthermore, a failure by our banking subsidiaries to be well capitalized under applicable regulatory guidelines could lead to higher FDIC assessments. |
| Basel III. The U.S. Basel III final rule and provisions in the Dodd-Frank Act, including the Collins Amendment, will increase capital requirements for banking organizations such as us. Consistent with the Basel Committees Basel III capital framework, the U.S. Basel III final rule includes a new minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 4.5% and a Common Equity Tier 1 capital conservation buffer of greater than 2.5% of risk-weighted assets. We have established capital ratio targets that align with U.S. regulatory expectations under fully phased-in Basel III rules. Although we currently have capital ratios that exceed these minimum levels and a strategic plan to keep them at least at these levels, failure to maintain the capital conservation buffer would result in increasingly stringent restrictions on our ability to make dividend payments and other capital distributions and pay discretionary bonuses to executive officers. As to us, the U.S. Basel III final rule will phase in over time beginning on January 1, 2015, and will become fully effective on January 1, 2019. |
| Capital Plans. We are required to submit an annual capital plan to the Federal Reserve Board. The capital plan must include an assessment of our expected uses and sources of capital over a forward-looking planning horizon of at least nine quarters, a detailed description of our process for assessing capital adequacy, our capital policy and a discussion of any expected changes to our business plan that are likely to have a material impact on our capital adequacy or liquidity. Based on a qualitative and quantitative assessment, including a supervisory stress test conducted as part of the CCAR process, the Federal Reserve Board will either object to our capital plan, in whole or in part, or provide a notice of non-objection to us by March 31 of a calendar year. If the Federal Reserve Board objects to a capital plan, we may not make any capital distribution other than those with respect to which the Federal Reserve Board has indicated its non-objection. Although we were permitted to continue capital actions at a level consistent with those executed in 2013, the Federal Reserve Board objected to certain qualitative aspects of our 2014 capital plan and we are not permitted to increase our capital distributions above 2013 levels until a new capital plan is approved by the Federal Reserve Board. The deadline for our next capital plan submission is January 5, 2015, and we cannot assure you that the Federal Reserve Board will not object to our next capital plan or that, even if it does not object to it, our planned capital distributions will not be significantly modified from 2013 levels. |
| Stress Tests. In addition to capital planning, we and our banking subsidiaries are subject to capital stress testing requirements imposed by the Dodd-Frank Act that will likely require us to hold more capital than the minimum requirements applicable to us. The stress testing requirements are designed to show that we can meet our capital requirements even under stressed economic conditions. |
| Liquidity Coverage Ratio. The federal banking regulators also evaluate our liquidity as part of the supervisory process. In September 2014, the U.S. federal banking regulators issued a final rule with respect to the U.S. implementation of the Liquidity Coverage Ratio (LCR). This rule includes a modified version of the Basel Committees LCR in the United States, which applies to bank holding companies with more than $50 billion but less than $250 billion in total assets, and less than $10 billion in on-balance sheet foreign exposure, such as us. The modified version of the LCR differs in certain respects from the Basel Committees version of the LCR, including a narrower definition of high-quality liquid assets, different prescribed cash inflow and outflow assumptions for certain types of instruments and transactions and a shorter phase-in schedule that begins on January 1, 2016 and ends on January 1, 2017. |
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See Regulation and Supervision for further discussion of the capital adequacy and liquidity standards to which we are subject.
We could be required to act as a source of strength to our banking subsidiaries, which would have a material adverse effect on our business, financial condition and results of operations.
Federal Reserve Board policy historically required bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. The Dodd-Frank Act codified this policy as a statutory requirement. This support may be required by the Federal Reserve Board at times when we might otherwise determine not to provide it or when doing so is not otherwise in the interests of CFG or our stockholders or creditors, and may include one or more of the following:
| Any extensions of credit from us to our banking subsidiaries that are included in the relevant banks capital would be subordinate in right of payment to depositors and certain other indebtedness of such subsidiary banks. |
| In the event of a bank holding companys bankruptcy, any commitment that the bank holding company had been required to make to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment. |
| In certain circumstances one of our banking subsidiaries could be assessed for losses incurred by the other. In addition, in the event of impairment of the capital stock of one of our banking subsidiaries, we, as our banking subsidiarys stockholder, could be required to pay such deficiency. |
We depend on our banking subsidiaries for most of our revenue, and restrictions on dividends and other distributions by our banking subsidiaries could affect our liquidity and ability to fulfill our obligations.
As a bank holding company, we are a separate and distinct legal entity from our banking subsidiaries: CBNA and CBPA. We typically receive substantially all of our revenue from dividends from our banking subsidiaries. These dividends are the principal source of funds to pay dividends on our equity and interest and principal on our debt. Various federal and/or state laws and regulations, as well as regulatory expectations, limit the amount of dividends that our banking subsidiaries may pay. For example:
| CBNA is required by federal law to obtain the prior approval of the OCC for the payment of cash dividends if the total of all dividends declared by CBNA in the calendar year is in excess of its current year net income combined with its retained net income of the two preceding years, less any required transfers to surplus (the recent earnings test). |
| CBNA may pay dividends only to the extent that retained net profits (including the portion transferred to surplus) exceed bad debts (as defined by regulation). |
| CBPA may only pay dividends out of accumulated net earnings and dividends may not be declared unless surplus is at least equal to contributed capital. |
| Neither CBNA nor CBPA may pay a dividend if, in the opinion of the applicable federal regulatory agency, either is engaged in or is about to engage in an unsafe or unsound practice, which would include a dividend payment that would reduce either banks capital to an inadequate level. |
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As a result of the goodwill impairment recognized by CBNA in the second quarter of 2013, CBNA does not meet the recent earnings test and must obtain specific prior approval from the OCC before making a capital distribution. We expect the recent earnings test to remain negative through 2015. As a result, we expect that CBNA will be required to obtain specific prior approval from the OCC before making a capital distribution through 2015. Since the goodwill impairment in 2013, the OCC has approved each request by CBNA to distribute to us up to 30% of its prior quarter after-tax net income. However, CBNA may not rely on past or current approvals as a guarantee of future approvals. Under the Pennsylvania Banking Code of 1965, as amended (the PA Code), CBPA is restricted from paying dividends in excess of accumulated net earnings. As of June 30, 2014, CBPAs accumulated net earnings were $227 million.
In addition, on February 18, 2014, the Federal Reserve Board approved a final rule implementing certain enhanced prudential standards for bank holding companies with $50 billion or more in total consolidated assets. The rules will subject a foreign banking organization with at least $50 billion in non-branch U.S. assets as of June 30, 2015 to various requirements, including a requirement to establish by July 1, 2016 a U.S. intermediate holding company (an IHC) to hold all of the foreign banking organizations interests in U.S. companies which it controls for U.S. bank regulatory purposes. An IHC will have to comply with U.S. risk-based capital, leverage, liquidity and risk-management requirements, as well as other regulations. Although the timing of our separation from the RBS Group is uncertain, the RBS Group will be subject to the enhanced prudential standards for foreign banking organizations, including the requirement to create an IHC, owing in part to the fact that we are an indirect subsidiary of RBS. If we become a subsidiary of the RBS Group IHC, even if we receive dividends from our banking subsidiaries, our ability to pay dividends or make capital distributions could be constrained by the IHCs capital requirements, which will be affected by any interests it holds in other of the RBS Groups U.S. companies.
We are and may be subject to regulatory actions that may have a material impact on our business.
We are involved, from time to time, in reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding our business. These regulatory actions involve, among other matters, accounting and operational matters, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief that may require changes to our business or otherwise materially impact our business. For example, in April 2013, our banking subsidiaries consented to the issuance of orders by the OCC and the FDIC (the Consent Orders). In the Consent Orders (which are publicly available and will remain in effect until terminated by the regulators), our banking subsidiaries neither admitted nor denied the regulators findings that they had engaged in deceptive marketing and implementation of the banks overdraft protection program, checking rewards programs and stop-payment process for pre-authorized recurring electronic fund transfers. Under the Consent Orders, our banking subsidiaries paid a total of $10 million in civil monetary penalties and are required to develop plans to provide restitution to affected customers (the amount of which is anticipated to be approximately $8 million), cease and desist any operations in violation of Section 5 of the Federal Trade Commission Act and submit to the regulators periodic written progress reports regarding compliance with the Consent Orders. For more information regarding ongoing significant regulatory actions in which we are involved and certain identified past practices and policies for which we could face potential formal administrative enforcement actions, see BusinessLegal and Regulatory Proceedings.
In regulatory actions, such as those referred to above, it is inherently difficult to determine whether any loss is probable or even possible or to estimate the amount of any loss. We cannot predict with certainty if, how or when such proceedings will be resolved or what the eventual fine, penalty or other relief, conditions or restrictions, if any, may be, particularly for actions that are in their early stages of
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investigation. We expect to make significant restitution payments to our banking subsidiaries customers arising from certain of the consumer compliance issues and also expect to pay civil money penalties in connection with certain of these issues. Adverse regulatory actions could have a material adverse effect on our business, financial condition and results of operations.
We are and may be subject to litigation that may have a material impact on our business.
Our operations are diverse and complex and we operate in legal and regulatory environments that expose us to potentially significant litigation risk. In the normal course of business, we have been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with our activities as a financial services institution, including with respect to unfair or deceptive business practices and mis-selling of certain products. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the entities that would otherwise be the primary defendants in such cases are bankrupt or in financial distress. We recently settled legal actions alleging violations under the Fair Labor Standards Act and certain state fair wage laws. Moreover, a number of recent judicial decisions have upheld the right of borrowers to sue lending institutions on the basis of various evolving legal theories, collectively termed lender liability. Generally, lender liability is founded on the premise that a lender has either violated a duty, whether implied or contractual, of good faith and fair dealing owed to the borrower or has assumed a degree of control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or stockholders. This could increase the amount of private litigation to which we are subject. For more information regarding ongoing significant legal proceedings in which we are involved and certain identified past practices and policies for which we could face potential civil litigation, see BusinessLegal and Regulatory Proceedings.
In disputes and legal proceedings, such as those referred to above, it is inherently difficult to determine whether any loss is probable or even possible or to estimate the amount of any loss. We cannot predict with certainty if, how or when such proceedings will be resolved or what the eventual settlement, fine, penalty or other relief, if any, may be, particularly for proceedings that are in their early stages of development or where plaintiffs seek substantial or indeterminate damages. Numerous issues may need to be resolved, including through potentially lengthy discovery and determination of important factual matters, determination of issues related to class certification and the calculation of damages and by addressing novel or unsettled legal questions relevant to the proceedings in question, before a loss or additional loss or range of loss or additional loss can be reasonably estimated for any proceeding. Adverse judgments in litigation or adverse regulatory actions could have a material adverse effect on our business, financial condition and results of operations.
The Dodd-Frank Act has changed and will likely continue to substantially change the legal and regulatory framework under which we operate our business.
On July 21, 2010, President Obama signed into law the Dodd-Frank Act, which has changed and will likely continue to substantially change the legal and regulatory framework under which we operate. The Dodd-Frank Act represents a significant overhaul of many aspects of the regulation of the financial-services industry, addressing, among other things, (i) systemic risk, (ii) capital adequacy, (iii) consumer financial protection, (iv) interchange fees and (v) mortgage lending practices. A significant number of the provisions of the Dodd-Frank Act still require extensive rulemaking and interpretation by regulatory authorities. In several cases, authorities have extended implementation periods and delayed effective dates. Accordingly, in many respects the ultimate impact of the Dodd-Frank Act and its effects on the U.S. financial system and on us will not be known for an extended period of time.
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The following are some of the current provisions of the Dodd-Frank Act that may affect our operations:
| Creation of the CFPB with centralized authority for consumer protection in the banking industry. |
| New limitations on federal preemption. |
| Application of heightened capital, liquidity, single counterparty credit limits, stress testing, risk management and other enhanced prudential standards. |
| Changes to the assessment base for deposit insurance premiums. |
| Creation of a new framework for the regulation of over-the-counter derivatives and new regulations for the securitization market and the strengthening of the regulatory oversight of securities and capital markets by the SEC. |
Some of these and other major changes under the Dodd-Frank Act could materially impact the profitability of our business, the value of assets we hold or the collateral available for coverage under our loans, require changes to our business practices or force us to discontinue businesses and expose us to additional costs, taxes, liabilities, enforcement actions and reputational risk.
The Dodd-Frank Acts provisions and related rules that restrict bank interchange fees may negatively impact our revenues and earnings.
Pursuant to the Dodd-Frank Act, the Federal Reserve Board adopted rules effective October 1, 2011, limiting the interchange fees that may be charged with respect to electronic debit transactions. Interchange fees, or swipe fees, are charges that merchants pay to us and other credit card companies and card-issuing banks for processing electronic payment transactions. Since taking effect, these limitations have reduced our debit card interchange revenues and have created meaningful compliance costs. Additional limits may further reduce our debit card interchange revenues and create additional compliance costs. In July 2013, a decision by a Washington D.C. District Court judge invalidated the Federal Reserve Boards interchange rule, ruling in favor of a group of retailers who argued that the new, lower interchange fees had been inappropriately set too high by the Federal Reserve Board. The Federal Reserve Board has successfully appealed the decision but it is uncertain whether the group of retailers will further appeal. If the rule were to be revised so that interchange fees were even lower, it would further adversely impact our noninterest income.
The CFPBs residential mortgage regulations could adversely affect our business, financial condition or results of operations.
The CFPB finalized a number of significant rules that will impact nearly every aspect of the lifecycle of a residential mortgage. These rules implement the Dodd-Frank Act amendments to the Equal Credit Opportunity Act, the Truth in Lending Act and the Real Estate Settlement Procedures Act. The final rules require banks to, among other things: (i) develop and implement procedures to ensure compliance with a new reasonable ability to repay test and identify whether a loan meets a new definition for a qualified mortgage, (ii) implement new or revised disclosures, policies and procedures for servicing mortgages including, but not limited to, early intervention with delinquent borrowers and specific loss mitigation procedures for loans secured by a borrowers principal residence, (iii) comply with additional restrictions on mortgage loan originator compensation, and (iv) comply with new disclosure requirements and standards for appraisals and escrow accounts maintained for higher priced mortgage loans. These new rules create operational and strategic challenges for us, as we are both a mortgage originator and a servicer. For example, business models for cost, pricing, delivery, compensation and risk management will need to be reevaluated and potentially revised, perhaps
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substantially. Additionally, programming changes and enhancements to systems will be necessary to comply with the new rules. We also expect additional rulemaking affecting our residential mortgage business to be forthcoming. These rules and any other new regulatory requirements promulgated by the CFPB and state regulatory authorities could require changes to our business, in addition to the changes we have been required to make thus far. Such changes would result in increased compliance costs and potential changes to our product offerings, which would have an adverse effect on the revenue derived from such business.
The Dodd-Frank Acts consumer protection regulations could adversely affect our business, financial condition or results of operations.
The Federal Reserve Board enacted consumer protection regulations related to automated overdraft payment programs offered by financial institutions. Prior to the enactment of these regulations, our overdraft and insufficient funds fees represented a significant amount of noninterest fees. Since taking effect on July 1, 2010, the fees received by us for automated overdraft payment services have decreased, thereby adversely impacting our noninterest income. Complying with these regulations has resulted in increased operational costs for us, which may continue to rise. The actual impact of these regulations in future periods could vary due to a variety of factors, including changes in customer behavior, economic conditions and other factors, which could adversely affect our business, financial condition or results of operations.
The consumer protection provisions of the Dodd-Frank Act and the examination, supervision and enforcement of those laws and implementing regulations by the CFPB have created a more intense and complex environment for consumer finance regulation. The CFPB is authorized to engage in consumer financial education, track consumer complaints, request data and promote the availability of financial services to underserved consumers and communities. We expect increased oversight of financial services products by the CFPB, which is likely to affect our operations. The CFPB has significant authority to implement and enforce federal consumer finance laws, including the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Billing Act and new requirements for financial services products provided for in the Dodd-Frank Act, as well as the authority to identify and prohibit unfair, deceptive or abusive acts and practices (UDAAP). The review of products and practices to prevent UDAAP is a continuing focus of the CFPB, and of banking regulators more broadly. The ultimate impact of this heightened scrutiny is uncertain but could result in changes to pricing, practices, products and procedures. It could also result in increased costs related to regulatory oversight, supervision and examination, additional remediation efforts and possible penalties.
In addition, the Dodd-Frank Act provides the CFPB with broad supervisory, examination and enforcement authority over various consumer financial products and services, including the ability to require reimbursements and other payments to customers for alleged legal violations, and to impose significant penalties, as well as injunctive relief that prohibits lenders from engaging in allegedly unlawful practices. The CFPB also has the authority to obtain cease and desist orders providing for affirmative relief and/or monetary penalties. The Dodd-Frank Act and accompanying regulations, including regulations to be promulgated by the CFPB, are being phased in over time, and while some regulations have been promulgated, many others have not yet been proposed or finalized. We cannot predict the terms of all of the final regulations, their intended consequences or how such regulations will affect us or our industry.
The Dodd-Frank Act does not prevent states from adopting stricter consumer protection standards. State regulation of financial products and potential enforcement actions could also adversely affect our business, financial condition or results of operations.
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Compliance with anti-money laundering and anti-terrorism financing rules involve significant cost and effort.
We are subject to rules and regulations regarding money laundering and the financing of terrorism. Monitoring compliance with anti-money laundering and anti-terrorism financing rules can put a significant financial burden on banks and other financial institutions and poses significant technical challenges. Although we believe our current policies and procedures are sufficient to comply with applicable rules and regulations, we cannot guarantee that our anti-money laundering and anti-terrorism financing policies and procedures completely prevent situations of money laundering or terrorism financing. Any such failure events may have severe consequences, including sanctions, fines and reputational consequences, which could have a material adverse effect on our business, financial condition or results of operations.
We may become subject to more stringent regulatory requirements and activity restrictions, or have to restructure, if the Federal Reserve Board and FDIC determine that our resolution plan is not credible.
Federal Reserve Board and FDIC regulations require bank holding companies with more than $50 billion in assets to submit resolution plans that, in the event of material financial distress or failure, establish the rapid, orderly and systemically safe liquidation of the company under the U.S. Bankruptcy Code. Insured depository institutions with more than $50 billion in assets must submit to the FDIC a resolution plan whereby they can be resolved in a manner that is orderly and that ensures that depositors will receive access to insured funds within certain required timeframes. If the Federal Reserve Board and the FDIC jointly determine that a companys resolution plan is not credible, and the company fails to cure the deficiencies in a timely manner, then the Federal Reserve Board and the FDIC may jointly impose on the company, or on any of its subsidiaries, more stringent capital, leverage or liquidity requirements or restrictions on growth, activities or operations, or require the divestment of certain assets or operations. If the Federal Reserve Board and the FDIC determine that our resolution plan is not credible or would not facilitate our orderly resolution under the U.S. Bankruptcy Code, we could become subject to more stringent regulatory requirements or business restrictions, or have to divest certain of our assets or businesses. Any such measures could have a material adverse effect on our business, financial condition or results of operations.
Risks Related to our Common Stock
Our stock price could decline due to the large number of outstanding shares of our common stock eligible for future sale, and RBS has committed to sell its remaining beneficial ownership of our common stock by the end of 2016 with a possible 12 month extension in certain circumstances. The exact timing of such sale or sales remains uncertain.
The sale of substantial amounts of shares of our common stock in the public market, or the perception that such sales could occur, could harm the prevailing market price of common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. Upon completion of this offering we will have a total of 559,998,324 outstanding shares of common stock. Of the outstanding shares, the 140,000,000 shares sold in this offering (or 161,000,000 shares if the underwriters exercise their option to purchase additional shares in full) will be freely tradable without restriction or further registration under the Securities Act, except that any shares held by our affiliates, as that term is defined under Rule 144 of the Securities Act, may be sold only in compliance with the limitations described in Shares Eligible for Future Sale.
The remaining 419,998,324 shares outstanding will be held indirectly by RBSG International Holdings Limited, a wholly owned subsidiary of RBS. After this offering, these shares will be subject to certain restrictions on resale. We, our officers, directors and the selling stockholders that will collectively
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own 419,998,324 shares following this offering (or 398,998,324 shares if the underwriters exercise their option to purchase additional shares in full), will sign lock-up agreements with the underwriters that will, subject to certain customary exceptions, restrict the sale of the shares of our common stock held by them for 180 days following the date of this prospectus, subject to extension in the case of an earnings release or material news or a material event relating to us. Morgan Stanley & Co. LLC, Goldman, Sachs & Co. and J.P. Morgan Securities LLC may, in their sole discretion, release all or any portion of the shares of common stock subject to lock-up agreements. See Underwriting for a description of these lock-up agreements.
Upon the expiration of the lock-up agreements described above, all such shares will be eligible for resale in a public market, subject, in the case of shares held by our affiliates, to volume, manner of sale and other limitations under Rule 144. We expect that the selling stockholders and other members of the RBS Group will be considered affiliates 180 days after this offering based on their expected share ownership (consisting of 419,998,324 shares, or 398,998,324 shares if the underwriters exercise their option to purchase additional shares in full), as well as their veto and board nomination rights under the Separation Agreement we intend to enter into with RBS prior to the completion of this offering. However, commencing 180 days following this offering, RBS will have the right, subject to certain exceptions and conditions, to require us to register its shares of common stock under the Securities Act, and it will have the right to participate in future registrations of securities by us. Registration of any of these outstanding shares of common stock would result in such shares becoming freely tradable without compliance with Rule 144 upon effectiveness of the registration statement. See Shares Eligible for Future Sale.
As restrictions on resale end, the market price of our shares of common stock could drop significantly as RBS has publicly stated its intent to sell its remaining shares in the short to medium term. The RBS Group, which is currently controlled by the UK government, is undertaking a restructuring plan to facilitate its eventual privatization. As part of its obligations under the European Commissions State Aid Amendment Decision of April 9, 2014, RBS has committed to dispose of its remaining ownership of our common stock by December 31, 2016, with an automatic 12-month extension depending on market conditions. RBSs current intention for disposal of its remaining ownership of our common stock is to sell, over time, such remaining shares in a series of tranches, subject to market conditions and the terms of the lock-up provisions discussed above. The timing and manner of the sale of RBSs remaining ownership of our common stock remains uncertain, and we have no control over the manner in which RBS may seek to divest such remaining shares. RBS could elect to sell its common stock in a number of different ways, including in a number of tranches via future registrations or, alternatively, by the sale of all or a significant tranche of such remaining shares to a single third-party purchaser. Any such sale would impact the price of our shares of common stock and there can be no guarantee that the price at which RBS is willing to sell its remaining shares will be at a level that our Board would be prepared to recommend to holders of our common stock or that you determine adequately values our shares of common stock.
In addition, these factors could also make it more difficult for us to raise additional funds through future offerings of our shares of common stock or other securities.
If RBS sells a controlling interest in our company to a third party in a private transaction, you may not realize any change-of-control premium on shares of our common stock and we may become subject to the control of a presently unknown third party.
Following the completion of this offering, RBS will continue to beneficially own a significant equity interest of our company. RBS will have the ability, should it choose to do so, to sell some or all of its shares of our common stock in a privately negotiated transaction, which, if sufficient in size, could result in a change of control of our company.
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The ability of RBS to privately sell its shares of our common stock, with no requirement for a concurrent offer to be made to acquire all of the shares of our outstanding common stock that will be publicly traded hereafter, could prevent you from realizing any change-of-control premium on your shares of our common stock that may otherwise accrue to RBS on its private sale of our common stock. Additionally, if RBS privately sells its significant equity interest in our company, we may become subject to the control of a presently unknown third party. Such third party may have conflicts of interest with those of other stockholders. In addition, if RBS sells a controlling interest in our company to a third party, RBS may terminate the license agreement and other transitional arrangements, and our other commercial agreements and relationships could be impacted, all of which may adversely affect our ability to run our business as described in this prospectus and may have a material adverse effect on our business, operating results and financial condition.
There is no prior public market for our common stock and one may not develop.
Prior to this offering, there has not been a public trading market for our common stock. An active trading market may not develop or be sustained after this offering. If an active trading market does not develop, you may have difficulty selling your shares of common stock at an attractive price, or at all. The initial public offering price for our common stock sold in this offering will be determined by negotiations among the selling stockholders and the underwriters. This price may not be indicative of the price at which our common stock will trade after this offering. The market price of our common stock may decline below the initial offering price, and you may not be able to sell your common stock at or above the price you paid in this offering, or at all.
Our stock price may be volatile, and you could lose all or part of your investment as a result.
You should consider an investment in our common stock to be risky, and you should invest in our common stock only if you can withstand a significant loss and wide fluctuation in the market value of your investment. The market price of our common stock could be subject to wide fluctuations in response to, among other things, the factors described in this Risk Factors section, and other factors, some of which are beyond our control. These factors include:
| quarterly variations in our results of operations or the quarterly financial results of companies perceived to be similar to us; |
| changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors; |
| our announcements or our competitors announcements regarding new products or services, enhancements, significant contracts, acquisitions or strategic investments; |
| fluctuations in the market valuations of companies perceived by investors to be comparable to us; |
| future sales of our common stock; |
| additions or departures of members of our senior management or other key personnel; |
| changes in industry conditions or perceptions; and |
| changes in applicable laws, rules or regulations and other dynamics. |
Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market price of equity securities of many companies. These fluctuations have often been unrelated or disproportionate to the operating performance of these companies.
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These broad market fluctuations, as well as general economic, systemic, political and market conditions, such as recessions, loss of investor confidence, interest rate changes or international currency fluctuations, may negatively affect the market price of our common stock.
If any of the foregoing occurs, it could cause our stock price to fall and may expose us to securities class action litigation that, even if unsuccessful, could be costly to defend and a distraction to management.
We may not pay cash dividends on our common stock.
Although we intend to pay dividends to our stockholders, we have no obligation to do so and may change our dividend policy at any time without notice to our stockholders. Holders of our common stock are only entitled to receive such cash dividends as our Board may declare out of funds legally available for such payments. Any decision to declare and pay dividends will be dependent on a variety of factors, including our financial condition, earnings, legal requirements and other factors that our Board deems relevant, as well as obtaining applicable regulatory consents and approvals as described under Regulation and Supervision, including the CCAR process. In addition, our ability to pay dividends may be limited by covenants of any future indebtedness we or our subsidiaries incur. As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than that which you paid for it. In addition, since we are a holding company with no significant assets other than the capital stock of our banking subsidiaries, we depend upon dividends from our banking subsidiaries for substantially all of our income. Accordingly, our ability to pay dividends depends primarily upon the receipt of dividends or other capital distributions from our banking subsidiaries. The ability of our banking subsidiaries to pay dividends to us is subject to, among other things, their earnings, financial condition and need for funds, as well as federal and state governmental policies and regulations applicable to us and our banking subsidiaries, which limit the amount that may be paid as dividends without prior regulatory approval. See We depend on our banking subsidiaries for most of our revenue, and restrictions on dividends and other distributions by our banking subsidiaries could affect our liquidity and ability to fulfill our obligations and Regulation and Supervision.
You may incur immediate and substantial dilution in the net tangible book value of the shares you purchase in this offering.
The initial public offering price may be substantially higher than the net tangible book value per share of our common stock based on the total value of our tangible assets less our total liabilities divided by our shares of common stock outstanding immediately following this offering. In that case, if you purchase common stock in this offering, you will experience immediate and substantial dilution in net tangible book value per share after completion of this offering. To the extent outstanding options to purchase our common stock are exercised, there will be further dilution. For further details see Dilution.
Anti-takeover provisions and the regulations to which we are subject may make it more difficult for a third party to acquire control of us, even if the change in control would be beneficial to stockholders.
We are a bank holding company incorporated in the state of Delaware. Anti-takeover provisions in Delaware law and our amended and restated certificate of incorporation and amended and restated bylaws, as well as regulatory approvals that would be required under federal law, could make it more difficult for a third party to take control of us and may prevent stockholders from receiving a premium for their shares of our common stock. These provisions could adversely affect the market price of our common stock and could reduce the amount that stockholders might get if we are sold.
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These provisions include the following, some of which may only become effective when RBS no longer owns shares of our common stock representing at least 50% of our issued and outstanding capital stock:
| the sole ability of our Board to fill a director vacancy on our Board; |
| advance notice requirements for stockholder proposals and director nominations; |
| provisions limiting the stockholders ability to call special meetings of stockholders, to require special meetings of stockholders to be called and to take action by written consent; |
| the approval of holders of at least 75% of the shares entitled to vote generally to amend, alter, change or repeal specified provisions, including those relating to actions by written consent of stockholders, calling of special meetings of stockholders, business combinations and amendment of our amended and restated certificate of incorporation and amended and restated bylaws; and |
| the ability of our Board to designate the terms of and issue new series of preferred stock without stockholder approval, which could be used, among other things, to institute a rights plan that would have the effect of significantly diluting the stock ownership of a potential hostile acquirer, likely preventing acquisitions that have not been approved by our Board. |
For further details see Description of Capital StockAnti-Takeover Effects of Some Provisions. We believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our Board and by providing our Board with more time to assess any acquisition proposal. However, these provisions apply even if the offer may be determined to be beneficial by some stockholders and could delay or prevent an acquisition that our Board determines is not in our best interest and that of our stockholders.
Furthermore, banking laws impose notice, approval and ongoing regulatory requirements on any stockholder or other party that seeks to acquire direct or indirect control of an FDIC-insured depository institution. These laws include the Bank Holding Company Act and the Change in Bank Control Act. These laws could delay or prevent an acquisition.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements under the captions Prospectus Summary, Risk Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations, Business and in other sections of this prospectus that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as may, might, will, should, expects, plans, anticipates, believes, estimates, predicts, potential or continue, the negative of these terms and other comparable terminology. These forward-looking statements may relate to our financial condition, results of operations, plans, objectives, future performance and business, including, but not limited to, statements with respect to expected earnings levels, the adequacy of the allowance for credit losses, delinquency trends, market risk and the impact of interest rate changes, capital market conditions, capital composition and adequacy and liquidity, the effect of legal proceedings and new accounting standards on our financial condition and results of operations. Forward-looking statements are not guarantees of future performance, are based on managements current expectations and, by their nature, involve certain risks, uncertainties, estimates and assumptions by management that are difficult to predict. Various factors, some of which are beyond our control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements, including those factors discussed under the caption entitled Risk Factors. You should specifically consider the numerous risks outlined under Risk Factors. Other factors that might cause such a difference include, but are not limited to:
| Our ability to successfully execute our strategic plan, including by increasing revenue, reducing costs and executing our capital initiatives; |
| Our ability to remedy regulatory deficiencies and meet supervisory requirements and expectations; |
| The rate of growth in the economy and employment levels, as well as general business and economic conditions; |
| Changes in interest rates and market liquidity, as well as the magnitude of such changes, which may reduce interest margins, impact funding sources and affect the ability to originate and distribute financial products in the primary and secondary markets; |
| Changes in federal bank regulatory and supervisory policies, including required levels of capital; |
| The impact of the Dodd-Frank Act on our businesses, business practices and costs of operations; |
| The relative strength or weakness of the consumer and commercial credit sectors and of the real estate markets in the markets in which our borrowers are located; |
| Competition in the financial services industry; and |
| Legislative, tax, accounting or regulatory changes. |
Other possible events or factors that could cause results or performance to differ materially from those expressed in such forward-looking statements include the following:
| Negative economic conditions that adversely affect the general economy, housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of nonperforming assets, charge-offs and provision for credit losses; |
| Adverse movements and volatility in debt and equity capital markets; |
| Changes in market rates and prices, which may adversely impact the value of financial assets and liabilities; |
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| Liabilities resulting from litigation and regulatory investigations; |
| Our ability to grow our core businesses; |
| Decisions to downsize, sell or close units or otherwise change our business mix; and |
| Managements ability to identify and manage these and other risks. |
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We are under no duty to update any of these forward-looking statements after the date of this prospectus to conform to our prior statements as to actual results or revised expectations.
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The selling stockholders are selling all of the shares of common stock in this offering and we will not receive any proceeds from the sale of the common stock in the offering.
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We intend to pay quarterly cash dividends on our common stock at an initial amount of approximately $0.10 per share. Any declaration of dividends will be at the discretion of our Board and will depend on our financial condition, earnings, cash needs, regulatory constraints, capital requirements (including requirements of our subsidiaries) and any other factors that our Board deems relevant in making such a determination. Therefore, there can be no assurance that we will pay any dividends to holders of our common stock, or as to the amount of any such dividends. See Our Relationship with the RBS Group and Certain Other Related Party TransactionsRelationship with the RBS GroupOther for further information regarding capital distributions.
Dividend payments to our stockholders are subject to the oversight, regulatory policies and requirements of the Federal Reserve Board, including requirements to maintain adequate capital above regulatory minima. As described in the section entitled Regulation and Supervision, dividends generally may only be paid or made under a capital plan as to which the Federal Reserve Board has not objected, including in respect of the CCAR process. In March 2014, the Federal Reserve Board objected on qualitative grounds to our capital plan submitted as part of the CCAR process. In its public report entitled Comprehensive Capital Analysis and Review 2014: Assessment Framework and Results, the Federal Reserve Board cited significant deficiencies in our capital planning processes, including inadequate governance, weak internal controls and deficiencies in our practices for estimating revenues and losses under a stress scenario and for ensuring the appropriateness of loss estimates across our business lines in a specific stress scenario. Although the Federal Reserve Board acknowledged that bank holding companies such as ours that are new to the CCAR process are subject to different expectations, our weaknesses were considered serious enough to warrant the Federal Reserve Boards objection based on its qualitative assessment of our capital planning process. As a result, we are not permitted to increase our capital distributions above 2013 levels until a new capital plan is approved by the Federal Reserve Board. The deadline for our next capital plan submission is January 5, 2015, and we cannot assure you that the Federal Reserve Board will not object to our next capital plan or that, even if it does not object to it, our planned capital distributions will not be significantly modified from 2013 levels.
We are a legal entity separate and distinct from our banking subsidiaries and other subsidiaries. Our principal source of liquidity is dividends from CBNA and CBPA. Various federal and state statutes and regulations limit the amount of dividends that may be paid to us by our banking subsidiaries without regulatory consent.
In particular, dividends payable by CBNA, as a national bank subsidiary, are limited to the lesser of the amounts calculated under a recent earnings test and an undivided profits test. Under the recent earnings test, a dividend may not be paid if the total of all dividends declared by a bank in any calendar year is in excess of the current years net income combined with the retained net income of the two preceding years, less any required transfers to surplus, unless the national bank obtains the approval of the OCC. Under the undivided profits test, a dividend may be paid only to the extent that retained net profits (as defined and interpreted by regulation), including the portion transferred to surplus, exceed bad debts (as defined by regulation). As a result of the goodwill impairment recognized by CBNA in the second quarter of 2013, CBNA does not meet the recent earnings test and must obtain specific prior approval from the OCC before making a capital distribution. We expect the recent earnings test to remain negative through 2015. As a result, we expect that CBNA will be required to obtain specific prior approval from the OCC before making a capital distribution through 2015. Since the goodwill impairment in 2013, the OCC has approved each request by CBNA to distribute to us up to 30% of its prior quarter after-tax net income. However, CBNA may not rely on past or current approvals as a guarantee of future approvals.
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With respect to CBPA, the PA Code states, in part, that dividends may be declared and paid only out of accumulated net earnings and may not be declared unless surplus is at least equal to contributed capital. As of June 30, 2014, accumulated net earnings of CBPA were $227 million. We book capital contributed to our wholly-owned subsidiary, CBPA, almost entirely as surplus, which stands at $3.8 billion as of June 30, 2014.
In addition, with respect to both CBNA and CBPA, if, in the opinion of the applicable federal regulatory agency, a depository institution under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), the regulator may require, after notice and hearing, that the bank cease and desist from such practice. The OCC and the FDIC have indicated that the payment of dividends would constitute an unsafe and unsound practice if the payment would reduce a depository institutions capital to an inadequate level.
Moreover, under the Federal Deposit Insurance Act (FDIA), an insured depository institution may not pay any dividends if the institution is undercapitalized or if the payment of the dividend would cause the institution to become undercapitalized. In addition, the federal bank regulatory agencies have issued policy statements which provide that FDIC-insured depository institutions and their holding companies should generally pay dividends only out of their current operating earnings.
During the six months ended June 30, 2014, we declared and paid the following cash dividends, by quarter:
Six Months Ended June 30, 2014 |
Aggregate Cash
Dividend |
|||
(in millions) | ||||
1st Quarter |
$ | 25 | ||
2nd Quarter (1) |
343 | |||
|
|
|||
Total |
$ | 368 | ||
|
|
(1) | Includes special common dividends to RBS. See Managements Discussion and Analysis of Financial Condition and Results of OperationCapital. |
Additionally, on August 1, 2014 and August 28, 2014 we declared and paid a special common dividend of $333 million and a common dividend of $50 million, respectively, to RBS.
During the year ended December 31, 2013, we declared and paid the following cash dividends, by quarter:
Year Ended December 31, 2013 |
Aggregate Cash
Dividend |
|||
(in millions) | ||||
1st Quarter |
$ | 40 | ||
2nd Quarter (1) |
388 | |||
3rd Quarter (1) |
383 | |||
4th Quarter (1) |
374 | |||
|
|
|||
Total |
$ | 1,185 | ||
|
|
(1) | Includes special common dividends to RBS. See Managements Discussion and Analysis of Financial Condition and Results of OperationCapital. |
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During the year ended December 31, 2012, we declared and paid the following cash dividends, by quarter:
Year Ended December 31, 2012 |
Aggregate Cash
Dividend |
|||
(in millions) | ||||
1st Quarter |
$ | | ||
2nd Quarter |
40 | |||
3rd Quarter |
55 | |||
4th Quarter |
55 | |||
|
|
|||
Total |
$ | 150 | ||
|
|
During the year ended December 31, 2011, we did not declare or pay any dividends.
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The following table sets forth our capitalization as of June 30, 2014. The selling stockholders are selling all of the shares of common stock in this offering and we will not receive any proceeds from the sale of the shares. This table should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and our unaudited interim and audited consolidated financial statements and notes included elsewhere in this prospectus.
As of
June 30, 2014 |
||||
Actual | ||||
(in millions) | ||||
Debt: |
||||
Short-term borrowed funds: |
||||
Federal funds purchased |
$ | | ||
Securities sold under agreements to repurchase |
6,807 | |||
Other short-term borrowed funds |
7,702 | |||
|
|
|||
Total short-term borrowed funds |
$ | 14,509 | ||
|
|
|||
Long-term borrowed funds: |
||||
Citizens Financial Group, Inc. |
||||
4.150% fixed rate subordinated debt, due 2022 |
$ | 350 | ||
5.158% fixed-to-floating rate subordinated debt, (LIBOR + 3.56%) callable, due 2023 (1) |
333 | |||
4.771% fixed rate subordinated debt, due 2023 (1) |
333 | |||
4.691% fixed rate subordinated debt, due 2024 (1) |
334 | |||
4.153% fixed rate subordinated debt, due 2024 (1) |
333 | |||
|
|
|||
1,683 | ||||
Banking Subsidiaries |
||||
Federal Home Loan Advances due through 2033 |
24 | |||
Other |
25 | |||
|
|
|||
49 | ||||
|
|
|||
Total long-term borrowed funds |
$ | 1,732 | ||
|
|
|||
Total debt |
$ | 16,241 | ||
|
|
|||
Stockholders equity: |
||||
Preferred Stock |
$ | | ||
Common Stock |
6 | |||
Additional paid-in capital |
18,603 | |||
Retained earnings (2) |
1,346 | |||
Accumulated other comprehensive loss |
(358 | ) | ||
|
|
|||
Total stockholders equity |
$ | 19,597 | ||
|
|
|||
Total capitalization |
$ | 35,838 | ||
|
|
(1) | Intercompany borrowed funds with the RBS Group. See Our Relationship with the RBS Group and Certain Other Related Party TransactionsRelationship with the RBS GroupOther and Note 18 Related Party Transactions to our audited consolidated financial statements included elsewhere in this prospectus. |
(2) | A $50 million dividend was paid to RBS Group on August 28, 2014. |
On August 1, 2014, we executed an additional $333 million exchange of common equity for 10-year subordinated debt (4.023% fixed rate subordinated debt, due 2024) to the RBS Group and, subject to regulatory approval, we plan to continue our strategy of capital optimization by, assuming
61
completion of this offering, issuing $334 million of our shares of preferred stock to RBS and then using the proceeds from this issuance to purchase $334 million of our shares of common stock from RBS in the fourth quarter of 2014. In addition, we intend to repurchase approximately $500 million of shares of our common stock and $250 million of shares of our common stock in 2015 and 2016, respectively, with proceeds from the issuance of subordinated debt or another lesser form of capital. See Our Relationship with the RBS Group and Certain Other Related Party TransactionsRelationship with the RBS GroupOther for further details of the planned fourth quarter exchange transaction.
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Our consolidated net tangible book value as of June 30, 2014 was $13.1 billion or $23.39 per share of common stock. Consolidated net tangible book value per share represents consolidated tangible assets, less consolidated liabilities, divided by the aggregate number of shares of common stock outstanding. Our consolidated net tangible book value per share will not be affected by the sale of shares of common stock in this offering. On August 1, 2014, we exchanged $333 million of Tier 1 common equity for Tier 2 subordinated debt. Pro forma for this exchange, as of June 30, 2014, our consolidated net tangible book value would have been $12.8 billion or $22.79 per share of common stock, without giving effect to any additional net income earned or additional dividends paid between June 30, 2014 and August 1, 2014. Dilution per share represents the difference between the price per share to be paid by new investors for the shares of common stock sold in this offering and the consolidated net tangible book value per share. The price per share to the public of the shares of common stock in this offering exceeds the pro forma consolidated net tangible book value per share prior to the offering. Therefore, purchasers of shares of common stock in the offering will realize immediate and substantial dilution in the consolidated net tangible book value of $1.21 per share. The following table illustrates this per share dilution:
Assumed initial public offering price |
$ | 24.00 | ||
Pro forma consolidated net tangible book value per share as of June 30, 2014 |
$ | 22.79 | ||
|
|
|||
Dilution per share to new investors |
$ | 1.21 | ||
|
|
We have not issued any shares of common stock or rights to acquire shares of common stock in the last five years.
Sales by the selling stockholders in this offering will reduce the number of shares held by existing stockholders to 419,998,324 or approximately 75.0% of the total shares of common stock outstanding after the offering, or to 398,998,324 shares or approximately 71.2% of the total shares of common stock outstanding after the offering if the option to purchase additional shares is exercised in full, and will increase the number of shares to be purchased by new investors to 140,000,000 or approximately 25.0% of the total shares of common stock outstanding after the offering, or to 161,000,000 shares or approximately 28.7% of the total shares of common stock outstanding after the offering if the option to purchase additional shares is exercised in full, of the total shares of common stock outstanding after the offering.
The foregoing table assumes no exercise of the underwriters over-allotment option and excludes (i) 5,087,770 shares (based principally on the midpoint of the range set forth on the cover page of this prospectus) of common stock underlying CFG equity awards following the conversion of outstanding RBS deferred share awards, outstanding RBS long-term incentive awards (assuming maximum achievement of the performance conditions applicable to the long-term incentive awards) and special IPO awards into awards on shares of our common stock upon completion of this offering and (ii) 62,112,029 shares of common stock that may be granted under our new equity compensation plans (including our employee stock purchase plan) following this offering. See Compensation Discussion and Analysis and our audited consolidated financial statements included elsewhere in this prospectus.
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SELECTED CONSOLIDATED FINANCIAL DATA
We derived the selected consolidated operating data for the years ended December 31, 2013, 2012 and 2011 and the selected consolidated balance sheet data as of December 31, 2013 and 2012 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the selected consolidated statement of operations data for the years ended December 31, 2010 and 2009 and the selected consolidated balance sheet data as of December 31, 2011, 2010 and 2009 from our consolidated financial statements, which are not included in this prospectus. We derived the selected consolidated operating data for the six months ended June 30, 2014 and 2013 and the selected balance sheet data as of June 30, 2014 from our unaudited interim consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results expected for any future period.
In our opinion, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the information set forth herein. Our operating results for the six months ended June 30, 2014 are not necessarily indicative of those to be expected for the year ending December 31, 2014 or for any future period. You should read the following selected consolidated financial data in conjunction with the sections of this prospectus entitled Summary Consolidated Financial and Other Data, Managements Discussion and Analysis of Financial Condition and Results of Operations, and Selected Statistical Information and our consolidated financial statements and notes thereto included elsewhere in this prospectus.
For the Six Months
Ended June 30, |
For the Year Ended December 31, | |||||||||||||||||||||||||||
2014 | 2013 | 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||||||||
(dollars in millions, except per share amounts) | ||||||||||||||||||||||||||||
Operating Data: |
||||||||||||||||||||||||||||
Net interest income |
$ | 1,641 | $ | 1,509 | $ | 3,058 | $ | 3,227 | $ | 3,320 | $ | 3,345 | $ | 3,419 | ||||||||||||||
Noninterest income |
998 | 870 | 1,632 | 1,667 | 1,711 | 1,733 | 1,666 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total revenue |
2,639 | 2,379 | 4,690 | 4,894 | 5,031 | 5,078 | 5,085 | |||||||||||||||||||||
Provision for credit
|
170 | 202 | 479 | 413 | 882 | 1,644 | 2,783 | |||||||||||||||||||||
Noninterest expense |
1,758 | 6,073 | 7,679 | 3,457 | 3,371 | 3,483 | 3,495 | |||||||||||||||||||||
Noninterest expense,
|
1,758 | 1,638 | 3,244 | 3,457 | 3,371 | 3,483 | 3,495 | |||||||||||||||||||||
Income (loss) before
|
711 | (3,896 | ) | (3,468 | ) | 1,024 | 778 | (49 | ) | (1,193 | ) | |||||||||||||||||
Income tax expense
|
232 | (174 | ) | (42 | ) | 381 | 272 | (61 | ) | (420 | ) | |||||||||||||||||
Net income (loss) |
479 | (3,722 | ) | (3,426 | ) | 643 | 506 | 11 | (740 | ) | ||||||||||||||||||
Net income (loss),
|
479 | 358 | 654 | 643 | 506 | 11 | (740 | ) | ||||||||||||||||||||
Net income (loss) per
|
0.86 | (6.65 | ) | (6.12 | ) | 1.15 | 0.90 | 0.02 | (1.32 | ) | ||||||||||||||||||
Net income (loss) per
|
0.86 | 0.64 | 1.17 | 1.15 | 0.90 | 0.02 | (1.32 | ) |
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For the Six Months
Ended June 30, |
For the Year Ended December 31, | |||||||||||||||||||||||||||
2014 | 2013 | 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||||||||
(dollars in millions, except per share amounts) | ||||||||||||||||||||||||||||
Other Operating Data: |
||||||||||||||||||||||||||||
Return on average
|
4.96 | % | (13.87 | )% | (15.69 | )% | 2.69 | % | 2.19 | % | 0.05 | % | (3.77 | )% | ||||||||||||||
Return on average
|
4.96 | % | 2.98 | % | 3.00 | % | 2.69 | % | 2.19 | % | 0.05 | % | (3.77 | )% | ||||||||||||||
Return on average tangible
|
7.45 | % | (24.96 | )% | (25.91 | )% | 4.86 | % | 4.18 | % | 0.11 | % | (9.56 | )% | ||||||||||||||
Return on average tangible
|
7.45 | % | 5.37 | % | 4.95 | % | 4.86 | % | 4.18 | % | 0.11 | % | (9.56 | )% | ||||||||||||||
Return on average total
|
0.77 | % | (2.73 | )% | (2.83 | )% | 0.50 | % | 0.39 | % | 0.01 | % | (0.47 | )% | ||||||||||||||
Return on average total
|
0.77 | % | 0.59 | % | 0.54 | % | 0.50 | % | 0.39 | % | 0.01 | % | (0.47 | )% | ||||||||||||||
Return on average total
|
0.81 | % | (2.99 | )% | (3.05 | )% | 0.55 | % | 0.43 | % | 0.01 | % | (0.51 | )% | ||||||||||||||
Return on average total
|
0.81 | % | 0.64 | % | 0.58 | % | 0.55 | % | 0.43 | % | 0.01 | % | (0.51 | )% | ||||||||||||||
Efficiency ratio (1) |
66.58 | % | 255.24 | % | 163.73 | % | 70.64 | % | 67.00 | % | 68.59 | % | 68.73 | % | ||||||||||||||
Efficiency ratio, excluding
|
66.58 | % | 68.80 | % | 69.17 | % | 70.64 | % | 67.00 | % | 68.59 | % | 68.73 | % | ||||||||||||||
Net interest margin (5)(12) |
2.88 | % | 2.83 | % | 2.85 | % | 2.89 | % | 2.97 | % | 2.78 | % | 2.49 | % |
As of
June 30, |
As of December 31, | |||||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||||||
Total assets |
$ | 130,279 | $ | 122,154 | $ | 127,053 | $ | 129,654 | $ | 129,689 | $ | 147,681 | ||||||||||||
Loans and leases (6) |
88,829 | 85,859 | 87,248 | 86,795 | 87,022 | 95,080 | ||||||||||||||||||
Allowance for loan and lease losses |
1,210 | 1,221 | 1,255 | 1,698 | 2,005 | 2,209 | ||||||||||||||||||
Total securities |
24,823 | 21,245 | 19,417 | 23,352 | 21,802 | 28,161 | ||||||||||||||||||
Goodwill |
6,876 | 6,876 | 11,311 | 11,311 | 11,311 | 11,709 | ||||||||||||||||||
Total liabilities |
110,682 | 102,958 | 102,924 | 106,261 | 106,995 | 125,405 | ||||||||||||||||||
Deposits (7) |
91,656 | 86,903 | 95,148 | 92,888 | 92,155 | 98,053 | ||||||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
6,807 | 4,791 | 3,601 | 4,152 | 5,112 | 5,222 | ||||||||||||||||||
Other short-term borrowed funds |
7,702 | 2,251 | 501 | 3,100 | 1,930 | 11,373 | ||||||||||||||||||
Long-term borrowed funds |
1,732 | 1,405 | 694 | 3,242 | 5,854 | 7,135 | ||||||||||||||||||
Total stockholders equity |
19,597 | 19,196 | 24,129 | 23,393 | 22,694 | 22,276 |
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As of
June 30, |
As of December 31, | |||||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||
Other Balance Sheet Data: |
||||||||||||||||||||||||
Asset Quality Ratios: |
||||||||||||||||||||||||
Allowance for loan and lease losses as a
|
1.36 | % | 1.42 | % | 1.44 | % | 1.96 | % | 2.30 | % | 2.32 | % | ||||||||||||
Allowance for loan and lease losses as a
|
101 | % | 86 | % | 67 | % | 95 | % | 85 | % | 101 | % | ||||||||||||
Nonperforming loans and leases as a percentage
|
1.35 | % | 1.65 | % | 2.14 | % | 2.06 | % | 2.71 | % | 2.31 | % | ||||||||||||
Capital ratios: |
||||||||||||||||||||||||
Tier 1 capital ratio (8) |
13.3 | % | 13.5 | % | 14.2 | % | 13.9 | % | 13.0 | % | 11.6 | % | ||||||||||||
Total capital ratio (9) |
16.2 | % | 16.1 | % | 15.8 | % | 15.1 | % | 14.4 | % | 13.0 | % | ||||||||||||
Tier 1 common equity ratio (10) |
13.3 | % | 13.5 | % | 13.9 | % | 13.3 | % | 12.5 | % | 11.1 | % | ||||||||||||
Leverage ratio (11) |
11.1 | % | 11.6 | % | 12.1 | % | 11.6 | % | 10.4 | % | 8.7 | % |
(1) | These measures are non-GAAP financial measures. For more information on the computation of these non-GAAP financial measures, see Managements Discussion and Analysis of Financial Condition and Results of OperationsPrincipal Components of Operations and Key Performance Metrics Used By ManagementKey Performance Metrics and Non-GAAP Financial Measures. |
(2) | Earnings per share information reflects a 165,582-for-1 forward stock split effective on August 22, 2014. |
(3) | We define Return on average common equity as net income (loss) divided by average common equity. |
(4) | We define Return on average total assets as net income (loss) divided by average total assets. |
(5) | We define Net interest margin as net interest income divided by average total interest-earning assets. |
(6) | Excludes loans held for sale of $262 million, $1.3 billion, $646 million, $564 million, $716 million, and $456 million as of June 30, 2014 and December 31, 2013, 2012, 2011, 2010, and 2009, respectively. |
(7) | Excludes deposits held for sale of $5.3 billion as of December 31, 2013. |
(8) | We define Tier 1 capital ratio as Tier 1 capital balance divided by total risk-weighted assets as defined under Basel I. |
(9) | We define Total capital ratio as total capital balance divided by total risk-weighted assets as defined under Basel I. |
(10) | We define Tier 1 common equity ratio as Tier 1 capital balance, minus preferred stock, divided by total risk-weighted assets as defined under Basel I. |
(11) | We define Leverage ratio as Tier 1 capital balance divided by quarterly average total assets as defined under Basel I. |
(12) | Operating ratios for the periods ended June 30, 2014 and 2013 are presented on an annualized basis. |
66
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, those set forth in Special Note Regarding Forward-Looking Statements and Risk Factors and the matters set forth in this prospectus generally. The following discussion is based on, and should be read in conjunction with, our unaudited interim and audited consolidated financial statements and related notes included elsewhere in this prospectus, as well as Summary Consolidated Financial and Other Data, Selected Consolidated Financial Data and the other financial information included elsewhere in this prospectus.
Overview
We are the 13th largest retail bank holding company in the United States according to SNL Financial with $130.3 billion of total assets as of June 30, 2014. Headquartered in Providence, Rhode Island, we deliver a broad range of retail and commercial banking products and services to more than five million individuals, institutions and companies. Our approximately 18,050 employees strive to meet the financial needs of customers and prospects through approximately 1,230 branches and approximately 3,215 ATMs operated in an 11-state footprint across the New England, Mid-Atlantic and Midwest regions and through our online, telephone and mobile banking platforms. We have 90 retail and commercial non-branch offices located both in our geographic footprint and in nine states and the District of Columbia outside our branch footprint. Our 11-state branch banking footprint contains approximately 29.9 million households and 3.1 million businesses according to SNL Financial. We conduct our banking operations through our two wholly owned banking subsidiaries, CBNA and CBPA.
We operate our business through two operating segments: Consumer Banking and Commercial Banking. Consumer Banking accounted for $46.9 billion and $45.4 billion, or approximately 53% and 53% of our year-to-date average loan and lease balances (including loans held for sale) for the six months ended June 30, 2014 and 2013, respectively, and $45.1 billion and $46.5 billion, or approximately 53% and 53%, as of December 31, 2013 and 2012, respectively. Consumer Banking serves retail customers and small businesses with annual revenues of up to $25 million through a network that as of June 30, 2014 included approximately 1,230 branches operated in an 11-state footprint across the New England, Mid-Atlantic and Midwest regions, as well as through our online, telephone and mobile banking platforms. Our Consumer Banking products and services include deposit products, mortgage and home equity lending, student loans, auto financing, credit cards, business loans and wealth management and investment services.
Commercial Banking accounted for $37.0 billion and $34.2 billion, or approximately 42% and 40% of our year-to-date average loan and lease balances (including loans held for sale) for the six months ended June 30, 2014 and 2013, respectively, and $34.6 billion and $32.5 billion, or approximately 40% and 37%, as of December 31, 2013 and 2012, respectively. Commercial Banking offers a broad complement of financial products and solutions, including lending and leasing, trade financing, deposit and treasury management, foreign exchange and interest rate risk management, corporate finance and debt and equity capital markets capabilities.
As of June 30, 2014 and December 31, 2013, we had $3.5 billion and $3.8 billion, respectively, of non-core asset balances, which are included in Other along with our treasury function, securities portfolio, wholesale funding activities, goodwill, community development assets and other unallocated assets, liabilities, revenues, provision for credit losses and expenses not attributed to Consumer Banking or Commercial Banking. Non-core assets are primarily loans inconsistent with our strategic
67
goals, generally as a result of geographic location, industry, product type or risk level. We have actively managed these loans down since they were designated as non-core on June 30, 2009, and the portfolio decreased a further 10% as of June 30, 2014 compared to December 31, 2013. The largest component of our non-core portfolio is our home equity products serviced by others (a portion of which we now service internally).
Recent Events
On June 20, 2014, we closed the sale of certain assets and liabilities associated with our Chicago-area retail branches, small business relationships and select middle market relationships to U.S. Bancorp. The agreement to sell these assets and liabilities to U.S. Bancorp had previously been announced in January 2014. This sale, which we refer to as the Chicago Divestiture, included 103 branches, including 94 full-service branches, with $4.8 billion of deposits and $1.0 billion in loans as of June 30, 2014. We recorded a gain on sale of $288 million and also incurred related expenses of $17 million. Management estimates that the Chicago Divestiture has the effect of reducing quarterly net interest income by approximately $12 million to $15 million, noninterest income by approximately $13 million to $17 million and noninterest expense by approximately $20 million to $25 million. We intend to invest the majority of the sale proceeds over time into higher returning activities.
On May 29, 2014, we entered into an agreement with a third party to purchase predominantly prime auto loans, including an initial purchase of $150 million in principal balances of loans. On the same date, we entered into an agreement with the same party to purchase auto loans for future rolling 90-day periods that automatically renew until termination by either party. For the first year ended May 29, 2015, we are required to purchase a minimum of $250 million in principal balances of loans up to a maximum of $600 million in principal balances of loans per rolling 90-day period. After May 29, 2015, the minimum per each rolling 90-day period increases to $400 million in principal balances of loans, with a maximum of $600 million in principal balances of loans. We may cancel the agreement at any time at will; however, if we elect to cancel at any time during the first three years of the agreement, we will be charged a variable termination fee.
Key Factors Affecting Our Business
Macro-economic conditions
Our business is affected by national, regional and local economic conditions, as well as the perception of those conditions and future economic prospects. The significant macro-economic factors that impact our business are: the U.S. and global economic landscapes, unemployment rates, the housing markets and interest rates.
The U.S. economy expanded 1.0% in the six months ended June 30, 2014, as gains in consumer spending and business investment in the second quarter of 2014 helped the economy rebound from a slump in the first quarter of 2014 caused by harsh winter weather. This expansion followed considerable improvement in the economic landscape in 2013, with nominal GDP growth averaging 3.1% for the year. The Eurozone economy expanded 0.7% in the three months ended March 31, 2014, after having emerged from recession in the second half of 2013. In addition to the improving picture in the Eurozone and periphery countries, reaccelerating growth in China provided further support. The U.S. unemployment rate dropped from 6.7% at year-end 2013 to 6.1% at June 30, 2014. The overall improvement was partially driven by a decrease in the labor force participation rate, which declined to its lowest level in over 35 years. After a pause in late 2013 and the first quarter of 2014, the housing market continued to strengthen in the second quarter of 2014, as demonstrated by continued price increases, and an increase in existing home sales. The Federal Reserve Board maintained very accommodative monetary policy conditions through a zero to 25 basis point federal funds target at the short end of the curve, and quantitative easing programs designed to reduce longer tenor rates.
68
Interest rates remain relatively low, and financial conditions are supportive of continued growth. See Interest rates below for further discussion of the impact of interest rates on our results.
Credit trends
Credit trends improved during the six months ended June 30, 2014 compared to the same period in 2013, largely driven by improving macro-economic factors as discussed above. Net charge-offs for the six months ended June 30, 2014 of $155 million decreased $100 million, or 39%, from $255 million for the six months ended June 30, 2013. The annualized net charge-offs as a percentage of total average loans improved to 0.36% for the six months ended June 30, 2014, compared to 0.60% for the six months ended June 30, 2013.
Credit trends improved during 2013 compared to 2012 largely driven by the improvement in the macro-economic factors discussed above. The improvement in credit trends led to an improvement in our net charge-offs for the year ended December 31, 2013, which decreased $374 million, or 43%, to $501 million, compared to $875 million for the year ended December 31, 2012. The net charge-offs as a percentage of total average loans improved to 0.59% for the year ended December 31, 2013, compared to 1.01% for the year ended December 31, 2012. The overall charge-off rates are expected to increase marginally in 2015 and 2016 but are expected to remain below 2013 levels as commercial recovery opportunities dissipate, home prices stabilize and non-core portfolios continue to runoff.
Interest rates
Net interest income is our largest source of revenue and is the difference between the interest earned on interest-earning assets (usually loans and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (usually deposits and borrowings). The level of net interest income is primarily a function of the average balance of interest-earning assets, the average balance of interest-bearing liabilities and the spread between the contractual yield on such assets and the contractual cost of such liabilities. These factors are influenced by both the pricing and mix of interest-earning assets and interest-bearing liabilities which, in turn, are impacted by external factors such as local economic conditions, competition for loans and deposits, the monetary policy of the Federal Reserve Board and market interest rates. For further discussion, refer to Risk Governance and Quantitative and Qualitative Disclosures About RiskMarket RiskNon-Trading Risk.
The cost of our deposits and short-term wholesale borrowings is largely based on short-term interest rates, which are primarily driven by the Federal Reserve Boards actions. However, the yields generated by our loans and securities are typically driven by short-term and long-term interest rates, which are set by the market or, at times, by the Federal Reserve Boards actions. The level of net interest income is therefore influenced by movements in such interest rates and the pace at which such movements occur. In 2013 and through the six months ended June 30, 2014, short-term and long-term interest rates remained at very low levels by historical standards, with many benchmark rates, such as the federal funds rate and one- and three-month LIBOR, near zero. Further declines in the yield curve or a decline in longer-term yields relative to short-term yields (a flatter yield curve) would have an adverse impact on our net interest margin and net interest income. The low interest rate environment has compressed our net interest margin in recent periods.
In 2013 and through the six months ended June 30, 2014, the Federal Reserve Board maintained a highly accommodative monetary policy, and indicated that this policy would remain in effect for a considerable time after its asset purchase program ends and the economic recovery strengthens. As of June 2014, the Federal Reserve was purchasing $35 billion per month, composed of $20 billion in Treasury securities and $15 billion in agency mortgage-backed securities. The Federal Reserve Board announced an end to purchases in October 2014.
69
Regulatory trends
We are subject to extensive regulation and supervision, which continue to evolve as the legal and regulatory framework governing our operations continues to change. The current operating environment also has heightened regulatory expectations around many regulations including consumer compliance, the Bank Secrecy Act, and anti-money laundering compliance and increased internal audit activities. As a result of these heightened expectations, we expect to incur additional costs for additional compliance personnel or professional fees associated with advisors and consultants.
Dodd-Frank regulation
As described further under Regulation and Supervision, we are subject to a variety of laws and regulations, including the Dodd-Frank Act. The Dodd-Frank Act is complex, and many aspects of it are subject to final rulemaking that will take effect over several years. The Dodd-Frank Act will continue to impact our earnings through fee reductions, higher costs and imposition of new restrictions on us. The Dodd-Frank Act may also continue to have a material adverse impact on the value of certain assets and liabilities held on our balance sheet. The ultimate impact of the Dodd-Frank Act on our business will depend on regulatory interpretation and rulemaking as well as the success of any of our actions to mitigate the negative impacts of certain provisions. Key parts of the Dodd-Frank Act that will specifically impact our business are the repeal of a previous prohibition against payment of interest on demand deposits, which became effective in July 2011, and the introduction of a stress-testing and capital planning framework developed by the Federal Reserve Board, known as CCAR. As part of our obligations under the Dodd-Frank Act, we, and certain other bank holding companies, will be required to publish results of the Dodd-Frank stress test (DFAST) during the third quarter of 2014. The DFAST process is used to project net income, loan losses and capital ratios over a nine-quarter horizon under hypothetical, stressful macroeconomic and financial market scenarios developed by the Federal Reserve Board as well as under certain mandated assumptions about capital distributions prescribed in the DFAST rule. Given the purpose of the DFAST process and the assumptions used in order to assess our likely performance during hypothetical economic conditions, we expect that projected results under the DFAST severely adverse scenarios will show severe negative impacts on earnings, inconsistent with management expectations in light of the current economic and operating environment.
Repeal of the prohibition on depository institutions paying interest on demand deposits
We began offering interest-bearing corporate checking accounts after the 2011 repeal of the prohibition on depository institutions paying interest on demand deposits. Currently, industrywide interest rates for this product are very low and thus far the impact of the repeal has not had a significant effect on our results. However, market rates could increase more significantly in the future. If we need to pay higher interest rates on checking accounts to maintain current clients or attract new clients, our interest expense would increase, perhaps materially. Furthermore, if we fail to offer interest rates at a sufficient level to retain demand deposits, our core deposits may be reduced, which would require us to obtain funding in other ways or limit potential future asset growth.
Comprehensive Capital Analysis and Review
CCAR is an annual exercise by the Federal Reserve Board to ensure that the largest bank holding companies have sufficient capital to continue operations throughout times of economic and financial stress and robust, forward-looking capital planning processes that account for their unique risks.
As part of CCAR, the Federal Reserve Board evaluates institutions capital adequacy, internal capital adequacy assessment processes and their plans to make capital distributions, such as dividend payments or stock repurchases. In March 2014, the Federal Reserve Board objected on qualitative grounds to our capital plan submitted as part of the CCAR process. In addition to modifications we may be required to make in connection with our proposed capital distributions through the CCAR process,
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we may incur additional expenses in connection with the CCAR process that would affect our profitability and results of operations. For further information regarding the CCAR process, see Dividend Policy and Regulation and Supervision.
Basel III final rules applicable to us and our banking subsidiaries
In July 2013, the Federal Reserve Board, OCC, and FDIC issued the U.S. Basel III final rules. The final rule implements the Basel III capital framework and certain provisions of the Dodd-Frank Act, including the Collins Amendment. See Regulation and SupervisionCapital for further information. Certain aspects of the final rules, such as the new minimum capital ratios, will become effective on January 1, 2015. In order to comply with the new capital requirements, we established capital ratio targets that meet or exceed U.S. regulatory expectations under fully phased-in Basel III rules, and as a result our capital requirements were increased.
HELOC Payment Shock
Recent attention has been given by regulators, rating agencies, and the general press regarding the potential for increased exposure to credit losses associated with HELOCs that were originated during the period of rapid home price appreciation between 2003 and 2007. Industrywide, many of the HELOCs originated during this timeframe were structured with an extended interest-only payment period followed by a requirement to convert to a higher payment amount that would begin fully amortizing both principal and interest beginning at a certain date in the future. As of June 30, 2014, approximately 33% of our $16.2 billion HELOC portfolio, or $5.3 billion in drawn balances, and $4.5 billion in undrawn balances, were subject to a payment reset or balloon payment between July 1, 2014 and December 31, 2017, including $350 million in balloon balances where full payment is due at the end of a ten-year interest only draw period.
To help manage this exposure, in September 2013, we launched a comprehensive program designed to provide heightened customer outreach to inform, educate and assist customers through the reset process as well as to offer alternative financing and forbearance options. Preliminary results indicate that our efforts to assist customers at risk of default have successfully reduced delinquency and charge-off rates compared to our original expectations.
As of June 30, 2014, for the $668 million of our HELOC portfolio that was originally structured with a reset period in 2013, 93.7% of the balances were refinanced, paid off or were current on payments, 3.4% were past due and 2.9% had been charged off. As of June 30, 2014, for the $898 million of our HELOC portfolio that was originally structured with a reset period in 2014, 96.4% of the balances were refinanced, paid off or were current on payments, 3.1% were past due and 0.5% had been charged off. HELOC portfolio balances of $352 million are scheduled to reset in the remainder of 2014. Factors that affect our future expectations for charge-off risk for the portion of our HELOC portfolio subject to reset periods in the future include improved loan-to-value ratios resulting from continued home price appreciation, stable portfolio credit score profiles and more robust loss mitigation efforts.
Factors Affecting Comparability of Our Results
Goodwill
During the 19-year period from 1988 to 2007, we completed a series of more than 25 acquisitions of other financial institutions and financial assets and liabilities. We accounted for these types of business combinations using the acquisition method of accounting. Under this accounting method, the acquired companys net assets are recorded at fair value at the date of acquisition, and the difference between the purchase price and the fair value of the net assets acquired is recorded as goodwill.
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Under relevant accounting guidance, we are required to review goodwill for impairment annually, or more frequently if events or circumstances indicate that the fair value of any of our business units might be less than its carrying value. The valuation of goodwill is dependent on forward-looking expectations related to the performance of the U.S. economy and our associated financial performance.
The prolonged delay in the full recovery of the U.S. economy, and the impact of that delay on our earnings expectations, prompted us to record a $4.4 billion pretax ($4.1 billion after tax) goodwill impairment as of June 30, 2013 related to our Consumer Banking reporting unit. For segment reporting purposes, the impairment charge is reflected in Other.
Although the U.S. economy has demonstrated signs of recovery, notably improvements in unemployment and housing, the pace and extent of recovery in these indicators, as well as in overall gross domestic product, have lagged behind previous expectations. The impact of the slow recovery is most evident in Consumer Banking. The forecasted lower economic growth for the United States, coupled with increasing costs of complying with the new regulatory framework in the financial industry, resulted in a deceleration of expected growth for Consumer Bankings future income, which resulted in our recording of a goodwill impairment charge during the second quarter of 2013. We have recorded goodwill impairment charges in the past and any further impairment to our goodwill could materially affect our results in any given period. As of both June 30, 2014 and December 31, 2013, we had a carrying value of goodwill of $6.9 billion. For additional information regarding our goodwill impairment testing, see Note 5 Goodwill to our unaudited interim consolidated financial statements, as well as Note 1 Significant Accounting Policies and Note 8 Goodwill to our audited consolidated financial statements included elsewhere in this prospectus.
Investment in the business
We regularly incur expenses associated with investments in our infrastructure, and, from 2009 to year end 2013, we have invested more than $1.0 billion in infrastructure and technology, with an additional $250 million planned for each of 2014 and 2015. These investments, which are designed to lower our costs and improve our customer experience, include significant programs to enhance our resiliency, upgrade customer-facing technology and streamline operations. Recent significant investments included the 2013 launch of our new teller system, new commercial loan platform and new auto loan platform and the 2013 upgrade of the majority of our ATM network, including equipping more than 1,450 ATMs with advanced deposit-taking functionality. These investments also involved spending to prepare for the planned rollout of our new mortgage platform. We expect that these investments will increase our long-term overall efficiency and add to our capacity to increase revenue.
Operating expenses to operate as a fully independent public company
Following the completion of this offering and as part of our transition to a stand-alone company, we expect to incur one-time expenditures of approximately $55 million, including capitalized costs of $18 million, as well as ongoing incremental expenses of approximately $34 million per year. We expect these ongoing costs will include higher local charges associated with exiting worldwide vendor relationships and incremental expenses to support information technology, compliance, corporate governance, regulatory, financial and risk infrastructure that are necessary to enable us to operate as a fully stand-alone public company. For additional information on the planned separation from the RBS Group, see Our Relationship with the RBS Group and Certain Other Related Party Transactions.
Principal Components of Operations and Key Performance Metrics Used By Management
As a banking institution, we manage and evaluate various aspects of both our results of operations and our financial condition. We evaluate the levels and trends of the line items included in our balance
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sheet and statement of operations, as well as various financial ratios that are commonly used in our industry. We analyze these ratios and financial trends against our own historical performance, our budgeted performance and the financial condition and performance of comparable banking institutions in our region and nationally.
The primary line items we use in our key performance metrics to manage and evaluate our statement of operations include net interest income, noninterest income, total revenue, provision for credit losses, noninterest expense and net income (loss). The primary line items we use in our key performance metrics to manage and evaluate our balance sheet data include loans and leases, securities, allowance for credit losses, deposits, borrowed funds and derivatives.
Net interest income
Net interest income is the difference between the interest earned on interest-earning assets (usually loans and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (usually deposits and borrowings). The level of net interest income is primarily a function of the average balance of interest-earning assets, the average balance of interest-bearing liabilities and the spread between the contractual yield on such assets and the cost of such liabilities. Net interest income is impacted by the relative mix of interest-earning assets and interest-bearing liabilities, movements in market interest rates, levels of nonperforming assets and pricing pressure from competitors. The mix of interest-earning assets is influenced by loan demand and by managements continual assessment of the rate of return and relative risk associated with various classes of interest-earning assets.
The mix of interest-bearing liabilities is influenced by managements assessment of the need for lower cost funding sources weighed against relationships with customers and growth requirements and is impacted by competition for deposits in our market and the availability and pricing of other sources of funds.
Noninterest income
The primary components of our noninterest income are service charges and fees, card fees, trust and investment services fees and securities gains, net.
Total revenue
Total revenue is the sum of our net interest income and our noninterest income.
Provision for credit losses
The provision for credit losses is the amount of expense that, based on our judgment, is required to maintain the allowance for credit losses at an adequate level to absorb probable losses inherent in the loan portfolio at the balance sheet date and that, in managements judgment, is appropriate under relevant accounting guidance. The provision for credit losses includes the provision for loan and lease losses as well as the provision for unfunded commitments. The determination of the amount of the allowance is complex and involves a high degree of judgment and subjectivity. For additional information regarding the provision for credit losses, see Critical Accounting EstimatesAllowance for Credit Losses, Note 4 Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk to our unaudited interim consolidated financial statements, as well as Note 1 Significant Accounting Policies and Note 5 Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk to our audited consolidated financial statements included elsewhere in this prospectus.
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Noninterest expense
Noninterest expense primarily includes salaries and employee benefits, outside services, occupancy, equipment expense, goodwill impairment, and other operating expenses.
Net income (loss)
We evaluate our net income based on measures including return on average total tangible assets, return on average tangible common equity and efficiency ratio.
Loans and leases
We classify our loans and leases pursuant to the following classes: commercial, commercial real estate, leases, residential (including residential mortgages and home equity loans and lines of credit), home equity products serviced by others (including certain purchased home equity loans and lines of credit), other secured retail (including automobile loans and other installment loans) and unsecured retail (including student loans and credit card).
Loans are reported at the amount of their outstanding principal, net of charge-offs, unearned income, deferred loan origination fees and costs and unamortized premiums or discounts (on purchased loans). Deferred loan origination fees and costs and purchase discounts and premiums are amortized as an adjustment of yield over the life of the loan, using the level yield interest method. Unamortized amounts remaining upon prepayment or sale are recorded as interest income or gain (loss) on sale, respectively. Credit card receivables include billed and uncollected interest and fees.
Leases are classified at the inception of the lease by type. Lease receivables, including leveraged leases, are reported at the aggregate of lease payments receivable and estimated residual values, net of unearned and deferred income, including unamortized investment credits. Lease residual values are reviewed at least annually for other-than-temporary impairment, with valuation adjustments recognized currently against noninterest income. Leveraged leases are reported net of non-recourse debt. Unearned income is recognized to yield a level rate of return on the net investment in the leases.
Mortgage loans held for sale are carried at fair value. Other loans held for sale primarily include loans relating to our Chicago branch network and are carried at the lower of cost or fair value.
Securities
Our securities portfolio is managed to seek return while maintaining prudent levels of quality, market risk and liquidity. Investments in debt and equity securities are carried in four portfolios: available for sale, held to maturity, trading account assets and other investment securities. We determine the appropriate classification at the time of purchase. Securities in our available for sale portfolio 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 relevant to our asset and liability strategy. Securities in our available for sale portfolio are carried at fair value, with unrealized gains and losses reported in other comprehensive income (OCI), as a separate component of stockholders equity, net of taxes. Securities are classified as held to maturity because we have the ability and intent to hold the securities to maturity, and are carried at amortized cost. Debt and equity securities that are bought and held principally for the purpose of being sold in the near term are classified as trading account assets and are carried at fair value. Realized and unrealized gains and losses on such assets are reported in noninterest income. Other investment securities are comprised mainly of FHLB stock and Federal Reserve Bank stock, which are carried at cost.
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Allowance for credit losses
Our estimate of probable losses in the loan and lease portfolios is recorded in the allowance for loan and lease losses and the reserve for unfunded lending commitments. Together these are referred to as the allowance for credit losses. We evaluate the adequacy of the allowance for credit losses using the following ratios: allowance for loan and lease losses as a percentage of total loans and leases; allowance for loan and lease losses as a percentage of nonperforming loans and leases; and nonperforming loans and leases as a percentage of total loans and leases. For additional information, see Critical Accounting EstimatesAllowance for Credit Losses and Note 1 Significant Accounting Policies and Note 5 Allowance for Credit Losses, Nonperforming Assets and Concentrations of Credit Risk to our audited consolidated financial statements included elsewhere in this prospectus.
Deposits
Our deposits include on demand, checking with interest, regular savings, money market accounts and term deposits. As of June 30, 2014 and December 31, 2013, total deposits were $91.7 billion and $86.9 billion, respectively.
Borrowed funds
Our total short-term borrowed funds include federal funds purchased and securities sold under agreement to repurchase and other short-term borrowed funds. As of June 30, 2014 and December 31, 2013, total short-term borrowed funds were $14.5 billion and $7.0 billion, respectively. Our total short-term borrowed funds are offset by $4.3 billion and $1.4 billion in excess reserves held at Federal Reserve Banks as of June 30, 2014 and December 31, 2013, respectively.
As of June 30, 2014, our long-term borrowed funds include $350 million of fixed rate subordinated debt held by external parties and $1.3 billion of subordinated debt held by the RBS Group. On August 1, 2014, we issued an additional $333 million of subordinated debt to the RBS Group. Subject to regulatory approval and assuming completion of this offering, we plan to continue our strategy of capital optimization by issuing to RBS $334 million of preferred stock and concurrently repurchasing $334 million of shares of our common stock from RBS. In addition we intend to repurchase approximately $500 million of shares of our common stock and $250 million of shares of our common stock in 2015 and 2016, respectively, with proceeds from the issuance of subordinated debt or another lesser form of capital. For additional information, see Our Relationship with the RBS Group and Certain Other Related Party Transactions.
Derivatives
Historically, we have used pay-fixed interest rate swaps to synthetically lengthen liabilities, offsetting duration in fixed-rate assets. With our material prepayment of fixed-rate mortgages and home equity loans since 2008, these swaps were no longer needed and have been terminated or allowed to run off, resulting in a reduction in the notional balance of these swaps to $1.0 billion as of June 30, 2014 from $1.5 billion as of December 31, 2013.
We also use receive-fixed swaps to minimize the exposure to variability in the interest cash flows on our floating rate assets. As of June 30, 2014, a notional amount of $4.0 billion receive-fixed swaps had been executed. The assets and liabilities recorded for derivatives designated as hedges reflect the fair value of these hedge instruments.
We also sell interest rate swaps and foreign exchange forwards to commercial customers. Offsetting swap and forward agreements are simultaneously transacted to minimize our market risk associated with the customer derivative products. The assets and liabilities recorded for derivatives not designated as hedges reflect the fair value of these transactions.
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Key Performance Metrics and Non-GAAP Financial Measures
We consider various measures when evaluating our performance and making day-to-day operating decisions, as well as evaluating capital utilization and adequacy, including:
| Return on average common equity, which we define as net income (loss) divided by average common equity; |
| Return on average tangible common equity, which we define as net income (loss) divided by average common equity excluding average goodwill, net of the deferred tax liability, and average other intangibles; |
| Return on average total assets, which we define as net income (loss) divided by average total assets; |
| Return on average total tangible assets, which we define as net income (loss) divided by average total assets excluding average goodwill, net of the deferred tax liability, and average other intangibles; |
| Efficiency ratio, which we define as the ratio of our total noninterest expense to the sum of net interest income and total noninterest income. We measure our efficiency ratio to evaluate the efficiency of our operations as it helps us monitor how costs are changing compared to our income. A decrease in our efficiency ratio represents improvement; and |
| Net interest margin, which we calculate by dividing annualized net interest income for the period by average total interest-earning assets, is a key measure that we use to evaluate our net interest income. |
Certain of the above financial measures, including return on average tangible common equity, return on average total tangible assets and the efficiency ratio are not recognized under GAAP. We also present noninterest expense, net income (loss), return on average total tangible assets, return on average tangible common equity, return on average common equity, return on average total assets, and efficiency ratio, net of the $4.4 billion pretax ($4.1 billion after tax) goodwill impairment we incurred for the six months ended June 30, 2013. In addition, in the net income (loss) table, we present net income (loss) and return on average tangible common equity, net of goodwill impairment, restructuring charges and special items for the six months ended June 30, 2014, and 2013. We believe these measures provide useful information to investors because these are among the measures used by our management team to evaluate our operating performance and make day-to-day operating decisions. In addition, we believe goodwill impairment in any period does not reflect the operational performance of the business in that period and, accordingly, it is useful to consider these line items with and without goodwill impairment. This presentation also increases comparability of period-to-period results.
We also consider pro forma capital ratios defined by banking regulators but not effective at each period end to be non-GAAP financial measures. Since analysts and banking regulators may assess our capital adequacy using these pro forma ratios, we believe they are useful to provide investors the ability to assess its capital adequacy on the same basis. Other companies may use similarly titled non-GAAP financial measures that are calculated differently from the way we calculate such measures. Accordingly, our non-GAAP financial measures may not be comparable to similar measures used by other companies.
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The following table reconciles non-GAAP financial measures to GAAP:
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As of and for the Six
Months Ended June 30, |
As of and for the Year Ended December 31, | |||||||||||||||||||||||||||||
Ref. |
2014 | 2013 | 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||||||
(dollars in millions, except per share amounts) | ||||||||||||||||||||||||||||||
Return on average total assets, excluding goodwill impairment: |
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Average total assets (GAAP) |
G | $ | 125,535 | $ | 122,875 | $ | 120,866 | $ | 127,666 | $ | 128,344 | $ | 138,253 | $ | 156,272 | |||||||||||||||
Return on average total assets, excluding goodwill impairment (non-GAAP) (1) |
D/G | 0.77 | % | 0.59 | % | 0.54 | % | 0.50 | % | 0.39 | % | 0.01 | % | (0.47 | )% | |||||||||||||||
Return on average total tangible assets, excluding goodwill impairment: |
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Average total assets (GAAP) |
G | $ | 125,535 | $ | 122,875 | $ | 120,866 | $ | 127,666 | $ | 128,344 | $ | 138,253 | $ | 156,272 | |||||||||||||||
Less: Average goodwill (GAAP) |
6,876 | 11,287 | 9,063 | 11,311 | 11,311 | 11,674 | 11,709 | |||||||||||||||||||||||
Less: Average other intangibles (GAAP) |
7 | 10 | 9 | 12 | 15 | 19 | 205 | |||||||||||||||||||||||
Add: Average deferred tax liabilities related to goodwill (GAAP) |
360 | 538 | 459 | 617 | 295 | 27 | 52 | |||||||||||||||||||||||
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Average tangible assets (non-GAAP) |
H | $ | 119,012 | $ | 112,116 | $ | 112,253 | $ | 116,960 | $ | 117,313 | $ | 126,587 | $ | 144,410 | |||||||||||||||
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Return on average total tangible assets (non-GAAP) (1) |
C/H | 0.81 | % | (2.99 | )% | (3.05 | )% | 0.55 | % | 0.43 | % | 0.01 | % | (0.51 | )% | |||||||||||||||
Return on average total tangible assets, excluding goodwill impairment (non-GAAP) (1) |
D/H | 0.81 | % | 0.64 | % | 0.58 | % | 0.55 | % | 0.43 | % | 0.01 | % | (0.51 | )% | |||||||||||||||
Efficiency ratio, excluding goodwill impairment: |
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Net interest income (GAAP) |
$ | 1,641 | $ | 1,509 | $ | 3,058 | $ | 3,227 | $ | 3,320 | $ | 3,345 | $ | 3,419 | ||||||||||||||||
Noninterest income (GAAP) |
998 | 870 | 1,632 | 1,667 | 1,711 | 1,733 | 1,666 | |||||||||||||||||||||||
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Total revenue (GAAP) |
I | $ | 2,639 | $ | 2,379 | $ | 4,690 | $ | 4,894 | $ | 5,031 | $ | 5,078 | $ | 5,085 | |||||||||||||||
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Efficiency ratio (non-GAAP) |
A/I | 66.58 | % | 255.24 | % | 163.73 | % | 70.64 | % | 67.00 | % | 68.59 | % | 68.73 | % | |||||||||||||||
Efficiency ratio, excluding goodwill impairment (non-GAAP) |
B/I | 66.58 | % | 68.80 | % | 69.17 | % | 70.64 | % | 67.00 | % | 68.59 | % | 68.73 | % | |||||||||||||||
Net income (loss) per average common sharebasic and diluted, excluding goodwill impairment: |
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Average common shares outstandingbasic and diluted |
L | 559,998,324 | 559,998,324 | 559,998,324 | 559,998,324 | 559,998,324 | 559,998,324 | 559,998,324 | ||||||||||||||||||||||
Net income (loss) per average common sharebasic and diluted, excluding goodwill impairment (unaudited) |
D/L | $ | 0.86 | $ | 0.64 | $ | 1.17 | $ | 1.15 | $ | 0.90 | $ | 0.02 | $ | (1.32 | ) |
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As of and for the Six
Months Ended June 30, |
As of and for the Year Ended December 31, | |||||||||||||||||||
Ref. |
2014 | 2013 | 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||
(dollars in millions, except per share amounts) | ||||||||||||||||||||
Pro forma Basel III common equity Tier 1 capital ratio: |
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Tier 1 common capital (regulatory) |
$ | 13,448 | $ | 13,301 | ||||||||||||||||
Less: Change in DTA and other threshold deductions (GAAP) |
(7 | ) | 6 | |||||||||||||||||
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Basel III common equity Tier 1 (non-GAAP) |
J | $ | 13,455 | $ | 13,295 | |||||||||||||||
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Risk-weighted assets (regulatory) |
$ | 101,397 | $ | 98,634 | ||||||||||||||||
Add: Net change in credit and other risk-weighted assets (regulatory) |
2,383 | 2,687 | ||||||||||||||||||
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Basel III risk-weighted assets (non-GAAP) |
K | $ | 103,780 | $ | 101,321 | |||||||||||||||
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Pro forma Basel III common equity Tier 1 capital ratio (non-GAAP) |
J/K | 13.0 | % | 13.1 | % | |||||||||||||||
Pro forma Basel III Tier 1 capital ratio: |
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Basel III common equity Tier 1 (non-GAAP) |
J | $ | 13,455 | $ | 13,295 | |||||||||||||||
Add: Trust preferred and minority interest (GAAP) |
| | ||||||||||||||||||
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Basel III Tier 1 capital (non-GAAP) |
N | $ | 13,455 | $ | 13,295 | |||||||||||||||
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Pro forma Basel III Tier 1 capital ratio (non-GAAP) |
N/K | 13.0 | % | 13.1 | % | |||||||||||||||
Pro forma Basel III total capital ratio: |
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Total Tier 2 common capital (regulatory) |
$ | 2,952 | $ | 2,584 | ||||||||||||||||
Add: Excess allowance for loan and lease losses (regulatory) |
7 | 27 | ||||||||||||||||||
Less: Reserves exceeding 1.25% of risk-weighted assets (regulatory) |
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Basel III common equity Tier 2 (non-GAAP) |
O | $ | 2,959 | $ | 2,611 | |||||||||||||||
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Pro forma Basel III total capital (non-GAAP) |
O+J | $ | 16,414 | $ | 15,906 | |||||||||||||||
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Pro forma Basel III total capital ratio (non-GAAP) |
(O+J)/K | 15.8 | % | 15.7 | % | |||||||||||||||
Pro forma Basel III leverage ratio: |
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Quarterly average assets (GAAP) |
$ | 127,526 | $ | 120,705 | ||||||||||||||||
Less: Goodwill (GAAP) |
6,876 | 6,876 |
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As of and for the Six
Months Ended June 30, |
As of and for the Year Ended December 31, | |||||||||||||||||||
Ref. |
2014 | 2013 | 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||
(dollars in millions, except per share amounts) | ||||||||||||||||||||
Restricted core capital elements (regulatory)(2) |
13 | 17 | ||||||||||||||||||
Add: Deferred tax liability related to goodwill (GAAP) |
382 | 351 | ||||||||||||||||||
Other comprehensive income pension adjustments (GAAP) |
257 | 259 | ||||||||||||||||||
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Basel III adjusted average assets (non-GAAP) |
P | $ | 121,276 | $ | 114,422 | |||||||||||||||
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Pro forma leverage ratio (non-GAAP) |
P/J | 11.1 | % | 11.6 | % |
(1) | Ratios for the periods ended June 30, 2014 and 2013 are presented on an annualized basis. |
(2) | Restricted core capital elements include other intangibles, intangible mortgage servicing assets, and disallowed mortgage servicing assets. |
As of and for the
Six Months Ended June 30, |
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Ref. | 2014 | 2013 | ||||||||||
(dollars in millions) | ||||||||||||
Net income (loss), excluding goodwill impairment, restructuring charges and special items: |
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Net income (loss) (GAAP) |
A | $ | 479 | $ | (3,722 | ) | ||||||
Add: Goodwill impairment (GAAP) |
| 4,080 | ||||||||||
Add: Restructuring charges (GAAP) |
64 | | ||||||||||
Special items: |
||||||||||||
Less: Net gain on the Chicago Divestiture (GAAP) |
180 | | ||||||||||
Add: Regulatory charges (GAAP) |
3 | | ||||||||||
Separation expenses (GAAP) |
5 | | ||||||||||
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|||||||||
Net income (loss), excluding goodwill impairment, restructuring charges and special items (non-GAAP) |
B | $ | 371 | $ | 358 | |||||||
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|
|
|||||||||
Return on average tangible common equity, excluding goodwill impairment, restructuring charges and special items: |
||||||||||||
Average common equity (GAAP) |
C | $ | 19,489 | $ | 24,212 | |||||||
Less: Average goodwill (GAAP) |
6,876 | 11,287 | ||||||||||
Less: Average other intangibles (GAAP) |
7 | 10 | ||||||||||
Add: Average deferred tax liabilities related to goodwill (GAAP) |
360 | 538 | ||||||||||
|
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|
|||||||||
Average tangible common equity (non-GAAP) |
D | $ | 12,966 | $ | 13,453 | |||||||
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|
|||||||||
Return on average tangible common equity, excluding goodwill impairment, restructuring charges and special items (non-GAAP) (1) |
B/D | 5.77 | % | 5.37 | % |
(1) | Ratios for the periods ended June 30, 2014 and 2013 are presented on an annualized basis. |
80
As of and for the Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||||||||||||||||
Ref. |
Consumer
Banking |
Commercial
Banking |
Other | Consolidated |
Consumer
Banking |
Commercial
Banking |
Other | Consolidated | ||||||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||||||||
Net income (loss), excluding goodwill impairment: |
||||||||||||||||||||||||||||||||||
Net income (loss) (GAAP) |
A | $ | 76 | $ | 282 | $ | 121 | $ | 479 | $ | 140 | $ | 264 | $ | (4,126 | ) | $ | (3,722 | ) | |||||||||||||||
Add: Goodwill impairment, net of income tax benefit (GAAP) |
| | | | | | 4,080 | 4,080 | ||||||||||||||||||||||||||
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Net income (loss), excluding goodwill impairment (non-GAAP) |
B | $ | 76 | $ | 282 | $ | 121 | $ | 479 | $ | 140 | $ | 264 | $ | (46 | ) | $ | 358 | ||||||||||||||||
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Efficiency ratio: |
||||||||||||||||||||||||||||||||||
Total revenue (GAAP) |
C | $ | 1,538 | $ | 734 | $ | 367 | $ | 2,639 | $ | 1,634 | $ | 699 | $ | 46 | $ | 2,379 | |||||||||||||||||
Noninterest expense (GAAP) |
D | 1,293 | 310 | 155 | 1,758 | 1,262 | 315 | 4,496 | 6,073 | |||||||||||||||||||||||||
Less: Goodwill impairment (GAAP) |
| | | | | | 4,435 | 4,435 | ||||||||||||||||||||||||||
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Noninterest expense, excluding goodwill impairment (non- GAAP) |
E | $ | 1,293 | $ | 310 | $ | 155 | $ | 1,758 | $ | 1,262 | $ | 315 | $ | 61 | $ | 1,638 | |||||||||||||||||
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Efficiency ratio (non-GAAP) |
D/C | 84.00 | % | 42.25 | % | NM | 66.58 | % | 77.27 | % | 45.12 | % | NM | 255.24 | % | |||||||||||||||||||
Efficiency ratio, excluding goodwill impairment (non-GAAP) |
E/C | 84.00 | % | 42.25 | % | NM | 66.58 | % | 77.27 | % | 45.12 | % | NM | 68.80 | % | |||||||||||||||||||
Return on average total tangible assets: |
||||||||||||||||||||||||||||||||||
Average total assets (GAAP) |
$ | 48,085 | $ | 37,491 | $ | 39,959 | $ | 125,535 | $ | 46,737 | $ | 34,897 | $ | 41,241 | $ | 122,875 | ||||||||||||||||||
Less: Average goodwill (GAAP) |
| | 6,876 | 6,876 | | | 11,287 | 11,287 | ||||||||||||||||||||||||||
Less: Average other intangibles (GAAP) |
| | 7 | 7 | | | 10 | 10 | ||||||||||||||||||||||||||
Add: Average deferred tax liabilities related to goodwill (GAAP) |
| | 360 | 360 | | | 538 | 538 | ||||||||||||||||||||||||||
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Average total tangible assets (non-GAAP) |
F | $ | 48,085 | $ | 37,491 | $ | 33,436 | $ | 119,012 | $ | 46,737 | $ | 34,897 | $ | 30,482 | $ | 112,116 | |||||||||||||||||
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Return on average total tangible assets (non-GAAP) (2) |
A/F | 0.32 | % | 1.52 | % | NM | 0.81 | % | 0.60 | % | 1.53 | % | NM | (2.99 | )% | |||||||||||||||||||
Return on average total tangible assets, excluding goodwill impairment (non-GAAP) (2) |
B/F | 0.32 | % | 1.52 | % | NM | 0.81 | % | 0.60 | % | 1.53 | % | NM | 0.64 | % | |||||||||||||||||||
Return on average tangible common equity: |
||||||||||||||||||||||||||||||||||
Average common equity (GAAP) (1) |
$ | 4,609 | $ | 4,076 | $ | 10,804 | $ | 19,489 | $ | 4,364 | $ | 3,878 | $ | 15,970 | $ | 24,212 | ||||||||||||||||||
Less: Average goodwill (GAAP) |
| | 6,876 | 6,876 | | | 11,287 | 11,287 | ||||||||||||||||||||||||||
Less: Average other intangibles (GAAP) |
| | 7 | 7 | | | 10 | 10 | ||||||||||||||||||||||||||
Add: Average deferred tax liabilities related to goodwill (GAAP) |
| | 360 | 360 | | | 538 | 538 | ||||||||||||||||||||||||||
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Average tangible common equity (non-GAAP) (1) |
G | $ | 4,609 | $ | 4,076 | $ | 4,281 | $ | 12,966 | $ | 4,364 | $ | 3,878 | $ | 5,211 | $ | 13,453 | |||||||||||||||||
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Return on average tangible common equity (non-GAAP) (1)(2) |
A/G | 3.35 | % | 13.97 | % | NM | 7.45 | % | 6.46 | % | 13.76 | % | NM | (24.96 | )% | |||||||||||||||||||
Return on average tangible common equity, excluding goodwill impairment (non-GAAP) (1)(2) |
B/G | 3.35 | % | 13.97 | % | NM | 7.45 | % | 6.46 | % | 13.76 | % | NM | 5.37 | % |
(1) | Operating segments are allocated capital on a risk-adjusted basis considering economic and regulatory capital requirements. We approximate that regulatory capital is equivalent to a sustainable target level for common equity Tier 1 and then allocate that approximation to the segments based on economic capital. |
(2) | Ratios are presented on an annualized basis. |
81
As of and for the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||
2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||||||||||||||||||||
Ref. |
Consumer
Banking |
Commercial
Banking |
Other | Consolidated |
Consumer
Banking |
Commercial
Banking |
Other | Consolidated |
Consumer
Banking |
Commercial
Banking |
Other | Consolidated | ||||||||||||||||||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss), excluding goodwill impairment: |
||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) (GAAP) |
A | $ | 242 | $ | 514 | $ | (4,182 | ) | $ | (3,426 | ) | $ | 185 | $ | 453 | $ | 5 | $ | 643 | $ | 265 | $ | 373 | $ | (132 | ) | $ | 506 | ||||||||||||||||||||||
Add: Goodwill impairment, net of income tax benefit (GAAP) |
| | 4,080 | 4,080 | | | | | | | | | ||||||||||||||||||||||||||||||||||||||
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Net income (loss), excluding goodwill impairment (non-GAAP) |
B | $ | 242 | $ | 514 | $ | (102 | ) | $ | 654 | $ | 185 | $ | 453 | $ | 5 | $ | 643 | $ | 265 | $ | 373 | $ | (132 | ) | $ | 506 | |||||||||||||||||||||||
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Efficiency ratio: |
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Total revenue (GAAP) |
C | $ | 3,201 | $ | 1,420 | $ | 69 | $ | 4,690 | $ | 3,384 | $ | 1,385 | $ | 125 | $ | 4,894 | $ | 3,332 | $ | 1,272 | $ | 427 | $ | 5,031 | |||||||||||||||||||||||||
Noninterest expense (GAAP) |
D | 2,522 | 635 | 4,522 | 7,679 | 2,691 | 625 | 141 | 3,457 | 2,524 | 605 | 242 | 3,371 | |||||||||||||||||||||||||||||||||||||
Less: Goodwill impairment (GAAP) |
| | 4,435 | 4,435 | | | | | | | | | ||||||||||||||||||||||||||||||||||||||
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Noninterest expense, excluding goodwill impairment (non-GAAP) |
E | $ | 2,522 | $ | 635 | $ | 87 | $ | 3,244 | $ | 2,691 | $ | 625 | $ | 141 | $ | 3,457 | $ | 2,524 | $ | 605 | $ | 242 | $ | 3,371 | |||||||||||||||||||||||||
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Efficiency ratio (non-GAAP) |
D/C | 78.76 | % | 44.66 | % | NM | 163.73 | % | 79.45 | % | 45.22 | % | NM | 70.64 | % | 75.78 | % | 47.55 | % | NM | 67.00 | % | ||||||||||||||||||||||||||||
Efficiency ratio, excluding goodwill impairment (non-GAAP) |
E/C | 78.76 | % | 44.66 | % | NM | 69.17 | % | 79.45 | % | 45.22 | % | NM | 70.64 | % | 75.78 | % | 47.55 | % | NM | 67.00 | % | ||||||||||||||||||||||||||||
Return on average total tangible assets: |
||||||||||||||||||||||||||||||||||||||||||||||||||
Average total assets (GAAP) |
$ | 46,465 | $ | 35,229 | $ | 39,172 | $ | 120,866 | $ | 47,824 | $ | 33,474 | $ | 46,368 | $ | 127,666 | $ | 46,071 | $ | 29,800 | $ | 52,473 | $ | 128,344 | ||||||||||||||||||||||||||
Less: Average goodwill (GAAP) |
| | 9,063 | 9,063 | | | 11,311 | 11,311 | | | 11,311 | 11,311 | ||||||||||||||||||||||||||||||||||||||
Less: Average other intangibles (GAAP) |
| | 9 | 9 | | | 12 | 12 | | | 15 | 15 | ||||||||||||||||||||||||||||||||||||||
Add: Average deferred tax liabilities related to goodwill (GAAP) |
| | 459 | 459 | | | 617 | 617 | | | 295 | 295 | ||||||||||||||||||||||||||||||||||||||
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Average total tangible assets (non-GAAP) |
F | $ | 46,465 | $ | 35,229 | $ | 30,559 | $ | 112,253 | $ | 47,824 | $ | 33,474 | $ | 35,662 | $ | 116,960 | $ | 46,071 | $ | 29,800 | $ | 41,442 | $ | 117,313 | |||||||||||||||||||||||||
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Return on average total tangible assets (non-GAAP) |
A/F | 0.52 | % | 1.46 | % | NM | (3.05 | )% | 0.39 | % | 1.35 | % | NM | 0.55 | % | 0.57 | % | 1.25 | % | NM | 0.43 | % | ||||||||||||||||||||||||||||
Return on average total tangible assets, excluding goodwill impairment (non-GAAP) |
B/F | 0.52 | % | 1.46 | % | NM | 0.58 | % | 0.39 | % | 1.35 | % | NM | 0.55 | % | 0.57 | % | 1.25 | % | NM | 0.43 | % | ||||||||||||||||||||||||||||
Return on average tangible common equity: |
||||||||||||||||||||||||||||||||||||||||||||||||||
Average common equity (GAAP) (1) |
$ | 4,395 | $ | 3,897 | $ | 13,542 | $ | 21,834 | $ | 3,813 | $ | 3,626 | $ | 16,499 | $ | 23,938 | $ | 3,423 | $ | 3,452 | $ | 16,262 | $ | 23,137 | ||||||||||||||||||||||||||
Less: Average goodwill (GAAP) |
| | 9,063 | 9,063 | | | 11,311 | 11,311 | | | 11,311 | 11,311 | ||||||||||||||||||||||||||||||||||||||
Less: Average other intangibles (GAAP) |
| | 9 | 9 | | | 12 | 12 | | | 15 | 15 | ||||||||||||||||||||||||||||||||||||||
Add: Average deferred tax liabilities related to goodwill (GAAP) |
| | 459 | 459 | | | 617 | 617 | | | 295 | 295 | ||||||||||||||||||||||||||||||||||||||
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Average tangible common equity (non-GAAP) (1) |
G | $ | 4,395 | $ | 3,897 | $ | 4,929 | $ | 13,221 | $ | 3,813 | $ | 3,626 | $ | 5,793 | $ | 13,232 | $ | 3,423 | $ | 3,452 | $ | 5,231 | $ | 12,106 | |||||||||||||||||||||||||
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Return on average tangible common equity (non-GAAP) (1) |
A/G | 5.48 | % | 13.20 | % | NM | (25.91 | )% | 4.89 | % | 12.45 | % | NM | 4.86 | % | 7.71 | % | 10.81 | % | NM | 4.18 | % | ||||||||||||||||||||||||||||
Return on average tangible common equity, excluding goodwill impairment (non-GAAP) (1) |
B/G | 5.48 | % | 13.20 | % | NM | 4.95 | % | 4.89 | % | 12.45 | % | NM | 4.86 | % | 7.71 | % | 10.81 | % | NM | 4.18 | % |
(1) | Operating segments are allocated capital on a risk-adjusted basis considering economic and regulatory capital requirements. We approximate that regulatory capital is equivalent to a sustainable target level for common equity Tier 1 and then allocate that approximation to the segments based on economic capital. |
82
Results of OperationsSix Months Ended June 30, 2014 Compared with Six Months Ended June 30, 2013
Highlights
For the six months ended June 30, 2014:
| net income increased $4.2 billion to $479 million compared to a $3.7 billion loss for the six months ended June 30, 2013; |
| net income for the six months ended June 30, 2014 was $479 million, and included a $180 million after tax gain related to the Chicago Divestiture and $72 million after tax in restructuring charges and special noninterest expense items largely related to our separation from the RBS Group and ongoing efforts to improve processes and enhance efficiencies across the organization. 2013 included a goodwill impairment charge of $4.1 billion after tax. Excluding the Chicago gain, restructuring charges and special noninterest expense items and the goodwill impairment charge, net income increased $13 million or 4% to $371 million compared to $358 million for the same period in 2013; |
| net interest income of $1.6 billion increased $132 million, or 9%, compared to $1.5 billion for the six months ended June 30, 2013, largely reflecting the benefit of lower hedging costs, growth in loans and the investment securities portfolio and a reduction in deposit costs as we continued to reduce our reliance on higher cost certificates of deposit and money market funds. These results were partially offset by the impact of declining loan yields given the relatively persistent low-rate environment; |
| net interest margin was 2.88% compared to 2.83% for the six months ended June 30, 2013, driven by the benefit of lower hedging costs and lower deposit costs, partially offset by decreased yields on commercial and retail loans and increased long-term borrowing costs largely associated with increased subordinated debt; |
| noninterest income for the six months ended June 30, 2014 included a $288 million pretax gain related to the Chicago Divestiture and increased $128 million, or 15%, to $998 million, compared to $870 million for the six months ended June 30, 2013. Excluding the gain, noninterest income decreased by $160 million, or 18%, as decreases in mortgage banking fees, securities gains, net, and service charges and fees were partially offset by growth in trust and investment services fees and capital markets fees. No securities gains are expected for the remainder of 2014; |
| noninterest expense of $1.8 billion decreased $4.3 billion, or 71%, compared to $6.1 billion for the six months ended June 30, 2013 driven by a $4.4 billion goodwill impairment charge incurred in the six months ended June 30, 2013, offset by $115 million of restructuring charges and special items incurred in the six months ended June 30, 2014, which are largely related to our separation from the RBS Group, ongoing efforts to improve processes and enhance efficiencies across the organization, including certain regulatory and compliance programs, and special expense items related to the Chicago Divestiture; |
| provision for credit losses totaled $170 million for the six months ended June 30, 2014, down $32 million, or 16%, from $202 million compared to the same period in 2013. Results for the six months ended June 30, 2014 included a net provision build of $15 million compared with a $53 million release in the six months ended June 30, 2013; |
| our return on average tangible common equity improved to 7.45% from (24.96%) for the six months ended June 30, 2013. Excluding the impact of the goodwill impairment, restructuring charges and special items mentioned above, our return on average tangible common equity improved to 5.77% from 5.37% for the six months ended June 30, 2013; |
| average loans and leases of $87.2 billion increased $1.5 billion, or 2%, from $85.7 billion as of June 30, 2013, as commercial loan growth, the purchase of residential mortgages and auto loans more than offset the decrease in home equity loans and lines of credit; |
83
| average interest-bearing deposits of $61.6 billion decreased $7.0 billion, or 10%, from $68.6 billion as of June 30, 2013, driven by the effect of the sale of $4.0 billion of interest-bearing deposits in the Chicago Divestiture, as well as attrition of higher cost money market and term deposits; |
| capital ratios continued to be well above regulatory requirements: our total capital ratio increased slightly to 16.2% from 16.1% as of December 31, 2013, and our Tier 1 capital ratio decreased slightly to 13.3% from 13.5% as of December 31, 2013 as a result of our plan to rebalance our capital structure; |
| net charge-offs of $155 million declined $100 million, or 39%, from $255 million for the six months ended June 30, 2013 and the allowance for credit losses totaled $1.3 billion as of June 30, 2014, up $15 million, or 1%, from December 31, 2013; and |
| net income (loss) per average common share, basic and diluted, was $0.86 compared to ($6.65) for the six months ended June 30, 2013, reflecting a 165,582-for-1 forward stock split effective on August 22, 2014. Net income per average common share, basic and diluted, excluding goodwill impairment, was $0.86 for the six months ended June 30, 2014 compared to $0.64 for the six months ended June 30, 2013, reflecting a 165,582-for-1 forward stock split effective on August 22, 2014. |
84
Net Income (Loss)
We reported net income of $479 million for the six months ended June 30, 2014, after recording a $180 million after tax gain related to the Chicago Divestiture and $72 million after tax of restructuring charges and special items related to our separation from the RBS Group and efforts to improve processes and enhance efficiencies across the organization. These results increased $4.2 billion from the six months ended June 30, 2013, which included a $4.1 billion after tax goodwill impairment charge. Excluding the gain, restructuring charges and special items, and impairment charges noted above, net income increased $13 million, or 4%, from the six months ended June 30, 2013, as the benefit of higher net interest income and lower provision for credit losses was partially offset by the effect of lower noninterest income and increased noninterest expenses.
Six Months Ended June 30, | ||||||||||||||||
2014 | 2013 | Change | Percent | |||||||||||||
(dollars in millions) | (%) | |||||||||||||||
Operating Data: |
||||||||||||||||
Net interest income |
$ | 1,641 | $ | 1,509 | $ | 132 | 9 | % | ||||||||
Noninterest income |
998 | 870 | 128 | 15 | ||||||||||||
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Total revenue |
2,639 | 2,379 | 260 | 11 | ||||||||||||
Provision for credit losses |
170 | 202 | (32 | ) | (16 | ) | ||||||||||
Noninterest expense |
1,758 | 6,073 | (4,315 | ) | (71 | ) | ||||||||||
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Income (loss) before income tax expense (benefit) |
711 | (3,896 | ) | 4,607 | 118 | |||||||||||
Income tax expense (benefit) |
232 | (174 | ) | 406 | 233 | |||||||||||
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|
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Net income (loss) |
$ | 479 | $ | (3,722 | ) | $ | 4,201 | 113 | % | |||||||
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|
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Net income, excluding goodwill impairment, restructuring charges and special items (1) |
$ | 371 | $ | 358 | $ | 13 | 4 | % | ||||||||
Return on average tangible common equity (1)(2) |
7.45 | % | (24.96 | )% | NM | | ||||||||||
Return on average tangible common equity, excluding goodwill impairment, restructuring charges and special items (1)(2) |
5.77 | % | 5.37 | % | 40 | bps | |
(1) | This is a non-GAAP financial measure. For more information on the computation of this non-GAAP financial measure, see Principal Components of Operations and Key Performance Metrics Used By ManagementKey Performance Metrics and Non-GAAP Financial Measures. |
(2) | Ratios for the periods ended June 30, 2014 and 2013 are presented on an annualized basis. |
85
Net Interest Income
The following table shows the major components of net interest income and net interest margin:
Six Months Ended June 30, | Change | |||||||||||||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||||||||||||||
Average
Balances |
Income/
Expense |
Yields/
Rates |
Average
Balances |
Income/
Expense |
Yields/
Rates |
Average
Balances |
Yields/
Rates |
|||||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||
Interest-bearing cash and due from banks and deposits in banks |
$ | 1,991 | $ | 2 | 0.23 | % | $ | 2,725 | $ | 7 | 0.54 | % | $ | (734 | ) | (31 | ) bps | |||||||||||||||
Taxable investment securities |
23,980 | 303 | 2.53 | 18,004 | 228 | 2.53 | 5,976 | | ||||||||||||||||||||||||
Non-taxable investment securities |
11 | | 2.60 | 12 | | 2.71 | (1 | ) | (11 | ) | ||||||||||||||||||||||
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Total investment securities |
23,991 | 303 | 2.53 | 18,016 | 228 | 2.53 | 5,975 | | ||||||||||||||||||||||||
Commercial |
29,402 | 447 | 3.03 | 28,517 | 442 | 3.08 | 885 | (5 | ) | |||||||||||||||||||||||
Commercial real estate |
6,991 | 89 | 2.53 | 6,487 | 89 | 2.73 | 504 | (20 | ) | |||||||||||||||||||||||
Leases |
3,720 | 52 | 2.79 | 3,361 | 53 | 3.18 | 359 | (39 | ) | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total commercial |
40,113 | 588 | 2.92 | 38,365 | 584 | 3.03 | 1,748 | (11 | ) | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Home equity lines of credit |
16,216 | 229 | 2.85 | 17,332 | 243 | 2.83 | (1,116 | ) | 2 | |||||||||||||||||||||||
Residential mortgages |
10,125 | 204 | 4.03 | 9,091 | 183 | 4.03 | 1,034 | | ||||||||||||||||||||||||
Home equity loans |
5,543 | 156 | 5.69 | 6,674 | 191 | 5.77 | (1,131 | ) | (8 | ) | ||||||||||||||||||||||
Automobile |
10,087 | 126 | 2.51 | 8,801 | 120 | 2.75 | 1,286 | (24 | ) | |||||||||||||||||||||||
Student and other retail |
3,482 | 96 | 5.52 | 3,747 | 102 | 5.50 | (265 | ) | 2 | |||||||||||||||||||||||
Credit cards |
1,639 | 82 | 10.13 | 1,651 | 87 | 10.57 | (12 | ) | (44 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total retail |
47,092 | 893 | 3.82 | 47,296 | 926 | 3.95 | (204 | ) | (13 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total loans and leases |
87,205 | 1,481 | 3.40 | 85,661 | 1,510 | 3.53 | 1,544 | (13 | ) | |||||||||||||||||||||||
Loans held for sale |
133 | 2 | 3.35 | 478 | 7 | 2.95 | (345 | ) | 40 | |||||||||||||||||||||||
Other loans held for sale |
1,062 | 22 | 4.06 | | | | 1,062 | 406 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Interest-earning assets |
114,382 | 1,810 | 3.17 | 106,880 | 1,752 | 3.28 | 7,502 | (11 | ) | |||||||||||||||||||||||
Allowance for loan and lease losses |
(1,262 | ) | (1,223 | ) | (39 | ) | ||||||||||||||||||||||||||
Goodwill |
6,876 | 11,287 | (4,411 | ) | ||||||||||||||||||||||||||||
Other noninterest-earning assets |
5,539 | 5,931 | 392 | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Total noninterest-earning assets |
11,153 | 15,995 | (4,842 | ) | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Total assets |
$ | 125,535 | $ | 122,875 | $ | 2,660 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Liabilities and Stockholders Equity |
||||||||||||||||||||||||||||||||
Checking with interest |
$ | 13,562 | $ | 4 | 0.06 | % | $ | 14,234 | $ | 4 | 0.06 | % | $ | (672 | ) | | bps | |||||||||||||||
Money market & savings |
38,667 | 33 | 0.17 | 43,121 | 61 | 0.28 | (4,454 | ) | (11 | ) | ||||||||||||||||||||||
Term deposits |
9,376 | 30 | 0.64 | 11,249 | 52 | 0.93 | (1,873 | ) | (29 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total interest-bearing deposits |
61,605 | 67 | 0.22 | 68,604 | 117 | 0.34 | (6,999 | ) | (12 | ) | ||||||||||||||||||||||
Interest-bearing deposits held for sale |
3,953 | 4 | 0.22 | | | | 3,953 | 22 | ||||||||||||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase (1) |
5,708 | 16 | 0.55 | 1,925 | 115 | 11.88 | 3,783 | (1,133 | ) | |||||||||||||||||||||||
Other short-term borrowed funds |
4,838 | 49 | 2.03 | 279 | 1 | 0.62 | 4,559 | 141 | ||||||||||||||||||||||||
Long-term borrowed funds |
1,412 | 33 | 4.60 | 624 | 10 | 3.03 | 788 | 157 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total borrowed funds |
11,958 | 98 | 1.63 | 2,828 | 126 | 8.83 | 9,130 | (720 | ) | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total interest-bearing liabilities |
77,516 | 169 | 0.43 | 71,432 | 243 | 0.68 | 6,084 | (25 | ) | |||||||||||||||||||||||
Demand deposits |
25,393 | 24,907 | 486 | |||||||||||||||||||||||||||||
Demand deposits held for sale |
932 | | 932 | |||||||||||||||||||||||||||||
Other liabilities |
2,205 | 2,324 | (119 | ) | ||||||||||||||||||||||||||||
Stockholders equity |
19,489 | 24,212 | (4,723 | ) | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Total liabilities and stockholders equity |
$ | 125,535 | $ | 122,875 | $ | 2,660 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Interest rate spread |
2.74 | 2.60 | ||||||||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||||||
Net interest income |
$ | 1,641 | $ | 1,509 | $ | 132 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Net interest margin |
2.88 | % | 2.83 | % | 5 | bps |
86
(1) | Balances are net of certain short-term receivables associated with reverse repurchase agreements. Interest expense includes the full cost of the repurchase agreements and certain hedging costs. The rate on federal funds purchased is elevated due to the impact from pay-fixed interest rate swaps that are scheduled to run off by the end of 2016. See Analysis of Financial ConditionJune 30, 2014 Compared with December 31, 2013Derivatives for further information. |
For the six months ended June 30, 2014, net interest income of $1.6 billion increased $132 million, or 9%, from $1.5 billion for the six months ended June 30, 2013 and reflected a five basis point increase in net interest margin to 2.88%. The increase in net interest income was driven by growth in average interest-earning assets, the benefit of a reduction in interest rate hedging costs, as well as lower funding costs on deposits partially offset by declining loan yields and increased long-term borrowing costs related to our issuance of subordinated debt. Average interest-earning assets increased $7.5 billion for the six months ended June 30, 2014 compared to the same period in 2013, driven by a $6.0 billion increase in the investment securities portfolio, a $1.7 billion increase in total commercial loans, a $1.0 billion increase in residential mortgages, and a $1.3 billion increase in auto loans, partially offset by a $2.2 billion decrease in home equity balances and a $265 million decrease in student and other retail loans.
The five basis point increase in net interest margin was driven by a 13 basis point benefit from interest rate hedging activity tied to maturing pay-fixed swaps originated prior to the financial crisis as well as lower deposit costs as we reduced our reliance on higher cost certificates of deposit. We do not expect this trend to continue in future periods. This benefit was partially offset by continued pressure on interest-earning asset yields given the effect of the relatively persistent low-rate environment and largely reflected the effect of continued prepayment of higher yielding consumer real estate secured loans and industrywide competition for loans.
Average interest-earning asset yields of 3.17% for the six months ended June 30, 2014 declined 11 basis points compared to 3.28% for the six months ended June 30, 2013, driven by a 13 basis point decline in the loan and lease portfolio yield, largely reflecting prepayments of higher yielding fixed-rate assets, which were replaced by new purchases and originations with lower yields given the relatively persistent low-rate environment. Investment portfolio income of $303 million for the six months ended June 30, 2014 increased $75 million, or 33%, compared to the six months ended June 30, 2013, and the yield on the portfolio of 2.53% for the six months ended June 30, 2014 was flat compared to the six months ended June 30, 2013.
Total interest-bearing deposit costs for the six months ended June 30, 2014, decreased $50 million, or 43%, to $67 million, from $117 million for the six months ended June 30, 2013 and reflected a 12 basis point decrease in the rate paid on deposits to 0.22% from 0.34%. Rates on term deposits were 0.64% and 0.93% for the six months ended June 30, 2014 and 2013, respectively, while rates on money market and savings declined from 0.28% for the six months ended June 30, 2013 to 0.17% for the six months ended June 30, 2014. As a result of the historically low interest rate environment, many deposit products have hit pricing floors at or near zero, limiting further rate reduction and thus compressing margins. The total cost of borrowed funds declined $28 million, or 22%, as higher rate pay-fixed rate swaps matured; the decrease was partially offset by the increased cost of long-term borrowed funds from our issuance of subordinated debt.
Total borrowed funds rates declined to 1.63% for the six months ended June 30, 2014 from 8.83% for the six months ended June 30, 2013. Within the federal funds purchased and securities sold under agreement category and other short-term borrowed funds category, pay-fixed swap expense declined to $56 million for the six months ended June 30, 2014 compared to $112 million for the same period in 2013. Over the same period, $1.7 billion in notional swap balances matured with a remaining balance of $1.0 billion as of June 30, 2014. Excluding the impact of hedging costs, the total borrowed funds rates were 0.69% and 1.08% for the six months ended June 30, 2014 and 2013, respectively.
87
Noninterest Income
The following table details the significant components of our noninterest income for the periods indicated:
Six Months Ended
June 30, |
Change | Percent | ||||||||||||||
2014 | 2013 | |||||||||||||||
(dollars in millions) | (%) | |||||||||||||||
Service charges and fees |
$ | 286 | $ | 325 | $ | (39 | ) | (12 | )% | |||||||
Card fees |
117 | 114 | 3 | 3 | ||||||||||||
Trust and investment services fees |
81 | 72 | 9 | 13 | ||||||||||||
Foreign exchange and trade finance fees |
44 | 48 | (4 | ) | (8 | ) | ||||||||||
Mortgage banking fees |
34 | 112 | (78 | ) | (70 | ) | ||||||||||
Capital markets fees |
44 | 23 | 21 | 91 | ||||||||||||
Bank-owned life insurance income |
23 | 25 | (2 | ) | (8 | ) | ||||||||||
Securities gains, net |
25 | 94 | (69 | ) | (73 | ) | ||||||||||
Other income (1) |
344 | 57 | 287 | 504 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Noninterest income |
$ | 998 | $ | 870 | $ | 128 | 15 | % | ||||||||
|
|
|
|
|
|
(1) | Includes net impairment losses on securities available for sale recognized in earnings and other income. |
Noninterest income of $998 million increased $128 million, or 15%, for the six months ended June 30, 2014, compared to $870 million for the six months ended June 30, 2013. The 2014 results reflected a $288 million gain on the Chicago Divestiture, partially offset by a $69 million decrease in securities gains and a $78 million reduction in mortgage banking fees, largely reflecting lower origination volumes, lower levels of mortgage servicing rights valuation recovery and our decision to retain a larger percentage of originations on balance sheet. Results also reflected a $39 million decrease in service charges and fees driven by a reduction in consumer service charges due to lower personal overdraft fees.
Provision for Credit Losses
For the six months ended June 30, 2014, the provision for credit losses was $170 million, down from $202 million for the six months ended June 30, 2013, driven by lower net charge-offs. The provision for loan and lease losses is the result of a detailed analysis performed to estimate an appropriate and adequate allowance for loan and lease losses (ALLL). Current credit trends continued to improve with net charge-offs for the six months ended June 30, 2014 of $155 million compared with $255 million for the six months ended June 30, 2013. The total provision for credit losses includes the provision for loan and lease losses as well as the provision for unfunded commitments. Refer to Analysis of Financial ConditionAllowance for Credit Losses and Nonperforming Assets for more information.
88
Noninterest Expense
The following table displays the significant components of our noninterest expense for the periods indicated:
Six Months Ended
June 30, |
Change | Percent | ||||||||||||||
2014 | 2013 | |||||||||||||||
(dollars in millions) | (%) | |||||||||||||||
Salaries and employee benefits |
$ | 872 | $ | 858 | $ | 14 | 2 | % | ||||||||
Outside services |
208 | 171 | 37 | 22 | ||||||||||||
Occupancy |
168 | 164 | 4 | 2 | ||||||||||||
Equipment expense |
129 | 138 | (9 | ) | (7 | ) | ||||||||||
Amortization of software |
64 | 45 | 19 | 42 | ||||||||||||
Goodwill impairment |
| 4,435 | (4,435 | ) | (100 | ) | ||||||||||
Other operating expense |
317 | 262 | 55 | 21 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Noninterest expense |
$ | 1,758 | $ | 6,073 | $ | (4,315 | ) | (71 | )% | |||||||
|
|
|
|
|
|
Noninterest expense was $1.8 billion for the six months ended June 30, 2014 and included $115 million of restructuring charges and special items largely related to our separation from the RBS Group as well as ongoing efforts to improve processes and enhance efficiencies across the organization. We expect to incur approximately $40 million to $80 million during the remainder of 2014 in additional restructuring and special items. During the six months ended June 30, 2013, a $4.4 billion pretax goodwill impairment charge was recorded. Refer to Results of OperationsYear Ended December 31, 2013 Compared with Year Ended December 31, 2012Noninterest Expense for more information. Excluding the restructuring charges and special items in 2014 and the goodwill impairment incurred in 2013, noninterest expense was flat year over year. See Note 23 Exit Costs and Restructuring Reserves to our unaudited interim consolidated financial statements included elsewhere in this prospectus.
Provision (Benefit) for Income Taxes
The provision (benefit) for income taxes totaled $232 million for the six months ended June 30, 2014, compared to an income tax benefit of $174 million for the six months ended June 30, 2013. The provision represents a 33% and 4% effective tax rate for the six months ending June 30, 2014 and 2013, respectively. The increase in the effective rate largely reflected the tax rate impact of the goodwill impairment charge taken in the second quarter of 2013. Goodwill not deductible for tax purposes accounted for 78.4% of the total goodwill impairment charge and generated a reduction of 31% in our effective tax rate for the six months ended June 30, 2013.
At June 30, 2014, we reported a net deferred tax liability of $403 million, compared to a $199 million liability at December 31, 2013. The increase in the net deferred tax liability was largely attributable to the utilization of net operating loss and tax credit carryforwards (which decreased the deferred tax asset), as well as a decrease in the unrealized loss reported on securities available for sale, derivative instruments and hedging activities. For further discussion, see Note 10 Income Taxes to our unaudited interim consolidated financial statements included elsewhere in this prospectus.
89
Business Segments
The following table presents certain financial data of our business segments as of and for the six months ended June 30, 2014:
As of and for the Six Months
Ended June 30, 2014 |
||||||||||||||||
Consumer
Banking |
Commercial
Banking |
Other (5) | Consolidated | |||||||||||||
(dollars in millions) | ||||||||||||||||
Net interest income |
$ | 1,083 | $ | 520 | $ | 38 | $ | 1,641 | ||||||||
Noninterest income |
455 | 214 | 329 | 998 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
1,538 | 734 | 367 | 2,639 | ||||||||||||
Noninterest expense |
1,293 | 310 | 155 | 1,758 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Profit before provision for credit losses |
245 | 424 | 212 | 881 | ||||||||||||
Provision for credit losses |
129 | (7 | ) | 48 | 170 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before income tax expense |
116 | 431 | 164 | 711 | ||||||||||||
Income tax expense |
40 | 149 | 43 | 232 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 76 | $ | 282 | $ | 121 | $ | 479 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Loans and leases and loans held for sale (period-end) (1) |
$ | 47,167 | $ | 37,541 | $ | 4,383 | $ | 89,091 | ||||||||
Average Balances: |
||||||||||||||||
Total assets |
$ | 48,085 | $ | 37,491 | $ | 39,959 | $ | 125,535 | ||||||||
Loans and leases and loans held for sale (1) |
46,876 | 36,997 | 4,527 | 88,400 | ||||||||||||
Deposits and deposits held for sale |
70,473 | 17,901 | 3,509 | 91,883 | ||||||||||||
Interest-earning assets |
46,906 | 37,124 | 30,352 | 114,382 | ||||||||||||
Key Metrics: |
||||||||||||||||
Net interest margin (2) |
4.66 | % | 2.83 | % | NM | 2.88 | % | |||||||||
Efficiency ratio (3) |
84.00 | % | 42.25 | % | NM | 66.58 | % | |||||||||
Average loans to average deposits ratio |
66.52 | % | 206.67 | % | NM | 96.21 | % | |||||||||
Return on average total tangible assets (2)(3) |
0.32 | % | 1.52 | % | NM | 0.81 | % | |||||||||
Return on average tangible common equity (2)(3)(4) |
3.35 | % | 13.97 | % | NM | 7.45 | % |
(1) | Loans held for sale refer to mortgage loans held for sale recorded in the Consumer Banking segment, as well as the loans relating to the Chicago Divestiture, which are recorded in both the Consumer Banking and Commercial Banking segments. |
(2) | Ratios for the period ended June 30, 2014 are presented on an annualized basis. |
(3) | These are non-GAAP financial measures. For more information on the computation of these non-GAAP financial measures, see Principal Components of Operations and Key Performance Metrics Used By ManagementKey Performance Metrics and Non-GAAP Financial Measures. |
(4) | Operating segments are allocated capital on a risk-adjusted basis considering economic and regulatory capital requirements. We approximate that regulatory capital is equivalent to a sustainable target level for common equity Tier 1 and then allocate that approximation to the segments based on economic capital. |
(5) | Includes the financial impact of non-core, liquidating loan portfolios and other non-core assets, our treasury activities, wholesale funding activities, securities portfolio, community development assets and other unallocated assets, liabilities, revenues, provision for credit losses and expenses not attributed to our Consumer Banking or Commercial Banking segments. For a description of non-core assets, see Analysis of Financial ConditionJune 30, 2014 Compared with December 31, 2013Loans and LeasesNon-Core Assets. |
We operate our business through two operating segments: Consumer Banking and Commercial Banking. Segment results are derived from our business line profitability reporting systems by specifically attributing managed balance sheet assets, deposits, and other liabilities and their related income or expense. Residual assets and liabilities not attributed to Consumer Banking and Commercial Banking are attributed to Other.
90
Other includes our treasury function, securities portfolio, wholesale funding activities, goodwill and goodwill impairment, community development assets and other unallocated assets, liabilities, revenues, provision for credit losses and expenses not attributed to Consumer Banking or Commercial Banking. Other also includes our non-core assets. Non-core assets are primarily loans inconsistent with our strategic goals, generally as a result of geographic location, industry, product type or risk level. The non-core portfolio totaled $3.5 billion as of June 30, 2014, down 10% from December 31, 2013. The largest component of our non-core portfolio is our home equity products currently or formerly serviced by others.
Our capital levels are evaluated and managed centrally; however, capital is allocated to the operating segments to support evaluation of business performance. Operating segments are allocated capital on a risk-adjusted basis considering economic and regulatory capital requirements. We approximate that regulatory capital is equivalent to a sustainable target level for common equity Tier 1 and then allocate that approximation to the segments based on economic capital. Interest income and expense is determined based on the assets and liabilities managed by the business segment. Because funding and asset liability management is a central function, funds transfer-pricing methodologies are utilized to allocate a cost of funds used, or credit for the funds provided, to all business segment assets, liabilities and capital, respectively, using a matched funding concept. The residual effect on net interest income of asset/liability management, including the residual net interest income related to the funds transfer pricing process, is included in Other.
Provision for credit losses is allocated to each business segment based on actual net charge-offs that have been recognized by the business segment. The difference between the consolidated provision for credit losses and the business segments net charge-offs is reflected in Other.
Noninterest income and expense directly managed by each business segment, including fees, service charges, salaries and benefits, and other direct revenues and costs are accounted for within each segments financial results in a manner similar to the consolidated financial statements. Occupancy costs are allocated based on utilization of facilities by the business segment. Generally, operating losses are charged to the business segment when the loss event is realized in a manner similar to a loan charge-off. Noninterest expenses incurred by centrally managed operations or business segments that directly support another business segments operations are charged to the applicable business segment based on its utilization of those services.
Income taxes are assessed to each business segment at a standard tax rate with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Other.
Developing and applying methodologies used to allocate items among the business segments is a dynamic process. Accordingly, financial results may be revised periodically as management systems are enhanced, methods of evaluating performance or product lines change, or our organizational structure changes.
91
Consumer Banking
As of and for the
Six Months Ended June 30, |
Change | Percent | ||||||||||||||
2014 | 2013 | |||||||||||||||
(dollars in millions) | (%) | |||||||||||||||
Net interest income |
$ | 1,083 | $ | 1,090 | $ | (7 | ) | (1 | )% | |||||||
Noninterest income |
455 | 544 | (89 | ) | (16 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
Total revenue |
1,538 | 1,634 | (96 | ) | (6 | ) | ||||||||||
Noninterest expense |
1,293 | 1,262 | 31 | 2 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Profit before provision for credit losses |
245 | 372 | (127 | ) | (34 | ) | ||||||||||
Provision for credit losses |
129 | 156 | (27 | ) | (17 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
Income before income tax expense |
116 | 216 | (100 | ) | (46 | ) | ||||||||||
Income tax expense |
40 | 76 | (36 | ) | (47 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
Net income |
$ | 76 | $ | 140 | $ | (64 | ) | (46 | ) | |||||||
|
|
|
|
|
|
|||||||||||
Loans and leases and loans held for sale (period-end) (1) |
$ | 47,167 | $ | 44,803 | $ | 2,364 | 5 | |||||||||
Average Balances: |
||||||||||||||||
Total assets |
$ | 48,085 | $ | 46,737 | $ | 1,348 | 3 | |||||||||
Loans and leases and loans held for sale (1) |
46,876 | 45,440 | 1,436 | 3 | ||||||||||||
Deposits and deposits held for sale |
70,473 | 72,499 | (2,026 | ) | (3 | ) | ||||||||||
Interest-earning assets |
46,906 | 45,467 | 1,439 | 3 | ||||||||||||
Key Metrics: |
||||||||||||||||
Net interest margin (2) |
4.66 | % | 4.83 | % | (17 | ) bps | | |||||||||
Efficiency ratio (3) |
84.00 | % | 77.27 | % | 673 | bps | | |||||||||
Average loans to average deposits ratio |
66.52 | % | 62.68 | % | 384 | bps | | |||||||||
Return on average total tangible assets (2)(3) |
0.32 | % | 0.60 | % | (28 | ) bps | | |||||||||
Return on average tangible common equity (2)(3)(4) |
3.35 | % | 6.46 | % | (311 | ) bps | |
(1) | Loans held for sale include mortgage loans held for sale and loans relating to the Chicago Divestiture. |
(2) | Ratios for the periods ended June 30, 2014 and 2013 are presented on an annualized basis. |
(3) | These are non-GAAP financial measures. For more information on the computation of these non-GAAP financial measures, see Principal Components of Operations and Key Performance Metrics Used By ManagementKey Performance Metrics and Non-GAAP Financial Measures. |
(4) | Operating segments are allocated capital on a risk-adjusted basis considering economic and regulatory capital requirements. We approximate that regulatory capital is equivalent to a sustainable target level for common equity Tier 1 and then allocate that approximation to the segments based on economic capital. |
Consumer Banking segment net income of $76 million for the six months ended June 30, 2014 decreased $64 million, or 46%, from $140 million for the six months ended June 30, 2013, as the benefit of lower provision for credit losses was more than offset by lower fee income and higher noninterest expense.
Net interest income of $1.1 billion for the six months ended June 30, 2014 remained relatively stable with the six months ended June 30, 2013, as the benefit of lower deposit costs and loan growth was largely offset by the effect of continued downward pressure on loan yields and deposit spreads given the relatively persistent low-rate environment. Loan growth reflected higher residential mortgage and auto loan outstandings, partially offset by lower home equity outstandings.
Noninterest income of $455 million decreased $89 million, or 16%, from $544 million for the six months ended June 30, 2013, driven by a decrease in mortgage banking fees. Mortgage banking fees for the six months ended June 30, 2014 decreased $78 million due to reduction in overall origination volume and our decision to strategically hold more loans on balance sheet. Mortgage banking fees were also negatively impacted by lower mortgage servicing rights valuation recovery compared to the same period in 2013 as long term rates began to increase in the middle of
92
2013. Service charges and fees were down $33 million for the six months ended June 30, 2014 compared to the same period in 2013, largely driven by the continued impact of prior regulatory changes, including changes in check posting order. This was partially offset by growth in trust and investment services fees of $10 million, as well as a $9 million gain on sale of portions of our Federal Family Education Loan Program portfolio.
Noninterest expense of $1.3 billion for the six months ended June 30, 2014 increased $31 million, or 2%, from the six months ended June 30, 2013 driven by increased regulatory and litigation costs, which more than offset the benefit of across the board expense reduction despite continued investment in key growth businesses.
Provision for credit losses of $129 million for the six months ended June 30, 2014 decreased $27 million, or 17%, from $156 million for the six months ended June 30, 2013, driven by improved credit quality within the loan portfolios.
Commercial Banking
As of and for the
Six Months Ended June 30, |
Change | Percent | ||||||||||||||
2014 | 2013 | |||||||||||||||
(dollars in millions) | (%) | |||||||||||||||
Net interest income |
$ | 520 | $ | 508 | $ | 12 | 2 | % | ||||||||
Noninterest income |
214 | 191 | 23 | 12 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total revenue |
734 | 699 | 35 | 5 | ||||||||||||
Noninterest expense |
310 | 315 | (5 | ) | (2 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
Profit before provision for credit losses |
424 | 384 | 40 | 10 | ||||||||||||
Provision for credit losses |
(7 | ) | (24 | ) | 17 | 71 | ||||||||||
|
|
|
|
|
|
|||||||||||
Income before income tax expense |
431 | 408 | 23 | 6 | ||||||||||||
Income tax expense |
149 | 144 | 5 | 3 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Net income |
$ | 282 | $ | 264 | $ | 18 | 7 | |||||||||
|
|
|
|
|
|
|||||||||||
Loans and leases and loans held for sale (period-end) (1) |
$ | 37,541 | $ | 34,312 | $ | 3,229 | 9 | |||||||||
Average Balances: |
||||||||||||||||
Total assets |
$ | 37,491 | $ | 34,897 | $ | 2,594 | 7 | |||||||||
Loans and leases and loans held for sale (1) |
36,997 | 34,189 | 2,808 | 8 | ||||||||||||
Deposits and deposits held for sale |
17,901 | 17,332 | 569 | 3 | ||||||||||||
Interest-earning assets |
37,124 | 34,302 | 2,822 | 8 | ||||||||||||
Key Metrics: |
||||||||||||||||
Net interest margin (2) |
2.83 | % | 2.99 | % | (16 | ) bps | | |||||||||
Efficiency ratio (3) |
42.25 | % | 45.12 | % | (287 | ) bps | | |||||||||
Average loans to average deposits ratio |
206.67 | % | 197.26 | % | 941 | bps | | |||||||||
Return on average total tangible assets (2)(3) |
1.52 | % | 1.53 | % | (1 | ) bps | | |||||||||
Return on average tangible common equity (2)(3)(4) |
13.97 | % | 13.76 | % | 21 | bps | |
(1) | Loans held for sale include loans relating to the Chicago Divestiture. |
(2) | Ratios for the periods ended June 30, 2014 and 2013 are presented on an annualized basis. |
(3) | These are non-GAAP financial measures. For more information on the computation of these non-GAAP financial measures, see Principal Components of Operations and Key Performance Metrics Used By ManagementKey Performance Metrics and Non-GAAP Financial Measures. |
(4) | Operating segments are allocated capital on a risk-adjusted basis considering economic and regulatory capital requirements. We approximate that regulatory capital is equivalent to a sustainable target level for common equity Tier 1 and then allocate that approximation to the segments based on economic capital. |
93
Commercial Banking net income of $282 million for the six months ended June 30, 2014 increased $18 million, or 7%, from $264 million for the six months ended June 30, 2013, driven by a $35 million increase in total revenue, partially offset by a $17 million decrease in the net recovery reflected in the provision for credit losses related to a reduction in recoveries of prior period charge-offs.
Net interest income of $520 million for the six months ended June 30, 2014 increased $12 million, or 2%, from $508 million for the six months ended June 30, 2013, as the benefit of a $2.8 billion increase in interest-earning assets was partially offset by continued downward pressure on loan yields given the relatively persistent low-rate environment and increased industrywide competition.
Noninterest income of $214 million for the six months ended June 30, 2014 increased $23 million, or 12%, from $191 million for the six months ended June 30, 2013, as a $37 million increase in leasing income and capital markets fees was partially offset by lower interest-rate product, foreign exchange and trade finance fee income.
Noninterest expense of $310 million for the six months ended June 30, 2014 decreased $5 million, or 2%, from $315 million for the six months ended June 30, 2013 as the benefit of lower employee incentive costs was partially offset by continued investment in the business to drive revenue growth.
Provision for credit losses for the six months ended June 30, 2014 reflected a net recovery of $7 million compared with a net recovery of $24 million for the six months ended June 30, 2013, reflecting decreasing monetization of loans or assets that had been charged off in prior periods.
Other
As of and for the
Six Months Ended June 30, |
Change | Percent | ||||||||||||||
2014 | 2013 | |||||||||||||||
(dollars in millions) | (%) | |||||||||||||||
Net interest income (expense) |
$ | 38 | $ | (89 | ) | $ | 127 | 143 | % | |||||||
Noninterest income |
329 | 135 | 194 | 144 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total revenue |
367 | 46 | 321 | 698 | ||||||||||||
Noninterest expense |
155 | 4,496 | (4,341 | ) | (97 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
Income (loss) before provision for credit losses |
212 | (4,450 | ) | 4,662 | 105 | |||||||||||
Provision for credit losses |
48 | 70 | (22 | ) | (31 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
Income (loss) before income tax expense (benefit) |
164 | (4,520 | ) | 4,684 | 104 | |||||||||||
Income tax expense (benefit) |
43 | (394 | ) | 437 | 111 | |||||||||||
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | 121 | $ | (4,126 | ) | $ | 4,247 | 103 | ||||||||
|
|
|
|
|
|
|||||||||||
Loans and leases and loans held for sale (period-end) |
$ | 4,383 | $ | 6,320 | $ | (1,937 | ) | (31 | ) | |||||||
Average Balances: |
||||||||||||||||
Total assets |
$ | 39,959 | $ | 41,241 | $ | (1,282 | ) | (3 | ) | |||||||
Loans and leases and loans held for sale |
4,527 | 6,510 | (1,983 | ) | (30 | ) | ||||||||||
Deposits and deposits held for sale |
3,509 | 3,680 | (171 | ) | (5 | ) | ||||||||||
Interest-earning assets |
30,352 | 27,111 | 3,241 | 12 |
Other recorded net income of $121 million for the six months ended June 30, 2014 compared with a net loss of $4.1 billion for the six months ended June 30, 2013, which included an after tax goodwill impairment charge of $4.1 billion. Excluding the goodwill impairment, the net loss for the six months ended June 30, 2013 was $46 million. Net income for the six months ended June 30, 2014 included a $180 million after tax gain related to the Chicago Divestiture partially offset by $72 million of after tax
94
restructuring charges and special items. Excluding these items, net income increased $59 million driven by higher net interest income largely reflecting a reduction in pay-fixed swap costs as well as lower noninterest expense and provision for credit losses.
Net interest income for the six months ended June 30, 2014 increased $127 million to $38 million compared to an expense of $89 million for the six months ended June 30, 2013. The increase was driven primarily by the benefit of a $5.2 billion increase in average investment securities, a reduction in interest rate swap costs, partially offset by a $1.7 billion decrease in average non-core loan balances.
Noninterest income for the six months ended June 30, 2014 increased $194 million driven by the $288 million gain on the Chicago Divestiture. Excluding the gain, noninterest income decreased $94 million driven by a $69 million reduction in securities gains and higher net losses on low-income housing investments, which are more than offset by increased tax credits.
Noninterest expense for the six months ended June 30, 2014 of $155 million included $115 million of pretax restructuring charges and special items and decreased $4.3 billion from the six months ended June 30, 2013, which included the $4.4 billion pretax goodwill impairment charge. Excluding the goodwill impairment, restructuring charges and special items, noninterest expense decreased $21 million largely reflecting lower employee incentive costs and lower costs related to the non-core loan portfolio. For further information about these special items, including expected additional future costs, see Note 23 Exit Costs and Restructuring Reserves to our unaudited interim consolidated financial statements included elsewhere in this prospectus. Noninterest expense excluding goodwill impairment, restructuring charges and special items may increase in the third quarter due to expense expected to be incurred in connection with certain supervisory matters. For further information, please refer to Risk FactorsRisks Related to Regulations Governing Our IndustryWe are and may be subject to regulatory actions that may have a material impact on our business. We are not able to predict the magnitude of these expenses but they could be significant.
The provision for credit losses within Other mainly represents the residual change in the consolidated allowance for credit losses after attributing the respective net charge-offs to the Consumer Banking and Commercial Banking segments. It also includes net charge-offs related to the non-core portfolio. The provision for credit losses for the six months ended June 30, 2014 decreased $22 million to $48 million compared to $70 million for the six months ended June 30, 2013 reflecting continued improvement in credit quality and decreased non-core net charge-offs. On a quarterly basis, we review and refine our 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. As of June 30, 2014, changes in these factors led to an increase of $15 million in the allowance for credit losses compared with a release of $53 million for the six months ended June 30, 2013. The provision also reflected an increase in overall credit exposure associated with growth in our loan portfolio.
Total assets as of June 30, 2014 included $2.1 billion and $4.8 billion of goodwill related to the Consumer Banking and Commercial Banking reporting units, respectively. For further information regarding the reconciliation of segment results to GAAP results, see Note 19 Business Segments to our unaudited interim consolidated financial statements included elsewhere in this prospectus.
95
Results of OperationsYear Ended December 31, 2013 Compared with Year Ended December 31, 2012
Highlights
For the year ended December 31, 2013:
| we recorded a $4.4 billion pretax ($4.1 billion after tax) goodwill impairment charge that resulted in a $3.4 billion net loss; |
| excluding the impact of the goodwill impairment charge and $26 million ($17 million after tax) in restructuring charges in 2013 and a net $158 million of pretax ($125 million after tax) unusual items in 2012, net income decreased $97 million, or 13%, from 2012. 2013 restructuring charges related to our implementation of a new branch image capture system on the teller line, which automated several key processes within the branch network, and our decision to close certain branches, which resulted in lease termination costs and other fixed asset write-offs. Unusual expenses in 2012 included a $138 million ($87 million after tax) litigation settlement related to overdraft protection, a $77 million ($49 million after tax) settlement of defined benefit pension plan obligations to vested former employees, a $25 million charge associated with a state tax settlement, and a $23 million ($15 million after tax) loss on sale of a commercial real estate portfolio, offset by a $75 million ($48 million after tax) gain on sale of VISA, Inc. Class B shares and a net $5 million ($3 million after tax) reversal of prior restructuring charges; |
| net interest margin was 2.85% compared to 2.89% in 2012, driven by declining yields on investment securities, auto loans, and commercial and consumer real estate-secured loans; |
| net interest income decreased $169 million, or 5%, to $3.1 billion compared to $3.2 billion in 2012, largely reflecting the effect of the continued low-rate environment which reduced loan yields and deposit spreads. Income from loans and leases decreased $204 million driven by the effect of lower interest rates and lower portfolio balances, principally in consumer real estate secured loans. Interest expense on deposits declined reflecting a decrease in total deposits and an improvement in the mix as we reduced our reliance on higher cost certificates of deposit and money market balances. Average earning assets decreased 4% as an increase in commercial loans was more than offset by declines in the investment portfolio and the consumer real estate secured portfolio, including a $947 million decrease in our non-core consumer real estate secured portfolio; |
| noninterest income decreased $35 million, or 2%, to $1.6 billion compared to $1.7 billion in 2012, which included a net benefit of $52 million in unusual items. Excluding the unusual items, noninterest income increased $17 million largely as higher securities gains, net, other services income, other income and trust and investment services revenue was partially offset by lower mortgage banking and card fee income. 2012 unusual items included the $75 million gain on sale of our VISA, Inc. Class B shares and a $23 million loss on the sale of a commercial real estate portfolio; |
| noninterest expense of $7.7 billion included a $4.4 billion goodwill impairment charge recorded in the second quarter of 2013 and a $26 million net restructuring charge. Noninterest expense in 2012 included a $138 million litigation settlement related to overdraft protection and a $77 million defined benefit pension plan obligation charge paid to vested former employees as a single lump sum payment, partially offset by a net $5 million reversal of prior restructuring charges. Excluding these unusual items, noninterest expense in 2013 decreased $29 million, or 1%, compared to 2012, largely due to lower other operating expense and salaries and employee benefits partially offset by higher amortization of software; |
96
| excluding the impact of the $4.4 billion pretax ($4.1 billion after tax) goodwill impairment charge, our return on average tangible common equity improved to 4.95% from 4.86% in 2012; |
| average loans and leases of $85.4 billion decreased $1.6 billion, or 2%, from $87.0 billion in 2012, as commercial loan growth was more than offset by a decrease in our retail loan portfolio, which included a $1.2 billion decrease in the non-core retail loan portfolio; |
| average interest-bearing deposits of $67.9 billion were flat compared to 2012 as growth in low cost deposits such as interest checking and money market and savings deposits, was offset by lower term deposits; |
| our capital ratios continued to be well above regulatory requirements: our total capital ratio increased to 16.1% from 15.8% in 2012, and our Tier 1 capital ratio was 13.5% compared to 14.2% in 2012 as a result of our plan to rebalance our capital structure; |
| net charge-offs declined $374 million from 2012 to $501 million and provision for credit losses totaled $479 million, up 16% from $413 million in 2012. The allowance for credit losses totaled $1.3 billion as of December 31, 2013, down $35 million, or 3%, reflecting continued improvement in overall credit quality from 2012; and |
| net (loss) income per average common share, basic and diluted, was ($6.12) in 2013 compared to $1.15 in 2012, reflecting a 165,582-for-1 forward stock split effective on August 22, 2014. In 2013, net income per average common share, basic and diluted, excluding goodwill impairment, was $1.17, reflecting a 165,582-for-1 forward stock split effective on August 22, 2014. |
Net Income (Loss)
We reported a net loss of $3.4 billion for the year ended December 31, 2013, after recording a goodwill impairment charge of $4.1 billion after tax in the second quarter of 2013 and $26 million ($17 million after tax) in restructuring charges. Excluding the goodwill impairment and restructuring charges above and a net $158 million of pretax unusual items in 2012, net income decreased $97 million, or 13%, from 2012, largely driven by the effect of the relatively persistent low interest rate environment on net interest income and a reduction in fee income, driven by continued pressure from regulatory changes and lower mortgage banking fees. Results also reflected increased provision for credit losses and lower noninterest expense, excluding goodwill impairment.
The restructuring charges in 2013 related to our implementation of a new branch image capture system on the teller line which automated several key processes within the branch network, and our decision to close certain branches, which resulted in lease termination costs and other fixed asset write-offs. Unusual expenses in 2012 included a $138 million ($87 million after tax) overdraft litigation settlement, a $77 million ($49 million after tax) settlement of defined benefit pension plan obligation to vested former employees, a $25 million charge related to a state tax settlement and a $23 million ($15 million after tax) loss on sale of a commercial real estate portfolio, offset by a $75 million ($48 million after tax) gain on sale of our VISA, Inc. Class B shares and a net $5 million ($3 million after tax) reversal of prior restructuring charges.
97
Year Ended December 31, | ||||||||||||||||
2013 | 2012 | Change | Percent | |||||||||||||
(dollars in millions) | (%) | |||||||||||||||
Operating Data: |
||||||||||||||||
Net interest income |
$ | 3,058 | $ | 3,227 | $ | (169 | ) | (5 | )% | |||||||
Noninterest income |
1,632 | 1,667 | (35 | ) | (2 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
Total revenue |
4,690 | 4,894 | (204 | ) | (4 | ) | ||||||||||
Provision for credit losses |
479 | 413 | 66 | 16 | ||||||||||||
Noninterest expense |
7,679 | 3,457 | 4,222 | 122 | ||||||||||||
Noninterest expense, excluding goodwill impairment (1) |
3,244 | 3,457 | (213 | ) | (6 | ) | ||||||||||
(Loss) income before income tax (benefit) expense |
(3,468 | ) | 1,024 | (4,492 | ) | (439 | ) | |||||||||
Income tax (benefit) expense |
(42 | ) | 381 | (423 | ) | (111 | ) | |||||||||
Net (loss) income |
(3,426 | ) | 643 | (4,069 | ) | (633 | ) | |||||||||
Net income, excluding goodwill impairment (1) |
654 | 643 | 11 | 2 | ||||||||||||
Return on average tangible common equity (1) |
(25.91 | )% | 4.86 | % | NM | | ||||||||||
Return on average tangible common equity, excluding goodwill impairment (1) |
4.95 | % | 4.86 | % | 9 bps | |
(1) | These are non-GAAP financial measures. For more information on the computation of these non-GAAP financial measures, see Principal Components of Operations and Key Performance Metrics Used By ManagementKey Performance Metrics and Non-GAAP Financial Measures. |
98
Net Interest Income
The following table shows the major components of net interest income and net interest margin:
Year Ended December 31, | Change | |||||||||||||||||||||||||||||||
2013 | 2012 | |||||||||||||||||||||||||||||||
Average
Balances |
Income/
Expense |
Yields/
Rates |
Average
Balances |
Income/
Expense |
Yields/
Rates |
Average
Balances |
Yields/
Rates |
|||||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||
Interest-bearing cash and due from banks and deposits in banks |
$ | 2,278 | $ | 11 | 0.46 | % | $ | 1,562 | $ | 7 | 0.46 | % | $ | 716 | | bps | ||||||||||||||||
Taxable investment securities |
19,062 | 477 | 2.50 | 22,030 | 615 | 2.79 | (2,968 | ) | (29 | ) | ||||||||||||||||||||||
Non-taxable investment securities |
12 | | 2.66 | 40 | 2 | 4.32 | (28 | ) | (166 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total investment securities |
19,074 | 477 | 2.50 | 22,070 | 617 | 2.79 | (2,996 | ) | (29 | ) | ||||||||||||||||||||||
Commercial |
28,654 | 900 | 3.10 | 27,273 | 849 | 3.07 | 1,381 | 3 | ||||||||||||||||||||||||
Commercial real estate |
6,568 | 178 | 2.67 | 7,063 | 196 | 2.72 | (495 | ) | (5 | ) | ||||||||||||||||||||||
Leases |
3,463 | 105 | 3.05 | 3,216 | 112 | 3.48 | 247 | (43 | ) | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total commercial |
38,685 | 1,183 | 3.02 | 37,552 | 1,157 | 3.04 | 1,133 | (2 | ) | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Home equity lines of credit |
17,105 | 485 | 2.83 | 17,745 | 497 | 2.80 | (640 | ) | 3 | |||||||||||||||||||||||
Residential mortgage |
9,104 | 360 | 3.96 | 9,551 | 413 | 4.32 | (447 | ) | (36 | ) | ||||||||||||||||||||||
Home equity loans |
6,330 | 361 | 5.71 | 8,176 | 481 | 5.88 | (1,846 | ) | (17 | ) | ||||||||||||||||||||||
Automobile |
8,857 | 235 | 2.65 | 8,276 | 273 | 3.30 | 581 | (65 | ) | |||||||||||||||||||||||
Student and other installment loans |
3,655 | 202 | 5.52 | 4,040 | 218 | 5.38 | (385 | ) | 14 | |||||||||||||||||||||||
Credit cards |
1,669 | 175 | 10.46 | 1,634 | 166 | 10.15 | 35 | 31 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total retail |
46,720 | 1,818 | 3.89 | 49,422 | 2,048 | 4.14 | (2,702 | ) | (25 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total loans and leases |
85,405 | 3,001 | 3.50 | 86,974 | 3,205 | 3.67 | (1,569 | ) | (17 | ) | ||||||||||||||||||||||
Loans held for sale |
392 | 12 | 3.07 | 538 | 17 | 3.10 | (146 | ) | (3 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Interest-earning assets |
107,149 | 3,501 | 3.25 | 111,144 | 3,846 | 3.45 | (3,995 | ) | (20 | ) | ||||||||||||||||||||||
Allowance for loan and lease losses |
(1,219 | ) | (1,506 | ) | 287 | |||||||||||||||||||||||||||
Goodwill |
9,437 | 11,323 | (1,886 | ) | ||||||||||||||||||||||||||||
Other noninterest-earning assets |
5,499 | 6,705 | (1,206 | ) | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Total noninterest-earning assets |
13,717 | 16,522 | (2,805 | ) | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Total assets |
$ | 120,866 | $ | 127,666 | $ | (6,800 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Liabilities and Stockholders Equity |
||||||||||||||||||||||||||||||||
Checking with interest |
$ | 14,096 | $ | 8 | 0.06 | % | $ | 13,522 | $ | 10 | 0.08 | % | $ | 574 | (2 | ) bps | ||||||||||||||||
Money market & savings |
42,575 | 105 | 0.25 | 41,249 | 121 | 0.29 | 1,326 | (4 | ) | |||||||||||||||||||||||
Term deposits |
11,266 | 103 | 0.91 | 13,534 | 244 | 1.80 | (2,268 | ) | (89 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total interest-bearing deposits |
67,937 | 216 | 0.32 | 68,305 | 375 | 0.55 | (368 | ) | (23 | ) | ||||||||||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase (1) |
2,400 | 192 | 7.89 | 2,716 | 119 | 4.31 | (316 | ) | 358 | |||||||||||||||||||||||
Other short-term borrowed funds |
251 | 4 | 1.64 | 3,026 | 101 | 3.27 | (2,775 | ) | (163 | ) | ||||||||||||||||||||||
Long-term borrowed funds |
778 | 31 | 3.93 | 1,976 | 24 | 1.20 | (1,198 | ) | 273 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total borrowed funds |
3,429 | 227 | 6.53 | 7,718 | 244 | 3.11 | (4,289 | ) | 342 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total interest-bearing liabilities |
71,366 | 443 | 0.61 | 76,023 | 619 | 0.80 | (4,657 | ) | (19 | ) | ||||||||||||||||||||||
Demand deposits |
25,399 | 25,053 | 346 | |||||||||||||||||||||||||||||
Other liabilities |
2,267 | 2,652 | (385 | ) | ||||||||||||||||||||||||||||
Stockholders equity |
21,834 | 23,938 | (2,104 | ) | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Total liabilities and stockholders equity |
$ | 120,866 | $ | 127,666 | $ | (6,800 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Interest rate spread |
2.64 | 2.65 | ||||||||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||||||
Net interest income |
$ | 3,058 | $ | 3,227 | $ | (169 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Net interest margin |
2.85 | % | 2.89 | % | (4 | ) bps |
(1) | Balances are net of certain short-term receivables associated with reverse repurchase agreements. Interest expense includes the full cost of the repurchase agreements and certain hedging costs. The rate on federal funds purchased is elevated due to the impact from pay-fixed interest rate swaps that are scheduled to run off by the end of 2016. See Analysis of Financial ConditionDecember 31, 2013 Compared with December 31, 2012Derivatives for further information. |
99
Net interest income of $3.1 billion in 2013 decreased $169 million, or 5%, from $3.2 billion in 2012, and reflected a four basis point decline in net interest margin to 2.85%. The decrease in net interest income was driven by a reduction in earning asset yields given the relatively persistent low-rate environment, as well as a decrease in loan and securities portfolio balances, which were partially offset by a reduction in pay fixed swap costs and improved deposit spreads. Average interest-earning assets decreased $4.0 billion driven by a $2.9 billion decrease in consumer real estate secured portfolios, a $2.3 billion decrease in the investment securities portfolio and a $385 million decrease in student and other installment loans, which were partially offset by a $1.1 billion increase in total commercial loans and a $581 million increase in auto loans.
The four basis point decrease in net interest margin reflected the effect of the relatively persistent low-rate environment, which led to a decline in earning asset yields that outpaced our ability to reduce the cost of interest-bearing liabilities. The decline in earning asset yields reflected continued prepayment of higher yielding consumer real estate secured loans as well as the contractual amortization of higher yield portfolios, which were entered into in higher interest rate environments. In addition, intense industrywide competition for loans compressed spreads on new originations and resulted in downward pressure on loan yields. To a lesser extent, rates on interest-bearing deposits also declined compared to 2012. Industrywide, net interest margins experienced downward pressure as higher rate loan and securities balances ran off and deposit rates approached floors beneath which they cannot be reduced further.
The net yield on average interest-earning assets decreased 20 basis points to 3.25% in 2013 from 3.45% in 2012, reflecting a 17 basis point decline in the loan and lease portfolio yield and a 35 basis point decline in the investment portfolio yield from 2012. The decline in average yields largely reflected the effect of the continued low-rate environment as new loans and securities were issued at lower rates and prepayment speeds on higher rate fixed assets in the portfolio increased. Investment portfolio income of $488 million decreased $136 million, or 22%, from 2012, and the yield on the portfolio declined 35 basis points to 2.29%. These results were impacted by our strategic decision to slow down reinvestment activity in the first half of 2013, given extremely low levels of market rates.
Our total interest-bearing deposit costs in 2013 decreased $159 million, or 42%, from $375 million in 2012 and reflected a 23 basis point decrease in the rate paid on deposits to 0.32% from 0.55% in 2012. The rates paid on term deposits declined to 0.91% from 1.80% in 2012. As a result of the historically low interest rate environment, many deposit products have hit pricing floors at or near zero, limiting further rate reductions and thus compressing margin. The total cost of borrowed funds increased to 6.53% from 3.11% in 2012 due to additional subordinated debt issued in 2013 and the full expense impact of the subordinated debt issued in 2012.
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Noninterest Income
The following table details the significant components of our noninterest income for the periods indicated:
Year Ended
December 31, |
Change | Percent | ||||||||||||||
2013 | 2012 | |||||||||||||||
(dollars in millions) | (%) | |||||||||||||||
Service charges and fees |
$ | 640 | $ | 704 | $ | (64 | ) | (9 | )% | |||||||
Card fees |
234 | 249 | (15 | ) | (6 | ) | ||||||||||
Mortgage banking fees |
153 | 189 | (36 | ) | (19 | ) | ||||||||||
Trust and investment services fees |
149 | 131 | 18 | 14 | ||||||||||||
Foreign exchange and trade finance fees |
97 | 105 | (8 | ) | (8 | ) | ||||||||||
Capital markets fees |
53 | 52 | 1 | 2 | ||||||||||||
Bank-owned life insurance income |
50 | 51 | (1 | ) | (2 | ) | ||||||||||
Securities gains, net |
144 | 95 | 49 | 52 | ||||||||||||
Other income (1) |
112 | 91 | 21 | 23 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total noninterest income |
$ | 1,632 | $ | 1,667 | $ | (35 | ) | (2 | )% | |||||||
|
|
|
|
|
|
(1) | Includes net impairment losses on securities available for sale recognized in earnings and other income. |
Total noninterest income of $1.6 billion in 2013 decreased 2%, or $35 million, from 2012 largely as higher securities gains, net, other income and trust and investment services fees were more than offset by lower service charges and fees, mortgage banking fees and card fees. Service charges and fees of $640 million decreased 9% largely on lower account volume. Mortgage banking fees of $153 million decreased $36 million, or 19%, from $189 million in 2012. The decrease was primarily driven by lower loan sale gains reflecting the decision to retain more loans on our balance sheet, which was partially offset by higher mortgage servicing rights valuations. Card fees of $234 million declined $15 million, or 6%, compared to $249 million in 2012 driven by lower transaction volumes. Net gains on the sale of securities of $144 million increased $49 million, or 52%, from $95 million in 2012 primarily reflecting the sale of higher yielding investment securities. We do not expect to record comparable securities gains, net, in the coming years. Other income of $112 million increased $21 million, or 23%, from 2012 primarily due to a $75 million gain on the sale of Visa Class B shares offset by a $23 million loss on the sale of a commercial real estate portfolio recorded in 2012. Excluding the gain on the sale of Visa Class B shares and the loss on commercial real estate, other income increased $73 million driven by higher derivatives income, leasing income, and a gain on sale of warrants.
Provision for Credit Losses
Provision for credit losses of $479 million in 2013 increased $66 million, or 16%, from $413 million in 2012, despite a $374 million decline in net charge-offs. The increase in the provision for credit losses reflected growth in the commercial loan portfolio and recognition of incremental loss exposure related to expected HELOC payment shock. Additionally, while overall credit quality continued to improve in 2013, the rate of improvement slowed relative to 2012. As a result, 2013 provision for credit losses included a release of $22 million from the allowance for credit losses (the amount by which net charge-offs exceeded the provision), compared with a release of $462 million in 2012. For further information regarding the expected HELOC payment shock, see Key Factors Affecting Our BusinessHELOC Payment Shock.
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Noninterest Expense
The following table displays the significant components of our noninterest expense for the periods indicated:
Year Ended
December 31, |
Change | Percent | ||||||||||||||
2013 | 2012 | |||||||||||||||
(dollars in millions) | (%) | |||||||||||||||
Salaries and employee benefits |
$ | 1,652 | $ | 1,743 | $ | (91 | ) | (5 | )% | |||||||
Outside services |
360 | 339 | 21 | 6 | ||||||||||||
Occupancy |
327 | 310 | 17 | 5 | ||||||||||||
Equipment expense |
275 | 279 | (4 | ) | (1 | ) | ||||||||||
Amortization of software |
102 | 77 | 25 | 32 | ||||||||||||
Goodwill impairment |
4,435 | | 4,435 | NM | ||||||||||||
Other operating expense |
528 | 709 | (181 | ) | (26 | ) | ||||||||||
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|
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Total noninterest expense |
$ | 7,679 | $ | 3,457 | $ | 4,222 | 122 | % | ||||||||
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|
|
|
Noninterest expense of $7.7 billion in 2013 increased $4.2 billion from $3.5 billion in 2012 and included a second quarter $4.4 billion goodwill impairment charge as described below. Excluding the goodwill impairment, noninterest expense of $3.2 billion declined $213 million, or 6%, from $3.5 billion in 2012. Results in 2012 included a $138 million litigation settlement related to overdraft protection and a $77 million settlement of defined benefit pension plan obligations to vested former employees, partially offset by a net $5 million reversal of prior restructuring charges. Excluding these unusual items and a $26 million restructuring charge in 2013, noninterest expense decreased $29 million, or 1%, driven by lower other operating expense and salaries and employee benefits.
In the second quarter of 2013, we recorded a $4.4 billion goodwill impairment charge driven by a deceleration of the expected future earnings associated with our Consumer Banking reporting unit as compared to our prior expectations. Although the U.S. economy has demonstrated signs of recovery, including notable improvements in unemployment and housing, the pace and extent of recovery in these indicators, as well as in overall gross domestic product, have lagged behind previous expectations and interest rates have remained at or near historically low levels for a protracted period of time. Lower economic growth rates for the United States, coupled with increased costs to comply with the new regulatory framework in the financial services industry, resulted in a deceleration of the expected growth rate for future earnings associated with the Consumer Banking reporting unit, which caused us to record a goodwill impairment charge during the second quarter of 2013. For segment reporting purposes, the impairment charge is reflected in Other, and the remaining carrying value of goodwill totaled $6.9 billion as of December 31, 2013. See Note 8 Goodwill to our audited consolidated financial statements included elsewhere in this prospectus for further information.
Provision (Benefit) for Income Taxes
In 2013, we recorded an income tax benefit of $42 million compared to $381 million of income tax expense in 2012. The effective tax rates for the years ended December 31, 2013 and 2012 were 1% and 37%, respectively. The decrease in the effective rate was mainly due to the tax rate impact of the goodwill impairment in calculating our income tax benefit as well as the effect of a $25 million charge related to a state tax settlement in 2012. Goodwill not deductible for tax purposes accounted for 78.4% of the total goodwill impairment charge and generated a reduction of 35% in our effective tax rate for the year ended December 31, 2013. During 2012, we recorded a state tax settlement charge for the years 2003 through 2008 related to our real estate investment trust and various passive investment companies. For further discussion of our tax settlement in 2012, see Note 14 Income Taxes to our audited consolidated financial statements included elsewhere in this prospectus.
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Business Segments
The following table presents certain financial data of our business segments for the year ended December 31, 2013:
As of and for the Year
Ended December 31, 2013 |
||||||||||||||||
Consumer
Banking |
Commercial
Banking |
Other (4) | Consolidated | |||||||||||||
(dollars in millions) | ||||||||||||||||
Net interest income (expense) |
$ | 2,176 | $ | 1,031 | $ | (149 | ) | $ | 3,058 | |||||||
Noninterest income |
1,025 | 389 | 218 | 1,632 | ||||||||||||
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|
|
|
|
|
|
|||||||||
Total revenue |
3,201 | 1,420 | 69 | 4,690 | ||||||||||||
Noninterest expense |
2,522 | 635 | 4,522 | 7,679 | ||||||||||||
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|
|
|
|
|
|
|||||||||
Profit (loss) before provision for credit losses |
679 | 785 | (4,453 | ) | (2,989 | ) | ||||||||||
Provision for credit losses |
308 | (7 | ) | 178 | 479 | |||||||||||
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|
|
|
|
|
|
|||||||||
Income (loss) before income tax expense |
371 | 792 | (4,631 | ) | (3,468 | ) | ||||||||||
Income tax expense (benefit) |
129 | 278 | (449 | ) | (42 | ) | ||||||||||
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|
|
|
|||||||||
Net income (loss) |
$ | 242 | $ | 514 | $ | (4,182 | ) | $ | (3,426 | ) | ||||||
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|
|
|
|
|
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Loans and leases and loans held for sale (period- end) (1) |
$ | 45,019 | $ | 36,155 | $ | 5,939 | $ | 87,113 | ||||||||
Average Balances: |
||||||||||||||||
Total assets |
$ | 46,465 | $ | 35,229 | $ | 39,172 | $ | 120,866 | ||||||||
Loans and leases and loans held for sale (1) |
45,106 | 34,647 | 6,044 | 85,797 | ||||||||||||
Deposits and deposits held for sale |
72,158 | 17,516 | 3,662 | 93,336 | ||||||||||||
Interest-earning assets |
45,135 | 34,771 | 27,243 | 107,149 | ||||||||||||
Key Metrics: |
||||||||||||||||
Net interest margin |
4.82 | % | 2.97 | % | NM | 2.85 | % | |||||||||
Efficiency ratio (2) |
78.76 | % | 44.66 | % | NM | 163.73 | % | |||||||||
Efficiency ratio, excluding goodwill impairment (2) |
78.76 | % | 44.66 | % | NM | 69.17 | % | |||||||||
Average loans to average deposits ratio |
62.51 | % | 197.80 | % | NM | 91.92 | % | |||||||||
Return on average total tangible assets (2) |
0.52 | % | 1.46 | % | NM | (3.05 | )% | |||||||||
Return on average total tangible assets, excluding goodwill impairment (2) |
0.52 | % | 1.46 | % | NM | 0.58 | % | |||||||||
Return on average tangible common equity (2)(3) |
5.48 | % | 13.20 | % | NM | (25.91 | )% | |||||||||
Return on average tangible common equity, excluding goodwill impairment (2)(3) |
5.48 | % | 13.20 | % | NM | 4.95 | % |
(1) | Loans held for sale refer to mortgage loans held for sale recorded in the Consumer Banking segment, as well as the loans relating to the Chicago Divestiture, which are recorded in both the Consumer Banking and Commercial Banking segments. |
(2) | These are non-GAAP financial measures. For more information on the computation of these non-GAAP financial measures, see Principal Components of Operations and Key Performance Metrics Used By ManagementKey Performance Metrics and Non-GAAP Financial Measures. |
(3) | Operating segments are allocated capital on a risk-adjusted basis considering economic and regulatory capital requirements. We approximate that regulatory capital is equivalent to a sustainable target level for common equity Tier 1 and then allocate that approximation to the segments based on economic capital. |
(4) | Includes the financial impact of non-core, liquidating loan portfolios and other non-core assets, our treasury activities, wholesale funding activities, securities portfolio, community development assets and other unallocated assets, liabilities, revenues, provision for credit losses, and expenses not attributed to our Consumer Banking or Commercial Banking segments. For a description of non-core assets, see Analysis of Financial ConditionDecember 31, 2013 Compared with December 31, 2012Loans and LeasesNon-Core Assets. |
We operate our business through two operating segments: Consumer Banking and Commercial Banking. Segment results are derived from our business line profitability reporting systems by
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specifically attributing managed balance sheet assets, deposits, and other liabilities and their related income or expense. Residual assets and liabilities not attributed to Consumer Banking and Commercial Banking are attributed to Other.
Other includes our treasury function, securities portfolio, wholesale funding activities, goodwill and goodwill impairment, community development assets and other unallocated assets, liabilities, revenues, provision for credit losses and expenses not attributed to Consumer Banking or Commercial Banking. Other also includes our non-core assets. Non-core assets are primarily loans inconsistent with our strategic goals, generally as a result of geographic location, industry, product type or risk level. The non-core portfolio totaled $3.8 billion as of December 31, 2013, down 33% from December 31, 2012. The largest component of our non-core portfolio is our home equity products currently or formerly serviced by others.
Our capital levels are evaluated and managed centrally; however, capital is allocated to the operating segments to support evaluation of business performance. Operating segments are allocated capital on a risk-adjusted basis considering economic and regulatory capital requirements. We approximate that regulatory capital is equivalent to a sustainable target level for common equity Tier 1 and then allocate that approximation to the segments based on economic capital. Interest income and expense is determined based on the assets and liabilities managed by the business segment. Because funding and asset liability management is a central function, funds transfer-pricing methodologies are utilized to allocate a cost of funds used, or credit for the funds provided, to all business segment assets, liabilities and capital, respectively, using a matched funding concept. The residual effect on net interest income of asset/liability management, including the residual net interest income related to the funds transfer pricing process, is included in Other.
Provision for credit losses is allocated to each business segment based on actual net charge-offs that have been recognized by the business segment. The difference between the consolidated provision for credit losses and the business segments net charge-offs is reflected in Other.
Noninterest income and expense directly managed by each business segment, including fees, service charges, salaries and benefits, and other direct revenues and costs are accounted for within each segments financial results in a manner similar to the consolidated financial statements. Occupancy costs are allocated based on utilization of facilities by the business segment. Generally, operating losses are charged to the business segment when the loss event is realized in a manner similar to a loan charge-off. Noninterest expenses incurred by centrally managed operations or business segments that directly support another business segments operations are charged to the applicable business segment based on its utilization of those services.
Income taxes are assessed to each business segment at a standard tax rate with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Other.
Developing and applying methodologies used to allocate items among the business segments is a dynamic process. Accordingly, financial results may be revised periodically as management systems are enhanced, methods of evaluating performance or product lines change, or our organizational structure changes.
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Consumer Banking
As of and for the
Year Ended December 31, |
||||||||||||||||
2013 | 2012 | Change | Percent | |||||||||||||
(dollars in millions) | (%) | |||||||||||||||
Net interest income |
$ | 2,176 | $ | 2,197 | $ | (21 | ) | (1 | )% | |||||||
Noninterest income |
1,025 | 1,187 | (162 | ) | (14 | ) | ||||||||||
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|
|
|
|
|||||||||||
Total revenue |
3,201 | 3,384 | (183 | ) | (5 | ) | ||||||||||
Noninterest expense |
2,522 | 2,691 | (169 | ) | (6 | ) | ||||||||||
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|
|
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Profit before provision for credit losses |
679 | 693 | (14 | ) | (2 | ) | ||||||||||
Provision for credit losses |
308 | 408 | (100 | ) | (24 | ) | ||||||||||
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|
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|
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Income before income tax expense |
371 | 285 | 86 | 30 | ||||||||||||
Income tax expense |
129 | 100 | 29 | 29 | ||||||||||||
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|
|
|
|||||||||||
Net income |
$ | 242 | $ | 185 | $ | 57 | 31 | |||||||||
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|
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Loans and leases and loans held for sale (period-end) (1) |
$ | 45,019 | $ | 46,289 | $ | (1,270 | ) | (3 | ) | |||||||
Average Balances: |
||||||||||||||||
Total assets |
$ | 46,465 | $ | 47,824 | $ | (1,359 | ) | (3 | ) | |||||||
Loans and leases and loans held for sale (1) |
45,106 | 46,455 | (1,349 | ) | (3 | ) | ||||||||||
Deposits and deposits held for sale |
72,158 | 70,812 | 1,346 | 2 | ||||||||||||
Interest-earning assets |
45,135 | 46,479 | (1,344 | ) | (3 | ) | ||||||||||
Key Metrics: |
||||||||||||||||
Net interest margin |
4.82 | % | 4.73 | % | 9 | bps | | |||||||||
Efficiency ratio (2) |
78.76 | % | 79.45 | % | (69 | ) bps | | |||||||||
Average loans to average deposits ratio |
62.51 | % | 65.60 | % | (309 | ) bps | | |||||||||
Return on average total tangible assets (2) |
0.52 | % | 0.39 | % | 13 | bps | | |||||||||
Return on average tangible common equity (2)(3) |
5.48 | % | 4.89 | % | 59 | bps | |
(1) | Loans held for sale include mortgage loans held for sale and loans relating to the Chicago Divestiture. |
(2) | These are non-GAAP financial measures. For more information on the computation of these non-GAAP financial measures, see Principal Components of Operations and Key Performance Metrics Used By ManagementKey Performance Metrics and Non-GAAP Financial Measures. |
(3) | Operating segments are allocated capital on a risk-adjusted basis considering economic and regulatory capital requirements. We approximate that regulatory capital is equivalent to a sustainable target level for common equity Tier 1 and then allocate that approximation to the segments based on economic capital. |
Consumer Banking net income of $242 million in 2013 increased $57 million, or 31%, from 2012 as a 5% decrease in revenue was more than offset by a 6% decrease in noninterest expense and a $100 million decrease in provision for credit losses. 2012 unusual items included a $75 million ($48 million after tax) benefit in revenue relating to a gain on the sale of Visa class B shares and a $138 million ($87 million after tax) settlement charge in noninterest expense associated with overdraft litigation. Excluding these items, net income increased $18 million as the benefit of lower provision for credit losses and continued expense discipline more than offset the lower revenue reflecting continued pressure from the relatively persistent low-rate environment as well as the impact of regulatory changes on service charges and card fees.
Net interest income of $2.2 billion in 2013 declined $21 million, or 1%, largely driven by a 3% decrease in earning assets and a reduction in deposit spreads. The average loan portfolio declined $1.3 billion to $45.1 billion, driven by a $1.8 billion decrease in home equity balances given industrywide higher levels of mortgage refinance activity. In 2013, we originated $5.7 billion in mortgages compared with $7.9 billion in 2012. We sold 67% of 2013 originations compared to 70% in
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2012. Average deposits grew 2% to $72.2 billion reflecting a $3.0 billion increase in money market deposits, partially offset by a $2.4 billion decrease in certificates of deposit.
Noninterest income of $1.0 billion decreased $162 million, or 14%, from 2012, which included the benefit of the $75 million gain on the sale of Visa class B shares. Excluding this gain, noninterest income decreased $87 million driven by a $53 million decrease in service charges and a $36 million decrease in mortgage banking fees. The decrease in mortgage banking fees reflected a $2.2 billion decrease in origination volumes as well as lower gains on the sale of mortgages as secondary market spreads narrowed. Gains on sale of mortgages decreased $77 million and volume related fees declined $28 million, partially offset by the recovery of mortgage servicing rights valuations and lower amortization expense.
Noninterest expense of $2.5 billion decreased $169 million, or 6%, from 2012, which included the $138 million overdraft settlement. Excluding this settlement charge, noninterest expense decreased $31 million driven by lower salaries and benefits and branch related costs partially offset by higher commissions expense.
Provision for credit losses of $308 million decreased $100 million, or 24%, from 2012, largely reflecting the benefit of decreased charge-offs in the residential real estate secured portfolio as well as general improvement in the credit environment.
Commercial Banking
As of and for the
Year Ended December 31, |
||||||||||||||||
2013 | 2012 | Change | Percent | |||||||||||||
(dollars in millions) | (%) | |||||||||||||||
Net interest income |
$ | 1,031 | $ | 1,036 | $ | (5 | ) | | ||||||||
Noninterest income |
389 | 349 | 40 | 11 | % | |||||||||||
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|
|
|
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Total revenue |
1,420 | 1,385 | 35 | 3 | ||||||||||||
Noninterest expense |
635 | 625 | 10 | 2 | ||||||||||||
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|
|
|||||||||||
Profit before provision for credit losses |
785 | 760 | 25 | 3 | ||||||||||||
Provision for credit losses |
(7 | ) | 63 | (70 | ) | (111 | ) | |||||||||
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|
|||||||||||
Income before income tax expense |
792 | 697 | 95 | 14 | ||||||||||||
Income tax expense |
278 | 244 | 34 | 14 | ||||||||||||
|
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|
|
|
|
|||||||||||
Net income |
$ | 514 | $ | 453 | $ | 61 | 13 | |||||||||
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|
|
|
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Loans and leases and loans held for sale (period-end) (1) |
$ | 36,155 | $ | 34,384 | $ | 1,771 | 5 | |||||||||
Average Balances: |
||||||||||||||||
Total assets |
$ | 35,229 | $ | 33,474 | $ | 1,755 | 5 | |||||||||
Loans and leases and loans held for sale (1) |
34,647 | 32,499 | 2,148 | 7 | ||||||||||||
Deposits and deposits held for sale |
17,516 | 17,650 | (134 | ) | (1 | ) | ||||||||||
Interest-earning assets |
34,771 | 32,600 | 2,171 | 7 | ||||||||||||
Key Metrics: |
||||||||||||||||
Net interest margin |
2.97 | % | 3.18 | % | (21 | ) bps | | |||||||||
Efficiency ratio (1) |
44.66 | % | 45.22 | % | (56 | ) bps | | |||||||||
Average loans to average deposits ratio |
197.80 | % | 184.13 | % | 1,367 | bps | | |||||||||
Return on average total tangible assets (2) |
1.46 | % | 1.35 | % | 11 | bps | | |||||||||
Return on average tangible common equity (2)(3) |
13.20 | % | 12.45 | % | 75 | bps | |
(1) | Loans held for sale include loans relating to the Chicago Divestiture. |
106
(2) | These are non-GAAP financial measures. For more information on the computation of these non-GAAP financial measures, see Principal Components of Operations and Key Performance Metrics Used By ManagementKey Performance Metrics and Non-GAAP Financial Measures. |
(3) | Operating segments are allocated capital on a risk-adjusted basis considering economic and regulatory capital requirements. We approximate that regulatory capital is equivalent to a sustainable target level for common equity Tier 1 and then allocate that approximation to the segments based on economic capital. |
Commercial Banking net income of $514 million in 2013 increased $61 million, or 13%, from $453 million in 2012 driven by growth in noninterest income and continued improvement in credit quality. Total revenue rose 3% reflecting an 11% increase in noninterest income and relatively flat net interest income.
Net interest income of $1.0 billion in 2013 remained relatively flat with the prior year as the benefit of loan growth of 7%, largely in middle market, mid-corporate, and franchise lending, was offset by a 21 basis point decline in net interest margin given the relatively persistent low-rate environment.
Noninterest income of $389 million in 2013 increased $40 million, or 11%, from 2012, largely due to higher interest rate products and leasing income, which was partially offset by lower foreign exchange and trade finance fees.
Noninterest expense of $635 million in 2013 increased $10 million, driven by higher salary and benefits cost as well as continued investment in technology and risk management.
Average loans and leases increased $2.1 billion, or 7%, in 2013 due to strong new loan origination activity particularly in the second half of 2013 in commercial finance. Average deposit balances were relatively flat at $17.5 billion despite a $256 million increase in noninterest-bearing demand deposits.
Provision for credit losses in 2013 reflected a net recovery of $7 million on prior charge-offs, compared with an expense of $63 million in 2012, as overall credit quality continued to improve.
Other
As of and for the
Year Ended December 31, |
||||||||||||||||
2013 | 2012 | Change | Percent | |||||||||||||
(dollars in millions) | (%) | |||||||||||||||
Net interest (expense) |
$ | (149 | ) | $ | (6 | ) | $ | (143 | ) | NM | ||||||
Noninterest income |
218 | 131 | 87 | 66 | % | |||||||||||
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|
|
|
|||||||||||
Total revenue |
69 | 125 | (56 | ) | (45 | ) | ||||||||||
Noninterest expense |
4,522 | 141 | 4,381 | NM | ||||||||||||
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|
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|
|||||||||||
(Loss) before provision for credit losses |
(4,453 | ) | (16 | ) | (4,437 | ) | NM | |||||||||
Provision for credit losses |
178 | (58 | ) | 236 | 406 | |||||||||||
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|||||||||||
(Loss) income before income tax (benefit) expense |
(4,631 | ) | 42 | (4,673 | ) | NM | ||||||||||
Income tax (benefit) expense |
(449 | ) | 37 | (486 | ) | NM | ||||||||||
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|
|
|
|
|||||||||||
Net (loss) income |
$ | (4,182 | ) | $ | 5 | $ | (4,187 | ) | NM | |||||||
|
|
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|
|
|||||||||||
Loans and leases and loans held for sale (period-end) |
$ | 5,939 | $ | 7,221 | $ | (1,282 | ) | (18 | ) | |||||||
Average Balances: |
||||||||||||||||
Total assets |
$ | 39,172 | $ | 46,368 | $ | (7,196 | ) | (16 | ) | |||||||
Loans and leases and loans held for sale |
6,044 | 8,558 | (2,514 | ) | (29 | ) | ||||||||||
Deposits and deposits held for sale |
3,662 | 4,896 | (1,234 | ) | (25 | ) | ||||||||||
Interest-earning assets |
27,243 | 32,065 | (4,822 | ) | (15 | ) |
107
A net loss of $4.2 billion was recorded for the year ended December 31, 2013, which included a pretax goodwill impairment charge of $4.4 billion. Excluding the goodwill impairment, the net loss was $102 million compared with net income of $5 million in 2012. 2013 results reflected the benefit of higher noninterest income and lower noninterest expense, which was more than offset by higher provision for credit losses and a reduction in net interest income. Total revenue of $69 million in 2013 decreased by $56 million, or 45%, from $125 million in 2012.
Net interest income in 2013 decreased $143 million to a loss of $149 million compared to a loss of $6 million in 2012. The decrease was driven by lower average investment portfolio balances of $2.3 billion, a $2.2 billion decrease in average non-core loan balances and a decrease in residual net interest income related to funds transfer pricing, which was partially offset by the benefit of interest rate swaps used for hedging assets and liabilities.
Noninterest income of $218 million in 2013 increased $87 million, or 66%, from $131 million in 2012, which included a $23 million loss on sale of non-core loans. Noninterest income in 2013 also included higher net gains on sale of securities available for sale of $65 million.
The provision for credit losses within Other mainly represents the residual change in the consolidated allowance for credit losses after attributing the respective net charge-offs to the Consumer Banking and Commercial Banking segments. It also includes net charge-offs related to the non-core portfolio. The provision totaled $178 million in 2013, and was an increase of $236 million from a negative provision of $58 million in 2012. Non-core net charge-offs were $195 million and $393 million in 2013 and 2012, respectively, resulting from improved credit quality and continued runoff in the portfolio. 2013 provision for credit losses included a release of $22 million from the allowance for credit losses (the amount by which net charge-offs exceeded the provision), compared with a release of $462 million in 2012.
Noninterest expense of $4.5 billion increased $4.4 billion from $141 million in 2012 and included a $4.4 billion goodwill impairment charge. Noninterest expense, excluding goodwill impairment, of $87 million in 2013 decreased $54 million, or 38%, from $141 million in 2012. 2013 results included $26 million of restructuring charges, and 2012 results included a $77 million settlement of defined benefit pension plan obligations to vested former employees, partially offset by a net $5 million reversal of prior restructuring charges.
Total assets include $2.1 billion and $4.8 billion of goodwill related to the Consumer Banking and Commercial Banking reporting units, respectively. For further information regarding the reconciliation of segment results to GAAP results, see Note 24 Business Segments to our audited consolidated financial statements included elsewhere in this prospectus.
108
Results of OperationsYear Ended December 31, 2012 Compared with Year Ended December 31, 2011
Net Income
2012 net income of $643 million increased $137 million, or 27%, from $506 million in 2011, reflecting a $469 million decrease in provision for credit losses and the benefit of a $75 million ($48 million after tax) gain on the sale of VISA, Inc. Class B shares and a net $5 million ($3 million after tax) reversal of prior restructuring processes, partially offset by a $138 million ($87 million after tax) litigation settlement related to overdraft protection, a $77 million ($49 million after tax) settlement of defined benefit pension plan obligations to vested former employees, a $25 million charge related to a state tax settlement and a $23 million ($15 million after tax) loss on sale of a commercial real estate portfolio.
Year Ended
December 31, |
||||||||||||||||
2012 | 2011 | Change | Percent | |||||||||||||
(dollars in millions) | (%) | |||||||||||||||
Operating Data: |
||||||||||||||||
Net interest income |
$ | 3,227 | $ | 3,320 | $ | (93 | ) | (3 | )% | |||||||
Noninterest income |
1,667 | 1,711 | (44 | ) | (3 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
Total revenue |
4,894 | 5,031 | (137 | ) | (3 | ) | ||||||||||
Provision for credit losses |
413 | 882 | (469 | ) | (53 | ) | ||||||||||
Noninterest expense |
3,457 | 3,371 | 86 | 3 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Income before income tax expense |
1,024 | 778 | 246 | 32 | ||||||||||||
Income tax expense |
381 | 272 | 109 | 40 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Net income |
$ | 643 | $ | 506 | $ | 137 | 27 | % | ||||||||
|
|
|
|
|
|
|||||||||||
Return on average tangible common equity (1) |
4.86 | % | 4.18 | % | 68 | bps | |
(1) | This is a non-GAAP financial measure. For more information on the computation of this non-GAAP financial measures, see Principal Components of Operations and Key Performance Metrics Used By ManagementKey Performance Metrics and Non-GAAP Financial Measures. |
109
Net Interest Income
The following table shows the major components of net interest income and interest margin:
Year Ended December 31, | Change | |||||||||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||||||||||
Average
Balances |
Income/
Expense |
Yields/
Rates |
Average
Balances |
Income/
Expense |
Yields/
Rates |
Average
Balances |
Yields/
Rates |
|||||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||
Interest-bearing cash and due from banks and deposits in banks |
$ | 1,562 | $ | 7 | 0.46 | % | $ | 2,016 | $ | 7 | 0.36 | % | $ | (454 | ) | 10 | bps | |||||||||||||||
Taxable investment securities |
22,030 | 615 | 2.79 | 22,698 | 748 | 3.30 | (668 | ) | (51 | ) | ||||||||||||||||||||||
Non-taxable investment securities |
40 | 2 | 4.32 | 49 | 2 | 4.37 | (9 | ) | (5 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total investment securities |
22,070 | 617 | 2.79 | 22,747 | 750 | 3.30 | (677 | ) | (51 | ) | ||||||||||||||||||||||
Commercial |
27,273 | 849 | 3.07 | 23,886 | 779 | 3.22 | 3,387 | (15 | ) | |||||||||||||||||||||||
Commercial real estate |
7,063 | 196 | 2.72 | 8,310 | 237 | 2.82 | (1,247 | ) | (10 | ) | ||||||||||||||||||||||
Leases |
3,216 | 112 | 3.48 | 2,952 | 113 | 3.83 | 264 | (35 | ) | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total commercial |
37,552 | 1,157 | 3.04 | 35,148 | 1,129 | 3.18 | 2,404 | (14 | ) | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Home equity lines of credit |
17,745 | 497 | 2.80 | 17,172 | 472 | 2.75 | 573 | 5 | ||||||||||||||||||||||||
Residential mortgage |
9,551 | 413 | 4.32 | 9,721 | 453 | 4.66 | (170 | ) | (34 | ) | ||||||||||||||||||||||
Home equity loans |
8,176 | 481 | 5.88 | 10,575 | 627 | 5.93 | (2,399 | ) | (5 | ) | ||||||||||||||||||||||
Automobile |
8,276 | 273 | 3.30 | 7,541 | 339 | 4.50 | 735 | (120 | ) | |||||||||||||||||||||||
Student and other installment loans |
4,040 | 218 | 5.38 | 4,863 | 259 | 5.32 | (823 | ) | 6 | |||||||||||||||||||||||
Credit cards |
1,634 | 166 | 10.15 | 1,580 | 155 | 9.79 | 54 | 36 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total retail |
49,422 | 2,048 | 4.14 | 51,452 | 2,305 | 4.48 | (2,030 | ) | (34 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total loans and leases |
86,974 | 3,205 | 3.67 | 86,600 | 3,434 | 3.95 | 374 | (28 | ) | |||||||||||||||||||||||
Loans held for sale |
538 | 17 | 3.10 | 359 | 13 | 3.70 | 179 | (60 | ) | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Interest-earning assets |
111,144 | 3,846 | 3.45 | 111,722 | 4,204 | 3.75 | (578 | ) | (30 | ) | ||||||||||||||||||||||
Allowance for loan and lease losses |
(1,506 | ) | (1,888 | ) | 382 | |||||||||||||||||||||||||||
Goodwill |
11,323 | 11,344 | (21 | ) | ||||||||||||||||||||||||||||
Other noninterest-earning assets |
6,705 | 7,166 | (461 | ) | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Total noninterest-earning assets |
16,522 | 16,622 | (100 | ) | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Total assets |
$ | 127,666 | $ | 128,344 | $ | (678 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Liabilities and Stockholders Equity |
||||||||||||||||||||||||||||||||
Checking with interest |
$ | 13,522 | $ | 10 | 0.08 | % | $ | 16,116 | $ | 15 | 0.10 | % | $ | (2,594 | ) | (2 | ) bps | |||||||||||||||
Money market & savings |
41,249 | 121 | 0.29 | 37,638 | 94 | 0.25 | 3,611 | 4 | ||||||||||||||||||||||||
Term deposits |
13,534 | 244 | 1.80 | 16,501 | 381 | 2.31 | (2,967 | ) | (51 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total interest-bearing deposits |
68,305 | 375 | 0.55 | 70,255 | 490 | 0.70 | (1,950 | ) | (15 | ) | ||||||||||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase (1) |
2,716 | 119 | 4.31 | 3,808 | 191 | 4.96 | (1,092 | ) | (65 | ) | ||||||||||||||||||||||
Short-term borrowed funds |
3,026 | 101 | 3.27 | 2,459 | 150 | 6.04 | 567 | (277 | ) | |||||||||||||||||||||||
Long-term borrowed funds |
1,976 | 24 | 1.20 | 5,085 | 53 | 1.02 | (3,109 | ) | 18 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total borrowed funds |
7,718 | 244 | 3.11 | 11,352 | 394 | 3.42 | (3,634 | ) | (31 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total interest-bearing liabilities |
76,023 | 619 | 0.80 | 81,607 | 884 | 1.07 | (5,584 | ) | (27 | ) | ||||||||||||||||||||||
Demand deposits |
25,053 | 21,191 | 3,862 | |||||||||||||||||||||||||||||
Other liabilities |
2,652 | 2,409 | 243 | |||||||||||||||||||||||||||||
Stockholders equity |
23,938 | 23,137 | 801 | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Total liabilities and stockholders equity |
$ | 127,666 | $ | 128,344 | $ | (678 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Interest rate spread |
2.65 | 2.68 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Net interest income |
$ | 3,227 | $ | 3,320 | $ | (93 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Net interest margin |
2.89 | % | 2.97 | % | (8 | ) bps |
(1) | Balances are net of certain short-term receivables associated with reverse repurchase agreements; interest expense includes the full cost of the repurchase agreements and certain hedging costs. The rate on federal funds purchased is elevated due to the impact from pay-fixed interest rate swaps that are scheduled to run off by the end of 2016. See Analysis of Financial ConditionDecember 31, 2013 Compared with December 31, 2012Derivatives for further information. |
110
Net interest income in 2012 of $3.2 billion declined $93 million compared to 2011, largely reflecting the impact of the continued low interest rate environment. The net interest margin in 2012 decreased 8 basis points to 2.89% compared to 2.97% in 2011.
Interest income of $3.8 billion in 2012 decreased $358 million, or 9%, from $4.2 billion in 2011, despite a small increase in average loans and leases balances, which totaled $87.0 billion compared to $86.6 billion in 2011. The lower interest income on loans was driven by the runoff and prepayment of higher yielding, fixed rate assets and new originations of loans with lower yields, as well as sales of higher yielding investment securities. In addition, an increase in prepayments speeds increased net premium amortization expense on investment securities.
The decrease in our interest income on interest-earning assets was partially offset by a $115 million, or 23%, decrease in our interest-bearing deposit costs of $375 million in 2012 compared to $490 million in 2011 and largely reflected the relatively persistent low interest rate environment. The 2012 cost of other borrowed funds decreased $150 million, or 38%, to $244 million compared to $394 million in 2011, primarily reflecting the effect of maturing fixed-rate swaps that carried high pay-fixed interest rates.
Noninterest Income
The following table details the significant components of our noninterest income for the periods indicated:
Year Ended
December 31, |
||||||||||||||||
2012 | 2011 | Change | Percent | |||||||||||||
(dollars in millions) | (%) | |||||||||||||||
Service charges and fees |
$ | 704 | $ | 742 | $ | (38 | ) | (5 | )% | |||||||
Card fees |
249 | 344 | (95 | ) | (28 | ) | ||||||||||
Mortgage banking fees |
189 | 62 | 127 | 205 | ||||||||||||
Trust and investment services fees |
131 | 131 | | | ||||||||||||
Foreign exchange and trade finance fees |
105 | 114 | (9 | ) | (8 | ) | ||||||||||
Capital markets fees |
52 | 40 | 12 | 30 | ||||||||||||
Bank-owned life insurance income |
51 | 49 | 2 | 4 | ||||||||||||
Securities gains, net |
95 | 162 | (67 | ) | (41 | ) | ||||||||||
Other income (1) |
91 | 67 | 24 | 36 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total noninterest income |
$ | 1,667 | $ | 1,711 | $ | 44 | (3 | )% | ||||||||
|
|
|
|
|
|
(1) | Includes net impairment losses on securities available for sale recognized in earnings and other income. |
Noninterest income of $1.7 billion in 2012 decreased $44 million, or 3%, from 2011, on lower card fees and securities gains, net, partially offset by higher mortgage banking fees. Card fees of $249 million in 2012 decreased $95 million, or 28%, from $344 million in 2011, driven by the effect of regulatory changes, including rules adopted by the Federal Reserve Board pursuant to the Dodd-Frank Act that limit the interchange fees that may be charged with respect to electronic debit transactions. For further information regarding the Federal Reserve Boards interchange fee rule see Risk FactorsRisks Related to Regulations Governing Our IndustryThe Dodd-Frank Acts provisions and related rules that restrict bank interchange fees may negatively impact our revenues and earnings and Regulation and SupervisionRules Affecting Debit Card Interchange Fees. Securities gains, net, of $95 million decreased $67 million, or 41%, from $162 million in 2011, primarily as a result of decreased sales volume. Mortgage banking fees of $189 million in 2012 increased $127 million, from $62 million in 2011, reflecting higher gains on the sale of mortgages. Other income of $91 million increased
111
$24 million in 2012, from $67 million in 2011, driven by a $75 million gain on the sale of VISA, Inc. Class B shares during the second quarter of 2012, offset by a $23 million loss on sale of a commercial real estate portfolio and a net $20 million loss on sales of venture capital investments.
Provision for Credit Losses
In 2012, provision for credit losses of $413 million decreased $469 million, or 53%, from $882 million in 2011. The decrease in the provision for credit losses reflected continued improvement in credit quality, including a $290 million reduction in net charge-offs from $1.2 billion in 2011 to $875 million in 2012. The 2012 provision for credit losses included a release of $462 million from the allowance for credit losses (the amount by which net charge-offs exceeded the provision), compared with a release of $283 million in 2011. The 2012 provision for credit losses benefited from a $102 million reduction in the unallocated reserve during the year reflecting improvement in the economic environment and overall credit quality.
Noninterest Expense
The following table displays the significant components of total noninterest expense:
Year Ended
December 31, |
||||||||||||||||
2012 | 2011 | Change | Percent | |||||||||||||
(dollars in millions) | (%) | |||||||||||||||
Salaries and employee benefits |
$ | 1,743 | $ | 1,623 | $ | 120 | 7 | % | ||||||||
Outside services |
339 | 340 | (1 | ) | | |||||||||||
Occupancy |
310 | 372 | (62 | ) | (17 | ) | ||||||||||
Equipment expense |
279 | 301 | (22 | ) | (7 | ) | ||||||||||
Amortization of software |
77 | 53 | 24 | 45 | ||||||||||||
Other operating expense |
709 | 682 | 27 | 4 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total noninterest expense |
$ | 3,457 | $ | 3,371 | $ | 86 | 3 | % | ||||||||
|
|
|
|
|
|
Noninterest expense of $3.5 billion in 2012 increased $86 million, or 3%, from $3.4 billion in 2011, driven by higher salaries and employee benefits, amortization of software and other operating expense, partially offset by lower occupancy and equipment expense. Salaries and employee benefits of $1.7 billion in 2012 increased $120 million driven by a $77 million pension charge following a lump sum payout to vested former employees of the defined benefit pension plan. 2012 results included a $138 million litigation settlement related to overdraft protection in the first quarter of 2012. Occupancy expense of $310 million in 2012 decreased $62 million, or 17%, from $372 million in 2011, driven by lower lease termination expenses. Other operating expense of $709 million in 2012 rose $27 million, or 4%, from 2011, largely reflecting the $138 million settlement offset by lower nonperforming asset costs.
Provision for Income Taxes
Provision for income taxes of $381 million in 2012 increased $109 million, or 40%, from $272 million in 2011. The provision represented a 37% and 35% effective tax rate for the years ended December 31, 2012 and 2011, respectively. The increase in the effective rate represents the impact of higher levels of 2012 pretax earnings relative to permanent tax differences, the effect of a state tax settlement in 2012, as well as a favorable provision-to-tax return adjustment in 2011.
112
Business Segments
The following table presents certain financial data of our business segments for the year ended December 31, 2012:
As of and for the Year Ended December 31, 2012 | ||||||||||||||||
Consumer
Banking |
Commercial
Banking |
Other (4) | Consolidated | |||||||||||||
(dollars in millions) | ||||||||||||||||
Net interest income (expense) |
$ | 2,197 | $ | 1,036 | $ | (6 | ) | $ | 3,227 | |||||||
Noninterest income |
1,187 | 349 | 131 | 1,667 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
3,384 | 1,385 | 125 | 4,894 | ||||||||||||
Noninterest expense |
2,691 | 625 | 141 | 3,457 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Profit (loss) before provision for credit losses |
693 | 760 | (16 | ) | 1,437 | |||||||||||
Provision for credit losses |
408 | 63 | (58 | ) | 413 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before income tax expense |
285 | 697 | 42 | 1,024 | ||||||||||||
Income tax expense |
100 | 244 | 37 | 381 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 185 | $ | 453 | $ | 5 | $ | 643 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Loans and leases and loans held for sale (period-end) (1) |
$ | 46,289 | $ | 34,384 | $ | 7,221 | $ | 87,894 | ||||||||
Average Balances: |
||||||||||||||||
Total assets |
$ | 47,824 | $ | 33,474 | $ | 46,368 | $ | 127,666 | ||||||||
Total loans and leases and loans held for sale (1) |
46,455 | 32,499 | 8,558 | 87,512 | ||||||||||||
Deposits and deposits held for sale |
70,812 | 17,650 | 4,896 | 93,358 | ||||||||||||
Interest-earning assets |
46,479 | 32,600 | 32,065 | 111,144 | ||||||||||||
Key Metrics: |
||||||||||||||||
Net interest margin |
4.73 | % | 3.18 | % | NM | 2.89 | % | |||||||||
Efficiency ratio (2) |
79.45 | % | 45.22 | % | NM | 70.64 | % | |||||||||
Average loans to average deposits ratio |
65.60 | % | 184.13 | % | NM | 93.74 | % | |||||||||
Return on average total tangible assets (2) |
0.39 | % | 1.35 | % | NM | 0.55 | % | |||||||||
Return on average tangible common equity (2)(3) |
4.89 | % | 12.45 | % | NM | 4.86 | % |
(1) | Loans held for sale refer to mortgage loans held for sale recorded in the Consumer Banking segment. |
(2) | These are non-GAAP financial measures. For more information on the computation of these non-GAAP financial measures, see Principal Components of Operations and Key Performance Metrics Used By ManagementKey Performance Metrics and Non-GAAP Financial Measures. |
(3) | Operating segments are allocated capital on a risk-adjusted basis considering economic and regulatory capital requirements. We approximate that regulatory capital is equivalent to a sustainable target level for common equity Tier 1 and then allocate that approximation to the segments based on economic capital. |
(4) | Includes the financial impact of non-core, liquidating loan portfolios and other non-core assets, our treasury activities, wholesale funding activities, securities portfolio, community development assets and other unallocated assets, liabilities, revenues, provision for credit losses, and expenses not attributed to our Consumer Banking or Commercial Banking segments. For a description of non-core assets, see Analysis of Financial ConditionDecember 31, 2013 Compared with December 31, 2012Loans and LeasesNon-Core Assets. |
113
Consumer Banking
As of and for the
Year Ended December 31, |
||||||||||||||||
2012 | 2011 | Change | Percent | |||||||||||||
(dollars in millions) | (%) | |||||||||||||||
Net interest income |
$ | 2,197 | $ | 2,204 | $ | (7 | ) | | ||||||||
Noninterest income |
1,187 | 1,128 | 59 | 5 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Total revenue |
3,384 | 3,332 | 52 | 2 | ||||||||||||
Noninterest expense |
2,691 | 2,524 | 167 | 7 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Profit before provision for credit losses |
693 | 808 | (115 | ) | (14 | ) | ||||||||||
Provision for credit losses |
408 | 400 | 8 | 2 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Income before income tax expense |
285 | 408 | (123 | ) | (30 | ) | ||||||||||
Income tax expense |
100 | 143 | (43 | ) | (30 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
Net income |
$ | 185 | $ | 265 | $ | (80 | ) | (30 | ) | |||||||
|
|
|
|
|
|
|||||||||||
Loans and leases and loans held for sale (period-end) (1) |
$ | 46,289 | $ | 46,116 | $ | 173 | | |||||||||
Average Balances: |
||||||||||||||||
Total assets |
$ | 47,824 | $ | 46,071 | $ | 1,753 | 4 | |||||||||
Loans and leases and loans held for sale (1) |
46,455 | 44,605 | 1,850 | 4 | ||||||||||||
Deposits and deposits held for sale |
70,812 | 68,881 | 1,931 | 3 | ||||||||||||
Interest-earning assets |
46,479 | 44,664 | 1,815 | 4 | ||||||||||||
Key Metrics: |
||||||||||||||||
Net interest margin |
4.73 | % | 4.93 | % | (20 | )bps | | |||||||||
Efficiency ratio (1) |
79.45 | % | 75.78 | % | 367 | bps | | |||||||||
Average loans to average deposits ratio |
65.60 | % | 64.76 | % | 84 | bps | | |||||||||
Return on average total tangible assets (2) |
0.39 | % | 0.57 | % | (18 | )bps | | |||||||||
Return on average tangible common equity (2)(3) |
4.89 | % | 7.71 | % | (282 | )bps | |
(1) | Loans held for sale includes mortgage loans originated for sale. |
(2) | These are non-GAAP financial measures. For more information on the computation of these non-GAAP financial measures, see Principal Components of Operations and Key Performance Metrics Used By ManagementKey Performance Metrics and Non-GAAP Financial Measures. |
(3) | Operating segments are allocated capital on a risk-adjusted basis considering economic and regulatory capital requirements. We approximate that regulatory capital is equivalent to a sustainable target level for common equity Tier 1 and then allocate that approximation to the segments based on economic capital. |
Consumer Banking net income of $185 million in 2012 decreased $80 million, or 30%, compared to $265 million in 2011, as a 2% increase in total revenue was more than offset by a 7% increase in noninterest expense. 2012 results included a $75 million ($48 million after tax) gain on the sale of Visa class B shares in noninterest income and a $138 million ($87 million after tax) overdraft charge litigation settlement in noninterest expense. Excluding these unusual items, net income totaled $224 million and decreased $41 million, or 15% from 2011, largely reflecting the impact of regulatory changes on fee income and lower net interest income driven by the continued low-rate environment.
Net interest income was largely unchanged at $2.2 billion as the benefit of loan growth of 4% and a 3% increase in deposits was offset by the impact of declining loan yields and deposit spreads, which drove a 20 basis point decrease in net interest margin in the face of the continued low-rate environment.
Noninterest income of $1.2 billion in 2012 increased $59 million, or 5%, compared to 2011. 2012 results included the benefit of a $75 million gain on Visa class B shares. Excluding this gain,
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noninterest income decreased $16 million as a $128 million increase in mortgage banking fees was more than offset by the effect of regulatory changes that drove a $98 million decrease in debit card fees and a $44 million decrease in service charges. 2012 mortgage banking fees reflected a $1.4 billion increase in origination volumes, and higher secondary market sale gains.
Noninterest expense of $2.7 billion in 2012 increased $167 million, or 7%, from 2011, driven by the overdraft litigation settlement. Excluding this settlement, noninterest expense of $2.6 billion increased $29 million, reflecting higher salaries and employee benefits tied to investments in mortgage and wealth as well as investments in technology and risk management infrastructure, partially offset by lower costs related to our branch network.
Provision for credit losses of $408 million increased 2% largely reflecting increased losses in consumer real estate secured.
Commercial Banking
As of and for the
Year Ended December 31, |
||||||||||||||||
2012 | 2011 | Change | Percent | |||||||||||||
(dollars in millions) | (%) | |||||||||||||||
Net interest income |
$ | 1,036 | $ | 929 | $ | 107 | 12 | % | ||||||||
Noninterest income |
349 | 343 | 6 | 2 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total revenue |
1,385 | 1,272 | 113 | 9 | ||||||||||||
Noninterest expense |
625 | 605 | 20 | 3 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Profit before provision for credit losses |
760 | 667 | 93 | 14 | ||||||||||||
Provision for credit losses |
63 | 92 | (29 | ) | (32 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
Income before income tax expense |
697 | 575 | 122 | 21 | ||||||||||||
Income tax expense |
244 | 202 | 42 | 21 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Net income |
$ | 453 | $ | 373 | $ | 80 | 21 | |||||||||
|
|
|
|
|
|
|||||||||||
Loans and leases and loans held for sale (period-end) |
$ | 34,384 | $ | 30,776 | $ | 3,608 | 12 | |||||||||
Average Balances: |
||||||||||||||||
Total assets |
$ | 33,474 | $ | 29,800 | $ | 3,674 | 12 | |||||||||
Loans and leases and loans held for sale |
32,499 | 28,763 | 3,736 | 13 | ||||||||||||
Deposits and deposits held for sale |
17,650 | 17,725 | (75 | ) | | |||||||||||
Interest-earning assets |
32,600 | 28,914 | 3,686 | 13 | ||||||||||||
Key Metrics: |
||||||||||||||||
Net interest margin |
3.18 | % | 3.21 | % | (3 | )bps | | |||||||||
Efficiency ratio (1) |
45.22 | % | 47.55 | % | (233 | )bps | | |||||||||
Average loans to average deposits ratio |
184.13 | % | 162.28 | % | 2,185 | bps | | |||||||||
Return on average total tangible assets (1) |
1.35 | % | 1.25 | % | 10 | bps | | |||||||||
Return on average tangible common equity (1)(2) |
12.45 | % | 10.81 | % | 164 | bps | |
(1) | These are non-GAAP financial measures. For more information on the computation of these non-GAAP financial measures, see Principal Components of Operations and Key Performance Metrics Used By ManagementKey Performance Metrics and Non-GAAP Financial Measures. |
(2) | Operating segments are allocated capital on a risk-adjusted basis considering economic and regulatory capital requirements. We approximate that regulatory capital is equivalent to a sustainable target level for common equity Tier 1 and then allocate that approximation to the segments based on economic capital. |
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Commercial Banking net income of $453 million in 2012 increased $80 million, or 21%, from $373 million in 2011, driven by growth in net interest income and improvement in credit quality. Total revenue rose 9% reflecting a 12% increase in net interest income and relatively flat noninterest income.
Net interest income of $1.0 billion in 2012 increased $107 million as the benefit of average loan growth of 13%, largely in middle market, mid-corporate, and asset finance, was partially offset by a 3 basis point decline in net interest margin, given the continued low interest rate environment. Deposits remained relatively stable at $17.7 billion but deposit costs improved as $3.2 billion migrated from interest-bearing to noninterest-bearing accounts.
Noninterest income of $349 million in 2012 increased $6 million, or 2%, from 2011, largely due to growth in capital markets fee income.
Noninterest expense of $625 million in 2012 increased $20 million driven by higher salary and benefits cost due to staffing investments.
Average loans and leases increased $3.7 billion, or 13%, in 2012 on increased loan origination activity across the majority of the commercial lines of business. Average deposit balances were relatively flat at $17.7 billion; however, the mix of deposits improved, driven by a $3.2 billion increase in noninterest-bearing demand deposits, which offset reductions in interest-bearing balances.
Provision for credit losses of $63 million in 2012 decreased from $92 million in 2011 as overall credit quality improved.
Other
As of and for the Year
Ended December 31, |
||||||||||||||||
2012 | 2011 | Change | Percent | |||||||||||||
(dollars in millions) | (%) | |||||||||||||||
Net interest (expense) income |
$ | (6 | ) | $ | 187 | $ | (193 | ) | (103 | )% | ||||||
Noninterest income |
131 | 240 | (109 | ) | (45 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
Total revenue |
125 | 427 | (302 | ) | (71 | ) | ||||||||||
Noninterest expense |
141 | 242 | (101 | ) | (42 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
(Loss) profit before provision for credit losses |
(16 | ) | 185 | (201 | ) | (109 | ) | |||||||||
Provision for credit losses |
(58 | ) | 390 | (448 | ) | (115 | ) | |||||||||
|
|
|
|
|
|
|||||||||||
Income (loss) before income tax expense (benefit) |
42 | (205 | ) | 247 | 120 | |||||||||||
Income tax expense (benefit) |
37 | (73 | ) | 110 | 151 | |||||||||||
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | 5 | $ | (132 | ) | $ | 137 | 104 | ||||||||
|
|
|
|
|
|
|||||||||||
Total loans and leases and loans held for sale (period-end) |
$ | 7,221 | $ | 10,467 | $ | (3,246 | ) | (31 | ) | |||||||
Average Balances: |
||||||||||||||||
Total assets |
$ | 46,368 | $ | 52,473 | $ | (6,105 | ) | (12 | ) | |||||||
Loans and leases and loans held for sale |
8,558 | 13,591 | (5,033 | ) | (37 | ) | ||||||||||
Deposits and deposits held for sale |
4,896 | 4,839 | 57 | 1 | ||||||||||||
Interest-earning assets |
32,065 | 38,144 | (6,079 | ) | (16 | ) |
Other recorded net income of $5 million for the year ended December 31, 2012 compared with a net loss of $132 million for the year ended December 31, 2011, as the benefit of a $448 million decrease in provision for credit losses and a $101 million decrease in noninterest expense was partially offset by a $193 million decrease in net interest income and a $109 million decrease in noninterest income.
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Net interest income in 2012 decreased $193 million to a loss of $6 million compared to $187 million in 2011. The decrease was driven by a $4.3 billion reduction in average non-core loan balances and a decrease in residual net interest income related to funds transfer pricing, partially offset by the benefit of a $201 million decrease in our pay fixed swaps expense.
Noninterest income of $131 million in 2012 decreased $109 million, or 45%, from $240 million in 2011. The decrease primarily resulted from lower net gains on sale of securities available for sale of $67 million, a $23 million loss on sale of non-core loans in 2012 and higher net loss on venture capital investments of $20 million.
The provision for credit losses within Other mainly represents the residual change in the consolidated allowance for credit losses after attributing the respective net charge-offs to the Consumer Banking and Commercial Banking segments. It also includes net charge-offs related to the non-core portfolio. The provision was a negative $58 million in 2012, and was a decrease of $448 million from $390 million in 2011. Non-core net charge-offs were $393 million and $653 million in 2012 and 2011, respectively, resulting from improved credit quality and continued runoff in the portfolio. The 2012 provision for credit losses included a release of $462 million from the allowance for credit losses (the amount by which net charge-offs exceeded the provision), compared with a release of $283 million in 2011.
Noninterest expense of $141 million in 2012 decreased $101 million from $242 million in 2011. The decrease reflected lower loan collection costs for non-core loans, and lower restructuring charges primarily related to lease termination expenses and lower amortization of intangible assets, partially offset by a $77 million settlement of defined benefit pension plan obligations to vested former employees.
Analysis of Financial ConditionJune 30, 2014 Compared with December 31, 2013
Loans and Leases
The following table shows the composition of loans and leases, including non-core loans:
June 30,
2014 |
December 31,
2013 |
Change | Percent | |||||||||||||
(dollars in millions) | (%) | |||||||||||||||
Commercial |
$ | 30,076 | $ | 28,667 | $ | 1,409 | 5 | % | ||||||||
Commercial real estate |
7,158 | 6,948 | 210 | 3 | ||||||||||||
Leases |
3,740 | 3,780 | (40 | ) | (1 | ) | ||||||||||
|
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|
|
|
|
|||||||||||
Total commercial |
40,974 | 39,395 | 1,579 | 4 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Residential, including originated home equity products |
30,116 | 29,694 | 422 | 1 | ||||||||||||
Home equity products serviced by others |
1,972 | 2,171 | (199 | ) | (9 | ) | ||||||||||
Other secured retail |
12,180 | 10,700 | 1,480 | 14 | ||||||||||||
Unsecured retail |
3,587 | 3,899 | (312 | ) | (8 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
Total retail |
47,855 | 46,464 | 1,391 | 3 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total loans and leases (1) (2) |
$ | 88,829 | $ | 85,859 | $ | 2,970 | 3 | % | ||||||||
|
|
|
|
|
|
(1) | Excluded from the table above are loans held for sale totaling $262 million and $1.3 billion as of June 30, 2014 and December 31, 2013, respectively. Loans held for sale as of December 31, 2013 primarily related to the Chicago Divestiture. For further discussion, see Note 13 Divestitures and Branch Assets and Liabilities Held for Sale to our unaudited interim consolidated financial statements included elsewhere in this prospectus. |
(2) | Mortgage loans serviced for others by the Companys subsidiaries are not included above, and amounted to $18.3 billion and $18.7 billion at June 30, 2014 and December 31, 2013, respectively. |
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Our loans and leases are disclosed in portfolio segments and classes. Our loan and lease portfolio segments are commercial and retail. The classes of loans and leases are: commercial, commercial real estate, leases, residential (includes residential mortgages and home equity loans and lines of credit), home equity products serviced by others (includes certain purchased home equity loans and lines of credit), other secured retail (includes automobile loans and other installment loans) and unsecured retail (includes student loans and credit card).
As of June 30, 2014, our loans and leases portfolio increased $3.0 billion, or 3%, to $88.8 billion compared to $85.9 billion as of December 31, 2013, primarily reflecting increases in total retail loans and total commercial loans and leases. As of June 30, 2014, our total commercial loans and leases grew $1.6 billion, or 4%, to $41.0 billion compared to $39.4 billion as of December 31, 2013 in large part due to growth in commercial loans, primarily in mid-corporate. As of June 30, 2014, our total retail loans increased $1.4 billion, or 3%, to $47.9 billion compared to $46.5 billion as of December 31, 2013, primarily due to increases in our other secured retail portfolio of 14% driven mainly by the purchase of auto loans and stronger originations, and our residential, including originated home equity products of 1%, but offset by decreases in our home equity products serviced by others and unsecured retail of 9% and 8%, respectively, as of June 30, 2014 compared to December 31, 2013. The decrease in our home equity products serviced by others is due to runoff and the decrease in our unsecured loans is due to the sale of student loans.
Non-Core Assets
The table below shows the composition of our non-core assets as of the dates indicated:
June 30,
2014 |
December 31,
2013 |
(Date of
Designation) June 30, 2009 |
Change from
2014-2013 |
Change from
2014-2009 |
||||||||||||||||
(dollars in millions) | (%) | (%) | ||||||||||||||||||
Commercial |
$ | 87 | $ | 108 | $ | 1,900 | (19 | )% | (95 | )% | ||||||||||
Commercial real estate |
297 | 381 | 3,412 | (22 | ) | (91 | ) | |||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total commercial |
384 | 489 | 5,312 | (21 | ) | (93 | ) | |||||||||||||
Residential, including originated home equity products |
651 | 705 | 2,082 | (8 | ) | (69 | ) | |||||||||||||
Home equity products serviced by others |
1,976 | 2,160 | 6,180 | (9 | ) | (68 | ) | |||||||||||||
Other secured retail (1) |
| | 4,037 | | (100 | ) | ||||||||||||||
Unsecured retail |
382 | 406 | 2,490 | (6 | ) | (85 | ) | |||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total retail |
3,009 | 3,271 | 14,789 | (8 | ) | (80 | ) | |||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total non-core loans |
3,393 | 3,760 | 20,101 | (10 | ) | (83 | ) | |||||||||||||
|
|
|
|
|
|
|||||||||||||||
Other assets |
65 | 81 | 378 | (20 | ) | (83 | ) | |||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total non-core assets |
$ | 3,458 | $ | 3,841 | $ | 20,479 | (10 | )% | (83 | )% | ||||||||||
|
|
|
|
|
|
(1) | Other secured retail loans were either paid down, charged off, sold or transferred to the core loan portfolio by December 31, 2011. |
Non-core assets are primarily loans inconsistent with our strategic goals, generally as a result of geographic location, industry, product type or risk level. We have actively managed these loans down since they were designated as non-core on June 30, 2009. Between that time and June 30, 2014, the portfolio has decreased $17.0 billion, including principal repayments of $9.1 billion; charge-offs of $3.8 billion; transfers back to the core portfolio of $2.8 billion; and sales of $1.3 billion.
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Transfers from non-core back to core are handled on an individual request basis and managed through the chief credit officer for our non-core portfolio. The rationale can vary and in the past some loan portfolio transfers have been approved after determination that the original decision to place them in non-core was not deemed appropriate. Individual loans can be reconsidered when the customer prospects changetypically related to situations where a non-strategic customer becomes a strategic customer due to growth or a new credit request that was previously considered to be unlikely.
At June 30, 2014, the non-core portfolio totaled $3.5 billion and has declined 10% since December 31, 2013 and over 83% since the designation of the non-core portfolios in 2009. Commercial non-core loan balances declined 21% compared to December 31, 2013, ending at $384 million compared to $489 million at December 31, 2013. Retail non-core loan balances of $3.0 billion decreased 8% or $262 million compared to December 31, 2013.
The largest component of our non-core portfolio is our home equity products currently or formerly serviced by other firms, or SBO, portfolio. The SBO portfolio is a liquidating portfolio consisting of pools of home equity loans and lines of credit purchased between 2003 and 2007. Although our SBO portfolio consists of loans that were initially serviced by others, we now service a portion of this portfolio internally. SBO balances serviced externally totaled $1.2 billion and $1.3 billion as of June 30, 2014 and December 31, 2013, respectively. The SBO portfolio has been closed to new purchases since the third quarter of 2007, with exposure down to $2.0 billion as of June 30, 2014 compared to $2.2 billion as of December 31, 2013. The SBO portfolio represented 6% of the entire real estate portfolio and 4% of the overall retail loan portfolio as of June 30, 2014.
The credit profile of the SBO portfolio is significantly weaker than the core real estate portfolio, with a weighted-average refreshed FICO score of 714 and combined loan to value (CLTV) of 98.6% as of June 30, 2014. The proportion of the portfolio in a second lien (subordinated) position is 95%. The amount of the portfolio in out of footprint geographies is 72.5%, with 28.8% concentrated in California, Nevada, Arizona and Florida.
Credit performance continues to improve due to portfolio liquidation (the lowest performing loans have already been charged off), more effective account servicing and collection strategies, and improvements in the real estate market. The delinquency rate of more than 90 days past due was 1.6% as of June 30, 2014, and decreased by 14 basis points from December 31, 2013. The SBO portfolio had a charge-off rate of 2.4% for the six months ended June 30, 2014 and a cumulative (inception to date) charge-off rate of 26.7% as of June 30, 2014.
Allowance for Credit Losses and Nonperforming Assets
We and our banking subsidiaries, CBNA and CBPA, maintain an allowance for credit losses, consisting of an allowance for loan and lease losses and a reserve for unfunded lending commitments. This allowance is created through charges to income, or provision for credit losses, and is maintained at an appropriate level adequate to absorb anticipated losses and is determined in accordance with GAAP. For further information on our processes to determine our allowance for credit losses, see Critical Accounting EstimatesAllowance for Credit Losses, Note 4 Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk, to our unaudited interim consolidated financial statements and Note 1 Significant Accounting Policies, to our audited consolidated financial statements included elsewhere in this prospectus.
The allowance for credit losses totaled $1.3 billion at June 30, 2014 and December 31, 2013. Our allowance for loan and lease losses was 1.36% of total loans and leases and 101% of nonperforming loans and leases as of June 30, 2014 compared with 1.42% and 86% as of December 31, 2013. The total loan portfolio credit performance continued to improve across all credit measures in the
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six months ended June 30, 2014. Net charge-offs for the six months ended June 30, 2014 of $155 million decreased 39% compared to $255 million for the six months ended June 30, 2013, primarily driven by decreases in the non-core, real estate secured and unsecured retail portfolios. The portfolio annualized net charge-off rate declined to 0.36% for the six months ended June 30, 2014 from 0.60% for the six months ended June 30, 2013. The delinquency rate improved to 1.6% as of June 30, 2014 from 1.9% at December 31, 2013. Nonperforming loans and leases totaled $1.2 billion, or 1.35%, of the total portfolio as of June 30, 2014 as compared to $1.4 billion, or 1.65%, of the total loan portfolio as of December 31, 2013. At June 30, 2014, $621 million of nonperforming loans and leases had been designated as impaired and had no specific allowance because they had been written down to the fair value of their collateral. These loans included $547 million of retail loans and $74 million of commercial loans. Excluding impaired loans that have been written down to their net realizable value, the allowance to nonperforming loans ratio totaled 209% at June 30, 2014 as compared to 151% at December 31, 2013.
Commercial Loan Asset Quality
Our commercial loan portfolio consists of traditional commercial and commercial real estate loans. The portfolio is focused primarily on in-footprint customers where our local delivery model provides for strong client connectivity.
For commercial loans and leases, we use regulatory classification ratings to monitor credit quality. Loans with a pass rating are those that we believe 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. See Note 4 Allowance for Credit Losses, Nonperforming Assets and Concentrations of Credit Risk, to our unaudited interim consolidated financial statements included elsewhere in this prospectus.
During the six months ended June 30, 2014, the quality of the commercial loan portfolio remained steady. As of June 30, 2014, total criticized loans decreased to 4.3%, or $1.8 billion, of the commercial loan portfolio compared to 4.9%, or $1.9 billion, at December 31, 2013. Commercial real estate criticized balances decreased 23% to 6.3%, or $451 million, of the commercial real estate portfolio compared to 8.4%, or $582 million, as of December 31, 2013. Commercial real estate accounted for 25.4% of the criticized loans as of June 30, 2014, compared to 30.4% as of December 31, 2013.
Nonperforming balances and charge-offs have displayed a positive trend in the first half of 2014. As of June 30, 2014, nonperforming commercial balances decreased $70 million, or 26%, to $195 million, compared to $265 million as of December 31, 2013, with a 23% decline in commercial real estate nonperforming loans over the same period. As of June 30, 2014, nonperforming commercial loans stood at 0.5% of the commercial loan portfolio compared to 0.7% as of December 31, 2013. Net charge-offs in our commercial loan portfolio for the six months ended June 30, 2014 reflected a net recovery of $21 million compared to a net recovery of $2 million for the six months ended June 30, 2013. Charge-off performance continues to be positively influenced by recoveries and lower gross losses driven by improved economic conditions and a strategic focus on high quality new business; however, this favorable trend is expected to reduce as recovery opportunities dissipate. See Key Factors Affecting Our BusinessCredit Trends for further details.
Retail Loan Asset Quality
For retail loans, we primarily use the loans 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 are continually updated and monitored. Our retail loan portfolio remains predominantly focused on lending across the New England, Mid-Atlantic and Midwest regions, with
120
continued geographic expansion outside the footprint with the auto finance and student lending portfolios. Originations within the footprint are primarily initiated through the branch network, whereas out-of-footprint lending is driven by indirect auto loans in dealer networks and student loans via our online platform.
The credit composition of our retail loan portfolio at June 30, 2014 remained favorable and well positioned across all product lines with an average refreshed FICO score of 753, down one point from December 31, 2013. Our real estate combined loan to value ratio, or CLTV, is calculated as the mortgage amount divided by the appraised value of the property and was 68.1% as of June 30, 2014 compared to 67.8% as of December 31, 2013. Excluding the SBO portfolio, the real estate CLTV was 65.9% as of June 30, 2014 compared to 65.1% as of December 31, 2013. The net charge-off rate (core and non-core) of 0.76% for the six months ended June 30, 2014 decreased 34 basis points from the same period in 2013. The overall rate of delinquency more than 30 days past due improved 30 basis points to 2.3% as of June 30, 2014, from 2.6% as of December 31, 2013. The improvement was driven by residential mortgage, home equity and student loans.
Nonperforming retail loans as a percentage of total retail loans were 2.1% as of June 30, 2014, an improvement of 38 basis points from December 31, 2013. The improvement in nonperforming retail loans was primarily driven by transfers of troubled debt restructurings (TDRs) from nonaccrual to accrual status.
Special TopicsHELOC Payment Shock
For further information regarding the possible HELOC payment shock, see Key Factors Affecting Our BusinessHELOC Payment Shock.
Troubled Debt Restructuring
TDR is the classification given to a loan that has been restructured in a manner that grants a concession to a borrower that is experiencing financial hardship that we would not otherwise make. TDRs typically result from our loss mitigation efforts and are undertaken in order to improve the likelihood of recovery and continuity of the relationship. Our loan modifications are handled on a case by case basis and are negotiated to achieve mutually agreeable terms that maximize loan collectability and meet our borrowers financial needs. The types of concessions include interest rate reductions, term extensions, principal forgiveness and other modifications to the structure of the loan that fall outside lending policy. Depending on the specific facts and circumstances of the customer, restructuring can involve loans moving to nonaccrual, remaining on nonaccrual or continuing on accrual status. As of June 30, 2014, we had $1.2 billion classified as retail TDRs, of which 31% were in nonaccrual status. Within this nonaccrual population, 53.6% were current in payment. TDRs generally return to accrual status once repayment capacity and appropriate payment history can be established. TDRs are evaluated for impairment individually. Loans are classified as TDRs until paid off, sold or refinanced at market terms.
For additional information regarding the troubled debt restructurings, see Note 4 Allowance for Credit Losses, Nonperforming Assets and Concentrations of Credit Risk to our unaudited interim consolidated financial statements and Note 1 Significant Accounting Policies to our audited consolidated financial statements included elsewhere in this prospectus.
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The table below presents our retail TDRs in delinquent status as of June 30, 2014:
June 30, 2014 | ||||||||||||||||
Current |
30-89 Days
Past Due |
90+ Days
Past Due |
Total | |||||||||||||
(in millions) | ||||||||||||||||
Recorded Investment: |
||||||||||||||||
Residential, including originated home equity products |
$ | 700 | $ | 39 | $ | 139 | $ | 878 | ||||||||
Home equity products serviced by others |
96 | 8 | 5 | 109 | ||||||||||||
Other secured retail |
27 | 3 | 1 | 31 | ||||||||||||
Unsecured retail |
187 | 10 | 3 | 200 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 1,010 | $ | 60 | $ | 148 | $ | 1,218 | ||||||||
|
|
|
|
|
|
|
|
The table below presents the accrual status of our retail TDRs as of June 30, 2014:
June 30, 2014 | ||||||||||||
Accruing | Nonaccruing | Total | ||||||||||
(in millions) | ||||||||||||
Recorded Investment: |
||||||||||||
Residential, including originated home equity products |
$ | 540 | $ | 338 | $ | 878 | ||||||
Home equity products serviced by others |
75 | 34 | 109 | |||||||||
Other secured retail |
23 | 8 | 31 | |||||||||
Unsecured retail |
198 | 2 | 200 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 836 | $ | 382 | $ | 1,218 | ||||||
|
|
|
|
|
|
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Securities
Our securities portfolio is managed to seek return while maintaining prudent levels of quality, market risk and liquidity. The following table presents our securities available for sale and held to maturity portfolios:
June 30, 2014 | December 31, 2013 |
Change in
Fair Value |
||||||||||||||||||
Amortized
Cost |
Fair Value |
Amortized
Cost |
Fair Value | |||||||||||||||||
(dollars in millions) | (%) | |||||||||||||||||||
Securities Available for Sale: |
||||||||||||||||||||
U.S. Treasury |
$ | 15 | $ | 15 | $ | 15 | $ | 15 | | |||||||||||
State and political subdivisions |
10 | 10 | 11 | 10 | | |||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||
Federal agencies and U.S. government sponsored entities |
17,343 | 17,585 | 14,970 | 14,993 | 17 | % | ||||||||||||||
Other/non-agency |
887 | 858 | 992 | 952 | (10 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total mortgage-backed securities |
18,230 | 18,443 | 15,962 | 15,945 | 16 | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total debt securities |
18,255 | 18,468 | 15,988 | 15,970 | 16 | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Marketable equity securities |
10 | 13 | 10 | 13 | | |||||||||||||||
Other equity securities |
12 | 12 | 12 | 12 | | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total equity securities |
22 | 25 | 22 | 25 | | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total securities available for sale |
$ | 18,277 | $ | 18,493 | $ | 16,010 | $ | 15,995 | 16 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Securities Held to Maturity: |
||||||||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||
Federal agencies and U.S. government sponsored entities |
$ | 3,897 | $ | 3,898 | $ | 2,940 | $ | 2,907 | 34 | % | ||||||||||
Other/non-agency |
1,485 | 1,500 | 1,375 | 1,350 | 11 | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total securities held to maturity |
5,382 | 5,398 | 4,315 | 4,257 | 27 | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total securities available for sale and held to maturity |
$ | 23,659 | $ | 23,891 | $ | 20,325 | $ | 20,252 | 18 | % | ||||||||||
|
|
|
|
|
|
|
|
As of June 30, 2014, the fair value of the securities available for sale and held to maturity portfolios increased by $3.6 billion, or 18%, to $23.9 billion, compared to $20.3 billion as of December 31, 2013. U.S. Government-guaranteed notes and GSE-issued mortgage-backed securities comprise the majority of the securities portfolio holdings. Reinvestments have been directed predominantly into fixed-rate mortgage-backed securities, and as of June 30, 2014, the portfolio had an average expected life of 4.5 years.
The investment portfolio includes higher quality, highly liquid investments reflecting our ongoing commitment to maintaining appropriate contingent liquidity and pledging capacity. The portfolio composition has also been dominated by holdings backed by mortgages so that they can be pledged to the Federal Home Loan Banks (FHLBs). This has become increasingly important due to the enhanced liquidity requirements of the Liquidity Coverage Ratio (LCR). For further discussion of the LCR, see Regulation and SupervisionLiquidity Standards.
For the six months ended June 30, 2014, the securities portfolio income of the securities available for sale and held to maturity portfolios increased $74 million, or 35%, to $286 million compared to $212 million for the six months ended June 30, 2013, and the yield on the portfolio was 2.48%. The portfolio yield decreased by one basis point, driven by faster prepayments in the mortgage-backed
123
securities portfolio. For the six months ended June 30, 2014, mortgage-backed securities maturities, principal paydowns, and sales totaled $1.5 billion and mortgage-backed securities purchases totaled $5.5 billion.
Deposits
The table below presents the major components of our deposits:
June 30,
2014 |
December 31,
2013 |
Change | Percent | |||||||||||||
(dollars in millions) | (%) | |||||||||||||||
Demand |
$ | 26,670 | $ | 24,931 | $ | 1,739 | 7 | % | ||||||||
Checking with interest |
15,171 | 13,630 | 1,541 | 11 | ||||||||||||
Regular savings |
7,829 | 7,509 | 320 | 4 | ||||||||||||
Money market accounts |
31,687 | 31,245 | 442 | 1 | ||||||||||||
Term deposits |
10,299 | 9,588 | 711 | 7 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total deposits |
91,656 | 86,903 | 4,753 | 5 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Deposits held for sale |
| 5,277 | (5,277 | ) | (100 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
Total deposits and deposits held for sale |
$ | 91,656 | $ | 92,180 | $ | (524 | ) | (1 | )% | |||||||
|
|
|
|
|
|
Including the impact of the sale of the deposits in connection with the Chicago Divestiture, total deposits and deposits held for sale as of June 30, 2014 declined $524 million, or 1%, compared to December 31, 2013. Excluding the impact of deposits held for sale, total deposits as of June 30, 2014, increased $4.8 billion, or 5%, to $91.7 billion compared to $86.9 billion as of December 31, 2013. All categories of deposits increased, led by demand deposits, which increased $1.7 billion, or 7%.
Borrowed Funds
The tables below present our borrowed funds.
The following is a summary of our short-term borrowed funds:
June 30,
2014 |
December 31,
2013 |
|||||||
(in millions) | ||||||||
Federal funds purchased |
$ | | $ | 689 | ||||
Securities sold under agreements to repurchase |
6,807 | 4,102 | ||||||
Other short-term borrowed funds |
7,702 | 2,251 | ||||||
|
|
|
|
|||||
Total short-term borrowed funds |
$ | 14,509 | $ | 7,042 | ||||
|
|
|
|
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Key data related to short-term borrowed funds is presented in the following table:
For the
Six Months Ended June 30, 2014 |
For the Year
Ended December 31, 2013 |
For the
Six Months Ended June 30, 2013 |
||||||||||
(dollars in millions) | ||||||||||||
Weighted-average interest rate at period end: |
||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
0.12 | % | 0.09 | % | 0.04 | % | ||||||
Other short-term borrowed funds |
0.27 | % | 0.20 | % | 2.25 | % | ||||||
Maximum amount outstanding at month-end during the period: |
||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
$ | 7,022 | $ | 5,114 | $ | 3,371 | ||||||
Other short-term borrowed funds |
7,702 | 2,251 | 750 | |||||||||
Average amount outstanding during the period: |
||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
$ | 5,708 | $ | 2,400 | $ | 1,925 | ||||||
Other short-term borrowed funds |
4,838 | 259 | 279 | |||||||||
Weighted-average interest rate during the period: |
||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
0.11 | % | 0.31 | % | 0.04 | % | ||||||
Other short-term borrowed funds |
0.26 | % | 0.44 | % | 0.26 | % |
The following is a summary of our long-term borrowed funds:
June 30,
2014 |
December 31,
2013 |
|||||||
(in millions) | ||||||||
Citizens Financial Group, Inc.: |
||||||||
4.150% fixed rate subordinated debt, due 2022 |
$ | 350 | $ | 350 | ||||
5.158% fixed-to-floating rate subordinated debt, (LIBOR + 3.56%) callable, due 2023 (1) |
333 | 333 | ||||||
4.771% fixed rate subordinated debt, due 2023 (1) |
333 | 333 | ||||||
4.691% fixed rate subordinated debt, due 2024 (1) |
334 | 334 | ||||||
4.153% fixed rate subordinated debt, due 2024 (1) |
333 | | ||||||
Banking Subsidiaries: |
||||||||
Federal Home Loan advances due through 2033 |
24 | 25 | ||||||
Other |
25 | 30 | ||||||
|
|
|
|
|||||
Total long-term borrowed funds |
$ | 1,732 | $ | 1,405 | ||||
|
|
|
|
(1) | Intercompany borrowed funds with the RBS Group. See Our Relationship with the RBS Group and Certain Other Related Party TransactionsRelationship with the RBS GroupOther and Note 14 Related Party Transactions to our unaudited interim consolidated financial statements included elsewhere in this prospectus. |
Short-term unsecured borrowed funds were minimal as of June 30, 2014. Other short-term borrowed funds include capital instruments and secured FHLB advances. The increase in total short-term borrowed funds relative to the December 31, 2013 balance reflected balance sheet growth, primarily securities. Additionally, asset liquidity is considered strong. As of June 30, 2014, unencumbered high-quality securities totaled $10.7 billion, unused FHLB capacity was approximately $1.6 billion and unencumbered loans pledged at the Federal Reserve Banks of $10.1 billion created additional contingent borrowing capacity of approximately $22.4 billion.
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Access to additional funding through repurchase agreements, collateralized borrowed funds or asset sales is available. Additionally, there is capacity to grow deposits. While access to short-term wholesale markets is limited, we have been able to meet our funding needs for the medium term with deposits and collateralized borrowed funds.
Derivatives
Historically, we have used pay-fixed swaps to synthetically lengthen liabilities and offset duration in fixed-rate assets. Given the material prepayment of fixed-rate mortgages and home equity loans since 2008, these swaps were no longer needed and have been terminated or allowed to run off, resulting in a reduction in the notional balance of these swaps to $1.0 billion as of June 30, 2014.
We use receive-fixed swaps to minimize the exposure to variability in the interest cash flows on our floating rate assets. This is reflected in the interest rate swaps line in the table below. As of June 30, 2014, a notional amount of $4.0 billion of receive-fixed swaps had been executed. The assets and liabilities recorded for derivatives designated as hedges reflect the fair value of these hedge instruments.
We also sell interest rate swaps and foreign exchange forwards to commercial customers. Offsetting swap and forward agreements are simultaneously transacted to minimize our market risk associated with the customer derivative products. The assets and liabilities recorded for derivatives not designated as hedges reflect the fair value of these transactions.
The table below presents our derivative assets and liabilities. For additional information regarding our derivative instruments, see Note 11 Derivatives to our unaudited interim consolidated financial statements included elsewhere in this prospectus.
June 30, 2014 | December 31, 2013 |
Changes
in Net Liabilities |
||||||||||||||||||||||||||
Notional
Amount (1) |
Derivative
Assets |
Derivative
Liabilities |
Notional
Amount (1) |
Derivative
Assets |
Derivative
Liabilities |
|||||||||||||||||||||||
(dollars in millions) | (%) | |||||||||||||||||||||||||||
Derivatives designated as hedging instruments: |
||||||||||||||||||||||||||||
Interest rate swaps |
$ | 5,000 | $ | 23 | $ | 223 | $ | 5,500 | $ | 23 | $ | 412 | (49 | )% | ||||||||||||||
Derivatives not designated as hedging instruments: |
||||||||||||||||||||||||||||
Interest rate swaps |
28,381 | 611 | 522 | 29,355 | 654 | 558 | (7 | ) | ||||||||||||||||||||
Foreign exchange contracts |
8,395 | 74 | 69 | 7,771 | 94 | 87 | (29 | ) | ||||||||||||||||||||
Other contracts |
731 | 8 | 14 | 569 | 7 | 10 | 100 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total derivatives not designated as hedging instruments |
693 | 605 | 755 | 655 | (12 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Gross derivative fair values |
716 | 828 | 778 | 1,067 | (61 | )% | ||||||||||||||||||||||
Less: Gross amounts offset in the consolidated balance sheets (2) |
(81 | ) | (81 | ) | (128 | ) | (128 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total net derivative fair values presented in the consolidated balance sheets (3) |
$ | 635 | $ | 747 | $ | 650 | $ | 939 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
126
(1) | The notional or contractual amount of interest rate derivatives and foreign exchange contracts is the amount upon which interest and other payments under the contract are based. For interest rate derivatives, the notional amount is typically not exchanged. Therefore, notional amounts should not be taken as the measure of credit or market risk as they tend to greatly overstate the true economic risk of these contracts. |
(2) | Amounts represent the impact of legally enforceable master netting agreements that allow us to settle positive and negative positions. |
(3) | We also offset assets and liabilities associated with repurchase agreements on our consolidated balance sheets. See Note 2 Securities to our unaudited interim consolidated financial statements included elsewhere in this prospectus for further discussion. |
Analysis of Financial ConditionDecember 31, 2013 Compared with December 31, 2012
Loans and Leases
The following table shows the composition of loans and leases, including non-core loans:
December 31, | Change | Percent | ||||||||||||||
2013 | 2012 | |||||||||||||||
(dollars in millions) | (%) | |||||||||||||||
Commercial |
$ | 28,667 | $ | 28,856 | $ | (189 | ) | (1 | )% | |||||||
Commercial real estate |
6,948 | 6,459 | 489 | 8 | ||||||||||||
Leases |
3,780 | 3,415 | 365 | 11 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total commercial |
39,395 | 38,730 | 665 | 2 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Residential, including originated home equity products |
29,694 | 31,101 | (1,407 | ) | (5 | ) | ||||||||||
Home equity products serviced by others |
2,171 | 2,960 | (789 | ) | (27 | ) | ||||||||||
Other secured retail |
10,700 | 10,568 | 132 | 1 | ||||||||||||
Unsecured retail |
3,899 | 3,889 | 10 | | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total retail |
46,464 | 48,518 | (2,054 | ) | (4 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
Total loans and leases (1) |
$ | 85,859 | $ | 87,248 | $ | (1,389 | ) | (2 | )% | |||||||
|
|
|
|
|
|
(1) | Excluded from the table above are loans totaling $1.1 billion, which were reclassified to loans held for sale at December 31, 2013. For further discussion, see Note 17 Divestitures and Branch Assets and Liabilities Held for Sale to our audited consolidated financial statements included elsewhere in this prospectus. |
Loan balances as of December 31, 2013, compared to December 31, 2012, reflect growth in total commercial offset by decreases in total retail, primarily in home equity products serviced by others and residential mortgages.
127
Non-Core Assets
The table below shows the composition of our non-core assets as of the dates indicated:
December 31, |
(Date of
Designation) June 30, 2009 |
Change from
2013-2012 |
Change from
2013-2009 |
|||||||||||||||||
2013 | 2012 | |||||||||||||||||||
(dollars in millions) | (%) | (%) | ||||||||||||||||||
Commercial |
$ | 108 | $ | 187 | $ | 1,900 | (42 | )% | (94 | )% | ||||||||||
Commercial real estate |
381 | 643 | 3,412 | (41 | ) | (89 | ) | |||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total commercial |
489 | 830 | 5,312 | (41 | ) | (91 | ) | |||||||||||||
Residential, including originated home equity products |
705 | 1,012 | 2,082 | (30 | ) | (66 | ) | |||||||||||||
Home equity products serviced by others |
2,160 | 2,897 | 6,180 | (25 | ) | (65 | ) | |||||||||||||
Other secured retail (1) |
| | 4,037 | | (100 | ) | ||||||||||||||
Unsecured retail |
406 | 869 | 2,490 | (53 | ) | (84 | ) | |||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total retail |
3,271 | 4,778 | 14,789 | (32 | ) | (78 | ) | |||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total non-core loans |
3,760 | 5,608 | 20,101 | (33 | ) | (81 | ) | |||||||||||||
Other assets |
81 | 106 | 378 | (24 | ) | (79 | ) | |||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total non-core assets |
$ | 3,841 | $ | 5,714 | $ | 20,479 | (33 | )% | (81 | )% | ||||||||||
|
|
|
|
|
|
(1) | Other secured retail loans were either paid down, charged off, sold or transferred to the core loan portfolio by December 31, 2011. |
Non-core assets are primarily loans inconsistent with our strategic goals, generally as a result of geographic location, industry, product type or risk level. We have actively managed these loans down since they were designated as non-core on June 30, 2009. Since that time, the portfolio has decreased $16.6 billion, including principal repayments of $8.8 billion; charge-offs of $3.8 billion; transfers back to the core portfolio of $2.8 billion; and sales of $1.2 billion.
Transfers from non-core back to core are handled on an individual request basis and managed through the chief credit officer for our non-core portfolio. The rationale can vary and in the past some loan portfolio transfers have been approved after determination that the original decision to place them in non-core was not deemed appropriate. Individual loans can be reconsidered when the customer prospects changetypically related to situations where a non-strategic customer becomes a strategic customer due to growth or a new credit request that was previously considered to be unlikely.
During 2013, total non-core assets continued to decline to a balance of $3.8 billion as of December 31, 2013, a decrease of $1.9 billion, or 33%, compared to $5.7 billion as of December 31, 2012. The larger than normal decrease was primarily driven by a non-core to core transfer of $677 million of conforming student, certain home equity products serviced by others and residential mortgage loans in 2013. Commercial non-core balances of $489 million declined 41% compared to the prior year end balance of $830 million, while non-core retail loans of $3.3 billion decreased $1.5 billion, or 32%, compared to $4.8 billion as of December 31, 2012. The accounts transferred were good quality loans that met our credit policy standards. Non-core assets are expected to continue to decline through a combination of the factors described above.
The largest component of our non-core portfolio is our home equity products currently or formerly serviced by other firms, or SBO, portfolio. The SBO portfolio is a liquidating portfolio consisting of pools of home equity loans and lines of credit purchased between 2003 and 2007. Although our SBO portfolio consists of loans that were initially serviced by others, we now service a portion of this portfolio internally. SBO balances serviced externally totaled $1.3 billion and $1.6 billion as of
128
December 31, 2013 and 2012, respectively. The SBO portfolio has been closed to new purchases since the third quarter of 2007, with exposure down to $2.2 billion as of December 31, 2013 from $5.5 billion as of December 31, 2009, representing an average annual liquidation rate of 20.7%. The SBO portfolio represented 7% of the entire real estate portfolio and 5% of the overall Consumer portfolio as of December 31, 2013.
The credit profile of the SBO portfolio is significantly weaker than the core real estate portfolio, with a weighted-average refreshed FICO score of 690 and combined loan to value (CLTV) of 96.2% as of December 31, 2013. The proportion of the portfolio in second lien (subordinated) position is 97%. The amount of the portfolio in out of footprint geographies is 71.2%, with 21.4% concentrated in California, Nevada, Arizona and Florida.
Credit performance continues to improve due to portfolio liquidation (the lowest performing loans have already been charged off), more effective account servicing and collection strategies, and improvements in the real estate market. The delinquency rate of more than 90 days past due was 1.8% as of December 31, 2013, and decreased by 14 basis points from December 31, 2012. The SBO portfolio had a full year charge-off rate of 5.4% through December 31, 2013 and a cumulative (inception to date) charge-off rate of 26% as of December 31, 2013.
Allowance for Credit Losses and Nonperforming Assets
The allowance for credit losses totaled $1.3 billion at both December 31, 2013 and 2012. Our allowance for loan and lease losses was 1.4% of total loans and leases and 86% of nonperforming loans as of December 31, 2013 compared with 1.4% and 67.1% as of December 2012. The total loan portfolio credit performance continued to improve across all credit measures in 2013. Net charge-offs for the year ended December 31, 2013 of $501 million decreased 42.7% compared to $875 million for the year ended December 31, 2012, primarily driven by decreases in the non-core, real estate secured, and unsecured retail portfolios. The portfolio net charge-off rate fell to 0.59% for the year ended December 31, 2013 from 1.01% for the year ended December 31, 2012. The delinquency rate improved to 1.9% as of December 31, 2013 compared to 2.5% as of December 31, 2012. Nonperforming loans and leases totaled $1.4 billion, or 1.7%, of the total portfolio as of December 31, 2013, as compared to $1.9 billion, or 2.1%, of the total loan portfolio as of December 31, 2012. At December 31, 2013, $607 million of nonperforming loans and leases had been designated as impaired and had no specific allowance because they had been written down to the fair value of their collateral. These loans included $530 million of retail loans and $77 million of commercial loans. Excluding impaired loans that have been written down to net realizable value, the allowance to nonperforming loans ratio totaled 151% at December 31, 2013 as compared to 106% at December 31, 2012.
Commercial Loan Asset Quality
During 2013, the quality of the commercial loan portfolio improved. As of December 31, 2013, total criticized loans decreased 37.0% to 4.9%, or $1.9 billion, of the commercial loan portfolio compared to 7.9%, or $3.0 billion, as of December 31, 2012. Commercial real estate criticized balances decreased 50.4% to 8.4%, or $582 million, of the commercial real estate portfolio compared to 18.2%, or $1.2 billion, as of December 31, 2012. Commercial real estate accounted for 30.4% of the criticized loans as of December 31, 2013 compared to 38.6% as of December 31, 2012. See Note 5 Allowance for Credit Losses, Nonperforming Assets and Concentrations of Credit Risk to our audited consolidated financial statements included elsewhere in this prospectus for further discussion.
Similarly, nonperforming balances and charge-offs have displayed a positive trend in 2013. As of December 31, 2013, nonperforming commercial balances decreased $345 million, to $265 million, compared to $610 million as of December 31, 2012, with a 60% decline in commercial real estate
129
nonperforming loans over the same period. As of December 31, 2013, nonperforming loans stood at 0.7% of the commercial loan portfolio compared to 1.6% as of December 31, 2012. Likewise, net charge-offs in our commercial loan portfolio for the year ended December 31, 2013 decreased $123 million, to $21 million compared to $144 million for the year ended December 31, 2012, primarily due to lower gross charge-offs. This improvement was driven by improved economic conditions and a strategic focus on high quality new business.
Retail Loan Asset Quality
The credit composition of our retail loan portfolio remained favorable and well positioned across all product lines with an average refreshed FICO score of 754 (Prime) as of December 31, 2013, unchanged from December 31, 2012. Our real estate combined loan to value ratio, or CLTV, is calculated as the mortgage amount divided by the appraised value of the property and improved to 67.8% as of December 31, 2013 compared to 74.8% as of December 31, 2012. Excluding the SBO portfolio, the real estate CLTV was 65.1% as of December 31, 2013 compared to 71.4% as of December 31, 2012. The favorable reduction in CLTV was driven by recent improvements in home values and higher quality originations.
The annual net charge-off rate (core and non-core) of 1.0% in 2013 decreased 45 basis points from the prior year, driven by SBO, HELOCs, and residential mortgage loans. The overall rate of delinquency more than 30 days past due improved 36 basis points to 2.6% as of December 31, 2013, from 3.0% as of December 31, 2012. The improvement was driven by improvement across all products except HELOC, which is experiencing mild deterioration as regulatory changes have increased the foreclosure backlog and the effects of payment shock start to materialize. For further information regarding the possible HELOC payment shock, see Key Factors Affecting Our BusinessHELOC Payment Shock.
Nonperforming retail loans as a percentage of total retail loans were 2.5% as of December 31, 2013, an improvement of 11 basis points from December 31, 2012. The improvement in nonperforming retail loans was primarily driven by the return of $178 million of current nonaccruing residential mortgage Troubled Debt Restructurings, or TDRs, to accruing status in December 2013. In general, nonaccruing TDRs can be returned to accruing status after a sustained period of performance if the loan is supported by a well-documented evaluation of the borrowers financial condition. Refer to the discussion of Nonperforming Loans and Leases in Note 1 Significant Accounting Policies to our audited consolidated financial statements included elsewhere in this prospectus for further information.
Special TopicsHELOC Payment Shock
For further information regarding the possible HELOC payment shock, see Key Factors Affecting Our BusinessHELOC Payment Shock.
Troubled Debt Restructuring
As of December 31, 2013, we had $1.2 billion classified as retail TDRs, of which 40.8% were in nonaccrual status. Within this nonaccrual population, 61.4% were current in payment. TDRs generally return to accrual status once repayment capacity and appropriate payment history can be established. TDRs are evaluated for impairment individually. Loans are classified as TDRs until paid off, sold or refinanced at market terms.
For additional information regarding the troubled debt restructurings, see Note 1 Significant Accounting Policies and Note 5 Allowance for Credit Losses, Nonperforming Assets and Concentrations of Credit Risk to our audited consolidated financial statements included elsewhere in this prospectus.
130
The table below presents our retail TDRs in delinquent status as of December 31, 2013:
December 31, 2013 | ||||||||||||||||
Current |
30-89 Days
Past Due |
90+Days
Past Due |
Total | |||||||||||||
(in millions) | ||||||||||||||||
Recorded Investment: |
||||||||||||||||
Residential, including originated home equity products |
$ | 649 | $ | 78 | $ | 125 | $ | 852 | ||||||||
Home equity products serviced by others |
104 | 4 | 4 | 112 | ||||||||||||
Other secured retail |
31 | 3 | 1 | 35 | ||||||||||||
Unsecured retail |
185 | 12 | 4 | 201 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 969 | $ | 97 | $ | 134 | $ | 1,200 | ||||||||
|
|
|
|
|
|
|
|
The table below presents the accrual status of our retail TDRs as of December 31, 2013:
December 31, 2013 | ||||||||||||
Accruing | Nonaccruing | Total | ||||||||||
(in millions) | ||||||||||||
Recorded Investment: |
||||||||||||
Residential, including originated home equity products |
$ | 410 | $ | 442 | $ | 852 | ||||||
Home equity products serviced by others |
79 | 33 | 112 | |||||||||
Other secured retail |
23 | 12 | 35 | |||||||||
Unsecured retail |
199 | 2 | 201 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 711 | $ | 489 | $ | 1,200 | ||||||
|
|
|
|
|
|
131
Securities
Our securities portfolio is managed to seek return while maintaining prudent levels of quality, market risk and liquidity. The following table presents our securities available for sale and held to maturity portfolios:
December 31,
2013 |
December 31,
2012 |
Change in
Fair Value |
||||||||||||||||||
Amortized
Cost |
Fair Value |
Amortized
Cost |
Fair Value | |||||||||||||||||
(dollars in millions) | (%) | |||||||||||||||||||
Securities Available for Sale: |
||||||||||||||||||||
U.S. Treasury |
$ | 15 | $ | 15 | $ | 15 | $ | 15 | | |||||||||||
State and political subdivisions |
11 | 10 | 20 | 21 | (52 | )% | ||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||
Federal agencies and U.S. government sponsored entities |
14,970 | 14,993 | 16,368 | 16,904 | (11 | ) | ||||||||||||||
Other/non-agency |
992 | 952 | 1,452 | 1,397 | (32 | ) | ||||||||||||||
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Total mortgage-backed securities |
15,962 | 15,945 | 17,820 | 18,301 | (13 | ) | ||||||||||||||
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|
|
|||||||||||||
Total debt securities |
15,988 | 15,970 | 17,855 | 18,337 | (13 | ) | ||||||||||||||
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Marketable equity securities |
10 | 13 | 5 | 7 | 86 | |||||||||||||||
Other equity securities |
12 | 12 | 12 | 12 | | |||||||||||||||
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|
|
|
|||||||||||||
Total equity securities |
22 | 25 | 17 | 19 | 32 | |||||||||||||||
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|
|||||||||||||
Total securities available for sale |
$ | 16,010 | $ | 15,995 | $ | 17,872 | $ | 18,356 | (13 | )% | ||||||||||
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Securities Held to Maturity: |
||||||||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||
Federal agencies and U.S. government sponsored entities |
$ | 2,940 | $ | 2,907 | $ | | $ | | NM | |||||||||||
Other/non-agency |
1,375 | 1,350 | | | NM | |||||||||||||||
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|||||||||||||
Total securities held to maturity |
4,315 | 4,257 | | | NM | |||||||||||||||
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Total securities available for sale and held to maturity |
$ | 20,325 | $ | 20,252 | $ | 17,872 | $ | 18,356 | 10 | % | ||||||||||
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In 2013, we transferred $4.2 billion of federal agency and non-agency debt securities from the securities available for sale portfolio to the securities held to maturity portfolio. At the time of transfer, $134 million of unrealized net losses were recognized in OCI. The amounts in OCI will be recognized in interest income over the remaining life of the securities as an offset to the adjustment of yield in a manner consistent with the amortization of premium and the accretion of discount. The resulting net realized yield on the securities held to maturity will remain unchanged from the original book yield.
As of December 31, 2013, the fair value of the securities available for sale and held to maturity portfolios increased by $1.9 billion, or 10%, to $20.3 billion compared to $18.4 billion as of December 31, 2012. U.S. Government-guaranteed notes and GSE-issued mortgage-backed securities comprise the majority of the securities portfolio holdings. Reinvestments have been directed predominantly into fixed rate mortgage-backed securities, and, as of December 31, 2013, the portfolio had an average expected life of 4.6 years. As long-term interest rates rose during the latter half of 2013, investment in agency mortgage-backed securities increased.
The investment portfolio includes higher quality, highly liquid investments reflecting our ongoing commitment to maintain appropriate contingent liquidity and pledging capacity. The portfolio
132
composition has also been dominated by holdings backed by mortgages so that they can be pledged to the Federal Home Loan Banks. This has become increasingly important due to the enhanced liquidity requirements of the liquidity coverage ratio, or LCR. For further discussion of the LCR, see Regulation and SupervisionLiquidity Standards.
In 2013, the securities portfolio income of the securities available for sale and held to maturity portfolios decreased $140 million, or 24%, to $446 million compared to $586 million in 2012, and the yield on the portfolio was 2.50%. The portfolio yield decreased by 38 basis points, driven by faster prepayments in the mortgage-backed securities portfolio coupled with securities sales programs during the year. In 2013, mortgage-backed securities maturities, principal paydowns, and sales totaled $8.2 billion, and mortgage-backed securities purchases totaled $10.7 billion.
Deposits
The table below presents the major components of our deposits:
December 31, | Change | Percent | ||||||||||||||
2013 | 2012 | |||||||||||||||
(dollars in millions) | (%) | |||||||||||||||
Demand |
$ | 24,931 | $ | 25,931 | $ | (1,000 | ) | (4 | )% | |||||||
Checking with interest |
13,630 | 14,577 | (947 | ) | (6 | ) | ||||||||||
Regular savings |
7,509 | 7,874 | (365 | ) | (5 | ) | ||||||||||
Money market accounts |
31,245 | 35,102 | (3,857 | ) | (11 | ) | ||||||||||
Term deposits |
9,588 | 11,664 | (2,076 | ) | (18 | ) | ||||||||||
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Total deposits |
86,903 | 95,148 | (8,245 | ) | (9 | ) | ||||||||||
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Deposits held for sale |
5,277 | | 5,277 | NM | ||||||||||||
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Total deposits and deposits held for sale |
$ | 92,180 | $ | 95,148 | $ | (2,968 | ) | (3 | )% | |||||||
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As of December 31, 2013, total deposits decreased $8.2 billion, or 9%, to $86.9 billion compared to $95.1 billion as of December 31, 2012. The decrease was primarily due to $5.3 billion in deposits that were reclassified to deposits held for sale at December 31, 2013. See Note 17 Divestitures and Branch Assets and Liabilities Held for Sale to our audited consolidated financial statements included elsewhere in this prospectus for further discussion.
Excluding the impact of the deposits held for sale reclassification, total deposits as of December 31, 2013 declined $3.0 billion, or 3%, compared to December 31, 2012. Term deposits decreased $2.1 billion, or 18%, reflecting continued runoff of higher cost term deposits. Money market accounts decreased 11% from December 31, 2012. All other deposit balances were flat year-over-year.
Borrowed Funds
The tables below present our borrowed funds.
The following is a summary of our short-term borrowed funds:
December 31, | ||||||||
2013 | 2012 | |||||||
(in millions) | ||||||||
Federal funds purchased |
$ | 689 | $ | 1,905 | ||||
Securities sold under agreements to repurchase |
4,102 | 1,696 | ||||||
Other short-term borrowed funds |
2,251 | 501 | ||||||
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|
|||||
Total short-term borrowed funds |
$ | 7,042 | $ | 4,102 | ||||
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133
Key data related to short-term borrowed funds is presented in the following table:
As of and for the Year
Ended December 31, |
||||||||||||
2013 | 2012 | 2011 | ||||||||||
(dollars in millions) | ||||||||||||
Weighted-average interest rate at year end: |
||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
0.09 | % | 0.10 | % | 0.06 | % | ||||||
Other short-term borrowed funds |
0.20 | % | 0.29 | % | 0.20 | % | ||||||
Maximum amount outstanding at month-end during the year: |
||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
$ | 5,114 | $ | 4,393 | $ | 6,406 | ||||||
Other short-term borrowed funds |
2,251 | 5,050 | 4,000 | |||||||||
Average amount outstanding during the year: |
||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
$ | 2,400 | $ | 2,716 | $ | 3,808 | ||||||
Other short-term borrowed funds |
259 | 3,045 | 2,645 | |||||||||
Weighted-average interest rate during the year: |
||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
0.31 | % | 0.22 | % | 0.12 | % | ||||||
Other short-term borrowed funds |
0.44 | % | 0.33 | % | 2.51 | % |
The following is a summary of our long-term borrowed funds:
December 31, | ||||||||
2013 | 2012 | |||||||
(in millions) | ||||||||
Citizens Financial Group, Inc.: |
||||||||
4.150% fixed rate subordinated debt, due 2022 |
$ | 350 | $ | 350 | ||||
5.158% fixed-to-floating rate subordinated debt, (LIBOR + 3.56%) callable, due 2023 (1) |
333 | | ||||||
4.771% fixed rate subordinated debt, due 2023 (1) |
333 | | ||||||
4.691% fixed rate subordinated debt, due 2024 (1) |
334 | | ||||||
1.860% floating-rate (LIBOR + 1.50%) subordinated debt, due 2035 |
| 289 | ||||||
Banking Subsidiaries: |
||||||||
Federal Home Loan advances due through 2033 |
25 | 27 | ||||||
Other |
30 | 28 | ||||||
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|||||
Total long-term borrowed funds |
$ | 1,405 | $ | 694 | ||||
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(1) | Intercompany borrowed funds with the RBS Group. See Our Relationship with the RBS Group and Certain Other Related Party TransactionsRelationship with the RBS GroupOther and Note 18 Related Party Transactions to our audited consolidated financial statements included elsewhere in this prospectus. |
Short-term unsecured borrowed funds of $689 million were more than offset by $1.4 billion in average excess reserves held at the Federal Reserve Banks as of December 31, 2013. Other borrowed funds include repurchase agreements and secured FHLB advances. The increase in total short-term borrowed funds relative to the year-earlier period reflected balance sheet growth, primarily securities. Further, excluding the $689 million in federal funds purchased, the remainder of the short-term funding position, or $6.4 billion, represented secured and stable sources. Additionally, asset liquidity was considered strong. As of December 31, 2013, unencumbered high-quality securities totaled $10.5 billion, unused FHLB capacity was approximately $8.2 billion and unencumbered loans pledged to the Federal Reserve Banks created additional contingent borrowing capacity of approximately $10.4 billion.
134
Derivatives
Historically, we have used pay-fixed interest rate swaps to synthetically lengthen liabilities and offset duration in fixed-rate assets. Given the material prepayment of fixed-rate mortgages and home equity loans since 2008, these swaps were no longer needed and have been terminated or allowed to run off, resulting in a reduction in the notional balance of these swaps from $4.2 billion as of December 31, 2012 to $1.5 billion as of December 31, 2013.
We use receive-fixed swaps to minimize the exposure to variability in the interest cash flows on our floating rate assets. This is reflected in the interest rate swaps line in the table below. As of December 31, 2013, a notional amount of $4.0 billion of receive-fixed swaps had been executed. The assets and liabilities recorded for derivatives designated as hedges reflect the market value of these hedge instruments.
We also sell interest rate swaps and foreign exchange forwards to commercial customers. Offsetting swap and forward agreements are simultaneously transacted to minimize our market risk associated with the customer derivative products. The assets and liabilities recorded for derivatives not designated as hedges reflect the market value of these transactions.
The table below presents our derivative assets and liabilities. For additional information regarding our derivative instruments, see Note 15 Derivatives to our audited consolidated financial statements included elsewhere in this prospectus.
December 31, 2013 | December 31, 2012 |
Changes
in net Liabilities |
||||||||||||||||||||||||||
Notional
Amount (1) |
Derivative
Assets |
Derivative
Liabilities |
Notional
Amount (1) |
Derivative
Assets |
Derivative
Liabilities |
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(dollars in millions) | (%) | |||||||||||||||||||||||||||
Derivatives designated as hedging instruments: |
||||||||||||||||||||||||||||
Interest rate swaps |
$ | 5,500 | $ | 23 | $ | 412 | $ | 4,200 | $ | 1 | $ | 257 | 52 | % | ||||||||||||||
Derivatives not designated as hedging instruments: |
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Interest rate swaps |
29,355 | 654 | 558 | 31,227 | 1,102 | 1,033 | 39 | |||||||||||||||||||||
Foreign exchange contracts |
7,771 | 94 | 87 | 5,978 | 71 | 67 | 75 | |||||||||||||||||||||
Other contracts |
569 | 7 | 10 | 2,815 | 35 | 15 | (115 | ) | ||||||||||||||||||||
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Total derivatives not designated as hedging instruments |
755 | 655 | 1,208 | 1,115 | 8 | |||||||||||||||||||||||
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Gross derivative fair values |
778 | 1,067 | 1,209 | 1,372 | 7 | % | ||||||||||||||||||||||
Less: Gross amounts offset in the consolidated balance sheets (2) |
(128 | ) | (128 | ) | (54 | ) | (54 | ) | ||||||||||||||||||||
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Total net derivative fair values presented in the consolidated balance sheets (3) |
$ | 650 | $ | 939 | $ | 1,155 | $ | 1,318 | ||||||||||||||||||||
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(1) | The notional or contractual amount of interest rate derivatives and foreign exchange contracts is the amount upon which interest and other payments under the contract are based. For interest rate derivatives, the notional amount is typically not exchanged. Therefore, notional amounts should not be taken as the measure of credit or market risk as they tend to greatly overstate the true economic risk of these contracts. |
(2) | Amounts represent the impact of legally enforceable master netting agreements that allow us to settle positive and negative positions. |
(3) | We also offset assets and liabilities associated with repurchase agreements on our consolidated balance sheets. See Note 3 Securities to our audited consolidated financial statements included elsewhere in this prospectus for further discussion. |
135
Quarterly Results of Operations
The following table sets forth unaudited quarterly consolidated statements of operations data and consolidated balance sheet data as of and for the quarters ended June 30, 2014, March 31, 2014, the four quarters of 2013 and the last two quarters of 2012. We have prepared the statement of operations data and balance sheet data on the same basis as the audited consolidated financial statements and the unaudited interim consolidated financial statements included elsewhere in this prospectus and, in the opinion of management, each statement of operations and balance sheet includes all adjustments, consisting solely of normal recurring adjustments, necessary for the fair statement of the results of operations and balance sheet data as of and for these periods. This information should be read in conjunction with the audited consolidated financial statements and the unaudited interim consolidated financial statements and, in each case, the related notes included elsewhere in this prospectus.
136
Summary Consolidated Financial and Other Data (unaudited)
As of and for the Three Months Ended | ||||||||||||||||||||||||||||||||
June 30,
2014 |
March 31,
2014 |
December 31,
2013 |
September 30,
2013 |
June 30,
2013 |
March 31,
2013 |
December 31,
2012 |
September 30,
2012 |
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(dollars in millions, except per share amounts) | ||||||||||||||||||||||||||||||||
Operating Data: |
||||||||||||||||||||||||||||||||
Net interest income |
$ | 833 | $ | 808 | $ | 779 | $ | 770 | $ | 749 | $ | 760 | $ | 772 | $ | 810 | ||||||||||||||||
Noninterest income |
640 | (12) | 358 | 379 | 383 | 437 | 433 | 390 | ( 19 ) | 422 | ||||||||||||||||||||||
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Total revenue |
1,473 | 1,166 | 1,158 | 1,153 | 1,186 | 1,193 | 1,162 | 1,232 | ||||||||||||||||||||||||
Provision for credit losses |
49 | 121 | 132 | 145 | 112 | 90 | 103 | 109 | ||||||||||||||||||||||||
Noninterest expense |
948 | (13) | 810 | 818 | ( 15 ) | 788 | 5,252 | ( 17 ) | 821 | 895 | ( 20 ) | 791 | ||||||||||||||||||||
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Income (loss) before income tax expense (benefit) |
476 | 235 | 208 | 220 | (4,178 | ) | 282 | 164 | 332 | |||||||||||||||||||||||
Income tax expense (benefit) |
163 | (14) | 69 | 56 | ( 16 ) | 76 | (273 | ) ( 18 ) | 99 | 63 | (21) | 123 | ||||||||||||||||||||
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Net income (loss) |
$ | 313 | $ | 166 | $ | 152 | $ | 144 | $ | (3,905 | ) | $ | 183 | $ | 101 | $ | 209 | |||||||||||||||
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Net income (loss) per average common sharebasic and diluted (1) |
$ | 0.56 | $ | 0.30 | $ | 0.27 | $ | 0.26 | $ | (6.97 | ) | $ | 0.33 | $ | 0.18 | $ | 0.37 | |||||||||||||||
Other Operating Data: |
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Return on average common equity (2)(3) |
6.41 | % | 3.48 | % | 3.12 | % | 2.91 | % | (13.94 | )% | 3.07 | % | 1.65 | % | 3.45 | % | ||||||||||||||||
Return on average total assets (3)(4) |
0.99 | % | 0.54 | % | 0.50 | % | 0.49 | % | (2.77 | )% | 0.60 | % | 0.32 | % | 0.65 | % | ||||||||||||||||
Net interest margin (3)(5) |
2.87 | % | 2.89 | % | 2.83 | % | 2.88 | % | 2.82 | % | 2.84 | % | 2.80 | % | 2.88 | % | ||||||||||||||||
Balance Sheet Data: |
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Total assets |
$ | 130,279 | $ | 126,892 | $ | 122,154 | $ | 120,074 | $ | 117,833 | $ | 126,044 | $ | 127,053 | $ | 131,580 | ||||||||||||||||
Loans and leases (6) |
88,829 | 87,083 | 85,859 | 85,493 | 85,006 | 85,782 | 87,248 | 86,941 | ||||||||||||||||||||||||
Allowance for loan and lease losses |
1,210 | 1,259 | 1,221 | 1,219 | 1,200 | 1,219 | 1,255 | 1,347 | ||||||||||||||||||||||||
Total securities |
24,823 | 24,804 | 21,245 | 20,852 | 17,408 | 18,066 | 19,417 | 21,341 | ||||||||||||||||||||||||
Goodwill |
6,876 | 6,876 | 6,876 | 6,876 | 6,876 | 11,311 | 11,311 | 11,311 | ||||||||||||||||||||||||
Total liabilities |
110,682 | 107,450 | 102,958 | 100,661 | 98,223 | 101,837 | 102,924 | 107,471 | ||||||||||||||||||||||||
Deposits (7) |
91,656 | 87,462 | 86,903 | 93,930 | 91,361 | 94,628 | 95,148 | 96,481 | ||||||||||||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
6,807 | 6,080 | 4,791 | 3,424 | 3,371 | 3,709 | 3,601 | 3,241 | ||||||||||||||||||||||||
Other short-term borrowed funds |
7,702 | 4,950 | 2,251 | 2 | 2 | 11 | 501 | 4,002 | ||||||||||||||||||||||||
Long-term borrowed funds |
1,732 | 1,403 | 1,405 | 1,064 | 732 | 692 | 694 | 697 | ||||||||||||||||||||||||
Total stockholders equity |
19,597 | 19,442 | 19,196 | 19,413 | 19,610 | 24,207 | 24,129 | 24,109 | ||||||||||||||||||||||||
Other Balance Sheet Data: |
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Asset Quality Ratios: |
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Allowance for loan and lease losses as a percentage of total loans and leases |
1.36 | % | 1.45 | % | 1.42 | % | 1.43 | % | 1.41 | % | 1.42 | % | 1.44 | % | 1.55 | % | ||||||||||||||||
Allowance for loan and lease losses as a percentage of nonperforming loans and leases |
101 | % | 92 | % | 86 | % | 72 | % | 69 | % | 67 | % | 67 | % | 75 | % | ||||||||||||||||
Nonperforming loans and leases as a percentage of total loans and leases |
1.35 | % | 1.57 | % | 1.65 | % | 1.98 | % | 2.06 | % | 2.14 | % | 2.14 | % | 2.08 | % |
137
As of and for the Three Months Ended | ||||||||||||||||||||||||||||||||
June 30,
2014 |
March 31,
2014 |
December 31,
2013 |
September 30,
2013 |
June 30,
2013 |
March 31,
2013 |
December 31,
2012 |
September 30,
2012 |
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(dollars in millions, except per share amounts) | ||||||||||||||||||||||||||||||||
Capital ratios: |
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Tier 1 capital ratio (8) |
13.3 | % | 13.4 | % | 13.5 | % | 14.0 | % | 14.3 | % | 14.5 | % | 14.2 | % | 14.1 | % | ||||||||||||||||
Total capital ratio (9) |
16.2 | % | 16.0 | % | 16.1 | % | 16.3 | % | 16.3 | % | 16.2 | % | 15.8 | % | 15.7 | % | ||||||||||||||||
Tier 1 common equity ratio (10) |
13.3 | % | 13.4 | % | 13.5 | % | 13.9 | % | 14.3 | % | 14.2 | % | 13.9 | % | 13.8 | % | ||||||||||||||||
Leverage ratio (11) |
11.1 | % | 11.4 | % | 11.6 | % | 12.1 | % | 11.8 | % | 12.5 | % | 12.1 | % | 11.9 | % |
(1) | Earnings per share information reflects a 165,582-for-1 forward stock split effective on August 22, 2014. |
(2) | We define Return on average common equity as net income (loss) divided by average common equity. |
(3) | Ratios for the periods above are presented on an annualized basis. |
(4) | We define Return on average total assets as net income (loss) divided by average total assets. |
(5) | We define Net interest margin as net interest income divided by average total interest-earning assets. |
(6) | Excludes loans held for sale of $262 million, $1.4 billion, $1.3 billion, $307 million, $429 million, $550 million, $646 million and $594 million as of June 30, 2014, March 31, 2014, December 31, 2013, September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012 and September 30, 2012, respectively. |
(7) | Excludes deposits held for sale of $5.2 billion and $5.3 billion as of March 31, 2014 and December 31, 2013, respectively. |
(8) | We define Tier 1 capital ratio as Tier 1 capital balance divided by total risk-weighted assets as defined under Basel I. |
(9) | We define Total capital ratio as total capital balance divided by total risk-weighted assets as defined under Basel I. |
(10) | We define Tier 1 common equity ratio as Tier 1 capital balance, minus preferred stock, divided by total risk-weighted assets as defined under Basel I. |
(11) | We define Leverage ratio as Tier 1 capital balance divided by quarterly average total assets as defined under Basel I. |
(12) | Includes $288 million of gain on the Chicago Divestiture. |
(13) | Includes $115 million of restructuring charges and special expense items related largely to efficiency initiatives and the Chicago Divestiture. |
(14) | Includes $65 million of tax expenses related to the gain on the Chicago Divestiture and restructuring charges and special items. |
( 15 ) | Includes $26 million of restructuring charges. |
( 16 ) | Includes $9 million of tax benefit related to restructuring charges. |
( 17 ) | Includes $4.4 billion of goodwill impairment charge. |
( 18 ) | Includes $355 million of tax benefit related to the goodwill impairment charge. |
( 19 ) | Includes $23 million loss on the sale of a commercial real estate portfolio. |
( 20 ) | Includes $77 million settlement of defined benefit pension plan obligations to vested former employees and $5 million reversal of prior restructuring charges. |
( 21 ) | Includes $33 million of net tax benefit related to the loss on sale of commercial real estate portfolio, settlement of the defined benefit pension plan obligations, and reversal of restructuring charges. |
Capital
As a bank holding company and a financial holding company, we are subject to regulation and supervision by the Federal Reserve Board. Our primary subsidiaries are our two insured depository institutions, CBNA, a national banking association whose primary federal regulator is the OCC, and CBPA, a Pennsylvania-charted savings bank regulated by the Department of Banking of the Commonwealth of Pennsylvania and supervised by the FDIC as its primary federal regulator.
Under current Basel I regulation, the Federal Reserve Board requires us to maintain minimum levels with respect to our total capital, Tier 1 capital and leverage ratios. The minimum standards for the total capital ratio (the ratio of our total risk-based capital, which is the sum of our Tier 1 and Tier 2 capital, as defined by Federal Reserve Board regulation, to total risk-weighted assets) and the Tier 1 capital ratio (the ratio of our Tier 1 capital to total risk-weighted assets) are 8.0% and 4.0%, respectively. The minimum Tier 1 leverage ratio (the ratio of a banking organizations Tier 1 capital to total adjusted quarterly average total assets, as defined for regulatory purposes) is 3.0% for bank holding companies that either have the highest supervisory rating or have implemented the Federal
138
Reserve Boards risk-adjusted measure for market risk. The minimum Tier 1 leverage ratio for all other bank holding companies is 4.0%, unless a different minimum is specified by the Federal Reserve Board.
In July 2013, the U.S. bank regulatory agencies approved final regulatory capital rules that implement the Basel III capital framework and certain provisions of the Dodd-Frank Act. We will be required to comply with these rules beginning on January 1, 2015, with certain aspects of the rules phasing in through 2018. For further discussion of the capital rules to which we will be subject, see Regulation and SupervisionCapital.
The table below demonstrates the strength of our regulatory capital ratios as of June 30, 2014. Actual Basel I ratios and pro forma Basel III ratios, which include estimated impacts of fully phased-in Basel III and U.S. standardized approach risk-weighted assets requirements, remain well above current Basel I and future Basel III minima:
Regulatory Ratios as of June 30, 2014 Basel I vs. Basel III Rules | ||||||||||||||||||||||||
Regulatory Ratio |
Basel I Ratios and Requirements |
Pro Forma Basel III Ratios and
Requirements (including adoption of U.S. Standardized Approach Risk-Weighted Assets) |
||||||||||||||||||||||
Actual Basel I
Ratio |
Required
Minimum |
Well Capitalized
Minimum for Purposes of Prompt Corrective Action |
Pro Forma
Basel III Ratio (1) |
Required
Minimum + Required Capital Conservation Buffer for Non-Leverage Ratios |
Well Capitalized
Minimum for Purposes of Prompt Corrective Action (2) |
|||||||||||||||||||
Tier 1 Capital to Risk-Weighted Assets (Tier 1 Capital Ratio) |
13.3 | % | 4.0 | % | 6.0 | % | 13.0 | % | 8.5 | % | 8.0 | % | ||||||||||||
Total Capital to Risk-Weighted Assets (Total Capital Ratio) |
16.2 | 8.0 | 10.0 | 15.8 | 10.5 | 10.0 | ||||||||||||||||||
Tier 1 Capital to Average Total Assets (Leverage Ratio) . |
11.1 | 3.0 | 5.0 | 11.1 | 4.0 | 5.0 | ||||||||||||||||||
Common Equity Tier 1 Capital to Risk-Weighted Assets (Common Equity Tier 1 Capital Ratio) |
|
Not
Applicable |
|
|
Not
Applicable |
|
|
Not
Applicable |
|
13.0 | 7.0 | 6.5 |
(1) | These are non-GAAP financial measures. For more information on the computation of these non-GAAP financial measures, see Principal Components of Operations and Key Performance Metrics Used By ManagementKey Performance Metrics and Non-GAAP Financial Measures. |
(2) | The Basel III well capitalized minima for purposes of prompt corrective action for bank holding companies have not yet been finalized. The percentages shown are the expected well capitalized minima based upon the current well capitalized minima for insured depository institutions. |
Our assessment of capital adequacy begins with our risk appetite and risk management framework, which provides for the identification, measurement and management of material risks. Required capital is determined for actual/forecasted risk portfolios using applicable regulatory capital methodologies, including estimated impacts of approved and proposed regulatory changes that will or may apply to future periods. Key analytical frameworks, which enable the comprehensive assessment of capital adequacy versus unexpected loss, supplement our base case forecast. These supplemental frameworks include Integrated Stress Testing, as well as an Internal Capital Adequacy Requirement that builds on internally assessed Economic Capital requirements. Our capital planning process is supported by a robust governance framework. This process includes: capital management policies and procedures that document capital
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adequacy metrics and limits, as well as our comprehensive capital contingency plan, and the active engagement of both the legal-entity boards and senior management in oversight and decision-making.
Forward-looking assessments of capital adequacy for us and for our banking subsidiaries feed development of capital plans that are submitted to the Federal Reserve Board and other bank regulators. We prepare these plans in full compliance with the Federal Reserve Boards Capital Plan Rule and participate in the Federal Reserve Boards annual CCAR stress-testing process. Both we and our banking subsidiaries also participate in semiannual stress tests required by the Dodd-Frank Act. Within this regulatory framework, we may only execute capital actions in accordance with a capital plan that the Federal Reserve Board has reviewed and to which the Federal Reserve Board has not objected. In March 2014, the Federal Reserve Board objected on qualitative grounds to our capital plan submitted as part of the CCAR process. As a result, we are not permitted to increase our capital distributions above 2013 levels until a new capital plan is approved by the Federal Reserve Board. The deadline for our next capital plan submission is January 5, 2015, and we cannot assure you that the Federal Reserve Board will not object to our next capital plan or that, even if it does not object to it, our planned capital distributions will not be significantly modified from 2013 levels. For further discussion of our 2014 capital plan, see Regulation and SupervisionDividends.
During the first two quarters of 2014, we completed the following capital actions:
| paid common dividends of $25 million and $10 million in the first and second quarter of 2014, respectively; and |
| paid a special common dividend of $333 million to RBS and issued $333 million of 10-year subordinated debt (4.153% fixed rate subordinated debt due July 1, 2024) to the RBS Group in the second quarter of 2014. |
Additionally, on August 1, 2014 we declared and paid a special common dividend of $333 million to RBS and issued $333 million of 10-year subordinated debt (4.023% fixed rate subordinated debt, due 2024) to the RBS Group, and on August 28, 2014 we declared and paid a common dividend of $50 million to RBS. Refer to Capitalization for further details of future planned capital actions.
During 2013, we completed the following capital actions:
| paid common dividends of $40 million, $55 million, $50 million and $40 million in the first, second, third and fourth quarters of 2013, respectively; |
| redeemed $289 million of floating rate junior subordinated deferrable interest debentures due March 4, 2034 from a special purpose subsidiary, which caused the redemption of $280 million of our trust preferred securities from the RBS Group in the second quarter of 2013; |
| through CBPA, we redeemed $10 million of floating rate junior subordinated deferrable interest debentures due April 22, 2032, which caused redemption of $10 million of our trust preferred securities from third parties in the fourth quarter of 2013; |
| paid a special common dividend of $333 million and issued $333 million of 10-year subordinated debt (5.158% fixed-to-floating rate callable subordinated debt due June 29, 2023) to RBS in the second quarter of 2013; |
| paid a special common dividend of $333 million to RBS and issued $333 million of 10-year subordinated debt (4.771% fixed rate subordinated debt due October 1, 2023) to the RBS Group in the third quarter of 2013; and |
| paid a special common dividend of $334 million to RBS and issued $334 million of 10-year subordinated debt (4.691% fixed rate subordinated debt due January 2, 2024) to the RBS Group in the fourth quarter of 2013. |
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Special common dividends paired with issuance of a like amount of subordinated debt, as executed in the second through fourth quarters of 2013, the second quarter of 2014 and August 1, 2014 are undertaken to produce a more-balanced capital structure without impacting our overall level of qualifying regulatory capital. Exchanging common equity for the same amount of Tier 2 subordinated debt has no impact on either the level of total capital or the total risk-based capital ratio. From the beginning of 2013 to June 30, 2014, these exchange transactions have aggregated to $1.3 billion. Even after execution of these actions, both Common Equity Tier 1 and Tier 1 Capital, calculated using fully phased-in Basel III definitions, were 13.0% as of June 30, 2014, well above their respective Basel III minima, including the capital conservation buffer, of 7.0% and 8.5%, respectively. Our pro forma Basel III total risk-based capital ratio after giving effect to all Basel III impacts also remained strong at 15.8% versus the Basel III minimum, including the capital conservation buffer, of 10.5%. These pro forma Basel III ratios are non-GAAP financial measures. For more information on computation of these non-GAAP financial measures, see Principal Components of Operations and Key Performance Metrics Used By ManagementKey Performance Metrics and Non-GAAP Financial Measures.
As a result of the goodwill impairment recognized by CBNA in the second quarter of 2013, CBNA must request specific approval from the OCC before executing capital distributions. This requirement is expected to remain in place through the fourth quarter of 2015. See Dividend Policy for further details. However, as of June 30, 2014, irrespective of the ability of our subsidiary banks to pay dividends we on a non-consolidated basis had liquid assets in excess of $399 million compared to an annual interest burden on existing subordinated debt of approximately $77 million.
Liquidity
We define liquidity as an institutions ability to meet its cash-flow and collateral obligations in a timely manner, at a reasonable cost. An institution must maintain current liquidity to fund its daily operations and forecasted cash-flow needs as well as contingent liquidity to deliver funding in a stress scenario. We consider the effective and prudent management of liquidity to be fundamental to our health and strength.
We manage liquidity at the consolidated enterprise level and at each material legal entity, including ourselves, CBNA and CBPA.
CFG Liquidity
Our primary sources of cash are (i) dividends from equity investments in our banking subsidiaries and (ii) externally issued subordinated debt ($350 million). Our uses of liquidity include the following: (i) routine cash flow requirements as a bank holding company, including payments of dividends, interest and expenses; (ii) needs of subsidiaries, including our banking subsidiaries, for additional equity and, as required, their needs for debt financing; and (iii) extraordinary requirements for cash, such as acquisitions.
On August 1, 2014, we exchanged $333 million of Tier 1 common equity for Tier 2 subordinated debt, and we plan to continue our strategy of capital optimization by issuing to RBS $334 million of preferred stock and concurrently repurchasing $334 million shares of common stock from RBS, assuming completion of this offering. In addition, we intend to repurchase approximately $500 million of shares of our common stock and $250 million of shares of our common stock in 2015 and 2016, respectively, with proceeds from the issuance of subordinated debt or another lesser form of capital, subject to regulatory approval. See Our Relationship with the RBS Group and Certain Other Related Party TransactionsRelationship with the RBS GroupOther for further details of the planned fourth quarter exchange transaction. As we increase subordinated debt in exchange for common equity, our funding costs will increase to reflect the incremental debt service.
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Our cash and cash equivalents represent a source of liquidity that can be used to meet various needs. As of June 30, 2014, we held cash and cash equivalents of $399 million. This should be viewed as a liquidity reserve.
Our liquidity risk is low, for four reasons. First, we have no material non-banking subsidiaries and our banking subsidiaries are self-funding. Second, we have no outstanding senior debt. Third, the capital structures of our banking subsidiaries are similar to our capital structure. As of June 30, 2014, our double leverage ratio (the combined equity of our subsidiaries divided by our equity) was 101.9%. Fourth, our other cash flow requirements, such as operating expenses, are relatively small.
Banking Subsidiaries Liquidity
In the ordinary course of business, the liquidity of CBNA and CBPA is managed by matching sources and uses of cash. The primary sources of bank liquidity include (i) deposits from our consumer and commercial franchise customers; (ii) payments of principal and interest on loans and debt securities; and (iii) as needed and as described below under Liquidity Risk Management and Governance, wholesale borrowings. The primary uses of bank liquidity include (i) withdrawals and maturities of deposits; (ii) payment of interest on deposits; (iii) funding of loan commitments; and (iv) funding of securities purchases. To the extent that the banks have relied on wholesale borrowings, uses also include payments of related principal and interest.
Our banking subsidiaries major businesses involve taking deposits and making loans. Hence, a key role of liquidity management is to ensure that customers have timely access to funds from deposits and loans. Liquidity management also involves maintaining sufficient liquidity to repay wholesale borrowings, pay operating expenses and support extraordinary funding requirements when necessary.
In the second quarter of 2014, CBNA issued $250 million in new subordinated debt to us. Additionally, CBNA issued $220 million in subordinated debt to us in exchange for common equity held by us and is expected to issue an additional $440 million in subordinated debt in exchange for common equity in the second half of 2014. Also during 2014, CBPA is expected to issue $300 million in subordinated debt to us in exchange for common equity held by us. Additionally during 2014, CBPA could issue $85 million in new subordinated debt to us to support asset growth if required. Because of the increased proportion of subordinated debt versus common equity in the capital structure of both CBNA and CBPA, funding costs will increase to reflect the incremental debt service costs.
Liquidity Risk
We define liquidity risk as the risk that we or either of our banking subsidiaries will be unable to meet our payment obligations in a timely manner. We manage liquidity risk at the consolidated enterprise level, and for each material legal entity including us, CBNA and CBPA. Liquidity risk can arise due to asset liquidity risk and/or funding liquidity risk.
Asset liquidity risk is the risk that market conditions may reduce an entitys ability to liquidate, pledge and/or finance certain assets and thereby substantially reduce the liquidity value of such assets. Drivers of asset liquidity risk include general market disruptions as well as specific issues regarding the credit quality and/or valuation of a security or loan, issuer or borrower and/or asset class.
Funding liquidity risk is the risk that market conditions and/or entity-specific events may reduce an entitys ability to raise funds from depositors and/or wholesale market counterparties. Drivers of funding liquidity may be idiosyncratic or systemic, reflecting impediments to operations and/or undermining of market confidence.
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Factors Affecting Liquidity
Given the composition of their assets and borrowing sources, asset liquidity at both CBNA and CBPA would be materially affected by such events as deterioration of financing markets for high-quality securities (e.g., mortgage-backed securities and other instruments issued by the Government National Mortgage Association, or GNMA, Federal National Mortgage Association, or FNMA, and the Federal Home Loan Mortgage Corporation, or FHLMC), by any incapacitation of the Federal Home Loan Banks, or FHLBs, to provide collateralized advances and/or by a refusal of the Federal Reserve Board to act as lender of last resort in systemic stress. Given the quality of our free securities, which represent unencumbered and liquid obligations, guaranteed explicitly (GNMA) or indirectly (FNMA and FHLMC) by the U.S. government, the positive track record of the FHLBs in stress and the commitment of the Federal Reserve Board to continue as lender of last resort in systemic stress scenarios, we view asset liquidity risk at our banking subsidiaries, both CBNA and CBPA, to be relatively modest.
Given the structure of their balance sheets, funding liquidity of CBNA and CBPA would be materially affected by an adverse idiosyncratic event (e.g., a major loss, causing a perceived or actual deterioration in its financial condition), an adverse systemic event (e.g., default or bankruptcy of a significant capital markets participant), or a combination of both (e.g., the financial crisis of 2008-2010). However, during the financial crisis, our banking subsidiaries reduced their dependence on unsecured wholesale funding to virtually zero. Consequently, and despite ongoing exposure to a variety of idiosyncratic and systemic events, we view our funding liquidity risk to be relatively modest.
An additional variable affecting our access, and the access of our banking subsidiaries, to unsecured wholesale market funds and to large denomination (i.e., uninsured) customer deposits is the credit ratings assigned by such agencies as Moodys, Standard & Poors and Fitch. The following table presents our credit ratings:
June 30, 2014 | ||||||
Moodys |
Standard and
Poors (1) |
Fitch (2) | ||||
Citizens Financial Group, Inc.: |
||||||
Long-term issuer |
NR | BBB+ | BBB+ | |||
Short-term issuer |
NR | A-2 | F2 | |||
Subordinated debt |
NR | BBB | BBB | |||
Citizens Bank, N.A.: |
||||||
Long-term issuer |
A3 | A- | BBB+ | |||
Short-term issuer |
P-2 | A-2 | F2 | |||
Citizens Bank of Pennsylvania: |
||||||
Long-term issuer |
A3 | A- | BBB+ | |||
Short-term issuer |
P-2 | A-2 | F2 |
NR = Not rated
(1) | On May 7, 2014, Standard & Poors lowered Citizens Financial Group, Inc.s stand-alone credit profile to A- from A. |
(2) | On August 21, 2014, Fitch affirmed Citizens Financial Group, Inc.s, Citizens Bank, N.A.s and Citizens Bank of Pennsylvanias long-term and short-term issuer ratings. |
Changes in our public credit ratings could affect both the cost and availability of our wholesale funding. Because of current credit ratings, CBNA and CBPA have limited access to unsecured wholesale funding. As a result and in order to maintain a conservative funding profile, our banking subsidiaries continue to minimize reliance on unsecured wholesale funding. At June 30, 2014, the majority of wholesale funding consisted of secured borrowings using high-quality liquid securities sold under agreements to repurchase (repurchase agreements) and secured FHLB advances using high-quality residential loan collateral. Our dependence on unsecured and credit-sensitive funding continues to be relatively low.
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Existing and evolving regulatory liquidity requirements represent another key driver of systemic liquidity conditions and liquidity management practices. The Federal Reserve Board evaluates our liquidity as part of the supervisory process, and the Federal Reserve Board recently issued regulations that will require us to conduct regular liquidity stress testing over various time horizons and to maintain a buffer of highly liquid assets sufficient to cover expected net cash outflows and projected loss or impairment of funding sources for a short-term liquidity stress scenario. See Regulation and SupervisionEnhanced Prudential Standards. In addition, the Basel Committee has developed a set of internationally-agreed upon quantitative liquidity metrics: the LCR and the Net Stable Funding Ratio (NSFR).
The LCR was developed to ensure banks have sufficient high-quality liquid assets to cover expected net cash outflows over a 30-day liquidity stress period. In September 2014, the U.S. federal banking regulators issued a final rule to implement a modified version of the LCR in the United States, which applies to bank holding companies with more than $50 billion but less than $250 billion in total assets, and less than $10 billion in on-balance sheet foreign exposure, such as us. The modified version of the LCR differs in certain respects from the Basel Committees version of the LCR, including a narrower definition of high-quality liquid assets, different prescribed cash inflow and outflow assumptions for certain types of instruments and transactions and a shorter phase-in schedule that begins on January 1, 2016 and ends on January 1, 2017. Achieving LCR compliance may require changes in the size and/or composition of our investment portfolio, the configuration of our discretionary wholesale funding portfolio, and our average cash position. While the specific LCR requirements were recently finalized, and hence the full extent of and impact from related implementation strategies cannot yet be quantified, at present, we expect to be fully compliant with the LCR by the required implementation date.
The NSFR was developed to provide a sustainable maturity structure of assets and liabilities and has a time horizon of one year. The Basel Committee contemplates that the NSFR, including any revisions, will be implemented as a minimum standard by January 1, 2018; however, the federal banking regulators have not yet proposed rules to implement the NSFR in the United States.
We continue to review these liquidity requirements, and to develop implementation plans and liquidity strategies. We expect to be fully compliant with the final rules on or prior to the applicable effective date.
Liquidity Risk Management and Governance
Liquidity risk is measured and managed by the Wholesale Funding and Liquidity unit within our treasury unit in accordance with policy guidelines promulgated by our Board and the Asset and Liability Management Committee. In managing liquidity risk, the Wholesale Funding and Liquidity unit delivers regular and comprehensive reporting, including current levels vs. threshold limits, for a broad set of liquidity metrics, explanatory commentary relating to emerging risk trends and, as appropriate, recommended remedial strategies.
The mission of our Wholesale Funding and Liquidity unit is to deliver prudent levels of current, projected and contingent liquidity from stable sources, in a timely manner and at a reasonable cost, without significant adverse consequences.
We seek to accomplish this mission by funding loans with stable deposits; by prudently controlling dependence on wholesale funding, particularly unsecured funding; and by maintaining ample available liquidity, including a liquidity buffer of unencumbered high-quality loans and securities. As of June 30, 2014:
| Core deposits continued to be our primary source of funding and our consolidated period-end loan-to-deposit ratio was 97.20% and includes loans and deposits held for sale; |
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| Unsecured wholesale funding was relatively low, at $1.1 billion, substantially offset by excess cash balances held at the Federal Reserve Banks, defined as total reserves held less required reserves of $4.3 billion; |
| Asset liquidity remained robust at $16.6 billion: net overnight position, defined as federal funds sold plus excess balances held at the Federal Reserve Banks minus federal funds purchased, totaled $4.3 billion; unencumbered liquid securities totaled $10.7 billion; and available FHLB capacity secured by mortgage loans totaled $1.6 billion; and |
| Available discount window capacity, defined as available total borrowing capacity from the Federal Reserve based on identified collateral, is secured by non-mortgage commercial and consumer loans, and totaled $10.1 billion. Use of this borrowing capacity would likely be considered only during exigent circumstances. |
The Wholesale Funding and Liquidity unit monitors a variety of liquidity and funding metrics, including specific risk threshold limits. The metrics are broadly classified as follows:
| Current liquidity sources and capacities, including excess cash at the Federal Reserve Banks, free and liquid securities and available and secured FHLB borrowing capacity; |
| Contingent stressed liquidity, including idiosyncratic, systemic and combined stress scenarios, in addition to evolving regulatory requirements such as the Liquidity Coverage Ratio and the Net Stable Funding Ratio; and |
| Current and prospective exposures, including secured and unsecured wholesale funding and spot and cumulative cash-flow gaps across a variety of horizons. |
Further, certain of these metrics are monitored for each of us, our banking subsidiaries, and for our consolidated enterprise on a daily basis, including net overnight position, free securities, internal liquidity, available FHLB borrowing capacity and total asset liquidity. In order to identify emerging trends and risks and inform funding decisions, specific metrics are also forecasted over a one-year horizon.
For the six months ended June 30, 2014, our operating activities contributed $1.0 billion in net cash, including an increase in other liabilities, which added $354 million, and an increase in depreciation, amortization and accretion, which added $196 million. For the six months ended June 30, 2014, net cash used by investing activities was $5.6 billion, primarily reflecting net securities available for sale portfolio purchases of $4.3 billion, a net increase in loans and leases of $2.2 billion and securities held to maturity portfolio purchases of $1.2 billion, partially offset by proceeds from maturities, paydowns and sales of securities available for sale of $2.1 billion. Finally, for the six months ended June 30, 2014, cash provided by financing activities was $7.2 billion, including a net increase in other short-term borrowed funds of $5.5 billion and a net increase in federal funds purchased and securities sold under agreement to repurchase of $2.0 billion. These activities represented a cumulative increase in cash and cash equivalents of $2.6 billion, which, when added to the cash and cash equivalents balance of $2.8 billion at the beginning of the period, resulted in an ending balance of cash and cash equivalents of $5.4 billion as of June 30, 2014.
For the six months ended June 30, 2013, aggregate operating activities contributed $1.4 billion in net cash. Significant items within this category included net loss of $3.7 billion and goodwill impairment of $4.4 billion. For the six months ended June 30, 2013, investing activities contributed net cash of $4.9 billion, primarily reflecting proceeds from maturities, paydowns and sales of securities available for sale of $5.3 billion, a decrease in loans and leases of $2.0 billion and a decrease in interest-bearing deposits in banks of $1.1 billion offset by purchases of securities available for sale of $3.3 billion. Finally, financing activities utilized net cash of $4.9 billion, primarily reflecting a decrease in deposits of $3.8 billion, a net decrease in other short-term borrowed funds of $500 million and dividends declared and paid to parent
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of $428 million. Together, these activities resulted in a cumulative increase in cash and cash equivalents of $1.4 billion. When added to the cash and cash equivalents balance of $3.1 billion at the beginning of the period, the result was an ending cash and cash equivalents balance of $4.5 billion at June 30, 2013.
For the year ended December 31, 2013, our operating activities contributed $2.6 billion in net cash, including sales of mortgage loans net of originations which, added $448 million, and a decrease in other assets, which added $827 million. For the year ended December 31, 2013, net cash contributed by investing activities decreased by $2.5 billion, primarily reflecting net securities available for sale portfolio purchases of $11.0 billion, partially offset by proceeds from maturities, paydowns and sales of securities available for sale of $8.4 billion. Finally, for the year ended December 31, 2013, cash used in financing activities was $502 million, including a net decrease in deposits of $3.0 billion, and $1.2 billion in dividends paid to RBS. These activities represented a cumulative decrease in cash and cash equivalents of $306 million, which, when added to cash and cash equivalents of $3.1 billion at the beginning of the year, resulted in an ending balance of cash and cash equivalents of $2.8 billion as of December 31, 2013.
For the year ended December 31, 2012, aggregate operating activities contributed $1.7 billion in net cash. Significant items within this category included net income of $643 million and deferred income taxes of $306 million. For the year ended December 31, 2012, investing activities contributed net cash of $919 million, primarily reflecting purchases of securities available for sale of $5.5 billion and an increase in loans and leases of $1.4 billion, more than offset by proceeds from maturities, paydowns and sales of securities available for sale of $9.4 billion. Finally, financing activities utilized net cash of $3.3 billion, primarily reflecting an increase in deposits of $2.6 billion, a net decrease in short-term borrowed funds of $2.6 billion, repayments of long-term borrowed funds of $2.9 billion, and a net decrease in federal funds purchased and securities sold under agreements to repurchase of $551 million. Together, these activities resulted in a cumulative decrease in cash and cash equivalents of $631 million. When added to the cash and cash equivalents balance of $3.7 billion at the beginning of the year, the result was an ending cash and cash equivalents balance of $3.1 billion at December 31, 2012.
Contractual Obligations
The following table presents our outstanding contractual obligations as of December 31, 2013:
Total |
Less than 1
year |
1 to 3 years | 3 to 5 years | After 5 years | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Long-term borrowed funds |
$ | 1,405 | $ | | $ | 9 | $ | 30 | $ | 1,366 | ||||||||||
Operating lease obligations |
896 | 173 | 307 | 203 | 213 | |||||||||||||||
Time deposits |
9,588 | 7,444 | 1,450 | 687 | 7 | |||||||||||||||
Purchase obligations (1) |
581 | 456 | 87 | 38 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 12,470 | $ | 8,073 | $ | 1,853 | $ | 958 | $ | 1,586 | |||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | Includes purchase obligations for goods and services covered by non-cancellable contracts and contracts including cancellation fees. |
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Off Balance Sheet Commitments
The following table presents our outstanding off balance sheet commitments. See Note 16 Commitments, Guarantees and Contingencies, to our audited consolidated financial statements included elsewhere in this prospectus for further discussion:
June 30,
2014 |
December 31,
2013 |
Change | Percent | |||||||||||||
(dollars in millions) | (%) | |||||||||||||||
Commitment amount: |
||||||||||||||||
Undrawn commitments to extend credit |
$ | 54,353 | $ | 53,987 | $ | 366 | 1 | % | ||||||||
Financial standby letters of credit |
2,622 | 2,556 | 66 | 3 | ||||||||||||
Performance letters of credit |
118 | 149 | (31 | ) | 21 | |||||||||||
Commercial letters of credit |
56 | 64 | (8 | ) | (13 | ) | ||||||||||
Marketing rights |
54 | 54 | | | ||||||||||||
Risk participation agreements |
20 | 17 | 3 | 18 | ||||||||||||
Residential mortgage loans sold with recourse |
12 | 13 | (1 | ) | (8 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
Total |
$ | 57,235 | $ | 56,840 | $ | 395 | 1 | % | ||||||||
|
|
|
|
|
|
As of December 31, | Change | Percent | ||||||||||||||
2013 | 2012 | |||||||||||||||
(dollars in millions) | (%) | |||||||||||||||
Commitment amount: |
||||||||||||||||
Undrawn commitments to extend credit |
$ | 53,987 | $ | 50,507 | $ | 3,480 | 7 | % | ||||||||
Financial standby letters of credit |
2,556 | 3,082 | (526 | ) | (17 | ) | ||||||||||
Performance letters of credit |
149 | 152 | (3 | ) | (2 | ) | ||||||||||
Commercial letters of credit |
64 | 103 | (39 | ) | (38 | ) | ||||||||||
Marketing rights |
54 | 57 | (3 | ) | (5 | ) | ||||||||||
Risk participation agreements |
17 | 30 | (13 | ) | (43 | ) | ||||||||||
Residential mortgage loans sold with recourse |
13 | 17 | (4 | ) | (24 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
Total |
$ | 56,840 | $ | 53,948 | $ | 2,892 | 5 | % | ||||||||
|
|
|
|
|
|
On May 29, 2014, we entered into an agreement to purchase auto loans on a quarterly basis in future periods. For the first year, the agreement requires the purchase of a minimum of $250 million of outstanding balances to a maximum of $600 million per quarterly period. For quarterly periods after the first year, the minimum and maximum purchases are $400 million and $600 million, respectively. The agreement automatically renews until terminated by either party. We may cancel the agreement at will with payment of a variable termination fee. After three years, there is no termination fee. For more information regarding this agreement, see Managements Discussion and Analysis of Financial Condition and Results of OperationsRecent Events.
Critical Accounting Estimates
Our consolidated financial statements, which are included elsewhere in this prospectus, are prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires us to establish accounting policies and make estimates that affect amounts reported in our consolidated financial statements.
An accounting estimate requires assumptions and judgments about uncertain matters that could have a material effect on our consolidated financial statements. Estimates are made using facts and circumstances known at a point in time. Changes in those facts and circumstances could produce results substantially different from those estimates. The most significant accounting policies and estimates and their related application are discussed below.
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See Note 1 Significant Accounting Policies in our audited consolidated financial statements included elsewhere in this prospectus for further discussion of our significant accounting policies.
Allowance for Credit Losses
Managements estimate of probable losses in our loan and lease portfolios including unfunded lending commitments is recorded in the allowance for loan and lease losses and the reserve for unfunded lending commitments, at levels that we believe to be appropriate as of the balance sheet date. Our determination of such estimates is based on a periodic evaluation of the loan and lease portfolios and unfunded credit facilities, as well as other relevant factors. This evaluation is inherently subjective and requires significant estimates and judgments of underlying factors, all of which are susceptible to change.
The allowance for loan and lease losses and reserve for unfunded lending commitments could be affected by a variety of internal and external factors. Internal factors include portfolio performance such as delinquency levels, assigned risk ratings, the mix and level of loan balances, differing economic risks associated with each loan category and the financial condition of specific borrowers. External factors include fluctuations in the general economy, unemployment rates, bankruptcy filings, developments within a particular industry, changes in collateral values and factors particular to a specific commercial credit such as competition, business and management performance. The allowance for loan and lease losses may be adjusted to reflect our current assessment of various qualitative risks, factors and events that may not be measured in our statistical procedures. There is no certainty that the allowance for loan and lease losses and reserve for unfunded lending commitments will be appropriate over time to cover losses because of unanticipated adverse changes in any of these internal, external or qualitative factors.
The evaluation of the adequacy of the commercial and commercial real estate allowance for loan and lease losses and reserve for unfunded lending commitments is primarily based on risk rating models that assess probability of default, loss given default and exposure at default on an individual loan basis. The models are primarily driven by individual customer financial characteristics and are validated against historical experience. Additionally, qualitative factors may be included in the risk rating models. After the aggregation of individual borrower incurred loss, additional overlays can be made based on back-testing against historical losses and forward loss curve ratios.
For nonaccruing commercial and commercial real estate loans with an outstanding balance of $3 million or greater and for all commercial and commercial real estate TDRs (regardless of size), we conduct specific analysis on a loan level basis to determine the probable amount of credit loss. If appropriate, a specific allowance is established for the loan through a charge to the provision for credit losses. For all classes of impaired loans, individual loan measures of impairment may result in a charge-off to the allowance for loan and lease losses, if deemed appropriate. In such cases, the provision for credit losses is not affected when a specific reserve for at least that amount already exists. Techniques utilized include comparing the loans carrying amount to the estimated present value of its future cash flows, the fair value of its underlying collateral, or the loans observable market price. The technique applied to each impaired loan is based on the workout officers opinion of the most probable workout scenario. Historically this has generally led to the use of the estimated present value of future cash flows approach. The fair value of underlying collateral will be used if the loan is deemed collateral-dependent. For loans that use the fair value of underlying collateral approach, a charge-off assessment is performed quarterly to write the loans down to fair value.
For most non-impaired retail loan portfolio types, the allowance for loan and lease losses is based upon the incurred loss model utilizing the probability of default (PD), loss given default (LGD) and exposure at default on an individual loan basis. When developing these factors, we may consider the
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loan product and collateral type, LTV ratio, lien position, borrowers credit, time outstanding, geographic location, delinquency status and incurred loss period. Incurred loss periods are reviewed and updated at least annually, and potentially more frequently when economic situations change rapidly, as they tend to fluctuate with economic cycles. Incurred loss periods are generally longer in good economic times and shorter in bad times.
For home equity lines and loans, a number of factors impact the PD. Specifically, the borrowers current FICO score, the utilization rate, delinquency statistics, borrower income, current combined loan to value ratio and months on books are all used to assess the borrowers creditworthiness. Similarly, the loss severity is also impacted by various factors, including the utilization rate, the combined loan to value ratio, the lien position, the Housing Price Index change for the location (as measured by the Case-Shiller index), months on books and current loan balance.
When we are not in a first lien position, we use delinquency information on the first lien exposures obtained from third-party credit information providers in the credit assessment. For all first liens, whether owned by a third party or by us, an additional assessment is performed on a quarterly basis. In this assessment, the most recent three months performance of the senior liens is reviewed for delinquency (90 days or more past due), modification, foreclosure and/or bankruptcy statuses. If any derogatory status is present, the junior lien will be placed on nonaccrual status regardless of its delinquency status on our books. This subsequent change to nonaccrual status will alter the treatment in the PD model, thus affecting the reserve calculation.
In addition, the first lien exposure is combined with the second lien exposure to generate a combined LTV. The combined LTV is a more accurate reflection of the leverage of the borrower against the property value, as compared to the LTV from just the junior lien(s). The combined LTV is used for modeling both the junior lien PD and LGD. This also impacts the Allowance for Loan Loss rates for the junior lien HELOCs.
The above measures are all used to assess the PD and LGD for HELOC borrowers for whom we originated the loans. There is also a portfolio of home equity products that were originated and serviced by others (SBO); however, we currently service some of the loans in this portfolio. The SBO portfolio is modeled as a separate class and the reserves for this class are generated by using the delinquency roll rate models as described below.
For student loan and SBO portfolios, we estimate the allowance for loan loss by utilizing a delinquency roll rate model. For such a model, the portfolio is segmented by delinquency category (e.g. 30 days past due, 60 days past due, etc.). The purpose of this segmentation is to evaluate the probability of a loan flowing into the next delinquency stage category, within one month. The projected rate for each delinquency category is the moving average of the previous 12 months rates, although the number of months used could vary by loan type, with the current month from the previous two years included to adjust for seasonality. For the portfolios utilizing the incurred loss model, roll rate models are also run as challenger models and can be used to support management overlays if deemed necessary. At a macro level, retail losses for all portfolio types may be affected by factors such as collateral values, unemployment rates and local economic conditions.
For retail TDRs that are not collateral-dependent, allowances are developed using the present value of expected future cash flows, compared to the recorded investment in the loans. Expected re-default factors are considered in this analysis. Retail TDRs that are deemed collateral-dependent are written down to the fair market value of the collateral less costs to sell. The fair value of collateral is periodically monitored subsequent to the modification.
Changes in the levels of estimated losses, even if minor, can significantly affect managements determination of an appropriate allowance for loan and lease losses. For consumer loans, losses are
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affected by such factors as loss severity, collateral values, economic conditions, and other factors. A 1% and 5% increase in the estimated loss rate for consumer loans at December 31, 2013 would have increased the allowance by $5 million and $25 million, respectively. The allowance for loan and lease losses for our Commercial Banking segment is sensitive to assigned credit risk ratings and inherent loss rates. If 10% and 20% of the December 31, 2013 period ending loan balances (including unfunded commitments) within each risk rating category of our Commercial Banking segment had experienced downgrades of two risk categories, the allowance for loan and lease losses would have increased by $32 million and $64 million, respectively, as of December 31, 2013.
Commercial loans and leases are charged off to the allowance when there is little prospect of collecting either principal or interest. Charge-offs of commercial loans and leases usually involve receipt of borrower-specific adverse information. For commercial collateral-dependent loans, an appraisal or other valuation is used to quantify a shortfall between the fair value of the collateral less costs to sell and the recorded investment in the commercial loan. Retail loan charge-offs are generally based on established delinquency thresholds rather than borrower-specific adverse information. When a loan is collateral-dependent, any shortfalls between the fair value of the collateral less costs to sell and the recorded investment is promptly charged off. Placing any loan or lease on nonaccrual status does not by itself require a partial or total charge-off; however, any identified losses are charged off at that time.
For additional information regarding the allowance for loan and lease losses and reserve for unfunded lending commitments, see Note 4 Allowance for Credit Losses, Nonperforming Assets and Concentrations of Credit Risk to our unaudited interim consolidated financial statements, as well as Note 5 Allowance for Credit Losses, Nonperforming Assets and Concentrations of Credit Risk, and Note 1 Significant Accounting Policies, to our audited consolidated financial statements included elsewhere in this prospectus.
Nonperforming Loans and Leases
Commercial loans, commercial real estate loans and leases are generally placed on nonaccrual status when contractually past due 90 days or more, or earlier if management believes that the probability of collection is insufficient to warrant further accrual. Some of these loans and leases may remain on accrual status when contractually past due 90 days or more if management considers the loan collectible. A loan may be returned to accrual status if (i) principal and interest payments have been brought current and we expect repayment of the remaining contractual principal and interest, (ii) the loan or lease has otherwise become well-secured and in the process of collection, or (iii) the borrower has been making regularly scheduled payments in full for the prior 6 months and it is reasonably assured that the loan or lease will be brought fully current within a reasonable period. Cash receipts on nonaccruing loans and leases are generally applied to reduce the unpaid principal balance.
Residential mortgages are generally placed on nonaccrual status when past due 120 days, or sooner if determined to be collateral-dependent. Residential mortgages are returned to accrual status when principal and interest payments become less than 120 days past due and when future payments are reasonably assured. Credit card balances (included in the unsecured retail class of loans) are placed on nonaccrual status when past due 90 days or more. Credit card balances are restored to accruing status if they subsequently become less than 90 days past due. Government guaranteed student loans (included in the unsecured class of loans) are not placed on nonaccrual status.
All other retail loans are generally placed on nonaccrual status when past due 90 days or more, or earlier if management believes the probability of collection is insufficient to warrant further accrual. Loans less than 90 days past due may be placed on nonaccrual status upon the death of the borrower, surrender or repossession of collateral, fraud or bankruptcy. Loans are generally returned to accrual
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status if the loan becomes less than 15 days past due. Cash receipts on nonaccruing loans and leases are generally applied to reduce the unpaid principal balance. Certain TDRs that are current in payment status are classified as nonaccrual in accordance with regulatory guidance. Income on these loans is generally recognized on a cash basis if management believes the remaining book value of the loan is realizable. Nonaccruing TDRs that meet the guidelines above for accrual status can be returned to accruing if supported by a well-documented evaluation of the borrowers financial condition, and if they have been current for at least 6 months.
Additional information regarding our nonperforming loans and leases can be found in Note 4 Allowance for Credit Losses, Nonperforming Assets and Concentrations of Credit Risk to our unaudited interim consolidated financial statements, as well as Note 5 Allowance for Credit Losses, Nonperforming Assets and Concentrations of Credit Risk, and Note 1 Significant Accounting Policies, to our audited consolidated financial statements included elsewhere in this prospectus.
Impaired Loans
A loan is considered to be impaired when it is probable that we will be unable to collect all of the contractual interest and principal payments as scheduled in the loan agreement. Impaired loans include nonaccruing larger balance (greater than $3 million carrying value) non-homogenous commercial and commercial real estate loans, and restructured loans that are deemed TDRs. A loan modification is identified as a TDR when we, or a bankruptcy court, grants the borrower a concession that we would not otherwise make in response to the borrowers financial difficulties. Concessions granted in TDRs for all classes of loans may include lowering the interest rate, forgiving a portion of principal, extending the loan term, lowering scheduled payments for a specified period of time, principal forbearance, or capitalizing past due amounts. A rate increase can be a concession if the increased rate is lower than a market rate for debt with risk similar to that of the restructured loan. Additionally, TDRs for commercial loans may also involve creating a multiple note structure, accepting non-cash assets, accepting an equity interest, or receiving a performance-based fee. In some cases a TDR may involve multiple concessions. The financial effects of TDRs for all loan classes may include lower income (either due to a lower interest rate or a delay in the timing of cash flows), larger loan loss provisions and accelerated charge-offs if the modification renders the loan collateral-dependent. In some cases, interest income throughout the term of the loan may increase if, for example, the loan is extended or the interest rate is increased as a result of the restructuring.
Impairment evaluations are performed at the individual loan level, and consider expected future cash flows from the loan, including, if appropriate, the realizable value of collateral. Impaired loans that are not TDRs are nonaccruing, and loans involved in TDRs may be accruing or nonaccruing. Retail loans that were discharged in bankruptcy and not reaffirmed by the customer are generally deemed to be collateral-dependent TDRs and are charged off to the fair value of the collateral, less cost to sell, and less amounts recoverable under a government guarantee (if any). Recently issued regulatory guidance on bankruptcy-discharged TDRs permits banks to apply judgment in the evaluation of the probability of loan repayment. As a result of the new guidance (which was issued in February 2014), loans for which we have documented that repayment is likely to occur need not be charged down to collateral value. Cash receipts on nonaccruing impaired loans, including nonaccruing loans involved in TDRs, are generally applied to reduce the unpaid principal balance.
Loans are generally restored to accrual status when principal and interest payments are brought current and when future payments are reasonably assured, following a sustained period of repayment performance by the borrower in accordance with the loans contractual terms.
For additional information regarding our impaired loans, see Note 4 Allowance for Credit Losses, Nonperforming Assets and Concentrations of Credit Risk to our unaudited interim consolidated
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financial statements, as well as Note 5 Allowance for Credit Losses, Nonperforming Assets and Concentrations of Credit Risk, and Note 1 Significant Accounting Policies, to our audited consolidated financial statements included elsewhere in this prospectus.
Fair Value
We measure fair value using the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is based upon quoted market prices in an active market, where available. If quoted prices are not available, observable market-based inputs or independently sourced parameters are used to develop fair value, whenever possible. Such inputs may include prices of similar assets or liabilities, yield curves, interest rates, prepayment speeds and foreign exchange rates.
We classify our assets and liabilities that are carried at fair value in accordance with the three-level valuation hierarchy:
| Level 1. Quoted prices (unadjusted) in active markets for identical assets or liabilities; |
| Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar instruments; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by market data for substantially the full term of the asset or liability; and |
| Level 3. Unobservable inputs that are supported by little or no market information and that are significant to the fair value measurement. |
Classification in the hierarchy is based upon the lowest level input that is significant to the fair value measurement of the asset or liability. For instruments classified in Level 1 and 2 where inputs are primarily based upon observable market data, there is less judgment applied in arriving at the fair value. For instruments classified in Level 3, management judgment is more significant due to the lack of observable market data.
Significant assets measured at fair value on a recurring basis include our mortgage-backed securities available for sale. These instruments are priced using an external pricing service and are classified as Level 2 within the fair value hierarchy. The services pricing models use predominantly observable valuation inputs to measure the fair value of these securities under both the market and income approaches. The pricing service utilizes a matrix pricing methodology to price our U.S. agency pass-through securities, which involves making adjustments to to-be-announced security prices based on a matrix of various mortgage-backed securities characteristics such as weighted-average maturities, indices and other pool-level information. Other agency and non-agency mortgage-backed securities are priced using a discounted cash flow methodology. This methodology includes estimating the cash flows expected to be received for each security using projected prepayment speeds and default rates based on historical statistics of the underlying collateral and current market conventions. These estimated cash flows are then discounted using market-based discount rates that incorporate characteristics such as average life, volatility, ratings, performance of the underlying collateral, and prevailing market conditions.
We review and update the fair value hierarchy classifications on a quarterly basis. Changes from one quarter to the next related to the observability of inputs in fair value measurements may result in a reclassification between the fair value hierarchy levels and are recognized based on period-end balances. We also verify the accuracy of the pricing provided by our primary external pricing service on a quarterly basis. This process involves using a secondary external vendor to provide valuations for our securities portfolio for comparison purposes. Any securities with discrepancies beyond a certain threshold are researched and, if necessary, valued by an independent outside broker.
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Fair value is also used on a nonrecurring basis to evaluate certain assets for impairment or for disclosure purposes. Examples of nonrecurring uses of fair value include mortgage servicing rights accounted for by the amortization method, loan impairments for certain loans and goodwill.
For additional information regarding our fair value measurements, see Note 2 Securities, Note 6 Mortgage Banking, and Note 11 Derivatives to our unaudited interim consolidated financial statements, as well as Note 1 Significant Accounting Policies, Note 3 Securities, Note 9 Mortgage Banking and Note 15 Derivatives to our audited consolidated financial statements included elsewhere in this prospectus.
Goodwill
Goodwill is an asset that represents the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is not amortized, but is subject to annual impairment tests. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. A reporting unit is a business operating segment or a component of a business operating segment. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or organically grown, are available to support the value of the goodwill.
The goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing each reporting units fair value to its carrying value including goodwill. If the fair value of a reporting unit exceeds its carrying value, applicable goodwill is deemed to be not impaired. If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to measure the amount of impairment.
The second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit, as determined in the first step, over the aggregate fair values of the individual assets, liabilities and identifiable intangible assets as if the reporting unit were being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss recognized cannot exceed the amount of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted.
We review goodwill for impairment annually as of October 31 (previously as of September 30) or more often if events or circumstances indicate that it is more likely than not that the fair value of one or more reporting units is below its carrying value. We rely on the income approach (discounted cash flow method) as the primary method for determining fair value. Market-based methods are used as benchmarks to corroborate the value determined by the discounted cash flow method.
We rely on several assumptions when estimating the fair value of our reporting units using the discounted cash flow method. These assumptions include the current discount rate, as well as projected loan losses, income taxes and capital retention rates. Discount rates are estimated based on the Capital Asset Pricing Model, which considers the risk-free interest rate, market risk premium, beta and unsystematic risk and size premium adjustments specific to a particular reporting unit. The discount rates are also calibrated on the assessment of the risks related to the projected cash flows of each reporting unit. Multi-year financial forecasts are developed for each reporting unit by considering several key business drivers such as new business initiatives, customer retention standards, market
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share changes, anticipated loan and deposit growth, forward interest rates, historical performance and industry and economic trends, among other considerations. The long-term growth rate used in determining the terminal value of each reporting unit was estimated based on managements assessment of the minimum expected terminal growth rate of each reporting unit, as well as broader economic considerations such as gross domestic product and inflation.
We corroborate the fair value of our reporting units determined by the discounted cash flow method using market-based methods: a comparable company method and a comparable transaction method. The comparable company method measures fair value of a business by comparing it to publicly traded companies in similar lines of business. This involves identifying and selecting the comparable companies based on a number of factors (i.e., size, growth, profitability, risk and return on investment), calculating the market multiples (i.e., price-to-tangible book value, price-to-cash earnings and price-to-net income) of these comparable companies and then applying these multiples to our operating results to estimate the value of the reporting units equity on a marketable, minority basis. A control premium is then applied to this value to estimate the fair value of the reporting unit on a marketable, controlling basis. The comparable transaction method measures fair value of a business based on exchange prices in actual transactions and on asking prices for controlling interests in public or private companies currently offered for sale. The process involves comparison and correlation of ourselves with other similar companies. Adjustments for differences in factors described earlier (i.e., size, growth, profitability, risk and return on investment) are also considered.
The valuation of goodwill is dependent on forward-looking expectations related to the performance of the U.S. economy and our associated financial performance. The prolonged delay in the full recovery of the U.S. economy, and the impact of that delay on earnings expectations, prompted a goodwill impairment test as of June 30, 2013. Although the U.S. economy has demonstrated signs of recovery, notably improvements in unemployment and housing, the pace and extent of recovery in these indicators, as well as in overall gross domestic product, have lagged previous expectations. The impact of the slow recovery is most evident in our Consumer Banking reporting unit. Accordingly, the percentage by which the estimated fair value of our Consumer Banking reporting unit exceeded its carrying value declined from 7% at December 31, 2011 to 5% at December 31, 2012.
During the first half of 2013, we observed further deceleration of expected growth for our Consumer Banking reporting units future profits based on forecasted economic growth for the U.S. economy and the continuing impact of the new regulatory framework in the financial industry. This deceleration was incorporated into our revised earnings forecast in the second quarter of 2013, and we subsequently concluded that there was a likelihood of greater than 50% that goodwill impairment had occurred as of June 30, 2013.
An interim goodwill impairment test was subsequently performed for our Consumer Banking and Commercial Banking reporting units. Step One of these tests indicated that (1) the fair value of our Consumer Banking reporting unit was less than its carrying value by 19% and (2) the fair value of our Commercial Banking reporting unit exceeded its carrying value by 27%. Step Two of the goodwill impairment test was subsequently performed for our Consumer Banking reporting unit, which resulted in the recognition of a pretax $4.4 billion impairment charge in our Consolidated Statement of Operations for the period ending June 30, 2013. The impairment charge, which was a non-cash item, had minimal impact on our Tier 1 and total capital ratios. The impairment charge had no impact on our liquidity position or tangible common equity.
We performed an annual test for impairment of goodwill for both reporting units as of October 31, 2013. As of this testing date, the percentage by which the fair value of our Consumer Banking reporting unit exceeded its carrying value was 21%, and the percentage by which the fair value of our Commercial Banking reporting unit exceeded its carrying value was 31%.
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We based the fair value estimates used in our annual goodwill impairment testing on assumptions we believe to be representative of assumptions that a market participant would use in valuing the reporting units but that are unpredictable and inherently uncertain, including estimates of future growth rates and operating margins and assumptions about the overall economic climate and the competitive environment for our reporting units. There can be no assurances that future estimates and assumptions made for purposes of goodwill testing will prove accurate predictions of the future. If the assumptions regarding business plans, competitive environments or anticipated growth rates are not achieved, we may be required to record goodwill impairment charges in future periods.
For additional information regarding our goodwill impairment testing, see Note 5 Goodwill to our unaudited interim consolidated financial statements, as well as Note 1 Significant Accounting Policies and Note 8 Goodwill to our audited consolidated financial statements included elsewhere in this prospectus.
Income Taxes
Accrued income taxes are reported as a component of either other assets or other liabilities, as appropriate, in the audited consolidated balance sheets and reflect our estimate of income taxes to be paid or that effectively have been prepaid. Deferred income tax assets and liabilities represent the amount of future income taxes to be paid or that effectively have been prepaid, and the net balance is reported as an asset or liability in the audited consolidated balance sheets. We determine the realization of the deferred tax asset based upon an evaluation of the four possible sources of taxable income: (1) the future reversals of taxable temporary differences; (2) future taxable income exclusive of reversing temporary differences and carryforwards; (3) taxable income in prior carryback years; and (4) tax planning strategies. In projecting future taxable income, we utilize forecasted pretax earnings, adjust for the estimated book-tax differences and incorporate assumptions, including the amount of income allocable to taxing jurisdictions. These assumptions require significant judgment and are consistent with the plans and estimates that we use to manage the underlying businesses. The realization of the deferred tax assets could be reduced in the future if these estimates are significantly different than forecasted.
We are subject to income tax in the United States and multiple state and local jurisdictions. The tax laws and regulations in each jurisdiction may be interpreted differently in certain situations, which could result in a range of outcomes. Thus, we are required to exercise judgment regarding the application of these tax laws and regulations. We evaluate and recognize tax liabilities related to any tax uncertainties. Due to the complexity of some of these uncertainties, the ultimate resolution may differ from the current estimate of tax liabilities or refunds.
Our estimate of accrued income taxes, deferred income taxes and income tax expense can also change in any period as a result of new legislative or judicial guidance impacting tax positions, as well as changes in income tax rates. Any changes, if they occur, can be significant to our audited consolidated financial position, results of operations or cash flows.
For additional information regarding income taxes, see Note 10 Income Taxes to our unaudited interim consolidated financial statements, as well as Note 14 Income Taxes and Note 1 Significant Accounting Policies to our audited consolidated financial statements included elsewhere in this prospectus.
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Risk Governance and Quantitative and Qualitative Disclosures About Risk
We are committed to maintaining a strong, integrated and proactive approach to the management of all risks to which we are exposed in pursuit of our business objectives. A key aspect of our Boards responsibility as the main decision making body is setting our risk appetite to ensure that the levels of risk that we are willing to accept in the attainment of our strategic business and financial objectives are clearly understood.
To enable the Board to carry out its objectives, it has delegated authority for risk management activities, as well as governance and oversight of those activities, to a number of Board and executive management level risk committees. The key committees that specifically consider risk across the enterprise are set out in the diagram below.
Chief Risk Officer
The Chief Risk Officer, or CRO, directs our overall risk management function overseeing the compliance, regulatory, operational and credit risk management. In addition, the CRO has oversight of the management of market, liquidity and strategic risks. The CRO reports to our CEO and Board Risk Committee.
Risk Framework
Our risk management framework is embedded in our business through a Three Lines of Defense model which defines responsibilities and accountabilities.
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First Line of Defense
The business lines (including their associated support functions) are the First Line of Defense and are accountable for owning and managing, within our defined risk appetite, the risks which exist in their respective business areas. The business lines are responsible for performing regular risk assessments to identify and assess the material risks that arise in their area of responsibility, complying with relevant risk policies, testing and certifying the adequacy and effectiveness of their controls on a regular basis, establishing and documenting operating procedures and establishing and owning a governance structure for identifying and managing risk.
Second Line of Defense
The Second Line of Defense includes independent monitoring and control functions accountable for developing and ensuring implementation of risk and control frameworks, oversight of risk, financial management and valuation, and regulatory compliance. This centralized risk function is appropriately independent from the business and is accountable for overseeing and challenging our business lines on the effective management of their risks. This risk function utilizes training, communications and awareness to provide expert support and advice to the business lines. This includes interpreting the risk policy standards and risk management framework, overseeing compliance by the businesses with policies and responsibilities, including providing relevant management information and escalating concerns where appropriate.
The Executive Risk Committee, chaired by the CRO, actively considers our inherent material risks, analyzes our overall risk profile and seeks confirmation that the risks are being appropriately identified, assessed and mitigated.
Third Line of Defense
Our internal audit function is the Third Line of Defense acting as an independent appraisal and assurance function. As an independent assurance function, internal audit ensures the key business risks are being managed to an acceptable level and that the risk management and internal control framework is operating effectively. Independent assessments are provided to our Audit Committee on a monthly basis and to the Board and executive management in the form of quarterly opinions.
Risk Appetite
Risk Appetite is a strategic business and risk management tool. We define our risk appetite as the maximum limit of acceptable risk beyond which we would either be unable to achieve our strategic objectives and capital adequacy obligations or would assume an unacceptable amount of risk to do so. The Board Risk Committee advises our Board of Directors in relation to current and potential future risk strategy, including determination of risk appetite and tolerance.
The principal non-market risks to which we are subject are: credit risk, operational risk, liquidity risk, strategic risk and reputational risk. We are also subject to market risks. Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices, commodity prices and/or other relevant market rates or prices. Market risk does not result from proprietary trading, which we prohibit. Rather, modest market risk arises from trading activities that serve customer needs, including hedging of interest rate and foreign exchange risk. As described below, more material market risk arises from our non-trading banking activities, such as loan origination and deposit-gathering. We have established enterprise-wide policies and methodologies to identify, measure, monitor and report market risk. We actively manage both trading and non-trading market risks. We are also subject to liquidity risk, discussed above under Liquidity.
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Our risk appetite framework and risk limit structure establishes guidelines to determine the balance between existing and desired levels of risk and supports the implementation, measurement and management of our risk appetite policy.
Credit Risk
Overview
Credit risk represents the potential for loss arising from a customer, counterparty, or issuer failing to perform in accordance with the contractual terms of the obligation. While the majority of our credit risk is associated with lending activities, we do engage with other financial counterparties for a variety of purposes including investing, asset and liability management, and trading activities. Given the financial impact of credit risk on our profit and loss and balance sheet, the assessment, approval, and management of credit risk represents a major part of our overall risk-management responsibility.
Objective
The credit risk management organization is responsible for approving credit transactions, monitoring portfolio performance, identifying problem loans, and ensuring remedial management.
Organizational Structure
Management and oversight of credit risk is the responsibility of the Chief Credit Officers (CCO). Although there is substantial overlap between our consumer and commercial risk management functions and our business segments, Consumer Banking and Commercial Banking, as well as Other, the allocation of a line of business to either Consumer Banking or Commercial Banking for accounting purposes does not necessarily align with our risk management categories. The relevant CCO and their teams oversee the management of credit risk activities, under the guidance of the CRO. There are additional matrix reporting lines for the CCOs and CRO that tie into the segment executive management, as well as the RBS Group Credit Risk Management. From a commercial perspective, it is likely that some matrix reporting lines will continue into the RBS Group Risk functions for as long as we are majority owned by the RBS Group.
The credit risk teams operate independently from the business lines to ensure decisions are not influenced by unbalanced objectives. Each team is comprised of senior credit officers who possess extensive experience structuring and approving loans.
Governance
The primary mechanisms used to govern our credit risk function are our consumer and commercial credit policies. These policies outline the minimum acceptable lending standards that align with our desired risk appetite. Material issues or changes are identified by the individual committees and presented to the Combined Credit Risk Committee, Executive Risk Committee and the Board for approval as required.
Key Management Processes
To ensure credit risks are managed within our risk appetite and business and risk strategies are achieved, we employ a comprehensive and integrated control program. The programs objective is to proactively (1) identify, (2) measure, (3) monitor, and (4) mitigate existing and emerging credit risks across the lifecycle (origination, account management/portfolio management, and loss mitigation and recovery).
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On the consumer banking side of credit risk, our teams use models to evaluate consumer loans across the lifecycle of the loan. Starting at origination, credit scoring models are used to forecast the probability of default of an applicant. These models are embedded in the loan origination system, which allows for real-time scoring and automated decisions for many of our products. Periodic validations are performed on our purchased and proprietary scores to ensure fit for purpose. When approving customers for a new loan or extension of an existing credit line, credit scores are used in conjunction with other credit risk variables such as affordability, length of term, collateral value, collateral type, and lien subordination.
The origination process is supported by dedicated underwriting teams that reside in the business line. The size of each team depends on the intensity of the approval process as the number of handoffs, documentation, and verification requirements differ substantially depending on the loan product.
To ensure proper oversight of the underwriting teams, lending authority is granted by credit risk to each underwriter. The amount of delegated authority depends on the experience of the individual. We periodically evaluate the performance of each underwriter and annually reauthorize their delegated authority. Only senior members of the credit risk team are authorized to grant significant exceptions to credit policies. It is not uncommon to make exceptions to established policies when compensating factors are present. These exceptions are capped at 5% of origination volume and tracked separately to ensure performance expectations are achieved.
Once an account is established, credit scores and collateral values are refreshed at regular intervals to allow for proactive identification of increasing or decreasing levels of credit risk. For accounts with contingent liability (revolving feature), credit policies have been developed that leverage the refreshed customer data to determine if a credit line should be increased, decreased, frozen, or closed. Lastly, behavioral modeling, segmentation, and loan modifications are used to cure delinquency, reduce the severity of loss, and maximize recoveries. Our approach to managing credit risk is highly analytical and, where appropriate, is automated, to ensure consistency and efficiency.
One of the central tools used to manage credit risk is the Consumer and Small Business Credit Risk Dashboard. This dashboard is refreshed monthly and evaluates key dimensions of credit risk against predefined parameters, commonly referred to as triggers and limits. Triggers are designed to alert senior management of unfavorable performance deviations from current risk profile and provide sufficient lead time to address and implement corrective actions before the risk increases in materiality. Where appropriate, triggers are aligned to budget expectations and operational targets. Limits, conversely, are designed to represent the maximum risk tolerance or appetite we are willing to accept in any given year.
The credit risk team is constantly evaluating current and projected economic conditions, internal credit performance in relation to budget and predefined risk tolerances, and current and expected regulatory guidance to determine the optimal balance of expansion and contraction policies. All policy change proposals receive intense scrutiny and syndication prior to approval and implementation. This process ensures decisions are made based on profit based analytics with full consideration to operational and regulatory risks.
On the commercial banking side of credit risk, the structure is broken into Commercial and Industrial (C&I) loans and leases and Commercial Real Estate (CRE). Within C&I there are separate verticals established for certain specialty products (e.g., asset based lending, leasing, franchise finance, health care, technology, mid-corporate). A specialty vertical is a stand-alone team of industry or product specialists. Substantially all activity that falls under the ambit of the defined industry or product is managed through a specialty vertical when one exists. CRE also operates as a specialty vertical.
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Commercial credit risk management begins with defined credit products and policies. New credit products and material changes to existing credit products require multiple levels of review and approval. The initial level of review involves the engagement of risk disciplines from across the enterprise for a New Product Risk Assessment. This assessment process reviews the product description, strategic rationale and financial impact and considers the risk impact from multiple perspectives (Reputation, Operational, Regulatory, Market, Legal as well as Credit). Credit risk approval then involves the determination and development of credit policy which includes the approval of the appropriate credit risk acceptance criteria beyond the general credit underwritings standards that already exist.
Commercial transactions are subject to individual analysis and approval at origination and thereafter are subject to formal annual reviews. The underwriting process includes the establishment and approval of Credit Grades that confirm the Probability of Default (PD) and Loss Given Default (LGD). Approval then requires both a business line approver and an independent Credit Approver. The approval level is determined by the size of the credit relationship as well as the PD with larger relationships and weaker PDs requiring more senior individuals. The checks and balances in the credit process and the independence of the credit approver function are designed to appropriately assess and sanction the level of credit risk being accepted, facilitate the early recognition of credit problems when they occur, and to provide for effective problem asset management and resolution. All authority to grant credit is delegated through the independent credit administration function and is closely monitored and regularly updated.
The primary factors considered in commercial credit approvals are the financial strength of the borrower, assessment of the borrowers management capabilities, cash flows from operations, industry sector trends, type and sufficiency of collateral, type of exposure, transaction structure, and the general economic outlook. While these are the primary factors considered, there are a number of other factors that may be considered in the decision process. In addition to the credit analysis conducted during the approval process at origination and annual review, our Credit Quality Assurance group performs testing to provide an independent review and assessment of the quality and/or risk of new loan originations. This group is part of our Risk Management area, and conducts portfolio reviews on a risk-based cycle to evaluate individual loans, validate risk ratings, as well as test the consistency of the credit processes.
The maximum level of credit exposure to individual credit borrowers is limited by policy guidelines based on the perceived risk of each borrower or related group of borrowers. Concentration risk is managed through limits on industry (sector), loan type (asset class), and loan quality factors. We focus predominantly on extending credit to commercial customers with existing or expandable relationships within our primary banking markets, although we will consider lending opportunities outside our primary markets if we believe that the associated risks are acceptable and aligned with strategic initiatives. Geographic considerations occur at both the transactional level as well as the product level, as certain specialties operate on a national basis.
Our management of risk concentrations includes the establishment of Sector and Asset Class limits which track and report correlated risk exposures. We established limits for 29 separate Sectors. These Sector Limits are approved annually by the Concentration Risk Management Committee. Exposure against these limits is tracked on a monthly basis. The two largest sector concentrations are Industrials and CRE.
Apart from Industrials and CRE (which together make up 29% of the commercial utilization as of June 30, 2014), we do not have any major sector concentrations. The Industrial sector includes basic C&I lending focused on general manufacturing. The sector is diversified and not managed as a specialized vertical. Our customers are local to our market and present no significant concentration.
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We have a smaller concentration in CRE than our peer banks based on industry data obtained from SNL Financial. As of March 31, 2014, our CRE outstandings amounted to 12% of total outstanding loans. According to SNL Financial, the corresponding ratio for peer banks was 18%.
We have also established, through the Concentration Risk Management Committee, Asset Class Limits to further measure and manage concentration risks. Asset classes include Leveraged Lending, Franchise Finance and Loan Underwriting Risk. These asset class limits are expressed as either a percentage of capital or by specific dollar thresholds. Exposure against these limits is tracked quarterly.
Our standardized credit grading system considers many components that directly correlate to loan quality and likelihood of repayment. Our assessment of a borrowers credit strength, or lack thereof, is reflected in our risk ratings for such loans, which are directly tied to, and an integral component of, our allowance for loan and lease losses methodology. When deterioration in credit strength is noted, a loan becomes subject to Watch Review. The Watch Review process evaluates the weaknesses and recommends corrective strategy. The Watch Review process involves senior representatives from the business line portfolio management team, credit and our Global Recovery Group (GRG). If a viable corrective action strategy is not achieved, the credit is subject to classification as either Criticized or Classified which triggers a risk rating downgrade. As such, the loan would attract a higher allowance for loan and lease losses requirement, be subject to more frequent review (including continued inclusion in the Watch Review process), and be reported as a non-pass credit to our regulators. In addition, all classified assets are transferred to GRG.
Substantially all loans categorized as Classified are managed by GRG. GRG is a specialized group of credit professionals that handles the day-to-day management of workouts, commercial recoveries, and problem loan sales. Its responsibilities include developing and implementing action plans, assessing risk ratings, and determining the appropriateness of the allowance, the accrual status, and the ultimate collectability of the Classified loan portfolio.
Market Risk
Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices, commodity prices and/or other relevant market rates or prices. Market risk does not result from proprietary trading, which we prohibit. Rather, modest market risk arises from trading activities that serve customer needs, including hedging of interest rate and foreign exchange risk. As described below, more material market risk arises from our non-trading banking activities, such as loan origination and deposit-gathering. We have established enterprise-wide policies and methodologies to identify, measure, monitor and report market risk. We actively manage both trading and non-trading market risks.
Non-Trading Risk
We are exposed to market risk as a result of non-trading banking activities. This market risk is comprised entirely of interest rate risk, as we have no direct currency, equity or commodity risk. This interest rate risk emerges from the balance sheet after the aggregation of our assets, liabilities and equity. We refer to this non-trading risk embedded in the balance sheet as structural interest rate risk or interest rate risk in the banking book. Our mortgage servicing rights assets also contain interest rate risk as the value of the fee stream is impacted by the level of long-term interest rates.
A major source of structural interest rate risk is a difference in the repricing of assets, on the one hand, and liabilities and equity, on the other. First, there are differences in the timing of rate changes reflecting the maturity and/or repricing of assets and liabilities. For example, the rate earned on a residential mortgage may be fixed for 30 years; the rate paid on a certificate of deposit may be fixed
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only for a few months. Due to these timing differences, net interest income is sensitive to changes in the level and shape of the yield curve. Second, there are differences in the drivers of rate changes of various assets and liabilities. For example, commercial loans may reprice based on one-month LIBOR or prime; the rate paid on retail money market demand accounts may be only loosely correlated with LIBOR and depend on competitive demand for funds. Due to these basis differences, net interest income is sensitive to changes in spreads between certain indices or repricing rates.
Another important source of structural interest rate risk relates to the potential exercise of explicit or embedded options. For example, most consumer loans can be prepaid without penalty; and most consumer deposits can be withdrawn without penalty. The exercise of such options by customers can exacerbate the timing differences discussed above.
A primary source of our structural interest rate risk relates to faster repricing of floating rate loans relative to the retail deposit funding. This source of asset sensitivity is concentrated at the short end of the yield curve. Given the very low level of short-term interest rates, this risk is asymmetrical with significantly more upside benefit than potential exposure. The secondary source of our interest rate risk is driven by longer term rates comprising the rollover or reinvestment risk on fixed rate loans as well as the prepayment risk on mortgage related loans and securities funded by non-rate sensitive deposits and equity.
The primary goal of interest rate risk management is to control exposure to interest rate risk within policy limits approved by the Board. These limits and guidelines reflect our tolerance for interest rate risk over both short-term and long-term horizons. To ensure that exposure to interest rate risk is managed within this risk appetite, we must both measure the exposure and, as necessary, hedge it. The Treasury Asset and Liability Management team is responsible for measuring, monitoring and reporting on the structural interest rate risk position. These exposures are reported on a monthly basis to the Asset and Liability Committee and at Board meetings.
We measure structural interest rate risk through a variety of metrics intended to quantify both short-term and long-term exposures. The primary method that we use to quantify interest rate risk is simulation analysis in which we model net interest income from assets, liabilities and hedge derivative positions under various interest rate scenarios over a three-year horizon. Exposure to interest rate risk is reflected in the variation of forecasted net interest income across scenarios.
Key assumptions in this simulation analysis relate to the behavior of interest rates and spreads, the changes in product balances and the behavior of loan and deposit clients in different rate environments. The most material of these behavioral assumptions relate to the repricing characteristics and balance fluctuations of deposits with indeterminate (i.e., non-contractual) maturities as well as the pace of mortgage prepayments.
As the future path of interest rates cannot be known in advance, we use simulation analysis to project net interest income under various interest rate scenarios including a most likely (implied forward) scenario as well as a variety of deliberately extreme and perhaps unlikely scenarios. These scenarios may assume gradual ramping of the overall level of interest rates, immediate shocks to the level of rates and various yield curve twists in which movements in short- or long-term rates predominate. Generally, projected net interest income in any interest rate scenarios is compared to net interest income in a base case where market forward rates are realized.
The table below reports net interest income exposures against a variety of interest rate scenarios. Exposures are measured as a percentage change in net interest income over the next year due to either instantaneous, or gradual parallel +/- 200 basis point moves in benchmark interest rates. The net interest income simulation analyses do not include possible future actions that management might
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undertake to mitigate this risk. The current limit is an adverse change of 10% related to an instantaneous +/- 200 basis point move. As the table illustrates, our balance sheet is asset-sensitive: net interest income would benefit from an increase in interest rates. Exposure to a decline in interest rates is well within limit. It should be noted that the magnitude of any possible decline in interest rates is constrained by the low absolute starting levels of rates. While an instantaneous and severe shift in interest rates was used in this analysis, we believe that any actual shift in interest rates would likely be more gradual and would therefore have a more modest impact.
The table below summarizes our positioning in various parallel yield curve shifts:
Basis points
Estimated % Change in
Net Interest Income over 12 Months |
||||||||||||
Tolerance
Level |
June 30,
2014 |
December 31,
2013 |
||||||||||
Instantaneous Change in Interest Rates |
||||||||||||
+200 |
(10 | )% | 13.4 | % | 16.1 | % | ||||||
+100 |
6.8 | % | 8.0 | % | ||||||||
-100 |
(2.7 | )% | (3.7 | )% | ||||||||
-200 |
(10 | )% | (3.4 | )% | (5.7 | )% | ||||||
Gradual Change in Interest Rates |
||||||||||||
+200 |
6.6 | % | 6.8 | % | ||||||||
+100 |
3.2 | % | 3.2 | % | ||||||||
-100 |
(1.4 | )% | (2.0 | )% | ||||||||
-200 |
(2.1 | )% | (3.0 | )% |
As part of the routine risk management process, a wide variety of similar analyses are reported for each of the next three rolling years.
As recommended by bank regulators, CBPA also uses a valuation measure of exposure to structural interest rate risk, Economic Value of Equity, as a supplement to net interest income simulations. Nevertheless, multi-year net interest income simulation is the main tool for managing structural interest rate risk.
As noted, the balance sheet is asset-sensitive, positioned to benefit from an increase in interest rates. The magnitude of this asset-sensitivity has been reduced from more elevated levels at the end of 2012. At that time, the extremely low levels of medium- to long-term interest rates presented a poor risk-to-reward trade-off for transaction that would add asset duration. As a result, the investment portfolio was reduced in size, increasing asset-sensitivity. Subsequently, intermediate- and long-term interest rates have risen and we resumed portfolio investment, moderating the aggregate asset-sensitivity of the balance sheet.
We also had market risk associated with the value of the mortgage servicing right assets, which are impacted by the level of interest rates. As of June 30, 2014 and December 31, 2013, our mortgage servicing rights had a book value of $175 million and $185 million, respectively, and were carried at the lower of cost or fair value. As of June 30, 2014, and December 31, 2013, the fair value of the mortgage servicing rights was $186 million and $195 million, respectively. Given low interest rates over recent years, there is a valuation allowance of $20 million and $23 million on the asset as of June 30, 2014 and December 31, 2013, respectively. Depending on the interest rate environment, hedges may be used to stabilize the fair value of the mortgage servicing right asset.
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Trading Risk
We are exposed to market risk primarily through client facilitation activities including derivatives and foreign exchange products. Exposure is created as a result of the implied volatility and spreads of a select range of interest rates and foreign exchange rates. These trading activities are conducted through our two banking subsidiaries, CBNA and CBPA.
Client facilitation activities consist primarily of interest rate derivatives and foreign exchange contracts where we enter into offsetting trades with a separate counterparty or exchange to manage our exposure to the customer. Historically, the majority of these offsetting trades have been with the RBS Group. We will occasionally execute hedges against the spread that exists across the client facing trade and its offset in the market to maintain a low risk profile. We do not engage in any proprietary trading to benefit from price differences between financial instruments and markets.
We record interest rate derivatives and foreign exchange contracts as derivative assets and liabilities on our consolidated balance sheets. Trading assets and liabilities are carried at fair value with income earned related to these activities included in net interest income. Changes in fair value of trading assets and liabilities are reflected in other net gains (losses), a component of noninterest income on the consolidated statements of operations.
Market Risk Governance. Our market risk function currently leverages the subject matter expertise within the RBS Group to ensure appropriate controls are in place to manage market risk. As part of our separation from the RBS Group, we intend to enter into a Transitional Services Agreement pursuant to which RBS Securities Inc. will continue to provide us with all necessary Value-at-Risk (VaR) and other risk measurements required for regulatory reporting related to derivative and foreign exchange contract trading activities, as well as internal market risk reporting and general consultative services related to our market risk framework until the dates specified in the Transitional Services Agreement. During the terms of the relevant services under the Transitional Services Agreement, we intend to build out our own market risk organization and framework in order to gradually migrate away from reliance on services provided by the RBS Group. As part of this process, we hired a new head of market risk management to begin building out our stand-alone capabilities with respect to market risk management.
Given the low level of market risk and substantial market risk expertise at our parent, we have received the support of our U.S. banking regulators for relying on the RBS Groups market risk expertise. In managing our market risk, dealing authorities represent a key control in the management of market risk by setting the scope within which the business is permitted to operate. Dealing authorities are established jointly by designated senior business line and senior risk manager, and are reviewed at least annually. Dealing authorities are structured to accommodate the client facing trades, market offset trades and sets of hedges needed to maintain a low risk profile. Primary responsibility for keeping within established tolerances resides with the business. Key risk indicators, including a combined VaR for interest rate and foreign exchange rate risk, are monitored on a daily basis and reported against tolerances consistent with our risk appetite and business strategy to relevant business line management and risk counterparts.
Market Risk Measurement. We use VaR metrics, complemented with sensitivity analysis and stress testing in measuring market risk. During the term of the Transitional Services Agreement, we will continue to leverage the RBS Group market risk measurement models, which are described further below, that capture correlation effects and allow for aggregation of market risk across risk types, business lines and legal entities. We measure and monitor market risk for both management and regulatory capital purposes.
Value-at-Risk Overview. The RBS Groups market risk measurement model is based on historical simulation. The VaR measure estimates the extent of any fair value losses on trading positions that
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may occur due to broad market movements (General VaR) such as changes in the level of interest rates, foreign exchange rates, equity prices and commodity prices. It is calculated on the basis that current positions remain broadly unaltered over the course of a given holding period. It is assumed that markets are sufficiently liquid to allow the business to close its positions, if required, within this holding period. VaRs benefit is that it captures the historic correlations of a portfolio. Based on the composition of our covered positions, we do not calculate a Specific Risk VaR measure which estimates the extent of any losses that may occur from factors other than broad market movements. The RBS Groups General VaR approach is expressed in terms of a confidence level over the past 500 trading days. The internal VaR measure (used as the basis of the main VaR trading limits) is a 99% confidence level with a one day holding period, meaning that a loss greater than the VaR is expected to occur, on average, on only one day in 100 trading days (i.e., 1% of the time). Theoretically, there should be a loss event greater than VaR two to three times per year. The regulatory measure of VaR is done at a 99% confidence level with a 10-day holding period. The historical market data applied to calculate the VaR is updated on a 10 business day lag. Refer to Market Risk Regulatory Capital below for details of our 10-day VAR metrics for the quarters ended June 30, 2014, March 31, 2014 and December 31, 2013, including high, low, average and period end VaR for interest rate and foreign exchange rate risks, as well as total VaR. We began measuring the high, low, and average VaR for interest rate and foreign exchange currency rate risk during the fourth quarter of 2013, in conjunction with incorporating trade-level detail for foreign exchange risk in our market risk measurement models. Prior to that time, VaR for foreign exchange exposure was calculated using a manual process that did not capture potential interest rate risk from any forward transactions.
Market Risk Regulatory Capital. Effective January 1, 2013, the U.S. banking regulators adopted Risk-Based Capital Guidelines: Market Risk as the regulations covering the calculation of market risk capital (the Market Risk Rule). The Market Risk Rule, commonly known as Basel 2.5, substantially modified the determination of market risk-weighted assets and implemented a more risk sensitive methodology for the risk inherent in certain trading positions categorized as covered positions. For the purposes of the market risk rule, all of our client facing trades, market offset trades and sets of hedges needed to maintain a low risk profile qualify as covered positions. The internal VaR measure is calculated based on the same population of trades that is utilized for regulatory VaR. The following table shows the results of our modeled measures for regulatory capital calculations:
For the Quarter Ended June 30, 2014 | ||||||||||||||||
Market Risk Category |
Period End | Average | High | Low | ||||||||||||
(in millions) | ||||||||||||||||
Interest Rate |
$ | | $ | | $ | 1 | $ | | ||||||||
Foreign Exchange Currency Rate |
| | 1 | | ||||||||||||
Diversification Benefit |
| | NM | (1) | NM | (1) | ||||||||||
|
|
|
|
|||||||||||||
General VaR |
| | 1 | | ||||||||||||
Specific Risk VaR |
| | | | ||||||||||||
|
|
|
|
|||||||||||||
Total VaR |
$ | | $ | | $ | 1 | $ | | ||||||||
|
|
|
|
|||||||||||||
Stressed General VaR |
$ | | $ | | $ | 4 | $ | 2 | ||||||||
Stressed Specific Risk VaR |
| | | | ||||||||||||
|
|
|
|
|||||||||||||
Total Stressed VaR |
$ | 2 | $ | 2 | $ | 4 | $ | 2 | ||||||||
|
|
|
|
|||||||||||||
CFG Market Risk Regulatory Capital |
$ | 9 | ||||||||||||||
CFG Market Risk-Weighted Assets |
$ | 113 |
(1) | The high and low for the portfolio may have occurred on different trading days than the high and low for the components. Therefore, there is no diversification benefit shown for the high and low columns. |
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For the Quarter Ended March 31, 2014 | ||||||||||||||||
Market Risk Category |
Period End | Average | High | Low | ||||||||||||
(in millions) | ||||||||||||||||
Interest Rate |
$ | | $ | | $ | 1 | $ | | ||||||||
Foreign Exchange Currency Rate |
| | 1 | | ||||||||||||
Diversification Benefit |
| | NM | (1) | NM | (1) | ||||||||||
|
|
|
|
|||||||||||||
General VaR |
| | 2 | | ||||||||||||
Specific Risk VaR |
| | | | ||||||||||||
|
|
|
|
|||||||||||||
Total VaR |
$ | | $ | | $ | 2 | $ | | ||||||||
|
|
|
|
|||||||||||||
Stressed General VaR |
$ | 2 | $ | 2 | $ | 7 | $ | | ||||||||
Stressed Specific Risk VaR |
| | | | ||||||||||||
|
|
|
|
|||||||||||||
Total Stressed VaR |
$ | 2 | $ | 2 | $ | 7 | $ | | ||||||||
|
|
|
|
|||||||||||||
CFG Market Risk Regulatory Capital |
$ | 9 | ||||||||||||||
CFG Market Risk-Weighted Assets |
$ | 111 |
(1) | The high and low for the portfolio may have occurred on different trading days than the high and low for the components. Therefore, there is no diversification benefit shown for the high and low columns. |
For the Quarter Ended December 31, 2013 | ||||||||||||||||
Market Risk Category |
Period End | Average | High | Low | ||||||||||||
(in millions) | ||||||||||||||||
Interest Rate |
$ | 1 | $ | | $ | 1 | $ | | ||||||||
Foreign Exchange Currency Rate |
| 1 | 3 | | ||||||||||||
Diversification Benefit |
| | NM | (1) | NM | (1) | ||||||||||
|
|
|
|
|||||||||||||
General VaR |
1 | 1 | 3 | | ||||||||||||
Specific Risk VaR |
| | | | ||||||||||||
|
|
|
|
|||||||||||||
Total VaR |
$ | 1 | $ | 1 | $ | 3 | $ | | ||||||||
|
|
|
|
|||||||||||||
Stressed General VaR |
$ | 2 | $ | 3 | $ | 7 | $ | | ||||||||
Stressed Specific Risk VaR |
| | | | ||||||||||||
|
|
|
|
|||||||||||||
Total Stressed VaR |
$ | 2 | $ | 3 | $ | 7 | $ | | ||||||||
|
|
|
|
|||||||||||||
CFG Market Risk Regulatory Capital |
$ | 12 | ||||||||||||||
CFG Market Risk-Weighted Assets |
$ | 146 |
(1) | The high and low for the portfolio may have occurred on different trading days than the high and low for the components. Therefore, there is no diversification benefit shown for the high and low columns. |
Stress VaR (SVaR). Stress VaR is an extension of VaR, but uses a longer historical look back horizon that is fixed from January 1, 2005. This is done not only to identify headline risks from more volatile periods, but also to provide a counter balance to VaR which may be low during periods of low volatility. The holding period for profit and loss determination is 10 days. SVaR is also a component of market risk regulatory capital. SVaR for us is calculated under its own dynamic window regime as compared to the RBS Groups static SVaR window. In a dynamic window regime, values of the 10-day, 99% VaR are calculated over all possible 260-day periods that can be obtained from the complete historical data set. Refer to Market Risk Regulatory Capital above for details of SVaR metrics, including high, low, average and period end SVaR for the combined portfolio. We began measuring the high, low, and average SVaR for our combined portfolio during the fourth quarter of 2013 in conjunction with the incorporation of trade-level detail for foreign exchange risk, in our market risk measurement models. Prior to that time, our SVaR measure did not include foreign exchange risk given low levels of materiality.
Sensitivity Analysis. Sensitivity analysis is the measure of exposure to a single risk factor, such as a one basis point change in rates or credit spread. We conduct and monitor sensitivity on interest
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rates, basis spreads, foreign exchange exposures and option prices. Whereas VaR is based on previous moves in market risk factors over recent periods, it may not be an accurate predictor of future market moves. Sensitivity analysis complements VaR as it provides an indication of risk relative to each factor irrespective of historical market moves and is an effective tool in evaluating the appropriateness of hedging strategies.
Stress Testing. Conducting a stress test of a portfolio consists of running risk models with the inclusion of key variables that simulate various historical or hypothetical scenarios. For historical stress tests, profit and loss results are simulated for selected time periods corresponding to the most volatile underlying returns while hypothetical stress tests aim to consider concentration risk, illiquidity under stressed market conditions and risk arising from the banks trading activities that may not be fully captured by its other models. Hypothetical scenarios also assume that the market moves happen simultaneously and that no repositioning or hedging activity takes place to mitigate losses as events unfold. We generate stress tests of our trading positions on a regular basis. For example, we currently include a stress test that simulates a Lehman Crisis scenario by taking the worst, 10-day peak to trough moves for the various risk factors that go into VaR from that period, and assuming they occurred simultaneously.
VaR Model Review and Validation. Market risk measurement models used within the RBS Group, including VaR models, are subject to ongoing and independent review and validation that focuses on the model methodology. Independent review of market risk measurement models is the responsibility of RBS Group Risk Analytics (GRA). Aspects covered include challenging the assumptions used, the quantitative techniques employed and the theoretical justification underpinning them, and an assessment of the soundness of the required data over time. Where possible, the quantitative impact of the major underlying modeling assumptions will be estimated (e.g., through developing alternative models). Results of such reviews are shared with U.S. regulators. For the terms of the relevant services under the Transitional Services Agreement, we and the RBS Group expect to utilize the same independently validated VaR model for both management and regulatory reporting purposes. The RBS Group market risk teams, including those providing consultative services to us under the Transitional Services Agreement, will conduct internal validation before a new or changed model element is implemented and before a change is made to a market data mapping. For example, the RBS Group market risk teams also perform regular reviews of key risk factors that are used in the market risk measurement models to produce profit and loss vectors used in the VaR calculations. These internal validations are subject to independent re-validation by GRA and, depending on the results of the impact assessment, notification to the appropriate regulatory authorities for the RBS Group and us may be required.
VaR Backtesting. Backtesting is one form of validation of the VaR model. The Market Risk Rule requires a comparison of our internal VaR measure to the actual net trading revenue (excluding fees, commissions, reserves, intra-day trading and net interest income) for each day over the preceding year (the most recent 250 business days). Any observed loss in excess of the VaR number is taken as an exception. The level of exceptions determines the multiplication factor used to derive the VaR and SVaR-based capital requirement for regulatory reporting purposes. We perform sub-portfolio backtesting as required under the Market Risk Rule, and as approved by its U.S. banking regulators, for interest rate and foreign exchange positions. The following table shows our daily net trading revenue and total internal VaR for the quarters ending June 30, 2014 and March 31, 2014. Prior to this time, we did not perform our own portfolio specific backtesting, relying instead on the RBS Groups backtesting results. Until such time as we can accumulate a full 250 business days of backtesting results, we continue to utilize a multiplication factor derived from the RBS Groups backtesting results, as agreed with our banking regulators.
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Daily VaR Backtesting: Sub-portfolio Level Backtesting.
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SELECTED STATISTICAL INFORMATION
The accompanying supplemental information should be read in conjunction with the sections of this prospectus entitled Summary Consolidated Financial and Other Data, Selected Consolidated Financial Data and Managements Discussion and Analysis of Financial Condition and Results of Operations and our unaudited interim and audited consolidated financial statements and related notes included elsewhere in this prospectus.
Distribution of Assets, Liabilities and Stockholders Equity; Interest Rates and Interest Differential
The following table provides a summary of our consolidated average balances including major categories of interest-earning assets and interest-bearing liabilities:
Six Months Ended June 30, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | |||||||||||||||||||||||||||||||||||||||||||||
Average
Balances |
Income/
Expense |
Yields/
Rates |
Average
Balances |
Income/
Expense |
Yields/
Rates |
Average
Balances |
Income/
Expense |
Yields/
Rates |
Average
Balances |
Income/
Expense |
Yields/
Rates |
|||||||||||||||||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing cash and due from banks and deposits in banks |
$ | 1,991 | $ | 2 | 0.23 | % | $ | 2,278 | $ | 11 | 0.46 | % | $ | 1,562 | $ | 7 | 0.46 | % | $ | 2,016 | $ | 7 | 0.36 | % | ||||||||||||||||||||||||
Taxable investment securities |
23,980 | 303 | 2.53 | 19,062 | 477 | 2.50 | 22,030 | 615 | 2.79 | 22,698 | 748 | 3.30 | ||||||||||||||||||||||||||||||||||||
Non-taxable investment securities |
11 | | 2.60 | 12 | | 2.66 | 40 | 2 | 4.32 | 49 | 2 | 4.37 | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||
Total investment securities |
23,991 | 303 | 2.53 | 19,074 | 477 | 2.50 | 22,070 | 617 | 2.79 | 22,747 | 750 | 3.30 | ||||||||||||||||||||||||||||||||||||
Commercial |
29,402 | 447 | 3.03 | 28,654 | 900 | 3.10 | 27,273 | 849 | 3.07 | 23,886 | 779 | 3.22 | ||||||||||||||||||||||||||||||||||||
Commercial real estate |
6,991 | 89 | 2.53 | 6,568 | 178 | 2.67 | 7,063 | 196 | 2.72 | 8,310 | 237 | 2.82 | ||||||||||||||||||||||||||||||||||||
Leases |
3,720 | 52 | 2.79 | 3,463 | 105 | 3.05 | 3,216 | 112 | 3.48 | 2,952 | 113 | 3.83 | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||
Total commercial |
40,113 | 588 | 2.92 | 38,685 | 1,183 | 3.02 | 37,552 | 1,157 | 3.04 | 35,148 | 1,129 | 3.18 | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||
Home equity lines of credit |
16,216 | 229 | 2.85 | 17,105 | 485 | 2.83 | 17,745 | 497 | 2.80 | 17,172 | 472 | 2.75 | ||||||||||||||||||||||||||||||||||||
Residential mortgage |
10,125 | 204 | 4.03 | 9,104 | 360 | 3.96 | 9,551 | 413 | 4.32 | 9,721 | 453 | 4.66 | ||||||||||||||||||||||||||||||||||||
Home equity loans |
5,543 | 156 | 5.69 | 6,330 | 361 | 5.71 | 8,176 | 481 | 5.88 | 10,575 | 627 | 5.93 | ||||||||||||||||||||||||||||||||||||
Automobile |
10,087 | 126 | 2.51 | 8,857 | 235 | 2.65 | 8,276 | 273 | 3.30 | 7,541 | 339 | 4.50 | ||||||||||||||||||||||||||||||||||||
Student and other installment loans |
3,482 | 96 | 5.52 | 3,655 | 202 | 5.52 | 4,040 | 218 | 5.38 | 4,863 | 259 | 5.32 | ||||||||||||||||||||||||||||||||||||
Credit cards |
1,639 | 82 | 10.13 | 1,669 | 175 | 10.46 | 1,634 | 166 | 10.15 | 1,580 | 155 | 9.79 | ||||||||||||||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||
Total retail |
47,092 | 893 | 3.82 | 46,720 | 1,818 | 3.89 | 49,422 | 2,048 | 4.14 | 51,452 | 2,305 | 4.48 | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||
Total loans and leases (1) |
87,205 | 1,481 | 3.40 | 85,405 | 3,001 | 3.50 | 86,974 | 3,205 | 3.67 | 86,600 | 3,434 | 3.95 | ||||||||||||||||||||||||||||||||||||
Loans held for sale |
133 | 2 | 3.35 | 392 | 12 | 3.07 | 538 | 17 | 3.10 | 359 | 13 | 3.70 | ||||||||||||||||||||||||||||||||||||
Other Loans held for sale |
1,062 | 22 | 4.06 | | | | | | | | | | ||||||||||||||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||
Interest-earning assets |
114,382 | 1,810 | 3.17 | 107,149 | 3,501 | 3.25 | 111,144 | 3,846 | 3.45 | 111,722 | 4,204 | 3.75 | ||||||||||||||||||||||||||||||||||||
Allowance for loan and lease losses |
(1,262 | ) | (1,219 | ) | (1,506 | ) | (1,888 | ) | ||||||||||||||||||||||||||||||||||||||||
Goodwill |
6,876 | 9,063 | 11,311 | 11,311 | ||||||||||||||||||||||||||||||||||||||||||||
Other noninterest-earning assets |
5,539 | 5,873 | 6,717 | 7,199 | ||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||
Total noninterest-earning assets |
11,153 | 13,717 | 16,522 | 16,622 | ||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||
Total assets |
$ | 125,535 | $ | 120,866 | $ | 127,666 | $ | 128,344 | ||||||||||||||||||||||||||||||||||||||||
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|
169
Six Months Ended June 30, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | |||||||||||||||||||||||||||||||||||||||||||||
Average
Balances |
Income/
Expense |
Yields/
Rates |
Average
Balances |
Income/
Expense |
Yields/
Rates |
Average
Balances |
Income/
Expense |
Yields/
Rates |
Average
Balances |
Income/
Expense |
Yields/
Rates |
|||||||||||||||||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||
Liabilities and Stockholders Equity |
||||||||||||||||||||||||||||||||||||||||||||||||
Checking with interest |
$ | 13,562 | $ | 4 | 0.06 | % | $ | 14,096 | $ | 8 | 0.06 | % | $ | 13,522 | $ | 10 | 0.08 | % | $ | 16,116 | $ | 15 | 0.10 | % | ||||||||||||||||||||||||
Money market & savings |
38,667 | 33 | 0.17 | 42,575 | 105 | 0.25 | 41,249 | 121 | 0.29 | 37,638 | 94 | 0.25 | ||||||||||||||||||||||||||||||||||||
Term deposits |
9,376 | 30 | 0.64 | 11,266 | 103 | 0.91 | 13,534 | 244 | 1.80 | 16,501 | 381 | 2.31 | ||||||||||||||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||
Total interest-bearing deposits |
61,605 | 67 | 0.22 | 67,937 | 216 | 0.32 | 68,305 | 375 | 0.55 | 70,255 | 490 | 0.70 | ||||||||||||||||||||||||||||||||||||
Interest-bearing deposits held for sale |
3,953 | 4 | 0.22 | | | | | | | | | | ||||||||||||||||||||||||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase (2) |
5,708 | 16 | 0.55 | 2,400 | 192 | 7.89 | 2,716 | 119 | 4.31 | 3,808 | 191 | 4.96 | ||||||||||||||||||||||||||||||||||||
Short-term borrowed funds |
4,838 | 49 | 2.03 | 251 | 4 | 1.64 | 3,026 | 101 | 3.27 | 2,459 | 150 | 6.04 | ||||||||||||||||||||||||||||||||||||
Long-term borrowed funds |
1,412 | 33 | 4.60 | 778 | 31 | 3.93 | 1,976 | 24 | 1.20 | 5,085 | 53 | 1.02 | ||||||||||||||||||||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||
Total borrowed funds |
11,958 | 98 | 1.63 | 3,429 | 227 | 6.53 | 7,718 | 244 | 3.11 | 11,352 | 394 | 3.42 | ||||||||||||||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||
Total interest-bearing liabilities |
77,516 | 169 | 0.43 | 71,366 | 443 | 0.61 | 76,023 | 619 | 0.80 | 81,607 | 884 | 1.07 | ||||||||||||||||||||||||||||||||||||
Demand deposits |
25,393 | 25,399 | 25,053 | 21,191 | ||||||||||||||||||||||||||||||||||||||||||||
Demand deposits held for sale |
932 | | | | ||||||||||||||||||||||||||||||||||||||||||||
Other liabilities |
2,205 | 2,267 | 2,652 | 2,409 | ||||||||||||||||||||||||||||||||||||||||||||
Stockholders equity |
19,489 | 21,834 | 23,938 | 23,137 | ||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||
Total liabilities and stockholders equity |
$ | 125,535 | $ | 120,866 | $ | 127,666 | $ | 128,344 | ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||
Interest rate spread |
2.74 | 2.64 | 2.65 | 2.68 | ||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||
Net interest income |
$ | 1,641 | $ | 3,058 | $ | 3,227 | $ | 3,320 | ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||
Net interest margin |
2.88 | % | 2.85 | % | 2.89 | % | 2.97 | % |
(1) | Interest income and rates on loans include loan fees. Additionally, average nonaccrual loans were included in the average loan balances used to determine the average yield on loans in amounts of $1.3 billion, $1.6 billion, $1.7 billion and $1.9 billion at June 30, 2014, December 31, 2013, 2012 and 2011, respectively. |
(2) | Balances are net of certain short-term receivables associated with reverse repurchase agreements. Interest expense includes the full cost of the repurchase agreements and certain hedging costs. The yield on Federal funds purchased is elevated due to the impact from pay-fixed interest rate swaps that are scheduled to runoff by the end of 2016. See Managements Discussion and Analysis of Financial Condition and Results of OperationsAnalysis of Financial ConditionJune 30, 2014 Compared with December 31, 2013Derivatives and Managements Discussion and Analysis of Financial Condition and Results of OperationsAnalysis of Financial ConditionDecember 31, 2013 Compared with December 31, 2012Derivatives for further information. |
170
Change in Net Interest IncomeVolume and Rate Analysis
The following table presents the amount of changes in interest income and interest expense due to changes in both average volume and average rate. Average volume and rate changes have been allocated between the average rate and average volume variances on a consistent basis based upon the respective percentage changes in average balances and average rates.
June 30, 2014 versus June 30, 2013 | 2013 Versus 2012 | 2012 Versus 2011 | ||||||||||||||||||||||||||||||||||
Average
Volume |
Average
Rate |
Net
Change |
Average
Volume |
Average
Rate |
Net
Change |
Average
Volume |
Average
Rate |
Net
Change |
||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||||
Interest Income |
||||||||||||||||||||||||||||||||||||
Interest-bearing cash and due from banks and deposits in banks |
$ | (2 | ) | $ | (3 | ) | $ | (5 | ) | $ | (4 | ) | $ | | $ | 4 | $ | (2 | ) | $ | 2 | $ | | |||||||||||||
Taxable investment securities |
75 | | 75 | (83 | ) | (55 | ) | (138 | ) | (22 | ) | (111 | ) | (133 | ) | |||||||||||||||||||||
Non-taxable investment securities |
| | | (2 | ) | | (2 | ) | | | | |||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|||||||||||||||||||
Total investment securities |
75 | 1 | 75 | (85 | ) | (55 | ) | (140 | ) | (22 | ) | (111 | ) | (133 | ) | |||||||||||||||||||||
Commercial |
14 | (9 | ) | 5 | 43 | 8 | 51 | 111 | (41 | ) | 70 | |||||||||||||||||||||||||
Commercial real estate |
7 | (7 | ) | | (14 | ) | (4 | ) | (18 | ) | (36 | ) | (5 | ) | (41 | ) | ||||||||||||||||||||
Leases |
6 | (7 | ) | (1 | ) | 9 | (16 | ) | (7 | ) | 10 | (11 | ) | (1 | ) | |||||||||||||||||||||
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|
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|
|
|
|
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|
|
|
|
|
|
|
|||||||||||||||||||
Total commercial |
27 | (23 | ) | 4 | 38 | (12 | ) | 26 | 85 | (57 | ) | 28 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Home equity lines of credit |
(16 | ) | 2 | (14 | ) | (18 | ) | 6 | (12 | ) | 16 | 9 | 25 | |||||||||||||||||||||||
Residential mortgage |
21 | | 21 | (19 | ) | (34 | ) | (53 | ) | (8 | ) | (32 | ) | (40 | ) | |||||||||||||||||||||
Home equity loans |
(33 | ) | (2 | ) | (35 | ) | (108 | ) | (12 | ) | (120 | ) | (142 | ) | (4 | ) | (146 | ) | ||||||||||||||||||
Automobile |
14 | (8 | ) | 6 | 19 | (57 | ) | (38 | ) | 33 | (99 | ) | (66 | ) | ||||||||||||||||||||||
Student and other installment loans |
(10 | ) | 4 | (6 | ) | (26 | ) | 10 | (16 | ) | (52 | ) | 11 | (41 | ) | |||||||||||||||||||||
Credit cards |
(1 | ) | (4 | ) | (5 | ) | 3 | 6 | 9 | 5 | 6 | 11 | ||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total retail |
(25 | ) | (8 | ) | (33 | ) | (149 | ) | (81 | ) | (230 | ) | (148 | ) | (109 | ) | (257 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total loans and leases |
2 | (31 | ) | (29 | ) | (111 | ) | (93 | ) | (204 | ) | (63 | ) | (166 | ) | (229 | ) | |||||||||||||||||||
Loans held for sale |
(5 | ) | 22 | 17 | (5 | ) | | (5 | ) | 7 | (3 | ) | 4 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total interest income |
$ | 70 | $ | (12 | ) | $ | 58 | $ | (197 | ) | $ | (148 | ) | $ | (345 | ) | $ | (80 | ) | $ | (278 | ) | $ | (358 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Interest Expense |
||||||||||||||||||||||||||||||||||||
Checking with interest |
$ | | $ | | $ | | $ | | $ | (2 | ) | $ | (2 | ) | $ | (2 | ) | $ | (3 | ) | $ | (5 | ) | |||||||||||||
Money market & savings |
(6 | ) | (22 | ) | (28 | ) | 4 | (20 | ) | (16 | ) | 9 | 18 | 27 | ||||||||||||||||||||||
Term deposits |
(11 | ) | (11 | ) | (22 | ) | (41 | ) | (100 | ) | (141 | ) | (68 | ) | (69 | ) | (137 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total interest-bearing deposits |
(17 | ) | (33 | ) | (50 | ) | (37 | ) | (122 | ) | (159 | ) | (61 | ) | (54 | ) | (115 | ) | ||||||||||||||||||
Interest-bearing deposits held for sale |
| 4 | 4 | | | | | | | |||||||||||||||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
226 | (325 | ) | (99 | ) | (14 | ) | 87 | 73 | (55 | ) | (17 | ) | (72 | ) | |||||||||||||||||||||
Other short-term borrowed funds |
14 | 34 | 48 | (92 | ) | (5 | ) | (97 | ) | 35 | (84 | ) | (49 | ) | ||||||||||||||||||||||
Long-term borrowed funds |
13 | 10 | 23 | (15 | ) | 22 | 7 | (32 | ) | 3 | (29 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total borrowed funds |
253 | (281 | ) | (28 | ) | (121 | ) | 104 | (17 | ) | (52 | ) | (98 | ) | (150 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total interest expense |
236 | (310 | ) | (74 | ) | (158 | ) | (18 | ) | (176 | ) | (113 | ) | (152 | ) | (265 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Net interest income |
$ | (166 | ) | $ | 298 | $ | 132 | $ | (39 | ) | $ | (130 | ) | $ | (169 | ) | $ | 33 | $ | (126 | ) | $ | (93 | ) | ||||||||||||
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|
|
|
|
171
Investment Portfolio
The following table presents the book value of the major components of our investments portfolio. See Note 2 Securities to our unaudited interim consolidated financial statements and Note 3 Securities to our audited consolidated financial statements included elsewhere in this prospectus for further discussion.
June 30, | December 31, | |||||||||||||||
2014 | 2013 | 2012 | 2011 | |||||||||||||
(in millions) | ||||||||||||||||
Securities Available for Sale: |
||||||||||||||||
U.S. Treasury |
$ | 15 | $ | 15 | $ | 15 | $ | 15 | ||||||||
State and political subdivisions |
10 | 10 | 21 | 90 | ||||||||||||
Other bonds, notes and debentures |
| | | 1 | ||||||||||||
Mortgage-backed securities: |
||||||||||||||||
Federal agencies and U.S. government sponsored entities |
17,585 | 14,993 | 16,904 | 20,129 | ||||||||||||
Other/non-agency |
858 | 952 | 1,397 | 1,893 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total mortgage-backed securities |
18,443 | 15,945 | 18,301 | 22,022 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total debt securities available for sale |
18,468 | 15,970 | 18,337 | 22,128 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Marketable equity securities |
13 | 13 | 7 | 10 | ||||||||||||
Other equity securities |
12 | 12 | 12 | 12 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total equity securities available for sale |
25 | 25 | 19 | 22 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total securities available for sale |
$ | 18,493 | $ | 15,995 | $ | 18,356 | $ | 22,150 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Securities Held to Maturity: |
||||||||||||||||
Mortgage-backed securities: |
||||||||||||||||
Federal Agencies and U.S. government sponsored entities |
$ | 3,897 | $ | 2,940 | $ | | $ | | ||||||||
Other/non-agency |
1,485 | 1,375 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total securities held to maturity |
$ | 5,382 | $ | 4,315 | $ | | $ | | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Other Investment Securities: |
||||||||||||||||
Federal Reserve Bank stock |
$ | 470 | $ | 462 | $ | 490 | $ | 490 | ||||||||
Federal Home Loan Bank stock |
472 | 468 | 565 | 655 | ||||||||||||
Venture capital and other investments |
6 | 5 | 6 | 57 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other investment securities |
$ | 948 | $ | 935 | $ | 1,061 | $ | 1,202 | ||||||||
|
|
|
|
|
|
|
|
172
The following table presents an analysis of the amortized cost, remaining contractual maturities, and weighted-average yields by contractual maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Distribution of Maturities | ||||||||||||||||||||||||||||||||||||||||
As of June 30, 2014 | As of December 31, 2013 | |||||||||||||||||||||||||||||||||||||||
Due in 1 Year
or Less |
Due After 1
Through 5 Years |
Due After 5
Through 10 Years |
Due After
10 Years |
Total |
Due in 1 Year
or Less |
Due After 1
Through 5 Years |
Due After 5
Through 10 Years |
Due After
10 Years |
Total | |||||||||||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||||||||||||||
Amortized Cost: |
||||||||||||||||||||||||||||||||||||||||
Debt securities Available for Sale: |
||||||||||||||||||||||||||||||||||||||||
U.S. Treasury |
$ | 15 | $ | | $ | | $ | | $ | 15 | $ | 15 | $ | | $ | | $ | | $ | 15 | ||||||||||||||||||||
State and political subdivisions |
| | | 10 | 10 | | | | 11 | 11 | ||||||||||||||||||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||||||||||||||||||||||
Federal agencies and U.S. government sponsored entities |
3 | 35 | 2,603 | 14,702 | 17,343 | | 39 | 2,865 | 12,066 | 14,970 | ||||||||||||||||||||||||||||||
Other/non-agency |
| 61 | 76 | 750 | 887 | | 43 | 120 | 829 | 992 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total debt securities available for sale |
18 | 96 | 2,679 | 15,462 | 18,255 | 15 | 82 | 2,985 | 12,906 | 15,988 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Debt Securities Held to Maturity: |
||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||||||||||||||||||||||
Federal agencies and U.S. government sponsored entities |
| | | 3,897 | 3,897 | | | | 2,940 | 2,940 | ||||||||||||||||||||||||||||||
Other/non-agency |
| | | 1,485 | 1,485 | | | | 1,375 | 1,375 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total debt securities held to maturity |
| | | 5,382 | 5,382 | | | | 4,315 | 4,315 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total amortized cost of debt securities (1) |
$ | 18 | $ | 96 | $ | 2,679 | $ | 20,844 | $ | 23,637 | $ | 15 | $ | 82 | $ | 2,985 | $ | 17,221 | $ | 20,303 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Weighted-average yield (2) |
1.05 | % | 4.80 | % | 1.79 | % | 2.74 | % | 2.64 | % | 0.17 | % | 4.79 | % | 1.82 | % | 2.81 | % | 2.67 | % |
(1) | As of June 30, 2014 and December 31, 2013, no investments exceeded 10% of stockholders equity. |
(2) | Yields on tax-exempt securities are not computed on a tax-equivalent basis. |
173
Loan and Lease Portfolio
The following table shows the composition of total loans and leases. See Note 3 Loans and Leases to our unaudited interim consolidated financial statements and Note 4 Loans and Leases to our audited consolidated financial statements included elsewhere in this prospectus for further discussion of our loan and lease portfolio.
June 30, | December 31, | |||||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Loans and Leases: |
||||||||||||||||||||||||
Commercial |
$ | 30,076 | $ | 28,667 | $ | 28,856 | $ | 25,770 | $ | 21,877 | $ | 21,253 | ||||||||||||
Commercial real estate |
7,158 | 6,948 | 6,459 | 7,602 | 8,920 | 10,463 | ||||||||||||||||||
Leases |
3,740 | 3,780 | 3,415 | 3,164 | 3,016 | 3,290 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
40,974 | 39,395 | 38,730 | 36,536 | 33,813 | 35,006 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Residential, including originated home equity products |
30,116 | 29,694 | 31,101 | 33,151 | 33,738 | 36,947 | ||||||||||||||||||
Home equity products serviced by others |
1,972 | 2,171 | 2,960 | 3,624 | 4,412 | 5,510 | ||||||||||||||||||
Other secured retail |
12,180 | 10,700 | 10,568 | 9,576 | 10,981 | 12,502 | ||||||||||||||||||
Unsecured retail |
3,587 | 3,899 | 3,889 | 3,908 | 4,078 | 5,115 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total retail |
47,855 | 46,464 | 48,518 | 50,259 | 53,209 | 60,074 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total loans and leases |
$ | 88,829 | $ | 85,859 | $ | 87,248 | $ | 86,795 | $ | 87,022 | $ | 95,080 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Maturities and Sensitivities of Loans and Leases to Changes in Interest Rates
The following table is a summary of loans and leases by remaining maturity or repricing date:
June 30, 2014 | ||||||||||||||||
Due in 1 Year
or Less |
Due After 1
Through 5 Years |
Due After 5
Years |
Total Loans
and Leases |
|||||||||||||
(in millions) | ||||||||||||||||
Commercial |
$ | 25,500 | $ | 2,595 | $ | 1,981 | $ | 30,076 | ||||||||
Commercial real estate |
6,762 | 233 | 163 | 7,158 | ||||||||||||
Leases |
732 | 1,786 | 1,222 | 3,740 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial |
32,994 | 4,614 | 3,366 | 40,974 | ||||||||||||
Residential, including originated home equity products |
12,464 | 5,546 | 12,106 | 30,116 | ||||||||||||
Home equity products serviced by others |
673 | 4 | 1,295 | 1,972 | ||||||||||||
Other secured retail |
645 | 5,958 | 5,577 | 12,180 | ||||||||||||
Unsecured retail |
1,508 | 175 | 1,904 | 3,587 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total retail |
15,290 | 11,683 | 20,882 | 47,855 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans and leases |
$ | 48,284 | $ | 16,297 | $ | 24,248 | $ | 88,829 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Loans and leases due after one year at fixed interest rates |
$ | 10,241 | $ | 18,199 | $ | 28,440 | ||||||||||
Loans and leases due after one year at variable interest rates |
6,056 | 6,049 | 12,105 |
174
December 31, 2013 | ||||||||||||||||
Due in 1 Year
or Less |
Due After 1
Through 5 Years |
Due After 5
Years |
Total Loans
and Leases |
|||||||||||||
(in millions) | ||||||||||||||||
Commercial |
$ | 24,299 | $ | 2,525 | $ | 1,843 | $ | 28,667 | ||||||||
Commercial real estate |
6,505 | 286 | 157 | 6,948 | ||||||||||||
Leases |
610 | 1,872 | 1,298 | 3,780 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial |
31,414 | 4,683 | 3,298 | 39,395 | ||||||||||||
Residential, including originated home equity products |
12,482 | 5,786 | 11,426 | 29,694 | ||||||||||||
Home equity products serviced by others |
734 | 5 | 1,432 | 2,171 | ||||||||||||
Other secured retail |
485 | 6,032 | 4,183 | 10,700 | ||||||||||||
Unsecured retail |
1,659 | 226 | 2,014 | 3,899 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total retail |
15,360 | 12,049 | 19,055 | 46,464 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans and leases |
$ | 46,774 | $ | 16,732 | $ | 22,353 | $ | 85,859 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Loans and leases due after one year at fixed interest rates |
$ | 10,232 | $ | 16,186 | $ | 26,418 | ||||||||||
Loans and leases due after one year at variable interest rates |
6,500 | 6,167 | 12,667 |
Loan and Lease Concentrations
This disclosure presents our exposure to any concentration of loans and leases that exceed 10% of total loans and leases. At June 30, 2014 and December 31, 2013, we did not identify any concentration of loans and leases that exceeded the 10% threshold. See Note 4 Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk to our unaudited interim consolidated financial statements and Note 5 Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk to our audited consolidated financial statements included elsewhere in this prospectus for further discussion of how we manage concentration exposures.
175
Risk Elements
The following table presents a summary of nonperforming loans and leases by class:
June 30, | December 31, | |||||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Nonaccrual loans and leases |
||||||||||||||||||||||||
Commercial |
$ | 63 | $ | 96 | $ | 119 | $ | 176 | $ | 283 | $ | 225 | ||||||||||||
Commercial real estate |
129 | 169 | 386 | 710 | 927 | 886 | ||||||||||||||||||
Leases |
| | 1 | 1 | 13 | 33 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
192 | 265 | 506 | 887 | 1,223 | 1,144 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Residential, including originated home equity products |
876 | 981 | 1,043 | 690 | 764 | 555 | ||||||||||||||||||
Home equity products serviced by others |
80 | 89 | 133 | 93 | 169 | 273 | ||||||||||||||||||
Other secured retail |
18 | 26 | 25 | 19 | 27 | 43 | ||||||||||||||||||
Unsecured retail |
22 | 22 | 23 | 23 | 37 | 63 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total retail |
996 | 1,118 | 1,224 | 825 | 997 | 934 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total nonaccrual loans and leases |
$ | 1,188 | $ | 1,383 | $ | 1,730 | $ | 1,712 | $ | 2,220 | $ | 2,078 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Loans and leases that are accruing and 90 days or more delinquent |
||||||||||||||||||||||||
Commercial |
$ | | $ | | $ | 71 | $ | 1 | $ | 87 | $ | 1 | ||||||||||||
Commercial real estate |
1 | | 33 | 4 | 2 | 65 | ||||||||||||||||||
Lease |
2 | | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
3 | | 104 | 5 | 89 | 66 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Residential, including originated home equity products |
| | | 29 | 15 | 22 | ||||||||||||||||||
Other secured retail |
| | | 36 | 29 | 27 | ||||||||||||||||||
Unsecured retail |
9 | 33 | 35 | 2 | 2 | 2 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total retail |
9 | 33 | 35 | 67 | 46 | 51 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total accruing and 90 days or more delinquent |
12 | 33 | 139 | 72 | 135 | 117 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total nonperforming loans and leases |
$ | 1,200 | $ | 1,416 | $ | 1,869 | $ | 1,784 | $ | 2,355 | $ | 2,195 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Troubled debt restructurings (1) |
$ | 960 | $ | 777 | $ | 704 | $ | 493 | $ | 346 | $ | 209 |
(1) | TDR balances reported in this line item consist of only those TDRs not reported in the nonaccrual loan or accruing and 90 days or more delinquent loan categories. Thus, only those TDRs that are in compliance with their modified terms and not past due, or those TDRs that are past due 30-89 days and still accruing are included in the TDR balances listed above. |
176
Impact of Nonperforming Loans and Leases on Interest Income
The following table presents the gross interest income for both nonaccrual and restructured loans that would have been recognized if such loans had been current in accordance with their original contractual terms, and had been outstanding throughout the period or since origination if held for only part of the period. The table also presents the interest income related to these loans that was actually recognized for the periods.
Six Months Ended
June 30, 2014 |
Year Ended
December 31, 2013 |
|||||||
(in millions) |
||||||||
Gross amount of interest income that would have been recorded in accordance with original contractual terms, and had been outstanding throughout the period or since origination, if held for only part of the period (1) |
$ | 79 | $ | 176 | ||||
Interest income actually recognized |
3 | 27 | ||||||
|
|
|
|
|||||
Total interest income foregone |
$ | 76 | $ | 149 | ||||
|
|
|
|
(1) | Based on the contractual rate that was being charged at the time the loan was restructured or placed on nonaccrual status. |
Potential Problem Loans
This disclosure presents outstanding amounts as well as specific reserves for certain loans and leases where information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present repayment terms. At June 30, 2014 and December 31, 2013, we did not identify any potential problem loans or leases within the portfolio that were not already included in Risk Elements above.
Cross-Border Outstandings
Cross-border outstandings can include loans, receivables, interest-bearing deposits with other banks, other interest-bearing investments and other monetary assets that are denominated in either dollars or other non-local currency.
As of June 30, 2014, December 31, 2013, 2012 and 2011, there were no aggregate cross-border outstandings from borrowers or counterparties in any country that exceeded 1%, or were between 0.75% and 1% of consolidated total assets.
177
Summary of Loan and Lease Loss Experience
The following table summarizes the changes to our allowance for loan and lease losses:
As of and
for the Six Months Ended June 30, |
As of and for the Year Ended December 31, | |||||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Allowance for Loan and Lease LossesBeginning: |
||||||||||||||||||||||||
Commercial |
$ | 361 | $ | 379 | $ | 394 | $ | 399 | $ | 451 | $ | 387 | ||||||||||||
Commercial real estate |
78 | 111 | 279 | 401 | 317 | 161 | ||||||||||||||||||
Leases |
24 | 19 | 18 | 28 | 79 | 49 | ||||||||||||||||||
Qualitative (1) |
35 | | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
498 | 509 | 691 | 828 | 847 | 597 | ||||||||||||||||||
Residential, including originated home equity products |
348 | 263 | 283 | 301 | 366 | 157 | ||||||||||||||||||
Home equity products serviced by others |
103 | 178 | 293 | 385 | 495 | 474 | ||||||||||||||||||
Other secured retail |
57 | 76 | 95 | 118 | 219 | 228 | ||||||||||||||||||
Unsecured retail |
155 | 140 | 145 | 217 | 251 | 258 | ||||||||||||||||||
Qualitative (1) |
60 | | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total retail |
723 | 657 | 816 | 1,021 | 1,331 | 1,117 | ||||||||||||||||||
Unallocated |
| 89 | 191 | 156 | 31 | 17 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total allowance for loan and lease lossesbeginning |
$ | 1,221 | $ | 1,255 | $ | 1,698 | $ | 2,005 | $ | 2,209 | $ | 1,731 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Gross Charge-Offs: |
||||||||||||||||||||||||
Commercial |
$ | (11 | ) | $ | (72 | ) | $ | (127 | ) | $ | (170 | ) | $ | (267 | ) | $ | (406 | ) | ||||||
Commercial real estate |
(3 | ) | (36 | ) | (129 | ) | (208 | ) | (420 | ) | (321 | ) | ||||||||||||
Leases |
| | (1 | ) | | (1 | ) | (38 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
(14 | ) | (108 | ) | (257 | ) | (378 | ) | (688 | ) | (765 | ) | ||||||||||||
Residential, including originated home equity products |
(93 | ) | (233 | ) | (324 | ) | (328 | ) | (364 | ) | (323 | ) | ||||||||||||
Home equity products serviced by others |
(37 | ) | (146 | ) | (268 | ) | (366 | ) | (540 | ) | (709 | ) | ||||||||||||
Other secured retail |
(41 | ) | (74 | ) | (105 | ) | (132 | ) | (205 | ) | (308 | ) | ||||||||||||
Unsecured retail |
(60 | ) | (142 | ) | (156 | ) | (182 | ) | (294 | ) | (375 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total retail |
(231 | ) | (595 | ) | (853 | ) | (1,008 | ) | (1,403 | ) | (1,715 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total gross charge-offs |
$ | (245 | ) | $ | (703 | ) | $ | (1,110 | ) | $ | (1,386 | ) | $ | (2,091 | ) | $ | (2,480 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Gross Recoveries: |
||||||||||||||||||||||||
Commercial |
$ | 24 | $ | 46 | $ | 64 | $ | 42 | $ | 33 | $ | 31 | ||||||||||||
Commercial real estate |
11 | 40 | 47 | 47 | 23 | 3 | ||||||||||||||||||
Leases |
| 1 | 2 | 3 | 1 | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
35 | 87 | 113 | 92 | 57 | 34 | ||||||||||||||||||
Residential, including originated home equity products |
24 | 55 | 52 | 51 | 48 | 48 | ||||||||||||||||||
Home equity products serviced by others |
11 | 28 | 27 | 22 | 20 | 58 | ||||||||||||||||||
Other secured retail |
10 | 12 | 21 | 35 | 46 | 41 | ||||||||||||||||||
Unsecured retail |
10 | 20 | 22 | 21 | 71 | 13 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total retail |
55 | 115 | 122 | 129 | 185 | 160 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total gross recoveries |
$ | 90 | $ | 202 | $ | 235 | $ | 221 | $ | 242 | $ | 194 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
178
As of and
for the Six Months Ended June 30, |
As of and for the Year Ended December 31, | |||||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||
Net (Charge-offs)/Recoveries: |
||||||||||||||||||||||||
Commercial |
$ | 13 | $ | (26 | ) | $ | (63 | ) | $ | (128 | ) | $ | (234 | ) | $ | (375 | ) | |||||||
Commercial real estate |
8 | 4 | (82 | ) | (161 | ) | (397 | ) | (318 | ) | ||||||||||||||
Leases |
| 1 | 1 | 3 | | (38 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
21 | (21 | ) | (144 | ) | (286 | ) | (631 | ) | (731 | ) | |||||||||||||
Residential, including originated home equity products |
(69 | ) | (178 | ) | (272 | ) | (277 | ) | (316 | ) | (275 | ) | ||||||||||||
Home equity products serviced by others |
(26 | ) | (118 | ) | (241 | ) | (344 | ) | (520 | ) | (651 | ) | ||||||||||||
Other secured retail |
(31 | ) | (62 | ) | (84 | ) | (97 | ) | (159 | ) | (267 | ) | ||||||||||||
Unsecured retail |
(50 | ) | (122 | ) | (134 | ) | (161 | ) | (223 | ) | (362 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total retail |
(176 | ) | (480 | ) | (731 | ) | (879 | ) | (1,218 | ) | (1,555 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total net (charge-offs)/recoveries |
$ | (155 | ) | $ | (501 | ) | $ | (875 | ) | $ | (1,165 | ) | $ | (1,849 | ) | $ | (2,286 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ratio of net charge-offs to average loans and leases |
(0.36 | )% | (0.59 | )% | (1.01 | )% | (1.35 | )% | (2.04 | )% | (2.21 | )% | ||||||||||||
Provision for loan and lease losses: |
||||||||||||||||||||||||
Commercial |
$ | (23 | ) | $ | 13 | $ | 48 | $ | 123 | $ | 182 | $ | 439 | |||||||||||
Commercial real estate |
(13 | ) | (36 | ) | (84 | ) | 39 | 481 | 474 | |||||||||||||||
Leases |
(1 | ) | 4 | | (13 | ) | (51 | ) | 68 | |||||||||||||||
Qualitative (1) |
26 | | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
(11 | ) | (19 | ) | (36 | ) | 149 | 612 | 981 | |||||||||||||||
Residential, including originated home equity products |
42 | 170 | 252 | 259 | 251 | 484 | ||||||||||||||||||
Home equity products serviced by others |
1 | 43 | 126 | 252 | 410 | 672 | ||||||||||||||||||
Other secured retail |
38 | 43 | 65 | 74 | 58 | 258 | ||||||||||||||||||
Unsecured retail |
44 | 140 | 129 | 89 | 189 | 355 | ||||||||||||||||||
Qualitative (1) |
30 | | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total retail |
155 | 396 | 572 | 674 | 908 | 1,769 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Unallocated |
| 103 | (102 | ) | 68 | 125 | 14 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total provision for loan and lease losses |
$ | 144 | $ | 480 | $ | 434 | $ | 891 | $ | 1,645 | $ | 2,764 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
TransfersGeneral Allowance to Qualitative Allowance (1) : |
||||||||||||||||||||||||
Commercial |
$ | | $ | 35 | ||||||||||||||||||||
Retail |
| 60 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Unallocated |
$ | | $ | (95 | ) | |||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Retail Emergence Period Change (2) : |
||||||||||||||||||||||||
Residential, including originated home equity products |
$ | | $ | 96 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total retail |
| 96 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Unallocated |
| (96 | ) | |||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Emergence period change |
$ | | $ | | ||||||||||||||||||||
|
|
|
|
179
As of and
for the Six Months Ended June 30, |
As of and for the Year Ended December 31, | |||||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Sale/Other: |
||||||||||||||||||||||||
Commercial |
$ | | $ | (5 | ) | $ | | $ | | $ | | $ | | |||||||||||
Commercial real estate |
| (1 | ) | (2 | ) | | | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
| (6 | ) | (2 | ) | | | | ||||||||||||||||
Residential, including originated home equity products |
| (3 | ) | | | | | |||||||||||||||||
Unsecured retail |
| (3 | ) | | | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total retail |
| (6 | ) | | | | | |||||||||||||||||
Unallocated |
| (1 | ) | | (33 | ) | | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Sale/other |
$ | | $ | (13 | ) | $ | (2 | ) | $ | (33 | ) | $ | | $ | | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Allowance for Loan and Lease LossesEnding: |
||||||||||||||||||||||||
Commercial |
$ | 351 | $ | 361 | $ | 379 | $ | 394 | $ | 399 | $ | 451 | ||||||||||||
Commercial real estate |
73 | 78 | 111 | 279 | 401 | 317 | ||||||||||||||||||
Leases |
23 | 24 | 19 | 18 | 28 | 79 | ||||||||||||||||||
Qualitative (1) |
61 | 35 | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
508 | 498 | 509 | 691 | 828 | 847 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Residential, including originated home equity products |
321 | 348 | 263 | 283 | 301 | 366 | ||||||||||||||||||
Home equity products serviced by others |
78 | 103 | 178 | 293 | 385 | 495 | ||||||||||||||||||
Other secured retail |
64 | 57 | 76 | 95 | 118 | 219 | ||||||||||||||||||
Unsecured retail |
149 | 155 | 140 | 145 | 217 | 251 | ||||||||||||||||||
Qualitative (1) |
90 | 60 | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total retail |
702 | 723 | 657 | 816 | 1,021 | 1,331 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Unallocated |
| | 89 | 191 | 156 | 31 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total allowance for loan and lease losses ending |
$ | 1,210 | $ | 1,221 | $ | 1,255 | $ | 1,698 | $ | 2,005 | $ | 2,209 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Reserve for unfunded lending commitmentsbeginning |
$ | 39 | $ | 40 | $ | 61 | $ | 70 | $ | 71 | $ | 52 | ||||||||||||
Provision (Credit) for unfunded lending commitments |
26 | (1 | ) | (21 | ) | (9 | ) | (1 | ) | 19 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Reserve for unfunded lending commitmentsending |
$ | 65 | $ | 39 | $ | 40 | $ | 61 | $ | 70 | $ | 71 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total allowance for credit lossesending |
$ | 1,275 | $ | 1,260 | $ | 1,295 | $ | 1,759 | $ | 2,075 | $ | 2,280 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | As discussed in Note 1 Significant Accounting Policies to our audited consolidated financial statements included elsewhere in this prospectus, the allowance for loan and lease losses is reviewed separately for commercial and retail loans, and the allowance for loan and lease losses for each includes an adjustment for qualitative allowance that includes certain risks, factors and events that might not be measured in the statistical analysis. As a result of this adjustment, the unallocated allowance was absorbed into the separately measured commercial and retail qualitative allowance. |
(2) | During December 2013, we updated our estimate of the incurred loss period for certain residential mortgages. This change reflected an analysis of defaulted borrowers and aligned to managements view that incurred but unrealized losses emerge differently during various points of an economic/business cycle. See Note 5 Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk, to our audited consolidated financial statements included elsewhere in this prospectus for further detail. |
180
Allocation of the Allowance for Loan and Lease Losses
The following table presents an allocation of the allowance for loan and lease losses by class and the percent of each class of loans and leases to total loans and leases:
June 30, | December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||||||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial |
$ | 351 | 34 | % | $ | 361 | 33 | % | $ | 379 | 33 | % | $ | 394 | 30 | % | $ | 399 | 25 | % | $ | 451 | 22 | % | ||||||||||||||||||||||||
Commercial real estate |
73 | 8 | 79 | 8 | 111 | 7 | 279 | 9 | 401 | 10 | 317 | 11 | ||||||||||||||||||||||||||||||||||||
Leases |
23 | 4 | 23 | 5 | 19 | 4 | 18 | 3 | 28 | 4 | 79 | 4 | ||||||||||||||||||||||||||||||||||||
Commercial qualitative allowance |
61 | N/A | 35 | N/A | | N/A | | N/A | | N/A | | N/A | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total commercial |
508 | 46 | 498 | 46 | 509 | 44 | 691 | 42 | 828 | 39 | 847 | 37 | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Residential, including originated home equity products |
321 | 34 | 348 | 35 | 263 | 36 | 283 | 38 | 301 | 39 | 366 | 39 | ||||||||||||||||||||||||||||||||||||
Home equity products serviced by others |
78 | 2 | 102 | 2 | 178 | 3 | 293 | 4 | 385 | 5 | 495 | 6 | ||||||||||||||||||||||||||||||||||||
Other secured retail |
64 | 14 | 58 | 12 | 76 | 12 | 95 | 11 | 118 | 12 | 219 | 13 | ||||||||||||||||||||||||||||||||||||
Unsecured retail |
149 | 4 | 155 | 5 | 140 | 5 | 145 | 5 | 217 | 5 | 251 | 5 | ||||||||||||||||||||||||||||||||||||
Retail qualitative allowance |
90 | N/A | 60 | N/A | | N/A | | N/A | | N/A | | N/A | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total retail |
702 | 54 | 723 | 54 | 657 | 56 | 816 | 58 | 1,021 | 61 | 1,331 | 63 | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Unallocated |
| N/A | | N/A | 89 | N/A | 191 | N/A | 156 | N/A | 31 | N/A | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total |
$ | 1,210 | 100 | % | $ | 1,221 | 100 | % | $ | 1,255 | 100 | % | $ | 1,698 | 100 | % | $ | 2,005 | 100 | % | $ | 2,209 | 100 | % | ||||||||||||||||||||||||
|
|
|
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|
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|
|
|
|
|
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|
|
|
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|
|
|
|
|
|
|
181
Deposits
The following table presents the average balances and average interest rates paid for deposits. See Note 10 Deposits to our audited consolidated financial statements included elsewhere in this prospectus for further discussion.
For the Six
Months Ended June 30, |
For the Year Ended December 31, | |||||||||||||||
2014 | 2013 | 2012 | 2011 | |||||||||||||
Average
Balances |
Average
Balances |
Average
Balances |
Average
Balances |
|||||||||||||
(in millions) | ||||||||||||||||
Noninterest-bearing demand deposits (1) |
$ | 25,393 | $ | 25,399 | $ | 25,053 | $ | 21,191 | ||||||||
|
|
|
|
|
|
|
|
For the Six
Months Ended June 30, |
For the Year Ended December 31, | |||||||||||||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | |||||||||||||||||||||||||||||
Average
Balances |
Yields/
Rates |
Average
Balances |
Yields/
Rates |
Average
Balances |
Yields/
Rates |
Average
Balances |
Yields/
Rates |
|||||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||||||
Checking with interest |
$ | 13,562 | 0.06 | % | $ | 14,096 | 0.06 | % | $ | 13,522 | 0.08 | % | $ | 16,116 | 0.10 | % | ||||||||||||||||
Money market & savings |
38,667 | 0.17 | 42,575 | 0.25 | 41,249 | 0.29 | 37,638 | 0.25 | ||||||||||||||||||||||||
Term deposits |
9,376 | 0.64 | 11,266 | 0.80 | 13,534 | 1.20 | 16,501 | 1.54 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total interest-bearing deposits (1)(2) |
$ | 61,605 | 0.22 | % | $ | 67,937 | 0.30 | % | $ | 68,305 | 0.43 | % | $ | 70,255 | 0.52 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
(1) | The aggregate amount of deposits by foreign depositors in domestic offices was approximately $1 million as of June 30, 2014, December 31, 2013, 2012, and 2011. |
(2) | None of these customer deposit categories exceeded 10% of average total customer deposits for any of the periods presented. |
Time Certificates of Deposit of $100,000 or More
The following table presents the amount of time certificates of deposit of $100,000 or more, segregated by time remaining until maturity:
June 30,
2014 |
December 31,
2013 |
|||||||
(in millions) | ||||||||
Three months or less |
$ | 2,715 | $ | 2,221 | ||||
After three months through six months |
739 | 427 | ||||||
After six months through twelve months |
845 | 718 | ||||||
After twelve months |
685 | 570 | ||||||
|
|
|
|
|||||
Total term deposits |
$ | 4,984 | $ | 3,936 | ||||
|
|
|
|
Return on Equity and Assets
The following table presents our return on average total assets, return on average common equity, dividend payout ratio and average equity to average assets ratio:
June 30, | December 31, | |||||||||||||||
2014 | 2013 | 2012 | 2011 | |||||||||||||
Return on average total assets |
0.77 | % | (2.83 | )% | 0.50 | % | 0.39 | % | ||||||||
Return on average common equity |
4.96 | (15.69 | ) | 2.69 | 2.19 | |||||||||||
Dividend payout ratio |
76.80 | (34.58 | ) | 23.31 | | |||||||||||
Average equity to average assets ratio |
15.53 | 18.06 | 18.75 | 18.03 |
182
Short-Term Borrowed Funds
The following table presents amounts and weighted-average rates for categories of short-term borrowed funds. See Note 7 Borrowed Funds to our unaudited interim consolidated financial statements, as well as Note 11 Borrowed Funds to our audited consolidated financial statements included elsewhere in this prospectus for further discussion.
June 30, | December 31, | |||||||||||
2014 | 2013 | 2012 | ||||||||||
(in millions) | ||||||||||||
Federal funds purchased |
$ | | $ | 689 | $ | 1,905 | ||||||
Securities sold under agreements to repurchase |
6,807 | 4,102 | 1,696 | |||||||||
Other short-term borrowed funds |
7,702 | 2,251 | 501 | |||||||||
|
|
|
|
|
|
|||||||
Total short-term borrowed funds |
$ | 14,509 | $ | 7,042 | $ | 4,102 | ||||||
|
|
|
|
|
|
June 30, | December 31, | |||||||||||||||
2014 | 2013 | 2012 | 2011 | |||||||||||||
(dollars in millions) | ||||||||||||||||
Weighted-average interest rate at period end: |
||||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
0.12 | % | 0.09 | % | 0.10 | % | 0.06 | % | ||||||||
Other short-term borrowed funds |
0.27 | 0.20 | 0.29 | 0.20 | ||||||||||||
Maximum amount outstanding at month-end during the period: |
||||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
$ | 7,022 | $ | 5,114 | $ | 4,393 | $ | 6,406 | ||||||||
Other short-term borrowed funds |
7,702 | 2,251 | 5,050 | 4,000 | ||||||||||||
Average amount outstanding during the period: |
||||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
$ | 5,708 | $ | 2,400 | $ | 2,716 | $ | 3,808 | ||||||||
Other short-term borrowed funds |
4,838 | 259 | 3,045 | 2,645 | ||||||||||||
Weighted-average interest rate during the period: |
||||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
0.11 | % | 0.31 | % | 0.22 | % | 0.12 | % | ||||||||
Other short-term borrowed funds |
0.26 | 0.44 | 0.33 | 2.51 |
183
We are the 13th largest retail bank holding company in the United States according to SNL Financial, with $130.3 billion of total assets as of June 30, 2014. Headquartered in Providence, Rhode Island, we deliver a comprehensive range of retail and commercial banking products and services to approximately five million individuals, institutions and companies. Our approximately 18,050 employees strive to meet the financial needs of customers and prospects through approximately 1,230 branches operated in an 11-state footprint across the New England, Mid-Atlantic and Midwest regions and through our online, telephone and mobile banking platforms. We have 90 retail and commercial non-branch offices located both in our geographic footprint and in nine states and the District of Columbia outside our branch footprint. Our 11-state branch banking footprint contains approximately 29.9 million households and 3.1 million businesses according to SNL Financial and our target is to maintain an overall business mix with approximately three-quarters concentrated within our footprint.
Business Segments
Through our two operating segmentsConsumer Banking and Commercial Bankingwe offer a broad set of banking products and services while providing local delivery and a differentiated customer focus. Because we operate in a highly competitive industry and believe that banking should have a personal touch, we have programs in place to train and prepare our employees to deliver a consistent, high-quality experience through every customer interaction. Furthermore, we seek to ensure that customers select us as their primary banking partner by taking the time to understand their banking needs, and we tailor our full range of products and services accordingly. To that end, our Consumer Banking value proposition is based on providing simple, easy to understand product offerings and a convenient banking experience with a more personalized approach. Commercial Banking focuses on offering a client-centric experience by leveraging an in-depth understanding of our clients and prospects businesses in order to proactively provide quality solutions through a broad range of products and services.
The following tables present certain financial information for our segments as of and for the six months ended June 30, 2014 and as of and for the year ended December 31, 2013:
As of and for the Six Months Ended
June 30, 2014 |
As of and for the Year Ended
December 31, 2013 |
|||||||||||||||||||||||||||||||
Consumer
Banking |
Commercial
Banking |
Other (1) | Consolidated |
Consumer
Banking |
Commercial
Banking |
Other (1) | Consolidated | |||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Total loans and leases and loans held for sale (average) |
$ | 46,876 | $ | 36,997 | $ | 4,527 | $ | 88,400 | $ | 45,106 | $ | 34,647 | $ | 6,044 | $ | 85,797 | ||||||||||||||||
Total deposits and deposits held for sale (average) |
70,473 | 17,901 | 3,509 | 91,883 | 72,158 | 17,516 | 3,662 | 93,336 | ||||||||||||||||||||||||
Net interest income |
1,083 | 520 | 38 | 1,641 | 2,176 | 1,031 | (149 | ) | 3,058 | |||||||||||||||||||||||
Noninterest income |
455 | 214 | 329 | 998 | 1,025 | 389 | 218 | 1,632 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total revenue |
$ | 1,538 | $ | 734 | $ | 367 | $ | 2,639 | $ | 3,201 | $ | 1,420 | $ | 69 | $ | 4,690 | ||||||||||||||||
Net Income (loss) (2) |
76 | 282 | 121 | 479 | 242 | 514 | (4,182 | ) | (3,426 | ) |
(1) | Includes the financial impact of non-core, liquidating loan portfolios and other non-core assets and liabilities, our treasury activities, wholesale funding activities, securities portfolio, community development assets and other unallocated assets, liabilities, revenues, provision for credit losses and expenses not attributed to the Consumer Banking or Commercial Banking segments. For a description of non-core assets, see Managements Discussion and Analysis of Financial Condition and Results of OperationAnalysis of Financial Condition. |
184
(2) | Includes a goodwill impairment charge of $4.4 billion ($4.1 billion after tax) in the second quarter of 2013. For more information, see Managements Discussion and Analysis of Financial Condition and Results of OperationsResults of OperationsYear Ended December 31, 2013 Compared with Year Ended December 31, 2012Net Income (Loss), Note 8 Goodwill to our audited consolidated financial statements and Note 5 Goodwill to our unaudited interim consolidated financial statements included elsewhere in this prospectus. |
Our History and Recent Strategic Initiatives
Our history dates back to High Street Bank, founded in 1828, which established Citizens Savings Bank in 1871. Citizens Savings Bank acquired a controlling interest in its founder by the 1940s, renaming the entity Citizens Trust Company. By 1981, we had grown to 29 branches in Rhode Island with approximately $1.0 billion of assets, and in 1988 we became a wholly owned subsidiary of the RBS Group. Over the following two decades, we grew substantially through a series of over 25 strategic bank acquisitions, including:
| In 1988, we acquired Fairhaven Savings Bank in Massachusetts, our first retail banking expansion beyond Rhode Island; |
| In 1996, we moved beyond southern New England when RBS and Bank of Ireland combined their New England banking operations through the merger of Citizens and First NH Bank in New Hampshire; |
| In 1999 and 2000, we acquired the commercial banking group of State Street Corporation and Boston-based UST Corporation, including its U.S. Trust branches in the Boston area; these acquisitions doubled the size of our Massachusetts operations and made us New Englands second-largest bank, with more than $30.0 billion in assets; |
| In 2001, we acquired the regional banking business of Mellon Financial Corporation, which included $14.4 billion in deposits, expanding our retail network outside of New England to Pennsylvania, Delaware and New Jersey; and |
| In 2004, we completed the largest transaction in our history by acquiring Charter One, which operated approximately 680 branches in nine states, and had $41.3 billion in assets, and expanded our branch footprint into New York, Vermont, Michigan, Ohio, Illinois and Indiana. |
These acquisitions greatly expanded our footprint throughout New England and into the Mid-Atlantic and the Midwest, transforming us from a local retail bank into one of the largest retail U.S. bank holding companies with nearly $170.0 billion in assets at the start of the global financial crisis. Following this period of expansion and the subsequent global financial crisis, we took a number of decisive steps to begin repositioning and strengthening our business profile, including:
| Transformed business mix : Refocused our efforts to transform our business model toward a more balanced and diversified platform with a greater emphasis on higher-growth, higher-return businesses. As of June 30, 2014, we had expanded the contribution of Commercial Banking relative to Consumer Banking to approximately 44% and 56% of the loans in our operating segments, respectively, as compared to 36% and 64%, respectively, as of December 31, 2009; |
| Improved deposit mix : Increased lower cost and more stable demand, checking, money market and savings accounts to 89% from 74% of total deposits at June 30, 2014 compared to December 31, 2009. This improvement in our core deposit funding mix, as well as our efforts to aggressively lower the rates paid on our time deposits, resulted in a more beneficial cost of total deposits, which decreased to 0.16% for the first half of 2014 from 0.23% for the year ended December 31, 2013 and 1.32% for the year ended December 31, 2009; |
|
Reduced reliance on wholesale funding : Since the start of the financial crisis in 2009, we have aggressively worked to reduce the higher cost wholesale funding component of our balance |
185
sheet. We reduced wholesale borrowings from $23.7 billion as of December 31, 2009 to $16.2 billion as of June 30, 2014, and as of that date the balances were principally lower cost, more stable secured Federal Home Loan Bank and repurchase agreement borrowings; |
| Improved strategic focus : Identified and began running down certain non-core assets deemed to be inconsistent with our strategic goals, generally as a result of geographic location, industry, product type or risk level. The non-core portfolio decreased to $3.5 billion at June 30, 2014 from $20.5 billion when it was designated on June 30, 2009; |
| Optimized our geographic footprint : Exited certain geographies where we had underperforming market share positions and redeployed the capital into businesses with more attractive growth and return characteristics. In 2008, we sold 18 branches in the New York Adirondacks region, and in 2009, we sold our Indiana branch franchise, which consisted of 65 branches. In 2012, we sold 57 mostly in-store branches in Long Island and Westchester County, New York, and on June 20, 2014, we closed the sale of our 103 Chicago retail branches along with certain assets and deposits. Additionally, we have routinely sought to optimize the branch footprint through a process of consolidation and rationalization, which has resulted in the closure of another 232 branches since the beginning of 2009; |
| Refined our branch service delivery model : Proactively addressed evolving consumer preferences for banking interactions through expansion of alternative distribution channels. We have reduced our branch footprint while building out self-service channels through online and mobile banking, including remote deposit capture and person-to-person payments. Our mobile banking channel has experienced rapid growth with a 40% increase in active mobile customers since year-end 2012. We have continued to optimize the distribution network by migrating staffing in our branches toward a universal banker model, which involves training bankers to handle both teller and traditional banker functions, with a goal of further improving the efficiency of our network and allowing frontline employees to become more sales and solutions oriented; and |
| Increased infrastructure investment : Invested more than $1.0 billion in infrastructure and technology from 2009 to year end 2013, with an additional $250 million planned for each of 2014 and 2015. These investments, which are designed to lower our costs and improve our customer experience, include significant programs to enhance our information technology resiliency, upgrade customer-facing technology and streamline operations. Significant investments included the 2013 launch of our new teller system, new commercial loan platform and new auto loan platform and the 2013 upgrade of the majority of our ATM network, including by equipping more than 1,450 ATMs with advanced deposit-taking functionality. These investments also involved spending to prepare for the planned rollout of our new mortgage platform. |
These steps have helped provide a strong foundation for our ongoing transformation from a wholly owned subsidiary of a global financial group into a stand-alone U.S. regional bank. We have brought together a seasoned management team with an average of over 20 years of banking experience at large international financial institutions. The team was bolstered by the May 2013 announcement of Bruce Van Sauns appointment as our Chairman and CEO. The team is focused on delivering improved returns, through implementation of growth and efficiency initiatives, along with a more disciplined allocation of capital and resources. This performance-driven culture is designed to enhance our competitiveness by rigorously analyzing the risk-return profiles of our diversified businesses and selectively investing in those that are well positioned to gain market share, improve efficiency and generate long-term growth and sustainable profitability. In prior years many of our strategies around risk management, capital and investments were heavily influenced by our status as a subsidiary of a larger global financial institution.
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Customer Focus
The focus on performance is complementary to our historic credo, which centers on delivering for customers, colleagues and communities. Ensuring that we are serving customers well, in a superior and differentiated fashion relative to peers, remains key to delivering long-term franchise value. As a result of our commitment to serving customers, Money magazine named our banking subsidiaries in its 2013 list of The Best Banks in America, and our Commercial Banking middle market business also received a number one rank from Greenwich Associates in key client survey scores compared to the top four competitors in our footprint across a number of categories, including Overall Lead Client Satisfaction. We strive to develop stronger and higher value customer relationships through an intense focus on delivering a differentiated experience across all of our distribution platforms, including our online, telephone and mobile banking platforms. We expect this focus to continue to drive improved customer loyalty across our businesses and distinguish us from our competitors. We believe this approach will enable us to win, retain and expand customer relationships, as well as increase cross-sell and share of wallet penetration across our business segments.
Our Competitive Strengths
Our long history of operations, through a range of challenging economic cycles, forms the basis for our competitive strengths. From our community bank roots, we bring a commitment to strong customer relationships, local service and an active involvement in the communities we serve. Our acquisitions enabled us to develop material scale in highly desirable markets and broad product capabilities. The actions taken since the global financial crisis have resulted in a business model with solid asset quality, a stable core deposit mix and a superior capital position. In particular, we believe that the following strengths differentiate us from our competitors and provide a strong foundation from which to execute our strategy to deliver enhanced growth, profitability and returns.
| Significant Scale with Strong Market Penetration in Attractive Geographic Markets : We believe our market share and scale in our footprint is central to our success and growth. With approximately 1,230 branch and 90 non-branch offices, approximately 3,215 ATMs and 18,050 employees, as well as our online, telephone and mobile banking platforms, we serve more than five million individuals, institutions and companies. As of June 30, 2013, we ranked second by deposit market share in the New England region and in the top five in nine of our key metropolitan statistical areas, or MSAs, including Boston, Providence, Philadelphia, Pittsburgh and Cleveland, according to SNL Financial. We believe this strong market share in our core regions, which have relatively diverse economies and affluent demographics, will help us achieve our long-term growth objectives. The following table sets forth information regarding our competitive position in our principal MSAs. |
MSA |
Total
Branches |
Deposits
($ in Millions) |
Market
Rank (1) |
Market
Share (%) (1) |
||||||||||||
Boston, MA |
212 | $ | 28,343 | 2 | 16.4 | % | ||||||||||
Philadelphia, PA |
188 | 17,012 | 4 | 8.1 | ||||||||||||
Providence, RI |
100 | 12,854 | 1 | 34.6 | ||||||||||||
Pittsburgh, PA |
131 | 7,130 | 2 | 8.8 | ||||||||||||
Detroit, MI |
95 | 4,563 | 6 | 4.6 | ||||||||||||
Cleveland, OH |
64 | 4,105 | 5 | 7.9 | ||||||||||||
Manchester, NH |
28 | 4,014 | 1 | 38.7 | ||||||||||||
Albany, NY |
29 | 1,590 | 4 | 7.1 | ||||||||||||
Buffalo, NY |
43 | 1,573 | 4 | 4.8 | ||||||||||||
Rochester, NY |
34 | 1,540 | 4 | 10.3 |
(1) | Source: FDIC, June 2013. Excludes non-retail banks as defined by SNL Financial. See Certain Important Information. |
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| Strong Customer Relationships : We focus on building strong customer relationships by delivering a consistent, high quality level of service supported by a wide range of products and services. We believe we provide a distinctive customer experience characterized by the personal touch of a local bank with the product selection of a larger financial institution. Our Consumer Banking cross-sell efforts have improved to 4.9 products and services per retail household as of June 30, 2014 compared to 4.2 products and services as of December 31, 2009. Additionally, Consumer Banking improved overall customer satisfaction as measured by J.D. Power and Associates by 5% from 2012 to 2013, while the industry average score improved by 3% during the same period. Our ability to provide a unique customer experience is also evidenced by our Commercial Banking middle market team ranking among the top five in customer and lead bank penetration, with a 10% market penetration in our footprint based on Greenwich Associates rolling four-quarter data as of June 30, 2014. |
| Stable Base of Core Deposits : We have a strong funding profile, with $91.7 billion of total deposits as of June 30, 2014, consisting of 29% in noninterest-bearing deposits and 71% in interest-bearing deposits. Noninterest-bearing deposits provide a lower-cost funding base, and we grew this base to $26.7 billion at June 30, 2014, up 40% from $19.0 billion at December 31, 2009. For the six months ended June 30, 2014, our total average cost of deposits was 0.16%, down from 0.23% in 2013, 0.40% in 2012 and 1.32% in 2009. |
| Superior Capital Position : We are among the most well capitalized large regional banks in the United States, with a Tier 1 common equity ratio of 13.3% as of June 30, 2014, ranking highest among peer regional banks, which had an average Tier 1 common equity ratio of 10.3% at that date, according to SNL Financial. Our Common Equity Tier 1 ratio at June 30, 2014 under Basel III rules was 13.0% (on a fully phased-in basis). Our strong capital position provides us the financial flexibility to continue to invest in our businesses and execute our strategic growth initiatives. Through recent capital optimization efforts we have sought to better align our Tier 1 common equity capital base with peer regional banking organizations, while maintaining a solid total capital position, by reducing Tier 1 common equity capital and increasing other Tier 1 and Tier 2 capital. On August 1, 2014, we exchanged $333 million of Tier 1 common equity for Tier 2 subordinated debt, and we plan to continue our strategy of capital optimization by issuing to RBS $334 million of preferred stock and concurrently repurchasing $334 million of shares of our common stock from RBS in the fourth quarter of 2014, subject to regulatory approval and assuming completion of this offering. Pro forma for these exchanges, our Tier 1 common equity ratio would have been 12.6% as of June 30, 2014. See Our Relationship with the RBS Group and Certain Other Related Party TransactionsRelationship with the RBS GroupOther for further details of the planned fourth quarter exchange transaction. We plan to repurchase approximately $500 million of shares of our common stock and $250 million of shares of our common stock in 2015 and 2016, respectively, with proceeds from the issuance of subordinated debt or another lesser form of capital, subject to regulatory approval. |
|
Solid Asset Quality Throughout a Range of Credit Cycles : Our experienced credit risk professionals and conservative credit culture, combined with centralized processes and consistent underwriting standards across all business lines, have allowed us to maintain strong asset quality through a variety of business cycles. As a result, we weathered the global financial crisis better than our peers: for the two-year period ending December 31, 2009, net charge-offs averaged 1.63% of average loans compared to a peer average of 1.76% according to SNL Financial. More recently, the credit quality of our loan portfolio has continued to improve; nonperforming assets as a percentage of total assets were 0.95% at June 30, 2014, compared to 1.20% and 1.55% as of December 31, 2013 and 2012, respectively. Net charge-offs declined substantially to an annualized 0.36% of average loans in the six months ended June 30, 2014 versus 0.60% for the six months ended June 30, 2013. Our allowance for loan and lease losses was 1.36% of total loans at June 30, 2014. We |
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believe the high quality of our loan portfolio provides us with significant capacity to prudently seek to add more attractive, higher yielding risk-adjusted returns while still maintaining appropriate risk discipline and solid asset quality. |
| Experienced Management Team Supported by a High-Performing, Talented Workforce : Our leadership team of seasoned industry professionals is supported by a highly motivated, diverse set of managers and employees committed to delivering a strong customer value proposition. Our highly experienced and talented executive management team, whose members have more than 20 years of banking experience on average, provide strong leadership to deliver on our overall business objectives. We have recently made selective additions to our management team and added key business line leaders, including the Head of Distribution and Head of Everyday Banking in Consumer Banking, as well as the Head of Technology Banking and Head of Loan Trading for Commercial Banking. Bruce Van Saun, who was announced as our Chairman and CEO in May 2013, has more than 30 years of financial services experience including four years as the RBS Group Finance Director. Earlier in his career, Mr. Van Saun held a number of senior positions at The Bank of New York Mellon, Deutsche Bank, Wasserstein Perella Group and Kidder Peabody & Co. |
| Commitment to Communities : Community involvement is one of our principal values and we strive to contribute to a better quality of life by serving the communities across our footprint through employee volunteer efforts, a foundation that funds a range of non-profit organizations and executives that provide board leadership to community organizations. These efforts contribute to a culture that seeks to promote positive employee morale and provide differentiated brand awareness in the community relative to peer banks, while also making a positive difference within the communities we serve. Employee engagement increased during 2013 as highlighted by a 27% increase in employee volunteerism to more than 76,000 hours companywide. In addition, employees serve on approximately 480 community boards across our footprint. We believe our strong commitment to our communities provides a competitive advantage by strengthening customer relationships and increasing loyalty. |
Business Strategy
Building on our core strengths, we intend to become a top-performing regional bank as viewed through the lenses of our five major stakeholders: customers, investors, regulators, colleagues and communities. We have identified a series of fundamental strategic initiatives designed to maximize the full potential of our business and drive sustainable growth and enhanced profitability. The core measure of our success in executing our strategic initiatives will be our ability to deliver higher ROTCE. We aim for our strategic initiatives to increase our ROTCE from 5% in 2013, excluding our $4.1 billion after-tax goodwill impairment charge, to a run-rate target of greater than 10% over a two- to three-year period. 3 We plan to accomplish this goal through: (a) driving revenue growth in both the Consumer Banking and Commercial Banking segments; (b) enhancing cost reduction efforts across the company; (c) leveraging capital actions aimed at better aligning our capital structure with those of regional bank peers; and (d) the beneficial impact of a rising interest rate environment on our asset-sensitive balance sheet. We also expect these efforts to result in a targeted run-rate efficiency ratio (noninterest expense divided by the sum of net interest income and noninterest income) in the 60% range over a two- to three-year period.
| Revenue Growth : We are committed to generating profitable revenue growth in a disciplined manner by placing greater emphasis on reallocating resources toward businesses that we believe will further increase and diversify our revenue base in order to deliver more attractive |
3 | For information regarding the calculation of ROTCE and efficiency ratio, see Managements Discussion and Analysis of Financial Condition and Results of OperationPrincipal Components of Operations and Key Performance Metrics Used By ManagementKey Performance Metrics and Non-GAAP Financial Measures. |
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risk-adjusted returns to stockholders. As such, a key component of our strategy to further improve our operating results is focused around prudently growing higher-return earning assets and identifying and capitalizing on more fee income opportunities. We plan to invest more than $70 million in business initiatives in 2014, the financial benefits of which we expect to begin realizing in a two- to three-year period. |
Increasing Loan Origination We will seek to prudently expand our balance sheet and drive increased loan origination volume by hiring more than 550 sales professionals in mortgage, small business and auto, as well as by building out our commercial industry focused teams and through increased loan origination volume in mid-corporate and franchise finance over a two- to three-year period.
| In mortgage, we are repositioning our origination platform through increased hiring of additional mortgage loan officers over the next two to three years and increasing capacity through the launch of a new origination and processing platform in the second half of 2014. In addition, we will continue to purchase high-quality mortgage assets in the secondary market through a targeted program. |
| We expect to accelerate growth in our auto loan portfolio both organically and through loan purchases. Over the past three years we have increased our auto finance representatives by approximately 65%, which has underpinned the expansion of our dealer network from approximately 3,500 to more than 6,500 over the same time period. |
| In Commercial Banking, we will continue to build out our industry focused teams where, for example, our Healthcare and Technology efforts have resulted in business line net operating income growth of over 50% since 2011. We are successfully recruiting respected industry leaders to bolster our expertise, adding more dedicated resources, and evaluating other specialties such as aerospace, chemicals and energy. |
| We are extending our origination efforts nationally in the mid-corporate space, which is focused on serving larger, mostly public clients with annual revenue of more than $500 million. We are selectively expanding geographically where our established expertise and product capabilities can be relevant. The national expansion, launched in the third quarter of 2013, has already added over $330 million of new loans outstanding as of June 30, 2014, and we are in the process of adding approximately 20 new, dedicated employees to accelerate our progress. |
| Finally, our franchise finance business is expanding its target market to include additional strong national and regional brands, large and up-and-coming restaurant operating companies and expansion of gas station and convenience dealer penetration. |
Focus on Higher Return Assets Given our scale, expertise and current geographic reach, we believe we are well positioned to further diversify our asset base by prudently seeking higher yielding risk-adjusted assets with a more balanced mix of commercial and consumer loans and appropriate risk discipline.
| We continue to invest in attractive markets with higher return profiles, including expansion of our healthcare and technology verticals, where we can utilize our in-depth industry knowledge. |
| We have increased our commitment to selectively serve the leveraged loan market, which rests on our strengthened capital markets capabilities. |
| In October 2013, we deployed a fully automated auto loan origination platform with more sophisticated pricing and credit underwriting capabilities that will enable us to prudently originate more attractive risk-adjusted return assets. |
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| We continue to improve our private student lending platform, which we believe is well positioned for growth and includes an education refinance product that is unique in our footprint and serves a critical borrower need. |
Driving Additional Fee Income We also intend to transition to a more balanced revenue profile by taking steps to further grow our noninterest income base and reduce our overall reliance on net interest income.
| We expect to drive increased growth in Wealth Management by expanding our advisor sales force where we expect to hire approximately an additional 100 financial consultants and premier bankers, while also training and licensing a number of existing bankers to sell investment products. |
| We expect to continue to expand our capital markets product and service offerings in order to generate higher fee income. |
| With respect to our cash management services, we are in the final stages of a multi-year investment of over $80 million in domestic cash products and services that will improve the breadth and depth of our product offering. Overall, our improvements support a holistic approach to working capital management via cash management, card and trade products. We have built out a targeted sales model for commercial cards where we have recently added six employees to the team dedicated to card sales and program utilization. |
Our target is to increase our run-rate ROTCE over a two- to three-year period by approximately 160 to 200 basis points through these revenue growth initiatives.
| Cost Initiatives : We are focused on streamlining our processes and improving our cost structures. As a result of the initiative launched in late 2013 to improve efficiency and effectiveness, we expect to generate aggregate annualized expense savings of approximately $200 million over a two- to three-year period. These savings include reductions in salaries and employee benefits ($120 million), lower occupancy expenses ($20 million), and streamlining operations in other areas ($60 million). We expect that this initiative will reduce our employee base by approximately 470 net employees, including the effect of our adding approximately 1,330 loan officers, relationship managers and others to support growth initiatives. Noninterest expense savings from this initiative are targeted to benefit our run-rate ROTCE in a two- to three-year period by approximately 90 to 100 basis points and to achieve a targeted efficiency ratio in the 60% range. 4 |
| Reduction of Tier 1 Common Equity Ratio : Given the elevated level of common equity in our capital structure compared to peers, we intend to continue to pursue various capital actions, subject to regulatory approval, that are expected to reduce our Tier 1 common equity ratio to a level that is more consistent with that of other peer regional banks. We expect lower levels of tangible common equity to facilitate a 70 to 80 basis point improvement to our run-rate ROTCE over a two- to three-year period. |
| Rising Interest Rate Environment : Net interest income growth has been challenged by the relatively persistent low interest rate environment. We remain well positioned for a rising rate environment, which would be beneficial to our net interest margin because our asset sensitive balance sheet would react favorably to an increase in both short-term and long-term rates. As of June 30, 2014, the estimated impact on our net interest income over the next twelve months based on a 200 basis point gradual increase in rates would be 6.6%. See Managements |
4 | For information regarding the calculation of ROTCE and efficiency ratio, see Managements Discussion and Analysis of Financial Condition and Results of OperationPrincipal Components of Operations and Key Performance Metrics Used By ManagementKey Performance Metrics and Non-GAAP Financial Measures. |
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Discussion and Analysis of Financial Condition and Results of OperationsRisk Governance and Quantitative and Qualitative Disclosures About RiskMarket RiskNon-Trading Risk for further details. Based on managements expectations, which utilized the market implied forward rates based on the yield curve as of February 28, 2014, the benefit to our net interest income from a gradually rising rate environment would be expected to increase our run-rate ROTCE over a two- to three-year period by 130 to 160 basis points. |
The bullets above are not intended as an exhaustive presentation of factors that will affect our medium term ROTCE. We also anticipate a benefit to our ROTCE over the next two to three years from runoff of our non-core portfolio and existing pay-fixed interest rate swaps, which we expect to be offset by the negative impact on our medium term ROTCE of some deterioration in the credit environment to historical levels and a decline in gains on investments in securities.
While our ROTCE target and its components are presented with numerical specificity, and we believe such targets to be reasonable as of the date of this prospectus, given the uncertainties surrounding our assumptions, including possible regulatory restrictions on activities we intend to pursue, there are significant risks that these assumptions may not be realized and thus our goals may not be achieved. Accordingly, our actual results may differ from these targets and the differences may be material and adverse, particularly if actual events adversely differ from one or more of our key assumptions. Our ROTCE targets and the related underlying assumptions are forward-looking statements. We strongly caution investors not to place undue reliance on any of these assumptions or targets. Except as may be required by applicable securities laws, we are not under any obligation (and expressly disclaim any obligation) to update or alter any assumptions, goals, targets, projections or other related statements that we may make. See Special Note Regarding Forward-Looking Statements and Risk Factors, including Risk FactorsOur ability to implement our strategic plan and achieve our indicative performance targets requires us to increase our revenue from existing sources, find additional sources of revenue and reduce and control our costs. Because our strategic plans and indicative performance targets are based on assumptions regarding the future, including regarding matters that are beyond our control, there are significant risks that these assumptions may not be realized and thus our goals may not be achieved for additional information regarding these forward-looking statements. For information regarding the calculation of ROTCE, see Managements Discussion and Analysis of Financial Condition and Results of OperationPrincipal Components of Operations and Key Performance Metrics Used By ManagementKey Performance Metrics and Non-GAAP Financial Measures.
Consumer Banking Segment
Consumer Banking serves retail customers and small businesses with annual revenues of up to $25 million through a network that as of June 30, 2014 included approximately 1,230 branches operated in an 11-state footprint across the New England, Mid-Atlantic and Midwest regions, as well as through online, telephone and mobile banking platforms. We have an intense focus on winning, expanding and retaining customers through our Consumer Banking value proposition: Simple. Clear. Personal . We believe that offering a wide range of straightforward and understandable banking products and services to customers and prospects, coupled with personal customer service, will enable us to drive enhanced customer loyalty. This commitment to our customers led us to introduce a major operational initiative in 2013: Bank Better , a companywide approach to enhancing the banking experience for our customers. Comprising dozens of individual initiatives ranging from improved customer communications to upgrades of both customer-facing and customer-supporting technology, we announced Bank Better in December 2013.
Consumer Banking is committed to delivering a differentiated experience with a focus on customer convenience and service. We continue to strive to optimize the effectiveness of our distribution
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channels in order to adapt to increasing customer preferences for self service banking capabilities and decreasing demand for branch-based services similar to the universal banker model we introduced in January 2013. As a result of our commitment to serving our customers and making improvements in our infrastructure, Money magazine named our banking subsidiaries in its 2013 list of The Best Banks in America. The magazine noted our robust branch and ATM presence, our extended branch hours, and supermarket branch presence with seven-day-a-week service. In addition, we were recently named as the best bank in the U.S. for consumers in the baby boomer generation, according to a study by financial advice website GoBankingRates.com. We have increased our share of wallet penetration to 33% of deposit households also having a consumer loan with us, 68% of checking households utilizing direct deposit and 17% utilizing online bill pay as of June 30, 2014 compared to 23%, 59% and 13%, respectively, as of December 31, 2009. Consumer Banking accounted for $47.2 billion, or 56%, of the loans in our operating segments as of June 30, 2014.
Consumer Banking is organized as follows:
Distribution : As of June 30, 2014, our multi-channel distribution system included a network of approximately 1,230 branches, of which 356 were in-store locations, as well as approximately 3,215 ATMs and a workforce of banking specialists ranging from financial consultants and business banking officers to private bankers. Our ATM network includes both owned and branded sites, some of which are located in gas stations, convenience stores and other retail outlets. Our digital platform provides online and mobile capabilities which continue to improve the deployment of banking applications for both Android and Apple smartphones and iPads. This platform provides our customers the convenience of paying bills, transferring money between accounts and from person to person, in addition to a host of other everyday transactions. As of June 30, 2014, we had 1.7 million online banking customers and 549,000 active mobile customers. Lastly, our customer contact center handles approximately 10 million calls annually, providing our customers with extended access to our services.
We continue to focus on improving customer convenience while also optimizing our distribution model. In an effort to better align our distribution channels with evolving customer banking preferences, we closed more than 30 low-performing branches in 2013 and expect to continue to consolidate and reformat a number of branches over the next several years based on market opportunities and
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evolving customer preferences. We rolled out a new teller platform system across the network in 2013 which both expands customer convenience by providing secure, paperless transaction options at the branch, including debit card identification and simple, easy-to-read receipts, while also creating back office efficiencies. With our rollout of more than 1,450 enhanced ATMs we offer our customers the ability to receive expanded funds availability. Finally, we plan to test new low-cost and highly automated or sales-focused formats in our network to further address the changing preferences of consumers.
Everyday Banking : Provides customers with deposit and payment products and services, including checking, savings, money market, certificates of deposit, debit cards, credit cards and overdraft protection. We have over 1.4 million active debit cards issued and over 630,000 credit cards; 24% of our deposit customers now have a credit card relationship with us, more than double the percentage at the beginning of 2009. This was achieved by instituting more focused cross selling efforts in our branch network, which generates substantially all of our credit card origination volume. The division also actively manages the overall deposit portfolio, and since 2009 we have considerably improved our deposit costs from 1.32% to 0.23% in 2013 and 0.16% for the six months ended June 30, 2014. This was done by instituting more disciplined pricing practices and the winding down of non-core, higher cost deposits in the portfolio. In addition, recent product innovation efforts have focused on responding to customer preferences for banking products that are straightforward and easy to understand. As a result, in January 2014 we launched our new One Deposit Checking product which offers a simple and transparent fee structureno monthly maintenance fee with one deposit of any amount each statement cycleand our new $5 Overdraft Pass, which allows our customers to overdraw their checking and money market accounts without incurring an overdraft fee if the overdraft item is $5 or less.
Business Banking : Serves small and medium enterprise businesses with annual gross revenue of up to $25 million through a combination of branch-based employees, Business Banking officers and relationship managers. As of June 30, 2014, the team served approximately 330,000 customers with loans outstanding of $3.0 billion and deposit balances of $12.7 billion. We plan to continue to grow our sales force of approximately 330 bankers to over 400 over the next few years, as well as improve our lending infrastructure, expand our credit policy and redesign our Small Business Administration, or SBA program.
Wealth Management : Provides a full range of advisory services to clients with an array of banking, investment and insurance products and services through a sales force of more than 400 financial consultants and private/premier bankers. Through the Premier Banking program, we provide clients that have estimated investable assets of $500,000 to $2 million with a complete range of wealth management solutions, including financial planning, private banking, investment management and trust services. Our Premier Banking program is currently available in Massachusetts, Rhode Island, Connecticut, New Hampshire, Michigan, Ohio, Philadelphia and Pittsburgh with expansion plans in 2014 and 2015 into other areas of the franchise. Since 2011, Premier Banking households have grown from 12,000 to 46,000. In addition to Premier Banking, we also have a Private Bank focused on individuals with over $2 million in investable assets. We offer tailored solutions to meet the lending, trust, investment and banking needs of our Private Banking clients. As of June 30, 2014, wealth management had approximately $4.2 billion in assets under management and more than $18.0 billion in investment brokerage assets.
Home Lending Solutions (HLS) : Offers home equity loans, HELOCs and residential mortgages. We serve customers primarily in our 11-state footprint and select out-of-footprint states through both the branch network, a direct to consumer call center and a mortgage loan officer base of 366 as of June 30, 2014. Home equity originations are sourced almost exclusively through our branch network and, based on first quarter 2014 originations, we ranked in the top five in all of our 10 largest markets
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for HELOCs based on data provided by Equifax. In addition, we ranked sixth nationally in HELOCs by outstanding balances as of June 30, 2014, according to SNL Financial. The home equity portfolio is conservatively underwritten with a refreshed average loan to value of 66% and a refreshed average FICO score of 765. Our mortgage business has grown from an unranked position to a position of relevance over the last four years, ranking 27th nationally among retail originators as reported by Inside Mortgage Finance for the first quarter of 2014. This new mortgage business is also conservatively underwritten with an average FICO of 765 and average loan to value of 70%. The business continues to focus on growing its sales force and improving back office efficiencies and is currently implementing a new origination platform designed to streamline our fulfillment process, enhance productivity and decrease the time from application to close, which is a key driver of customer satisfaction.
Indirect Auto Finance : Provides financing for the purchase of both new and used vehicles through a network of over 6,500 automotive dealerships in 43 states as of June 30, 2014, compared to just over 3,400 dealers in 23 states at December 31, 2010. As of June 30, 2014, we ranked 12th nationally among regulated depository institutions, and, in terms of first quarter 2014 originations, we ranked in the top five in seven of our top 10 markets according to Autocount. The average FICO score for first half 2014 originations was 759, compared to an average FICO score of 769 for 2013 originations, and the mix between new and used cars financed was 63% and 37%, respectively. In addition to expanding the geographic footprint of our business, we implemented a new origination platform in October 2013 that has facilitated more granular credit and pricing strategies which will enable us to optimize risk-adjusted returns. Our underwriting strategy, which has historically focused on super-prime, continues to focus on high quality borrowers through a prudent expansion of originations across a broader credit spectrum to include predominantly prime auto loans. As a result, we have been able to increase organic originations and have entered into a flow purchase agreement with a third party to accelerate our move into the prime space. The minimum weighted average FICO score for loans purchased under the flow purchase agreement is 705. For more information regarding this flow purchase agreement, see Managements Discussion and Analysis of Financial Condition and Results of OperationsRecent Events.
Student Lending : Offers a variety of student loan products including the TruFit Student Loan program, which features no origination, application or disbursement fees, competitive rates and a choice of repayment options. We launched education finance in 2009 and have expanded to partner with over 1,200 higher education schools in all 50 states, which resulted in loan origination volume more than doubling to $253 million in 2013 from $112 million in 2010. Loan origination volume was $147 million during the first six months of 2014. In 2013, 96% of our private student loan originations had co-signors and approximately 75% of our borrowers had a FICO score above 750. In January 2014, we launched an Education Refinance Loan product, which is a loan solution for students that have graduated from college or graduate school and are looking to refinance or consolidate private student loan debt.
Commercial Banking Segment
Commercial Banking primarily targets companies and institutions with annual revenues of $25 million to $2.5 billion and strives to serve as the lead bank for its clients with multi-product, long-term, profitable relationships, driven by proactively delivering compelling financial solutions with quality execution and an emphasis on building long-term relationships. While activity is concentrated within the 11-state footprint, Commercial Banking pursues business opportunities nationally on a targeted basis.
We believe our Commercial Banking segment provides a compelling value proposition for our clients as evidenced by our Greenwich Associates top five ranking in both client penetration and number of lead relationships in middle market banking within our footprint based on rolling four-quarter
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data as of June 30, 2014. In addition, we strengthened our market share in loan syndications from 25th by volume of syndicated loans and 18th by number of syndicated loans in 2010 to 10th by volume and 9th by number in the first half of 2014, according to the Thomson Reuters overall national middle market bookrunner league table. Commercial Banking accounted for $37.5 billion, or approximately 44%, of the loans in our operating segments as of June 30, 2014, up significantly from 36% as of December 31, 2009.
Commercial Banking is composed of lines of business, as well as product groups. The Corporate Finance & Capital Markets and the Treasury Solutions product groups support all lines of business in Commercial Banking. These business lines and product groups work in teams to understand and determine client needs and provide comprehensive solutions to meet those needs. New clients are acquired through a coordinated approach to the market ranging from leveraging deep industry knowledge in specialized banking groups to deploying a regional coverage approach for middle market businesses with targeted profiles that are headquartered in our branch geographic footprint. Complementing these direct, field-based origination activities are telephone and e-marketing-based lead generation programs.
Commercial Banking is organized as follows:
Corporate Banking : Targets domestic commercial and industrial clients, serving middle-market companies with annual gross revenues of $25 million to $500 million and mid-corporate companies with annual revenues of $500 million to $2.5 billion. It offers a broad range of products, including lines of credit, term loans, commercial mortgages, domestic and global treasury management solutions, trade services, interest rate products and foreign exchange, providing an average revenue mix of approximately 70% interest income and 30% fee income. Loans are extended on both a secured and unsecured basis, according to the credit profile of the client, and substantially all loans are floating rate loans at varying spreads over LIBOR. The average tenor of our commercial loans varies according to market conditions but currently stands at 3.4 years. Corporate Banking is a general lending practice, but is augmented by an expanding number of specialty lending groups targeting U.S. subsidiaries of foreign corporations, technology companies, government entities, including state governments, counties, municipalities, public schools, trustees, commissions, authorities and districts throughout New England; healthcare companies; not-for-profit and educational institutions throughout the footprint; security alarm companies; and professional firms, including legal, accounting and consulting firms, private trustees, family offices, title insurance companies and real estate investment trusts; Franchise Finance, providing financing to restaurant companies, convenience stores and gas stations on a national basis and Business Capital (asset based lending). The portfolio is well diversified with over 4,000 commercial relationships and approximately $40.0 billion in commitments. The
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weighted-average credit profile of Corporate Bankings mid-corporate clients is a low investment grade equivalent, while the middle market is a near investment grade equivalent.
Asset Finance : Offers loan and tax- and non-tax-oriented leases, with an average term of approximately six-and-a-half years and a maximum term of 20 years for long-lived assets such as rail cars. The team also offers equipment financing term loans for middle market and mid-corporate companies located in our branch footprint, as well as Fortune 500 companies throughout the United States. All transactions are secured by the assets financed, commitments tend to be fully drawn and most leases and loans are fixed rate. Areas of industry specialization include energy, utilities and chemicals. We also deploy dedicated teams to financing corporate aircraft. Fee income is related to operating lease income, syndications fees and equipment/residual gains.
Commercial Real Estate : Provides customized debt capital solutions for middle market and institutional developers and investors as well as real estate investment trusts (REITs). We provide financing for projects in the office, multi-family, industrial, core retail, healthcare and hospitality sectors. Loan types include construction financing, term debt and lines of credit. Most loans are secured by commercial real estate properties and all are non-owner occupied. Any owner-occupied commercial real estate would be originated through our Corporate Banking business. REIT credit facilities are typically unsecured but based upon an advance formula on unlevered real estate holdings. Portfolio concentrations consist of 25% office, 27% multi-family, 18% retail, 6% industrial, 5% hospitality and 7% healthcare as of June 30, 2014. Our prudent credit underwriting standards and sound risk management practices, along with the benefit of improved economic conditions, resulted in a net recovery (i.e., recoveries exceeding charge-offs) of 4 basis points for the six months ended June 30, 2014. In addition, nonaccrual loans have declined by over 80% from year-end 2010 and net income has increased by more than 300%.
Corporate Finance & Capital Markets : The product groups include debt capital markets, corporate finance, strategic client acquisitions, foreign exchange and interest rate risk management services and financial advisory and equity capital markets services under a referral agreement with Oppenheimer & Co., Inc. (Oppenheimer). The lines of business include the centralized leveraged finance team, which provides leveraged financing solutions; the private equity team, which serves the unique and time-sensitive needs of private equity firms, management companies and funds; and the sponsor finance team, which provides acquisition and follow-on financing for new and recapitalized portfolio companies. Since 2010, we have dedicated a substantial amount of time and resources to building our capital markets capabilities. We have added key hires with capital markets, leveraged finance and loan syndication expertise to enhance our ability to provide thoughtful and timely advice to clients.
| Capital Markets originates, structures and underwrites multibank credit facilities. We target middle market, mid-corporate and private equity sponsors with a focus on offering value-added ideas to optimize their capital structure. We are able to originate and distribute senior and second lien debt through our sales desk and work with RBS to originate investment grade and high yield bonds along with convertible debt. Additionally, Capital Markets has expanded its loan sales capabilities allowing a focus on institutional relationships beyond RBS core investors. The group is in the final stages of building a secondary loan trading desk which is the next critical step following the expansion of the distribution business. From 2010 through the first half of 2014, Capital Markets has been involved in closing 409 transactions and has served in the lead-left role on 186 transactions and as joint lead arranger on 223 transactions. Our experience and execution capabilities have catapulted our league table standings from 25th by volume of syndicated loans and 18th by number of syndicated loans in 2010 to 10th by volume and 9th by number in the first half of 2014, according to the Thomson Reuters overall national middle market bookrunner league table. |
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| Corporate Finance provides advisory services to middle market and mid-corporate companies. Services include M&A, equity private placements and capital structure advisory. The team works closely with industry sector specialists within debt capital markets on proprietary transaction development which serves to originate deal flow in multiple bank products. The team is also responsible for coordinating the financial advisory and equity capital markets referral agreement with Oppenheimer. |
| Global Markets is a customer-facing business providing foreign exchange and interest rate risk management services: |
| Interest Rate Products is a customer-facing business providing interest rate risk management services to help companies mitigate risks associated with interest rate volatility. |
| Foreign Exchange is a customer-facing business that provides foreign exchange payment and risk management services to help companies mitigate risk associated with currency fluctuations. Global Markets FX provides payment and risk management products to assist its corporate and consumer customers. We offer clients cross-border payable and receivable solutions in over 125 local currencies by utilizing a global network of correspondent partner banks. These services allow our customers to maximize returns on assets and minimize exchange rate costs. |
| Leveraged Finance offers debt financing solutions for middle market and mid-corporate companies supporting acquisition, recapitalization, refinancing, and growth capital transactions across a wide range of industries. Transactions are typically secured by a first security interest in the companys assets and include public, private, and private equity owned entities. Leveraged Finance is responsible for the underwriting, execution, and portfolio management of our leveraged cash flow transactions. |
| The Private Equity Banking Group specializes in banking services to private equity funds, venture capital funds, infrastructure funds, credit funds and secondary funds. These services include capital call revolving lines of credit, management company lines of credit, and associated banking products and services such as cash management, foreign exchange and wealth management. |
| Strategic Client Acquisition (SCA) was created to accelerate new client relationships through active participation in primary and secondary loan markets. The team efficiently sources transactions through long-established relationships in traditional pro rata markets as well as institutional, or term loan B, markets across all sectors. The combination of pro rata and term loan B tranches allows our traditional banking team to forge new relationships and accelerate existing relationship development while generating highly accretive returns. |
Treasury Solutions : Supports all lines of business in Commercial Banking and Business Banking with treasury management solutions, including domestic and international cash management, commercial cards and trade finance. Treasury Solutions provides services to the smallest business banking clients ($500,000 annual revenue) to our largest mid-corporate clients (over $2.5 billion annual revenue). Treasury Solutions manages the client experience end to end, from product development to sales to implementation to client services. Treasury Solutions offers a range of innovative products and services to meet clients treasury management needs, which typically include enhancing cash flow, maintaining liquidity, automating reconciliation and posting, and mitigating fraud. Traditional domestic cash management products solve client needs related to receivables, payables, information reporting and liquidity management. Receivables products include wholesale and retail lockbox, remote deposit capture, image cash letter, integrated receivables including automated clearinghouse house, or ACH, and wire data and coin and currency. Receivables products help our customers reduce days sales outstanding by collecting their receivables faster and posting information to their accounts receivable or
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enterprise resource planning, or ERP, systems more efficiently. Payables products include ACH, wire transfer, account reconciliation, integrated payables, electronic invoice payment and presentment, commercial cards and ePayables. Payables products help our clients pay efficiently, maximize working capital by extending days payables outstanding, and reconcile their payments to their accounts payable or ERP systems. Treasury Solutions offers robust information reporting services led by our commercial online banking system and augmented by alternate reporting channels including email, transmission, phone and fax. Our liquidity management solutions, including zero balance accounts, sweep-to-investment, and sweep-to-line help our clients maximize working capital by eliminating idle balances. Treasury Solutions offers international solutions to our clients including cash management solutions in Canada and trade finance solutions such as import and export letters of credit, bankers acceptance and supply chain finance.
Competition
The financial services industry in general and in our branch footprint is highly competitive. Our branch footprint is in the New England, Mid-Atlantic and Midwest regions, though certain lines of business serve broader, national markets. Within those markets we face competition from community banks, super-regional and national financial institutions, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies and money market funds. Competition among providers of financial products and services continues to increase, with consumers having the opportunity to select from a growing variety of traditional and nontraditional alternatives. The ability of non-banking financial institutions to provide services previously limited to commercial banks has intensified competition.
In Consumer Banking, the industry has become increasingly dependent on and oriented towards technology-driven delivery systems, permitting transactions to be conducted by telephone and computer, as well as through online and mobile channels. In addition, technology has lowered the barriers to entry and made it possible for non-bank institutions to attract funds and provide lending and other financial services in our footprint despite not having a physical presence within our footprint. Given their lower cost structure, these institutions are often able to offer rates on deposit products that are higher than what may be average for the market for retail banking institutions with a traditional branch footprint, such as us. The primary factors driving competition for loans and deposits are interest rates, fees charged, customer service levels, convenience, including branch location and hours of operation, and the range of products and services offered. In particular, the competition for home equity lines and auto loans has intensified, resulting in pressure on pricing.
In Commercial Banking, there is intense competition for quality loan originations from traditional banking institutions, particularly large regional banks, as well as commercial finance companies, leasing companies and other non-bank lenders, and institutional investors including collateralized loan obligation (CLO) managers, hedge funds and private equity firms. Some larger competitors, including certain national banks that have a significant presence in our market area, may offer a broader array of products and, due to their asset size, may sometimes be in a position to hold more exposure on their own balance sheet. We compete on a number of factors including, among others, customer service, quality of execution, range of products offered, price and reputation.
Intellectual Property
In the highly competitive banking industry in which we operate, trademarks, service marks, trade names and logos are important to the success of our business. We own and license a variety of trademarks, service marks, trade names, logos and pending registrations and are spending significant resources to develop our stand-alone brands. In connection with this offering, we expect to enter into a trademark license agreement, pursuant to which we will be granted a limited license to use certain
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trademarks (including the daisywheel logo) from RBS for an initial term of 5 years and, at our option, up to 10 years, following the completion of the offering. See Our Relationship with the RBS Group and Certain Other Related Party TransactionsRelationship with the RBS GroupTrademark License Agreement. After the consummation of this offering, we intend to change the legal names of any of our subsidiaries that continue to include RBS and to continue operational and legal work to rebrand CFG and our banking subsidiaries. The process of changing all marketing materials, operational materials, signage, systems, and legal entities containing RBS to our new brand name will take approximately 14 months and cost approximately $14 million, excluding any incremental advertising and customer communication expenses. We expect to then shift the majority of our advertising and marketing budget to our new brand progressively as the different legal entities complete their individual brand name changes; we expect the shift in advertising and marketing investment to be completed no later than July 31, 2015.
Information Technology Systems
We have recently made and continue to make significant investments in our information technology systems for our banking and lending and cash management activities. We believe this is necessary investment in order to offer new products and improve our overall customer experiences, as well as to provide scale for future growth and acquisitions. The technology investments include replacing systems that support our branch tellers, commercial loans, automobile loans and treasury solutions. Additional investments that are in process include creating an enterprise data warehouse to capture and manage data to better understand our customers, identify our capital requirements and support regulatory reporting and a new mortgage system for our home lending solutions business.
Employees
As of June 30, 2014, we had approximately 18,050 employees, which included approximately 17,400 full-time employees, 760 part-time employees, including employees on leave, and approximately 575 positions filled by temporary employees. None of our employees are parties to a collective bargaining agreement. We consider our relationship with our employees to be good and have not experienced interruptions of operations due to labor disagreements.
Properties
Our headquarters is in Providence, Rhode Island. As of June 30, 2014, we leased approximately 5.8 million square feet of office and retail branch space. Our portfolio of leased space consists of 3.8 million square feet of retail branch space which spans 11 states and 2.0 million square feet of non-branch office space. As of June 30, 2014, we owned an additional 1.1 million square feet of office and branch space. We operate 82 branches in Rhode Island, 46 in Connecticut, 250 in Massachusetts, 20 in Vermont, 74 in New Hampshire, 147 in New York, 11 in New Jersey, 360 in Pennsylvania, 23 in Delaware, 119 in Ohio and 97 in Michigan. Of these branches, 1,185 are leased and the rest are owned. Management believes the terms of the various leases are consistent with market standards and were arrived at through arms-length bargaining. We also believe that our properties are in good operating condition and adequately serve our current business operations. We anticipate that suitable additional or alternative space, including those under lease options, will be available at commercially reasonable terms for future expansion.
Legal and Regulatory Proceedings
We operate in a legal and regulatory environment that exposes us to potentially significant risks. In addition to the matters described below, in the normal course of business, we are named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with our activities as a banking institution, including with respect to allegations of
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unfair or deceptive business practices and mis-selling of certain products. Actual or threatened legal actions against us include claims for substantial amounts of compensatory damages, claims for intermediate amounts of compensatory damages and claims for punitive damages. For additional information, see Note 12 Commitments, Guarantees and Contingencies to our unaudited interim consolidated financial statements and Note 16 Commitments, Guarantees and Contingencies to our audited consolidated financial statements included elsewhere in this prospectus.
In part as a result of the extensive regulation, supervision and examination of our business described elsewhere in this prospectus, we are also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding our business, certain of which may result in adverse judgments, settlements, fines, penalties, public or private censure, increased costs, required remediation, restriction on business activities or other impacts on us.
We contest liability and the amount of damages as appropriate in each pending matter. Where available information indicates that it is probable a liability has been incurred at the date of the consolidated financial statements and we can reasonably estimate the amount of that loss, we accrue the estimated loss as a charge to income.
In many proceedings, however, it is inherently difficult to determine whether any loss is probable or even possible or to estimate the amount of any loss. We cannot predict with certainty if, how or when such proceedings will be resolved or what the eventual settlement, fine, penalty or other relief, if any, may be, particularly for proceedings that are in their early stages of development or where plaintiffs seek substantial or indeterminate damages. Numerous issues may need to be resolved before liability can be reasonably estimated, including through potentially lengthy discovery and determination of important factual matters, determination of issues related to class certification and the calculation of damages and by addressing novel or unsettled legal questions relevant to the proceedings in question.
Set out below are descriptions of significant legal matters in which we are involved. Subject to the foregoing, and based on current knowledge, consultation with counsel and established reserves, we believe that the outcome of such proceedings will not have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
Consumer Products
The activities of our banking subsidiaries are subject to extensive laws and regulations concerning unfair or deceptive acts or practices in connection with customer products. Certain of our banking subsidiaries practices with respect to overdraft protection and other consumer products have not met applicable standards. Our banking subsidiaries have implemented and are continuing to implement changes to bring their practices in conformity with applicable laws and regulations. In April 2013, our banking subsidiaries consented to the issuance of orders by the OCC and the FDIC (the Consent Orders). In the Consent Orders (which are publicly available and will remain in effect until terminated by the regulators), our banking subsidiaries neither admitted nor denied the regulators findings that they had engaged in deceptive marketing and implementation of the banks overdraft protection program, checking rewards programs, and stop-payment process for pre-authorized recurring electronic fund transfers. Under the Consent Orders, our banking subsidiaries paid a total of $10 million in civil monetary penalties and are required to develop plans to provide restitution to affected customers. The amount of restitution is currently anticipated to be approximately $8 million, and that amount is fully covered by an existing reserve. The Consent Orders also require our banking subsidiaries to cease and desist any operations in violation of Section 5 of the Federal Trade Commission Act, and to submit to the regulators periodic written progress reports regarding compliance with the Consent Orders. In addition, CBNA agreed to take certain remedial actions to
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improve its compliance risk management systems and to create a comprehensive action plan designed to achieve compliance with the Consent Order. Restitution plans have been prepared and submitted for approval, and CBNA has submitted for approval and is in the process of implementing its action plan for compliance with the Consent Order, as well as updated policies, procedures, and programs related to its compliance risk management systems.
Our banking subsidiaries are also addressing issues regarding, among other things, certain identity theft and debt cancellation products, certain overdraft fees, signature debit card fees, our banking subsidiaries policies and practices with respect to consumer complaints process, fair lending, identifying and correcting errors in customer deposits, and the charging of cost-based credit card late payment fees. Our banking subsidiaries have paid restitution, and expect to pay additional restitution, to certain affected customers in connection with certain of these practices. In addition, our banking subsidiaries may face formal administrative enforcement actions from their federal and other governmental supervisory agencies, including the assessment of civil monetary penalties and restitution, relating to the past practices and policies identified above and other consumer products, and they could also face potential civil litigation. For further information regarding risks related to regulatory actions and litigation, please refer to Risk FactorsRisks Related to Our BusinessSupervisory requirements and expectations on us as a financial holding company and a bank holding company, our need to make improvements and devote resources to various aspects of our controls, processes, policies and procedures, and any regulator-imposed limits on our activities, could limit our ability to implement our strategic plan, expand our business, improve our financial performance and make capital distributions to our stockholders, Risk FactorsRisks Related to Regulations Governing Our IndustryWe are and may be subject to regulatory actions that may have a material impact on our business and Risk FactorsRisks Related to Regulations Governing Our IndustryWe are and may be subject to litigation that may have a material impact on our business.
Fair Labor Standards Act Litigation
We were named in several purported class actions brought under the Fair Labor Standards Act (FLSA) and equivalent state statutes alleging that certain categories of branch employees were denied overtime for hours worked. These suits were brought by current and former branch employees alleging that either: (1) they are/were in Assistant Branch Manager positions and were improperly classified as exempt under the FLSA thereby denying them pay for all hours worked, including overtime pay; or (2) they are/were properly classified as non-exempt tellers, bankers or the like but were told not to record all of their hours, had hours they entered deleted by their managers and/or were otherwise denied pay for hours worked, including overtime pay. These cases covered our entire geographic footprint, and have been settled, with final court approval of the settlements granted May 5, 2014. The settlement amount ($12 million), which had been fully covered by a then existing reserve, has been paid by us and is in the process of being distributed pursuant to the terms of the settlement. Separately, we were named in two lawsuits brought by current and former mortgage loan officers and home loan advisors alleging that they were improperly classified as exempt under the FLSA and corresponding state laws and therefore denied pay for all hours worked, including overtime pay. These cases have also been settled, and final court approval of the settlements was granted on January 29, 2014. The combined settlement amount of these two cases ($3 million), which had been fully covered by then existing reserves, has been paid by us and distributed pursuant to the terms of the settlements.
Telephone Consumer Protection Act Litigation
We are a defendant in a purported class action complaint filed in December 2013 in the United States District Court for the Southern District of California pursuant to the Telephone Consumer Protection Act (TCPA). The named plaintiff purports to represent a national class of customers who allegedly received automated calls to their cell phones from the bank or its agents, without customer consent, in violation of the TCPA. We are vigorously defending this matter.
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LIBOR Litigation
We are a defendant in lawsuits in which allegations have been made that our parent company, the RBS Group, manipulated U.S. dollar LIBOR to the detriment of our customers. The lawsuits include a purported class action on behalf of our borrowers whose interest rate was tied to U.S. dollar LIBOR. The plaintiffs in these cases assert various theories of liability, including fraud, negligent misrepresentation, breach of contract, and unjust enrichment. We are vigorously defending these matters.
Foreclosure-Related Expenses
In May 2013, the civil division of the U.S. Attorneys Office for the Southern District of New York served a subpoena pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 seeking information regarding home mortgage foreclosure expenses submitted for reimbursement to the United States Department of Housing and Urban Development, the Federal National Mortgage Association, or the Federal Home Loan Mortgage Corporation. We are cooperating with the investigation.
Mortgage Repurchase Demands
We are an originator and servicer of residential mortgages and routinely sell such mortgage loans in the secondary market and to government-sponsored entities. In the context of such sales, we make certain representations and warranties regarding the characteristics of the underlying loans and, as a result, may be contractually required to repurchase such loans or indemnify certain parties against losses for certain breaches of those representations and warranties. Between January 1, 2009 and June 30, 2014, we received approximately $146 million in repurchase demands and $97 million in indemnification payment requests in respect of loans originated, for the most part, since 2003. Of those claims presented, $81 million was paid to repurchase residential mortgage loans, and $32 million was incurred for indemnification costs to make investors whole. We repurchased mortgage loans totaling $35 million and $13 million for the years ended December 31, 2013 and 2012, respectively, and $17 million and $26 million for the six months ended June 30, 2014 and 2013, respectively. We incurred indemnification costs of $12 million and $5 million for the years ended December 31, 2013 and 2012, respectively, and $7 million and $6 million for the six months ended June 30, 2014 and 2013, respectively. We cannot estimate what the future level of repurchase demands or our ultimate exposure will be, and cannot give any assurance that the historical experience will continue in the future. It is possible that the volume of repurchase demands will increase. In addition to the above, we have since December 2013 been responding to subpoenas issued by the Office of the Inspector General for the Federal Housing Finance Agency seeking information about loans sold to the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation from 2003 through 2011.
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Our operations are subject to extensive regulation, supervision and examination under federal and state law. These laws and regulations cover all aspects of our business, including lending practices, safeguarding deposits, customer privacy and information security, capital structure, transactions with affiliates and conduct and qualifications of personnel. These laws and regulations are intended primarily for the protection of depositors, the Deposit Insurance Fund and the banking system as a whole and not for the protection of shareholders and creditors.
In 2010, President Obama signed into law the Dodd-Frank Act, which restructured the financial regulatory regime in the United States. The Dodd-Frank Act represents a significant overhaul of many aspects of the regulation of the financial services industry, addressing, among other things, systemic risk, capital adequacy, deposit insurance assessments, consumer financial protection, derivatives, restrictions on an insured banks transactions with its affiliates, lending limits and mortgage-lending practices. Various provisions of the Dodd-Frank Act, discussed in greater detail below, require the issuance of many implementing regulations which will take effect over several years, making it difficult to anticipate the overall impact to us, our subsidiaries or the financial industry more generally. While the overall impact cannot be predicted with any degree of certainty, the Dodd-Frank Act will affect us across a wide range of areas.
As a result of and in addition to new legislation aimed at regulatory reform, such as the Dodd-Frank Act, and the increased capital and liquidity requirements introduced by the U.S. implementation of the Basel III framework, the federal banking agencies, the Federal Reserve Board, the OCC and the FDIC, as well as the new CFPB, have taken a generally stricter approach to supervising and regulating financial institutions and financial products and services over which they exercise their respective supervisory authorities. We, our two banking subsidiaries and our products and services are all subject to greater supervisory scrutiny and enhanced supervisory requirements and expectations and face significant challenges in meeting them. We expect to continue to face greater supervisory scrutiny and enhanced supervisory requirements for the foreseeable future.
General
As a bank holding company and financial holding company (as defined in the Bank Holding Company Act), we are subject to regulation, supervision and examination by the Federal Reserve Board, through the Federal Reserve Bank of Boston.
CBNA is a national banking association. As such, it is subject to regulation, examination and supervision by the OCC as its primary federal regulator and by the FDIC as the insurer of its deposits.
CBPA is a Pennsylvania-chartered savings bank. Accordingly, it is subject to supervision by the Department of Banking of the Commonwealth of Pennsylvania (the PA Banking Department), as its chartering agency, and regulation, supervision and examination by the FDIC as the primary federal regulator of state-chartered savings banks and as the insurer of its deposits.
A principal objective of the U.S. bank regulatory system is to protect depositors by ensuring the financial safety and soundness of banks. To that end, the banking regulators have broad regulatory, examination and enforcement authority. The regulators regularly examine our operations, and CFG and our banking subsidiaries are subject to periodic reporting requirements.
The regulators have various remedies available if they determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of a banking organizations operations are unsatisfactory. The regulators may also take action if they
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determine that the banking organization or its management is violating or has violated any law or regulation. The regulators have the power to, among other things:
| enjoin unsafe or unsound practices; |
| require affirmative actions to correct any violation or practice; |
| issue administrative orders that can be judicially enforced; |
| direct increases in capital; |
| direct the sale of subsidiaries or other assets; |
| limit dividends and distributions; |
| restrict growth; |
| assess civil monetary penalties; |
| remove officers and directors; and |
| terminate deposit insurance. |
CBNA and CBPA are subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged and limitations on the types of investments that may be made, activities that may be engaged in, the opening and closing of branches and types of services that may be offered. The consumer lending and finance activities of CBNA and CBPA are also subject to extensive regulation under various federal and state laws. These statutes impose requirements on the making, enforcement and collection of consumer loans and on the types of disclosures that must be made in connection with such loans. CBNA and CBPA and certain of their subsidiaries are also prohibited from engaging in certain tie-in arrangements in connection with extensions of credit, leases or sales of property, or furnishing products or services.
In addition, CBNA and CBPA are subject to regulation, supervision and examination by the CFPB. The CFPB has broad authority to regulate the offering and provision of consumer financial products by depository institutions with more than $10 billion in total assets. The CFPB may promulgate rules under a variety of consumer financial protection statutes, including the Truth in Lending Act, the Electronic Funds Transfer Act and the Real Estate Settlement Procedures Act.
The Dodd-Frank Act established the Financial Stability Oversight Council, which has oversight authority for monitoring and regulating systemic risk, and can recommend prudential standards, reporting and disclosure requirements to the Federal Reserve Board for systemically important financial institutions.
Financial Holding Company Regulation
The Gramm-Leach-Bliley Act of 1999 (GLBA) permits a qualifying bank holding company to become a financial holding company. Financial holding companies may engage in a broader range of activities than those permitted for a bank holding company, which are limited to (i) banking, managing or controlling banks, (ii) furnishing services to or performing services for subsidiaries and (iii) activities that the Federal Reserve Board has determined to be so closely related to banking as to be a proper incident thereto. GLBA broadens the scope of permissible activities for financial holding companies to include, among other things, securities underwriting and dealing, insurance underwriting and brokerage, merchant banking and other activities that are declared by the Federal Reserve Board, in cooperation with the Treasury Department, to be financial in nature or incidental thereto or that the Federal Reserve Board declares unilaterally to be complementary to financial activities. In addition, a
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financial holding company may conduct permissible new financial activities or acquire permissible non-bank financial companies with after-the-fact notice to the Federal Reserve Board.
We have elected and qualified for financial holding company status under the GLBA. To maintain financial holding company status, a financial holding company and its banking subsidiaries must remain well capitalized and well managed, and maintain a Community Reinvestment Act (CRA) rating of at least Satisfactory. If a financial holding company ceases to meet these requirements, the Federal Reserve Boards regulations provide that we must enter into an agreement with the Federal Reserve Board to comply with all applicable capital and management requirements. Until the financial holding company returns to compliance, the Federal Reserve Board may impose limitations or conditions on the conduct of its activities, and the company may not commence any of the broader financial activities permissible for financial holding companies or acquire a company engaged in such financial activities without prior approval of the Federal Reserve Board. Any restrictions imposed on our activities by the Federal Reserve Board may not necessarily be made known to the public. If the company does not return to compliance within 180 days, the Federal Reserve Board may require divestiture of the companys depository institutions. Failure to satisfy the financial holding company requirements could also result in loss of financial holding company status. Bank holding companies and banks must also be both well capitalized and well managed in order to acquire banks located outside their home state.
The OCC recently determined that CBNA is not currently both well capitalized and well managed, as those terms are defined in applicable regulations, based on certain minimum capital ratios and supervisory ratings, respectively, and consequently no longer meets the conditions to own a financial subsidiary. A financial subsidiary is permitted to engage in a broader range of activitiessimilar to those of a financial holding companythan those permissible for a national bank. CBNA has two financial subsidiaries, Citizens Securities, Inc., a registered broker-dealer, and RBS Citizens Insurance Agency, Inc., a dormant entity, although it continues to collect commissions on certain outstanding policies. CBNA has entered into the OCC Agreement pursuant to which it must develop a remediation plan, which must be approved by the OCC, setting forth the specific actions it will take to bring itself back into compliance with the conditions to own a financial subsidiary and the schedule for achieving that objective. Until CBNA satisfactorily addresses the deficiencies, it will be subject to restrictions on its ability to acquire control or build an interest in any new financial subsidiary and to commence new activities in any existing financial subsidiary, without the prior approval of the OCC. If CBNA fails to remediate the condition within 180 days after receipt of the OCC Agreement, or such longer period as the OCC may permit, it may have to divest itself of its financial subsidiaries and comply with any additional limitations or conditions on its conduct as the OCC may impose. CBNA has implemented a comprehensive enterprise-wide program that seeks to address these deficiencies.
Separately, CBNA is also making improvements to its compliance management systems, risk management, deposit reconciliation practices and overdraft fees in order to address deficiencies in those areas. CBPA is making improvements to address deficiencies in its deposit reconciliation practices, overdraft fees, identity theft add-on products, third-party payment processor activities, oversight of third-party service providers, compliance program, policies and, procedures and training, consumer complaints process and anti-money laundering controls. These efforts require us to make investments in additional resources and systems and also require a significant commitment of managerial time and attention.
We are also required to make improvements to our overall compliance and operational risk management programs and practices in order to comply with enhanced supervisory requirements and expectations and to address weaknesses in retail credit risk management, liquidity risk management, model risk management, outsourcing and vendor risk management and related oversight and monitoring practices and tools. Our and our banking subsidiaries consumer compliance program and controls also require improvement, particularly with respect to deposit reconciliation processes, fair lending and mortgage servicing.
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Under the Bank Holding Company Act, currently we may not be able to engage in certain categories of new activities or acquire shares or control of other companies other than in connection with internal reorganizations.
Standards for Safety and Soundness
The FDIA requires the Federal Reserve Board, OCC and FDIC to prescribe operational and managerial standards for all insured depository institutions, including CBNA and CBPA. The agencies have adopted regulations and interagency guidelines which set forth the safety and soundness standards used to identify and address problems at insured depository institutions before capital becomes impaired. If an agency determines that a bank fails to satisfy any standard, it may require the bank to submit an acceptable plan to achieve compliance, consistent with deadlines for the submission and review of such safety and soundness compliance plans.
Under Section 619 of the Dodd-Frank Act, which codifies the Federal Reserve Boards long-standing source of strength doctrine, any bank holding company that controls an insured depository institution must serve as a source of financial and managerial strength for its depository institution subsidiary. The statute defines source of financial strength as the ability to provide financial assistance in the event of the financial distress at the insured depository institution. The Federal Reserve Board may require a bank holding company to provide such support at times when it may not have the financial resource to do so or when doing so is not otherwise in the interests of CFG or its shareholders or creditors.
CBPA is also subject to supervision by the PA Banking Department. The PA Banking Department may order any Pennsylvania-chartered savings bank to discontinue any violation of law or unsafe or unsound business practice. It may also order the termination of any trustee, officer, attorney or employee of a savings bank engaged in objectionable activity.
Dividends
Various federal and state statutory provisions and regulations, as well as regulatory expectations, limit the amount of dividends that we and our subsidiaries may pay. Dividends payable by CBNA, as a national bank subsidiary, are limited to the lesser of the amount calculated under a recent earnings test and an undivided profits test. Under the recent earnings test, a dividend may not be paid if the total of all dividends declared by a bank in any calendar year is in excess of the current years net income combined with the retained net income of the two preceding years, less any required transfers to surplus, unless the national bank obtains the approval of the OCC. Under the undivided profits test, a dividend may be paid only to the extent that retained net profits (as defined and interpreted by regulation), including the portion transferred to surplus, exceed bad debts (as defined by regulation). CBNA is currently required to seek the OCCs approval prior to paying any dividends to us. Federal bank regulatory agencies have issued policy statements which provide that FDIC-insured depository institutions and their holding companies should generally pay dividends only out of their current operating earnings. Under Pennsylvania law, CBPA may declare and pay dividends only out of accumulated net earnings. It may not declare dividends unless its retained earnings equal or exceed contributed capital.
Furthermore, with respect to both CBNA and CBPA, if, in the opinion of the applicable federal regulatory agency, either is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), the regulator may require, after notice and hearing, that such bank cease and desist from such practice. The OCC and the FDIC have indicated that the payment of dividends would constitute an unsafe and unsound practice if the payment would reduce a depository institutions capital to an inadequate level.
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Supervisory stress tests conducted by the Federal Reserve Board in connection with its annual CCAR process affect our ability to make capital distributions. As part of the CCAR process, the Federal Reserve Board evaluates institutions capital adequacy and internal capital adequacy assessment processes to ensure that they have sufficient capital to continue operations during periods of economic and financial stress. The Federal Reserve Board must approve any planned distribution of capital in connection with the CCAR process. In March 2014, the Federal Reserve Board objected on qualitative grounds to our capital plan for the one-year period ending March 31, 2015 submitted as part of the CCAR process. In its public report entitled Comprehensive Capital Analysis and Review 2014: Assessment Framework and Results, the Federal Reserve Board cited significant deficiencies in our capital planning processes, including inadequate governance, weak internal controls and deficiencies in our practices for estimating revenues and losses under a stress scenario and for ensuring the appropriateness of loss estimates across our business lines in a specific stress scenario. Although the Federal Reserve Board acknowledged that bank holding companies such as ours that are new to the CCAR process are subject to different expectations, our weaknesses were considered serious enough to warrant the Federal Reserve Boards objection based on its qualitative assessment of our capital planning process. As a result, we are not permitted to increase our capital distributions above 2013 levels (for capital plan purposes, the one-year period ended March 31, 2014) until a new capital plan is approved by the Federal Reserve Board. The deadline for our next capital plan submission is January 5, 2015, and we cannot assure you that the Federal Reserve Board will not object to our next capital plan or that, even if it does not object to it, our planned capital distributions will not be significantly modified from 2013 levels.
In addition, the ability of banks and bank holding companies to pay dividends and make other forms of capital distribution will also depend on their ability to maintain a sufficient capital conservation buffer under the U.S. Basel III capital framework (described further below). The capital conservation buffer requirements will be phased in beginning on January 1, 2016. The ability of banks and bank holding companies to pay dividends, and the contents of their respective dividend policies, could be impacted by a range of regulatory changes made pursuant to the Dodd-Frank Act, many of which still require final implementing rules to become effective.
Federal Deposit Insurance Act
The FDIA imposes various requirements on insured depository institutions. For example, the FDIA requires, among other things, that the federal banking agencies take prompt corrective action in respect of depository institutions that do not meet minimum capital requirements, which are described below in Capital. The FDIA sets forth the following five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. A depository institutions capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors that are established by regulation.
The FDIA prohibits any depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be undercapitalized. Undercapitalized institutions are subject to growth limitations and are required to submit a capital restoration plan. For a capital restoration plan to be acceptable, among other things, the depository institutions parent holding company must guarantee that the institution will comply with the capital restoration plan. If a depository institution fails to submit an acceptable capital restoration plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, orders to elect a new board of directors, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized institutions are subject to the appointment of a receiver or conservator.
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The FDIA prohibits insured banks from accepting brokered deposits or offering interest rates on any deposits significantly higher than the prevailing rate in the banks normal market area or nationally (depending upon where the deposits are solicited), unless it is well capitalized, or it is adequately capitalized and receives a waiver from the FDIC. A bank that is adequately capitalized and that accepts brokered deposits under a waiver from the FDIC may not pay an interest rate on any deposit in excess of 75 basis points over certain prevailing market rates. The FDIA imposes no such restrictions on a bank that is well capitalized.
The FDIA requires CBNA and CBPA to pay deposit insurance assessments. Deposit insurance assessments are based on average consolidated total assets, less average tangible equity and various other regulatory factors included in a FDIC assessment scorecard. Deposit insurance assessments are also affected by the minimum reserve ratio with respect to the Deposit Insurance Fund (DIF). The minimum reserve ratio is currently 2%, and the FDIC is free to increase this ratio in the future.
Under the FDIA, banks may also be held liable by the FDIC for certain losses incurred, or reasonably expected to be incurred, by the DIF. Either CBNA and CBPA may be liable for losses caused by the others default and also may be liable for any assistance provided by the FDIC to the other if it is in danger of default.
Capital
We must comply with capital adequacy standards established by the Federal Reserve Board. CBNA and CBPA must comply with similar capital adequacy standards established by the OCC and FDIC, respectively. We currently have capital in excess of the well capitalized standards described below. For more detail on our regulatory capital, see Managements Discussion and Analysis of Financial Condition and Results of OperationCapital.
Capital Requirements Applicable to Us, As Currently in Effect
The Federal Reserve Board has adopted guidelines pursuant to which it assesses the adequacy of capital as part of its examination and supervision of a bank holding company. These guidelines include quantitative measures that assign risk weights to a bank holding companys assets, exposures and off-balance sheet items to determine its risk-weighted assets and that define and set minimum regulatory capital requirements.
Under existing regulatory capital rules applicable to us and our banking subsidiaries, capital is divided into two tiers. Tier 1 capital consists principally of stockholders equity less any amounts of goodwill, other intangible assets, non-financial equity investments and other items that are required to be deducted. Tier 2 capital consists principally of perpetual and trust preferred stock that is not eligible to be included as Tier 1 capital, term subordinated debt, intermediate-term preferred stock and, subject to limitations, general allowances for loan losses. Assets are adjusted under the risk-based guidelines to take into account different risk characteristics. Quarterly average on-balance sheet assets for purpose of the leverage ratio do not include goodwill, other intangible assets or items that the Federal Reserve Board has determined should be deducted from Tier 1 capital.
Under the capital adequacy guidelines currently in effect, bank holding companies must maintain a Tier 1 risk-based capital ratio of at least 4%, a total risk-based capital ratio of at least 8% and a leverage ratio of at least 4%. To qualify as well capitalized, a bank holding company must maintain a Tier 1 risk-based capital ratio of at least 6%, a total risk-based capital ratio of at least 10% and a leverage ratio of at least 5%.
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Basel III Final Rules Applicable to Us and Our Banking Subsidiaries
In July 2013, the Federal Reserve Board, OCC and FDIC issued the U.S. Basel III final rule. The final rule implements the Basel III capital framework and certain provisions of the Dodd-Frank Act, including the Collins Amendment, which establishes minimum risk-based capital and leverage requirements on a consolidated basis for insured depository institutions and their bank holding companies. Certain aspects of the final rule, such as the new minimum capital ratios, changes to the prompt corrective action ratios to reflect the higher minimum capital ratios for the various capital tiers and the revised methodology for calculating risk-weighted assets, will become effective on January 1, 2015. Other aspects of the final rule, such as the capital conservation buffer and the new regulatory deductions from and adjustments to capital, will be phased in over several years beginning on January 1, 2015.
The U.S. Basel III final rule includes a new minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 4.5% and a Common Equity Tier 1 capital conservation buffer of greater than 2.5% of risk-weighted assets that will apply to all U.S. banking organizations. Failure to maintain the capital conservation buffer will result in increasingly stringent restrictions on a banking organizations ability to make dividend payments and other capital distributions and pay discretionary bonuses to executive officers. The final rule also increases the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6%, while maintaining the current minimum total risk-based capital ratio of 8%. In addition, for the largest and most internationally active U.S. banking organizations, the final rule includes a new minimum supplementary leverage ratio that takes into account certain off-balance sheet exposures.
The U.S. Basel III final rule focuses regulatory capital on Common Equity Tier 1 capital, and introduces new regulatory adjustments and deductions from capital as well as narrower eligibility criteria for regulatory capital instruments. Consistent with the requirements of the Collins Amendment, the new eligibility criteria for regulatory capital instruments results in, among other things, trust preferred securities no longer qualifying as Tier 1 capital for bank holding companies, such as us. The final rule also revises the methodology for calculating risk-weighted assets for certain types of assets and exposures.
Liquidity Standards
The Federal Reserve Board evaluates our liquidity as part of the supervisory process. In September 2014, the Federal Reserve Board, OCC and FDIC issued a final rule to implement the Basel III LCR. The LCR is a quantitative liquidity metric designed by the Basel Committee to ensure that banks have sufficient high-quality liquid assets to cover expected net cash outflows over a 30-day liquidity stress period. The final rule applies a modified version of the LCR to bank holding companies with more than $50 billion but less than $250 billion in total assets, and less than $10 billion in on-balance sheet foreign exposure, such as us. The modified version of the LCR differs in certain respects from the Basel Committees version of the LCR, including a narrower definition of high-quality liquid assets, different prescribed cash inflow and outflow assumptions for certain types of instruments and transactions, and a shorter phase-in schedule that begins on January 1, 2016 and ends on January 1, 2017.
Basel III also will impose a NSFR, a quantitative liquidity metric designed to promote the resilience of a banks liquidity risk profile over a longer period than the LCR. The NSFR establishes a minimum acceptable amount of stable funding based on the liquidity characteristics of an institutions assets and activities over a one-year horizon. The NSFR has been developed to provide a sustainable maturity structure of assets and liabilities. The Basel Committee contemplates that the NSFR, including any revisions, will be implemented as a minimum standard by January 1, 2018. Federal banking regulators have not yet proposed rules to implement the NSFR in the United States.
In addition, under the Dodd-Frank Act the Federal Reserve Board has implemented enhanced prudential standards for bank holding companies with $50 billion or more in total consolidated assets.
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See Enhanced Prudential Standards. These regulations will require us to conduct regular liquidity stress testing over various time horizons and to maintain a buffer of higher liquid assets sufficient to cover expected net cash outflows and projected loss or impairment of funding sources for a short-term liquidity stress scenario. This liquidity buffer requirement is designed to complement the Basel III LCR, but how the two requirements will interact as they are implemented is not yet clear.
Stress Testing Requirements
The Federal Reserve Board, OCC and FDIC have promulgated final rules under the Dodd-Frank Act requiring us, CBNA and CBPA to conduct annual stress tests and publish a summary of the results. As part of our obligations under the Dodd-Frank Act, we, and certain other bank holding companies, will be required to publish results of the Dodd-Frank stress test (DFAST) during the third quarter of 2014. The DFAST process is used to project net income, loan losses and capital ratios over a nine-quarter horizon under hypothetical, stressful macroeconomic and financial market scenarios developed by the Federal Reserve Board as well as certain mandated assumptions about capital distributions prescribed in the DFAST rule. Given the purpose of the DFAST process and the assumptions used in order to assess our likely performance during hypothetical economic conditions, we expect that projected results under the DFAST severely adverse scenarios will show severe negative impacts on earnings, inconsistent with management expectations in light of the current economic and operating environment.
Separately, the Federal Reserve Board has issued an interim final rule specifying how large bank holding companies should incorporate the U.S. Basel III capital standards into their 2014 capital plan and stress test capital projections. Among other things, the interim final rule requires large bank holding companies to project both their Common Equity Tier 1 risk-based capital ratio using the methodology under existing capital guidelines and their Common Equity Tier 1 risk-based capital ratio under the U.S. Basel III capital standards, as such standards phase in over the nine-quarter planning horizon.
Final Regulations Under the Volcker Rule
In December 2013, the Federal Reserve Board, OCC and FDIC issued final rules to implement the Volcker Rule. The Volcker Rule prohibits an insured depository institution, such as CBNA and CBPA, and its affiliates from (1) engaging in proprietary trading or (2) investing in or sponsoring certain types of funds, both subject to certain limited exceptions. These prohibitions are expected to impact the ability of U.S. banking organizations to provide investment management products and services that are competitive with non-banking firms generally and with non-U.S. banking organizations in overseas markets. The final rules would also effectively prohibit short-term trading strategies by any U.S. banking organization if those strategies involve instruments other than those specifically permitted for trading.
Resolution Plans
Federal Reserve Board and FDIC regulations require bank holding companies with more than $50 billion in assets to submit resolution plans that, in the event of material financial distress or failure, establish the rapid, orderly and systemically safe liquidation of the company under the bankruptcy code. Insured depository institutions with more than $50 billion in assets must submit to the FDIC a resolution plan whereby they can be resolved in a manner that is orderly and that ensures that depositors will receive access to insured funds within certain required timeframes. If the Federal Reserve Board and the FDIC determine that a companys resolution plan is not credible, and the company fails to cure the deficiencies in a timely manner, then the Federal Reserve Board and the FDIC may jointly impose on the company, or on any of its subsidiaries, more stringent capital, leverage or liquidity requirements or restrictions on growth, activities or operations, or require the divestment of
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certain assets or operations. We timely submitted our resolution plan, jointly with RBS, on July 1, 2013. When RBS no longer controls us for bank regulatory purposes, we will separately file our own resolution plan with the Federal Reserve Board and FDIC.
Enhanced Prudential Standards
The Dodd-Frank Act requires the Federal Reserve Board to impose liquidity, single counterparty credit limits, risk management and other enhanced prudential standards for bank holding companies with $50 billion or more in total consolidated assets, including us. The Federal Reserve Board on February 18, 2014 approved a final rule implementing certain of the enhanced prudential standards. Under the final rule, we will have to comply with various liquidity risk management standards and maintain a liquidity buffer of unencumbered highly liquid assets based on the results of internal liquidity stress testing. The final rule also establishes certain requirements and responsibilities for our risk committee and mandates certain risk management standards. The final rule establishes a compliance date of January 1, 2015, for these new standards. Final rules on single counterparty credit limits and an early remediation framework have not yet been promulgated.
The enhanced prudential standards rules also will subject a foreign banking organization with at least $50 billion in non-branch U.S. assets as of June 30, 2015 to various requirements, including a requirement to establish by July 1, 2016 an IHC to hold all of the foreign banking organizations interests in U.S. companies which it controls for U.S. bank regulatory purposes. An IHC will have to comply with U.S. risk-based capital, leverage, liquidity and risk-management requirements, as well as other regulations. Although the timing of our separation from the RBS Group is uncertain, the RBS Group will likely be subject to the enhanced prudential standards for foreign banking organizations, including the requirement to create an IHC, owing in part to the fact that we are a subsidiary of the RBS Group. If we become a subsidiary of an RBS Group IHC, even if we receive dividends from our banking subsidiaries, our ability to pay dividends or make capital distributions could be constrained by the IHCs capital requirements, which will be affected by any interests that it holds in other RBS Group U.S. companies.
Heightened Standards
In September 2014, the OCC adopted guidelines that establish heightened standards for large national banks with average total consolidated assets of $50 billion or more, including CBNA. The guidelines will be effective 60 days after they are published in the Federal Register. If CBNAs average total consolidated assets, as defined in the guidelines, are below $100 billion as of the relevant measurement date, CBNA will be required to comply with the guidelines within 18 months after the effective date. The guidelines set forth minimum standards for the design and implementation of a banks risk governance framework, and minimum standards for oversight of that framework by a banks board of directors. The guidelines supersede the OCCs heightened expectations program for large banks that the OCC began informally communicating to certain banks in 2010. The guidelines are intended to focus management and boards of directors of covered banks on strengthening risk management practices and governance and improve bank examiners ability to assess compliance with the OCCs expectations. Under the guidelines, a bank may use certain components or the entirety of its parent companys risk governance framework if the risk profiles of the parent company and the covered bank are substantially the same as demonstrated through a documented assessment, but the framework must ensure the banks risk profile is easily distinguished and separate from the parent for risk management and supervisory reporting purposes. A banks board of directors is required to have two members who are independent of the bank and parent company management. The guidelines provide that a banks board of directors should require management to establish and implement an effective risk governance framework that meets the standards in the guidelines, and the board of directors or the boards risk committee should approve any significant changes to the risk governance framework and monitor compliance with the framework. The board of directors should also provide active oversight and a credible challenge to managements recommendations and decisions and exercise independent judgment.
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Protection of Customer Personal Information
The privacy provisions of the GLBA generally prohibit financial institutions, including us, from disclosing nonpublic personal financial information of consumer customers to third parties for certain purposes (primarily marketing) unless customers have the opportunity to opt out of the disclosure. The Fair Credit Reporting Act restricts information sharing among affiliates for marketing purposes. Both the Fair Credit Reporting Act and Regulation V, issued by the Federal Reserve Board, govern the use and provision of information to consumer reporting agencies.
Federal and state banking agencies have prescribed standards for maintaining the security and confidentiality of consumer information, and we are subject to such standards, as well as certain federal and state laws or standards for notifying consumers in the event of a security breach.
Anti-Tying Restrictions
Generally, a bank may not extend credit, lease, sell property or furnish any services or fix or vary the consideration for them on the condition that (1) the customer obtain or provide some additional credit, property or services from or to that bank or its bank holding company or their subsidiaries or (2) the customer not obtain some other credit, property or services from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of the credit extended. A bank may, however, offer combined-balance products and may otherwise offer more favorable terms if a customer obtains two or more traditional bank products. Certain foreign transactions are exempt from the general rule.
Community Reinvestment Act Requirements
The CRA requires the banking agencies to evaluate the record of us and our banking subsidiaries in meeting the credit needs of our local communities, including low and moderate income neighborhoods. These evaluations are considered in evaluating mergers, acquisitions and applications to open a branch or facility and, in the case of a bank holding company that has elected financial holding company status, a CRA rating of satisfactory is required to commence certain new financial activities or to acquire a company engaged in such activities. We received a rating of satisfactory in our most-recent CRA evaluation.
Rules Affecting Debit Card Interchange Fees
The Federal Reserve Board issued final rules, effective October 1, 2011, establishing standards, including a cap, for debit card interchange fees and prohibiting network exclusivity arrangements and routing restrictions. In July 2013, a U.S. federal district court invalidated the Federal Reserve Boards interchange fee rule in favor of a group of retailers who argued that the Federal Reserve Board had inappropriately set the new limits on interchange fees too high. The Federal Reserve Board successfully appealed the district court decision and the caps imposed by the final rules remain in effect.
Consumer Financial Protection Regulations
The consumer protection provisions of the Dodd-Frank Act and the examination, supervision and enforcement of those laws and implementing regulations by the CFPB have created a more intense and complex environment for consumer finance regulation. The CFPB is authorized to engage in consumer financial education, track consumer complaints, request data and promote the availability of financial services to underserved consumers and communities. We expect increased oversight of financial services products by the CFPB, which are likely to affect our operations. The CFPB has significant authority to implement and enforce federal consumer finance laws, including the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Billing Act and new requirements for financial services products provided for in the Dodd-Frank Act, as well as the authority to identify and
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prohibit unfair, deceptive or abusive acts and practices. The review of products and practices to prevent such acts and practices is a continuing focus of the CFPB, and of banking regulators more broadly. The ultimate impact of this heightened scrutiny is uncertain but could result in changes to pricing, practices, products and procedures. It could also result in increased costs related to regulatory oversight, supervision and examination, additional remediation efforts and possible penalties.
In addition, the Dodd-Frank Act provides the CFPB with broad supervisory, examination and enforcement authority over various consumer financial products and services, including the ability to require reimbursements and other payments to customers for alleged legal violations and to impose significant penalties, as well as injunctive relief that prohibits lenders from engaging in allegedly unlawful practices. The CFPB also has the authority to obtain cease and desist orders providing for affirmative relief and/or monetary penalties. The Dodd-Frank Act and accompanying regulations, including regulations to be promulgated by the CFPB, are being phased in over time. While some regulations have been promulgated, many others have not yet been proposed or finalized. We cannot predict the terms of all of the final regulations, their intended consequences or how such regulations will affect us or our industry. The Dodd-Frank Act does not prevent states from adopting stricter consumer protection standards. State regulation of financial products and potential enforcement actions could also adversely affect our business, financial condition or results of operations.
Moreover, retail activities of banks are subject to a variety of statutes and regulations designed to protect consumers. Interest and other charges collected or contracted for by banks are subject to state usury laws and federal laws concerning interest rates. Loan operations are also subject to federal laws applicable to credit transactions, such as:
| the federal Truth-In-Lending Act and Regulation Z issued by the Federal Reserve Board, governing disclosures of credit terms to consumer borrowers; |
| the Home Mortgage Disclosure Act and Regulation C issued by the Federal Reserve Board, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; |
| the Equal Credit Opportunity Act and Regulation B issued by the Federal Reserve Board, prohibiting discrimination on the basis of various prohibited factors in extending credit; |
| the Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; |
| the Service Members Civil Relief Act, applying to all debts incurred prior to commencement of active military service (including credit card and other open-ended debt) and limiting the amount of interest, including service and renewal charges and any other fees or charges (other than bona fide insurance) that is related to the obligation or liability; and |
| the guidance of the various federal agencies charged with the responsibility of implementing such federal laws. |
Deposit operations also are subject to, among others:
| the Truth in Savings Act and Regulation DD issued by the Federal Reserve Board, which require disclosure of deposit terms to consumers; |
| Regulation CC issued by the Federal Reserve Board, which relates to the availability of deposit funds to consumers; |
| the Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and |
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| the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board, which governs automatic deposits to and withdrawals from deposit accounts and customers rights and liabilities arising from the use of automated teller machines and other electronic banking services. |
The CFPB has finalized a number of significant rules which will impact nearly every aspect of the lifecycle of a residential mortgage. The final rules require banks to, among other things: (i) develop and implement procedures to ensure compliance with a new reasonable ability to repay test and identify whether a loan meets a new definition for a qualified mortgage, (ii) implement new or revised disclosures, policies and procedures for servicing mortgages including, but not limited to, early intervention with delinquent borrowers and specific loss mitigation procedures for loans secured by a borrowers principal residence, (iii) comply with additional restrictions on mortgage loan originator compensation and (iv) comply with new disclosure requirements and standards for appraisals and escrow accounts maintained for higher priced mortgage loans. These new rules create operational and strategic challenges for us, as we are both a mortgage originator and a servicer. Forthcoming additional rulemaking affecting the residential mortgage business is also expected. These rules and any other new regulatory requirements promulgated by the CFPB and other federal or state regulators could require changes to our business, result in increased compliance costs and affect the streams of revenue of such business.
In addition, our two banking subsidiaries are currently subject to consent orders issued by the OCC and the FDIC in connection with their findings of deceptive marketing and implementation of some of our checking account and funds transfer products and services. Among other things, the consent orders require us to remedy deficiencies and develop stronger compliance controls, policies and procedures. We have made progress and continue to make progress in addressing these requirements, but the consent orders remain in place and we are unable to predict when they may be terminated.
Commercial Real Estate Lending
Lending operations that involve concentrations of commercial real estate loans are subject to enhanced scrutiny by federal banking regulators. Regulators have advised financial institutions of the risks posed by commercial real estate lending concentrations. Such loans generally include land development, construction loans and loans secured by multifamily property and nonfarm, nonresidential real property where the primary source of repayment is derived from rental income associated with the property. The guidance prescribes the following guidelines for examiners to help identify institutions that are potentially exposed to concentration risk and may warrant greater supervisory scrutiny:
| total reported loans for construction, land development and other land represent 100% or more of the institutions total capital, or |
| total commercial real estate loans represent 300% or more of the institutions total capital, and the outstanding balance of the institutions commercial real estate loan portfolio has increased by 50% or more during the prior 36 months. |
In 2009, the federal banking regulators issued additional guidance on commercial real estate lending that emphasizes these considerations.
In addition, the Dodd-Frank Act contains provisions that may cause us to reduce the amount of our commercial real estate lending and increasing the cost of borrowing, including rules relating to risk retention of securitized assets. Section 941 of the Dodd-Frank Act requires, among other things, a loan originator or a securitizer of asset-backed securities to retain a percentage of the credit risk of securitized assets. The banking agencies have jointly issued a proposed rule to implement these requirements but have yet to issue final rules.
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Transactions with Affiliates and Insiders
A variety of legal limitations restrict us from lending money to, borrowing money from, or in some cases transacting business with CBNA and CBPA. Among such restrictions to which we are subject are Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Board Regulation W. Section 23A places limits on the amount of covered transactions, which include loans or extensions of credit to, investments in or certain other transactions with, affiliates, as well as the amount of advances to third parties collateralized by the securities or obligations of affiliates. The aggregate of all covered transactions is limited to 10% of a banks capital and surplus for any one affiliate and 20% for all affiliates. Furthermore, within the foregoing limitations as to amount, certain covered transactions must meet specified collateral requirements ranging from 100% to 130%. Also, a bank is prohibited from purchasing low-quality assets from any of its affiliates. Section 608 of the Dodd-Frank Act broadens the definition of covered transactions to include derivative transactions and the borrowing or lending of securities if the transaction will cause a bank to have credit exposure to an affiliate. The revised definition also includes the acceptance of debt obligations of an affiliate as collateral for a loan or extension of credit to a third party. Furthermore, reverse repurchase transactions are viewed as extensions of credit (instead of asset purchases) and thus become subject to collateral requirements.
Section 23B prohibits an institution from engaging in certain transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the bank, as those prevailing at the time for comparable transactions with non-affiliated companies. Except for limitations on low-quality asset purchases and transactions that are deemed to be unsafe or unsound, Regulation W generally excludes affiliated depository institutions from treatment as affiliates. Transactions between a bank and any of its subsidiaries that are engaged in certain financial activities may be subject to the affiliated transaction limits. The Federal Reserve Board also may designate banking subsidiaries as affiliates.
Pursuant to Federal Reserve Board Regulation O, we are also subject to quantitative restrictions on extensions of credit to executive officers, directors, principal stockholders and their related interests. In general, such extensions of credit (1) may not exceed certain dollar limitations, (2) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties and (3) must not involve more than the normal risk of repayment or present other unfavorable features. Certain extensions of credit also require the approval of our Board.
Anti-Money Laundering; USA PATRIOT Act; Office of Foreign Assets Control
Institutions must maintain anti-money laundering programs that include established internal policies, procedures and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. We are prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence in dealings with foreign financial institutions and foreign customers. We also must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions. Recent laws provide law enforcement authorities with increased access to financial information maintained by banks. Anti-money laundering obligations have been substantially strengthened as a result of the USA PATRIOT Act, enacted in 2001 and renewed in 2006. Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications.
The USA PATRIOT Act provides for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering. The statute also creates enhanced information collection tools and enforcement mechanics for the U.S.
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government, including: (1) requiring standards for verifying customer identification at account opening; (2) promulgating rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering; (3) requiring reports by non-financial trades and businesses filed with the Treasurys Financial Crimes Enforcement Network for transactions exceeding $10,000; and (4) mandating the filing of suspicious activities reports if a bank believes a customer may be violating U.S. laws and regulations. The statute also requires enhanced due diligence requirements for financial institutions that administer, maintain or manage private bank accounts or correspondent accounts for non-U.S. persons.
The Federal Bureau of Investigation may send bank regulatory agencies lists of the names of persons suspected of involvement in terrorist activities. We can be requested to search our records for any relationships or transactions with persons on those lists and may be required to report any identified relationships or transactions. Furthermore, OFAC is responsible for helping to ensure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and Acts of Congress. OFAC publishes, and routinely updates, lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts, including the Specially Designated Nationals and Blocked Persons. If we find a name on any transaction, account or wire transfer that is on an OFAC list, we must freeze such account, file a suspicious activity report and notify the appropriate authorities.
Other Regulatory Matters
We and our subsidiaries and affiliates are subject to numerous examinations by federal and state banking regulators, as well as the SEC, FINRA and various state insurance and securities regulators. In some cases, regulatory agencies may take supervisory actions that may not be publicly disclosed, which restrict or limit a financial institution. As part of our regular examination process, our and our banking subsidiaries respective regulators may advise us or our banking subsidiaries to operate under various restrictions as a prudential matter. We and our subsidiaries have from time to time received requests for information from regulatory authorities at the federal level or in various states, including state insurance commissions, state attorneys general, federal agencies or law enforcement authorities, securities regulators and other regulatory authorities, concerning their business practices. Such requests are considered incidental to the normal conduct of business.
In order to remedy various weaknesses and meet various regulatory and supervisory challenges, we need to make substantial improvements to our compliance, risk management and other processes, systems and controls. We expect to continue to dedicate significant resources and managerial time and attention and to make significant investments in enhanced compliance, risk management and other processes, systems and controls. We also expect to make restitution payments to our banking subsidiaries customers, which could be significant, arising from certain consumer compliance deficiencies and may be required to pay civil money penalties in connection with certain of these deficiencies. We have established reserves in respect of these future payments, but the amounts that we are ultimately obligated to pay could be in excess of our reserves.
The remediation efforts and other matters described above will increase our operational costs and may limit our ability to implement aspects of our strategic plan or otherwise pursue certain business opportunities. Moreover, if we are unsuccessful in remedying these weaknesses and meeting the enhanced supervisory requirements and expectations that apply to us and our banking subsidiaries, we could remain subject to existing restrictions or become subject to additional restrictions on our activities, informal (non-public) or formal (public) supervisory actions or public enforcement actions, including the payment of civil money penalties.
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Executive Officers and Directors
The following table sets forth information regarding our executive officers and directors, as of the date of this prospectus:
Name |
Age |
Position |
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Bruce Van Saun |
57 | Chairman and Chief Executive Officer | ||||
Mark Casady |
53 | Director | ||||
Anthony Di Iorio |
70 | Director | ||||
Robert Gillespie |
59 | Director | ||||
William P. Hankowsky |
63 | Director | ||||
Howard W. Hanna III |
67 | Director | ||||
Leo (Lee) I. Higdon |
68 | Director | ||||
Charles J. (Bud) Koch |
68 | Director | ||||
Robert D. Matthews, Jr. |
51 | Director and Vice Chairman, Commercial Banking | ||||
Arthur F. Ryan |
71 | Lead Director | ||||
Shivan S. Subramaniam |
65 | Director | ||||
Wendy A. Watson |
66 | Director | ||||
Marita Zuraitis |
54 | Director | ||||
David Bowerman |
49 | Vice Chairman, Business Services | ||||
Brad L. Conner |
53 | Vice Chairman, Consumer Banking | ||||
John J. Fawcett |
55 | Chief Financial Officer | ||||
Stephen T. Gannon |
61 | Executive Vice President, General Counsel and Chief Legal Officer | ||||
Ronald S. Ohsberg |
50 | Executive Vice President, Controller | ||||
Nancy L. Shanik |
60 | Group Executive Vice President, Chief Risk Officer |
Directors
Bruce Van Saun joined our Board as Chairman and Chief Executive Officer in October 2013. From October 2009 through October 2013, Mr. Van Saun served as the RBS Group Finance Director and was a member of its board of directors. From 1997 to 2008, Mr. Van Saun held a number of senior positions with Bank of New York and later Bank of New York Mellon, including vice chairman and chief financial officer. Earlier in his career, he held senior positions with Deutsche Bank, Wasserstein Perella Group and Kidder Peabody & Co. In all, Mr. Van Saun has more than 30 years of financial services experience. Mr. Van Saun has served on the board of directors of our subsidiaries CBNA and CBPA since October 2013, and also served as a director on the boards of our affiliates, The Royal Bank of Scotland plc (from October 2009 to September 2013) and National Westminster Bank plc (from October 2009 to September 2013). In addition, Mr. Van Saun has served as a director on the franchise board of Lloyds of London since September 2012. He has previously served on a number of boards in both the United Kingdom and the United States, including the boards of Direct Line Insurance Group plc (from April 2012 to October 2013), WorldPay (Ship Midco Limited) (from July 2011 to September 2013), ConvergEx Inc. (from May 2007 to October 2013), AbitibiBowater (Resolute Forest Products Inc.) Corporation (from June 2005 to April 2008), and Stride Rite Corporation (from June 1999 to December 2005). Mr. Van Saun is a member of the Financial Services Roundtable and The Clearing House supervisory board. Mr. Van Saun holds a B.S. in Business Administration from Bucknell University in 1979 and an M.B.A. in Finance and General Management from the University of North Carolina in 1983.
Mark Casady joined our Board in June 2014. Mr. Casady is chief executive officer and chairman of the board of directors of LPL Financial Holdings Inc. He joined LPL Financial in May 2002 as chief
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operating officer, became president in April 2003, and became chief executive officer and chairman in December 2005. Before joining LPL Financial, Mr. Casady was managing director, mutual fund group for Deutsche Asset Management, Americasformerly Scudder Investments. He joined Scudder in 1994 and held roles as managing directorAmericas; head of global mutual fund group and head of defined contribution services. He was also a member of the Scudder, Stevens and Clark board of directors and management committee. Mr. Casady serves on the board of governors of FINRA and the board of directors of the Financial Services Roundtable. He has also served on the boards of our subsidiaries, CBNA and CBPA, since June 2014. Mr. Casady is former chairman of the Insured Retirement Institute and Eze Software Group; Mr. Casady received his B.S. from Indiana University and his M.B.A. from DePaul University.
Anthony Di Iorio has served on our Board since January 2014. Mr. Di Iorio began his career at Peat Marwick (now KPMG) where he worked in the firms Financial Institutions Practice in New York and Chicago. After leaving Peat Marwick he worked for several leading financial institutions, including as Co-controller of Goldman Sachs, Chief Financial Officer of the Capital Markets business of NationsBank (now Bank of America), Executive Vice President of Paine Webber and CEO of Paine Webber International. He joined Deutsche Bank in Frankfurt in 2001 and later became the Banks Chief Financial Officer and a member of its Board and Group Executive Committee. After retiring in 2008 he served as senior adviser to Ernst & Young working with the firms financial services partners in the United Kingdom, Europe, the Middle East and Africa. Mr. Di Iorio served on the board of directors of The Royal Bank of Scotland Group plc and those of its subsidiaries, The Royal Bank of Scotland plc and National Westminster Bank Plc from September 2011 to March 2014, and has served on the board of directors of our subsidiaries CBNA and CBPA since January 2014. Mr. Di Iorio holds a Bachelor of Business Administration from Iona College and an M.B.A. from Columbia University.
Robert Gillespie joined our board in August 2014. Mr. Gillespie began his career with PricewaterhouseCoopers where he qualified as a chartered accountant. He then moved into banking by joining SG Warburg where he specialized in corporate finance and was appointed as a Director of the firm in 1987 and as a Managing Director of its U.S. investment banking business in 1989. Following the acquisition of Warburg by Swiss Bank Corporation in 1995 and that firms subsequent merger with Union Bank of Switzerland to form UBS in 1998, Mr. Gillespie held the roles of Head of UK Corporate Finance, Head of European Corporate Finance and Co-Head of UBSs global business and CEO of the EMEA region. He relinquished his management roles at the end of 2005 and was appointed Vice Chairman of UBS Investment Bank. Mr. Gillespie left UBS to join Evercore Partners, from where he was seconded to the UK Panel on Takeovers and Mergers, as Director General, from 2010 to 2013. Mr. Gillespie resigned from Evercore Partners in March 2013. In December 2013, Mr. Gillespie joined the Board of The Royal Bank of Scotland Group plc and those of its subsidiaries, The Royal Bank of Scotland plc and National Westminster Bank Plc. Mr. Gillespie has also served on the boards of our subsidiaries, Citizens Bank, N.A. and Citizens Bank of Pennsylvania, since August 2014. In addition, Mr. Gillespie serves on the board of directors of Ashurst LLP (since 2013), The Boat Race Company Limited (since 2009), Somerset House Trust and Somerset House Enterprises Limited (since 2003) and serves on the board of directors of Social Finance, Ltd (since 2013) and as a trustee and director of Topolski Memoir Limited (since 2009). Mr. Gillespie has also served on the Council of the University of Durham since 2007, and has been the Chairman of the Council since 2012. Mr. Gillespie received his B.A. in Economics from the University of Durham in 1977, and his A.C.A. from the Institute of Chartered Accountants in England and Wales in 1980.
William P. Hankowsky has served on our Board since November 2006. Mr. Hankowsky is the chairman, president and chief executive officer of Liberty Property Trust. Mr. Hankowsky joined Liberty in January of 2001 as chief investment officer, and was responsible for refining the companys corporate strategy and investment process. In 2002, he was named president, and in 2003 was appointed chief executive officer and elected chairman of Libertys board of trustees. Prior to joining Liberty, Mr. Hankowsky served for 11 years as president of the Philadelphia Industrial Development
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Corporation (PIDC), where he oversaw the citys economic development agency, managing 11 industrial parks, operating 20 loan programs, and coordinating major projects including a new arena, convention center, hotels and stadium. Prior to PIDC, Mr. Hankowsky was the city of Philadelphias commerce director. Mr. Hankowsky currently serves on the boards of Aqua America Inc. (NYSE: WTR) since 2004, Interstate General Media (Philadelphia Inquirer, Daily News), Delaware River Waterfront Corporation, Greater Philadelphia Chamber of Commerce, the Kimmel Center for the Performing Arts, the Board of Governors of the National Association of Real Estate Investment Trusts, Philadelphia Convention and Visitors Bureau, Pennsylvania Academy of the Fine Arts, and Philadelphia Shipyard Development Corporation. Mr. Hankowsky has also served on the board of directors of our subsidiaries CBNA and CBPA since November 2006. Mr. Hankowsky received a Bachelor of Arts degree in economics from Brown University.
Howard W. (Hoddy) Hanna III has served on our Board since June 2009. Mr. Hanna is the chairman and chief executive officer of Howard Hanna Real Estate Services, Inc. Mr. Hanna became a sales associate in 1970 and the General Manager of Howard Hanna Real Estate Services in 1974. Mr. Hanna became Chief Operating Officer of Howard Hanna Real Estate Services and its parent company, Hanna Holdings, Inc. when the company incorporated in 1979 and then became President in 1983 and Chief Executive Officer in 1990. Howard Hanna Real Estate Services, Inc. offers a full range of mortgage origination products and services in certain geographies and, in this capacity, competes with us in Pennsylvania, Ohio and Michigan. Mr. Hanna currently serves as the Chair of the Childrens Hospital of Pittsburgh Foundation Board of Trustees. He is a member of the Childrens Hospital of Pittsburgh of UPMC Board of Trustees and he serves on the Hospital Boards Finance and Investment Committee. Mr. Hanna also serves on the boards of John Carroll University, LaRoche College, the Katz Graduate School of Business Board of Visitors, University of Pittsburgh, the Diocese of Pittsburgh Finance Council and the YMCA of Greater Pittsburgh. From 2007 to 2012, Mr. Hanna served on the board of directors of the Federal Reserve Bank of Clevelands Pittsburgh office. Mr. Hanna has also served on the board of directors of our subsidiaries CBNA and CBPA since June 2009. Mr. Hanna received a Bachelor of Science degree from John Carroll University in 1969.
Leo (Lee) I. Higdon joined our Board in August 2014. From 2006 to 2013, Mr. Higdon was the President of Connecticut College. Mr. Higdon currently serves on the board of directors of Eaton Vance Corporation, where he is non-executive chairman (since 2000), and HealthSouth Corporation, where he is lead director (since 2004). From 2001 to 2006, he was the President of the College of Charleston. Prior to becoming President of the College of Charleston, Mr. Higdon was the President of Babson College and the Dean of the Darden Graduate School of Business Administration at the University of Virginia. Mr. Higdon spent over 20 years at Salomon Brothers Inc, holding various positions, including Vice President and Managing Director, and Vice Chairman from 1988 to 1993. In addition, Mr. Higdon previously served on the board of directors of Bestfoods, Inc., Chemtura Corporation and Newmont Mining Corporation. Mr. Higdon earned a B.A. in history from Georgetown University and a M.B.A. in Finance from the University of Chicago.
Charles (Bud) Koch has served on our Board since September 2004. He also serves on the board of directors of our subsidiaries CBNA and CBPA. Mr. Koch is the retired Chairman of the Board and Chief Executive Officer of Charter One Financial and its subsidiary Charter One Bank. He served as Charter Ones Chief Executive Officer from 1987 to 2004 and as its Chairman from 1995 to 2004, when the bank was sold to RBS. Mr. Koch was a director of RBS and its subsidiaries Royal Bank of Scotland plc and National Westminster Bank from 2004 until February 2009. Mr. Koch has been a director of Assurant Inc. (AIZ) since August 2005, and he currently serves as Chair of the Assurant Finance and Investment Committee, and a member of its Compensation Committee. Mr. Koch has been a director of the Federal Home Loan Bank of Cincinnati since 1990. He was Chairman of the Board of the FHLB of Cincinnati from 2005 to 2006, and he currently serves on its Risk Committee, its Compensation Committee and its Nomination and Governance Committee. His long tenure on the
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FHLB of Cincinnati Board has been interrupted twice, for a total of 3 years, due to term limitations. Mr. Koch serves as a trustee of Case Western Reserve University, and he served as its Chairman of the Board from 2008 to 2012. He is also a past Chairman of the Board of John Carroll University. Mr. Koch graduated from Lehigh University with a B.S. in Industrial Engineering and earned a MBA from Loyola College in Baltimore, Maryland.
Robert D. Matthews, Jr. has served on our Board since July 2009. Mr. Matthews is Vice Chairman of CFG, with specific responsibility for the Commercial Banking business lines including Corporate Banking, Commercial Finance, Corporate Finance and Capital Markets and Treasury Solutions. Mr. Matthews also oversees the State Presidents who represent our overall franchise in our 12 markets under the Citizens Bank and Charter One brands and oversees both our Community Reinvestment Act and Public and Government Affairs functions. Prior to assuming his current position in 2009, Mr. Matthews was a member of the Executive Leadership Group at Citizens Bank and was responsible for Commercial Markets. Mr. Matthews joined our leadership team in 2007 from Citigroup Inc., where he was Executive Vice President and Head of U.S. Commercial and Middle Market Banking. Mr. Matthews has served on the board of directors of the Private Export Funding Corporation since 2011 and is a member of that boards Audit and Risk Committees. Mr. Matthews has also served on the board of directors of our subsidiaries CBNA and CBPA since July 2009. Mr. Matthews received a Bachelors degree in Economics from Harvard College in 1985 with an emphasis on labor relations and bargaining behavior.
Arthur F. Ryan has served on our Board since April 2009. Mr. Ryan is the former Chairman, Chief Executive Officer and President of Prudential Financial, Inc., one of the largest diversified financial institutions in the world. After 13 years at Prudential, he retired as CEO and President in 2007 and he retired as Chairman in May 2008. Prior to joining Prudential in 1994, Mr. Ryan worked at Chase Manhattan Bank for 22 years. He ran Chase Manhattans worldwide retail bank between 1984 and 1990, and he became President and Chief Operating Officer in 1990. Mr. Ryan served on the board of directors of The Royal Bank of Scotland Group plc and those of its subsidiaries, The Royal Bank of Scotland plc and National Westminster Bank Plc from October 2008 to September 2013, and has served as a non-executive director of Regeneron Pharmaceuticals, Inc. since January 2003. Mr. Ryan has also served on the board of directors of our subsidiaries CBNA and CBPA since April 2009.
Shivan S. Subramaniam has served on our Board since January 2005. Mr. Subramaniam has been the Chairman and Chief Executive Officer of Factory Mutual Insurance Company since 2002 and President and Chief Executive Officer since 1999. Mr. Subramaniam is responsible for strategic and operational direction at FM Global, which is one of the worlds leading commercial and industrial property insurers. Previously, Mr. Subramaniam served as Chairman and Chief Executive Officer at Allendale Insurance, a predecessor company of FM Global. Elected president of Allendale in 1992, he held a number of senior-level positions in finance and management after joining the company in 1974. Mr. Subramaniams career spans nearly 40 years in the insurance industry. Mr. Subramaniam has served on the board of directors of Lifespan Corporation since December 2006, and is a trustee of Bryant University and a director of the Rhode Island Public Expenditure Council (RIPEC). Mr. Subramaniam has also served on the board of directors of our subsidiaries CBNA and CBPA since January 2005. Mr. Subramaniam received his bachelors degree in mechanical engineering from the Birla Institute of Technology, Pilani, India, and has since earned two masters degreesone in operations research from the Polytechnic at New York University, and another in management from the Sloan School of Management at the Massachusetts Institute of Technology.
Wendy A. Watson has served on our Board since October 2010. Until her retirement in 2009, Ms. Watson was the Executive Vice President, Global Services for State Street Bank & Trust Company. Ms. Watson joined State Street Bank & Trust Company in 2000. Previously, Ms. Watson was with the Canadian Imperial Bank of Commerce where she served as head of the Global Private
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Banking and Trust business and President & CEO CIBC Finance. She has also served as Chief Information Officer and as head of Internal Audit for Confederation Life Insurance Company in Toronto. Ms. Watson began her career in the audit department of Sun Life Assurance Company in Canada where she rose to become the No. 2 person in the companys 70-person global audit function. Ms. Watson has served as a director of CMA Holdings Canada since 2010, of DAS Canada Insurance Company (a subsidiary of Munich Re) since 2010, and of the Independent Order of the Foresters Live Insurance Company since 2013. Ms. Watsons years of board service also include Chair of the Board of two of State Street Banks multi-national entitiesState Street Syntel Private Ltd (India) and State Street Syntel Services Ltd (Mauritius). Ms. Watson currently serves on the Community Service Committee of Boston Childrens Hospital and the Advisory Board of Crittenten Womens Union. Ms. Watson has also served on the board of directors of our subsidiaries CBNA and CBPA since October 2010. In addition to her corporate directorship roles, Ms. Watson is also currently a member of the Editorial Board of the Intelligent Outsourcer Journal and has served as a member of the board of directors of the Womens College Hospital and the Womens College Hospital Foundation in Toronto. Ms. Watson is a magna cum laude graduate of McGill University in Montreal with a Bachelor of Commerce degree with majors in Accounting and Law. Ms. Watson holds an advanced Professional Director Certification from the American College of Corporate Directors, a public company director education and credentialing organization. She is a fellow of the National Association of Corporate Directors. She is also a CPA and Certified Fraud Examiner.
Marita Zuraitis has served on our Board since May 2011. Ms. Zuraitis is Director, President and Chief Executive Officer of the Horace Mann Educators Corporation. Prior to joining Horace Mann in May 2013, Ms. Zuraitis served as Executive Vice President and a member of the Executive Leadership Team for The Hanover Insurance Group, Inc. While at The Hanover Insurance Group, Ms. Zuraitis served as President, Property and Casualty Companies, responsible for the personal and commercial lines of operation at Citizens Insurance Company of America, The Hanover Insurance Company and their affiliates, a position she held since 2004. Prior to 2004, Ms. Zuraitis was with The St. Paul Travelers Companies for six years, where she achieved the position of President and Chief Executive Officer, Commercial Lines. She also held a number of increasingly responsible underwriting and field management positions with United States Fidelity and Guaranty Company and Aetna Life and Casualty. Ms. Zuraitis has 30 years of experience in the insurance industry. Ms. Zuraitis has served as a member of the board of trustees for the American Institute for Chartered Property and Casualty Underwriters (The Institutes) since June 2009. Ms. Zuraitis is a member of the executive committee and the compensation committee of The Institutes. Ms. Zuraitis has also served on the board of directors of our subsidiaries CBNA and CBPA since May 2011. She is also a past Chairperson of the board of trustees for NCCI Holdings, Inc., a provider of workers compensation data analytics based in Boca Raton, Florida, and a past member of the board of Worcester Academy in Worcester, Massachusetts. A graduate of Fairfield University in Fairfield, Connecticut, Ms. Zuraitis completed the Advanced Executive Education Program at the Wharton School of Business and the Program on Negotiations at Harvard University.
Executive Officers
David Bowerman is Vice Chairman, Head of Citizens Business Services with responsibility for Operations, Technology, Property, Procurement and Security across Citizens entities in the Americas. Prior to assuming his current position in 2008, Mr. Bowerman was Managing Director, UK and European Operations, with RBS plc, with responsibility for eight Business Services operations and a staff of 21,000 supporting RBSs income-generating divisions. Mr. Bowerman joined NatWest Bank in 1982. During his years with RBS, he has undertaken a range of retail and corporate roles. He gained extensive experience and built a wide portfolio of successes in leading and implementing significant cultural change and organizational strategies. Mr. Bowerman is a fellow of the Chartered Institute of
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Bankers in Scotland. He was educated in England and attended Harvard Business Schools Advanced Management Program. Mr. Bowerman has served on the board of the Institute for the Study and Practice of Nonviolence, in Providence, R.I., since 2011.
Brad L. Conner is Vice Chairman of our Consumer Banking Division. He is responsible for Retail Banking, Business Banking, Wealth Management, Home Lending Solutions, Auto Finance and Education Finance, as well as the Consumer Phone Bank and online channels. Before joining CFG in 2008, Mr. Conner was President of JP Morgan Chase & Co.s Home Equity and Mortgage Home Loan Direct business. He previously oversaw the combined home equity business of Chase and Bank One after the companies merged in 2004, and served as CEO of Chases Education Finance businesses. In his 12 years at Bank One/Chase, Mr. Conner played a key leadership role in the growth and evolution of the companys mortgage and home equity businesses. Mr. Conner served as a director for the Rhode Island Public Expenditure Council from 2010 through 2012. Since 2009, he has served on the board of trustees of the Dave Thomas Foundation for Adoption, where he has served as treasurer since 2011, and he currently serves on its audit committee and its Committee for Institutional Advancement. He has also been a member of the Consumer Bankers Association board of directors since 2011. Mr. Conner has a B.A. and M.B.A. from the University of Arkansas.
John J. Fawcett is our Chief Financial Officer. Mr. Fawcetts functional responsibilities include financial management functions including controllers, financial reporting, planning and analysis, tax management, treasury, corporate strategy and investor relations. In January 2008, Mr. Fawcett joined CFG from Citigroup Inc., where he held various roles over the course of a 20-year career including Chief Financial Officer for Trading and Capital Markets; Head of Planning and Analysis for the Global Corporate and Investment Bank; and most recently Chief Financial Officer for the Global Transactions Services Business. Mr. Fawcett earned a B.S. in accounting and an M.B.A. in finance from St. Johns University.
Stephen T. Gannon is our General Counsel and Chief Legal Officer. Mr. Gannon is responsible for overseeing our legal department, providing strategic leadership to the management of legal risk and overseeing an integrated legal function. Prior to joining CFG in August 2014, Mr. Gannon was the Executive Vice-President and Deputy General Counsel of Capital One Financial Corporation. In his seven years at Capital One Financial Corporation, Mr. Gannon was responsible for advising on litigation and regulatory matters, transactional and product line matters as well as policy affairs and governance and, in January 2014, was appointed to serve as Market President for Central Virginia. Mr. Gannon was previously the General Counsel Retail Brokerage Group at Wachovia Securities LLC, a partner and head of the securities litigation practice at LeClair Ryan, P.C., a partner at McSweeney, Burtch, and Crump, P.C., as well as a Staff Attorney and Branch Chief at the Securities and Exchange Commission. Mr. Gannon earned an A.B. in History and a J.D. from Georgetown University.
Ronald S. Ohsberg is our Corporate Controller. He is responsible for financial reporting, accounting policy, accounting operations, treasury operations and Finance Division risk and control. In 2004, Mr. Ohsberg joined CFG after working at FleetBoston Financial, where over a 12-year period he held various managerial roles, most recently as Director of Accounting. Prior to that he was an audit manager with KPMG. Mr. Ohsberg earned B.S. degrees in accounting and finance and an M.B.A. from the University of Rhode Island. He also is a CPA.
Nancy L. Shanik is our Chief Risk Officer. She is responsible for overseeing our risk management organization, including its vision, strategy development and execution and day-to-day operations. She is a member of the RBS Americas Risk Committee and the RBS Group Risk Board. Ms. Shanik serves on the board of the Kleinfelder Group and she also chairs its audit committee. Ms. Shanik joined CFG in 2010 from Alvarez & Marsal in New York, where she had been a managing director since 2009. Prior
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to this, Ms. Shanik spent 31 years with Citigroup Inc. in positions of increasing responsibility. She was both a Managing Director and Senior Credit Officer and served as the Chief Credit Officer of Citigroup Inc.s Global Commercial Markets business. She has developed broad-based and hands-on leadership, management and restructuring experience throughout her diverse career. Ms. Shanik earned an M.B.A. from Tulane University Graduate School of Business with concentrations in corporate finance and accounting, and a bachelors degree cum laude in marketing and communication theory from the University of Vermont. She also attended the Stanford University Executive Program.
Board Composition
Following completion of this offering, our Board will consist of 13 directors, Bruce Van Saun, Mark Casady, Anthony Di Iorio, Robert Gillespie, William P. Hankowsky, Howard W. Hanna III, Leo (Lee) I. Higdon, Charles J. (Bud) Koch, Robert D. Matthews, Jr., Arthur F. Ryan, Shivan S. Subramaniam, Wendy A. Watson and Marita Zuraitis. As part of our separation from the RBS Group, we intend to enter into the Separation Agreement, which will provide the RBS Group with certain rights relating to the composition of our Board. See Our Relationship with the RBS Group and Certain Other Related Party TransactionsRelationship with the RBS GroupSeparation and Shareholder Agreement.
Mr. Van Saun serves as our Chairman of the Board and Chief Executive Officer. When the Chairman of the Board is also the Chief Executive Officer, our Corporate Governance Guidelines provide for the election of one of our independent directors to serve as Lead Director. Mr. Ryan currently serves as our Lead Director, and is responsible for serving as liaison between the Chairman and the independent directors, approving meeting agendas and schedules for our Board and presiding at executive sessions of the independent directors and any other board meetings at which the Chairman is not present, among other responsibilities.
We have determined that each of Mr. Casady, Mr. Di Iorio, Mr. Gillespie, Mr. Hankowsky, Mr. Hanna, Mr. Higdon, Mr. Koch, Mr. Ryan, Mr. Subramaniam, Ms. Watson and Ms. Zuraitis is an independent director within the meaning of the applicable rules of the SEC and NYSE. In addition, each of Mr. Di Iorio, Mr. Hankowsky, Mr. Hanna, Mr. Koch and Ms. Watson is also an independent director under Rule 10A-3 of the Securities Exchange Act of 1934, as amended (the Exchange Act) for the purpose of audit committee membership, and each of Mr. Ryan, Mr. Hankowsky and Ms. Watson is also an independent director under Rule 10C-1 of the Exchange Act for the purpose of compensation committee membership. Our Board has determined that each of Mr. Di Iorio, Mr. Hankowsky, Mr. Hanna, Mr. Koch and Ms. Watson is a financial expert within the meaning of the applicable rules of the SEC and NYSE.
Background and Experience of Directors
When considering whether directors and nominees have the experience, qualifications, attributes or skills, taken as a whole, to enable our Board to satisfy its oversight responsibilities effectively in light of our business and structure, the Board focuses primarily on each persons background and experience as reflected in the information discussed in each of the directors individual biographies set forth above. We believe that our directors provide an appropriate mix of experience and skills relevant to the size and nature of our business. In particular, the members of our Board considered the following important characteristics, among others:
| Mr. Van Saunwe considered his experience as an executive in the financial services industry, his extensive financial background and his experience serving on the boards of other public companies, including RBS. Furthermore, we also considered how his additional role as our Chief Executive Officer would bring managements perspective to Board deliberations and provide valuable information about the status of our day-to-day operations. |
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| Mr. Casadywe considered his experience as an executive in the financial services industry, including his experience as chief executive officer of LPL Financial Holdings Inc., and his experience serving on the boards of directors of the Insured Retirement Institute, Eze Software Group and the Financial Services Roundtable and the board of governors of FINRA. |
| Mr. Di Ioriowe considered his experience as an executive in the financial services industry, including his experience as chief financial officer of Deutsche Bank, his extensive financial background and his experience serving on the boards of other public companies, including RBS. |
| Mr. Gillespiewe considered his experience as an executive in the financial services industry, including his experience as Co-Head of UBSs global business, CEO of UBSs EMEA region and Vice Chairman of UBS Investment Bank, his extensive financial background and his experience serving on the boards of other public companies, including RBS. |
| Mr. Hankowskywe considered his extensive business and management expertise, including his experience as chief executive officer of Liberty Property Trust, his service as president of PIDC, his experience serving on the boards of numerous public companies and non-profit entities and his experience in the real estate sector. |
| Mr. Hannawe considered his extensive business and management expertise, his experience serving on the boards of numerous non-profit entities and the board of directors of the Federal Reserve Bank of Clevelands Pittsburgh office and his experience in the real estate and mortgage origination sectors. |
| Mr. Higdonwe considered his experience as an executive in the financial services industry, including his experience as Vice President and Managing Director and Vice Chairman of Salomon Brothers Inc and his experience serving on the boards of other public companies, including Eaton Vance Corporation and HealthSouth Corporation. |
| Mr. Kochwe considered his experience as an executive in the financial services industry, including his experience as chief executive officer of Charter One Financial, his experience serving on the boards of other public companies and the FHLB of Cincinnati and his experience in the retail banking sector. |
| Mr. Matthewswe considered his experience as an executive in the financial services industry and his experience serving on the board of the Private Export Funding Corporation. Furthermore, we also considered how his additional role as Vice Chairman of CFG overseeing the Commercial Banking business lines, among other areas, as well as his experience as Head of U.S. Commercial and Middle Market Banking at Citigroup Inc. would bring managements perspective and industry insight to Board deliberations and provide valuable information about the status of our day-to-day operations. |
| Mr. Ryanwe considered his experience as an executive in the financial services industry, including his experience as chief executive officer of Prudential Financial, Inc., his experience serving on the boards of other public companies and his experience in the retail banking sector. |
| Mr. Subramaniamwe considered his extensive business and management expertise, including his experience as chief executive officer of FM Global, and his experience serving on the boards of directors of FM Global and Lifespan Corporation and the board of trustees of Bryant University. |
| Ms. Watsonwe considered her experience as an executive in the financial services industry, her extensive financial background and her experience serving on the boards of other financial services companies. |
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| Ms. Zuraitiswe considered her experience as an executive in the financial services industry, her experience serving on the boards of Horace Mann Educators Corporation and NCCI Holdings, Inc. and her experience in the insurance sector. |
Board Committees
Upon completion of this offering, the standing committees of our Board will consist of the following committees:
The Audit Committee will consist of Ms. Watson, Mr. Di Iorio, Mr. Hankowsky, Mr. Hanna and Mr. Koch, with Ms. Watson serving as chair, and be comprised entirely of independent directors. The Audit Committee operates pursuant to a charter approved by the Board. The Audit Committee reviews and, as it deems appropriate, recommends to our Board our internal accounting and financial controls and the accounting principles and auditing practices and procedures to be employed in preparation and review of our financial statements. The Audit Committee is also directly responsible for the engagement and oversight of independent public auditors.
The Compensation and Human Resources Committee (formerly named the Compensation Advisory Committee), or Compensation Committee, will consist of Mr. Ryan, Mr. Hankowsky and Ms. Watson, with Mr. Ryan serving as chair, and be comprised entirely of independent directors. The Compensation Committee operates pursuant to a charter approved by the Board. The Compensation Committee is responsible for, among other things, reviewing and approving our overall compensation philosophy, determining the compensation of our executive officers and directors, administering our incentive and equity-based compensation plans, and succession planning.
The Nominating and Corporate Governance Committee will consist of Mr. Subramaniam, Mr. Di Iorio and Mr. Ryan, with Mr. Subramaniam serving as chair, and be comprised entirely of independent directors. The Nominating and Corporate Governance Committee operates pursuant to a charter approved by the Board. The Nominating and Corporate Governance Committee reviews and, as it deems appropriate, recommends to the Board policies and procedures relating to director and board committee nominations and corporate governance policies.
The Risk Committee will consist of Mr. Koch, Mr. Casady, Mr. Subramaniam, Ms. Watson and Ms. Zuraitis, with Mr. Koch serving as chair. The Risk Committee operates pursuant to a charter approved by the Board. The Risk Committee reviews and, as it deems appropriate, recommends to the Board the design and implementation of our risk strategy and policy, risk appetite framework and specific risk appetites and limits. The Risk Committee also oversees our risk management function and reviews the due diligence of any proposed strategic transaction.
Compensation Committee Interlocks and Insider Participation
During 2014, no member of our Compensation Committee has been one of our officers or employees, and none has had any relationships with our company of the type that is required to be disclosed under Item 404 of Regulation S-K. None of our executive officers serves or has served as a member of our Board, Compensation Committee or other board committee performing equivalent functions of any entity that has one or more executive officers serving as one of our directors or on our Compensation Committee.
Corporate Governance Guidelines and Code of Business Conduct and Ethics
Our Board has adopted Corporate Governance Guidelines, which set forth a flexible framework within which our Board, assisted by Board committees, directs our affairs. The Guidelines address,
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among other things, the composition and functions of the Board, director independence, compensation of directors, management succession and review, Board committees and selection of new directors.
Our Board has also adopted a Code of Business Conduct and Ethics, which sets forth key guiding principles concerning ethical conduct and is applicable to all of our directors, officers and employees. The Code addresses, among other things, conflicts of interest, protection of confidential information and compliance with laws, rules and regulations, and describes the process by which any concerns about violations should be reported.
The Corporate Governance Guidelines and the Code of Business Conduct Ethics will be available on our corporate website. We expect that any amendments to these codes, or any waivers of their requirements, will be disclosed on our website.
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COMPENSATION DISCUSSION AND ANALYSIS
Introduction
This Compensation Discussion & Analysis, or CD&A, focuses on our executive compensation philosophy and program. In particular, the CD&A and the compensation tables that follow focus on the compensation paid to our named executive officers, or NEOs, with respect to fiscal year 2013. Our NEOs are executive officers who served in the roles of our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, during 2013 as well as our three next most highly compensated executive officers during 2013, all of whom are named below:
Name |
Position | |
Bruce Van Saun |
Chairman and Chief Executive Officer | |
John J. Fawcett |
Chief Financial Officer | |
Robert D. Matthews, Jr. |
Head of Commercial Banking | |
Brad L. Conner |
Head of Consumer Banking | |
Nancy L. Shanik |
Chief Risk Officer | |
Name of Former Executive |
Position | |
Ellen Alemany |
Former Chairman and Chief Executive Officer |
Background
Our Compensation Committee has been involved with the evaluation of the performance of our executive team, has provided oversight with respect to our executive compensation decisions, and has been actively engaged with senior management in talent management and management succession planning.
As a wholly owned subsidiary of RBS prior to this offering, the compensation packages of our NEOs, which are guided by U.S. market data, have been governed by the compensation philosophy and objectives of RBS, and have been subject to approval by the RBS Performance and Remuneration Committee of the board of directors of RBS, or RemCo, and compliance with all applicable laws and regulations. See Applicability of UK and European Remuneration Rules below for further details. This CD&A describes compensation programs and decisions as they relate to our NEOs.
Compensation Philosophy & Objectives
The fundamental principles that RBS follows in designing and implementing compensation programs for our NEOs are to:
| attract, retain, motivate and reward high-caliber executives to deliver long-term business performance within acceptable risk parameters; |
| provide clear alignment between annual and long-term compensation for executives and RBS/divisional strategic plans; |
| support a culture where employees recognize the importance of serving customers well and are rewarded for superior individual performance; and |
| encourage the creation of value over the long-term and align the rewards of the participants with the returns to shareholders. |
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Executive Compensation Procedures
Role of RemCo
Prior to this offering RemCo has been responsible for the approval, evaluation and oversight of our executive officer compensation and has approved base salaries, equity grants and annual bonus awards for our NEOs, in each case, following consideration by our Compensation Committee. Our CEO works with our Compensation Committee to formulate compensation recommendations to be submitted to RemCo for all NEOs other than himself. None of our NEOs attend the RemCo meeting at which it is determined whether such recommendations should be approved. Following this offering, while we remain subject to UK and European remuneration regulations, RemCos role with respect to our executive compensation will be more limited and will be to work with our Compensation Committee to ensure compliance with those regulations. For further details, see Applicability of UK and European Remuneration Rules below.
Role of Compensation Committee
Our Compensation Committee is composed of independent directors for purposes of the NYSE listing rules, Section 16 of the Exchange Act and Section 162(m) of the Internal Revenue Code of 1986, as amended (together with applicable regulations, Section 162(m)). Our Compensation Committees role with respect to the compensation of our NEOs has been largely advisory as executive compensation decisions are formally approved by RemCo, as described above. Historically, including during 2013, our CEO and Head of Human Resources presented executive compensation proposals to our Compensation Committee for its review and feedback prior to submission to RemCo for approval, but our Compensation Committee did not formally approve compensation decisions relating to our NEOs.
Following this offering, our Compensation Committee will continue to be composed of independent directors and will be responsible for establishing, implementing and monitoring the administration of our executive compensation plans and programs and for approving our executive officer compensation. RemCo will work with our Compensation Committee to ensure compliance with UK and European remuneration regulations while those regulations apply to us. For further details, see Applicability of UK and European Remuneration Rules below. For more on our Compensation Committees responsibilities, see ManagementBoard Committees above. Our Compensation Committee is expected to have the ability to delegate its authority to subcommittees when it deems it appropriate and in our shareholders best interests. Under its charter, our Compensation Committee will have the ability to delegate to one or more of our officers the authority to make equity grants to employees other than our executive officers in accordance with, and under our, proposed omnibus incentive plan. See Our Anticipated NEO Compensation Program Following the OfferingOmnibus Incentive Plan for details.
Role of Compensation Consultants
PricewaterhouseCoopers LLP
The advisers to RemCo are appointed independently by RemCo, which reviews its selection of advisers annually. The advisers are instructed by, and report directly to, RemCo. The Chair of RemCo approves the fees for the advisers. PricewaterhouseCoopers LLP, or PwC, was appointed as RemCos remuneration adviser on September 14, 2010, and PwCs appointment is reconfirmed by RemCo annually, including most recently in July 2013, as part of an annual review of the quality of advice received and fees charged. PwC is a signatory to the voluntary code of conduct in relation to remuneration consulting in the UK. PwC also provides professional services in the ordinary course of business, including assurance, advisory, tax and legal advice to subsidiaries of RBS. During 2013,
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PwC attended each of the nine scheduled RemCo meetings and, with respect to our executive compensation, was involved in reviewing recommendations on our executive compensation issues.
McLagan
Historically, including for 2013, our management has retained McLagan to provide peer survey data that is referred to in making executive compensation recommendations for the upcoming year. In October 2012, McLagan provided survey data regarding the compensation of our executives relative to executives in similar roles at the following companies, as applicable: Bank of America Corp.; BMO Financial Group; Citigroup Inc.; Fifth Third Bancorp; First Niagara Financial Group, Inc.; HSBC Holdings plc; Huntington Bancshares, Inc.; JP Morgan Chase & Co.; KeyCorp; M&T Bank Corp.; PNC Financial Services Group, Inc.; SunTrust Banks, Inc.; The Toronto-Dominion Bank; Webster Financial Corp.; and Wells Fargo & Company. This information was referred to by management in making compensation recommendations for our NEOs for 2013, other than for Mr. Van Saun, who was not our employee at the time. The relevant companies were selected because they are among the companies with which we compete for talent.
In preparing executive compensation recommendations that are ultimately submitted to RemCo, our management refers to the survey data provided by McLagan as a reference point for pay levels and practices and considers such data relevant to, but not determinative of, their consideration of overall executive compensation matters. Going forward, we anticipate that McLagan will continue to provide us with survey data and that Compensation Advisory Partners (discussed below) will also be involved in selecting the companies that should be included in that survey data. Survey data gathered by McLagan is not provided directly to RemCo or our Compensation Committee but is referred to by management when formulating executive compensation recommendations that are presented to our Compensation Committee for feedback and ultimately to RemCo for approval.
Frederic W. Cook & Co., Inc.
In anticipation of our transition to public company status, in December 2013, our management engaged Frederic W. Cook & Co., Inc., or Cook, to advise on public company director and executive compensation design. While our Compensation Committee was conducting a search for its own independent compensation consultant, Cook was engaged to provide us information regarding the executive compensation programs of our public company peers and to provide advice regarding compensation considerations relevant to public companies, such as Section 162(m). We did not engage Cook for any additional services outside of executive and director compensation consulting.
Compensation Advisory Partners
In March 2014, our Compensation Committee retained Compensation Advisory Partners, LLC, or CAP, to provide guidance and advice going forward on compensation-related matters, including changes to our executive and director compensation structure following this offering. CAP was directly selected and retained by our Compensation Committee to provide a broad set of services pertaining to the compensation of our executives and our directors. We do not engage CAP for any additional services outside of executive and director compensation consulting. In connection with CAPs retention, our Compensation Committee conducted an assessment of potential conflicts of interest of CAP, and no conflicts of interest relating to its services were identified.
Role of Management
Our CEO annually reviews the performance of each of the other NEOs. Following this review, the CEO, together with our Head of Human Resources, makes compensation recommendations for the
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NEOs other than himself, including recommendations for salary adjustments, annual incentives and long-term equity-based incentive awards, to our Compensation Committee for review and feedback. Our CEO then submits these proposals to RemCo for approval. During 2013, RemCo also considered at its meetings the views of the RBS Chairman, Group Chief Executive, RBS Finance Director, RBS Human Resources Director, RBS Head of Reward, RBS Secretary and RBS Chief Risk Officer with respect to executive compensation.
Going forward, we expect that our CEO will similarly be engaged in compensation decisions relating to the other NEOs. Our CEO does not and will not have any role in determining his own compensation.
Components of Our Executive Compensation Program and Analysis
The following table presents the principal elements of the compensation program that applied to our NEOs for the 2013 performance year and the objective of each element:
Element of Pay |
Objective |
Operation |
||
Base Salary | To attract and retain employees by being competitive in the specific market in which each individual employee works. | Base salaries are reviewed annually and should reflect the talents, skills and competencies of the individual. Salaries should be sufficient so that inappropriate risk-taking is not encouraged. | ||
Annual Incentives | To support a culture where employees recognize the importance of serving customers well and are rewarded for superior individual performance. |
The annual incentive pool is based on RemCos review and holistic assessment of our performance against a number of financial and operational performance-related guideposts, including customer, financial, risk and people (such as employee engagement and leadership) measures. Allocation from the pool depends on divisional, functional and individual performance. Individual performance assessment is supported by a structured performance management framework.
Under the RBS-wide deferral arrangements, a significant proportion of annual incentive awards for our more senior and higher-paid employees are deferred (part in RBS bonds (with interest in certain prior years) and part as a right to receive RBS shares) over a three-year period. Deferred awards are subject to clawback, which for 2014 awards includes post-vesting clawback, as discussed in Clawback Policy below. For individuals who are considered Code Staff under UK rules, which for 2013 included Mr. Van Saun and Mss. Shanik and Alemany, at least 50% of any annual incentive must be delivered in the form of shares or share-linked instruments and be subject to an additional six-month retention period post-vesting. See Applicability of UK and European Remuneration Rules below for details.
|
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Element of Pay |
Objective |
Operation |
||
Deferred awards in the form of the right to receive RBS shares held by our employees will be converted into equity awards of our stock upon completion of this offering. For details, see Our Compensation in Connection with this OfferingConversion of Outstanding RBS Deferred Share Awards and RBS LTIP Awards Following This Offering below. | ||||
Long-Term Incentive Plan | To encourage the creation of value over the long term and to align the rewards of the participants with the returns to shareholders. |
RBS provides certain employees in senior roles (including our NEOs) with long-term incentive awards.
Awards for our NEOs have historically been structured as performance-vesting share units. Vesting after a three-year period is based partly on RBS, divisional and/or functional performance (except for our CEO, for whom vesting is based solely on RBS performance). Vesting levels may vary between 0 and 100%.
Awards are subject to clawback, which for 2014 awards includes post-vesting clawback, as discussed in Clawback Policy below. For individuals who are considered Code Staff, which for 2013 included Mr. Van Saun and Mss. Shanik and Alemany, these awards (including Special IPO Awards described below) are subject to a six-month retention period post-vesting. See Applicability of UK and European Remuneration Rules below for details.
In anticipation of this offering, our employees, including our NEOs, received special equity awards in lieu of traditional performance-vesting share units, the terms of which are described in Our Compensation in Connection with This OfferingSpecial IPO Awards Granted in 2014 below.
Long-term incentive awards, including special equity awards relating to this offering, held by our employees will be converted into equity awards of our stock upon completion of this offering. For details, see Our Compensation in Connection with this OfferingConversion of Outstanding RBS Deferred Share Awards and RBS LTIP Awards Following This Offering below. |
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Element of Pay |
Objective |
Operation |
||
Perquisites and Other Benefits | To give employees an opportunity to provide for their retirement and address certain other specific needs. |
Our NEOs are generally eligible to participate in our company-sponsored benefit programs, including our broad-based 401(k) plan, offered on the same terms and conditions as those made generally available to our employees.
In addition, we provide certain personal benefits to certain of the NEOs for competitive reasons. For additional details, see the All Other Compensation column of the 2013 Summary Compensation Table below, along with accompanying footnotes. |
Base Salary
Although we have no written policies or guidelines for setting or adjusting the base salaries of our NEOs, our NEOs salaries are intended to be competitive with those of our peers and are subject to change if, among other reasons, the executives experience or responsibilities change materially or there are changes in the competitive market environment. Mr. Van Sauns base salary was increased, effective April 1, 2014, to $1,487,000 to remain competitive. For the amounts of our NEOs base salaries, see the Salary column of the 2013 Summary Compensation Table below, along with accompanying footnotes.
Annual Incentive Awards
Determination of Our CEOs Annual Incentive Award
Although our CEO had a strong year in terms of delivering on his objectives, he did not receive an annual incentive award for the 2013 performance year in light of the overall challenges faced by RBS during that period.
Determination of Annual Bonus Pool Under AIP
For the 2013 performance year, as in past years, our NEOs (other than our CEO) participated in our discretionary Annual Incentive Plan, or AIP. The aggregate discretionary AIP annual bonus pool was approved by RemCo after a collaborative holistic review by RBS and us of our performance during 2013. As part of that assessment, RemCo reviewed our performance against a number of financial and operational performance-related guideposts, including, among other things, our operating income, cost-to-income ratio, return on equity and people and customer metrics, and such other objective and subjective criteria as deemed appropriate by RemCo. No specific weight was assigned to any particular performance factor or guidepost and the aggregate amount of the bonus pool was not determined formulaically.
Determining Other NEOs Annual Incentive Awards (Other than the CEO)
There are no target award amounts established under the AIP for our NEOs or other participants. Rather, proposed incentive award amounts, or AIP awards, submitted to RemCo for review and approval for our NEOs are determined at year-end by the CEO, after taking into account the funding of the relative bonus pool and qualitative assessment of individual performance.
All employees, including our NEOs, participate in a robust performance management process whereby managers and employees develop a set of mutually agreed upon performance objectives during the first quarter of each performance year. All employees are reviewed annually as part of the
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performance management process and are rated between 1 (low) and 5 (high), which is a consideration in determining annual incentive awards.
There is no particular weight assigned to performance-related factors; rather, our CEO may evaluate performance as deemed appropriate in his discretion. For the 2013 performance year, our CEO made the following determinations regarding each NEOs individual performance, which were taken into account by RemCo in ultimately approving our NEOs individual annual incentive awards:
| Mr. Fawcett . Mr. Fawcett was principally responsible for the successful execution of three planned capital conversion transactions that were integral in efforts to realign our capital position with that of our regional bank peers. He was a key contributor to strategic initiatives (including public offering readiness planning, Project Top (a revenue generation and expense review project) and the Chicago Divestiture). |
| Mr. Matthews . Under Mr. Matthewss leadership, strong strategic progress was made in the commercial business, which delivered good current financial performance and is positioned for further growth. Key initiatives include the expansion of the capital markets business and industry coverage groups. Mr. Matthews was instrumental in increasing customer satisfaction and loyalty and effectively controlling risk, as evidenced by strong audit and risk ratings. With Mr. Matthewss oversight and guidance, the commercial business increased its market share during 2013 despite increasing competitive pressures. |
| Mr. Conner . Mr. Conner continued to build a strong foundation for the consumer business. To that end, Mr. Conner has made good progress in building a customer-centric organization with a focus on implementing measures to ensure progress, and aligning the organization with such measures. He has assembled a talented team who are focused on growth. |
| Ms. Shanik . Ms. Shanik was instrumental in designing and implementing a framework for effective risk management, including development of a new risk governance committee structure, creation of divisional policy ownership and adoption of key changes relating to our risk operating model. |
Mandatory Deferral of 2013 Annual Incentive Awards
The time and the form of payment for AIP awards are determined by RemCo. For the 2013 performance year, AIP awards were granted partially in the form of a deferred bond with no interest and partially as a right to receive RBS shares, or deferred share awards, with such awards being granted under, and subject to the rules of, the RBS 2010 Deferral Plan, or the RBS Deferral Plan.
For the 2013 performance year, all employees were subject to the same form and timing of payment for AIP awards, including our NEOs. Up to $3,129 was paid in March 2014, the next $35,986 was awarded in the form of a deferred bond with no interest to be paid in June 2014, and amounts above $39,115 were awarded as deferred share awards with a grant date fair market value equal to the remaining value of the award. The portion of the award granted as deferred share awards under the RBS Deferral Plan is scheduled to vest (i.e., they remain subject to forfeiture in the event of a termination for cause or grantee engaging in detrimental activity or competitive activity (in each case, as defined in the RBS Deferral Plan)) ratably in four installments on each of June 6, 2014, March 9, 2015, March 7, 2016 and March 7, 2017. Code Staff (which, for 2013, included Mr. Van Saun and Mss. Shanik and Alemany) are required to hold their RBS shares for at least six months following the applicable vesting date. For details, see Applicability of UK and European Remuneration Rules below.
Each of our NEOs (other than our CEO) received the following number of deferred share awards in respect of their annual incentive awards for the 2013 performance year: Mr. Fawcett (101,428);
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Mr. Matthews (125,148); Mr. Conner (79,533); and Ms. Shanik (102,340). Under the SEC reporting rules, these numbers will appear in the Stock Awards column of our 2014 Summary Compensation Table, which will be included in our annual proxy statement for the 2014 fiscal year. For the amount of the deferred bond portion of our NEOs annual incentive awards for the 2013 performance year, see the Bonus column of the 2013 Summary Compensation Table below, along with accompanying footnotes.
Outstanding deferred share awards held by our employees will be converted into equity awards of our stock upon completion of this offering. For details, see Our Compensation in Connection with this OfferingConversion of Outstanding RBS Deferred Share Awards and RBS LTIP Awards Following This Offering below.
For 2014 annual incentive awards, assuming the UK Remuneration Code, or the UK Code, continues to apply to us at grant, all of our NEOs will be required to meet the variable pay requirements applicable to Code Staff. For further details, see Applicability of UK and European Remuneration Rules below.
Special One-Time Allowances
In addition, in February 2014, RBS approved funding for special one-time cash allowances for certain of our employees. These allowances, which will be paid in June 2014, relate to the 2013 performance year and are designed to provide additional cash compensation during 2014 to selected employees significantly impacted by the bonus deferral schedule for the 2013 performance year, with a focus on employees in our customer-facing businesses. Two of our NEOsMessrs. Matthews and Connerwill be receiving such allowances. For the amounts of these one-time allowances to be paid to Messrs. Matthews and Conner, see the Bonus column of the 2013 Summary Compensation Table below, along with accompanying footnotes.
Annual Incentive Awards Going Forward
We have adopted an annual incentive plan in which our NEOs will participate starting with the 2014 performance year. For details and a summary of material terms, see Our Anticipated NEO Compensation Program Following the OfferingAnnual Incentive Plan below.
Long-Term Incentive Awards
The compensation philosophy of rewarding the achievement of long-term company objectives has also been, prior to this offering, accomplished by providing our NEOs with the opportunity to receive RBS equity awards that vested over time, subject to the satisfaction of certain performance conditions. Prior to this offering, long-term equity-based awards granted to our NEOs and certain other employees have been granted pursuant to the RBS 2010 Long-Term Incentive Plan, or the LTIP. These awards, or LTIP awards, have historically been granted on an annual basis, at the same time AIP awards are made, and have been structured in the form of a right to receive a number of RBS shares after a three-year performance period in a maximum amount of 100% of the RBS shares underlying the award originally granted, subject to the satisfaction of certain performance conditions and exercise of RemCos negative discretion. All LTIP awards are subject to clawback provisions during the vesting period under the accountability review process and, for 2014 awards, are also subject to post-vesting clawback. For details, see Clawback Policy below. Awards granted under the LTIP are at risk of cancellation or forfeiture if a grantee leaves RBS generally other than in limited good leaver circumstances (as described in the LTIP) or if applicable performance conditions are not satisfied.
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LTIP awards granted to our NEOs have been subject to a range of financial and non-financial RBS, divisional and functional performance measures. With respect to LTIP awards granted in 2013, the vesting of:
| Mr. Van Sauns award is 100% based on RBS performance; |
| Messrs. Matthewss and Conners awards and Ms. Alemanys award are 25% based on RBS performance and 75% based on our performance; and |
| Mr. Fawcetts and Ms. Shaniks awards are 50% based on our performance, 25% based on RBS-wide functional performance and 25% based on RBS performance. |
The percentage of LTIP awards that vests is determined by RemCo at the end of the performance period based on RemCos assessment of financial and non-financial performance of RBS, CFG and functions (such as finance, risk, legal and human resources), as applicable, and is subject to RemCos negative discretion. Our performance measures focus on our financial and operational performance, effective risk management and customer and people measures but are not formulaic, and are assessed by RemCo holistically. The ultimate vesting of an LTIP award could vary between 0% and 100% of the RBS shares underlying the awards originally granted. It is intended that the vesting level will be the same for all employees in the same division or function, unless a clawback event occurs. For the amounts of LTIP awards granted to our NEOs in 2013 and applicable vesting provisions, see the Stock Awards column of the 2013 Summary Compensation Table below and the 2013 Grants of RBS Plan-Based Awards table below, along with accompanying footnotes.
In anticipation of this offering, our employees, including our NEOs, did not receive traditional LTIP awards in 2014. Instead, our NEOs and certain other key employees received RBS special equity awards. For additional details regarding the terms and amounts of these special awards, see Our Compensation in Connection with This OfferingSpecial IPO Awards Granted in 2014 below.
Outstanding LTIP awards held by our employees will be converted into equity awards of our stock upon completion of this offering, as described in the Our Compensation in Connection with This OfferingConversion of Outstanding RBS Deferred Share Awards and RBS LTIP Awards Following This Offering below.
Other Benefits
Employment Agreements/Offer Letters and Severance Benefits
We have entered into an employment agreement with our CEO and offer letters with each of our other NEOs that contain covenants, such as those prohibiting post-employment competition or solicitation by the NEOs. For details, see Compensation TablesPotential Payments Upon Termination or Change in ControlEmployment Agreements/Offer Letters with our NEOs below.
In addition, our full-time employees, including our NEOs (other than our CEO who is eligible for severance under the terms of his employment agreement) are eligible for severance benefits in accordance with our severance practice, which provides for the payment of severance benefits to such employees in the event their employment with us is terminated without cause and for reasons unrelated to poor performance. For details, see Compensation TablesPotential Payments Upon Termination or Change in ControlSeverance Practice below.
Nonqualified Deferred Compensation Plans
Our employees may participate in two nonqualified deferred compensation plansthe CFG Deferred Compensation Plan and the RBS Americas Deferred Compensation Plan. Following closure
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of the CFG Deferred Compensation Plan to new participants on December 31, 2008, the RBS Americas Deferred Compensation Plan was adopted, effective as of January 1, 2009. The deferred compensation plans currently do not offer any matching contributions or provide for above-market earnings, and none of our NEOs participated in these plans during 2013. Only Ms. Alemany had a balance under each of these plans as of December 31, 2013. For a description of the material terms of these deferred compensation plans, see Compensation TablesNonqualified Deferred Compensation below.
Pension Plan
We sponsor the RBS Americas Pension Plan, a tax-qualified, non-contributory defined benefit pension plan that was closed to new participants effective January 1, 2009 and frozen to all participants and benefit accruals effective December 31, 2012. None of our NEOs is eligible to participate in this plan other than Messrs. Matthews and Conner (who were hired prior to 2009), each of whom had a benefit under this plan as of December 31, 2013. For a description of the material terms of the RBS Americas Pension Plan, see Compensation Tables2013 Pension Benefits below.
401(k) Plan
We maintain a qualified defined contribution 401(k) plan for all of our employees. Employees may defer up to 50% of their eligible pay to the plan (up to Internal Revenue Code limits). After employees have completed one full year of service, employee contributions are matched at 100% up to an overall limit of 5% on a pay period basis and employees receive an additional company contribution equal to 2% of earnings, subject to limits set by the Internal Revenue Service. Our NEOs are entitled to participate in our 401(k) plan on the same basis as our employees generally, except that Mr. Van Saun is not eligible to receive any company contributions under our 401(k) plan.
Health and Welfare Benefit Plans
Our NEOs are currently eligible to participate in CFG-sponsored benefit programs, offered on the same terms and conditions as those made generally available to our employees, including medical, dental, vision, short-term and long-term disability plans.
Perquisites and Other Benefits
We provide our NEOs with company-selected independent advisors to assist them with financial planning, if desired by the executives. Our NEOs are also covered by a relocation policy (which includes a reimbursement for taxes related to relocation expenses) and a charitable contribution policy that generally covers all our employees. Additionally, Mr. Matthews received temporary housing benefits in excess of benefits provided for under the relocation policy, as described in footnote 7 to the 2013 Summary Compensation Table below. In 2013, we also provided certain of our NEOs with reimbursements for taxes relating to financial planning. Mr. Van Saun was also eligible for a housing allowance during his employment as RBSs Chief Financial Officer.
Lastly, Mr. Van Saun receives and Ms. Alemany received an annual pension and benefits allowance. For Mr. Van Saun, this benefit is intended to make him whole for certain pension and benefits funding available to him during his service to RBS in the UK and has been increased, effective as of April 1, 2014, to an annual payment of $561,929 (from $519,659) in connection with the increase of his base salary; for Ms. Alemany, this payment was intended to make her whole for certain pension benefits she received from her former employer.
For additional details regarding these and other perquisites that we provide to our executives, see footnote 7 to the 2013 Summary Compensation Table below.
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Clawback Policy
RBS has implemented a group-wide accountability review process to ensure that there is a standardized process for RBS to take appropriate action in instances where new and restated financial information would change the bonus and/or long-term incentive decisions which were made in previous years or which will be made in the current year. The CFG Accountability Review Panel, or ARP, meets on a quarterly basis to consider the events referred for its review and the proposed recommendations for action. To the extent further action is deemed appropriate by the ARP, our CEO is responsible for making final decisions based on the recommendations and advice of the ARP. The potential accountability review actions can include compensation adjustments (e.g., current-year bonus reduction or clawback), disciplinary action (e.g., dismissal) and performance adjustments (e.g., a change to performance rating).
In addition, all deferred share awards and LTIP awards are (and, consequently, any awards that are converted into awards on our shares in connection with and upon the closing of this offering, will be) subject to clawback provisions contained in the relevant plan rules. Specifically, under these plans (and plans that will govern the converted awards, see Our Compensation in Connection with This OfferingConversion of Outstanding RBS Deferred Share Awards and RBS LTIP Awards Following This Offering below), an award may be reduced before it is paid out if, following the grant date, RBS (or CFG) becomes aware of information that would have affected the decision about the executives performance or learns that the performance factors on which reward decisions were based do not turn out to be accurate. RBS (or CFG) may also reclaim any unpaid portion of an award if RBS (or CFG) or an executives business unit suffers a material downturn in its financial performance or suffers a material failure of risk management. Awards granted under the RBS Deferral Plan and the LTIP in 2014 are subject to clawback provisions which may apply post-vesting, normally for up to six months following the vesting date. This means RBS (or CFG) may require individuals to repay some or all of their awards in exceptional circumstances relating to the performance of RBS (or CFG) or an individual participant or the application (or non-compliance with) any legal or regulatory requirement applicable to RBS (or CFG) or such participant. For further details regarding the clawback provisions applicable to awards granted under the RBS Deferral Plan and LTIP in 2014, see Our Compensation in Connection with This OfferingConversion of Outstanding RBS Deferred Share Awards and RBS LTIP Awards Following This Offering below.
In addition, our CEO and CFO are subject to clawback as mandated by the Sarbanes-Oxley Act. Further, our Compensation Committee will monitor the regulatory developments related to clawback, including under the Dodd-Frank Act, and will modify its practices and policy, to the extent necessary, to comply with applicable law and regulations.
Balancing Risk and Incentive Compensation
We have implemented a multi-layered approach in order to ensure that we balance risk and incentive compensation. All employees, including our NEOs, participate in a robust performance management process whereby managers and employees develop a set of mutually agreed performance objectives during the first quarter of each performance year. All employees are reviewed annually as part of the performance management process and are rated 1 (low)5 (high), which is a consideration in determining annual incentive awards. Included within an employees performance management document are objectives and measures specifically relating to risk management.
As part of the effort to evaluate roles within the business to assess the inherent risk associated with each role, we operate a covered role identification process. Covered roles are roles that either individually or as part of a group can expose the firm to material amounts of risk. Individuals in covered roles, including each of the NEOs, have additional risk-based objectives that are included in their
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performance objectives as part of the performance management process referred to in the preceding paragraph.
In addition, we identify employees serving in covered roles who are members of executive management, serve in key control positions, are material risk-takers and/or have credit approval authority above a specified threshold as Tier 1 employees. Tier 1 employees are reviewed by our regional risk leadership as part of their year-end performance evaluation. The result of this evaluation is considered by senior management before year-end compensation is finalized. Each of our NEOs is a Tier 1 employee.
As a supplement to the performance management process, some individuals, including all NEOs, are subject to a 360 review. This process is completed through the use of an evaluation tool which allows for peer, subordinate and manager feedback. One of the areas that participants are evaluated on within the 360 review is risk. All participants receive an overall risk and control feedback score which reflects input from all feedback providers. Additionally, input from the assigned risk officer is separately highlighted in the results of the 360 review to ensure pointed risk feedback is obtained where applicable.
Lastly, as part of the management of the region, individual regional key leaders are reviewed together by our CEO and the RBS Americas management team to assess their performance from a regional management and risk perspective. The regional co-heads along with the regional head of human resources and chief risk officer complete this review and provide their input to the line management to assure that the regional point of view is taken into account when making final pay decisions. As we become an independent company and are no longer part of the RBS U.S. region, we expect this regional layer of review will no longer continue.
Compensation Risk Assessment
Our Compensation Committee has performed a review of compensation policies and practices for all of our employees and has concluded that our compensation policies and practices are not reasonably likely to have a material adverse effect on us.
Applicability of UK and European Remuneration Rules
Due to RBSs ownership of us, certain employees are identified as Code Staff and are subject to specific requirements regarding the oversight, structure and delivery of variable pay under the UK Code. During 2013, Mr. Van Saun and Mss. Shanik and Alemany were our only employees determined to be Code Staff. Specifically, under the UK Code, a minimum of 40% (for Code Staff with variable compensation up to £500,000) or 60% (for Code Staff with variable compensation over £500,000) of variable pay must be deferred over a minimum three-year period, vesting no faster than on an annual pro rata basis. A minimum of 50% of any variable pay, both immediate and deferred, must be delivered in equity or equivalents. Shares delivered to Code Staff upon vesting of variable pay awards must be held for a period of six months post-vesting before they may be sold or transferred. Awards granted and shares delivered under the RBS Deferral Plan and LTIP (which, as described below, will be converted into awards on our shares upon the closing of this offering and, upon conversion, administered under the CFG Deferral Plan and CFG LTIP, respectively) must comply with these requirements. In addition, awards granted under the Citizens Financial Group, Inc. 2014 Omnibus Incentive Plan, the Citizens Financial Group, Inc. 2014 Employee Stock Purchase Plan and the Citizens Financial Group, Inc. 2014 Non-Employee Directors Plan (in each case as described below), must also comply with the above requirements while UK and European remuneration regulations continue to apply to us.
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The Code Staff definition was recently revised by the new European Banking Authority with expanded criteria to identify Material Risk Takers, or MRTs. RBS and CFG have completed a review of CFGs employees in order to determine which employees are deemed to be MRTs. Approximately 40 employees have been identified as MRTs, including each of our NEOs. As a result, all such employees will be subject to the remuneration requirements described above in respect of variable pay granted for performance year 2014 and beyond, to the extent that UK and European remuneration regulations apply to us at the time of grant.
One of the requirements of CRD IV is that MRTs may not receive variable compensation in excess of 100% of fixed compensation starting with performance year 2014. In order to deliver competitive levels of compensation to our employees impacted by CRD IV, role based allowances have been approved by RemCo for certain MRTs, subject to these limitations. The annual role based allowance for each of Messrs. Van Saun, Fawcett, Matthews and Conner and Ms. Shanik is $2,676,600, $525,000, $975,000, $805,000, and $661,000, respectively. These allowances will be delivered in a combination of cash and CFG shares or solely in CFG shares. Any shares delivered as part of the allowance will be fully vested upon grant, but subject to transfer restrictions lapsing ratably over three years for Messrs. Fawcett, Matthews and Conner and Ms. Shanik, and lapsing in installments for up to five years for Mr. Van Saun.
We intend to maintain competitive total compensation levels for affected employees, although the structure of our compensation packages may not be considered in line with our peers. Our Compensation Committee will administer our equity plans with reference to, and will work with RemCo to ensure compliance with, applicable UK and European remuneration regulations for so long as they continue to apply to us. Once we cease to be subject to UK and European remuneration regulations, we will evaluate and modify our compensation structure as appropriate so that it is more aligned with our peers and continues to attract and retain the high-caliber talent necessary to maximize long-term shareholder value.
Our Compensation in Connection with This Offering
Special IPO Awards Granted in 2014
As mentioned above, in anticipation of this offering, our employees, including our NEOs, did not receive any LTIP awards in 2014 for the 2013 performance year. In lieu of such typical annual LTIP awards granted historically, RemCo granted to certain of our employees, including the NEOs, special IPO awards. The special IPO awards have been granted subject to the LTIP rules (except as indicated otherwise in the award certificates) and have been initially denominated 50% in a convertible bond and 50% as a right to receive RBS shares. Upon the closing of this offering, the entire award will convert into a right to receive our shares based on our stock price at the effective time of this offering and the RBS share price over the 30 London Stock Exchange dealing days immediately prior to such date (converted into U.S. Dollars using the average U.S. Dollar to British Pound currency exchange rate over such period). Following this offering, the special IPO awards will be subject to the terms and conditions of the CFG Converted Equity 2010 Long Term Incentive Plan (as described below) and applicable award certificates.
For each of Messrs. Van Saun, Fawcett, Matthews and Conner and Ms. Shanik, the amount of the special IPO awards denominated in a convertible bond was $2,346,888, $475,000, $550,000, $500,000 and $440,000, respectively, and the number of RBS shares subject to the award was 428,216, 86,670, 100,354, 91,231 and 80,283, respectively.
The special IPO awards are scheduled to vest 50% in March 2016 and 50% in March 2017, subject to satisfaction of the following conditions: (i) completion of the initial public offering on or by
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December 31, 2014; (ii) the grantee receiving a 3 performance rating (fully satisfactory) for each performance year ending on December 31 of 2014, 2015 and 2016; and (iii) the grantee being in continuous employment with us through the applicable vesting date, unless the grantee leaves under certain good leaver circumstances described in the award certificate. If the initial offering is not completed on or by December 31, 2014, RemCo will have discretion to provide for the vesting of some or a portion of these awards in its discretion.
Similarly to other 2014 LTIP awards, these special IPO awards are subject to clawback provisions which may apply prior to and following vesting. See Clawback Policy above.
Conversion of Outstanding RBS Deferred Share Awards and RBS LTIP Awards Following This Offering
Upon completion of this offering, outstanding deferred share awards and LTIP awards held by our employees will be converted into awards to receive our shares. These converted awards will be governed by the terms of the CFG Converted Equity 2010 Long Term Incentive Plan, or the CFG LTIP, and the CFG Converted Equity 2010 Deferral Plan Rules, or the CFG Deferral Plan, as applicable.
The terms of the CFG LTIP, the CFG Deferral Plan and the converted awards are intended to mirror those of the LTIP, the RBS Deferral Plan and the outstanding LTIP awards and deferred share awards, as applicable, in all material respects, except that outstanding awards will be delivered in CFG shares rather than RBS shares. Additionally, the LTIP awards are currently subject to the performance conditions described above under Components of Our Executive Compensation Program and AnalysisLong-Term Incentive Awards. We are currently considering how the existing performance conditions applicable to such awards will be treated as a result of the conversion. Alternatives under consideration include truncating the three-year performance period or assessing performance at the end of the original performance period applicable to such awards.
Each of the CFG LTIP and the CFG Deferral Plan were adopted by our Board of Directors. No new awards can be granted under these plans following the completion of this offering.
Other outstanding equity awards held by our employees (i.e., stock options outstanding under the RBS Group 2007 Executive Share Option Plan) will continue as currently in effect with respect to RBS stock following this offering. For the amounts of such outstanding stock options, see Outstanding RBS Equity Awards at 2013 Fiscal Year-End table below.
The number of shares subject to converted LTIP awards and deferred share awards will be determined based on our stock price at the effective time of this offering. As of the date of this prospectus, for each of Messrs. Van Saun, Fawcett, Matthews and Conner and Ms. Shanik, the number of RBS shares underlying LTIP awards and deferred share awards to be converted into awards to receive our shares was 1,690,018, 497,820, 547,076, 457,040 and 452,732, respectively, assuming maximum achievement of the performance conditions applicable to the LTIP awards.
The following is a summary of the material terms of the CFG LTIP and the CFG Deferral Plan. This summary is qualified in its entirety by reference to the CFG LTIP and the CFG Deferral Plan, attached as Exhibit 10.28 and Exhibit 10.27, respectively, to this registration statement.
CFG Converted Equity 2010 Long Term Incentive Plan
Shares Subject to the Plan
The number of shares authorized for issuance under the CFG LTIP is the maximum number of CFG shares that can be delivered in respect of converted LTIP awards. Any shares that are subject to
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a CFG LTIP award that are released or lapse or are satisfied in cash or bonds in lieu of shares, in whole or in part, will become available for issuance under the Citizens Financial Group, Inc. 2014 Omnibus Incentive Plan (described below).
Termination of Employment
If a participant ceases to be an employee of any member of the CFG group (as defined in the CFG LTIP) for any reason other than due to the participants death or due to exceptional circumstances (as described in the CFG LTIP), an outstanding award will be forfeited on the date of such participants termination of employment (or, on the date which the participant gives or receives notice of termination, as determined in the discretion of our Compensation Committee). Unless otherwise provided in an award certificate, any unvested portion of an award will vest in full on the date of such participants death. In the event a participant ceases to be employed by any member of the CFG group due to exceptional circumstances, unless otherwise provided in an award certificate, an award will continue to vest and settle on their original vesting schedule, subject to the satisfaction of performance condition(s), if applicable, and will be prorated to reflect the period the participant was employed. However, if after a participant ceases to be an employee of the CFG group due to exceptional circumstances, such participant engages in detrimental activity (as defined in the CFG LTIP), the award will be forfeited.
Corporate Events
In the event of a change of control (as defined in the CFG LTIP), unless our Compensation Committee determines otherwise, any unvested portion of an award will vest on the date of such change of control, subject to the satisfaction of performance condition(s), if applicable, and prorated to reflect the portion of the vesting period that has passed.
In the event our Compensation Committee becomes aware that we are or are expected to be affected by any variation in share capital, demerger, distribution (other than an ordinary dividend), delisting or other transaction which, in the opinion of our Compensation Committee could affect the current or future value of our shares, our Compensation Committee will have authority to:
| allow awards to vest, subject to any conditions our Compensation Committee may impose, as determined in its discretion; |
| cause awards to become forfeited in whole or in part; |
| require substitution by the acquiring company of awards; |
| adjust the number of shares comprised in an award and such other terms as appear appropriate to our Compensation Committee; and/or |
| take any other appropriate action (including, for the avoidance of doubt, allowing awards to be exchanged for new awards on equivalent terms, as far as practicable). |
Clawback of Awards
For CFG LTIP awards granted prior to 2014, our Compensation Committee may at any time review any CFG LTIP award in light of the performance of any member of the CFG group or RBS, any business area or team, and the conduct, capability or performance of the individual participant, and may take any action in accordance with applicable law. Following this review, our Compensation Committee may make any determination with respect to any unvested portion of an award including (i) reducing the number of our shares in respect of such award, (ii) determining that no shares, cash or bonds will vest in respect of such award or (iii) determining that no amount (or a reduced amount) will be paid in respect of any dividend equivalent.
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For CFG LTIP awards granted in 2014, our Compensation Committee may decide before an award vests (or for such period after an awards vests as our Compensation Committee deems appropriate) that any participant be subject to clawback in light of: (i) the performance of, or the application of (or non-compliance with) any legal or regulatory requirement applicable to, any member of the CFG group, RBS, any business area or team or the individual participant or (ii) any other matter which our Compensation Committee considers relevant. To give effect to the clawback provision, our Compensation Committee may take any action, including, but not limited to: (i) reducing the number of shares in respect of such award and/or determining the extent to which such award (or any award granted to the participant under any other employee share plan or incentive plan operated by any member of the CFG group) vests or becomes exercisable, (ii) reducing any bonus award that would otherwise be payable to the participant, (iii) reducing the amount that will be paid in respect of any dividend equivalent and/or (iv) requiring the participant to pay or repay any amounts as may be required for the application of clawback to be satisfied in full.
Plan Term
The CFG LTIP will be effective on the effective date of this offering and will terminate on the date on which all CFG LTIP awards have been vested, settled, delivered, forfeited, reduced, canceled or otherwise lapsed or expired. The plan will expire sooner if our Compensation Committee terminates the CFG LTIP.
Amendment or Termination
Our Compensation Committee may amend or terminate the CFG LTIP at any time, subject to (i) RemCo approval and (ii) applicable law and the rules and regulations of the primary stock market or exchange on which our shares are quoted or traded. However, any amendment or change to the CFG LTIP to the advantage of present or future participants which relates to (i) participant eligibility, (ii) authorized shares, (iii) individual award limits, (iv) the basis for determining a participants entitlement to benefits (or an adjustment to entitlements) or (v) the terms of the amendment provision contained in the CFG LTIP must be approved by our shareholders. Shareholder approval is not required where our Compensation Committee makes minor changes to the CFG LTIP (i) to benefit the administration of the plan, (ii) to comply with or take account of applicable law or rules of the stock market or exchange on which our shares are principally quoted or traded or (iii) to obtain or maintain favorable tax or regulatory treatment.
CFG Converted Equity 2010 Deferral Plan
Shares Subject to the Plan
The number of shares authorized for issuance under the CFG Deferral Plan is the maximum number of CFG shares that can be delivered in respect of converted deferred share awards. Any shares that are subject to a CFG deferred share award that are released or lapse or are satisfied in cash or bonds in lieu of shares, in whole or in part, will become available for issuance under the Citizens Financial Group, Inc. 2014 Omnibus Incentive Plan (described below).
Termination of Employment
If a participant ceases to be an employee of any member of the CFG group (as defined in the CFG Deferral Plan) for any reason other than for cause (as defined in the CFG Deferral Plan) or due to the participants death, an outstanding award will continue to vest (i.e., settle) on its original vesting schedule, except that if a participant engages in any detrimental activity or competitive activity (in each case, as defined in the CFG Deferral Plan), any unvested portion of an award will be
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forfeited (except to the extent our Compensation Committee determines otherwise). If a participant ceases to be an employee of any member of the CFG group due to a termination for cause, any outstanding award will be forfeited on the date of such participants termination of employment (or, on the date which the participant receives notice of such termination, as determined in the discretion of our Compensation Committee). Any unvested portion of an award will vest on the date of the participants death and the participant will receive an amount in cash equal to the value of the shares underlying such award on such date.
Corporate Events
In the event our Compensation Committee becomes aware that we are or expected to be affected by any variation in share capital, demerger, distribution (other than an ordinary dividend), change of control (defined under the CFG Deferral Plan similarly as under the Citizens Financial Group, Inc. 2014 Omnibus Incentive Plan, described below), delisting or other transaction, which, in the opinion of our Compensation Committee could affect the current or future value of our shares or bonds, our Compensation Committee will have authority to:
| cause awards to become forfeited; |
| require substitution by the acquiring company of awards; |
| adjust the number of shares comprised in an award and such other terms as appear appropriate to our Compensation Committee; and/or |
| take any other appropriate action (including, for the avoidance of doubt, allowing awards to be exchanged for new awards on equivalent terms, as far as practicable). |
Clawback of Awards
For CFG deferred share awards granted prior to 2014, our Compensation Committee may at any time review any CFG deferred share award in light of the performance of any member of the CFG group or RBS, any business area or team, and the conduct, capability or performance of the individual participant, and may take any action in accordance with applicable law. Following this review, our Compensation Committee may make any determination in respect of any unvested portion of a CFG deferred share award including (i) reducing the number of our shares, securities or cash in respect of such award, (ii) determining that an award will not vest (in whole or in part) or (iii) determining that no amount (or a reduced amount) will be paid in respect of any dividend equivalent or notional interest.
For CFG deferred share awards granted in 2014, our Compensation Committee may decide before an award vests (or for such period after an awards vests as our Compensation Committee deems appropriate) that any participant be subject to clawback in light of: (i) the performance of, or the application of (or non-compliance with) any legal or regulatory requirement applicable to, any member of the CFG group, RBS, any business area or team or the individual participant or (ii) any other matter which our Compensation Committee considers relevant. To give effect to the clawback provision, our Compensation Committee may take any action, including, but not limited to: (i) reducing the number of shares in respect of such award and/or determining the extent to which such award (or any award granted to the participant under any other employee share plan or incentive plan operated by any member of the CFG group) vests or becomes exercisable, (ii) reducing any bonus award that would otherwise be payable to the participant, (iii) reducing the amount that will be paid in respect of any dividend equivalent and/or (iv) requiring the participant to pay or repay any amounts as may be required for the application of clawback to be satisfied in full.
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Plan Term
The CFG Deferral Plan will be effective on the effective date of this offering and will terminate on the date on which all CFG deferred share awards have been vested, settled, delivered, forfeited, reduced, canceled or otherwise lapsed or expired. The plan will expire sooner if our Compensation Committee terminates the CFG Deferral Plan.
Amendment or Termination
Our Compensation Committee may amend or terminate the CFG Deferral Plan at any time, subject to (i) RemCo approval and (ii) applicable law and the rules and regulations of the primary stock market or exchange on which our shares are quoted or traded. However, any amendment or change to the CFG Deferral Plan to the advantage of present or future participants which relates to (i) participant eligibility, (ii) authorized shares, (iii) individual award limits, (iv) the basis for determining a participants entitlement to benefits (or an adjustment to entitlements) or (v) the terms of the amendment provision contained in the CFG Deferral Plan, must be approved by our shareholders. Shareholder approval is not required where our Compensation Committee makes minor changes to the CFG Deferral Plan (i) to benefit the administration of the plan, (ii) to comply with or take account of applicable law or rules of the stock market or exchange on which our shares are principally quoted or traded or (iii) to obtain or maintain favorable tax or regulatory treatment.
Our Anticipated NEO Compensation Program Following the Offering
In anticipation of becoming a public company, we have been working to develop our own compensation philosophy, objectives and procedures for the period following the completion of this offering. We anticipate that our compensation philosophy and objectives will be similar to the principles currently followed by RBS with respect to our NEOs as described above. Our Compensation Committee will review the impact of the offering on all aspects of compensation and may make adjustments to the compensation program as it deems appropriate and in the best interests of our shareholders. Together with our Board of Directors, our Compensation Committee will be responsible for determining our compensation philosophy, consistent with all applicable laws and regulations. In this regard, our Compensation Committee will work with RemCo to ensure compliance with UK and European remuneration regulations while those regulations continue to apply to us. For further details, see Applicability of UK and European Remuneration Rules above.
Annual Incentive Plan
Bonuses payable to our NEOs will be subject to the maximums set forth in the RBS Citizens Financial Group, Inc. Performance Formula and Incentive Plan, or the Section 162(m) Plan, which was adopted in connection with this offering. The Section 162(m) Plan has been designed to grant annual incentive awards that are intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code. We anticipate granting awards under the Section 162(m) Plan starting in respect of the 2014 performance year. At the beginning of each performance year, our Compensation Committee will designate participants in the Section 162(m) Plan for the relevant year. The Section 162(m) Plan sets forth the maximum annual incentive award that can be granted to any participant for any year at 2% of adjusted pretax operating income for our CEO and 0.7% of pretax operating income for other participants. Our Compensation Committee may use negative discretion to reduce the amount of each participating executives annual incentive award based on our Compensation Committees assessment of company and individual performance during the relevant year.
The Section 162(m) plan defines pretax operating income as, for the applicable fiscal year, our consolidated pretax income, adjusted to exclude the impact of any extraordinary items, goodwill
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impairment, integration and restructuring costs, discontinued operations, acquisition costs, gains or losses on strategic disposals, pension curtailments or settlements, cumulative effect of accounting changes, valuation adjustments related to debt accounted for at fair value, and other unusual or non-recurring items of loss or expense. In each case, all of the preceding terms included in the definition of pretax operating income will have the meanings as defined by generally accepted accounting principles accepted in the United States of America and identified in the audited financial statements, notes to the audited financial statements, managements discussion and analysis or our other filings with the SEC.
Omnibus Incentive Plan
We have adopted the Citizens Financial Group, Inc. 2014 Omnibus Incentive Plan, or the Omnibus Plan, which permits us to grant of equity-based and cash incentive awards to our NEOs and other employees and service providers. The following is a summary of the material terms of the Omnibus Plan and these awards. This summary is qualified in its entirety by reference to the Omnibus Plan attached as Exhibit 10.29 to this registration statement.
Purpose
The purpose of the Omnibus Plan is to motivate and reward those employees and other individuals who are expected to perform at the highest level and contribute significantly to our success, thereby furthering our best interests and those of our shareholders.
Plan Term
The Omnibus Plan is scheduled to expire after ten years following the effective date of this offering. The plan will expire sooner if, prior to the end of the ten-year term, the maximum number of shares available for issuance under the Omnibus Plan has been issued or our Board of Directors terminates the Omnibus Plan.
Authorized Shares and Award Limits
Subject to adjustment (as described below), 52,592,057 shares of our common stock (representing 10.3% of our issued and outstanding shares as of the effective time of this offering, less the amount of shares subject to converted awards) are available for awards to be granted under the Omnibus Plan (other than substitute awards, which are awards granted in assumption of, or in substitution for, an outstanding award previously granted by a company or other business acquired by us or with which we combine). Shares granted under the Omnibus Plan that are subject to an outstanding award that is forfeited, expires, terminates, otherwise lapses or is settled for cash, in whole or in part, without the delivery of the shares will again be available for issuance under the Omnibus Plan. In addition, any shares that are subject to converted equity awards under the CFG Converted Equity 2010 Long Term Incentive Plan and the CFG Converted Equity 2010 Deferral Plan that are released, lapse or are satisfied in cash or our bonds, in whole or in part, will be available for awards to be granted under the Omnibus Plan. Shares tendered or withheld in payment of an exercise price or in respect of taxes will not again become available for issuance under the Omnibus Plan.
Subject to adjustment (as described below), the maximum number of shares of our common stock that may be granted to any single individual during any calendar year is as follows: (i) stock options and SARs that relate to no more than 1,000,000 shares; (ii) restricted stock and RSUs that relate to no more than 1,000,000 shares; (iii) performance awards denominated in shares and other share-based awards that relate to no more than 1,000,000 shares; (iv) deferred awards denominated in shares that relate to no more than 1,000,000 shares; (v) deferred awards denominated in cash that relate to no more than $15,000,000; and (vi) performance awards denominated in cash and other cash-based awards that relate to no more than $15,000,000.
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Administration
Our Compensation Committee will administer the Omnibus Plan and will have authority to:
| designate participants; |
| determine the types of awards (including substitute awards) to be granted to each participant; |
| determine the number of shares to be covered by awards (or with respect to which payments, rights or other matters are to be calculated in connection with awards); |
| determine the terms and conditions of awards; |
| determine whether, to what extent and under what circumstances awards may be settled or exercised in cash, shares, other awards, other property or net settlement; |
| determine the circumstances under which awards may be canceled, repurchased, forfeited or suspended; |
| determine whether, and to what extent and under what circumstances cash, shares of our common stock and other awards may be deferred automatically or at the election of the holder or the Compensation Committee; |
| interpret and administer the Omnibus Plan and any instrument or agreement relating to, or award made under, the Omnibus Plan; |
| amend the terms or conditions of outstanding awards, including to accelerate the time or times at which an award becomes vested, unrestricted or may be exercised; |
| correct any defect, supply any omission and reconcile any inconsistency in the Omnibus Plan or any award to carry the Omnibus Plan into effect; |
| establish, amend, suspend or waive rules and regulations and appoint agents and other individuals for the proper administration of the Omnibus Plan; and |
| make any other determination and take any other action that it deems necessary or desirable to administer the Omnibus Plan. |
To the extent not inconsistent with applicable law and our Compensation Committees charter, our Compensation Committee may delegate to a committee of one or more directors or to one or more of our officers the authority to grant awards under the Omnibus Plan.
Types of Awards
The Omnibus Plan provides for grants of incentive and non-qualified stock options, SARs, restricted stock, RSUs, performance awards, deferred awards, other share-based awards and other cash-based awards:
|
Stock Options. A stock option is a contractual right to purchase shares at a future date at a specified exercise price. The per share exercise price of a stock option will be determined by our Compensation Committee at the time of grant but may not (except in the case of substitute awards) be less than the fair market value of a share of our common stock (defined under the Omnibus Plan as the closing price of a share of our common stock on the day prior to the grant date). Our Compensation Committee will determine the date on which each stock option becomes vested and exercisable and the expiration date of each option. No stock option will be exercisable more than ten years from the grant date, except that our Compensation Committee may provide in an award agreement for an extension of such ten-year term in the event the exercise of the option would be prohibited by law on the expiration date. A grant of a stock option may not be accompanied by a tandem award of dividend equivalents or provide for dividends, dividend equivalents or other distributions to be paid on |
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such options. Stock options that are intended to qualify as incentive stock options must meet the requirements of Section 422 of the Internal Revenue Code. |
| SARs. A SAR represents a contractual right to receive, in cash or shares, an amount equal to the appreciation of one share of our common stock from the grant date over the exercise or hurdle price of such SAR. The per share exercise price of a SAR (except in the case of substitute awards) will be determined by our Compensation Committee but may not be less than the fair market value of a share of our common stock (as defined under the Omnibus Plan and summarized above). Our Compensation Committee will determine the date on which each SAR may be exercised or settled, in whole or in part, and the expiration date of each SAR. However, no SAR will be exercisable more than ten years from the grant date. A grant of a SAR may not be accompanied by a tandem award of dividend equivalents or provide for dividends, dividend equivalents or other distributions to be paid on such SAR. |
| Restricted Stock. Restricted stock is an award of shares of our common stock that are subject to restrictions on transfer and a substantial risk of forfeiture. |
| RSUs. An RSU represents a contractual right to receive the value of a share of our common stock at a future date, subject to specified vesting and other restrictions. |
| Performance Awards. Performance awards, which may be denominated in cash or shares, will be earned upon the satisfaction of performance conditions specified by our Compensation Committee. The performance conditions for awards that are intended to qualify as performance-based compensation for purposes of Section 162(m) of the Internal Revenue Code may include, but not be limited to, the following: |
| return measures (including, but not limited to, total shareholder return; return on equity; return on tangible common equity; return on tier 1 common equity; return on assets or net assets; return on risk-weighted assets; and return on capital (including return on total capital or return on invested capital)); |
| revenues (including, but not limited to, total revenue; gross revenue; net revenue; revenue growth; and net sales); |
| income/earnings measures (including, but not limited to, earnings per share; earnings or loss (including earnings before or after interest, taxes, depreciation and amortization); gross income; net income after cost of capital; net interest income; non-interest income; fee income; net interest margin; operating income (before or after taxes); pre- or after-tax income or loss (before or after allocation of corporate overhead and bonus); pre- or after-tax operating income; net earnings; net income or loss (before or after taxes); operating margin; gross margin; and adjusted net income); |
| expense measures (including, but not limited to, expenses; operating efficiencies; non-interest expense and operating/efficiency ratios; and improvement in or attainment of expense levels or working capital levels (including cash and accounts receivable)); |
| balance sheet/risk management measures (including, but not limited to, loans; deposits; assets; tangible equity; charge-offs; net charge-offs; non-performing assets or loans; risk-weighted assets; classified assets; criticized assets; allowance for loans and lease losses; loan loss reserves; asset quality levels; year-end cash; investments; interest-sensitivity gap levels; regulatory compliance; satisfactory internal or external audits; financial ratings; shareholders equity; tier 1 capital; and liquidity); |
| cash flow measures (including, but not limited to, cash flow or cash flow per share (before or after dividends); and cash flow return on investment); |
| share price measures (including, but not limited to, share price; appreciation in and/or maintenance of share price; and market capitalization); |
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| strategic objectives (including, but not limited to, market share; debt reduction; operating efficiencies; customer satisfaction; customer growth; employee satisfaction; research and development achievements; branding; mergers and acquisitions; succession management; people development; management retention; dynamic market response; expense reduction initiatives; reductions in costs; risk management; regulatory compliance and achievements; implementation, completion or attainment of measurable objectives with respect to research, development, commercialization, products or projects, production volume levels, acquisitions and divestitures; factoring transactions; and recruiting and maintaining personnel); and |
| other measures (including, but not limited to, economic value-added models or equivalent metrics; economic profit added; gross profits; economic profit; comparisons with various stock market indices; financial ratios (including those measuring liquidity, activity, profitability or leverage); cost of capital or assets under management; and financing and other capital raising transactions (including sales of the Companys equity or debt securities; factoring transactions; sales or licenses of the Companys assets, including its intellectual property, whether in a particular jurisdiction or territory or globally; or through partnering transactions)). |
These performance criteria may be measured on an absolute ( e.g. , plan or budget) or relative basis, may be established on a corporate-wide basis or with respect to one or more business units, divisions, subsidiaries or business segments, may be based on a ratio or separate calculation of any performance criteria and may be made relative to an index or one or more of the performance goals themselves.
| Deferred Awards. Our Compensation Committee is authorized to grant deferred awards which may be denominated in a right to receive shares of our common stock or cash, including in lieu of any annual bonus payable under any of our bonus plans or arrangements. Our Compensation Committee will determine the method of converting the amount of annual bonus into a deferred award and, if applicable, the form, vesting, settlement, forfeiture and cancellation provisions or any other criteria applicable to such deferred awards. Deferred awards can be granted independently or as an element of, or supplement to, any other award. Our Compensation Committee may determine the form or forms (including cash, shares, other awards, other property or any combination thereof) in which payment of the amount owing upon settlement of any deferred award may be made. |
| Other Share-Based Awards. Our Compensation Committee is authorized to grant other share-based awards, which may be denominated, payable or valued in or based on, in whole or in part, shares of our common stock or factors that may influence the value of our shares, including convertible or exchangeable debt securities, other rights convertible or exchangeable into shares, purchase rights for shares, awards with value and payment contingent upon our performance or that of our business units or any other factors designated by our Compensation Committee. |
| Other Cash-Based Awards. Our Compensation Committee is authorized to grant other cash-based awards either independently or as an element of or supplement to any other award under the Omnibus Plan. |
Our Compensation Committee will determine the terms and conditions of all awards granted under the Omnibus Plan, including the date(s) on which awards become vested.
Adjustments
In the event that our Compensation Committee determines that, as result of any dividend or other distribution, recapitalization, stock split, reverse stock split, reorganization, merger, consolidation,
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separation, rights offering, split-up, spin-off, combination, repurchase or exchange of our shares or other securities, issuance of warrants or other rights to purchase our shares or other securities, issuance of our shares pursuant to the anti-dilution provisions of our securities, or other similar corporate transaction or event affecting our shares, or of changes in applicable laws, regulations or accounting principles, an adjustment is appropriate to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Omnibus Plan, our Compensation Committee will, subject to compliance with Section 409A of the Internal Revenue Code, adjust equitably any or all of:
| the number and type of shares or other securities that thereafter may be made the subject of awards, including the aggregate and individual limits under the Omnibus Plan; |
| the number and type of shares or other securities subject to outstanding awards; and |
| the grant, purchase, exercise or hurdle price for any award or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding award. |
In addition, our Compensation Committee is authorized to adjust the terms and conditions of, and the criteria included in, outstanding awards in recognition of events (including those events described above) affecting the Company or the financial statements of the Company, or changes in applicable laws, regulations or accounting principles, whenever our Compensation Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Omnibus Plan, subject, in all such instances, to compliance with Section 162(m) of the Internal Revenue Code.
Termination of Service and Change of Control
Our Compensation Committee will determine the effect of a termination of employment or service on outstanding awards, including whether the awards will vest, become exercisable, settle or be forfeited. In the event of a change of control (as defined in the Omnibus Plan and summarized below), except as otherwise provided in the applicable award agreement, our Compensation Committee may provide for:
| continuation or assumption of outstanding awards under the Omnibus Plan by us (if we are the surviving corporation) or by the surviving corporation or its parent; |
| substitution by the surviving corporation or its parent of awards with substantially the same terms and value as such outstanding awards under the Omnibus Plan; |
| acceleration of the vesting (including the lapse of any restrictions, with any performance criteria or conditions deemed met at target) or the right to exercise outstanding awards immediately prior to the date of the change of control and the expiration of awards not timely exercised by the date determined by our Compensation Committee; or |
| in the case of outstanding stock options and SARs, cancelation in consideration of a payment in cash or other consideration equal to the intrinsic value of the award. Our Compensation Committee may, in its sole discretion, terminate without the payment of any consideration, any stock options or SARs for which the exercise or hurdle price is equal to or exceeds the per share value of the consideration to be paid in the change of control transaction. |
Under the Omnibus Plan, except as otherwise provided in a participants award agreement, change of control generally means the occurrence of one or more of the following events:
| the acquisition of more than 50% of the combined voting power of our outstanding securities (other than by an employee benefit plan or trust maintained by us); |
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| the replacement of the majority of our directors during any 12-month period; |
| the consummation of our merger or consolidation with another entity (unless our voting securities outstanding immediately before such transaction continue to represent at least 50% of the combined voting power and total fair market value of the securities of the surviving entity, or if applicable, the ultimate parent thereof, outstanding immediately after such transaction); or |
| the transfer of our assets having an aggregate fair market value of more than 50% of the fair market value of us and our subsidiaries immediately before such transfer, but only to the extent that in connection with such transfer or within a reasonable period thereafter, our shareholders receive distributions of cash and/or assets having a fair market value that is greater than 50% of the fair market value of us and our subsidiaries immediately before such transfer. |
Amendment and Termination
Our Board of Directors may amend, alter, suspend, discontinue or terminate the Omnibus Plan, subject to approval of our shareholders if required by applicable law or the rules of the stock exchange on which our shares are principally traded. Our Compensation Committee may also amend, alter, suspend, discontinue or terminate, or waive any conditions or rights under, any outstanding award. However, subject to the adjustment provision and change of control provision (each summarized above), any such action by our Compensation Committee that would materially adversely affect the rights of a holder of an outstanding award may not be taken without the holders consent, except (i) to the extent that such action is taken to cause the Omnibus Plan to comply with applicable law, stock market or exchange rules and regulations, or accounting or tax rules and regulations, or (ii) to impose any clawback or recoupment provisions on any awards in accordance with the Omnibus Plan.
In addition, our Compensation Committee may amend the Omnibus Plan or create sub-plans in such manner as may be necessary to enable the plan to achieve its stated purposes in any jurisdiction in a tax-efficient manner and in compliance with local rules and regulations. In the event of our dissolution or liquidation, each award will terminate immediately prior to the consummation of such action, unless otherwise determined by our Compensation Committee.
Cancellation or Clawback of Awards
Our Compensation Committee may, to the extent permitted by applicable law and stock exchange rules or by any of our policies, cancel or require reimbursement of any awards granted, shares issued or cash received upon the vesting, exercise or settlement of any awards granted under the Omnibus Plan or the sale of shares underlying such awards.
Prohibition on Repricing
Subject to the adjustment provision summarized above, our Compensation Committee may not directly or indirectly, through cancellation or regrant or any other method, reduce, or have the effect of reducing, the exercise or hurdle price of any award established at the time of grant without approval of our shareholders.
U.S. Federal Income Tax Consequences
Non-Qualified Stock Options
A non-qualified stock option is an option that does not meet the requirements of Section 422 of the Internal Revenue Code. A participant will not recognize taxable income when granted a non-qualified
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stock option. When the participant exercises the stock option, he or she will recognize taxable ordinary income equal to the excess of the fair market value of the shares received on the exercise date over the aggregate exercise price of the shares. The participants tax basis in the shares acquired on exercise of the option will be increased by the amount of such taxable income. We generally will be entitled to a federal income tax deduction in an amount equal to the ordinary income that the participant recognizes. When the participant sells the shares acquired on exercise, the participant will realize long-term or short-term capital gain or loss, depending on whether the participant holds the shares for more than one year before selling them. Special rules apply if all or a portion of the exercise price is paid in the form of shares.
Incentive Stock Options
An incentive stock option is an option that meets the requirements of Section 422 of the Internal Revenue Code. A participant will not have taxable income when granted an incentive stock option or when exercising the option. If the participant exercises the option and does not dispose of the shares until the later of two years after the grant date and one year after the exercise date, the entire gain, if any, realized when the participant sells the shares will be taxable as long-term capital gain. We will not be entitled to any corresponding tax deduction.
If a participant disposes of the shares received upon exercise of an incentive stock option within the one-year or two-year periods described above, it will be considered a disqualifying disposition, and the option will be treated as a non-qualified stock option for federal income tax purposes. If a participant exercises an incentive stock option more than three months after the participants employment or service with us terminates, the option will be treated as a non-qualified stock option for federal income tax purposes. If the participant is disabled and terminates employment or service because of his or her disability, the three-month period is extended to one year. The three-month period does not apply in the case of the participants death.
Restricted Stock
Unless a participant makes an election to accelerate recognition of the income to the date of grant as described below, the participant will not recognize income, and the Company will not be allowed a tax deduction, at the time a restricted stock award is granted. When the restrictions lapse, the participant will recognize ordinary income equal to the fair market value of the common stock as of that date, less any amount paid for the stock, and the Company will be allowed a corresponding tax deduction at that time. If the participant files an election under Section 83(b) of the Internal Revenue Code within 30 days after the date of grant of the restricted stock, the participant will recognize ordinary income as of the date of grant equal to the fair market value of the common stock as of that date, less any amount the participant paid for the common stock, and we will be allowed a corresponding tax deduction at that time. Any future appreciation in the common stock will be taxable to the participant at capital gains rates. However, if the restricted stock award is later forfeited, the participant will not be able to recover the tax previously paid pursuant to his Section 83(b) election.
RSUs
A participant does not recognize income, and the Company will not be allowed a tax deduction, at the time an RSU is granted. When the RSUs vest and are settled for cash or stock, the participant generally will be required to recognize as income an amount equal to the fair market value of the shares on the date of vesting, and the Company will be allowed a corresponding tax deduction at that time . Any gain or loss recognized upon a subsequent sale or exchange of the stock (if settled in stock) is treated as capital gain or loss for which we are not entitled to a deduction.
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Employee Stock Purchase Plan
We have adopted the Citizens Financial Group, Inc. 2014 Employee Stock Purchase Plan, or the ESPP, which permits our employees to contribute up to a specified percentage of base salary and commissions to purchase our shares at a discount. The following is a summary of the material terms of the ESPP and is qualified in its entirety by reference to the ESPP attached as Exhibit 10.32 to this registration statement.
Purpose
The purpose of the ESPP is to facilitate our employees participation in the ownership and economic progress of CFG by providing our employees with an opportunity to purchase shares of our common stock.
Plan Term
The ESPP is scheduled to expire ten years following the effective date of this offering. The term will expire sooner if, prior to the end of the ten-year term, the maximum number of shares available for issuance under the ESPP has been issued, our shareholders do not approve the ESPP within 12 months after the date the ESPP is adopted by our Board of Directors or our Board of Directors terminates the ESPP.
Authorized Shares and Share Limits
Subject to adjustment (as described below), 7,839,977 shares of our common stock (representing 1.4% of our issued and outstanding shares as of the effective time of this offering) are available for sale under the ESPP. A participant may not purchase more than a maximum of 5,000 shares of our common stock during any single offering period.
Authorized and unissued shares of our common stock or shares reacquired by us may be made subject to purchase under the ESPP, as determined in the discretion of our Compensation Committee or our Board of Directors. If any purchase of shares of our common stock pursuant to an option under the ESPP is not consummated for any reason, the shares subject to such option may be again made available for sale under the ESPP.
Administration
Our Compensation Committee will administer the ESPP and will have authority to:
| designate participants (subject to Section 423 of the Internal Revenue Code); |
| determine all questions with regards to rights of employees, including but not limited to, eligibility to participate in the ESPP and the range of permissible percentages of payroll deductions and the maximum amount; |
| adopt rules of procedure and regulations necessary for the administration of the ESPP (provided that such rules are not inconsistent with the terms of the plan) and enforce the terms of the ESPP and regulations adopted; |
| prescribe procedures to be followed by eligible employees to participate in the ESPP; |
| direct the administration of the ESPP; |
| direct or cause the distribution of shares of our common stock purchased under the ESPP; |
| furnish or cause to be furnished to us information required for tax or other purposes; |
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| maintain separate accounts in the name of each participant; |
| receive from us, our subsidiaries and each eligible employee information necessary for the proper administration of the ESPP; |
| engage the service of counsel and agents whom it may deem advisable to assist it with the performance of its duties; |
| interpret and construe the ESPP in its sole discretion, correct any defect, supply any omission or reconcile any inconsistency in the ESPP to carry the ESPP into effect; and |
| make any changes or modifications necessary to administer and implement the provisions of the ESPP in any foreign country to the fullest extent possible. |
Eligibility
Our employees (including employees of our designated subsidiaries) whose customary employment is for more than five months per year and at least 20 hours per week, and who have completed 30 days of service with us on the first day of any offering period (as summarized below), may participate in the ESPP, except that no employee will be eligible to participate in the ESPP if, immediately after the grant of an option to purchase shares under the ESPP, that employee would own 5% of the total combined voting power or value of all classes of our common stock. In addition, employees who are citizens or residents of a foreign jurisdiction will be prohibited from participating in the ESPP if the grant of an option to such employees would be prohibited under the laws of such foreign jurisdiction or if compliance with the laws of such foreign jurisdiction would cause the ESPP to violate the requirements of Section 423 of the Internal Revenue Code.
Participation
In order to participate in the ESPP, an employee who is eligible at the beginning of an offering period will authorize payroll deductions of up to 10% of base salary and commissions on an after-tax basis for each pay date during the offering period, except that for the initial offering period (as summarized below), eligible employees may authorize deductions of up to 50% of base salary and commissions. A participant may not make any separate cash payment into his or her account or alter the amount of his or her payroll deductions during an offering period, but may withdraw from participation (as summarized below).
No participant may accrue options to purchase shares of our common stock at a rate that exceeds $25,000 in fair market value of our stock (determined as of the first day of the offering period during which such rights are granted) for each calendar year in which such rights are outstanding at any time.
Offering Periods
The ESPP provides for offering periods every calendar quarter, with purchases being made on the last day of each offering period. The initial offering period under the ESPP will commence on the first subscription date following the effective date of this offering and will terminate on the earlier of the last day of the calendar quarter or the calendar year in which the effective date of this offering occurs.
Purchases
On the last day of an offering period, also referred to as the exercise date, a participants accumulated payroll deductions are used to purchase shares of our common stock. The number of shares a participant purchases on each exercise date is determined by dividing the total amount of payroll deductions withheld from the participants base salary and/or commissions, as applicable,
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during that offering period by 90% of the closing price of a share of our common stock on such exercise date (or if the shares did not trade on such date, for the most recent trading day preceding the exercise date, as the case may be), as reported on the principal stock market or exchange on which our shares of common stock are quoted or traded.
Participants are not entitled to any dividends or voting rights with respect to options to purchase shares of our common stock under the ESPP. Shares received upon exercise of an option shall be entitled to receive dividends on the same basis as other outstanding shares of our common stock.
Withdrawal and Termination of Employment
A participant can withdraw all, but not less than all, of the payroll deductions credited to his or her account for the applicable offering period by delivery of notice prior to the exercise date for such offering period. If a participants employment is terminated on or before the exercise date (including due to retirement or death), the participant will be deemed to have elected to withdraw from the ESPP, and the accumulated payroll deductions held in the participants account will be returned to the participant or his or her beneficiary (in the event of the participants death).
Adjustments upon Changes in Capitalization and Certain Transactions
In the event of a merger, reorganization, consolidation, recapitalization, dividend or distribution, stock split, reverse stock split, spin-off or other similar transaction or other change in corporate structure affecting shares of our common stock or their value, or any unusual or reoccurring transactions or events affecting us or any changes in applicable laws, regulations or accounting principles, our Compensation Committee, in its sole discretion, is authorized to take action to:
| terminate outstanding options in exchange for an amount of cash equal to the amount that would have been obtained if such options were currently exercisable; |
| replace outstanding options with other rights or property; |
| provide for the assumption of outstanding options by a successor or survivor corporation (or a parent or subsidiary) or the substitution of similar rights covering such successor or survivor (or a parent or subsidiary); |
| make adjustments to the number and type of common stock subject to outstanding options under the ESPP or to the terms and conditions of outstanding options and options which may be granted in the future; |
| shorten the offering period then in progress and set as the new exercise date the date immediately prior to the date of any transaction or event described above and provide for necessary procedures to effectuate such actions; and/or |
| provide that all outstanding options will terminate without being exercised. |
Amendment and Termination
Our Board of Directors may amend, alter, suspend, discontinue or terminate the ESPP at any time and for any reason, except that our Board of Directors may not, without shareholder approval, increase the maximum number of shares of common stock that may be issued under the ESPP (except pursuant to or in connection with a change in capitalization or other transaction summarized above). Except as required to comply with Section 423 of the Internal Revenue Code, as required to obtain a favorable tax ruling from the Internal Revenue Service, or as specifically provided in the ESPP, no such amendment, alteration, suspension, discontinuation or termination of the ESPP may be made to an outstanding option which adversely affects the rights of any participant without the consent of such participant.
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U.S. Federal Income Tax Consequences
The ESPP and the options to purchase shares of our common stock granted to participants under the ESPP are intended to qualify under the provisions of Sections 421 and 423 of the Internal Revenue Code. Under these provisions, no income will be taxable to a participant until the shares purchased under the ESPP are sold or otherwise disposed of. Upon a sale or other disposition of the shares, the participants tax consequences will generally depend upon his or her holding period with respect to the shares. If the shares are sold or disposed of more than two years after the first day of the relevant offering period and one year after the date of acquisition of the shares, the participant will recognize ordinary income equal to the lesser of (1) an amount equal to 10% of the fair market value of the shares as of the date of option grant or (2) the excess of the fair market value of the shares at the time of such sale or disposition over the exercise price of the option. Any additional gain on such sale or disposition will be treated as long-term capital gain. We are generally not allowed a tax deduction for such ordinary income or capital gain.
If shares are disposed of before the expiration of these holding periods, the difference between the fair market value of such shares at the time of purchase and the exercise price will be treated as income taxable to the participant at ordinary income rates in the year in which the sale or disposition occurs, and we will generally be entitled to a tax deduction in the same amount in such year.
Stock Ownership Guidelines
We have established stock ownership guidelines in order to further align the long-term interests of our executive officers and non-employee directors with those of our shareholders. Our stock ownership guidelines require that our executive officers and non-employee directors own shares of our common stock having an aggregate value equal to a multiple of the executive officers annual base salary or the non-employee directors annual cash retainer, as follows:
Position |
Multiple |
|||
Chief Executive Officer |
5x Annual Base Salary | |||
All Other Executive Officers |
3x Annual Base Salary | |||
Non-Employee Directors |
3x Annual Cash Board Retainer |
Shares that count for purposes of ownership under the share ownership guidelines include (i) shares or units for which receipt has been deferred (including shares held through our 401(k) plan, shares purchased under the ESPP, unvested RSUs or shares or units held through a deferred compensation plan maintained by us) and (ii) restricted stock and unvested RSUs (that may only be settled in shares) that are subject to time-based vesting conditions only. Unexercised options (whether vested or unvested), performance awards (including performance-based restricted stock and performance-based units) and unvested RSUs that may only be settled in cash do not count towards the satisfaction of these stock ownership guidelines.
Generally, each executive officer or non-employee director will have five years from the date he or she becomes subject to these guidelines to achieve compliance. Non-employee directors are also subject to a holding requirement until they achieve compliance with these stock ownership guidelines.
In addition, Mr. Van Saun is currently subject to stock ownership guidelines of RBS as a member of the RBS executive committee, which require him to hold RBS shares worth 125% of salary (excluding unvested RBS shares granted under RBS share plans, including the RBS Deferral Plan and LTIP). The requirement will cease to apply when Mr. Van Saun is no longer a member of RBSs executive committee, which will occur on or before the closing of this offering.
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Prohibition on Hedging and Pledging
We have adopted a policy prohibiting any of our insiders, including our NEOs, from hedging or pledging their ownership in our securities (including equity-based awards), which would undermine the risk alignment effects embedded in our equity-based compensation arrangements. A similar prohibition already exists in respect of awards granted under the RBS Deferral Plan and LTIP.
Tax Deductibility of Compensation
Under Section 162(m), a public company generally may not deduct compensation in excess of $1 million paid to its chief executive officer and the three other most highly compensated executive officers (other than the chief financial officer), unless the compensation qualifies as performance-based. We intend to seek to maximize deductibility under Section 162(m) of all elements of compensation of such employees, from and after the time that our compensation programs become subject to Section 162(m). Following this offering, we generally intend to structure our equity-based and cash-based incentive awards to meet the exception under Section 162(m) for performance-based compensation and to minimize the impact of Section 162(m). However, to maintain flexibility in compensating our executives, we do not have a policy requiring compensation to be fully deductible under Section 162(m).
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2013 Summary Compensation Table
Name and Principal Position |
Year | Salary ($) |
Bonus
($) (3) |
Stock
Awards ($) (4)(5) |
Change in
Pension Value and Nonqualified Deferred Compensation Earnings ($) (6) |
All Other
Compensation ($) (7) |
Total ($) | |||||||||||||||||||||
Bruce Van Saun, Chairman & Chief Executive Officer (1)(2) |
2013 | 1,203,538 | | 3,733,933 | | 733,352 | 5,670,823 | |||||||||||||||||||||
John J. Fawcett, Chief Financial Officer |
2013 | 700,000 | 39,115 | 805,939 | 520 | 32,059 | 1,577,633 | |||||||||||||||||||||
Robert D. Matthews, Jr., Head of Commercial Banking |
2013 | 750,000 | 189,115 | 960,943 | 505 | 355,739 | 2,256,302 | |||||||||||||||||||||
Brad L. Conner, Head of Consumer Banking |
2013 | 700,000 | 189,115 | 860,942 | 505 | 36,063 | 1,786,625 | |||||||||||||||||||||
Nancy L. Shanik, Chief Risk Officer |
2013 | 575,000 | 39,115 | 1,058,336 | 670 | 20,250 | 1,693,371 | |||||||||||||||||||||
Ellen Alemany, Former Chairman & Chief Executive Officer (1) |
2013 | 2,115,385 | | 3,958,329 | 2,214 | 1,439,847 | 7,515,775 |
(1) | Ms. Alemany served as our Chairman and Chief Executive Officer until her retirement on September 30, 2013, with Mr. Van Saun succeeding her in such roles as of October 1, 2013. Prior to that date, Mr. Van Saun served as RBSs Chief Financial Officer. Compensation amounts for Mr. Van Saun in the above 2013 Summary Compensation Table include compensation received during 2013 from RBS for his services as RBSs Chief Financial Officer as well as compensation received from us for his services as our Chief Executive Officer. |
(2) | Other than for stock awards, Mr. Van Sauns compensation that was earned during 2013 for his services as RBSs Chief Financial Officer has been converted from British Pounds Sterling to U.S. dollars using the year-to-date average exchange rate as of December 31, 2013 of 1.5645922 used by RBS for internal purposes. |
(3) | The amounts in this column include, for Messrs. Fawcett, Matthews and Conner and Ms. Shanik, the RBS deferred bond component of the annual AIP awards paid to each of them in 2014 with respect to the 2013 performance year: $3,129 of this AIP award was paid in March 2014 and $35,986 will be deferred until June 6, 2014. In addition, for each of Messrs. Matthews and Conner, the amounts in this column include $150,000 as a special one-time cash allowance that will be paid to each of them in June 2014 as compensation relating to the 2013 performance year. |
(4) | Although deferred share awards and LTIP awards are initially expressed in British Pounds Sterling, those amounts were converted by RBS into U.S. dollars at the time of grant for U.S. employees, including our NEOs, other than Mr. Van Saun who at the time of grant in 2013 was employed as RBSs Chief Financial Officer. In converting these awards into U.S. dollars, RBS used the average exchange rate for the five trading days on the London Stock Exchange preceding the grant date, which was 1.50562. We have used the same exchange rate to convert the value of Mr. Van Sauns equity awards. |
(5) | The amounts in this column reflect the aggregate grant date fair value of the deferred share awards granted under the RBS Deferral Plan and awards granted under the LTIP in 2013 in respect of the 2012 performance year, in each case, calculated in accordance with FASB ASC Topic 718, excluding the effect of estimated forfeitures. The amounts for the LTIP awards were calculated based on the probable outcome of the performance conditions as of the grant date, consistent with the estimate of aggregate compensation cost to be recognized over the service period determined as of the grant date under FASB ASC Topic 718, excluding the effect of estimated forfeitures. For a breakdown of these amounts, see the Grant Date Fair Value of Stock and Option Awards column of the 2013 Grants of RBS Plan-Based Awards table below. The actual value, if any, realized by the NEOs for these awards is a function of the value of the underlying shares if and when these awards vest and, for LTIP awards, holistic assessment by RemCo of the applicable performance guideposts (and subject to RemCos negative discretion). For purposes of this table and the tables that follow, deferred share awards are considered unvested to the extent they remain subject to forfeiture in the event of a termination for cause or grantees engaging in a detrimental activity or competitive activity (in each case, as defined in the RBS Deferral Plan). |
The following are the values of the LTIP awards as of the grant date, assuming attainment of the maximum level of performance: Mr. Van Saun, ($3,387,645); Mr. Fawcett, ($840,002); Mr. Matthews, ($1,050,002); Mr. Conner, ($900,001); Ms. Shanik, ($725,000); and Ms. Alemany ($3,500,000). |
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(6) | The amounts in this column reflect the portion of interest earned during 2013 on outstanding deferred bonds granted under the RBS Deferral Plan in excess of 120% of the applicable U.S. federal long-term rate. Because of changes in assumptions underlying the present value calculations from the end of 2012 to the end of 2013 with respect to the eligible NEOs (Messrs. Matthews and Conner) accumulated benefits under the RBS Americas Pension Plan, there was no increase in pension values for these NEOs and $0 has been included in this column with respect to changes in pension values for 2013. See the footnotes to and the commentary following the 2013 Pension Benefits table below for more details on the assumptions used to determine the present values. |
(7) | The amounts in this column reflect the aggregate incremental cost of certain perquisites and other benefits (to the extent the total value of such perquisites and personal benefits for a named executive officer was $10,000 or more) provided to the named executive officers in 2013 as follows: |
(a) | For Mr. Van Saun, (i) with respect to his services to RBS, includes a housing allowance in the amount of $252,269; his benefits funding in the amount of $30,829; and his pension funding in the amount of $312,429; and (ii) with respect to his services to us, includes his pension and benefits allowance in the amount of $119,921 (as described under Potential Payments Upon Termination or Change in ControlEmployment Agreements/Offer Letters with our NEOs below); charitable matching contributions made by us on behalf of Mr. Van Saun in the amount of $11,000; and the cost associated with personal car and driver use in the amount of $6,904, which is based on allocation of fixed costs (e.g., drivers compensation and benefits and car lease payments) and variable costs (e.g., fuel, maintenance and insurance costs, driver overtime and tolls) attributable to travel between his home and our Stamford office in 2013. |
(b) | For Mr. Fawcett, represents company contributions to the 401(k) plan in the amount of $20,250; and the cost of an authorized car service used periodically by Mr. Fawcett in the amount of $11,809 for travel between his home and our offices in 2013. |
(c) | For Mr. Matthews, includes company contributions to the 401(k) plan in the amount of $12,750; cost of financial planning services in the amount of $13,220; housing and related expenses for a corporate apartment in Boston, Massachusetts in the amount of $131,031 (which benefit has been discontinued as of February 28, 2014); reimbursement for taxes relating to the housing and related expenses in the amount of $117,135; reimbursement for taxes relating to financial planning in the amount of $9,000; charitable matching contributions made by us on behalf of Mr. Matthews in the amount of $25,000; and the cost associated with personal car and driver use in the amount of $47,603, which is based on allocation of fixed costs (e.g., drivers compensation and benefits and car lease payments) and variable costs (e.g., fuel, maintenance and insurance costs, driver overtime and tolls) attributable to travel between his home and our Boston office in 2013. |
(d) | For Mr. Conner, includes company contributions to the 401(k) plan in the amount of $13,110; cost of financial planning services in the amount of $13,220; and reimbursement for taxes relating to financial planning in the amount of $9,733. |
(e) | For Ms. Shanik, represents company contributions to the 401(k) plan in the amount of $20,250. |
(f) | For Ms. Alemany, includes company contributions to the 401(k) plan in the amount of $12,865; financial planning services in the amount of $13,220; a pension allowance in the amount of $740,385; a payment in the amount of $500,000 made to Ms. Alemany as compensation for providing consulting services to us upon request through the end of 2013; company-paid long-term disability premiums in the amount of $52,244 under the executive long-term disability plan in effect at the time Ms. Alemany joined CFG; reimbursement for taxes in the amount of $66,579 relating to financial planning and the long-term disability coverage; charitable matching contributions made by us on behalf of Ms. Alemany in the amount of $27,500; and the cost associated with personal car and driver use in the amount of $27,054, which is based on allocation of fixed costs (e.g., drivers compensation and benefits and car lease payments) and variable costs (e.g., fuel, maintenance and insurance costs, driver overtime and tolls) attributable to travel between her home and our Stamford office in 2013. |
(g) | During 2013, certain family members of Ms. Alemany and Messrs. Van Saun, Conner and Matthews occasionally accompanied them on business trips on the company plane, but there was no incremental cost associated with such use. Our NEOs are not currently permitted to use the company plane for personal travel. |
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2013 Grants of RBS Plan-Based Awards
Name |
Grant
Date |
Estimated Future Payouts
|
All Other
Stock Awards: Number of Shares of Stock or Units (#) (2) |
Grant Date
Fair Value of Stock and Option Awards ($) (3) |
||||||||||||||||||||
Threshold
(#) |
Target
(#) |
Maximum
(#) |
||||||||||||||||||||||
Bruce Van Saun |
3/8/13 | | | 727,685 | | 2,258,425 | ||||||||||||||||||
3/8/13 | | | | 316,947 | 1,475,508 | |||||||||||||||||||
John J. Fawcett |
3/8/13 | | | 180,437 | | 560,000 | ||||||||||||||||||
3/8/13 | | | | 52,829 | 245,939 | |||||||||||||||||||
Robert D. Matthews, Jr. |
3/8/13 | | | 225,546 | | 700,000 | ||||||||||||||||||
3/8/13 | | | | 56,052 | 260,943 | |||||||||||||||||||
Brad L. Conner |
3/8/13 | | | 193,325 | | 599,999 | ||||||||||||||||||
3/8/13 | | | | 56,052 | 260,943 | |||||||||||||||||||
Nancy L. Shanik |
3/8/13 | | | 155,734 | | 483,332 | ||||||||||||||||||
3/8/13 | | | | 123,514 | 575,004 | |||||||||||||||||||
Ellen Alemany |
3/8/13 | | | 751,819 | | 2,333,328 | ||||||||||||||||||
3/8/13 | | | | 349,059 | 1,625,001 |
(1) | The amounts in this column represent RBS LTIP awards granted in 2013. There is no threshold or target level of performance for these LTIP awards, and the number of RBS shares reflected above is the maximum number of shares that may be earned under the terms of these awards, assuming attainment of the maximum level of performance. For additional information, see Compensation Discussion and AnalysisComponents of our Executive Compensation Program and AnalysisLong-Term Incentive Awards above. |
(2) | The amounts in this column represent RBS deferred share awards granted under the RBS Deferral Plan in 2013 for the 2012 performance year. For additional details, see Compensation Discussion and AnalysisComponents of our Executive Compensation Program and AnalysisAnnual Incentive AwardsMandatory Deferral of 2013 Annual Incentive Awards above. |
(3) | This column reflects the grant date value of deferred share awards and LTIP awards, calculated in accordance with FASB ASC Topic 718, excluding the effect of estimated forfeitures. The amounts for LTIP awards granted in 2013 were calculated based on the probable outcome of the performance conditions as of the grant date, consistent with the estimate of aggregate compensation cost to be recognized over the service period determined as of the grant date under FASB ASC Topic 718, excluding the effect of estimated forfeitures. The actual value, if any, realized by the NEOs for these awards is a function of the value of the underlying shares if and when these awards vest and, for LTIP awards, holistic assessment by RemCo of the applicable performance guideposts. Grant date fair values of these awards were initially expressed in British Pounds Sterling. For details regarding how these values were converted into U.S. dollars, see footnote 4 to the 2013 Summary Compensation Table above. |
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Outstanding RBS Equity Awards at 2013 Fiscal Year-End
Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||||
Name |
Number of
Securities Underlying Unexercised Options (#) Exercisable (1) |
Number of
Securities Underlying Unexercised Options (#) Unexercisable |
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) |
Option
Exercise Price ($) (2) |
Option
Expiration Date (3) |
Number
of Shares or Units of Stock That Have Not Vested (#) (4) |
Market
Value of Shares or Units of Stock That Have Not Vested ($) (5) |
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) |
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) (5) |
|||||||||||||||||||||||||||
Bruce Van Saun |
| | | | | | | 170,677 | (6) | 954,571 | ||||||||||||||||||||||||||
| | | | | | | 803,859 | (7) | 4,495,861 | |||||||||||||||||||||||||||
| | | | | | | 727,685 | (8) | 4,069,833 | |||||||||||||||||||||||||||
| | | | | 150,000 | (9) | 838,928 | | | |||||||||||||||||||||||||||
| | | | | 316,947 | (10) | 1,772,637 | | | |||||||||||||||||||||||||||
John J. Fawcett |
212,451 | | | 4.66 | 4/2/19 | | | | | |||||||||||||||||||||||||||
| | | | | | | 56,259 | (6) | 314,648 | |||||||||||||||||||||||||||
| | | | | | | 188,820 | (7) | 1,056,044 | |||||||||||||||||||||||||||
| | | | | | | 180,437 | (8) | 1,009,157 | |||||||||||||||||||||||||||
| | | | | 12,315 | (11) | 68,876 | | | |||||||||||||||||||||||||||
| | | | | 34,544 | (9) | 193,199 | | | |||||||||||||||||||||||||||
| | | | | 52,829 | (10) | 295,465 | | | |||||||||||||||||||||||||||
Robert D. Matthews, Jr. |
109,260 | | | 4.66 | 4/2/19 | | | | | |||||||||||||||||||||||||||
| | | | | | | 51,785 | (6) | 289,626 | |||||||||||||||||||||||||||
| | | | | | | 168,590 | (7) | 942,896 | |||||||||||||||||||||||||||
| | | | | | | 225,546 | (8) | 1,261,445 | |||||||||||||||||||||||||||
| | | | | 11,970 | (11) | 66,946 | | | |||||||||||||||||||||||||||
| | | | | 43,422 | (9) | 242,853 | | | |||||||||||||||||||||||||||
| | | | | 56,052 | (10) | 313,490 | | | |||||||||||||||||||||||||||
Brad L. Conner |
145,680 | | | 4.66 | 4/2/19 | | | | | |||||||||||||||||||||||||||
| | | | | | | 44,880 | (6) | 251,007 | |||||||||||||||||||||||||||
| | | | | | | 144,987 | (7) | 810,891 | |||||||||||||||||||||||||||
| | | | | | | 193,325 | (8) | 1,081,238 | |||||||||||||||||||||||||||
| | | | | 11,970 | (11) | 66,946 | | | |||||||||||||||||||||||||||
| | | | | 43,422 | (9) | 242,853 | | | |||||||||||||||||||||||||||
| | | | | 56,052 | (10) | 313,490 | | | |||||||||||||||||||||||||||
Nancy L. Shanik |
| | | | | | | 41,290 | (6) | 230,929 | ||||||||||||||||||||||||||
| | | | | | | 144,987 | (7) | 810,891 | |||||||||||||||||||||||||||
| | | | | | | 155,734 | (8) | 870,997 | |||||||||||||||||||||||||||
| | | | | 15,881 | (11) | 88,820 | | | |||||||||||||||||||||||||||
| | | | | 51,701 | (9) | 289,156 | | | |||||||||||||||||||||||||||
| | | | | 74,108 | (10) | 414,475 | | | |||||||||||||||||||||||||||
Ellen Alemany |
805,251 | | | 4.66 | 9/29/14 | | | | | |||||||||||||||||||||||||||
| | | | | | | 269,281 | (6) | 1,506,048 | |||||||||||||||||||||||||||
| | | | | | | 786,751 | (7) | 4,400,182 | |||||||||||||||||||||||||||
| | | | | | | 501,213 | (8) | 2,803,209 | |||||||||||||||||||||||||||
| | | | | 52,475 | (11) | 293,485 | | | |||||||||||||||||||||||||||
| | | | | 139,368 | (9) | 779,464 | | | |||||||||||||||||||||||||||
| | | | | 209,435 | (10) | 1,171,339 | | |
(1) | The amounts in this column reflect stock options that were granted under the RBS Group 2007 Executive Share Option Plan, or Option Plan, on April 3, 2009 to certain of our NEOs. These options cliff-vested and became exercisable on April 3, 2012. No other options have been granted to our NEOs since April 3, 2009. |
(2) | Stock options were granted with an exercise price equal to the fair market value of RBS shares on the date of grant of 2.82 British Pounds Sterling, which has been converted into U.S. Dollars using the 1.6542 exchange rate, which was the rate used by RBS for internal purposes as of December 31, 2013. |
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(3) | This column reflects the expiration date of stock options outstanding as of December 31, 2013. Ms. Alemanys stock options expire on September 29, 2014 due to the termination of her employment by reason of her retirement. When we cease to be a member of the RBS (as defined in the Option Plan), our employees (including the NEOs) will be treated as having terminated employment under the terms of their option awards and will have 12 months to exercise outstanding options. |
(4) | The amounts in this column reflect deferred share awards granted under the RBS Deferral Plan that remained unvested as of December 31, 2013. |
(5) | Values in these columns have been calculated by multiplying the number of shares outstanding as of December 31, 2013 by £3.381, the closing price on the London Stock Exchange for RBS shares as of December 31, 2013, and converted into U.S. Dollars using the 1.6542 exchange rate, which was the rate used by RBS for internal purposes as of December 31, 2013. For LTIP awards, the amounts in this column assume assessment by RemCo of the maximum level of performance for LTIP awards granted in 2012 and 2013 (assuming no exercise of negative discretion by RemCo) and actual performance as assessed by RemCo for the 20112013 performance cycle for LTIP awards granted in 2011 (along with applicable exercise of negative discretion). For additional information, see Compensation Discussion and AnalysisComponents of our Executive Compensation Program and AnalysisLong-Term Incentive Awards above. |
(6) | These amounts reflect the number of shares underlying LTIP awards granted on March 7, 2011 that were unvested but expected to vest (Mr. Van Saun at 27%; Mr. Fawcett at 48.50%; Messrs. Matthews and Conner at 50%; Ms. Shanik at 46%; and Ms. Alemany at 48.75%) on March 7, 2014, based on RemCos holistic assessment of actual performance with respect to certain RBS, CFG and functional performance guideposts for the January 1, 2011 to December 31, 2013 performance period and exercise of negative discretion by RemCo. |
(7) | These amounts reflect the maximum number of shares underlying LTIP awards granted on March 7, 2012 which are scheduled to vest on March 9, 2015 between 0% and 100% based on RemCos holistic assessment of certain RBS, CFG and functional performance guideposts for the January 1, 2012 to December 31, 2014 performance period and exercise of negative discretion by RemCo, if any. |
(8) | These amounts reflect the maximum number of shares underlying LTIP awards granted on March 8, 2013 which are scheduled to vest on March 7, 2016 between 0% and 100% based on RemCos holistic assessment of certain RBS, CFG and functional performance guideposts for the January 1, 2013 to December 31, 2015 performance period and exercise of negative discretion by RemCo, if any. For Ms. Alemany, this reflects two-thirds of her 2013 LTIP award, to which she was entitled pursuant to her separation agreement. For details, see Potential Payments Upon Termination or Change in ControlSeparation Agreement with Ellen Alemany. |
(9) | These amounts reflect unvested deferred share awards granted under the RBS Deferral Plan in March 2012 relating to the 2011 performance year. Three installments of deferred share awards granted to Mss. Alemany and Shanik have already vested on March 7, 2012, March 8, 2013 (March 7, 2013 for Ms. Shanik) and March 7, 2014, with the remaining installment scheduled to vest on March 9, 2015. One-half of the deferred share awards granted to Mr. Van Saun vested on March 8, 2013 and the other half vested on March 7, 2014. Deferred share awards granted to Messrs. Fawcett, Matthews and Conner vested as to one-third on March 7, 2013, one-third on March 7, 2014 and the remaining one-third is scheduled to vest on March 9, 2015. RBS shares delivered upon vesting to Mr. Van Saun and Mss. Shanik and Alemany are subject to an additional six-month holding period following each vesting date since they were Code Staff for 2012. For additional details, see Compensation Discussion and AnalysisComponents of our Executive Compensation Program and AnalysisAnnual Incentive AwardsMandatory Deferral of 2013 Annual Incentive Awards and Compensation Discussion and AnalysisApplicability of UK and European Remuneration Rules above. |
(10) | These amounts reflect unvested deferred share awards granted under the RBS Deferral Plan in March 2013 relating to the 2012 performance year. Two installments of the deferred share awards granted to Mss. Alemany and Shanik have already vested on March 8, 2013 (March 7, 2013 for Ms. Shanik) and March 7, 2014, with the remaining installments scheduled to vest on March 9, 2015 and March 7, 2016. One-half of the deferred share awards granted to Mr. Van Saun vested on March 7, 2014 and the other half is scheduled to vest on March 9, 2015. Deferred share awards granted to Messrs. Fawcett, Matthews and Conner vested as to one-third on March 7, 2014, and the remaining two-thirds is scheduled to vest in two equal installments on March 9, 2015 and March 7, 2016. RBS shares delivered upon vesting to Mr. Van Saun and Mss. Shanik and Alemany are subject to an additional six-month holding period following each vesting date since they were Code Staff for 2013. For additional details, see Compensation Discussion and AnalysisComponents of our Executive Compensation Program and AnalysisAnnual Incentive AwardsMandatory Deferral of 2013 Annual Incentive Awards and Compensation Discussion and AnalysisApplicability of UK and European Remuneration Rules above. |
(11) | These amounts reflect unvested deferred share awards granted under the RBS Deferral Plan in March 2011 relating to the 2010 performance year. Deferred share awards granted to Mss. Shanik and Alemany vested in four installments on each of March 7, 2011, March 9, 2012 (March 7, 2012 for Ms. Shanik), March 8, 2013 (March 7, 2013 for Ms. Shanik) and March 7, 2014. Deferred share awards granted to Messrs. Fawcett, Matthews and Conner vested in three equal installments on March 7 of each of 2012, 2013 and 2014. RBS shares delivered upon vesting to Mr. Van Saun and Mss. Shanik and Alemany are subject to an additional six-month holding period following each vesting date since they were Code Staff for 2011. For additional details, see Compensation Discussion and AnalysisComponents of our Executive Compensation Program and AnalysisAnnual Incentive AwardsMandatory Deferral of 2013 Annual Incentive Awards and Compensation Discussion and AnalysisApplicability of UK and European Remuneration Rules above. |
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RBS Options Exercised and Stock Vested in 2013
Stock Awards | ||||||||
Name |
Number of
Shares Acquired on Vesting (#) |
Value
Realized on Vesting ($) (1) |
||||||
Bruce Van Saun |
301,544 | 1,378,344 | ||||||
John J. Fawcett |
174,507 | 803,627 | ||||||
Robert D. Matthews, Jr. |
193,156 | 889,452 | ||||||
Brad L. Conner |
194,705 | 896,601 | ||||||
Nancy L. Shanik |
91,136 | 415,177 | ||||||
Ellen Alemany |
547,702 | 2,516,184 |
(1) | The values reflected in this column have been calculated by multiplying the number of shares underlying outstanding equity awards that vested on each relevant date by the closing price on the London Stock Exchange of RBS shares on such date, and then converted into U.S. Dollars based on the exchange rate used by RBS for internal purposes as of each such date, which were as follows: March 7, 2013 (1.5025); March 8, 2013 (1.4928); and May 14, 2013 (1.5257). |
2013 Pension Benefits
We sponsor the RBS Americas Pension Plan, or the Pension Plan, which is a non-contributory defined benefit pension plan that is qualified under Section 401(a) of the Internal Revenue Code. The Pension Plan was closed to new hires and re-hires effective January 1, 2009, and frozen to all participants and benefit accruals effective December 31, 2012. During 2013 regular full-time and part-time employees of the Company who were hired before January 1, 2009 and completed one year of service were eligible for benefits under the Pension Plan.
The benefit under the Pension Plan for employees is currently calculated using a formula based on the employees average gross compensation (defined under the Pension Plan as a participants average eligible compensation during five years of employment (whether or not consecutive) prior to December 31, 2012 yielding the highest average), subject to limitations imposed by the Internal Revenue Service. Eligible compensation generally includes all taxable compensation, other than certain equity-based and non-recurring amounts. The formula generally provides for a benefit of 1% of average gross compensation multiplied by each year of the participants credited service, with such benefit percentage varying depending on the employees hire date and retirement date, as specified under the Pension Plan. Pension benefits under the Pension Plan are generally payable in the form of a monthly annuity, though benefits under the Pension Plan may be received as a lump sum payment.
A participants pension benefit under the Pension Plan vests in full on the normal retirement dategenerally, when the participant reaches age 65 (or, for certain individuals (depending on the date such participant commenced participation in the Pension Plan), the fifth anniversary of the date such participant commenced participation in the Pension Plan, if later). A participants pension benefit under the Pension Plan also vests in full upon completion of five years of vesting service. Participants may begin receiving full retirement benefits on the first day of the month coincident with or immediately following the normal retirement date and may be eligible for reduced benefits if retiring after attainment of age 55 with a minimum of five years of vesting service. Participants who retire after attainment of age 62 with a minimum of twenty years of vesting service are eligible to receive unreduced retirement benefits. Messrs. Matthews and Conner became participants in the Pension Plan on April 1, 2009 and July 1, 2009, respectively. As of December 31, 2013, Messrs. Matthews and Conner were not eligible for early retirement under the Pension Plan. Based on their age at date of hire, Messrs. Matthews and Conner will never be eligible for unreduced retirement benefits at age 62.
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Name |
Plan Name |
Number of Years
Credited Service (#) (2) |
Present Value of
Accumulated Benefit ($) (3) |
Payments
During Last Fiscal Year ($) |
||||||||||
Bruce Van Saun (1) |
| | | | ||||||||||
John D. Fawcett (1) |
| | | | ||||||||||
Robert D. Matthews, Jr. |
RBS Americas Pension Plan | 4.75 | 72,982 | 0 | ||||||||||
Brad L. Conner |
RBS Americas Pension Plan | 4.54 | 73,106 | 0 | ||||||||||
Nancy L. Shanik (1) |
| | | | ||||||||||
Ellen Alemany (1) |
| | | |
(1) | Messrs. Van Saun and Fawcett and Mss. Shanik and Alemany are not eligible for benefits under any Company-sponsored defined benefit plans. |
(2) | After December 31, 2012, no further benefit accruals occur under the RBS Americas Pension Plan. Therefore, an eligible employees actual years of service to us may be more than such employees years of credited service under the RBS Americas Pension Plan. |
(3) | The present value of accumulated benefits at December 31, 2013 was calculated using the same actuarial assumptions used by us for GAAP financial reporting purposes, except as noted below. The key assumptions are: (i) a discount rate of 5.0%, (ii) a retirement age of 65, as required (the earliest unreduced retirement age under the RBS Americas Pension Plan), (iii) the RP-2000 Scale AA Combined Healthy Mortality Table for males using generational projection Scale AA and (iv) no pre-retirement decrements, as required. |
Nonqualified Deferred Compensation
Name |
Executive
Contributions in Last FY ($) |
Registrant
Contributions in Last FY ($) (2) |
Aggregate
Earnings in Last FY ($) (3) |
Aggregate
Withdrawals ($) (4) |
Aggregate
Balance at Last FYE (5) ($) |
|||||||||||||||
Bruce Van Saun (1) |
||||||||||||||||||||
AIP awardsdeferred bonds |
| | | | | |||||||||||||||
Nonqualified deferred compensation plans (6) |
| | | | | |||||||||||||||
John J. Fawcett |
||||||||||||||||||||
AIP awardsdeferred bonds |
| 35,986 | 12,460 | 836,599 | 522,996 | |||||||||||||||
Nonqualified deferred compensation plans (6) |
| | | | | |||||||||||||||
Robert D. Matthews, Jr. |
||||||||||||||||||||
AIP awardsdeferred bonds |
| 35,986 | 12,741 | 874,130 | 578,810 | |||||||||||||||
Nonqualified deferred compensation plans (6) |
| | | | | |||||||||||||||
Brad L. Conner |
||||||||||||||||||||
AIP awardsdeferred bonds |
| 35,986 | 12,741 | 874,130 | 578,810 | |||||||||||||||
Nonqualified deferred compensation plans (6) |
| | | | | |||||||||||||||
Nancy L. Shanik |
||||||||||||||||||||
AIP awardsdeferred bonds |
| 35,986 | 13,297 | 473,297 | 737,838 | |||||||||||||||
Nonqualified deferred compensation plans (6) |
| | | | | |||||||||||||||
Ellen Alemany |
||||||||||||||||||||
AIP awardsdeferred bonds |
| | 42,024 | 1,382,024 | 2,115,740 | |||||||||||||||
Nonqualified deferred compensation plans (6) |
| | 916,156 | 706,193 | 8,716,007 |
(1) | Mr. Van Saun does not have any deferred bonds outstanding as of December 31, 2013 as all of his AIP awards have been granted in the form of deferred share awards (as is the case with other executive directors of RBS), as determined by RBS following consultation with its shareholders. |
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(2) | Amounts in this column reflect the RBS deferred bond portion (with no interest) of the AIP award granted in 2014 for the 2013 performance year, the payment of which has been deferred until June 6, 2014. These amounts are also reflected in the Bonus column of the 2013 Summary Compensation Table for applicable NEOs. |
(3) | Amounts in this column reflect aggregate earnings on the RBS deferred bond portion of AIP awards during 2013 with respect to awards for the 2012 and 2011 performance years. These amounts include any nonqualified deferred compensation earnings that are disclosed in the Change in Pension Value and Nonqualified Deferred Compensation Earnings column of the 2013 Summary Compensation Table and described in footnote 6 thereto. |
(4) | Amounts in this column reflect the aggregate value of deferred bonds and accrued interest that were paid out during 2013 with respect to deferred bond portion of AIP awards for the 2012 and 2011 performance years. |
(5) | All amounts deferred and earnings on such deferred amounts in 2013 have been reported in the Bonus and Change in Pension Value and Nonqualified Deferred Compensation Earnings columns of the 2013 Summary Compensation Table above. |
(6) | Amounts in this row reflect amounts with respect to the CFG Deferred Compensation Plan and the RBS Americas Deferred Compensation Plan, the material terms of which are described below. |
AIP AwardsDeferred Bond Awards
As described in the Compensation Discussion & Analysis above, the time and the form of payment for AIP awards are determined by RemCo. Awards have been historically granted partially in deferred bonds (with interest in certain prior years) and partially in deferred share awards, and are subject to the terms and conditions of the RBS Deferral Plan. Deferred share awards that were granted to our NEOs in 2013 for the 2012 performance year are reflected in the 2013 Grants of RBS Plan-Based Awards table above, and all deferred share awards that remained outstanding as of December 31, 2013 are reflected in the Outstanding Equity Awards At 2013 Fiscal Year-End above.
Amounts in the above table relate to the RBS deferred bond portion of AIP awards, including applicable earnings, to the extent they have been paid during 2013 or remained outstanding as of December 31, 2013. Prior to awards for performance year 2013, deferred bond awards earned interest. Deferred bonds remain subject to the cancellation and forfeiture provisions included in the RBS Deferral Plan.
Nonqualified Deferred Compensation Plans
We maintain two nonqualified deferred compensation plansthe CFG Deferred Compensation Plan and the RBS Americas Deferred Compensation Plan. Following closure of the CFG Deferred Compensation Plan to new participants on December 31, 2008, the RBS Americas Deferred Compensation Plan was adopted, effective as of January 1, 2009. The deferred compensation plans currently do not offer any matching contributions or provide for above-market earnings, and none of our NEOs participated in these plans during 2013. Only Ms. Alemany had a balance under each of these plans as of December 31, 2013.
Under the CFG Deferred Compensation Plan, eligibility was limited to our key officers as designated from time to time by our executive committee. Participants are permitted to defer between 1% and 90% of their base salary, annual bonus and payments under any long-term incentive plan, subject to a minimum deferral of $5,000. Participants select the allocation of their accounts among investment indices available under the plan. Our Board of Directors may amend the plan at any time, as long as the amount accrued to the date of amendment in any account under the plan is not decreased or otherwise restricted, and may terminate the plan at any time. Pursuant to elections made by Ms. Alemany under the plan, certain amounts outstanding under this plan as of December 31, 2013 were paid to her in a lump sum following her retirement date and other amounts continue to be paid to her as part of a series of 10 annual installments that commenced during her service.
Under the RBS Americas Deferred Compensation Plan, eligibility is limited to employees who have total compensation in the immediately preceding year equal to or exceeding the Internal Revenue Code Section 401(a)(17) limit for the relevant plan year. Participants are permitted to defer between
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1% and 80% of their base salary and annual bonus. Participants select the allocation of their accounts among investment indices available under the plan. Our Board of Directors may amend the plan at any time, as long as the amount accrued to the date of amendment in any account under the plan is not decreased or otherwise restricted. Pursuant to elections made by Ms. Alemany under the plan, the amount outstanding under this plan as of December 31, 2013 will be paid to Ms. Alemany in 10 annual installments, with the first payment occurring six months following her retirement date.
Potential Payments Upon Termination or Change in Control
We have entered into an employment agreement with our CEO and offer letters with each of our other NEOs. In addition, our full-time employees, including our NEOs (other than our CEO who is eligible for severance under the terms of his employment agreement) are eligible for severance benefits pursuant to our severance practice. Material terms of our severance practice, our CEOs employment agreement and each of our other NEOs offer letters are summarized below. Please see the Potential Payments Table section below for quantification of estimated payments, as provided for under these arrangements and the terms of outstanding equity awards (as applicable), that would be made to our NEOs under various termination scenarios or a change in control, assuming such event occurred on December 31, 2013.
In addition, following a termination of employment, our NEOs are entitled to the nonqualified deferred compensation amounts, to the extent vested, reported in the 2013 Nonqualified Deferred Compensation table above, subject to the terms of the arrangements, as described in the accompanying narrative.
Severance Practice
Our severance practice provides for the payment of severance benefits to eligible employees in the event their employment with us is terminated without cause and for reasons unrelated to poor performance. Under the severance practice, eligible employees who execute a severance and release agreement may receive a lump sum payment equal to two weeks of severance pay for each year of his or her employment, with a minimum payment of 26 weeks of base salary for individuals whose base salary equals or exceeds $300,000 and a maximum of 52 weeks of base salary payments (regardless of the employees base salary).
In addition to severance pay, eligible employees are entitled to receive benefits under our then-existing health and welfare plans for a period of one month following the month in which termination of employment occurs at active employee rates, which is in addition to the COBRA continuation coverage periods. Outplacement services are also offered to eligible employees with the duration of such service varying by level of employee. We may amend or terminate this practice at any time.
Employment Agreements/Offer Letters with Our NEOs
We have entered into an employment agreement with Mr. Van Saun and offer letters with each of our other NEOs. Material terms of Mr. Van Sauns agreement and the other NEOs offer letters are summarized below.
Employment Agreement with Mr. Van Saun
General Terms
In connection with his appointment, we entered into an offer letter and an employment agreement with our CEO, Mr. Van Saun, which were effective as of October 1, 2013 (referred to collectively as the employment agreement). Mr. Van Sauns compensation, as set forth in his employment agreement, was informed by negotiations between RBS, us and Mr. Van Saun, as well as the terms of his compensation arrangement during his tenure with RBS.
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Under the terms of Mr. Van Sauns employment agreement, Mr. Van Saun is:
| entitled to: |
| an initial annual base salary of $1,370,000; |
| an additional initial annual amount of $519,659, or the Pension and Benefit Funding, which is intended to make Mr. Van Saun whole for pension and benefits funding received during his service to RBS in the UK; |
| participate in our employee benefit and welfare plans on a basis that is at least as favorable as that provided to our other executives who are based in the United States, except that he does not receive company contributions to the 401(k) plan; |
| relocation benefits under the RBSs relocation policy in connection with his relocation to the U.S.; and |
| the right to receive tax and advisory support through the U.S. tax year ending December 2015 and UK tax year ending March 2016 (unless he is terminated sooner for cause (as defined in his employment agreement and summarized below) or voluntarily resigns); and |
| is eligible for: |
| discretionary annual incentive awards under the applicable bonus program with a target bonus opportunity equal to 175% of Mr. Van Sauns base salary and maximum bonus opportunity equal to 250% of Mr. Van Sauns base salary; and |
| long-term equity-based awards under the LTIP with a target long-term incentive opportunity equal to 200% of Mr. Van Sauns base salary and maximum long-term incentive opportunity equal to 300% of Mr. Van Sauns base salary. |
However, notwithstanding his eligibility under the bonus program and LTIP, as described above, starting with the 2014 performance year, Mr. Van Sauns variable compensation is subject to the limitations imposed by CRD IV for so long as such limitations continue to apply to us. For further details, see Compensation Discussion and AnalysisApplicability of UK and European Remuneration Rules above.
Under the terms of his employment agreement, Mr. Van Saun is also entitled to certain severance benefits as described below.
Termination Without Cause or for Good Reason Absent Change in Control
Upon six-months notice to Mr. Van Saun (or in the alternative, (i) payment in lieu of such notice equal to six months of his base salary and Pension and Benefit Funding, to be paid in installments on regularly scheduled payroll dates and reduced to offset other income he received during this period, or (ii) a six-month garden leave during which Mr. Van Saun will not be reporting to work but will continue to receive payments of his base salary and Pension and Benefit Funding), we can terminate Mr. Van Sauns employment without cause or, upon written notice to us, Mr. Van Saun can terminate his employment for good reason (as defined in his employment agreement and summarized below) if we fail to cure good reason circumstances within 30 days of receiving notice. Upon such terminations, in lieu of any other payments that may be due to him under any other severance plan or practice we maintain, Mr. Van Saun:
| will be entitled to a lump sum cash payment equal to 12 months of his then base salary within 30 days of his termination; |
|
will be treated as a good leaver by reason of redundancy under the RBS Deferral Plan and LTIP (which would result in him receiving his deferred share awards and LTIP awards on the |
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original payment dates, subject to satisfaction of the applicable performance conditions, if any, and pro rata reductions); and |
| subject to his execution of a release and not being terminated by us for underperformance, will be entitled to receive a pro rata target incentive award under the applicable annual incentive plan in respect of the year in which such termination occurs, provided that there is an orderly handover of responsibilities. |
In addition, upon his termination for good reason, Mr. Van Saun will receive a payment equal to six months of his base salary and Pension and Benefit Funding in lieu of the six-months notice requirement (to be paid in installments on regularly scheduled payroll dates and reduced to offset other income received during this period).
Termination in Connection with Change in Control
If, within six months of a disposal of CFG (which under his employment agreement is defined as a sale to a third party of all or substantially all of CFG), Mr. Van Saun is terminated by the applicable acquirer or resigns in direct response to being assigned to a position in which the nature or scope of his responsibilities or authority is not reasonably regarded as equivalent to or more senior to his position at us immediately prior to such sale, subject to his execution of a release, Mr. Van Saun will generally be:
| entitled to receive a payment equal to two times the sum of his then base salary and Pension and Benefit Funding; |
| treated as a good leaver by reason of redundancy under the RBS Deferral Plan and the LTIP (vesting for LTIP awards will be set at two-thirds of face value) and, will not be subject to proration if he has completed five years of service to RBS (provided he has given at least six-months notice in the event of a voluntary termination of employment, the RBS board of directors does not determine that he committed any act warranting termination for cause and he does not commence employment with certain enumerated companies during the vesting period (which may be waived); and |
| subject to not being terminated by us for underperformance, entitled to a pro rata target incentive award under the applicable annual incentive plan in respect of the year in which such termination occurs. |
The above payments are subject to the following conditions: (i) Mr. Van Saun has not been offered or accepted a position with the acquirer that is at least as equivalent to his position immediately prior to the sale; (ii) in our opinion, Mr. Van Saun has not materially underperformed against agreed-upon performance objectives and plans; (iii) circumstances do not exist that would warrant a termination of Mr. Van Saun by us or the acquirer for cause; and (iv) there has been no clawback triggered under RBS equity plans resulting in the reduction of Mr. Van Sauns awards.
Voluntary Termination Other Than for Good Reason
Mr. Van Saun can terminate his employment voluntarily (other than for good reason) at any time upon giving a six-months notice. We may, in our sole discretion, either place Mr. Van Saun on garden leave during such notice period (during which Mr. Van Saun will continue to receive his base salary and Pension and Benefit Funding) or pay him an amount equal to six months of his base salary in lieu of the notice period (to be paid in installments on regularly scheduled payroll dates and reduced to offset other income received during this period).
Following the date on which Mr. Van Saun completes five years of service with RBS, Mr. Van Saun will be treated as a good leaver by reason of redundancy under the RBS Deferral Plan and
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LTIP (but without any pro rata reduction), provided he has given at least six-months notice in the event of a voluntary termination of employment, the RBS board of directors does not determine that he committed any act warranting termination for cause and he does not commence employment with certain enumerated companies during the vesting period (which may be waived).
Termination due to Retirement, Death or Disability
Upon his termination of employment due to death or retirement, Mr. Van Saun or his estate will be entitled to, in each case, through the end of the month in which termination occurs:
| his base salary; and |
| Pension and Benefit Funding. |
Upon his termination due to disability, he will be entitled to receive the same payments except through the date on which he will first become eligible to receive payment of long-term disability benefits under our employee benefit plans as then in effect.
Termination for Cause
If Mr. Van Sauns employment is terminated for cause, Mr. Van Saun will receive his unpaid salary and Pension and Benefit Funding through his termination date and will not be entitled to any additional payments or benefits.
Restrictive Covenants
Mr. Van Saun is subject to a perpetual confidentiality covenant. During his employment and for a period of six months following termination from us other than for good reason (less any time spent on garden leave), Mr. Van Saun cannot hold a position as employee, director, officer, consultant, partner, agent or principal in certain enumerated companies deemed to be a competitor of RBS or us, without the prior consent of RBS and CFG. During his employment and for a period of 12 months following his termination of employment from us (less any time spent on garden leave), Mr. Van Saun also cannot solicit or hire employees of RBS or us or solicit any of our customers or prospective clients or persuade or attempt to persuade any such customers or clients to divert business from us.
Definitions
Cause generally means Mr. Van Sauns (i) willful material breach of any of his obligations under his employment agreement; (ii) in the opinion of RBSs board of directors, being guilty of gross misconduct which brings him or us or any other member of RBS into disrepute; (iii) dishonesty in the conduct of his duties; (iv) gross incompetence, willful neglect of duty or mismanagement of his financial affairs through failure to observe our rules and procedures for the operation of bank accounts and/or borrowing; (v) being found guilty of, or entering a plea of nolo contendere to, any felony or misdemeanor involving dishonesty; (vi) committing any act of bankruptcy or taking advantage of any statute for the time being in force offering relief to insolvent debtors; or (vii) being prohibited from acting as our officer or any other member of the RBS due to any default on his part.
Good reason generally means (i) material breach of Mr. Van Sauns employment agreement or (ii) a substantial diminution or other substantial adverse change not consented to by Mr. Van Saun, in the nature or scope of his base salary or responsibilities, authorities, powers, functions or duties.
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Offer Letters of Messrs. Fawcett, Matthews and Conner and Ms. Shanik
Each of Messrs. Fawcett, Matthews and Conner and Ms. Shanik have offer letters with us or one of our subsidiaries. These offer letters generally provide for the terms of each executives compensation arrangement, including salary, eligibility to receive annual cash and equity incentive awards and vacation and eligibility for other health and welfare benefits.
Under the offer letters, each of the executives is subject to a notice period with regard to his or her intent to leave our or one of our subsidiaries employ for any reason (for Messrs. Fawcett and Matthews, 90 days; for Mr. Conner, 60 days; and for Ms. Shanik, 30 days). In addition, each of the offer letters contains non-solicitation of customers and employees covenants (for Mr. Fawcett, for 90 days following his termination of employment for wrongful conduct (as defined in his offer letter); for Mr. Matthews and Ms. Shanik, for 12 months following a termination of employment for any reason; and for Mr. Conner, for 12 months with respect to the non-solicitation of employees covenant and for six months with respect to the non-solicitation of customers covenant following his termination of employment for any reason). Mr. Fawcetts offer letter also includes a non-competition covenant that survives for 90 days following his termination of employment for wrongful conduct (as defined in his offer letter).
In addition, for Mr. Matthews, if, within one year of a change in control (defined as the time when any person other than us or RBS or any of their affiliates becomes the owner of more than 50% of the voting power of our stock), Mr. Matthewss compensation is decreased or his title, level or responsibility are materially decreased, Mr. Matthews is entitled, upon giving notice of his resignation, to receive, within 90 days of his termination, (i) the cash equivalent of two years base salary and (ii) the cost of any benefits he was receiving immediately prior to the time of such change in control (including any living expense allowances, if applicable). Ms. Shaniks offer letter originally provided for certain severance benefits if her employment was terminated by us other than for wrongful conduct (as defined in her offer letter) or serious underperformance within three years of the commencement of her employment with us. As of September 2013, the obligation to pay such severance benefits to Ms. Shanik has lapsed.
Potential Payments Table
The following table summarizes estimated payments, as provided for under our severance practice, our CEOs employment agreement and each of our other NEOs offer letters and the terms of their outstanding equity awards (as applicable), that would be made to our NEOs at, following or in connection with a termination of employment under various termination scenarios or a change in control, assuming such event occurred on December 31, 2013. For the summary of the material terms of the severance practice, our CEOs employment agreement and each of our other NEOs offer letters, see Severance Practice and Employment Agreements/Offer Letters with our NEOs above.
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Amounts for Ellen Alemany are not included in the table below because she retired prior to December 31, 2013. Amounts which were paid or payable to her in connection with her retirement, along with the terms of her separation agreement, are described below under Separation Agreement with Ellen Alemany and are also included in the All Other Compensation column of the 2013 Summary Compensation Table above.
Name |
Voluntary
Termination ($) |
Voluntary
Termination with Good Reason ($) |
Not for Cause
Termination ($) |
For Cause
Termination ($) |
Change in
Control Not for Cause Termination ($) |
Change in
Control Only (No Related Termination) ($) |
Death ($) |
Disability
($) |
Retirement
($) |
|||||||||||||||||||||||||||
Bruce Van Saun |
||||||||||||||||||||||||||||||||||||
Cash Payment |
| (6) | 4,712,330 | (7) | 3,767,500 | (8) | | 6,176,818 | (9) | | | 944,830 | (10) | | ||||||||||||||||||||||
Deferred Share Awards/LTIP Awards (1)(2) |
7,391,083 | 7,391,083 | 7,391,083 | | 6,098,424 | 7,391,083 | 12,131,829 | 7,391,083 | 7,391,083 | |||||||||||||||||||||||||||
Health Benefits (3) |
| 1,153 | 1,153 | | 1,153 | | | | | |||||||||||||||||||||||||||
Outplacement Services (4) |
| 4,378 | 4,378 | | 4,378 | | | | | |||||||||||||||||||||||||||
Total |
7,391,083 | 12,108,944 | 11,164,114 | | 12,280,773 | 7,391,083 | 12,131,829 | 8,335,913 | 7,391,083 | |||||||||||||||||||||||||||
John J. Fawcett |
||||||||||||||||||||||||||||||||||||
Cash Payment |
| | 350,000 | (11) | | | | | | | ||||||||||||||||||||||||||
Deferred Share Awards/LTIP Awards (1)(5) |
557,540 | 557,540 | 1,780,389 | | 1,780,389 | 1,780,389 | 2,937,389 | 1,780,389 | 1,780,389 | |||||||||||||||||||||||||||
Health Benefits (3) |
| | 1,190 | | | | | | | |||||||||||||||||||||||||||
Outplacement Services (4) |
| | 4,378 | | | | | | | |||||||||||||||||||||||||||
Total |
557,540 | 557,540 | 2,135,957 | | 1,780,389 | 1,780,389 | 2,937,389 | 1,780,389 | 1,780,389 | |||||||||||||||||||||||||||
Robert D. Matthews, Jr. |
| |||||||||||||||||||||||||||||||||||
Cash Payment |
| | 375,000 | (11) | | 1,770,386 | (12) | | | | | |||||||||||||||||||||||||
Deferred Share Awards/LTIP Awards (1)(5) |
623,290 | 623,290 | 1,823,442 | | 1,823,442 | 1,823,442 | 3,117,259 | 1,823,442 | 1,823,442 | |||||||||||||||||||||||||||
Health Benefits (3) |
| | 1,153 | | | | | | | |||||||||||||||||||||||||||
Outplacement Services (4) |
| | 4,378 | | | | | | | |||||||||||||||||||||||||||
Total |
623,290 | 623,290 | 2,203,973 | | 3,593,828 | 1,823,442 | 3,117,259 | 1,823,442 | 1,823,442 | |||||||||||||||||||||||||||
Brad L. Conner |
||||||||||||||||||||||||||||||||||||
Cash Payment |
| | 350,000 | (11) | | | | | | | ||||||||||||||||||||||||||
Deferred Share Awards/LTIP Awards (1)(5) |
623,290 | 623,290 | 1,656,240 | | 1,656,240 | 1,656,240 | 2,766,425 | 1,656,240 | 1,656,240 | |||||||||||||||||||||||||||
Health Benefits (3) |
| | 1,066 | | | | | | | |||||||||||||||||||||||||||
Outplacement Services (4) |
| | 4,378 | | | | | | | |||||||||||||||||||||||||||
Total |
623,290 | 623,290 | 2,011,684 | | 1,656,240 | 1,656,240 | 2,766,425 | 1,656,240 | 1,656,240 | |||||||||||||||||||||||||||
Nancy L. Shanik |
||||||||||||||||||||||||||||||||||||
Cash Payment |
| | 287,500 | (11) | | | | | | | ||||||||||||||||||||||||||
Deferred Share Awards/LTIP Awards (1)(5) |
792,451 | 792,451 | 1,748,038 | | 1,748,038 | 1,748,038 | 2,705,267 | 1,748,038 | 1,748,038 | |||||||||||||||||||||||||||
Health Benefits (3) |
| | | | | | | | | |||||||||||||||||||||||||||
Outplacement Services (4) |
| | 4,378 | | | | | | | |||||||||||||||||||||||||||
Total |
792,451 | 792,451 | 2,039,916 | | 1,748,038 | 1,748,038 | 2,705,267 | 1,748,038 | 1,748,038 |
(1) | These amounts reflect the number of deferred share awards and LTIP awards (as described below and as applicable) outstanding as of December 31, 2013 and multiplied by £3.381 (the closing price on the London Stock Exchange for RBS shares as of December 31, 2013), and converted into U.S. dollars using an exchange rate of 1.6542 (which represented the exchange rate used for internal purposes by RBS as of December 31, 2013). The amounts in this row assume assessment by RemCo of the maximum level of performance for LTIP awards granted in 2012 and 2013 as of December 31, 2013 and reflect RemCos actual holistic assessment for LTIP awards granted in 2011. For additional information, see Compensation Discussion and AnalysisComponents of Our Executive Compensation Program and AnalysisLong-Term Incentive Awards above. |
(2) | Under the terms of his employment agreement, except in the event of a termination for cause (as defined in Mr. Van Sauns employment agreement), Mr. Van Saun will continue (i) to vest in his outstanding deferred share awards granted under the RBS Deferral Plan in accordance with the original vesting schedule, subject to not engaging in any competitive activity or detrimental activity (in each case, as defined in the RBS Deferral Plan) and (ii) to vest in his outstanding LTIP awards, subject to RemCos holistic assessment of applicable performance guideposts and subject to proration based on the portion of the applicable vesting period during which he was employed, except in the event of his death (in which case there would be no proration). |
In the event of our disposal (as defined in Mr. Van Sauns employment agreement) and Mr. Van Sauns termination by the applicable acquirer or his resignation in direct response to being assigned to a position in which the nature or scope of his |
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responsibilities or authority is not reasonably regarded as equivalent to or more senior to his position at CFG immediately prior to such disposal, subject to his execution of a release (as defined in his employment agreement), his LTIP awards would be deemed vested at two-thirds of their face value. |
Following September 8, 2014, the date Mr. Van Saun will have completed five years of service to RBS, Mr. Van Sauns LTIP awards will not be subject to proration (provided he has given at least six months notice in the event of a voluntary termination of employment, the RBS board of directors does not determine that he committed any act warranting a termination for cause and he does not commence employment with certain enumerated companies during the vesting period (which may be waived)). Since as of December 31, 2013, Mr. Van Saun would not have been eligible for this treatment, LTIP awards reflected in the table above are prorated. |
(3) | The amounts reflected above for this benefit reflect the cost of COBRA continuation coverage for one month under the plan in which the particular executive is enrolled, less the applicable active employee rate. For Mr. Van Saun, this benefit is provided under his employment agreement. |
(4) | Reflects the cost to us of providing outplacement services for 12 months under our outplacement policy. |
(5) | Under the terms of the RBS Deferral Plan, following an NEOs termination of employment for any reason (other than for cause (as defined in the RBS Deferral Plan), in which cases deferred share awards would be forfeited), each of these NEOs will continue to vest in his or her outstanding deferred share awards in accordance with the original vesting schedule as long as the NEO does not engage in any detrimental activity (as defined in the RBS Deferral Plan) in the case of termination of employment due to redundancy or both any competitive activity (as defined in the RBS Deferral Plan) and any detrimental activity in the case of any other termination of employment. |
Under the terms of the LTIP, following an NEOs termination of employment due to (i) ill-health, injury or disability, (ii) retirement with our agreement, (iii) redundancy, (iv) NEOs employing entity ceasing to be a member of RBS (such as due to a change in control event), (v) the business in which the NEO works being transferred to a person which is not a member of RBS or (vi) any other reason, if and to the extent RemCo so decides in any particular case, each of these NEOs would continue to vest in his or her outstanding LTIP awards in accordance with the original vesting schedule, subject to RemCos holistic assessment of applicable performance guideposts and, unless otherwise determined by RemCo or except in the event of the NEOs death, subject to proration based on the portion of the vesting period during which the NEO was employed by us. |
(6) | This assumes that we do not elect, in our discretion, to pay Mr. Van Saun six months of base salary and Pension and Benefits Funding in lieu of complying with the notice period under the terms of his employment agreement. |
(7) | This amount reflects the sum of (i) 18 months of base salary, (ii) six months of Pension and Benefits funding and (iii) a pro rata annual discretionary award based on target (175% of base salary under Mr. Van Sauns offer letter). Because the assumed termination date is December 31, 2013, the full target award is reflected. |
(8) | This amount reflects the sum of (i) 12 months of base salary and (ii) a pro rata annual discretionary award based on target (175% of base salary under Mr. Van Sauns offer letter). Because the assumed termination date is December 31, 2013, the full target award is reflected. This amount also assumes that we do not elect, in our discretion, to pay Mr. Van Saun six months of base salary and Pension and Benefits Funding in lieu of complying with the notice period under the terms of his employment agreement. |
(9) | This amount reflects the sum of (i) two times the sum of Mr. Van Sauns base salary and Pension and Benefits Funding and (ii) a pro rata annual discretionary award based on target (175% of base salary under Mr. Van Sauns offer letter). Because the assumed termination date is December 31, 2013, the full target award is reflected. |
(10) | This amount reflects six months of base salary and Pension and Benefits Funding, which will be paid to Mr. Van Saun prior to his receipt of long-term disability benefits under the terms of his employment agreement. |
(11) | This amount reflects 26 weeks of base salary, as provided for under our severance practice. |
(12) | This amount reflects two times Mr. Matthewss base salary ($1.5 million) plus the cost of relocation and financial planning benefits received by Mr. Matthews during 2013 ($270,386), as provided for under the terms of his offer letter. |
Separation Agreement with Ellen Alemany
In connection with her retirement, effective as of September 30, 2013, we entered into a separation and release agreement with Ms. Alemany. Under the terms of her separation agreement: (i) Ms. Alemany received a lump sum payment equal to $500,000, as compensation for providing consulting services to us upon request through the end of 2013; (ii) Ms. Alemany and her dependents are entitled to participate in a company self-funded retiree medical plan until Ms. Alemany reaches age 65, subject to Ms. Alemanys paying the full cost of premiums for that coverage; (iii) Ms. Alemany was eligible to be considered for a discretionary annual incentive award for the 2013 performance period, prorated 75% to reflect the portion of the performance year for which she was employed with us, paid
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in accordance with the RBS Deferral Plan, and subject to the same terms and conditions of the RBS Deferral Plan as applied to other senior executives who are Code Staff of CFG, RBS or their respective affiliates; (iv) LTIP awards granted to Ms. Alemany in 2011 and 2012 continue to fully vest in accordance with their terms (without proration) (for a total of $6,154,787); (v) LTIP awards granted to Ms. Alemany in 2013 continue to vest in accordance with their terms, subject to two-thirds proration based on the portion of the performance period deemed to have elapsed by September 30, 2013 (for a total of $1,947,453); (vi) Ms. Alemany has been treated as a voluntary leaver under the RBS Deferral Plan so that all earned but unpaid deferred awards will be paid according to their original schedules (for a total of $2,338,737). Ms. Alemany did not receive an annual incentive award for the 2013 performance year in light of overall challenges faced by RBS during 2013. Calculations for Ms. Alemany are based on the closing price on the London Stock Exchange for RBS shares on her date of retirement (£3.599) and an exchange rate of 1.6194, which was used for internal RBS purposes as of such date.
All of the above payments and benefits were subject to Ms. Alemany executing and not revoking a release of claims in our favor. In addition, any unvested RBS Deferral Plan awards remained subject to forfeiture if Ms. Alemany were to engage in any competitive activity (defined to include engaging in any activity with a competitor, accepting an offer of employment or engagement with a competitor or providing consulting services (with some exceptions) to any other financial institutions where such services relate to business activities that compete with us) or detrimental activity (as defined in the RBS Deferral Plan).
Ms. Alemany is also subject to a perpetual confidentiality covenant. In addition, for six months following her retirement, Ms. Alemany was restricted from competing with us or our affiliates and for 12 months following her retirement, she is restricted from soliciting, diverting or contacting any customers or vendors of ours or our affiliates, or soliciting or hiring any person who was employed by us or our affiliates.
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2013 Director Compensation Table
The following table lists the individuals who served as our non-employee directors during 2013 and summarizes their 2013 compensation. Directors who are also our employees are not compensated for their service on our Board of Directors.
Name |
Fees Earned or
Paid in Cash ($) |
All Other
Compensation ($) (2) |
Total
($) (3) |
|||||||||
William P. Hankowsky |
126,000 | | 126,000 | |||||||||
Howard W. Hanna III |
129,750 | (4) | | 129,750 | ||||||||
Charles J. (Bud) Koch |
149,500 | | 149,500 | |||||||||
Arthur F. Ryan |
138,500 | 2,500 | 141,000 | |||||||||
Judith M. von Seldenek (1) |
60,000 | | 60,000 | |||||||||
Shivan S. Subramaniam |
114,000 | (5) | 4,000 | 118,000 | ||||||||
Wendy A. Watson |
157,500 | (5) | 5,149 | 162,649 | ||||||||
Marita Zuraitis |
126,000 | | 126,000 |
(1) | Ms. Seldenek resigned effective April 25, 2013. |
(2) | Amounts in this column reflect matching charitable contributions made by us on behalf of directors during 2013. |
(3) | As of December 31, 2013, none of our directors held any stock awards or options in respect of CFG or RBS stock. |
(4) | Mr. Hanna elected to defer $64,500 of his board membership fees earned for 2013 pursuant to our Directors Deferred Compensation Plan. For a summary of material terms of the plan, see 2013 Director Compensation Program below. |
(5) | Each of Mr. Subramaniam and Ms. Watson elected to defer all of their board membership fees earned for 2013 pursuant to our Directors Deferred Compensation Plan. For a summary of material terms of the plan, see 2013 Director Compensation Program below. |
2013 Director Compensation Program
During 2013, we paid each non-employee director an annual retainer of $90,000. In addition, our lead director and the chair of each committee received an additional retainer of $10,000. Each non-employee director was also paid $1,500 for each board and committee meeting attended during 2013. Directors also receive reimbursement of business expenses incurred in connection with their attendance at meetings.
Directors may defer up to 100% of their meeting and retainer fees under our Directors Deferred Compensation Plan. No company contributions are made to this plan. Contributions to this plan are credited with interest on a monthly basis, based on the applicable interest crediting rate applicable for the month interest is to be posted. The interest crediting rate is the annualized average yield on the United States Treasury bond 10-year constant maturity for the immediately preceding calendar quarter plus two percent (2%), which is then divided by 12 to determine the monthly interest crediting rate. There are no above-market or preferential earnings on compensation deferred pursuant to this plan. In addition, our directors are eligible to receive matching charitable contributions up to $5,000 per year, as part of our general charitable contribution program. Under our charitable contribution policy, we match charitable contributions dollar-for-dollar up to the maximum matching contribution. Our non-employee directors do not participate in our employee benefit programs.
Post-IPO Director Compensation Program
Citizens Financial Group, Inc. Non-Employee Directors Compensation Policy
We have adopted the Citizens Financial Group, Inc. Non-Employee Director Compensation Policy, or the Director Compensation Policy, which establishes compensation to be paid to each of our
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non-employee directors commencing on the effective date of this offering. Our Compensation Committee may amend, revise, suspend, discontinue or terminate the Director Compensation Policy at any time.
Under the Director Compensation Policy, all non-employee directors will receive the following annual cash retainers, payable in semi-annual, equal installments:
Board Service |
Retainer
(Annualized) ($) |
|||
Board Retainer |
75,000 | |||
Lead Director Retainer |
20,000 | |||
Audit Committee Chair Retainer |
15,000 | |||
Other Committee Chair Retainer (per committee) |
10,000 |
In addition, each non-employee director who attends more than six meetings of any committee of our Board of Directors in any calendar year will also receive an additional cash fee of $1,500 for each such additional meeting attended (regardless of whether attended in person or by telephone).
Each non-employee director will also receive, on the date of each annual meeting of our shareholders, an annual grant of RSUs under the Citizens Financial Group, Inc. 2014 Non-Employee Directors Compensation Plan, or the Directors Plan, having a fair market value (defined under the Directors Plan as the closing price of a share of our common stock on the day prior to the grant date) of $75,000. Each annual award will vest 100% on the first anniversary of the grant date, subject to the terms and conditions of the Directors Plan and the applicable award agreement thereunder.
In addition, each non-employee director serving on our Board of Directors on the closing date of this offering will receive an initial award of RSUs under the Directors Plan with the number of shares underlying such RSU award equal to $75,000 divided by the price of a share of our common stock on the effective date of this offering, prorated to reflect the number of days between the effective date of this offering and May 5, 2015 (the expected date of our 2015 annual meeting of shareholders). The initial RSU award will vest on the date of our 2015 annual shareholder meeting (or, if earlier, the first anniversary of the grant date), subject to the terms and conditions of the Directors Plan and the applicable award agreement thereunder.
The initial and annual grants of RSUs will fully vest upon a change of control (as defined in the above description of the Omnibus Plan) or a non-employee directors separation from service from our Board of Directors for any reason (other than under circumstances which would constitute cause under the terms of our bylaws or applicable law).
Non-employee directors may defer up to 100% of their cash retainers and meeting fees under our Directors Deferred Compensation Plan. Non-employee directors are also eligible to receive matching charitable contributions up to an aggregate limit of $5,000 per year. For details, see 2013 Director Compensation Program above.
Citizens Financial Group, Inc. 2014 Non-Employee Directors Compensation Plan
We have adopted the Directors Plan which allows us to grant cash retainers, stock options, restricted stock, RSUs and other equity-based awards to our non-employee directors. The following is a summary of the material terms of the Directors Plan, which is qualified in its entirety by reference to the Directors Plan attached as Exhibit 10.30 to this registration statement.
Purpose
The purpose of the Directors Plan is to attract and retain the services of experienced non-employee directors.
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Plan Term
The Directors Plan will expire after ten years following the effective date of this offering. However, the plan will expire sooner if, prior to that date, the maximum number of shares of our common stock available for issuance under the Directors Plan has been issued or our Board of Directors terminates the plan.
Authorized Shares
Subject to adjustment (as described below), 1,679,995 shares of our common stock (representing 0.3% of our issued and outstanding shares as of the effective time of this offering) are available for awards to be granted under the Directors Plan (other than substitutes awards).
If an award is forfeited, expires, terminates or otherwise lapses or is settled for cash, in whole or in part, the shares covered by such award will again be available for issuance under the Directors Plan. Shares tendered or withheld in payment of an exercise price or in respect of taxes will not again become available for issuance under the Directors Plan.
Administration
Our Board of Directors will administer the Directors Plan and will have authority to:
| designate participants; |
| determine the types of awards (including substitute awards) to be granted to each participant; |
| determine the number of shares to be covered by awards (or with respect to which payments, rights or other matters are to be calculated in connection with awards); |
| determine the terms and conditions of awards; |
| determine whether, to what extent and under what circumstances awards may be settled or exercised in cash, shares, other awards, other property or net settlement; |
| determine the circumstances under which awards may be canceled, repurchased, forfeited or suspended; |
| determine whether, and to what extent and under what circumstances cash, shares of our common stock and other awards may be deferred automatically or at the election of the holder or our Board of Directors; |
| interpret and administer the Directors Plan and any instrument or agreement relating to, or award made under, the Directors Plan; |
| amend the terms or conditions of outstanding awards, including to accelerate the time or times at which an award becomes vested, unrestricted or may be exercised; |
| correct any defect, supply any omission and reconcile any inconsistency in the Directors Plan or any award to carry the Directors Plan into effect; |
| establish, amend, suspend or waive rules and regulations and appoint agents and other individuals for the proper administration of the Directors Plan; and |
| make any other determination and take any other action that it deems necessary or desirable to administer the Directors Plan. |
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Eligibility
Each regular, active member or prospective member of our Board of Directors who is not our employee or an employee of any of our affiliates (that is, entities that we directly or indirectly control or in which we have a significant equity interest, in each case determined by our Board of Directors, or any other entity which our Board of Directors determines should be treated as our affiliate).
Adjustments
In the event that our Board of Directors determines that, as result of any dividend or other distribution, recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, separation, rights offering, split-up, spin-off, combination, repurchase or exchange of our shares or other securities, issuance of warrants or other rights to purchase our shares or other securities, issuance of our shares pursuant to the anti-dilution provisions of our securities, or other similar corporate transaction or event affecting our shares, or of changes in applicable laws, regulations or accounting principles, an adjustment is appropriate to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Directors Plan, our Board of Directors will, subject to compliance with Section 409A of the Code, adjust equitably any or all of:
| the number and type of shares or other securities that thereafter may be made the subject of awards, including the aggregate limit under the Directors Plan; |
| the number and type of shares or other securities subject to outstanding awards; and |
| the grant, purchase, exercise or hurdle price for any award or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding award. |
In addition, our Board of Directors is authorized to adjust the terms and conditions of, and the criteria included in, outstanding awards in recognition of events (including those events described above) affecting the Company or the financial statements of the Company, or changes in applicable laws, regulations or accounting principles, whenever our Board of Directors determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Directors Plan.
Types of Awards
Our Board of Directors is authorized to grant stock options, restricted stock, RSUs, other share-based awards (see Our Anticipated NEO Compensation Program Following the OfferingOmnibus Incentive PlanTypes of Awards for more details) and retainers (as described below) to our non-employee directors.
Retainers
Our Board of Directors is authorized, subject to limitations under applicable law, to grant annual cash retainers to non-employee directors for service as a member of the Board of Directors or a committee of the Board or as chair or lead director of the Board or any such committee. These retainers may be received in shares of our common stock at the election of the directors.
Automatic Grants
Our Board of Directors may institute, by resolution, automatic award grants to new and to continuing members of our Board of Directors, and determine the number and type of such awards, the terms and conditions of such awards and the criteria for the grant of such awards.
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Separation from Service and Change of Control
Our Board of Directors will determine the effect of a separation from service from the Board of Directors on outstanding awards, including whether the awards will vest, become exercisable, settle or be forfeited. In the event of a change of control (as defined under the Omnibus Plan and summarized above), except as otherwise provided in the applicable award agreement, our Board of Directors may provide for:
| continuation or assumption of outstanding awards under the Directors Plan by us (if we are the surviving corporation) or by the surviving corporation or its parent; |
| substitution by the surviving corporation or its parent of awards with substantially the same terms and value as such outstanding awards under the Directors Plan; |
| acceleration of the vesting (including the lapse of any restrictions) or the right to exercise outstanding awards immediately prior to the date of the change of control and the expiration of awards not timely exercised by the date determined by our Board of Directors; or |
| in the case of outstanding stock options, cancelation in consideration of a payment in cash or other consideration equal to the intrinsic value of the award. Our Board of Directors may, in its sole discretion, terminate without the payment of any consideration, any stock options for which the exercise or hurdle price is equal to or exceeds the per share value of the consideration to be paid in the change of control transaction. |
Amendment and Termination
Our Board of Directors may amend, alter, suspend, discontinue or terminate the Directors Plan, subject to approval of our shareholders if required by applicable law or the rules of the stock exchange on which our shares are principally traded. Our Board of Directors may also amend, alter, suspend, discontinue or terminate, or waive any conditions or rights under, any outstanding award. However, subject to the adjustment provision and change of control provision (each summarized above), any such action by our Board of Directors that would materially adversely affect the rights of a holder of an outstanding award may not be taken without the holders consent, except (i) to the extent that such action is taken to cause the Directors Plan to comply with applicable law, stock market or exchange rules and regulations or accounting or tax rules and regulations or (ii) to impose any clawback or recoupment provisions on any awards in accordance with the Directors Plan.
In addition, our Board of Directors may amend the Directors Plan or create sub-plans in such manner as may be necessary to enable the plan to achieve its stated purposes in any jurisdiction in a tax-efficient manner and in compliance with local rules and regulations. In the event of our dissolution or liquidation, each award will terminate immediately prior to the consummation of such action, unless otherwise determined by our Board of Directors.
Cancellation or Clawback of Awards
Our Board of Directors may, to the extent permitted by applicable law and stock exchange rules or by any of our policies, cancel or require reimbursement of any awards granted, shares issued or cash received upon the vesting, exercise or settlement of any awards granted under the Directors Plan or the sale of shares underlying such awards.
Prohibition on Repricing
Subject to the adjustment provision summarized above, our Board of Directors may not directly or indirectly, through cancellation or regrant or any other method, reduce, or have the effect of reducing, the exercise or hurdle price of any award established at the time of grant without approval of our shareholders.
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U.S. Federal Income Tax Consequences
For more details on the U.S. federal income tax consequences of certain awards that may be granted under the Directors Plan, see Our Anticipated NEO Compensation Program Following the OfferingOmnibus Incentive PlanU.S. Federal Income Tax Consequences.
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OUR RELATIONSHIP WITH THE RBS GROUP AND CERTAIN OTHER RELATED PARTY TRANSACTIONS
Relationship with the RBS Group
Prior to the completion of this offering, we are an indirect wholly owned subsidiary of RBS, and have been a part of the RBS Groups consolidated business operations. Following the offering, we expect that RBS will continue to beneficially own a majority of our outstanding common stock, and as a result RBS will continue to have significant control of our business, including pursuant to the agreements described below. See Risk FactorsRisks Related to Our Separation from the RBS Group. In addition, we expect that, following this offering, the RBS Group will continue to consolidate our financial results in its financial statements.
In connection with this offering, we and RBS intend to enter into, or have entered into, certain agreements that will provide a framework for our ongoing relationship with the RBS Group. Of the agreements summarized below, the material agreements are filed as exhibits to the registration statement of which this prospectus is a part, and the summaries of these agreements set forth the terms of the agreements that we believe are material. These summaries are qualified in their entirety by reference to the full text of such agreements.
Separation and Shareholder Agreement
We intend to enter into the Separation Agreement with RBS immediately prior to the completion of this offering that will govern the relationship between the RBS Group and us following this offering.
Governance
The terms of the Separation Agreement will provide RBS with certain governance rights over us. In particular, until RBS ceases to beneficially own at least 20% of our issued and outstanding common stock, RBS will have the right to nominate one director to our Board, subject to election by our stockholders, and non-voting Board observer rights in certain circumstances. Until the time RBS is no longer required to consolidate our financial results under international financial reporting standards, RBS will also be entitled to designate a member of our Assets and Liabilities Committee. In addition, until the earlier of the date on which RBS ceases to directly or indirectly own at least 4.99% of our issued and outstanding common stock and the date on which RBS receives written notice from the Federal Reserve Board that RBS is not deemed to control us for purposes of the Bank Holding Company Act, amendments to certain of our key policies, including certain of our risk management, accounting, financial reporting, capital management, information security, corporate governance and human resources policies, will require the consent of RBS.
The Separation Agreement will also provide that, until RBS ceases to beneficially own at least 20% of our issued and outstanding common stock, the following corporate actions will require the consent of RBS:
| material changes to the scope or nature of our business; |
| any merger, consolidation, business combination or similar transaction involving us, CBNA or CBPA as a party; |
| acquisitions or dispositions of assets or liabilities, whether in a single transaction or series of related transaction, with a purchase price (in excess of book value) of above $500 million or where the book value of assets or liabilities acquired or disposed exceeds $4.0 billion; |
|
for so long as RBS is deemed to control us for European Union regulatory purposes, any acquisition of any package of assets or liabilities that constitutes a financial institution or any |
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acquisition the purpose of which is to expand our or any of our subsidiaries activities outside of our or any of their respective business model, if the aggregate purchase price of such acquisitions exceeds $125 million; |
| entry into joint ventures or similar transactions where the joint venture or other entity formed by such transaction has assets or liabilities with a book value in excess of $4.0 billion; |
| certain related party transactions; |
| the issuance of any capital stock, subject to certain exceptions including issuances pursuant to our approved equity incentive plans; |
| any increase or changes in certain funding and liquidity metrics agreed to by us and RBS prior to the date of this offering; and |
| liquidation, dissolution or voluntary bankruptcy or similar extraordinary transactions. |
In addition, until RBS ceases to beneficially own at least 50% of our issued and outstanding common stock, we will be required to obtain the consent of RBS to adopt an annual budget, amend an annual budget, to the extent such amendment is presented to our Board, and terminate or appoint a replacement for our Chief Executive Officer, Chief Financial Officer or Chief Risk Officer.
Covenants
We will agree, subject in certain cases until the time RBS is no longer required to consolidate our financial results under international financial reporting standards or certain other threshold dates, to certain covenants, including covenants relating to:
| compliance with a policy framework agreed by RBS prior to the date of this offering; |
| disclosure of information to RBS; |
| cooperation with respect to preparation of public filings; |
| the obligation to take, or refrain from taking, at RBSs reasonable written request, actions necessary to enable RBS to comply with its legal and regulatory obligations; |
| access by RBS to our personnel, auditors, advisers, data and facilities, to the extent required by RBS to meet its legal, regulatory, risk management, accounting and other requirements; and |
| consummation on or around October 1, 2014 of the $334 million capital exchange transaction described under Other. |
We have also agreed with RBS to share with RBS certain refunds, tax credits or other tax benefits attributable to tax proceedings that relate to periods prior to the separation and are expected to conclude after this offering.
Indemnification
Generally, each party will indemnify, defend and hold harmless the other party and its affiliates and their respective directors, officers, employees and agents from and against any and all losses relating to, arising out of or resulting from any breach by the indemnifying party or its subsidiaries of the Separation Agreement and the other agreements described in this section (unless such agreement provides for separate indemnification). Each party will also indemnify the other party against losses arising from the indemnifying partys business, whether arising prior to or after this offering. We have also agreed to indemnify RBS against certain liabilities arising from material inaccuracies in our filings
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with governmental authorities and securities exchanges, except with respect to any liabilities arising out of information provided by RBS for inclusion therein, with respect to which RBS has agreed to indemnify us. The Separation Agreement also specifies procedures with respect to claims subject to indemnification.
Term
The Separation Agreement will terminate on the earlier of the date on which RBS ceases to directly or indirectly own at least 4.99% of our issued and outstanding common stock and the date on which RBS receives written notice from the Federal Reserve Board that RBS is not deemed to control us for purposes of the Bank Holding Company Act, although certain provisions of the agreement will survive indefinitely. In addition, certain rights, including RBSs consent and governance rights, and obligations, including the covenants to which we are subject, will terminate upon a reduction in RBSs beneficial ownership of our outstanding common stock below specified thresholds.
Transitional Services Agreement
We intend to enter into a Transitional Services Agreement with RBS immediately prior to the completion of this offering for the continued provision of certain services, including certain information technology, operations, compliance, business continuity, legal, human resources, back office and web services. We refer to these services and resources, collectively, as the RBS services. The Transitional Services Agreement will also allow the RBS Group to continue to use certain of our services and resources. We refer to these services and resources, collectively, as the CFG services.
We will pay the RBS Group and the RBS Group will pay us mutually agreed upon fixed fees for the RBS services and the CFG Services, respectively. The services that are to be provided under the Transitional Services Agreement generally will continue to be provided until December 31, 2016, although certain services may have an earlier termination date or be terminated prior to that time. We and RBS Group will agree to migration plans for some of the services being provided under the Transitional Services Agreement and have agreed to discuss in good faith the mitigation of any risks or issues relating to the migration of any of the services and to agree to mitigation plans.
Trademark License Agreement
We intend to enter into a trademark license agreement with RBS immediately prior to the completion of this offering that will grant us a sole, limited license to use certain RBS trademarks, including the daisywheel logo. The term of the license is for an initial term of 5 years, and, at our option, up to 10 years, subject to partial earlier termination upon the occurrence of certain events, including the removal of the RBS brand name from all of our products and services by the time RBS ceases to hold at least 50% of our capital stock (but in no event earlier than October 1, 2015). Under the agreement, we will lose the right to use RBS trademarks in connection with the marketing of any product or service once we rebrand and cease using RBS trademarks in connection with such product or service. From and after the initial term of the trademark license agreement, we will be required to pay RBS an annual license fee of $500,000 for year six, increasing up to $5,000,000 for year ten for the right to continue to use the licensed trademarks.
Registration Rights Agreement
We intend to enter into a Registration Rights Agreement with RBS immediately prior to the completion of this offering, pursuant to which we will agree that, upon the request of RBS, we will use our reasonable best efforts to effect the registration under applicable federal and state securities laws of any shares of our common stock beneficially owned by RBS following this offering.
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Demand registration . RBS will be able to request registration under the Securities Act of all or any portion of our shares covered by the agreement and we will be obligated, subject to limited exceptions, to register such shares as requested by RBS. RBS will be able to request that we complete 6 demand registrations and underwritten offerings in any twelve-month period subject to limitations on minimum offering size. RBS will be able to designate the terms of each offering effected pursuant to a demand registration, which may take any form, including a shelf registration.
Piggy-back registration . If we at any time intend to file on our behalf or on behalf of any of our other security holders a registration statement in connection with a public offering of any of our securities on a form and in a manner that would permit the registration for offer and sale of our common stock held by RBS, RBS will have the right to include its shares of our common stock in that offering.
Registration expenses . We will be generally responsible for all registration expenses in connection with the performance of our obligations under the registration rights provisions in the Registration Rights Agreement. RBS is responsible for its own internal fees and expenses, any applicable underwriting discounts or commissions and any stock transfer taxes.
Indemnification . Generally, the agreement will contain indemnification and contribution provisions by us for the benefit of RBS and, in limited situations, by RBS for the benefit of us with respect to the information provided by RBS included in any registration statement, prospectus or related document.
Transfer . If RBS transfers shares covered by the agreement, it will be able to transfer the benefits of the Registration Rights Agreement to transferees of 5% of the shares of our common stock outstanding immediately following the completion of this offering, provided that each transferee agrees to be bound by the terms of the Registration Rights Agreement.
Term . The registration rights will remain in effect with respect to any shares covered by the agreement until:
| such shares have been sold pursuant to an effective registration statement under the Securities Act; |
| such shares have been sold to the public pursuant to Rule 144 under the Securities Act; or |
| such shares have been sold in a transaction in which the transferee is not entitled to the benefits of the Registration Rights Agreement. |
Commercial Matters
In addition to the agreements that we intend to enter into as part of our separation from the RBS Group, we expect to continue certain of our commercial relationships with the RBS Group for which we intend to continue or enter into one or more commercial matters agreements. The principal commercial activities to be covered by such agreements include the following.
Interest rate swaps and foreign currency products
We enter into interest rate swap agreements with the RBS Group for the purpose of reducing our exposure to interest rate fluctuations. As of June 30, 2014, the total notional amount of swaps outstanding was $5.0 billion which pay fixed rates ranging from 1.78% to 4.3% and receive overnight Federal funds rate and one month LIBOR with maturities from 2016 through 2023. As of December 31, 2013, the total notional amount of swaps outstanding was $5.5 billion, all of which pay fixed rates ranging from 1.78% to 5.47% and receive overnight Federal funds rate with maturities from 2014 to
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2023. Included in these balances were $4.0 billion of receive-fixed swaps that had been executed as of June 30, 2013 as part of a new hedging program initiated during the quarter ended March 31, 2013. We recorded net interest expense of $21 million and $92 million for the six months ended June 30, 2014 and 2013, respectively.
In order to meet the financing needs of our customers, we enter into interest rate swap and cap agreements with our customers and simultaneously enter into offsetting swap and cap agreements with the RBS Group. We earn a spread equal to the difference between rates charged to the customer and rates charged by the RBS Group. The notional amount of these interest rate swap and cap agreements outstanding with the RBS Group was $11.7 billion and $13.4 billion at June 30, 2014 and December 31, 2013, respectively. We recorded expense of $135 million for the six months ended June 30, 2014 and income of $176 million for the six months ended June 30, 2013.
Also, to meet the financing needs of our customers, we enter into a variety of foreign currency denominated products, such as loans, deposits and foreign exchange contracts. To manage the foreign exchange risk associated with these products, we enter into offsetting foreign exchange contracts with the RBS Group. We earn a spread equal to the difference between rates charged to the customer and rates charged by the RBS Group. The notional amount of foreign exchange contracts outstanding with the RBS Group was $4.9 billion and $4.6 billion at June 30, 2014 and December 31, 2013, respectively. We recorded expense within foreign exchange and trade finance fees of $7 million for the six months ended June 30, 2014 and income of $13 million for the six months ended June 30, 2013.
Other Commercial Matters
We have service and referral arrangements with the RBS Group in respect of certain commercial matters for which we intend to enter into a master commercial services agreement prior to the completion of this offering. We anticipate that the commercial matters to be included and the terms of such services and referrals will be largely consistent with historic periods. Our commercial services arrangements include those related to mortgage servicing, market research, data information services and automated cash management and liquidity financing. Our commercial referral arrangements include those related to transactional services, debt capital markets transactions, underwriting of loan syndications, asset finance and loan syndications and corporate credit card services.
Other
On May 24, 2013, we redeemed $289 million of floating rate junior subordinated deferrable interest debentures due March 4, 2034 from a special purpose subsidiary, which caused the redemption of $280 million of our trust preferred securities from RBS.
On June 28, 2013, we entered into a purchase agreement with RBS pursuant to which we issued to RBS $333,000,000 aggregate principal amount of 5.158% Fixed-to-Floating Rate Callable Subordinated Notes due 2023 pursuant to Rule 144A under the Securities Act. The principal amount of this subordinated debt was equal to a special dividend paid to RBS on the same day. Together, these actions reduced our common equity without reducing total regulatory capital.
On September 30, 2013, we entered into a purchase agreement with RBS pursuant to which we issued to RBS $333,000,000 aggregate principal amount of 4.771% Fixed Rate Subordinated Notes due 2023 pursuant to Rule 144A under the Securities Act. The principal amount of this subordinated debt was equal to a special dividend paid to RBS on the same day. Together, these actions reduced our common equity without reducing total regulatory capital.
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On December 2, 2013, we entered into a purchase agreement with RBS pursuant to which we issued to RBS $334,000,000 aggregate principal amount of 4.691% Fixed Rate Subordinated Notes due 2024 pursuant to Rule 144A under the Securities Act. The principal amount of this subordinated debt was equal to a special dividend paid to RBS on the same day. Together, these actions reduced our common equity without reducing total regulatory capital.
On June 26, 2014, we entered into a purchase agreement with RBS pursuant to which we issued to RBS $333,000,000 aggregate principal amount of 4.153% Fixed Rate Subordinated Notes due 2024 pursuant to Rule 144A under the Securities Act. The principal amount of this subordinated debt was equal to a special dividend paid to RBS on the same day. Together, these actions reduced our common equity without reducing total regulatory capital.
On August 1, 2014, we entered into a purchase agreement with RBS pursuant to which we issued to RBS $333,000,000 aggregate principal amount of 4.023% Fixed Rate Subordinated Notes due 2024 pursuant to Rule 144A under the Securities Act. The principal amount of this subordinated debt was equal to a special dividend paid to RBS on the same day. Together, these actions reduced our common equity without reducing total regulatory capital.
For further information regarding these and other capital actions taken during 2013 and 2014, please refer to Managements Discussion and Analysis of Financial Condition and Results of OperationsCapital.
We have agreed to an additional capital exchange transaction with RBS, to occur on or around October 1, 2014, subject to us obtaining any required regulatory approvals. On the same day, assuming completion of this offering, we will issue $334,000,000 of our shares of preferred stock to RBS and then use the proceeds from this issuance to purchase $334,000,000 of our shares of common stock from RBSG International Holdings Limited. Together, these actions will reduce our common equity without reducing either total Tier 1 regulatory capital or total regulatory capital. If the proposed exchange transaction occurs after the completion of this offering, the purchase price of a share of our common stock will be the average of the daily volume-weighted average price of a share of our common stock as reported by the NYSE over the five trading days preceding the purchase date (or such lesser number of trading days preceding such purchase date as occur between the date of this prospectus and such purchase date).
We also maintained a $50 million revolving line of credit as of December 31, 2013 and 2012 with the RBS Group. This line of credit was not drawn upon as of December 31, 2013 or 2012, expired on January 31, 2014, and was not renewed.
We have issued a guarantee to the RBS Group for a fee, pursuant to which we will absorb credit losses related to the sale of option contracts by the RBS Group to our customers. There were outstanding option contracts with a notional value of $1 million and $2 million at June 30, 2014 and December 31, 2013, respectively.
We have made loans to directors and executive officers and their immediate families, as well as their affiliated companies. Such loans amounted to $126 million and $78 million at June 30, 2014 and December 31, 2013, respectively. The loans to such persons (i) complied with our Regulation O policies and procedures, (ii) were made in the ordinary course of business, (iii) were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the lender, and (iv) did not involve more than a normal risk of collectability or did not present other features unfavorable to us.
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Under supplemental retirement arrangements relating to their service to Charter One, which we purchased in 2004, Mr. Koch as well as his brother, John Koch, are entitled to receive monthly payments. Mr. Bud Koch and Mr. John Koch received approximately $877,500 and $744,900, respectively, per year under this arrangement during each of 2013, 2012 and 2011.
Indemnification Agreements
We intend to enter into indemnification agreements with our directors and executive officers. These agreements will require us to indemnify these individuals to the fullest extent permitted by Delaware law against liabilities that may arise by reason of their service to us, and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors or executive officers, we have been informed that in the opinion of the SEC such indemnification is against public policy and is therefore unenforceable.
There is currently no pending material litigation or proceeding involving any of our directors, officers or employees for which indemnification is sought.
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PRINCIPAL AND SELLING STOCKHOLDERS
Immediately following the offering, RBSG International Holdings Limited will own approximately 75.0% of our outstanding common stock, assuming no exercise by the underwriters of their option to purchase additional shares, and approximately 71.2% of our common stock if the underwriters exercise their option to purchase additional shares in full.
RBSG International Holdings Limited is selling 135,363,704 shares of our common stock in this offering, assuming no exercise by the underwriters of their option to purchase additional shares. RBS CBFM North America Corporation is selling 4,636,296 shares of our common stock in this offering.
The following table sets forth information regarding beneficial ownership of our common stock as of September 5, 2014, by:
| each person whom we know to own beneficially more than 5% of our common stock; |
| each of the directors and named executive officers individually; and |
| all directors and executive officers as a group. |
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Upon completion of this offering, no shares of common stock underlying CFG equity awards will be beneficially owned by directors or officers in accordance with the rules of the SEC. The percentage of beneficial ownership for the following table is based on 559,998,324 shares of common stock outstanding as of September 5, 2014. Unless otherwise indicated, the address for each listed stockholder is: c/o Citizens Financial Group, Inc., One Citizens Plaza, Providence, RI, 02903. The address of the selling stockholders is c/o the Company Secretary, The Royal Bank of Scotland Group plc, PO Box 1000, RBS Gogarburn, Edinburgh EH12 1HQ. To our knowledge, except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock owned by them.
Shares Beneficially Owned
Before the Offering |
Number
of Shares Being Offered |
Shares Beneficially
Owned After the Offering (1) |
||||||||||||||||||
Name of Beneficial Owner |
Number | Percent | Number |
Common
Stock Beneficially Owned |
Percent | |||||||||||||||
Selling Stockholders |
||||||||||||||||||||
RBSG International Holdings Limited (2) |
555,362,028 | 99.2 | % | 135,363,704 | 419,998,324 | 75.0 | ||||||||||||||
RBS CBFM North America Corporation (3) |
4,636,296 | 0.8 | % | 4,636,296 | | | ||||||||||||||
Directors and Officers |
||||||||||||||||||||
Bruce Van Saun |
| | | | | |||||||||||||||
David Bowerman |
| | | | | |||||||||||||||
Brad L. Conner |
| | | | | |||||||||||||||
John Fawcett |
| | | | | |||||||||||||||
Robert D. Matthews, Jr. |
| | | | | |||||||||||||||
Nancy L. Shanik |
| | | | | |||||||||||||||
Mark Casady |
| | | | | |||||||||||||||
Anthony Di Iorio |
| | | | | |||||||||||||||
Robert Gillespie |
| | | | | |||||||||||||||
William P. Hankowsky |
| | | | | |||||||||||||||
Howard W. Hanna III |
| | | | | |||||||||||||||
Leo (Lee) I. Higdon |
||||||||||||||||||||
Charles J. (Bud) Koch |
| | | | | |||||||||||||||
Arthur F. Ryan |
| | | | | |||||||||||||||
Shivan S. Subramaniam |
| | | | | |||||||||||||||
Wendy A. Watson |
| | | | | |||||||||||||||
Marita Zuraitis |
| | | | | |||||||||||||||
Directors and Officers as a group (17 persons) |
| | | | |
(1) | Assumes no exercise of the underwriters option to purchase additional shares. See Underwriting. |
(2) | The shares are directly held by RBSG International Holdings Limited, a private limited company organized under the laws of the Scotland. RBSG International Holdings Limited is a wholly owned indirect subsidiary of RBS. RBS is a publicly owned company whose ordinary shares are traded on the London Stock Exchange and American Depositary Shares are traded on the NYSE. The UK Government, through Her Majestys Treasury (HM Treasury), is the ultimate controlling party of RBS and, as of June 30, 2014, held 62.9% of the voting rights in RBS and had an economic interest of 79.5%. The UK Governments shareholding is managed by UK Financial Investments Limited, a company wholly owned by the UK Government. |
(3) | The shares are directly held by RBS CBFM North America Corporation, a Delaware corporation. RBS CBFM North America Corporation is a wholly owned indirect subsidiary of RBS. See note (2) above for additional information regarding the beneficial ownership of RBS. |
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The following descriptions are summaries of the material terms of our amended and restated certificate of incorporation and amended and restated bylaws. Reference is made to the more detailed provisions of, and the descriptions are qualified in their entirety by reference to, the amended and restated certificate of incorporation and amended and restated bylaws, copies of which are filed with the SEC as exhibits to the registration statement of which this prospectus is a part, and applicable law.
General
Our authorized capital stock consists of 1,000,000,000 shares of common stock, par value $0.01 per share, and 100,000,000 shares of preferred stock, par value $25.00 per share. Unless our board of directors determines otherwise, we will issue all shares of capital stock in uncertificated form.
Common Stock
Common stock outstanding . As of June 30, 2014, there were 559,998,324 shares of common stock outstanding which were held of record by two stockholders. All outstanding shares of common stock are fully paid and non-assessable, and the shares of common stock to be issued upon completion of this offering will be fully paid and non-assessable.
Voting rights . The holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders, except on matters relating solely to terms of preferred stock.
Dividend rights . Subject to preferences that may be applicable to any outstanding preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by our Board out of funds legally available therefor. See Dividend Policy.
Rights upon liquidation . In the event of liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding.
Other rights . The holders of our common stock have no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock.
Preferred Stock
Our Board has the authority to issue preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further vote or action by the stockholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of our company without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock.
Anti-Takeover Effects of Some Provisions
Some provisions of our amended and restated certificate of incorporation and amended and restated bylaws could make the following more difficult:
| acquisition of control of us by means of a proxy contest or otherwise, or |
| removal of our incumbent officers and directors. |
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These provisions, as well as our ability to issue preferred stock, are designed to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our Board. We believe that the benefits of increased protection give us the potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us, and that the benefits of this increased protection outweigh the disadvantages of discouraging those proposals, because negotiation of those proposals could result in an improvement of their terms.
Election and Removal of Directors . Our Board will consist of not less than five nor more than 25 directors, excluding any directors elected by holders of preferred stock pursuant to provisions applicable in the case of defaults. The exact number of directors will be fixed from time to time by resolution of our Board. Our Board will initially have 12 members.
Our amended and restated certificate of incorporation and amended and restated bylaws will provide that directors may be removed, with or without cause, by an affirmative vote of shares representing a majority of the shares then entitled to vote at an election of directors. Any vacancy occurring on our Board and any newly created directorship may be filled only by a vote of a majority of the remaining directors in office.
Limits on Written Consents . Our amended and restated certificate of incorporation and amended and restated bylaws will provide that, upon RBS ceasing to beneficially own shares representing 50% of our issued and outstanding capital stock (the Triggering Event), stockholder action can be taken only at an annual or special meeting of stockholders and cannot be taken by written consent in lieu of a meeting.
Stockholder Meetings . Our amended and restated certificate of incorporation and amended and restated bylaws will also provide that, except as otherwise required by law, special meetings of the stockholders can only be called by the chairman of our Board or our chief executive officer, or pursuant to a resolution adopted by a majority of our Board or, until the Triggering Event, at the request of holders of a majority of the total voting power of our outstanding shares of common stock, voting together as a single class. Except as described above, stockholders are not permitted to call a special meeting or to require our Board to call a special meeting.
Super-Majority Approval Requirements . The Delaware General Corporation Law generally provides that the affirmative vote of the holders of a majority of the total voting power of the shares entitled to vote on any matter is required to amend a corporations certificate of incorporation or bylaws, unless either a corporations certificate of incorporation or bylaws require a greater percentage. Our amended and restated certificate of incorporation and amended and restated bylaws will provide that, following the Triggering Event, the affirmative vote of holders of 75% of the total voting power of our outstanding common stock eligible to vote in the election of directors, voting together as a single class, will be required to amend, alter, change or repeal specified provisions, including those relating to actions by written consent of stockholders, calling of special meetings of stockholders, business combinations and amendment of our amended and restated certificate of incorporation and amended and restated bylaws. This requirement of a super-majority vote to approve amendments to our amended and restated certificate of incorporation and amended and restated bylaws could enable a minority of our stockholders to effectively exercise veto power over any such amendments.
Other Limitations on Stockholder Actions . Our amended and restated bylaws will also impose some procedural requirements on stockholders who wish to:
| make nominations in the election of directors; |
| propose that a director be removed; |
| propose any repeal or change in our amended and restated bylaws; or |
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| propose any other business to be brought before an annual or special meeting of stockholders. |
Under these procedural requirements, in order to bring a proposal before a meeting of stockholders, a stockholder must deliver timely notice of a proposal pertaining to a proper subject for presentation at the meeting to our corporate secretary along with the following:
| a description of the business or nomination to be brought before the meeting and the reasons for conducting such business at the meeting; |
| the stockholders name and address; |
| any material interest of the stockholder in the proposal; |
| the number of shares beneficially owned by the stockholder and evidence of such ownership; and |
| the names and addresses of all persons with whom the stockholder is acting in concert and a description of all arrangements and understandings with those persons, and the number of shares such persons beneficially own. |
To be timely, a stockholder must generally deliver notice:
| in connection with an annual meeting of stockholders, not less than 120 days nor more than 180 days prior to the date on which the annual meeting of stockholders was held in the immediately preceding year, but in the event that the date of the annual meeting is more than 30 days before or more than 70 days after the anniversary date of the preceding annual meeting of stockholders, a stockholder notice will be timely if received by us not later than the close of business on the later of (1) the 120th day prior to the annual meeting and (2) the 10th day following the day on which we first publicly announce the date of the annual meeting; or |
| in connection with the election of a director at a special meeting of stockholders, not less than 120 days nor more than 150 days prior to the date of the special meeting, but in the event that less than 55 days notice or prior public disclosure of the date of the special meeting of the stockholders is given or made to the stockholders, a stockholder notice will be timely if received by us not later than the close of business on the 10th day following the day on which a notice of the date of the special meeting was mailed to the stockholders or the public disclosure of that date was made. |
In order to submit a nomination for our Board, a stockholder must also submit any information with respect to the nominee that we would be required to include in a proxy statement, as well as some other information. If a stockholder fails to follow the required procedures, the stockholders proposal or nomination will be ineligible and will not be voted on by our stockholders.
Dissenters Rights of Appraisal and Payment
Under the Delaware General Corporation Law, with certain exceptions, our stockholders will have appraisal rights in connection with a merger or consolidation of our company. Pursuant to the Delaware General Corporation Law, stockholders who properly request and perfect appraisal rights in connection with such merger or consolidation will have the right to receive payment of the fair value of their shares as determined by the Delaware Court of Chancery.
Stockholders Derivative Actions
Under the Delaware General Corporation Law, any of our stockholders may bring an action in our name to procure a judgment in our favor, also known as a derivative action, provided that the stockholder bringing the action is a holder of our shares at the time of the transaction to which the action relates or such stockholders stock thereafter devolved by operation of law.
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Forum Selection
The Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of fiduciary duty owed by any director, officer or other employee of ours to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law or (iv) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to the foregoing forum selection provisions.
Conflicts of Interest
Delaware law permits corporations to adopt provisions renouncing any interest or expectancy in certain opportunities that are presented to the corporation or its officers, directors or stockholders. Our amended and restated certificate of incorporation will, to the maximum extent permitted from time to time by Delaware law, renounce any interest or expectancy that we have in, or right to be offered an opportunity to participate in, specified business opportunities that are from time to time presented to our officers, directors or stockholders or their respective affiliates, other than those officers, directors, stockholders or affiliates who are our or our subsidiaries employees. Our amended and restated certificate of incorporation will provide that, to the fullest extent permitted by law, none of RBS or any of its affiliates or any director who is not employed by us or his or her affiliates will have any duty to refrain from (i) engaging in a corporate opportunity in the same or similar lines of business in which we or our affiliates now engage or propose to engage or (ii) otherwise competing with us or our affiliates. In addition, to the fullest extent permitted by law, in the event that RBS or any non-employee director acquires knowledge of a potential transaction or other business opportunity which may be a corporate opportunity for itself or himself or its or his affiliates or for us or our affiliates, such person will have no duty to communicate or offer such transaction or business opportunity to us or any of our affiliates and they may take any such opportunity for themselves or offer it to another person or entity. Our amended and restated certificate of incorporation will not renounce our interest in any business opportunity that is expressly offered to a non-employee director solely in his or her capacity as a director of CFG. To the fullest extent permitted by law, no business opportunity will be deemed to be a potential corporate opportunity for us unless we would be permitted to undertake the opportunity under our amended and restated certificate of incorporation, we have sufficient financial resources to undertake the opportunity and the opportunity would be in line with our business.
Limitation of Liability of Directors and Officers
Our amended and restated certificate of incorporation will provide that no director will be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director, except as required by applicable law, as in effect from time to time. Currently, Delaware law requires that liability be imposed for the following:
| any breach of the directors duty of loyalty to our company or our stockholders; |
| any act or omission not in good faith or which involved intentional misconduct or a knowing violation of law; |
| unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law; and |
| any transaction from which the director derived an improper personal benefit. |
As a result, neither we nor our stockholders have the right, through stockholders derivative suits on our behalf, to recover monetary damages against a director for breach of fiduciary duty as a director, including breaches resulting from grossly negligent behavior, except in the situations described above.
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Our amended and restated bylaws will provide that, to the fullest extent permitted by law, we will indemnify any officer or director of our company against all damages, claims and liabilities arising out of the fact that the person is or was our director or officer, or served any other enterprise at our request as a director, officer, employee, agent or fiduciary. We will reimburse the expenses, including attorneys fees, incurred by a person indemnified by this provision when we receive an undertaking to repay such amounts if it is ultimately determined that the person is not entitled to be indemnified by us. Amending this provision will not reduce our indemnification obligations relating to actions taken before an amendment.
Indemnification Agreements
We intend to enter into an indemnification agreement with each of our directors and executive officers as described in Our Relationship with the RBS Group and Certain Other Related Party TransactionsRelationship with the RBS GroupIndemnification Agreements. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors or executive officers, we have been informed that in the opinion of the SEC such indemnification is against public policy and is therefore unenforceable.
Listing
We have applied to list the common stock on the NYSE under the symbol CFG.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock is Computershare Trust Company, N.A.
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MATERIAL U.S. FEDERAL TAX CONSIDERATIONS
The following is a general discussion of the material U.S. federal income and estate tax consequences of the ownership and disposition of our common stock by a beneficial owner that is a non-U.S. holder purchasing our common stock in this offering, other than a non-U.S. holder that owns or has owned, actually or constructively, more than 5% of our common stock. For purposes of this discussion, a non-U.S. holder is a person or entity that, for U.S. federal income tax purposes, is a:
| nonresident alien individual, other than certain former citizens and residents of the United States subject to tax as expatriates; |
| a corporation (or other entity taxable as a corporation) not created or organized in the United States or under the laws of the United States or of any state therein (or the District of Columbia); or |
| an estate or trust, other than an estate or trust the income of which is subject to U.S. federal income tax regardless of its source. |
If an entity or arrangement that is classified as a partnership for U.S. federal income tax purposes owns our common stock, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships owning our common stock and partners in such partnerships are urged to consult their tax advisors as to the particular U.S. federal income tax consequences of owning and disposing of our common stock.
This discussion is based on the Internal Revenue Code of 1986, as amended (the Code), and administrative pronouncements, judicial decisions and final, temporary and proposed Treasury Regulations as of the date hereof, changes to any of which subsequent to the date of this prospectus may affect the tax consequences described herein. This discussion does not address all aspects of U.S. federal income and estate taxation that may be relevant to a non-U.S. holder in light of its particular circumstances and does not address any tax consequences arising under the laws of any state, local or foreign jurisdiction, nor does it address the tax consequences to special classes of investors including, but not limited to, tax-exempt organizations, controlled foreign corporations, passive foreign investment companies, corporations that accumulate earnings to avoid U.S. federal income tax, insurance companies, banks or other financial institutions, dealers in securities, persons liable for the alternative minimum tax, traders in securities that elect to use a mark-to-market method of accounting for their securities holdings, persons who have acquired our common stock as compensation or otherwise in connection with the performance of services, or persons that will own our common stock as a position in a straddle, conversion transaction or other risk reduction transaction. Prospective holders are urged to consult their tax advisors with respect to the particular tax consequences to them of owning and disposing of our common stock, including the consequences under the laws of any state, local or foreign jurisdiction.
Dividends
Any dividends we pay with respect to our common stock (see Dividend Policy) will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Any dividend paid to a non-U.S. holder of our common stock generally will be subject to withholding tax at a 30% rate or a reduced rate specified by an applicable income tax treaty. In order to obtain a reduced rate of withholding, a non-U.S. holder will be required to provide proper certification of its eligibility for such reduced rate.
If dividends paid to a non-U.S. holder are effectively connected with the non-U.S. holders conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base maintained by the non-U.S. holder in the
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United States), the non-U.S. holder will not be subject to U.S. withholding tax if the non-U.S. holder complies with applicable certification and disclosure requirements. Instead, the non-U.S. holder will generally be taxed with respect to the receipt of dividends paid on our common stock in the same manner as if the non-U.S. holder were a resident of the United States. A non-U.S. corporation receiving effectively connected dividends may also be subject to an additional branch profits tax imposed at a rate of 30% (or a lower rate specified in an applicable tax treaty).
Gain on Disposition of Our Common Stock
A non-U.S. holder generally will not be subject to U.S. federal income tax on gain realized upon the sale or other disposition of our common stock unless:
| the gain is effectively connected with a trade or business of the non-U.S. holder within the United States (and, if required by an applicable income tax treaty, is attributable to a U.S. permanent establishment or fixed base of such non-U.S. holder); |
| the non-U.S. holder is a nonresident alien individual and is present in the United States for 183 days or more in the taxable year of disposition and certain other conditions are met; or |
| we are or have been a United States real property holding corporation for U.S. federal income tax purposes at any time within the five-year period preceding the disposition or the non-U.S. holders holding period, whichever period is shorter, and our common stock has ceased to be traded on an established securities market prior to the beginning of the calendar year in which the sale or disposition occurs. We believe we are not, and do not anticipate becoming, a United States real property holding corporation. |
If a non-U.S. holder is engaged in a trade or business in the United States and gain recognized by the non-U.S. holder on a sale or other disposition of our common stock is effectively connected with a conduct of such trade or business and, if required by an applicable income tax treaty, is attributable to a permanent establishment or fixed base, the non-U.S. holder will generally be taxed with respect to such gain in the same manner as a U.S. person. Such non-U.S. holders are urged to consult their own tax advisors with respect to the U.S. tax consequences of the ownership and disposition of our common stock, including the possible imposition of a branch profits tax at a rate of 30% (or lower rate specified in an applicable tax treaty).
Information Reporting Requirements and Backup Withholding
Information returns will be filed with the Internal Revenue Service in connection with payments of dividends on our common stock. Unless the non-U.S. holder complies with certification procedures to establish that it is not a U.S. person, information returns may be filed with the Internal Revenue Service in connection with the proceeds from a sale or other disposition of our common stock and the non-U.S. holder may be subject to U.S. backup withholding on dividend payments on our common stock or on the proceeds from a sale or other disposition of our common stock. The amount of any backup withholding from a payment to a non-U.S. holder will be allowed as a credit against such holders U.S. federal income tax liability and may entitle such holder to a refund, provided that the required information is timely furnished to the Internal Revenue Service.
FATCA Withholding Tax
Legislation enacted in 2010 (commonly known as FATCA) generally imposes withholding at a rate of 30% on certain payments to certain foreign entities (including financial intermediaries), after December 31, 2012 (subject to certain transition rules), of dividends on and the gross proceeds of dispositions of U.S. common stock, unless various U.S. information reporting and due diligence requirements (generally relating to ownership by U.S. persons of interests in or accounts with those
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entities) have been satisfied. Current Treasury regulations implementing this withholding tax will defer the withholding obligation until January 1, 2017 for gross proceeds from dispositions of common stock of a U.S. issuer. Non-U.S. holders should consult their tax advisors regarding the possible implications of this legislation on their investment in our common stock.
Federal Estate Tax
The estates of nonresident alien individuals generally are subject to U.S. federal estate tax on property with a U.S. situs. Because we are a U.S. corporation, our common stock will be U.S. situs property and therefore will be includible in the U.S. taxable estate of a nonresident alien decedent who owns or possesses certain powers or interests in our common stock (including through certain trusts), unless an applicable estate tax treaty provides otherwise.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock. Future sales of substantial amounts of our common stock in the public market could adversely affect market prices prevailing from time to time. Furthermore, because only a limited number of shares will be available for sale shortly after this offering due to existing contractual and legal restrictions on resale as described below, there may be sales of substantial amounts of our common stock in the public market after the restrictions lapse. This may adversely affect the prevailing market price and our ability to raise equity capital in the future.
Upon completion of this offering, we will have 559,998,324 shares of common stock outstanding, excluding shares underlying any CFG equity awards outstanding at that time. Of these 559,998,324 shares, the 140,000,000 shares, or 161,000,000 shares if the underwriters exercise their over-allotment option in full, sold in this offering will be freely transferable without restriction or registration under the Securities Act of 1933, as amended (the Securities Act), except for any shares purchased by one of our existing affiliates, as that term is defined in Rule 144 under the Securities Act. The remaining 419,998,324 shares, or 398,998,324 shares if the underwriters exercise their overallotment option in full, of common stock outstanding are restricted shares as defined in Rule 144. Restricted shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144. As a result of the contractual 180-day lock-up period described below and the provisions of Rule 144, these shares will be available for sale in the public market as follows:
Number of Shares |
Date |
|
0 (or 0 shares if the underwriters exercise their overallotment option in full) |
On the date of this prospectus. |
|
0 (or 0 shares if the underwriters exercise their overallotment option in full) |
After 90 days from the date of this prospectus. |
|
419,998,324 (or 398,998,324 shares if the underwriters exercise their overallotment option in full) |
After 180 days from the date of this prospectus (subject to volume limitations). |
As part of its obligations under the European Commissions State Aid Amendment Decision of April 9, 2014, RBS has committed to dispose of its remaining ownership of our common stock by December 31, 2016, with an automatic 12-month extension depending on market conditions. See Risk FactorsRisks Related to our Common StockOur stock price could decline due to the large number of outstanding shares of our common stock eligible for future sale, and RBS has committed to sell its remaining beneficial ownership of our common stock, although the timing of such sale or sales remains uncertain.
Rule 144
In general, a person who has beneficially owned restricted shares of our common stock for at least six months would be entitled to sell such securities, provided that (i) such person is not deemed to have been one of our affiliates at the time of, or at any time during the 90 days preceding, a sale and (ii) we are subject to the Exchange Act periodic reporting requirements for at least 90 days before the sale. Persons who have beneficially owned restricted shares of our common stock for at least six months but who are our affiliates at the time of, or any time during the 90 days preceding, a sale, would be subject to additional restrictions, by which such person would be entitled to sell within any three-month period only a number of securities that does not exceed the greater of the following:
| 1% of the number of shares of our common stock then outstanding, which will equal approximately 5.6 million shares immediately after this offering; or |
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| the average weekly trading volume of our common stock on the NYSE during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale; |
provided, in each case, that we are subject to the Exchange Act periodic reporting requirements for at least 90 days before the sale. Such sales both by affiliates and by non-affiliates must also comply with the manner of sale, current public information and notice provisions of Rule 144 to the extent applicable.
Registration Rights
Upon completion of this offering, subject to the lock-up agreements described below, the holders of 419,998,324 shares of common stock (or 398,998,324 shares of common stock if the underwriters over-allotment option is exercised in full) or their transferees will be entitled to various rights with respect to the registration of these shares under the Securities Act. Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration, except for shares purchased by affiliates.
Equity Awards
Upon the completion of this offering, outstanding RBS deferred share awards, RBS LTIP awards (assuming maximum achievement of the performance conditions applicable to the LTIP awards) and special IPO awards granted to certain of our executive officers will convert into awards on shares of our common stock for a total of 1,378,226 shares (based principally on the midpoint of the range set forth on the cover page of this prospectus). For further details, see Compensation Discussion and Analysis. All of the shares subject to such converted equity awards held by our executive officers are subject to lock-up agreements. An additional 62,112,029 shares of common stock are available for future equity grants under our new stock plans (including our ESPP).
Upon completion of this offering, we intend to file a registration statement on Form S-8 under the Securities Act covering shares of common stock subject to outstanding CFG converted equity awards or issuable pursuant to our stock plans. Subject to Rule 144 volume limitations applicable to affiliates, shares registered under this registration statement will be available for sale in the open market, beginning 90 days after the date of the prospectus, except to the extent that the shares are subject to vesting restrictions with us or the contractual restrictions described below.
Lock-up Agreements
All of our directors, officers and the holders of substantially all of our common stock have agreed, subject to certain customary exceptions, not to offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, or enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock for a period of 180 days after the date of this prospectus, without the prior written consent of Morgan Stanley & Co. LLC, Goldman, Sachs & Co. and J.P. Morgan Securities LLC. See Underwriting.
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Under the terms and subject to the conditions in an underwriting agreement dated the date of this prospectus, the underwriters named below, for whom Morgan Stanley & Co. LLC, Goldman, Sachs & Co. and J.P. Morgan Securities LLC are acting as representatives, have severally agreed to purchase, and the selling stockholders have agreed to sell to them, severally, the number of shares indicated below:
Name |
Number of
Shares |
|||
Morgan Stanley & Co. LLC |
||||
Goldman, Sachs & Co. |
||||
J.P. Morgan Securities LLC |
||||
Barclays Capital Inc. |
||||
Citigroup Global Markets Inc. |
||||
Deutsche Bank Securities Inc. |
||||
RBS Securities Inc. |
||||
Wells Fargo Securities, LLC |
||||
Credit Suisse Securities (USA) LLC |
||||
UBS Securities LLC |
||||
Jefferies LLC |
||||
Keefe, Bruyette & Woods, Inc. |
||||
Oppenheimer & Co. Inc. |
||||
RBC Capital Markets, LLC |
||||
Sandler ONeill & Partners, L.P. |
||||
Evercore Group L.L.C. |
||||
ING Financial Markets LLC |
||||
Sanford C. Bernstein & Co., LLC |
||||
Guggenheim Securities, LLC |
||||
Lebenthal & Co., LLC |
||||
The Williams Capital Group, L.P. |
||||
Total: |
140,000,000 |
The underwriters and the representatives are collectively referred to as the underwriters and the representatives, respectively. The underwriters are offering the shares of common stock subject to their acceptance of the shares from the selling stockholders and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common stock offered by this prospectus if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the underwriters over-allotment option to purchase additional shares described below. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or the offering may be postponed or terminated.
The underwriters initially propose to offer part of the shares of common stock directly to the public at the offering price listed on the cover page of this prospectus and part to certain dealers. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representatives. The offering of the shares by the underwriters is subject to receipt and acceptance and subject to the underwriters right to reject any order in whole or in part. Sales of shares of common stock made outside the United States may be made by affiliates of the underwriters.
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The selling stockholders have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to 21,000,000 additional shares of common stock at the public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock offered by this prospectus. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase about the same percentage of the additional shares of common stock as the number listed next to the underwriters name in the preceding table bears to the total number of shares of common stock listed next to the names of all underwriters in the preceding table.
The following table shows the per share and total public offering price, underwriting discounts and commissions, and proceeds before expenses to the selling stockholders. These amounts are shown assuming both no exercise and full exercise of the underwriters option to purchase up to an additional shares of common stock.
Total | ||||||||||||
Per
Share |
No
Exercise |
Full
Exercise |
||||||||||
Public offering price |
$ | $ | $ | |||||||||
Underwriting discounts and commissions to be paid by the selling stockholders |
||||||||||||
Proceeds, before expenses, to selling stockholders |
$ | $ | $ |
The estimated offering expenses payable by us and the selling stockholders are approximately $12.3 million. We have agreed to reimburse the underwriters for certain expenses relating to clearance of this offering with the Financial Industry Regulatory Authority up to $50,000.
The underwriters have informed us that they do not intend sales to discretionary accounts to exceed 5% of the total number of shares of common stock offered by them.
We have applied to list our shares of common stock on the NYSE under the trading symbol CFG.
We and all directors and officers and the holders of substantially all of our outstanding stock and stock options have agreed that, subject to certain exceptions, without the prior written consent of Morgan Stanley & Co. LLC, Goldman, Sachs & Co. and J.P. Morgan Securities LLC on behalf of the underwriters, we and they will not, during the period ending 180 days after the date of this prospectus (the restricted period):
| offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock; |
| file any registration statement with the Securities and Exchange Commission relating to the offering of any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; or |
| enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock, |
whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise. In addition, we and each such other person agrees that, without the prior written consent of Morgan Stanley & Co. LLC, Goldman, Sachs & Co. and J.P. Morgan Securities LLC on behalf of the underwriters, we or such other person will not, during the restricted period, make any demand for, or exercise any right with respect to, the registration of any shares of common stock or any security convertible into or exercisable or exchangeable for common stock.
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The restrictions described in the paragraph above do not apply to:
| transactions by a selling stockholder, director or officer relating to shares of our common stock or other securities acquired in open market transactions after the completion of this offering; |
| the conversion of equity-based awards held by directors or officers or our or any of our subsidiaries current or former service providers, as applicable, in the form of securities of RBS (or American Depositary Shares representing such securities) into securities or equity-based awards of CFG; |
| transfers, sales, tenders or other dispositions by a selling stockholder, director or officer of shares of our common stock or any securities convertible into shares of our common stock to a bona-fide third party pursuant to (i) a tender or exchange offer for our securities or (ii) another transaction, including, a merger, consolidation or other business combination, in each case that results in a change in control of us, provided that all of a selling stockholders, directors or officers securities subject to the restrictions described above that are not so transferred, sold, tendered or otherwise disposed of remain subject to these restrictions and that in the event that the tender offer or other transaction is not completed, such securities will continue to be subject to these restrictions; |
| any issuance or transfer of shares of our common stock or securities convertible into or exercisable or exchangeable for shares of our common stock by us as consideration for a merger, acquisition, asset transfer or similar transaction, provided that the securities issued or transferred do not represent more than 5% of the total number of shares of our common stock issued and outstanding immediately following the completion of this offering including any exercise of the underwriters overallotment option and that we cause the recipient of such securities to execute and deliver a lock-up agreement; |
| transfers by a selling stockholder to any third-party pledgee in a bona fide transaction as collateral to secure obligations pursuant to lending or other arrangements between such third parties (or their affiliates or designees) and such selling stockholder or its affiliates or any similar arrangement relating to a financing arrangement for the benefit of such selling stockholder or its affiliates, provided that the selling stockholder shall cause any such third-party pledgee to execute and deliver to the representatives, on or prior to the pledging of such collateral, a lock-up agreement; |
| transfers by a selling stockholder if required to occur during the restricted period under the European Commissions State Aid Amendment Decision dated April 9, 2014 or as otherwise directed by such selling stockholders regulators; or |
| certain other customary exceptions, including sales pursuant to the underwriting agreement, issuance of shares pursuant to our incentive compensation plans described herein, establishment of any trading plan pursuant to Rule 10b5-1, the filing of one or more registration statements on Form S-8 and certain donations, charitable gifts or transfers to related parties. |
The restricted period described above will be extended if:
| during the last 17 days of the restricted period we issue an earnings release or material news or a material news event relating to us occurs, or |
| prior to the expiration of the restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the restricted period, |
in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.
301
Morgan Stanley & Co. LLC, Goldman, Sachs & Co. and J.P. Morgan Securities LLC, in their sole discretion, may release the common stock and other securities subject to the lock-up agreements described above in whole or in part at any time, with or without notice.
At our request, the underwriters have reserved approximately 2% of the shares of common stock to be offered by this prospectus for sale, at the initial public offering price, to directors, officers, employees and business associates of the Company. The number of shares of common stock available for sale to the general public will be reduced to the extent these individuals purchase such reserved shares. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus.
In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may sell more shares than they are obligated to purchase under the underwriting agreement, creating a short position. A short sale is covered if the short position is no greater than the number of shares available for purchase by the underwriters under the over-allotment option. The underwriters can close out a covered short sale by exercising the over-allotment option or purchasing shares in the open market. In determining the source of shares to close out a covered short sale, the underwriters will consider, among other things, the open market price of shares compared to the price available under the over-allotment option. The underwriters may also sell shares in excess of the over-allotment option, creating a naked short position. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in this offering. As an additional means of facilitating this offering, the underwriters may bid for, and purchase, shares of common stock in the open market to stabilize the price of the common stock. These activities may raise or maintain the market price of the common stock above independent market levels or prevent or retard a decline in the market price of the common stock. The underwriters are not required to engage in these activities and may end any of these activities at any time.
We, the selling stockholders, RBS and the several underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act.
A prospectus in electronic format may be made available on websites maintained by one or more underwriters, or selling group members, if any, participating in this offering. The representatives may agree to allocate a number of shares of common stock to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the representatives to underwriters that may make Internet distributions on the same basis as other allocations.
The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. Certain of the underwriters and their respective affiliates have, from time to time, performed, and may in the future perform, various financial advisory and investment banking services for us, for which they received or will receive customary fees and expenses. Also, we and Oppenheimer & Co., Inc. have established a referral program, including a fee sharing arrangement for referrals by the parties, pursuant to a written agreement dated May 31, 2012.
In addition, in the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers and may at any time hold long and short positions in such securities and instruments. Such investment and securities activities may involve our securities
302
and instruments. The underwriters and their respective affiliates may also make investment recommendations or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long or short positions in such securities and instruments.
Because RBS Securities Inc., an underwriter for this offering, is under common control with us and the selling stockholders and because affiliates of this underwriter will receive at least 5% of the proceeds of this offering, a conflict of interest under Financial Industry Regulatory Authority, Inc. (FINRA) Rule 5121 is deemed to exist. Accordingly, this offering will be conducted in accordance with this rule. Pursuant to FINRA Rule 5121, RBS Securities Inc. will not confirm sales to any account over which it exercises discretionary authority without the specific prior written approval of the account holder.
Pricing of the Offering
Prior to this offering, there has been no public market for our common stock. The initial public offering price was determined by negotiations between the selling stockholders and the representatives. Among the factors considered in determining the initial public offering price were our future prospects and those of our industry in general, our revenues, earnings and certain other financial and operating information in recent periods, and the price-earnings ratios, market prices of securities, and certain financial and operating information of companies engaged in activities similar to ours.
Selling Restrictions
Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published, in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
European Economic Area
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State) an offer to the public of any shares of our common stock may not be made in that Relevant Member State, except that an offer to the public in that Relevant Member State of any shares of our common stock may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:
(a) | to any legal entity which is a qualified investor as defined in the Prospectus Directive; |
(b) | to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the representatives for any such offer; or |
303
(c) | in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of shares of our common stock shall result in a requirement for the publication by us or any underwriter of a prospectus pursuant to Article 3 of the Prospectus Directive. |
For the purposes of this provision, the expression an offer to the public in relation to any shares of our common stock in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any shares of our common stock to be offered so as to enable an investor to decide to purchase any shares of our common stock, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, the expression Prospectus Directive means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State, and the expression 2010 PD Amending Directive means Directive 2010/73/EU.
United Kingdom
Each underwriter has represented and agreed that:
(a) | it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000 (FSMA) received by it in connection with the issue or sale of the shares of our common stock in circumstances in which Section 21(1) of the FSMA does not apply to us; and |
(b) | it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the shares of our common stock in, from or otherwise involving the United Kingdom. |
Hong Kong
The shares may not be offered or sold by means of any document other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), or (ii) to professional investors within the meaning of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a prospectus within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), and no advertisement, invitation or document relating to the shares may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to professional investors within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.
Singapore
This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the shares may not be circulated or distributed, nor may the shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore
(the SFA), (ii) to a relevant person, or any person pursuant to Section 275(1A), and in accordance
304
with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
Where the shares are subscribed or purchased under Section 275 by a relevant person which is: (a) a corporation (which is not an accredited investor) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor, shares, debentures and units of shares and debentures of that corporation or the beneficiaries rights and interest in that trust shall not be transferable for 6 months after that corporation or that trust has acquired the shares under Section 275 except: (1) to an institutional investor under Section 274 of the SFA or to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA; (2) where no consideration is given for the transfer; or (3) by operation of law.
Japan
The securities have not been and will not be registered under the Financial Instruments and Exchange Law of Japan (the Financial Instruments and Exchange Law) and each underwriter has agreed that it will not offer or sell any securities, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term, as used in this prospectus means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to a resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Financial Instruments and Exchange Law and any other applicable laws, regulations and ministerial guidelines of Japan.
305
The validity of the shares of common stock offered hereby will be passed upon for us by Davis Polk & Wardwell LLP, New York, New York, and by Cleary Gottlieb Steen & Hamilton LLP, for the underwriters.
The financial statements included in this prospectus have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing in this prospectus. Such financial statements are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the common stock offered hereby. This prospectus, which is part of the registration statement, does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement. For further information, we refer you to the registration statement and the exhibits and schedules filed as part of the registration statement. If a document has been filed as an exhibit to the registration statement, we refer you to the copy of the document that has been filed. A copy of the registration statement, including the exhibits and schedules thereto, may be read and copied at the SECs Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet website that contains reports, proxy statements and other information about issuers, like us, that file electronically with the SEC. The address of that site is www.sec.gov.
As a result of the offering, we will become subject to the full informational requirements of the Exchange Act. We will fulfill our obligations with respect to such requirements by filing periodic reports and other information with the SEC. We intend to furnish our stockholders with annual reports containing audited consolidated financial statements certified by an independent public accounting firm. We also maintain an Internet site at www.citizensbank.com. Our website and the information contained therein or connected thereto shall not be deemed to be incorporated into this prospectus or the registration statement of which it forms a part.
306
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-2 | ||||
F-4 | ||||
Consolidated Financial Statements: |
||||
Consolidated Balance Sheets as of December 31, 2012 and 2013 |
F-5 | |||
Consolidated Statements of Operations for the years ended December 31, 2011, 2012 and 2013 |
F-6 | |||
F-7 | ||||
F-8 | ||||
Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2012 and 2013 |
F-9 | |||
F-10 | ||||
Unaudited Interim Consolidated Financial Statements: |
||||
Consolidated Balance Sheets as of December 31, 2013 and June 30, 2014 |
F-93 | |||
Consolidated Statements of Operations for the six months ended June 30, 2013 and 2014 |
F-94 | |||
F-95 | ||||
F-96 | ||||
Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2014 |
F-97 | |||
F-98 |
F-1
CITIZENS FINANCIAL GROUP, INC.
GLOSSARY OF ACRONYMS AND TERMS
GLOSSARY OF ACRONYMS AND TERMS
The following listing provides a comprehensive reference of common acronyms and terms used throughout the document:
AFS |
Available For Sale | |
ALLL |
Allowance for Loan and Lease Losses | |
AOCI |
Accumulated Other Comprehensive Income | |
ATM |
Automatic Teller Machine | |
BHC |
Bank Holding Company | |
bps |
Basis Points | |
Capital Plan Rule |
Federal Reserves Regulation Y Capital Plan Rule | |
CCAR |
Comprehensive Capital Analysis and Review | |
CCB |
Capital Conservation Buffer | |
CEB |
Commercial Enterprise Banking | |
CEO |
Chief Executive Officer | |
CET1 |
Common Equity Tier 1 | |
Citizens or CFG or the Company |
Citizens Financial Group, Inc. and its Subsidiaries | |
CLTV |
Combined Loan-to-Value | |
CMO |
Collateralized Mortgage Obligation | |
CRA |
Community Reinvestment Act of 1977 | |
CSA |
Credit Support Annex | |
Dodd-Frank Act (DFA) |
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 | |
EC |
Economic Capital | |
EPS |
Earnings Per Share | |
ERISA |
Employee Retirement Income Security Act of 1974 | |
ESOP |
Executive Share Option Plan | |
Fannie Mae (FNMA) |
The Federal National Mortgage Association | |
FASB |
The Financial Accounting Standards Board | |
FDIC |
Federal Deposit Insurance Corporation | |
FDICIA |
Federal Deposit Insurance Corporation Improvement Act of 1991 | |
FFIEC |
Federal Financial Institutions Examination Council | |
FHC |
Financial Holding Company | |
FHLB |
Federal Home Loan Bank | |
FICO |
Fair Isaac Corporation (credit rating) | |
FLSA |
Fair Labor Standards Act of 1938, as amended | |
FRB |
Federal Reserve Bank | |
FRBG |
Federal Reserve Board of Governors | |
Freddie Mac (FHLMC) |
The Federal Home Loan Mortgage Corporation | |
FTP |
Funds Transfer Pricing |
F-2
GAAP |
Accounting Principles Generally Accepted in the United States of America | |
GDP |
Gross Domestic Product | |
Ginnie Mae (GNMA) |
The Government National Mortgage Association | |
GLBA |
Gramm-Leach-Bliley Act of 1999 | |
HELOC |
Home Equity Line of Credit | |
HTM |
Held To Maturity | |
ICAR |
Internal Capital Adequacy Requirement | |
IFRS |
International Financial Reporting Standards | |
ILP |
Incurred Loss Period | |
IST |
Integrated Stress Testing | |
IT |
Information Technology | |
LIBOR |
London Interbank Offered Rate | |
LOB |
Line of Business | |
LTV |
Loan-to-Value | |
MBS |
Mortgage-Backed Security | |
MD&A |
Managements Discussion and Analysis of Financial Condition and Results of Operation | |
MERS |
Mortgage Electronic Registration Systems, Inc. | |
MSR |
Mortgage Servicing Right | |
NPR |
Notice of Proposed Rulemaking | |
OCC |
Office of the Comptroller of the Currency | |
OCI |
Other Comprehensive Income | |
OIS |
Overnight Index Swap | |
OTC |
Over the Counter | |
PIMCO |
Pacific Investment Management Company, LLC | |
RBS |
The Royal Bank of Scotland plc. | |
RBS CBFM |
The Royal Bank of Scotland plc. Corporate Banking and Financial Markets | |
RBSG or RBS Group |
The Royal Bank of Scotland Group plc. | |
REIT |
Real Estate Investment Trust | |
ROTCE |
Return on Average Tangible Common Equity | |
RPA |
Risk Participation Agreement | |
RV |
Recreational Vehicle | |
SBO |
Serviced by Others | |
SIFI |
Systemically Important Financial Institutions | |
TDR |
Troubled Debt Restructuring | |
UK |
United Kingdom |
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
To the Board of Directors and Stockholders of
Citizens Financial Group, Inc.
Providence, Rhode Island
We have audited the accompanying consolidated balance sheets of Citizens Financial Group, Inc. and its subsidiaries (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of operations, other comprehensive income (loss), changes in stockholders equity, and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Citizens Financial Group, Inc. and its subsidiaries as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 12, 2014 (except for notes 24, 26, and 27, as to which the date is May 12, 2014, and except for notes 25 and 29, as to which the date is September 8, 2014)
F-4
CITIZENS FINANCIAL GROUP, INC.
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
F-5
CITIZENS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in millions, except share data) | ||||||||||||
INTEREST INCOME: |
||||||||||||
Interest and fees on loans and leases (related party balance of $56 in 2013) |
$ | 3,001 | $ | 3,205 | $ | 3,434 | ||||||
Interest and fees on loans held for sale |
12 | 17 | 13 | |||||||||
Investment securities (related party balance of $(1) in 2011) |
477 | 620 | 750 | |||||||||
Interest-bearing deposits in banks (related party balance of $1 in 2011) |
11 | 4 | 7 | |||||||||
|
|
|
|
|
|
|||||||
Total interest income |
3,501 | 3,846 | 4,204 | |||||||||
|
|
|
|
|
|
|||||||
INTEREST EXPENSE: |
||||||||||||
Deposits (related party balances of $15, $104 and $182, respectively) |
216 | 375 | 490 | |||||||||
Federal funds purchased and securities sold under agreement to repurchase (related party balances of $184, $117 and $187, respectively) |
192 | 119 | 191 | |||||||||
Other short-term borrowed funds (related party balances of $3, $90 and $88, respectively) |
4 | 101 | 150 | |||||||||
Long-term borrowed funds (related party balances of $16, $9 and $67, respectively) |
31 | 24 | 53 | |||||||||
|
|
|
|
|
|
|||||||
Total interest expense |
443 | 619 | 884 | |||||||||
|
|
|
|
|
|
|||||||
Net interest income |
3,058 | 3,227 | 3,320 | |||||||||
Provision for credit losses |
479 | 413 | 882 | |||||||||
|
|
|
|
|
|
|||||||
Net interest income after provision for credit losses |
2,579 | 2,814 | 2,438 | |||||||||
|
|
|
|
|
|
|||||||
NONINTEREST INCOME: |
||||||||||||
Service charges and fees (related party balances of $15, $23 and $22, respectively) |
640 | 704 | 742 | |||||||||
Card fees |
234 | 249 | 344 | |||||||||
Mortgage banking fees |
153 | 189 | 62 | |||||||||
Trust and investment services fees |
149 | 131 | 131 | |||||||||
Securities gains, net |
144 | 95 | 162 | |||||||||
Foreign exchange and trade finance fees (related party balances of $(15), $(9) and $1, respectively) |
97 | 105 | 114 | |||||||||
Capital markets fees (related party balances of $14, $7 and $6, respectively) |
53 | 52 | 40 | |||||||||
Bank-owned life insurance income |
50 | 51 | 49 | |||||||||
Other-than-temporary impairment: |
||||||||||||
Total other-than-temporary impairment losses |
(49 | ) | (84 | ) | (189 | ) | ||||||
Portions of loss recognized in other comprehensive income (before taxes) |
41 | 60 | 170 | |||||||||
|
|
|
|
|
|
|||||||
Net impairment losses recognized in earnings |
(8 | ) | (24 | ) | (19 | ) | ||||||
Other income (related party balances of $(32), $(285) and $(690), respectively) |
120 | 115 | 86 | |||||||||
|
|
|
|
|
|
|||||||
Total noninterest income |
1,632 | 1,667 | 1,711 | |||||||||
|
|
|
|
|
|
|||||||
NONINTEREST EXPENSE: |
||||||||||||
Salaries and employee benefits |
1,652 | 1,743 | 1,623 | |||||||||
Outside services |
360 | 339 | 340 | |||||||||
Occupancy (related party balances of $3, $2 and $3, respectively) |
327 | 310 | 372 | |||||||||
Equipment expense |
275 | 279 | 301 | |||||||||
Amortization of software |
102 | 77 | 53 | |||||||||
Goodwill impairment |
4,435 | | | |||||||||
Other operating expense |
528 | 709 | 682 | |||||||||
|
|
|
|
|
|
|||||||
Total noninterest expense |
7,679 | 3,457 | 3,371 | |||||||||
|
|
|
|
|
|
|||||||
(Loss) income before income tax (benefit) expense |
(3,468 | ) | 1,024 | 778 | ||||||||
Income tax (benefit) expense |
(42 | ) | 381 | 272 | ||||||||
|
|
|
|
|
|
|||||||
NET (LOSS) INCOME |
$ | (3,426 | ) | $ | 643 | $ | 506 | |||||
|
|
|
|
|
|
|||||||
Weighted-average number of shares outstanding: |
||||||||||||
Basic |
559,998,324 | 559,998,324 | 559,998,324 | |||||||||
Diluted |
559,998,324 | 559,998,324 | 559,998,324 | |||||||||
|
|
|
|
|
|
|||||||
Per common share information: |
||||||||||||
Basic earnings |
$ | (6.12 | ) | $ | 1.15 | $ | 0.90 | |||||
Diluted earnings |
(6.12 | ) | 1.15 | 0.90 | ||||||||
Dividends declared and paid to parent |
2.12 | 0.27 | | |||||||||
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
F-6
CITIZENS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in millions) | ||||||||||||
Net (loss) income |
$ | (3,426 | ) | $ | 643 | $ | 506 | |||||
Other comprehensive income (loss): |
||||||||||||
Net unrealized derivative instrument gains (losses) arising during the period, net of income taxes of $(100), $(15), and $(64), respectively |
(172 | ) | (26 | ) | (112 | ) | ||||||
Reclassification adjustment for net derivative (gains) losses included in net income, net of income taxes of $66, $123, and $188, respectively |
114 | 212 | 328 | |||||||||
Net unrealized securities (losses) gains arising during the period, net of income taxes of $(165), $80, and $163, respectively |
(285 | ) | 138 | 286 | ||||||||
Other than temporary impairment not recognized in earnings on securities, net of income taxes of $(15), $(22), and $(62), respectively |
(26 | ) | (38 | ) | (108 | ) | ||||||
Reclassification of net securities gains to net income, net of income taxes of $(50), $(26), and $(52), respectively |
(86 | ) | (45 | ) | (90 | ) | ||||||
Defined benefit pension plans: |
||||||||||||
Actuarial gain (loss), net of taxes of $66, $(63), and $(92), respectively |
110 | (107 | ) | (150 | ) | |||||||
Amortization of actuarial loss, net of taxes of $5, $14, and $8, respectively |
9 | 24 | 12 | |||||||||
Settlement/curtailment, net of taxes of $0, $34, and $0, respectively |
| 58 | (3 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total other comprehensive (loss) income, net of income taxes |
(336 | ) | 216 | 163 | ||||||||
|
|
|
|
|
|
|||||||
Total comprehensive (loss) income |
$ | (3,762 | ) | $ | 859 | $ | 669 | |||||
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
F-7
CITIZENS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
Preferred
Stock |
Common
Stock |
Additional
Paid-in Capital |
Retained
Earnings |
Accumulated
Other Comprehensive Income (Loss) |
Total | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Balance at January 1, 2011 |
$ | | $ | 6 | $ | 18,532 | $ | 4,847 | $ | (691 | ) | $ | 22,694 | |||||||||||
Capital contribution |
| | 30 | | | 30 | ||||||||||||||||||
Total comprehensive income: |
||||||||||||||||||||||||
Net income |
| | | 506 | | 506 | ||||||||||||||||||
Other comprehensive income |
| | | | 163 | 163 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total comprehensive income |
669 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at December 31, 2011 |
| 6 | 18,562 | 5,353 | (528 | ) | 23,393 | |||||||||||||||||
Dividend to parent |
| | | (150 | ) | | (150 | ) | ||||||||||||||||
Capital contribution |
| | 27 | | | 27 | ||||||||||||||||||
Total comprehensive income: |
||||||||||||||||||||||||
Net income |
| | | 643 | | 643 | ||||||||||||||||||
Other comprehensive income |
| | | | 216 | 216 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total comprehensive income |
859 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at December 31, 2012 |
| 6 | 18,589 | 5,846 | (312 | ) | 24,129 | |||||||||||||||||
Dividends to parent |
| | | (185 | ) | | (185 | ) | ||||||||||||||||
Dividends to parentexchange transactions |
| | | (1,000 | ) | | (1,000 | ) | ||||||||||||||||
Capital contribution |
| | 14 | | | 14 | ||||||||||||||||||
Total comprehensive loss: |
||||||||||||||||||||||||
Net loss |
| | | (3,426 | ) | | (3,426 | ) | ||||||||||||||||
Other comprehensive loss |
| | | | (336 | ) | (336 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total comprehensive loss |
(3,762 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at December 31, 2013 |
$ | | $ | 6 | $ | 18,603 | $ | 1,235 | $ | (648 | ) | $ | 19,196 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
F-8
CITIZENS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in millions) | ||||||||||||
OPERATING ACTIVITIES |
||||||||||||
Net (loss) income |
$ | (3,426 | ) | $ | 643 | $ | 506 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Provision for credit losses |
479 | 413 | 882 | |||||||||
Originations of mortgage loans held for sale |
(3,781 | ) | (5,496 | ) | (3,823 | ) | ||||||
Proceeds from sales of mortgage loans held for sale |
4,229 | 5,436 | 3,975 | |||||||||
Amortization of terminated cash flow hedges (related party balances of $69, $74 and $84, respectively) |
73 | 97 | 139 | |||||||||
Depreciation, amortization and accretion |
404 | 467 | 434 | |||||||||
(Recovery) impairment of mortgage servicing rights |
(47 | ) | 12 | 42 | ||||||||
Securities impairment |
8 | 24 | 19 | |||||||||
Goodwill impairment |
4,435 | | | |||||||||
Gain on other investment securities |
| (3 | ) | (9 | ) | |||||||
Deferred income taxes |
(53 | ) | 306 | 252 | ||||||||
Loss on disposal / impairment of premises and equipment |
16 | 11 | 8 | |||||||||
(Gain) loss on sales of: |
||||||||||||
Securities available for sale |
(144 | ) | (93 | ) | (162 | ) | ||||||
Other investment securities |
| (63 | ) | | ||||||||
Subsidiary |
| | (7 | ) | ||||||||
Premises and equipment |
| | (2 | ) | ||||||||
Other assets |
| 24 | | |||||||||
Decrease (increase) in other assets (related party balances of $(35), $(24) and $1, respectively) |
827 | 76 | (164 | ) | ||||||||
(Decrease) increase in other liabilities (related party balances of $(452), $(323) and $70, respectively) |
(371 | ) | (140 | ) | 389 | |||||||
|
|
|
|
|
|
|||||||
Net cash provided by operating activities |
2,649 | 1,714 | 2,479 | |||||||||
|
|
|
|
|
|
|||||||
INVESTING ACTIVITIES |
||||||||||||
Investment securities: |
||||||||||||
Purchases of securities available for sale |
(10,999 | ) | (5,532 | ) | (13,749 | ) | ||||||
Proceeds from maturities and paydowns of securities available for sale |
4,708 | 6,667 | 6,639 | |||||||||
Proceeds from sales of securities available for sale |
3,645 | 2,724 | 5,077 | |||||||||
Purchases of other investment securities |
(1 | ) | (1 | ) | (33 | ) | ||||||
Proceeds from sales of other investment securities |
127 | 204 | 93 | |||||||||
Purchases of securities held to maturity |
(224 | ) | | | ||||||||
Proceeds from maturities and paydowns of securities held to maturity |
22 | | | |||||||||
Net decrease (increase) in interest-bearing deposits in banks |
993 | (995 | ) | (68 | ) | |||||||
Net decrease in cash collateral |
| | 1,485 | |||||||||
Net increase in loans and leases |
(341 | ) | (1,432 | ) | (1,072 | ) | ||||||
Net increase in bank-owned life insurance |
(40 | ) | (42 | ) | (43 | ) | ||||||
Net cash payments for divestiture activities |
| (309 | ) | | ||||||||
Premises and equipment: |
||||||||||||
Purchases |
(160 | ) | (178 | ) | (106 | ) | ||||||
Proceeds from sales |
25 | 6 | 5 | |||||||||
Purchases of software |
(208 | ) | (193 | ) | (262 | ) | ||||||
|
|
|
|
|
|
|||||||
Net cash (used in) provided by investing activities |
(2,453 | ) | 919 | (2,034 | ) | |||||||
|
|
|
|
|
|
|||||||
FINANCING ACTIVITIES |
||||||||||||
Net (decrease) increase in deposits |
(2,968 | ) | 2,584 | 733 | ||||||||
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase |
1,190 | (551 | ) | (960 | ) | |||||||
Net increase (decrease) in other short-term borrowed funds |
1,750 | (2,599 | ) | 1,662 | ||||||||
Proceeds from long-term borrowed funds (related party balance of $1,000 in 2013) |
1,002 | 337 | 9 | |||||||||
Repayments of long-term borrowed funds (related party balances of $280, $216 and $0, respectively) |
(291 | ) | (2,885 | ) | (3,113 | ) | ||||||
Dividends declared and paid to parent |
(1,185 | ) | (150 | ) | | |||||||
|
|
|
|
|
|
|||||||
Net cash used in financing activities |
(502 | ) | (3,264 | ) | (1,669 | ) | ||||||
|
|
|
|
|
|
|||||||
Decrease in cash and cash equivalents |
(306 | ) | (631 | ) | (1,224 | ) | ||||||
Cash and cash equivalents at beginning of year |
3,063 | 3,694 | 4,918 | |||||||||
|
|
|
|
|
|
|||||||
Cash and cash equivalents at end of year |
$ | 2,757 | $ | 3,063 | $ | 3,694 | ||||||
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
F-9
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Citizens Financial Group, Inc. (formerly RBS Citizens Financial Group, Inc., effective April 16, 2014) conform to GAAP. The Company is a wholly-owned subsidiary of The Royal Bank of Scotland plc, a banking subsidiary of the ultimate parent, The Royal Bank of Scotland Group plc. On December 1, 2008, the UK Government became the ultimate controlling party of RBSG. The UK Governments shareholding is managed by UK Financial Investments Limited, a company wholly owned by the UK Government. The Companys principal business activity is banking, conducted through its subsidiaries Citizens Bank, N.A. (formerly RBS Citizens, N.A., effective April 16, 2014) and Citizens Bank of Pennsylvania.
Following is a summary of the significant accounting policies of the Company:
Basis of Presentation
The Consolidated Financial Statements include the accounts of the Company. All intercompany transactions and balances have been eliminated. The Company has evaluated its unconsolidated entities and does not believe that any entity in which it has an interest, but does not currently consolidate, meets the requirements for a variable interest entity to be consolidated.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the provision for credit losses, evaluation and measurement of impairment of goodwill, evaluation of unrealized losses on securities for other-than-temporary impairment, accounting for income taxes, the valuation of AFS and HTM securities, and derivatives.
Cash and Cash Equivalents
For the purposes of reporting cash flows, cash and cash equivalents have original maturities of three months or less and include cash and due from banks and interest-bearing cash and due from banks, primarily at the FRB.
Interest-Bearing Deposits in Banks
Interest-bearing deposits in banks are carried at cost and include deposits that mature within one year.
Securities
Investments in debt and equity securities are carried in four portfolios: AFS, HTM, trading account assets and other investment securities. Management determines the appropriate classification at the time of purchase.
Securities in the AFS portfolio 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 in managing the Companys asset / liability strategy. Gains and losses on the sales of securities are recognized in earnings and are computed using the specific identification method. Security impairments (i.e., declines in the fair value of securities below cost) that are considered by management to be other-
F-10
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
than-temporary are recognized in earnings as realized losses. However, the determination of the impairment amount is dependent on the Companys intent to sell (or not sell) the security. If the Company intends to sell the impaired security, the impairment loss recognized in current period earnings equals the difference between the instruments fair value and amortized cost. 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 credit-related impairment loss is recognized in current period earnings and equals the difference between the amortized cost of the security and the present value of the expected cash flows that have currently been projected.
Securities AFS are carried at fair value, with unrealized gains and losses reported in OCI as a separate component of stockholders equity, net of taxes. Premiums and discounts on debt securities are amortized or accreted using a level-yield method over the estimated lives of the individual securities. The Company uses actual prepayment experience and estimates of future prepayments to determine the constant effective yield necessary to apply the 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 are classified as HTM because the Company has the ability and intent to hold the securities to maturity. Transfers of debt securities into the HTM category from the AFS category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in OCI and in the carrying value of the HTM securities. Such amounts are amortized over the remaining life of the security. The securities are reported at cost and adjusted for amortization of premium and accretion of discount. Interest income is recorded on the accrual basis adjusted for the amortization of premium and the accretion of discount.
Trading account assets are comprised of debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading account assets, and are carried at fair value. Realized and unrealized gains and losses on such assets are reported in noninterest income in the Consolidated Statements of Operations. Trading account assets are reported in other assets in the Consolidated Balance Sheets.
Other investment securities are comprised mainly of FHLB stock and FRB stock, which are carried at cost; and venture capital investments, which are carried at fair value, with changes in fair value recognized in noninterest income. For securities that are not publicly traded, estimates of fair value are made based upon review of the investees financial results, condition and prospects. Other investment securities, which are carried at cost, are reviewed at least annually for impairment, with valuation adjustments recognized in noninterest income.
Loans and Leases
Loans are reported at the amount of their outstanding principal, net of charge-offs, unearned income, deferred loan origination fees and costs, and unamortized premiums or discounts (on purchased loans). Deferred loan origination fees and costs and purchase discounts and premiums are amortized as an adjustment of yield over the life of the loan, using the level-yield interest method. Unamortized amounts remaining upon prepayment or sale are recorded as interest income or gain (loss) on sale, respectively. Credit card receivables include billed and uncollected interest and fees.
F-11
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Leases are classified at the inception of the lease. Lease receivables, including leveraged leases, are reported at the aggregate of lease payments receivable and estimated residual values, net of unearned and deferred income, including unamortized investment credits. Lease residual values are reviewed at least annually for other-than-temporary impairment, with valuation adjustments recognized currently against noninterest income. Leveraged leases are reported net of non-recourse debt. Unearned income is recognized to yield a level rate of return on the net investment in the leases.
Loans and leases are disclosed in portfolio segments and classes. The Companys loan and lease portfolio segments are commercial and retail. The classes of loans and leases are: commercial, commercial real estate, leases, residential (includes residential mortgages and home equity loans and lines of credit), home equity products serviced by others (includes certain purchased home equity loans and lines of credit), other secured retail (includes automobile loans and other installment loans), and unsecured retail (includes student loans and credit card).
Loans held for sale are carried at the lower of cost or fair value. Loans accounted for under the fair value option are carried at fair value.
Allowance for Credit Losses
Managements estimate of probable losses in the Companys loan and lease portfolios is recorded in the ALLL and the reserve for unfunded lending commitments. The Company evaluates the adequacy of the ALLL by performing reviews of certain individual loans and leases, analyzing changes in the composition, size and delinquency of the portfolio, reviewing previous loss experience, and considering current and anticipated economic factors. The ALLL is established in accordance with the Companys credit reserve policies, as approved by the Audit Committee of the Board of Directors. The Chief Financial Officer and Chief Risk Officer review the adequacy of the ALLL each quarter, together with risk management. The ALLL is maintained at a level that management considers to be adequate based on the results of this evaluation, and is established through charges to earnings in the form of a provision for credit losses. Amounts determined to be uncollectible are deducted from the allowance and subsequent recoveries, if any, are added to the allowance. While management uses available information to estimate loan and lease losses, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Companys allowance for credit losses.
For non-impaired commercial and commercial real estate loans, the Company estimates the appropriate level of the ALLL by applying expected loss rates to existing loans with similar risk characteristics. Probable losses for commercial and commercial real estate loans are determined using a model that utilizes the probability of default, loss given default, and exposure at default on an individual loan basis. These factors consider the internal risk rating, loan tenor, and weighted-average life.
For non-impaired retail loans, the ALLL is based upon the appropriate selection of either (a) losses estimated using delinquency roll rate models or (b) an expected loss model utilizing the probability of default, loss given default, and exposure at default on an individual loan basis. When developing these factors, the Company may consider the loan product and collateral type, LTV ratio, lien position, borrowers credit, time outstanding, geographic location, delinquency status, and loss emergence period. Certain retail portfolios, including SBO home equity loans, student loans, and commercial credit card receivables utilize roll rate models exclusively to estimate the ALLL. Selection of the appropriate use of delinquency roll rate or expected loss models by product is determined quarterly.
F-12
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For nonaccruing commercial and commercial real estate loans with an outstanding balance of $3 million or greater and for all commercial and commercial real estate TDRs (regardless of size), the Company conducts further analysis to determine the probable amount of loss and establishes a specific allowance for the loan, if appropriate. The Company estimates the impairment amount by comparing the loans carrying amount to the estimated present value of its future cash flows, the fair value of its underlying collateral, or the loans observable market price. For collateral-dependent impaired commercial and commercial real estate loans, the excess of the Companys recorded investment in the loan over the fair value of the collateral, less cost to sell, is charged off to the ALLL.
For retail TDRs that are not collateral-dependent, allowances are developed using the present value of expected future cash flows, compared to the recorded investment in the loans. Expected re-default factors are considered in this analysis. Retail TDRs that are deemed collateral-dependent are written down to fair market value less cost to sell. The fair value of collateral is periodically monitored subsequent to the modification.
The ALLL may be adjusted to reflect the Companys current assessment of various qualitative risks, factors and events that may not be measured in the statistical analysis. Such factors include trends in economic conditions, loan growth, back testing results, base versus stress losses, credit underwriting policy exceptions, regulatory and audit findings, and peer comparisons.
In addition to the ALLL, the Company also estimates probable credit losses associated with off balance sheet financial instruments such as standby letters of credit, financial guarantees and binding unfunded loan commitments. Off balance sheet financial instruments are subject to individual reviews and are analyzed and segregated by risk according to the Companys internal risk rating scale. These risk classifications, in conjunction with historical loss experience, economic conditions and performance trends within specific portfolio segments, result in the estimate of the reserve for unfunded lending commitments.
The ALLL and the reserve for unfunded lending commitments are reported on the Consolidated Balance Sheets in the ALLL and in other liabilities, respectively. Provision for credit losses related to the loans and leases portfolio and the unfunded lending commitments are reported in the Consolidated Statements of Operations as provision for credit losses.
Commercial loans and leases are charged off to the allowance when there is little prospect of collecting either principal or interest. Charge-offs of commercial loans and leases usually involve receipt of borrower-specific adverse information. For commercial collateral-dependent loans, an appraisal or other valuation is used to quantify a shortfall between the fair value of the collateral less costs to sell and the recorded investment in the commercial loan. Retail loan charge-offs are generally based on established delinquency thresholds rather than borrower-specific adverse information. When a loan is collateral-dependent, any shortfalls between the fair value of the collateral less costs to sell and the recorded investment is promptly charged off. Placing any loan or lease on nonaccrual status does not by itself require a partial or total charge-off; however, any identified losses are charged off at that time.
Nonperforming Loans and Leases
Commercial loans, commercial real estate loans, and leases are generally placed on nonaccrual status when contractually past due 90 days or more, or earlier if management believes that the probability of collection is insufficient to warrant further accrual. Some of these loans and leases may
F-13
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
remain on accrual status when contractually past due 90 days or more if management considers the loan collectible. A loan may be returned to accrual status if (1) principal and interest payments have been brought current, and the Company expects repayment of the remaining contractual principal and interest, (2) the loan or lease has otherwise become well-secured and in the process of collection, or (3) the borrower has been making regularly scheduled payments in full for the prior six months and its reasonably assured that the loan or lease will be brought fully current within a reasonable period. Cash receipts on nonaccruing loans and leases are generally applied to reduce the unpaid principal balance.
Residential mortgages are generally placed on nonaccrual status when past due 120 days, or sooner if determined to be collateral-dependent. Residential mortgages are returned to accrual status when principal and interest payments become less than 120 days past due and when future payments are reasonably assured. Credit card balances (included in the unsecured retail class of loans) are placed on nonaccrual status when past due 90 days or more. Credit card balances are restored to accruing status if they subsequently become less than 90 days past due. Guaranteed student loans (included in the unsecured class of loans) are not placed on nonaccrual status.
All other retail loans are generally placed on nonaccrual status when past due 90 days or more, or earlier if management believes that the probability of collection is insufficient to warrant further accrual. Loans less than 90 days past due may be placed on nonaccrual status upon the death of the borrower, surrender or repossession of collateral, fraud or bankruptcy. Loans are generally returned to accrual status if the loan becomes less than 15 days past due. Cash receipts on nonaccruing loans and leases are generally applied to reduce the unpaid principal balance. Certain TDRs that are current in payment status are classified as nonaccrual in accordance with regulatory guidance. Income on these loans is generally recognized on a cash basis if management believes that the remaining book value of the loan is realizable. Nonaccruing TDRs that meet the guidelines above for accrual status can be returned to accruing if supported by a well documented evaluation of the borrowers financial condition, and if they have been current for at least 6 months.
Impaired Loans
A loan is considered to be impaired when it is probable that the Company will be unable to collect all of the contractual interest and principal payments as scheduled in the loan agreement. Impaired loans include nonaccruing larger balance (greater than $3 million carrying value), non-homogenous commercial and commercial real estate loans, and restructured loans that are deemed TDRs. A loan modification is identified as a TDR when the Company, or bankruptcy court, grants the borrower a concession the Company would not otherwise make in response to the borrowers financial difficulties. Concessions granted in TDRs for all classes of loans may include lowering the interest rate, forgiving a portion of principal, extending the loan term, lowering scheduled payments for a specified period of time, principal forbearance, or capitalizing past due amounts. A rate increase can be a concession if the increased rate is lower than a market rate for debt with risk similar to that of the restructured loan. Additionally, TDRs for commercial loans may also involve creating a multiple note structure, accepting non-cash assets, accepting an equity interest, or receiving a performance-based fee. In some cases a TDR may involve multiple concessions. The financial effects of TDRs for all loan classes may include lower income (either due to a lower interest rate or a delay in the timing of cash flows), larger loan loss provisions, and accelerated charge-offs if the modification renders the loan collateral-dependent. In some cases interest income throughout the term of the loan may increase if, for example, the loan is extended or the interest rate is increased as a result of the restructuring. Loans are classified as TDRs until paid off, sold, or refinanced at market terms.
F-14
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impairment evaluations are performed at the individual loan level, and consider expected future cash flows from the loan, including, if appropriate, the realizable value of collateral. Impaired loans which are not TDRs are nonaccruing, and loans involved in TDRs may be accruing or nonaccruing. Retail loans that were discharged in bankruptcy and not reaffirmed by the customer are deemed to be collateral-dependent TDRs and are charged off to the fair value of the collateral, less cost to sell, and less amounts recoverable under a government guarantee (if any). Cash receipts on nonaccruing impaired loans, including nonaccruing loans involved in TDRs, are generally applied to reduce the unpaid principal balance. Certain TDRs that are current in payment status are classified as nonaccrual in accordance with regulatory guidance. Income on the loans is generally recognized on a cash basis if management believes that the remaining book value of the loan is realizable.
Loans are generally restored to accrual status when principal and interest payments are brought current and when future payments are reasonably assured, following a sustained period of repayment performance by the borrower in accordance with the loans contractual terms.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization have been computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the life of the lease (including renewal options if exercise of those options is reasonably assured) or their estimated useful life, whichever is shorter.
Additions to property, plant and equipment are recorded at cost. The cost of major additions, improvements and betterments is capitalized. Normal repairs and maintenance and other costs that do not improve the property, extend the useful life or otherwise do not meet capitalization criteria are charged to expense as incurred. The Company evaluates premises and equipment for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.
Software
Costs related to computer software, developed or obtained for internal use, are capitalized if the projects improve functionality and provide long-term future operational benefits. Capitalized costs are amortized using the straight-line method over the assets expected useful life and is based upon the basic pattern of consumption and economic benefits provided by the asset. The Company begins to amortize the software when the asset (or identifiable component of the asset) is substantially complete and ready for its intended use. All other costs incurred in connection with an internal-use software project are expensed as incurred. Capitalized software is included in other assets on the Consolidated Balance Sheets.
Fair Value
The Company measures fair value using the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is based upon quoted market prices in an active market, where available. If quoted prices are not available, observable market-based inputs or independently sourced parameters are used to develop fair value, whenever possible. Such inputs may include prices of similar assets or liabilities, yield curves, interest rates, prepayment speeds, and foreign exchange rates.
F-15
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A portion of the Companys assets and liabilities is carried at fair value, including AFS securities, private equity investments, and derivative instruments. In addition, the Company elects to account for its residential mortgages held for sale at fair value. The Company classifies its assets and liabilities that are carried at fair value in accordance with the three-level valuation hierarchy:
| Level 1. Quoted prices (unadjusted) in active markets for identical assets or liabilities. |
| Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar instruments; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by market data for substantially the full term of the asset or liability. |
| Level 3. Unobservable inputs that are supported by little or no market information and that are significant to the fair value measurement. |
Classification in the hierarchy is based upon the lowest level input that is significant to the fair value measurement of the asset or liability. For instruments classified in Level 1 and 2 where inputs are primarily based upon observable market data, there is less judgment applied in arriving at the fair value. For instruments classified in Level 3, management judgment is more significant due to the lack of observable market data.
The Company reviews and updates the fair value hierarchy classifications on a quarterly basis. Changes from one quarter to the next related to the observability of inputs in fair value measurements may result in a reclassification between the fair value hierarchy levels and are recognized based on period-end balances.
Fair value is also used on a nonrecurring basis to evaluate certain assets for impairment or for disclosure purposes. Examples of nonrecurring uses of fair value include MSRs accounted for by the amortization method, loan impairments for certain loans, and goodwill.
Goodwill
Goodwill is the purchase premium associated with the acquisition of a business. It is assigned to reporting units at the date the goodwill is initially recorded. A reporting unit is a business operating segment or a component of a business operating segment. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or organically grown, are available to support the value of the goodwill.
Goodwill is not amortized, but is subject to annual impairment tests. The goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing each reporting units fair value to its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, applicable goodwill is deemed to be not impaired. If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to measure the amount of impairment.
The second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit, as determined in the first step, over the aggregate fair values of the individual assets, liabilities and identifiable intangible assets as if the reporting unit were being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill
F-16
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss that is recognized cannot exceed the amount of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted.
In September 2013, the Company changed its annual goodwill impairment test date from September 30 to October 31. The Company reviews goodwill for impairment annually as of October 31, or more often if events or circumstances indicate that it is more likely than not that the fair value of one or more reporting units is below its carrying value. The fair values of the Companys reporting units are determined using a combination of income and market-based approaches. The Company relies on the income approach (discounted cash flow method) for determining fair value. Market and transaction approaches are used as benchmarks only to corroborate the value determined by the discounted cash flow method. The Company relies on several assumptions when estimating the fair value of its reporting units using the discounted cash flow method. These assumptions include the current discount rate, as well as projected loan loss, income tax and capital retention rates.
Discount rates are estimated based on the Capital Asset Pricing Model, which considers the risk-free interest rate, market risk premium, beta, and unsystematic risk and size premium adjustments specific to a particular reporting unit. The discount rates are also calibrated on the assessment of the risks related to the projected cash flows of each reporting unit. Cash flow projections include estimates for projected loan loss, income tax and capital retention rates. Multi-year financial forecasts are developed for each reporting unit by considering several key business drivers such as new business initiatives, customer retention standards, market share changes, anticipated loan and deposit growth, forward interest rates, historical performance, and industry and economic trends, among other considerations. The long-term growth rate used in determining the terminal value of each reporting unit was estimated based on managements assessment of the minimum expected terminal growth rate of each reporting unit, as well as broader economic considerations such as GDP and inflation.
The Company based its fair value estimates on assumptions it believes to be representative of assumptions that a market participant would use in valuing the reporting unit but that are unpredictable and inherently uncertain, including estimates of future growth rates and operating margins and assumptions about the overall economic climate and the competitive environment for its reporting units. There can be no assurances that future estimates and assumptions made for purposes of goodwill testing will prove accurate predictions of the future. If the assumptions regarding business plans, competitive environments or anticipated growth rates are not achieved, the Company may be required to record goodwill impairment charges in future periods.
Bank-Owned Life Insurance
Bank-owned life insurance is stated at its cash surrender value. The Company is the beneficiary of life insurance policies on current and former officers and selected employees of the Company.
Employee Benefits
Pension costs under defined benefit plans are actuarially computed and include current service costs and amortization of prior service costs over the participants average future working lifetime. The actuarial cost method used in determining the net periodic pension cost is the projected unit credit
F-17
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
method. The cost of postretirement and postemployment benefits other than pensions is recognized on an accrual basis during the periods employees provide services to earn those benefits.
Derivatives
The Company is party to a variety of derivative transactions, including interest rate swap contracts, interest rate options, foreign exchange contracts, residential loan commitment rate locks, forward sale contracts, warrants and purchase options. The Company enters into contracts in order to meet the financing needs of its customers. The Company also enters into contracts as a means of reducing its interest rate and foreign currency risks, and these contracts are designated as hedges when acquired, based on managements intent. The Company monitors the results of each transaction to ensure that managements intent is satisfied.
All derivatives, whether designated for hedging relationships or not, are recognized in the Consolidated Balance Sheets at fair value. If a derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in AOCI, a component of stockholders equity. The ineffective portions of cash flow hedges are immediately recognized as an adjustment to income or expense. For cash flow hedging relationships that have been discontinued, balances in OCI are reclassified to interest expense in the periods during which the hedged item affects income. If it is probable that the hedged forecasted transaction will not occur, balances in OCI are reclassified immediately to income. Changes in the fair value of derivatives that do not qualify as hedges are recognized immediately in earnings.
Derivative assets and derivative liabilities governed by master netting agreements are netted by the counterparty on the balance sheet, and this netted derivative asset or liability position is also netted against the fair value of any cash collateral that has been pledged or received in accordance with a CSA.
Transfers and Servicing of Financial Assets
A transfer of financial assets is accounted for as a sale when control over the assets transferred is surrendered. Assets transferred that satisfy the conditions of a sale are derecognized, and all assets obtained and liabilities incurred in a purchase are recognized and measured at fair value. Servicing rights retained in the transfer of financial assets are initially recognized at fair value. Subsequent to the initial recognition date, the Company recognizes periodic amortization expense of servicing rights and assesses servicing rights for impairment.
Mortgage Banking
Mortgage loans held for sale are accounted for at fair value on an individual loan basis. Changes in the fair value, and realized gains and losses on the sales of mortgage loans, are reported in mortgage banking income.
The fair value of MSRs is determined based on expected future cash flows discounted at an interest rate commensurate with the servicing risks involved. MSRs are presented in the Consolidated Balance Sheets net of accumulated amortization, which is recorded in proportion to, and over the period of, net servicing income. The Companys identification of MSRs in a single class was determined based on the availability of market inputs and the Companys method of managing MSR risks. For the purpose of evaluating impairment, MSRs are stratified based on predominant risk
F-18
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
characteristics (such as interest rate, loan size, origination date, term, or geographic location) of the underlying loans. An allowance is then established in the event the recorded value of an individual stratum exceeds fair value.
The Company determines the fair value of MSRs using a model that calculates the present value of estimated net future servicing income. The model utilizes assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, default rates, cost to service, discount rate, escrow earnings, contractual servicing fee income, and ancillary income. The discount rate is the required rate of return investors in the market would expect for an asset of similar risk.
The Company accounts for derivatives in its mortgage banking operations at fair value on the balance sheet as derivative assets or derivative liabilities, depending on whether the derivative had a positive (asset) or negative (liability) fair value as of the balance sheet date. The Companys mortgage banking derivatives include commitments to originate mortgages held for sale, certain loan sale agreements, and other financial instruments that meet the definition of a derivative.
Income Taxes
The Company uses an asset and liability (balance sheet) approach for financial accounting and reporting of income taxes. This results in two components of income tax expense: current and deferred. Current income tax expense approximates taxes to be paid or refunded for the current period. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. These gross deferred tax assets and liabilities represent decreases or increases in taxes expected to be paid in the future because of future reversals of temporary differences in the bases of assets and liabilities, as measured by tax laws, and their bases, as reported in the Consolidated Financial Statements.
Deferred tax assets are recognized for net operating loss carryforwards and tax credit carryforwards. Valuation allowances are recorded as necessary to reduce deferred tax assets to the amounts that management concludes are more likely than not to be realized.
The Company also assesses the probability that the positions taken, or expected to be taken, in its income tax returns will be sustained by taxing authorities. A more likely than not (more than 50 percent) recognition threshold must be met before a tax benefit can be recognized. Tax positions that are more likely than not to be sustained are reflected in the Companys Consolidated Financial Statements.
Tax positions are measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The difference between the benefit recognized for a position and the tax benefit claimed on a tax return is referred to as an unrecognized tax benefit.
Revenue Recognition
Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured.
F-19
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest income on loans and securities classified as AFS or HTM is determined using the effective interest method. This method calculates periodic interest income at a constant effective yield on the net investment in the loan or security, to provide a constant rate of return over the terms of the financial assets. Securities classified as trading account assets, and other financial assets accounted for using the fair value option, are measured at fair value with corresponding changes recognized in noninterest income.
Loan commitment fees for loans that are likely to be drawn down, and other credit related fees, are deferred (together with any incremental costs) and recognized as an adjustment to the effective interest rate on the loan. When it is unlikely that a loan will be drawn down, the loan commitment fees are recognized over the commitment period on a straight-line basis.
Other types of noninterest revenues, such as service charges on deposits, interchange income on credit cards and trust revenues, are accrued and recognized into income as services are provided and the amount of fees earned are reasonably determinable.
Earnings Per Share
Basic EPS is computed by dividing net income / (loss) available to common shareholders by the weighted-average number of common shares outstanding during each period. Net income / (loss) available to common shareholders represents net income after preferred stock dividends, accretion of the discount on preferred stock issuances, gains or losses from any repurchases of preferred stock, and dividends. Diluted EPS is computed by dividing net income / (loss) available to common shareholders by the weighted-average number of common shares outstanding during each period, plus potential dilutive shares such as call options, share-based payment awards, and warrants using the treasury method.
New Accounting Pronouncements
In January 2014, the FASB issued Accounting Standards Update No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. This amendment clarifies that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amendment require disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. This amendment is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014, and is expected to have an immaterial impact on the Companys Consolidated Financial Statements.
Also in January 2014, the FASB issued Accounting Standards Update No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects. This amendment permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to
F-20
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). Qualified affordable housing project investments that are not accounted for using the proportional amortization method must be accounted for as an equity method or cost method investment. This amendment is effective for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014, and is expected to have an immaterial impact on the Companys Consolidated Financial Statements.
Reclassifications of Prior Year Amounts
Certain reclassifications were made to the prior year Financial Statements to conform to the 2013 presentation. Significant reclassifications are as follows:
| The Company reclassified student loans from the secured retail loan class to the other unsecured retail loan class. |
| The Company reclassified the 2012 $75 million gain related to the sale of its Visa Inc. Class B shares from Net Gains on Securities Available for Sale to Other Net Gains on the Consolidated Statements of Operations. |
| The Company reclassified software amortization from equipment expense to amortization of software on the Consolidated Statements of Operations. The software balance from 2012 was reclassified from Premises and Equipment to Other Assets in the Consolidated Balance Sheets. |
NOTE 2CASH AND DUE FROM BANKS
The Companys subsidiary banks maintain certain average reserve balances and compensating balances for check clearing and other services with the FRB. At December 31, 2013 and 2012, the balance of deposits at the FRB amounted to $1.4 billion. Average balances maintained with the FRB during the years ended December 31, 2013, 2012, and 2011 exceeded amounts required by law for the FRBs requirements. All amounts, both required and excess reserves, held at the FRB currently earn interest at a fixed rate of 25 basis points. As a result, the Company recorded, in interest-bearing deposits in banks, interest income on FRB deposits of $5 million, $3 million, and $5 million in 2013, 2012, and 2011, respectively.
F-21
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3SECURITIES
The following table provides the major components of securities at amortized cost and fair value:
December 31, 2013 | December 31, 2012 | |||||||||||||||||||||||||||||||
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Fair
Value |
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Fair
Value |
|||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Securities Available for Sale |
||||||||||||||||||||||||||||||||
U.S. Treasury |
$ | 15 | $ | | $ | | $ | 15 | $ | 15 | $ | | $ | | $ | 15 | ||||||||||||||||
State and political subdivisions |
11 | | (1 | ) | 10 | 20 | 1 | | 21 | |||||||||||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||||||||||||||
Federal agencies and U.S. government sponsored entities |
14,970 | 151 | (128 | ) | 14,993 | 16,368 | 537 | (1 | ) | 16,904 | ||||||||||||||||||||||
Other / non-agency |
992 | 5 | (45 | ) | 952 | 1,452 | 13 | (68 | ) | 1,397 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total mortgage-backed securities |
15,962 | 156 | (173 | ) | 15,945 | 17,820 | 550 | (69 | ) | 18,301 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total debt securities |
15,988 | 156 | (174 | ) | 15,970 | 17,855 | 551 | (69 | ) | 18,337 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Marketable equity securities |
10 | 3 | | 13 | 5 | 2 | | 7 | ||||||||||||||||||||||||
Other equity securities |
12 | | | 12 | 12 | | | 12 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total equity securities |
22 | 3 | | 25 | 17 | 2 | | 19 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total securities available for sale |
$ | 16,010 | $ | 159 | $ | (174 | ) | $ | 15,995 | $ | 17,872 | $ | 553 | $ | (69 | ) | $ | 18,356 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Securities Held to Maturity |
||||||||||||||||||||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||||||||||||||
Federal agencies and U.S. government sponsored entities |
$ | 2,940 | $ | | $ | (33 | ) | $ | 2,907 | $ | | $ | | $ | | $ | | |||||||||||||||
Other / non-agency |
1,375 | | (25 | ) | 1,350 | | | | | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total securities held to maturity |
$ | 4,315 | $ | | $ | (58 | ) | $ | 4,257 | $ | | $ | | $ | | $ | | |||||||||||||||
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|
|
|
|
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|
|
|
|
|
|
|
|||||||||||||||||
Other Investment Securities |
||||||||||||||||||||||||||||||||
Federal Reserve Bank stock |
$ | 462 | $ | | $ | | $ | 462 | $ | 490 | $ | | $ | | $ | 490 | ||||||||||||||||
Federal Home Loan Bank stock |
468 | | | 468 | 565 | | | 565 | ||||||||||||||||||||||||
Venture capital and other investments |
5 | | | 5 | 6 | | | 6 | ||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total other investment securities |
$ | 935 | $ | | $ | | $ | 935 | $ | 1,061 | $ | | $ | | $ | 1,061 | ||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2013, to reduce the growing potential negative impact of AFS securities market volatility on tangible common equity, the Company transferred a total of $4.2 billion, consisting of federal agency and other non-agency MBS from the AFS securities portfolio to establish the HTM securities portfolio. At the time of transfer, $134 million of unrealized net losses were recognized in OCI. The amounts in OCI will be recognized in interest income over the remaining life of the securities as an offset to the adjustment of yield in a manner consistent with the amortization of premium and the accretion of discount, resulting in no impact on net income.
F-22
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has reviewed its securities portfolio for other-than-temporary impairments. 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:
December 31, 2013 | ||||||||||||||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||||||||||||||
Number of
Issues |
Fair
Value |
Gross
Unrealized Losses |
Number of
Issues |
Fair
Value |
Gross
Unrealized Losses |
Number of
Issues |
Fair
Value |
Gross
Unrealized Losses |
||||||||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||||||||||
State and political subdivisions |
1 | $ | 10 | $ | (1 | ) | | $ | | $ | | 1 | $ | 10 | $ | (1 | ) | |||||||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||||||||||||||||||
Federal agencies and U.S. government sponsored entities |
263 | 12,067 | (158 | ) | 7 | 20 | (2 | ) | 270 | 12,087 | (160 | ) | ||||||||||||||||||||||||
Other / non-agency |
22 | 1,452 | (34 | ) | 19 | 490 | (37 | ) | 41 | 1,942 | (71 | ) | ||||||||||||||||||||||||
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|
|
|
|
|
|
|||||||||||||||||||
Total mortgage-backed securities |
285 | 13,519 | (192 | ) | 26 | 510 | (39 | ) | 311 | 14,029 | (231 | ) | ||||||||||||||||||||||||
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|
|
|||||||||||||||||||
Total |
286 | $ | 13,529 | $ | (193 | ) | 26 | $ | 510 | $ | (39 | ) | 312 | $ | 14,039 | $ | (232 | ) | ||||||||||||||||||
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|
December 31, 2012 | ||||||||||||||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||||||||||||||
Number of
Issues |
Fair
Value |
Gross
Unrealized Losses |
Number of
Issues |
Fair
Value |
Gross
Unrealized Losses |
Number of
Issues |
Fair
Value |
Gross
Unrealized Losses |
||||||||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||||||||||||||||||
Federal agencies and U.S. government sponsored entities |
29 | $ | 139 | $ | (1 | ) | 1 | $ | 3 | $ | | 30 | $ | 142 | $ | (1 | ) | |||||||||||||||||||
Other / non-agency |
2 | 53 | (1 | ) | 29 | 854 | (67 | ) | 31 | 907 | (68 | ) | ||||||||||||||||||||||||
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|
|
|
|||||||||||||||||||
Total |
31 | $ | 192 | $ | (2 | ) | 30 | $ | 857 | $ | (67 | ) | 61 | $ | 1,049 | $ | (69 | ) | ||||||||||||||||||
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|
|
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 securitys 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 Companys intent to sell (or not sell) the security.
If the Company intends to sell the impaired security, the impairment loss recognized in current period earnings equals the difference between the instruments fair value and its amortized cost. 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 credit-related impairment loss is recognized in current period earnings and equals the difference between the amortized cost of the 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 security are reviewed when determining whether a credit loss exists and the period over which the debt security is
F-23
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 as of:
December 31,
2013 |
December 31,
2012 |
December 31,
2011 |
||||||||||
(in millions) | ||||||||||||
Cumulative balance through January 1 |
$ | 55 | $ | 38 | $ | 24 | ||||||
Credit impairments recognized in earnings on securities not previously impaired |
| 1 | 1 | |||||||||
Credit impairments recognized in earnings on securities that have been previously impaired |
8 | 23 | 18 | |||||||||
Reductions due to increases in cash flow expectations on impaired securities |
(7 | ) | (7 | ) | (5 | ) | ||||||
|
|
|
|
|
|
|||||||
Cumulative balance through December 31 |
$ | 56 | $ | 55 | $ | 38 | ||||||
|
|
|
|
|
|
Cumulative credit losses recognized in earnings for impaired AFS debt securities held as of December 31, 2013, 2012, and 2011 were $56 million, $55 million, and $38 million, respectively. There were no credit losses recognized in earnings for the Companys HTM portfolio as of December 31, 2013 and 2012. The Company recognized $8 million, $24 million, and $19 million of credit related other-than-temporary impairment losses in earnings for the years ended December 31, 2013, 2012, and 2011, respectively, related to non-agency MBS in the AFS portfolio. No impaired debt securities were sold during 2013, 2012, or 2011. Reductions in credit losses due to increases in cash flow expectations were $7 million for the years ended December 31, 2013 and 2012, and $5 million for the year ended December 31, 2011, and are presented in investment securities interest income on the Consolidated Statements of Operations. The Company does not currently have the intent to sell these securities, and it is not likely that the Company will be required to sell these securities prior to the recovery of their amortized cost bases. As of December 31, 2013, 2012, and 2011, $41 million, $60 million, and $170 million, respectively, of pretax non-credit related losses were deferred in OCI.
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 investment 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 securities are not other-than-temporarily impaired because the Company does not currently have the intent to sell these securities, and it is not likely that the Company will be required to sell these securities prior to the recovery of their amortized cost bases. Additionally, any subsequent increases in the valuation of impaired securities do not impact their recorded cost bases.
F-24
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair value of debt securities at December 31, 2013 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Distribution of Maturities | ||||||||||||||||||||
1 Year
or Less |
1-5
Years |
5-10
Years |
After 10
Years |
Total | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Amortized Cost: |
||||||||||||||||||||
Debt securities available for sale |
||||||||||||||||||||
U.S. Treasury |
$ | 15 | $ | | $ | | $ | | $ | 15 | ||||||||||
State and political subdivisions |
| | | 11 | 11 | |||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||
Federal agencies and U.S. government sponsored entities |
| 39 | 2,865 | 12,066 | 14,970 | |||||||||||||||
Other / non-agency |
| 43 | 120 | 829 | 992 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total debt securities available for sale |
15 | 82 | 2,985 | 12,906 | 15,988 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Debt securities held to maturity |
||||||||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||
Federal agencies and U.S. government sponsored entities |
| | | 2,940 | 2,940 | |||||||||||||||
Other / non-agency |
| | | 1,375 | 1,375 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total debt securities held to maturity |
| | | 4,315 | 4,315 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total debt securities |
$ | 15 | $ | 82 | $ | 2,985 | $ | 17,221 | $ | 20,303 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Fair Value: |
||||||||||||||||||||
Debt securities available for sale |
||||||||||||||||||||
U.S. Treasury |
$ | 15 | $ | | $ | | $ | | $ | 15 | ||||||||||
State and political subdivisions |
| | | 10 | 10 | |||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||
Federal agencies and U.S. government sponsored entities |
| 41 | 2,853 | 12,099 | 14,993 | |||||||||||||||
Other / non-agency |
| 43 | 123 | 786 | 952 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total debt securities available for sale |
15 | 84 | 2,976 | 12,895 | 15,970 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Debt securities held to maturity |
||||||||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||
Federal agencies and U.S. government sponsored entities |
| | | 2,907 | 2,907 | |||||||||||||||
Other / non-agency |
| | | 1,350 | 1,350 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total debt securities held to maturity |
| | | 4,257 | 4,257 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total debt securities |
$ | 15 | $ | 84 | $ | 2,976 | $ | 17,152 | $ | 20,227 | ||||||||||
|
|
|
|
|
|
|
|
|
|
F-25
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amount of interest income from taxable and non-taxable investment securities are shown below:
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in millions) | ||||||||||||
Taxable |
$ | 488 | $ | 622 | $ | 755 | ||||||
Non-taxable |
| 2 | 2 | |||||||||
|
|
|
|
|
|
|||||||
Total interest income from investment securities |
$ | 488 | $ | 624 | $ | 757 | ||||||
|
|
|
|
|
|
Realized gains and losses on AFS securities are shown below:
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in millions) | ||||||||||||
Gains on sale of debt securities |
$ | 144 | $ | 93 | $ | 170 | ||||||
Losses on sale of debt securities |
| | (9 | ) | ||||||||
Gains on sale of marketable equity securities |
| 2 | 1 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 144 | $ | 95 | $ | 162 | ||||||
|
|
|
|
|
|
The amortized cost and fair value of securities pledged are shown below:
December 31, 2013 | December 31, 2012 | |||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
(in millions) | ||||||||||||||||
Pledged against repurchase agreements |
$ | 5,016 | $ | 4,998 | $ | 2,882 | $ | 2,988 | ||||||||
Pledged against Federal Home Loan Bank borrowed funds |
1 | 1 | 6 | 6 | ||||||||||||
Pledged against derivatives, to qualify for fiduciary powers, and to secure public and other deposits as required by law |
2,818 | 2,853 | 4,995 | 5,184 | ||||||||||||
|
|
|
|
|
|
|
|
Securitizations of mortgage loans retained in the investment portfolio for the years ended December 31, 2013, 2012, and 2011 were $106 million, $21 million, and $62 million, respectively. These securitizations included a substantive guarantee by a third party. In 2013, the guarantors were Fannie Mae, Ginnie Mae, and Freddie Mac, which purchased the underlying loans. In 2012, the guarantors were Fannie Mae and Freddie Mac. Fannie Mae guaranteed the 2011 securitizations. 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.
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 Companys repurchase agreements are typically short term (e.g., overnight) transactions, but they may be extended to longer terms to maturity. Such transactions are accounted for as secured borrowed funds on the Companys 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.
F-26
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effects of this offsetting on the Consolidated Balance Sheets are presented in the following table:
December 31, 2013 | December 31, 2012 | |||||||||||||||||||||||
Gross Assets
(Liabilities) |
Gross Assets
(Liabilities) Offset |
Net Amounts
of Assets (Liabilities) |
Gross Assets
(Liabilities) |
Gross Assets
(Liabilities) Offset |
Net Amounts
of Assets (Liabilities) |
|||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Reverse repurchase and similar arrangements |
$ | | $ | | $ | | $ | 5,100 | $ | (4,000 | ) | $ | 1,100 | |||||||||||
Repurchase and similar arrangements |
(3,000 | ) | | (3,000 | ) | (4,000 | ) | 4,000 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Note: | The Company also offsets certain derivative assets and derivative liabilities on the Consolidated Balance Sheets. See Note 15 Derivatives for further information. |
NOTE 4LOANS AND LEASES
A summary of the loans and leases portfolio follows:
December 31,
2013 |
December 31,
2012 |
|||||||
(in millions) | ||||||||
Commercial |
$ | 28,667 | $ | 28,856 | ||||
Commercial real estate |
6,948 | 6,459 | ||||||
Leases |
3,780 | 3,415 | ||||||
|
|
|
|
|||||
Total commercial |
39,395 | 38,730 | ||||||
|
|
|
|
|||||
Residential, including originated home equity products |
29,694 | 31,101 | ||||||
Home equity products serviced by others |
2,171 | 2,960 | ||||||
Other secured retail |
10,700 | 10,568 | ||||||
Unsecured retail |
3,899 | 3,889 | ||||||
|
|
|
|
|||||
Total retail |
46,464 | 48,518 | ||||||
|
|
|
|
|||||
Total loans and leases |
$ | 85,859 | $ | 87,248 | ||||
|
|
|
|
Excluded from the table above are loans totaling $1.1 billion, which were reclassified to loans held for sale at December 31, 2013. See Note 17 Divestitures and Branch Assets and Liabilities Held for Sale for further discussion.
Mortgage loans serviced for others by the Companys subsidiaries are not included above, and amounted to $18.7 billion and $18.6 billion at December 31, 2013 and 2012, respectively.
Loans pledged as collateral for FHLB borrowed funds totaled $19.0 billion and $22.9 billion at December 31, 2013 and 2012, 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 $13.9 billion and $17.7 billion at December 31, 2013 and 2012, respectively.
In 2012, the Company purchased a portfolio of auto loans with outstanding principal balances of $922 million. It also sold a portfolio of commercial real estate loans totaling $227 million incurring a loss on sale of $23 million that is presented in other net gains in the accompanying Consolidated Statements of Operations.
F-27
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is engaged in the leasing of equipment for commercial use, with primary lease concentrations to Fortune 1000 companies for large capital equipment acquisitions. A lessee is evaluated from a credit perspective using the same underwriting standards and procedures as for a loan borrower. A lessee is expected to make rental payments based on its cash flows and the viability of its balance sheet. Leases are usually not evaluated as collateral-based transactions, and therefore the lessees overall financial strength is the most important credit evaluation factor.
A summary of the investment in leases, before the allowance for lease losses, is as follows:
December 31,
2013 |
December 31,
2012 |
|||||||
(in millions) | ||||||||
Direct financing leases |
$ | 3,668 | $ | 3,260 | ||||
Leveraged leases |
112 | 155 | ||||||
|
|
|
|
|||||
Total leases |
$ | 3,780 | $ | 3,415 | ||||
|
|
|
|
The components of the investment in leases, before the allowance for lease losses, are as follows:
December 31,
2013 |
December 31,
2012 |
|||||||
(in millions) | ||||||||
Total future minimum lease rentals |
$ | 3,252 | $ | 3,186 | ||||
Estimated residual value of leased equipment (unguaranteed) |
968 | 678 | ||||||
Initial direct costs |
20 | 13 | ||||||
Unearned income on minimum lease rentals and estimated residual value of leased equipment |
(460 | ) | (462 | ) | ||||
|
|
|
|
|||||
Total leases |
$ | 3,780 | $ | 3,415 | ||||
|
|
|
|
At December 31, 2013, the future minimum lease rentals on direct financing and leveraged leases are as follows:
Year Ended December 31, |
(in millions) | |||
2014 |
$ | 675 | ||
2015 |
614 | |||
2016 |
501 | |||
2017 |
388 | |||
2018 |
363 | |||
Thereafter |
711 | |||
|
|
|||
Total |
$ | 3,252 | ||
|
|
Pretax income on leveraged leases was $3 million for the years ended December 31, 2013 and 2012 and $6 million for the year ended December 31, 2011. The income tax expense on this income was $1 million for the years ended December 31, 2013 and 2012 and $2 million for the year ended December 31, 2011. There was no investment credit recognized in income during these years.
F-28
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5ALLOWANCE FOR CREDIT LOSSES, NONPERFORMING ASSETS, AND CONCENTRATIONS OF CREDIT RISK
The ALLL is increased through a provision for credit losses that is charged to earnings, based on the Companys quarterly evaluation, and is reduced by net charge-offs and the ALLL associated with sold loans. See Note 1 Significant Accounting Policies, for a detailed discussion of ALLL methodologies and estimation techniques.
During 2013, the Company modified the way that it establishes the ALLL. As discussed in Note 1, Significant Accounting Policies, the ALLL is reviewed separately for commercial and retail segments, and the ALLL for each includes an adjustment for qualitative reserves that includes certain risks, factors and events that might not be measured in the statistical analysis. As a result of this change, the unallocated reserve was absorbed into the separately measured commercial and retail qualitative reserves.
Additionally, during December 2013, the Company revised and extended its incurred loss period for certain residential mortgages. This change reflects managements recognition that incurred but unrealized losses emerge differently during various points of an economic / business cycle. Incurred Loss Periods (ILPs) are not static and move over time based on several factors. As economies expand and contract, access to credit, jobs, and liquidity moves directionally with the economy. ILPs will be longer in stronger economic times, when borrowers have the financial ability to withstand adversity and the ILPs will be shorter in an adverse economic environment, when the borrower has less financial flexibility. Since the current economy has not been as strong as the economy during the 20022006 time period, we believe that ILPs will not be as long, but rather directional to our history. Since overall Company reserves are deemed adequate, there was no need to increase the reserve but rather reallocate some of the general reserves to cover the $96 million incurred loss period increase.
There were no other material changes in assumptions or estimation techniques compared with prior periods that impacted the determination of the current periods ALLL and the reserve for unfunded lending commitments.
The following is a summary of changes in the allowance for credit losses:
Year Ended December 31, 2013 | ||||||||||||||||
Commercial | Retail | Unallocated | Total | |||||||||||||
(in millions) | ||||||||||||||||
Allowance for loan and lease losses as of January 1, 2013 |
$ | 509 | $ | 657 | $ | 89 | $ | 1,255 | ||||||||
Charge-offs |
(108 | ) | (595 | ) | | (703 | ) | |||||||||
Recoveries |
87 | 115 | | 202 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net charge-offs |
(21 | ) | (480 | ) | | (501 | ) | |||||||||
Sales / Other |
(6 | ) | (6 | ) | (1 | ) | (13 | ) | ||||||||
Provision charged to income |
(19 | ) | 396 | 103 | 480 | |||||||||||
Transfer of unallocated reserve to qualitative reserve |
35 | 60 | (95 | ) | | |||||||||||
Loss emergence period change |
| 96 | (96 | ) | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Allowance for loan and lease losses as of December 31, 2013 |
498 | 723 | | 1,221 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Reserve for unfunded lending commitments as of January 1, 2013 |
40 | | | 40 | ||||||||||||
Credit for unfunded lending commitments |
(1 | ) | | | (1 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Reserve for unfunded lending commitments as of December 31, 2013 |
39 | | | 39 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total allowance for credit losses as of December 31, 2013 |
$ | 537 | $ | 723 | $ | | $ | 1,260 | ||||||||
|
|
|
|
|
|
|
|
F-29
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, 2012 | ||||||||||||||||
Commercial | Retail | Unallocated | Total | |||||||||||||
(in millions) | ||||||||||||||||
Allowance for loan and lease losses as of January 1, 2012 |
$ | 691 | $ | 816 | $ | 191 | $ | 1,698 | ||||||||
Charge-offs |
(257 | ) | (853 | ) | | (1,110 | ) | |||||||||
Recoveries |
113 | 122 | | 235 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net charge-offs |
(144 | ) | (731 | ) | | (875 | ) | |||||||||
Sales / Other |
(2 | ) | | | (2 | ) | ||||||||||
Provision charged to income |
(36 | ) | 572 | (102 | ) | 434 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Allowance for loan and lease losses as of December 31, 2012 |
509 | 657 | 89 | 1,255 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Reserve for unfunded lending commitments as of January 1, 2012 |
61 | | | 61 | ||||||||||||
Credit for unfunded lending commitments |
(21 | ) | | | (21 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Reserve for unfunded lending commitments as of December 31, 2012 |
40 | | | 40 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total allowance for credit losses as of December 31, 2012 |
$ | 549 | $ | 657 | $ | 89 | $ | 1,295 | ||||||||
|
|
|
|
|
|
|
|
Year Ended December 31, 2011 | ||||||||||||||||
Commercial | Retail | Unallocated | Total | |||||||||||||
(in millions) | ||||||||||||||||
Allowance for loan and lease losses as of January 1, 2011 |
$ | 828 | $ | 1,021 | $ | 156 | $ | 2,005 | ||||||||
Charge-offs |
(378 | ) | (1,008 | ) | | (1,386 | ) | |||||||||
Recoveries |
92 | 129 | | 221 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net charge-offs |
(286 | ) | (879 | ) | | (1,165 | ) | |||||||||
Sales/other |
| | (33 | ) | (33 | ) | ||||||||||
Provision charged to income |
149 | 674 | 68 | 891 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Allowance for loan and lease losses as of December 31, 2011 |
691 | 816 | 191 | 1,698 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Reserve for unfunded lending commitments as of January 1, 2011 |
70 | | | 70 | ||||||||||||
Credit for unfunded lending commitments |
(9 | ) | | | (9 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Reserve for unfunded lending commitments as of December 31, 2011 |
61 | | | 61 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total allowance for credit losses as of December 31, 2011 |
$ | 752 | $ | 816 | $ | 191 | $ | 1,759 | ||||||||
|
|
|
|
|
|
|
|
The recorded investment in loans and leases based on the Companys evaluation methodology is as follows:
December 31, 2013 | December 31, 2012 | |||||||||||||||||||||||
Commercial | Retail | Total | Commercial | Retail | Total | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Individually evaluated |
$ | 239 | $ | 1,200 | $ | 1,439 | $ | 474 | $ | 1,140 | $ | 1,614 | ||||||||||||
Formula-based evaluation |
39,156 | 45,264 | 84,420 | 38,256 | 47,378 | 85,634 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 39,395 | $ | 46,464 | $ | 85,859 | $ | 38,730 | $ | 48,518 | $ | 87,248 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
F-30
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the allowance for credit losses by evaluation method:
December 31, 2013 | December 31, 2012 | |||||||||||||||||||||||||||
Commercial | Retail | Total | Commercial | Retail | Unallocated | Total | ||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||
Individually evaluated |
$ | 23 | $ | 108 | $ | 131 | $ | 41 | $ | 73 | $ | | $ | 114 | ||||||||||||||
Formula-based evaluation |
514 | 615 | 1,129 | 508 | 584 | | 1,092 | |||||||||||||||||||||
Unallocated |
| | | | | 89 | 89 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Allowance for credit losses |
$ | 537 | $ | 723 | $ | 1,260 | $ | 549 | $ | 657 | $ | 89 | $ | 1,295 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 loans 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:
December 31, 2013 | ||||||||||||||||||||
Criticized | ||||||||||||||||||||
Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Commercial |
$ | 27,433 | $ | 588 | $ | 541 | $ | 105 | $ | 28,667 | ||||||||||
Commercial real estate |
6,366 | 339 | 116 | 127 | 6,948 | |||||||||||||||
Leases |
3,679 | 40 | 61 | | 3,780 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 37,478 | $ | 967 | $ | 718 | $ | 232 | $ | 39,395 | ||||||||||
|
|
|
|
|
|
|
|
|
|
December 31, 2012 | ||||||||||||||||||||
Criticized | ||||||||||||||||||||
Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Commercial |
$ | 27,100 | $ | 744 | $ | 809 | $ | 203 | $ | 28,856 | ||||||||||
Commercial real estate |
5,285 | 569 | 315 | 290 | 6,459 | |||||||||||||||
Leases |
3,304 | 88 | 23 | | 3,415 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 35,689 | $ | 1,401 | $ | 1,147 | $ | 493 | $ | 38,730 | ||||||||||
|
|
|
|
|
|
|
|
|
|
F-31
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The recorded investment in classes of retail loans, categorized by delinquency status, is as follows:
December 31, 2013 | ||||||||||||||||||||
Current |
1-29 Days
Past Due |
30-89 Days
Past Due |
90 Days or More
Past Due |
Total | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Residential, including originated home equity products |
$ | 27,912 | $ | 861 | $ | 259 | $ | 662 | $ | 29,694 | ||||||||||
Home equity products serviced by others |
1,901 | 167 | 43 | 60 | 2,171 | |||||||||||||||
Other secured retail |
10,068 | 550 | 66 | 16 | 10,700 | |||||||||||||||
Unsecured retail |
3,593 | 185 | 67 | 54 | 3,899 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 43,474 | $ | 1,763 | $ | 435 | $ | 792 | $ | 46,464 | ||||||||||
|
|
|
|
|
|
|
|
|
|
December 31, 2012 | ||||||||||||||||||||
Current |
1-29 Days
Past Due |
30-89 Days
Past Due |
90 Days or More
Past Due |
Total | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Residential, including originated home equity products |
$ | 29,075 | $ | 967 | $ | 230 | $ | 829 | $ | 31,101 | ||||||||||
Home equity products serviced by others |
2,595 | 188 | 62 | 115 | 2,960 | |||||||||||||||
Other secured retail |
9,938 | 545 | 74 | 11 | 10,568 | |||||||||||||||
Unsecured retail |
3,633 | 123 | 78 | 55 | 3,889 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 45,241 | $ | 1,823 | $ | 444 | $ | 1,010 | $ | 48,518 | ||||||||||
|
|
|
|
|
|
|
|
|
|
The presentation of student loans at December 31, 2012 in the table above, and in the tables that follow, were reclassified from the other secured retail loan class to the unsecured retail loan class to conform to the Companys current loan class presentation.
F-32
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nonperforming Assets
A summary of nonperforming loans and leases by class is as follows:
December 31, 2013 | December 31, 2012 | |||||||||||||||||||||||
Nonaccruing |
Accruing and 90
Days or More Delinquent |
Total
Nonperforming Loans and Leases |
Nonaccruing |
Accruing and 90
Days or More Delinquent |
Total
Nonperforming Loans and Leases |
|||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Commercial |
$ | 96 | $ | | $ | 96 | $ | 119 | $ | 71 | $ | 190 | ||||||||||||
Commercial real estate |
169 | | 169 | 386 | 33 | 419 | ||||||||||||||||||
Leases |
| | | 1 | | 1 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
265 | | 265 | 506 | 104 | 610 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Residential, including originated home equity products |
981 | | 981 | 1,043 | | 1,043 | ||||||||||||||||||
Home equity products serviced by others |
89 | | 89 | 133 | | 133 | ||||||||||||||||||
Other secured retail |
26 | | 26 | 25 | | 25 | ||||||||||||||||||
Unsecured retail |
22 | 33 | 55 | 23 | 35 | 58 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total retail |
1,118 | 33 | 1,151 | 1,224 | 35 | 1,259 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 1,383 | $ | 33 | $ | 1,416 | $ | 1,730 | $ | 139 | $ | 1,869 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
A summary of other nonperforming assets is as follows:
December 31,
2013 |
December 31,
2012 |
|||||||
(in millions) | ||||||||
Nonperforming assets, net of allowance: |
||||||||
Commercial |
$ | 10 | $ | 36 | ||||
Retail |
40 | 58 | ||||||
|
|
|
|
|||||
Nonperforming assets, net of allowance |
$ | 50 | $ | 94 | ||||
|
|
|
|
Nonperforming assets consists primarily of other real estate owned and is presented in other assets on the Consolidated Balance Sheets.
A summary of key performance indicators is as follows:
December 31,
2013 |
December 31,
2012 |
|||||||
Nonperforming commercial loans and leases as a percentage of total loans and leases |
0.31 | % | 0.70 | % | ||||
Nonperforming retail loans as a percentage of total loans and leases |
1.34 | 1.44 | ||||||
|
|
|
|
|||||
Total nonperforming loans and leases as a percentage of total loans and leases |
1.65 | 2.14 | ||||||
|
|
|
|
|||||
Nonperforming commercial assets as a percentage of total assets |
0.23 | 0.51 | ||||||
Nonperforming retail assets as a percentage of total assets |
0.97 | 1.04 | ||||||
|
|
|
|
|||||
Total nonperforming assets as a percentage of total assets |
1.20 | % | 1.55 | % | ||||
|
|
|
|
F-33
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is an analysis of the age of the past due amounts (accruing and nonaccruing):
December 31, 2013 | December 31, 2012 | |||||||||||||||||||||||
30-89 Days
Past Due |
90 Days or
More Past Due |
Total
Past Due |
30-89 Days
Past Due |
90 Days or
More Past Due |
Total
Past Due |
|||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Commercial |
$ | 61 | $ | 96 | $ | 157 | $ | 48 | $ | 190 | $ | 238 | ||||||||||||
Commercial real estate |
34 | 169 | 203 | 47 | 419 | 466 | ||||||||||||||||||
Leases |
24 | | 24 | 7 | 1 | 8 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
119 | 265 | 384 | 102 | 610 | 712 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Residential, including originated home equity products |
259 | 662 | 921 | 230 | 829 | 1,059 | ||||||||||||||||||
Home equity products serviced by others |
43 | 60 | 103 | 62 | 115 | 177 | ||||||||||||||||||
Other secured retail |
66 | 16 | 82 | 74 | 11 | 85 | ||||||||||||||||||
Unsecured retail |
67 | 54 | 121 | 78 | 55 | 133 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total retail |
435 | 792 | 1,227 | 444 | 1,010 | 1,454 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 554 | $ | 1,057 | $ | 1,611 | $ | 546 | $ | 1,620 | $ | 2,166 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans include (1) nonaccruing larger balance commercial loans (greater than $3 million carrying value) and (2) commercial and retail TDRs. The following is a summary of impaired loan information by class:
December 31, 2013 | ||||||||||||||||||||||||||||
Impaired
Loans With a Related Allowance |
Allowance
on Impaired Loans |
Impaired
Loans Without a Related Allowance |
Unpaid
Contractual Balance |
Total
Recorded Investment in Impaired Loans |
Interest
Income Recognized |
Average
Recorded Investment |
||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||
Commercial |
$ | 86 | $ | 15 | $ | 33 | $ | 214 | $ | 119 | $ | 1 | $ | 157 | ||||||||||||||
Commercial real estate |
76 | 8 | 44 | 221 | 120 | 1 | 149 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial |
162 | 23 | 77 | 435 | 239 | 2 | 306 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Residential, including originated home equity products |
355 | 59 | 497 | 1,081 | 852 | 14 | 737 | |||||||||||||||||||||
Home equity products serviced by others |
91 | 11 | 21 | 125 | 112 | 5 | 114 | |||||||||||||||||||||
Other secured retail |
23 | 3 | 12 | 43 | 35 | 1 | 33 | |||||||||||||||||||||
Unsecured retail |
201 | 35 | | 201 | 201 | 10 | 181 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total retail |
670 | 108 | 530 | 1,450 | 1,200 | 30 | 1,065 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 832 | $ | 131 | $ | 607 | $ | 1,885 | $ | 1,439 | $ | 32 | $ | 1,371 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-34
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 | ||||||||||||||||||||||||||||
Impaired
Loans With a Related Allowance |
Allowance
on Impaired Loans |
Impaired
Loans Without a Related Allowance |
Unpaid
Contractual Balance |
Total
Recorded Investment in Impaired Loans |
Interest
Income Recognized |
Average
Recorded Investment |
||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||
Commercial |
$ | 138 | $ | 25 | $ | 50 | $ | 321 | $ | 188 | $ | 1 | $ | 276 | ||||||||||||||
Commercial real estate |
133 | 16 | 153 | 448 | 286 | 1 | 310 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial |
271 | 41 | 203 | 769 | 474 | 2 | 586 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Residential, including originated home equity products |
268 | 41 | 536 | 1,003 | 804 | 6 | 474 | |||||||||||||||||||||
Home equity products serviced by others |
122 | 16 | 33 | 194 | 155 | 6 | 127 | |||||||||||||||||||||
Other secured retail |
28 | 5 | 15 | 49 | 43 | 1 | 33 | |||||||||||||||||||||
Unsecured retail |
138 | 11 | | 138 | 138 | | 11 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total retail |
556 | 73 | 584 | 1,384 | 1,140 | 13 | 645 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 827 | $ | 114 | $ | 787 | $ | 2,153 | $ | 1,614 | $ | 15 | $ | 1,231 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled Debt Restructurings
A loan modification is identified as a TDR when the Company or a bankruptcy court grants the borrower a concession the Company would not otherwise make in response to the borrowers financial difficulties. TDRs typically result from the Companys loss mitigation efforts and are undertaken in order to improve the likelihood of recovery and continuity of the relationship. Citizens loan modifications are handled on a case-by-case basis and are negotiated to achieve mutually agreeable terms that maximize loan collectability and meet the borrowers financial needs. Concessions granted in TDRs for all classes of loans may include lowering the interest rate, forgiving a portion of principal, extending the loan term, lowering scheduled payments for a specified period of time, principal forbearance, or capitalizing past due amounts. A rate increase can be a concession if the increased rate is lower than a market rate for debt with risk similar to that of the restructured loan. TDRs for commercial loans and leases may also involve creating a multiple note structure, accepting non-cash assets, accepting an equity interest, or receiving a performance-based fee. In some cases a TDR may involve multiple concessions. The financial effects of TDRs for all loan classes may include lower income (either due to a lower interest rate or a delay in the timing of cash flows), larger loan loss provisions, and accelerated charge-offs if the modification renders the loan collateral-dependent. In some cases interest income throughout the term of the loan may increase if, for example, the loan is extended or the interest rate is increased as a result of the restructuring.
Because TDRs are impaired loans, the Company measures impairment by comparing the present value of expected future cash flows, or, when appropriate, collateral value, to the loans recorded investment. Any excess of recorded investment over the present value of expected future cash flows or collateral value is recognized by creating a valuation allowance or increasing an existing valuation allowance. Any portion of the loans recorded investment the Company does not expect to collect as a result of the modification is charged off at the time of modification.
F-35
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercial TDRs were $167 million and $244 million on December 31, 2013 and 2012, respectively. Retail TDRs totaled $1.2 billion and $1.1 billion on December 31, 2013 and 2012, respectively. Commitments to lend additional funds to debtors owing receivables which were TDRs were $52 million and $86 million on December 31, 2013 and 2012, respectively.
The following table summarizes how loans were modified during the year ending December 31, 2013, the charge-offs related to the modifications, and the impact on the ALLL. The reported balances include loans that became TDRs during 2013, and were paid off in full, charged off, or sold prior to December 31, 2013.
Primary Modification Types | ||||||||||||||||||||||||
Interest Rate Reduction (1) | Maturity Extension (2) | |||||||||||||||||||||||
Number of
Contracts |
Pre-
Modification Outstanding Recorded Investment |
Post-
Modification Outstanding Recorded Investment |
Number of
Contracts |
Pre-
Modification Outstanding Recorded Investment |
Post-
Modification Outstanding Recorded Investment |
|||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||
Commercial |
126 | $ | 13 | $ | 13 | 134 | $ | 18 | $ | 18 | ||||||||||||||
Commercial real estate |
11 | 7 | 7 | 3 | 1 | 1 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
137 | 20 | 20 | 137 | 19 | 19 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Residential, including originated home equity products |
414 | 48 | 50 | 2,221 | 91 | 82 | ||||||||||||||||||
Home equity products serviced by others |
34 | 2 | 2 | 6 | | | ||||||||||||||||||
Other secured retail |
259 | 2 | 2 | 2 | | | ||||||||||||||||||
Unsecured retail |
2,729 | 15 | 15 | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total retail |
3,436 | 67 | 69 | 2,229 | 91 | 82 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
3,573 | $ | 87 | $ | 89 | 2,366 | $ | 110 | $ | 101 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Primary Modification Types | ||||||||||||||||||||
Other (3) | ||||||||||||||||||||
Number of
Contracts |
Pre-
Modification Outstanding Recorded Investment |
Post-
Modification Outstanding Recorded Investment |
Net Change to
ALLL Resulting from Modification |
Charge-offs
Resulting from Modification |
||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Commercial |
6 | $ | 1 | $ | 1 | $ | | $ | 1 | |||||||||||
Commercial real estate |
1 | | | (2 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
7 | 1 | 1 | (2 | ) | 1 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Residential, including originated home equity products |
2,196 | 174 | 160 | 4 | 23 | |||||||||||||||
Home equity products serviced by others |
312 | 14 | 11 | (1 | ) | 4 | ||||||||||||||
Other secured retail |
1,471 | 16 | 13 | | 4 | |||||||||||||||
Unsecured retail |
2,620 | 48 | 47 | 5 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total retail |
6,599 | 252 | 231 | 8 | 31 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
6,606 | $ | 253 | $ | 232 | $ | 6 | $ | 32 | |||||||||||
|
|
|
|
|
|
|
|
|
|
F-36
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) | Includes modifications that consist of multiple concessions, one of which is an interest rate reduction. |
(2) | Includes modifications that consist of multiple concessions, one of which is a maturity extension (unless one of the other concessions was an interest rate reduction). |
(3) | Includes modifications other than interest rate reductions or maturity extensions, such as lowering scheduled payments for a specified period of time, principal forbearance, capitalizing arrearages, and principal forgiveness. Also included are the following: deferrals, trial modifications, certain bankruptcies, loans in forbearance and prepayment plans. Modifications can include the deferral of accrued interest resulting in post modification balances being higher than pre-modification. |
The following table summarizes how loans were modified during the year ending December 31, 2012, the charge-offs related to the modifications, and the impact on the ALLL. The reported balances include loans that became TDRs during 2012, and were paid off in full, charged off, or sold prior to December 31, 2012.
Primary Modification Types | ||||||||||||||||||||||||
Interest Rate Reduction (1) | Maturity Extension (2) | |||||||||||||||||||||||
Number of
Contracts |
Pre-
Modification Outstanding Recorded Investment |
Post-
Modification Outstanding Recorded Investment |
Number of
Contracts |
Pre-
Modification Outstanding Recorded Investment |
Post-
Modification Outstanding Recorded Investment |
|||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||
Commercial |
18 | $ | 13 | $ | 13 | 108 | $ | 25 | $ | 24 | ||||||||||||||
Commercial real estate |
4 | 9 | 9 | 6 | 14 | 13 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
22 | 22 | 22 | 114 | 39 | 37 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Residential, including originated home equity products |
565 | 95 | 99 | 193 | 14 | 16 | ||||||||||||||||||
Home equity products serviced by others |
44 | 2 | 2 | 7 | 1 | | ||||||||||||||||||
Unsecured retail |
2,965 | 17 | 16 | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total retail |
3,574 | 114 | 117 | 200 | 15 | 16 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
3,596 | $ | 136 | $ | 139 | 314 | $ | 54 | $ | 53 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
F-37
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Primary Modification Types | ||||||||||||||||||||
Other (3) | ||||||||||||||||||||
Number of
Contracts |
Pre-Modification
Outstanding Recorded Investment |
Post-Modification
Outstanding Recorded Investment |
Net Change to
ALLL Resulting from Modification |
Charge-offs
Resulting from Modification |
||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Commercial |
180 | $ | 43 | $ | 46 | $ | (29 | ) | $ | 14 | ||||||||||
Commercial real estate |
16 | 72 | 74 | (26 | ) | 2 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
196 | 115 | 120 | (55 | ) | 16 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Residential, including originated home equity products |
6,221 | 425 | 384 | (6 | ) | 43 | ||||||||||||||
Home equity products serviced by others |
1,514 | 67 | 50 | (8 | ) | 17 | ||||||||||||||
Other secured retail |
3,201 | 25 | 17 | (4 | ) | 8 | ||||||||||||||
Unsecured retail |
7,557 | 139 | 138 | 5 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total retail |
18,493 | 656 | 589 | (13 | ) | 68 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
18,689 | $ | 771 | $ | 709 | $ | (68 | ) | $ | 84 | ||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | Includes modifications that consist of multiple concessions, one of which is an interest rate reduction. |
(2) | Includes modifications that consist of multiple concessions, one of which is a maturity extension (unless one of the other concessions was an interest rate reduction). |
(3) | Includes modifications other than interest rate reductions or maturity extensions, such as lowering scheduled payments for a specified period of time, principal forbearance, capitalizing arrearages, and principal forgiveness. Also included are the following: deferrals, trial modifications, certain bankruptcies, loans in forbearance and prepayment plans. Modifications can include the deferral of accrued interest resulting in post modification balances being higher than pre-modification. |
The table below summarizes TDRs that defaulted during 2013 and 2012 within 12 months of their modification date. For purposes of this table, a payment default is defined as being past due 90 days or more under the modified terms. Amounts represent the loans recorded investment at the time of payment default. Loan data in this table includes loans meeting the criteria that were paid off in full, charged off, or sold prior to December 31, 2013 and 2012. If a TDR of any loan type becomes 90 days past due after being modified, the loan is written down to fair value less cost to sell. The amount written off is charged to the ALLL.
2013 | 2012 | |||||||||||||||
Number of
Contracts |
Balance
Defaulted |
Number of
Contracts |
Balance
Defaulted |
|||||||||||||
(dollars in millions) | ||||||||||||||||
Commercial |
18 | $ | 1 | 4 | $ | 3 | ||||||||||
Commercial real estate |
3 | 1 | 1 | 5 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial |
21 | 2 | 5 | 8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Residential, including originated home equity products |
1,660 | 124 | 713 | 81 | ||||||||||||
Home equity products serviced by others |
229 | 5 | 208 | 15 | ||||||||||||
Other secured retail |
241 | 2 | 151 | 1 | ||||||||||||
Unsecured retail |
1,433 | 20 | 628 | 4 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total retail |
3,563 | 151 | 1,700 | 101 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
3,584 | $ | 153 | 1,705 | $ | 109 | ||||||||||
|
|
|
|
|
|
|
|
F-38
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concentrations of Credit Risk
Most of the Companys business activity is with customers located in the New England, Mid-Atlantic and Mid-West regions. Generally, loans are collateralized by assets including real estate, inventory, accounts receivable, other personal property and investment securities. As of December 31, 2013 and 2012, the Company had a significant amount of loans collateralized by residential and commercial real estate. There are no significant concentrations to particular industries within the commercial loan portfolio. Exposure to credit losses arising from lending transactions, which fail to perform according to contractual agreements, may fluctuate with the fair values of the collateral supporting loans. The Companys policy is to collateralize loans to the extent necessary; however, unsecured loans are also granted on the basis of the financial strength of the applicant and the facts surrounding the transaction.
Certain loan products, including residential mortgages, home equity loans and lines of credit, and credit cards, have contractual features that may increase credit exposure to the Company in the event of an increase in interest rates or a decline in housing values. These products include loans that exceed 90% of the value of the underlying collateral (high LTV loans), interest-only and negative amortization residential mortgages, and loans with low introductory rates. Certain loans have more than one of these characteristics.
The following table presents balances of loans with these characteristics:
December 31, 2013 | December 31, 2012 | |||||||||||||||||||||||||||||||||||||||
Residential
Mortgages |
Home
Equity Loans and Lines of Credit |
Home
Equity Products Serviced by Others |
Credit
Cards |
Total |
Residential
Mortgages |
Home
Equity Loans and Lines of Credit |
Home
Equity Products Serviced by Others |
Credit
Cards |
Total | |||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||||||||
High loan-to-value |
$ | 1,054 | $ | 2,798 | $ | 1,581 | $ | | $ | 5,433 | $ | 1,892 | $ | 4,685 | $ | 2,266 | $ | | $ | 8,843 | ||||||||||||||||||||
Interest only / negative amortization |
882 | | | | 882 | 868 | | | | 868 | ||||||||||||||||||||||||||||||
Low introductory rate |
| | | 119 | 119 | | | | 118 | 118 | ||||||||||||||||||||||||||||||
Multiple characteristics and other |
96 | | | | 96 | 233 | | | | 233 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total |
$ | 2,032 | $ | 2,798 | $ | 1,581 | $ | 119 | $ | 6,530 | $ | 2,993 | $ | 4,685 | $ | 2,266 | $ | 118 | $ | 10,062 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6PREMISES, EQUIPMENT, AND SOFTWARE
A summary of the carrying value of premises and equipment follows:
Useful Lives |
December 31,
2013 |
December 31,
2012 |
||||||||
(dollars in millions) | ||||||||||
Land and land improvements |
15 years | $ | 33 | $ | 48 | |||||
Buildings and leasehold improvements |
5-40 years | 636 | 669 | |||||||
Furniture, fixtures and equipment |
5-10 years | 1,598 | 1,671 | |||||||
|
|
|
|
|||||||
Total premises and equipment, gross |
2,267 | 2,388 | ||||||||
Less: accumulated depreciation |
1,675 | 1,745 | ||||||||
|
|
|
|
|||||||
Total premises and equipment, net |
$ | 592 | $ | 643 | ||||||
|
|
|
|
F-39
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The above table includes capital leases with book values of $45 million and $53 million and related accumulated depreciation of $17 million and $37 million as of December 31, 2013 and 2012, respectively. Depreciation charged to noninterest expense was $138 million, $163 million, and $179 million for the years ended December 31, 2013, 2012, and 2011, respectively, and is presented in the Consolidated Statements of Operations in occupancy and equipment expense.
The Company entered into a sale-leaseback transaction during 2013, which includes an operating lease for a period of 10 years. There was a $15 million gain recorded in 2013 of which $14 million was deferred. There were no sale-leaseback transactions during 2012. During 2011, the Company entered into a sale-leaseback transaction, which included an operating lease for a period of 10 years. There was a $1 million gain recorded in 2011 and the entire amount was deferred. The deferred gains on the Companys sale-leaseback transactions are amortized over the lease terms and reported in occupancy expense.
The Company had capitalized software assets, net of amortization, of $729 million and $623 million as of December 31, 2013 and 2012 respectively. Amortization expense was $102 million, $77 million, and $53 million for the years ended December 31, 2013, 2012, and 2011, respectively. Capitalized software assets are reported as a component of other assets in the Consolidated Balance Sheets.
The estimated future amortization expense for capitalized software assets is as follows:
Year |
(in millions) | |||
2014 |
$ | 108 | ||
2015 |
92 | |||
2016 |
73 | |||
2017 |
56 | |||
2018 |
33 | |||
Thereafter |
133 | |||
|
|
|||
Total |
$ | 495 | ||
|
|
NOTE 7LEASE COMMITMENTS
The Company is committed under long-term leases for the rental of premises and equipment. These leases have varying renewal options and require, in certain instances, the payment of insurance, real estate taxes and other operating expenses.
At December 31, 2013, the aggregate minimum rental commitments under these non-cancelable operating leases and capital leases, exclusive of renewals, are as follows for the years ended December 31:
Operating
Leases |
Capital
Leases |
|||||||
(in millions) | ||||||||
2014 |
$ | 173 | $ | 10 | ||||
2015 |
161 | 7 | ||||||
2016 |
146 | 7 | ||||||
2017 |
119 | 6 | ||||||
2018 |
84 | 2 | ||||||
Thereafter |
213 | 8 | ||||||
|
|
|
|
|||||
Total minimum lease payments |
$ | 896 | $ | 40 | ||||
Amounts representing interest |
n/a | (9 | ) | |||||
|
|
|
|
|||||
Present value of net minimum lease payments |
n/a | $ | 31 | |||||
|
|
|
|
F-40
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rental expense for such leases for the years ended December 31, 2013, 2012, and 2011 totaled $224 million, $203 million, and $228 million, respectively, and is presented in the Consolidated Statements of Operations in occupancy and equipment expense.
NOTE 8GOODWILL
Goodwill represents the excess of fair value of assets purchased over the purchase price. Since 1988, the Company has closed 26 acquisitions of banks or assets of banks. The changes in the carrying value of goodwill for the years ended December 31, 2013, 2012, and 2011 were:
Consumer | Commercial | Total | ||||||||||
(in millions) | ||||||||||||
Balance at December 31, 2011 |
$ | 6,393 | $ | 4,918 | $ | 11,311 | ||||||
Impairment losses based on results of interim impairment testing |
| | | |||||||||
|
|
|
|
|
|
|||||||
Balance at December 31, 2012 |
$ | 6,393 | $ | 4,918 | $ | 11,311 | ||||||
Impairment losses based on results of interim impairment testing |
(4,435 | ) | | (4,435 | ) | |||||||
Transfers |
178 | (178 | ) | | ||||||||
|
|
|
|
|
|
|||||||
Balance at December 31, 2013 |
$ | 2,136 | $ | 4,740 | $ | 6,876 | ||||||
|
|
|
|
|
|
Accumulated impairment losses related to the Consumer Banking reporting unit totaled $5.9 billion at December 31, 2013, and $1.5 billion at December 31, 2012 and 2011. The accumulated impairment losses related to the Commercial Banking unit at December 31, 2013, 2012 and 2011 totaled $50 million.
The Company performs an annual test for impairment of goodwill at a level of reporting referred to as a reporting unit. The Company has identified and allocated goodwill to the following reporting units based upon reviews of the structure of the Companys executive team and supporting functions, resource allocations and financial reporting processes:
| Consumer Banking |
| Commercial Banking |
During 2012, the Global Transaction Services reporting unit was combined with Commercial Banking following a reorganization of operations at RBSG.
The Company tested the value of goodwill as of June 30, 2013, and recorded an impairment charge of $4.4 billion relating to the Consumer Banking reporting unit. The impairment charge, which was a non-cash item, had minimal impact on the Companys regulatory capital ratios and liquidity, and for segment reporting purposes was included in Other. Refer to Note 24 Business Segments, for information regarding segment reporting. No impairment was recorded in 2012 and 2011.
The valuation of goodwill is dependent on forward-looking expectations related to the performance of the U.S. economy and the associated financial performance of the Company. The prolonged delay in the full recovery of the U.S. economy, and the impact of that delay on earnings expectations, prompted a goodwill impairment test as of June 30, 2013. Although the U.S. economy has demonstrated signs of recovery, notably improvements in unemployment and housing, the pace and extent of recovery in these indicators, as well as in overall Gross Domestic Product, have lagged previous expectations. The impact of the slow recovery is most evident in the Companys Consumer Banking reporting unit. Forecasted economic growth for the U.S., coupled with the continuing impact of
F-41
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the new regulatory framework in the financial industry, have resulted in a deceleration of expected growth for the Consumer Banking reporting units future profits, and an associated goodwill impairment. Refer to Note 1 Significant Accounting Policies, for information regarding the impairment test.
NOTE 9MORTGAGE BANKING
In its mortgage banking business, the Company sells residential mortgage loans to government-sponsored entities and other parties, who may issue securities backed by pools of such loans. The Company retains no beneficial interests in these sales, but may retain the servicing rights of the loans sold. The Company is obligated to subsequently repurchase a loan if the purchaser discovers a standard representation or warranty violation such as noncompliance with eligibility requirements, customer fraud, or servicing violations. This primarily occurs during a loan file review.
The Company received $4.2 billion, $5.4 billion, and $4.0 billion of proceeds from the sale of residential mortgages in 2013, 2012, and 2011, respectively, and recognized gains on such sales of $66 million, $123 million, and $41 million in 2013, 2012, and 2011, respectively. Pursuant to the standard representations and warranties obligations discussed in the preceding paragraph, the Company repurchased mortgage loans totaling $35 million, $13 million, and $9 million in 2013, 2012, and 2011, respectively.
Mortgage servicing fees, a component of mortgage banking income, were $61 million for the year ended December 31, 2013, and $60 million for the years ended December 31, 2012 and 2011. The Company recorded a recovery of $47 million compared to impairments of $12 million and $42 million for its MSRs for the years ended December 31, 2013, 2012, and 2011, respectively.
Changes related to MSRs were as follows:
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in millions) | ||||||||||||
MSRs: |
||||||||||||
Balance as of January 1 |
$ | 215 | $ | 215 | $ | 209 | ||||||
Amount capitalized |
45 | 67 | 59 | |||||||||
Amortization |
(52 | ) | (67 | ) | (53 | ) | ||||||
|
|
|
|
|
|
|||||||
Carrying amount before valuation allowance |
208 | 215 | 215 | |||||||||
|
|
|
|
|
|
|||||||
Valuation allowance for servicing assets: |
||||||||||||
Balance as of January 1 |
70 | 58 | 16 | |||||||||
Valuation (recovery) impairment |
(47 | ) | 12 | 42 | ||||||||
|
|
|
|
|
|
|||||||
Balance at end of period |
23 | 70 | 58 | |||||||||
|
|
|
|
|
|
|||||||
Net carrying value of MSRs |
$ | 185 | $ | 145 | $ | 157 | ||||||
|
|
|
|
|
|
MSRs are presented in other assets on the Consolidated Balance Sheets.
The fair value of MSRs is estimated using a valuation model that calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors, which are determined based on current market conditions. The valuation model uses a static discounted cash flow methodology incorporating current market interest rates. A static model does not attempt to forecast or
F-42
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
predict the future direction of interest rates; rather it estimates the amount and timing of future servicing cash flows using current market interest rates. The current mortgage interest rate influences the expected prepayment rate and therefore, the length of the cash flows associated with the servicing asset, while the discount rate determines the present value of those cash flows. Expected mortgage loan prepayment assumptions are obtained using the QRM Multi Component prepayment model. The Company periodically obtains third party valuations of its MSRs to assess the reasonableness of the fair value calculated by the valuation model.
The key economic assumptions used to estimate the value of mortgage MSRs are presented in the following tables:
Year Ended December 31, | ||||||||
2013 | 2012 | |||||||
(dollars in millions) | ||||||||
Fair value |
$ | 195 | $ | 147 | ||||
Weighted-average life (in years) |
5.4 | 3.6 | ||||||
Weighted-average constant prepayment rate |
13.0 | % | 21.4 | % | ||||
Weighted-average discount rate |
10.8 | % | 10.5 | % | ||||
|
|
|
|
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in millions) | ||||||||||||
Prepayment rate: |
||||||||||||
Decline in fair value from 50 bps adverse change in interest rates |
$ | 9 | $ | 11 | $ | 18 | ||||||
Decline in fair value from 100 bps adverse change in interest rates |
$ | 18 | $ | 18 | $ | 25 | ||||||
Weighted-average discount rate: |
||||||||||||
Decline in fair value from 50 bps adverse change |
$ | 3 | $ | 2 | $ | 2 | ||||||
Decline in fair value from 100 bps adverse change |
$ | 6 | $ | 4 | $ | 4 | ||||||
|
|
|
|
|
|
The key economic assumptions used in estimating the fair value of MSRs capitalized during the year were as follows:
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Weighted-average life (in years) |
6.0 | 4.0 | 5.0 | |||||||||
Weighted-average constant prepayment rate |
12.4 | % | 20.7 | % | 16.2 | % | ||||||
Weighted-average discount rate |
10.5 | % | 10.5 | % | 10.6 | % | ||||||
|
|
|
|
|
|
A sensitivity analysis as of December 31, 2013 of current fair value to an immediate 50 bps and 100 bps adverse change in the key economic assumptions presents the decline in fair value that would occur if the adverse change were realized. These sensitivities are hypothetical. The effect of a variation in a particular assumption on the fair value of the mortgage servicing rights is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, changes in interest rates, which drive changes in prepayment speeds, could result in changes in the discount rates), which might amplify or counteract the sensitivities. The primary risk inherent in the Companys MSRs is an increase in prepayments of the underlying mortgage loans serviced, which is dependent upon market movements of interest rates.
F-43
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10DEPOSITS
The major components of deposits are as follows:
December 31,
2013 |
December 31,
2012 |
|||||||
(in millions) | ||||||||
Demand |
$ | 24,931 | $ | 25,931 | ||||
Checking with interest |
13,630 | 14,577 | ||||||
Regular savings |
7,509 | 7,874 | ||||||
Money market accounts |
31,245 | 35,102 | ||||||
Term deposits |
9,588 | 11,664 | ||||||
|
|
|
|
|||||
Total deposits |
$ | 86,903 | $ | 95,148 | ||||
|
|
|
|
The maturity distribution of term deposits as of December 31, 2013 is as follows:
Year |
(in millions) | |||
2014 |
$ | 7,444 | ||
2015 |
985 | |||
2016 |
465 | |||
2017 |
431 | |||
2018 and thereafter |
263 | |||
|
|
|||
Total |
$ | 9,588 | ||
|
|
Of these deposits, the amount of term deposits with a denomination of $100,000 or more was $3.9 billion at December 31, 2013. The remaining maturities of these deposits are as follows:
(in millions) | ||||
Three months or less |
$ | 2,221 | ||
After three months through six months |
427 | |||
After six months through twelve months |
718 | |||
After twelve months |
570 | |||
|
|
|||
Total term deposits |
$ | 3,936 | ||
|
|
Excluded from the tables above are deposits totaling $5.3 billion, which includes term deposits of $891 million, that were reclassified to deposits held for sale at December 31, 2013. See Note 17 Divestitures and Branch Assets and Liabilities Held for Sale for further discussion. Of these term deposits held for sale, term deposits with a denomination of $100,000 or more were $268 million as of December 31, 2013.
F-44
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11BORROWED FUNDS
The following is a summary of the Companys short-term borrowed funds:
December 31, | ||||||||
2013 | 2012 | |||||||
(in millions) | ||||||||
Federal funds purchased |
$ | 689 | $ | 1,905 | ||||
Securities sold under agreements to repurchase |
4,102 | 1,696 | ||||||
Other short-term borrowed funds |
2,251 | 501 | ||||||
|
|
|
|
|||||
Total short-term borrowed funds |
$ | 7,042 | $ | 4,102 | ||||
|
|
|
|
Key data related to short-term borrowed funds is presented in the following table:
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(dollars in millions) | ||||||||||||
Weighted-average interest rate at year-end |
||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
0.09 | % | 0.10 | % | 0.06 | % | ||||||
Other short-term borrowed funds |
0.20 | 0.29 | 0.20 | |||||||||
Maximum amount outstanding at month-end during the year |
||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
$ | 5,114 | $ | 4,393 | $ | 6,406 | ||||||
Other short-term borrowed funds |
2,251 | 5,050 | 4,000 | |||||||||
Average amount outstanding during the year |
||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
$ | 2,400 | $ | 2,716 | $ | 3,808 | ||||||
Other short-term borrowed funds |
259 | 3,045 | 2,645 | |||||||||
Weighted-average interest rate during the year |
||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
0.31 | % | 0.22 | % | 0.12 | % | ||||||
Other short-term borrowed funds |
0.44 | 0.33 | 2.51 | |||||||||
|
|
|
|
|
|
The following is a summary of the Companys long-term borrowed funds:
December 31,
2013 |
December 31,
2012 |
|||||||
(dollars in millions) | ||||||||
Parent company: |
||||||||
4.150% fixed rate subordinated debt, due 2022, UST + 2.50% |
$ | 350 | $ | 350 | ||||
5.158% fixed-to-floating rate subordinated debt, (LIBOR + 3.56%) callable, due 2023 |
333 | | ||||||
4.771% fixed rate subordinated debt, due 2023 |
333 | | ||||||
4.691% fixed rate subordinated debt, due 2024 |
334 | | ||||||
1.860% floating-rate (LIBOR + 1.50%) subordinated debt, due 2035 |
| 289 | ||||||
Banking Subsidiaries |
||||||||
Federal Home Loan advances due through 2033 |
25 | 27 | ||||||
Other |
30 | 28 | ||||||
|
|
|
|
|||||
Total long-term borrowed funds |
$ | 1,405 | $ | 694 | ||||
|
|
|
|
F-45
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advances, lines of credit and letters of credit from the FHLB are collateralized by pledged mortgages and pledged securities at least sufficient to satisfy the collateral maintenance level established by the FHLB. The utilized borrowing capacity for FHLB advances and letters of credit was $4.2 billion and $1.1 billion at December 31, 2013 and 2012, respectively. The Companys available FHLB borrowing capacity was $8.2 billion and $12.8 billion at December 31, 2013 and 2012, respectively. The Company can also borrow from the FRB discount window to meet short-term liquidity requirements. These potential borrowed funds are secured by investment securities and loans. At December 31, 2013, the Companys unused secured borrowing capacity was approximately $28.9 billion, which includes free securities, FHLB borrowing capacity, and FRB discount window capacity. Additionally, at December 31, 2013, the Company had available a $50 million line of credit with RBS. This line of credit was not drawn upon at December 31, 2013, expired on January 31, 2014, and was not renewed.
The following is a summary of maturities for the Companys long-term borrowed funds at December 31, 2013:
Year |
(in millions) | |||
2014 or on demand |
$ | | ||
2015 |
3 | |||
2016 |
6 | |||
2017 |
17 | |||
2018 |
13 | |||
2019 and thereafter |
1,366 | |||
|
|
|||
Total |
$ | 1,405 | ||
|
|
NOTE 12PREFERRED STOCK
The Company has authorized 30,000 shares of $1 par value non-cumulative, non-voting perpetual preferred stock as of December 31, 2013. The preferred stock ranks senior to the common stock of the Company with respect to dividend rights upon liquidation or dissolution of the Company. The stock is not convertible into any other property of the Company, nor is it redeemable by either the Company or the holder thereof. Dividends are non-cumulative and are payable quarterly at LIBOR plus 180 bps, if and when declared by the Companys board of directors. In the event of any liquidation, dissolution or winding up of the Company, holders of each share of the preferred stock outstanding are entitled to be paid, out of the assets of the Company available for distribution to stockholders, before any payment is made to the holders of common stock, an amount equal to $100,000 per share of preferred stock then issued and outstanding. There were no shares issued and outstanding during 2013 or 2012.
NOTE 13EMPLOYEE BENEFITS
Pension Plans
The Company maintains a non-contributory pension plan (the Plan or qualified plan) that was closed to new hires and re-hires effective January 1, 2009 and frozen to all participants effective December 31, 2012. Benefits under the Plan are based on employees years of service and highest 5-year average eligible compensation. The Plan is funded on a current basis, in compliance with the requirements of the ERISA. The Company also provides an unfunded, non-qualified supplemental retirement plan (the non-qualified plan), which was closed and frozen consistent with the qualified plan.
F-46
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RBSG restructured the administration of employee benefit plans during 2008. As a result, the qualified and non-qualified pension plans of certain RBSG subsidiaries (referred to as the Companys Affiliates) merged with the Companys pension plans. As plan sponsor of the surviving plans, the Company recorded the pension obligation or asset (for the entire qualified plan) and obligation (for the entire non-qualified plan) in the accompanying Consolidated Balance Sheets as of December 31, 2013, 2012 and 2011.
During 2012, the Company offered to vested former employees who had not yet retired a one-time opportunity to receive the value of future defined benefit pension payments as a single lump sum payment. In December 2012, the Company made lump sum payments of $196 million to former employees who accepted the offer, which resulted in a $240 million reduction of the defined benefit obligation and a $92 million settlement charge.
The qualified plans allocation by asset category is as follows:
Target Asset Allocation | Actual Asset Allocation | |||||||||||
2014 | 2013 | 2012 | ||||||||||
Asset Category |
||||||||||||
Equity securities |
45-55 | % | 52.6 | % | 54.2 | % | ||||||
Debt securities |
40-50 | 42.9 | 40.2 | |||||||||
Other |
0-10 | 4.5 | 5.6 | |||||||||
|
|
|
|
|||||||||
Total |
100.0 | % | 100.0 | % | ||||||||
|
|
|
|
The written Pension Plan Investment Policy, set forth by the RBS Americas Retirement Committee, formulates those investment principles and guidelines that are appropriate to the needs and objectives of the Plan, and defines the management, structure, and monitoring procedures adopted for the ongoing operation of the aggregate funds of the Plan. Stated goals and objectives are:
| Total return, consistent with prudent investment management, is the primary goal of the Plan. The nominal rate of return objective should meet or exceed the actuarial rate return target. In addition, assets of the Plan shall be invested to ensure that principal is preserved and enhanced over time; |
| The total return for the overall Plan shall meet or exceed the Plans Policy Index; |
| Total portfolio risk exposure should generally rank in the mid-range of comparable funds. Risk-adjusted returns are expected to consistently rank in the top-half of comparable funds; and |
| Investment managers shall exceed the return of the designated benchmark index and rank in the top-half of the appropriate asset class and style universe. |
The RBS Americas Retirement Committee reviews, at least annually, the assets and net cash flow of the Plan, discusses the current economic outlook and the Plans investment strategy with the investment managers, reviews the current asset mix and its compliance with the Policy, and receives and considers statistics on the investment performance of the Plan.
The Plans investment advisors may vary equity commitments from 90% to 100% of assets under management. American Depository Receipts may be held by each domestic stock manager, in proportions that each manager shall deem appropriate. The maximum weight of the stock of any one company at the total portfolio level is 5% at market.
F-47
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The minimum quality rating of any fixed income issue held in an investment grade portfolio should be B, and the overall weighted-average quality should be A or higher. The overall quality of the high yield fixed income portfolio should be B or better. The average duration (interest rate sensitivity) of an actively managed fixed income portfolio should not exceed seven years.
Securities of an individual issuer, except the U.S. government and agencies and sovereign nations and their agencies, should not constitute more than 8% of an investment managers portfolio at any time, at fair value.
The assets of the qualified plan may be invested in any or all of the following asset categories:
a) | Equity-oriented investments: |
| domestic and foreign common and preferred stocks, and related rights, warrants, convertible debentures, and other common share equivalents |
| equity index futures, and options on equity index futures |
| exchange traded options on equities |
| venture capital funds / partnerships |
b) | Fixed income-oriented investments: |
| domestic and foreign bonds, debentures and notes |
| mortgages |
| mortgage-backed securities |
| asset-backed securities |
| guaranteed investment contracts or certificates |
| term deposits |
| money market securities or cash |
| financial futures and options on financial futures |
| forward contracts |
| options on financial instruments |
Unless specifically approved by the RBS Americas Retirement Committee, certain securities, strategies and investments are ineligible for inclusion within this Plans asset base. Among these are:
| privately-placed or other non-marketable debt, except securities issued under Rule 144A; |
| lettered, legend or other so-called restricted stock; |
| commodities (only the PIMCO All Asset Fund has been approved, which invests in a variety of PIMCO funds, including the PIMCO Commodity Real Return Fund); |
| straight preferred stocks and non-taxable municipal securities should not normally be held unless pricing anomalies in the marketplace suggest the likelihood of near-term capital gains when normal spread relationships resume; |
| unhedged short sales (market neutral hedge fund has been approved); |
| direct investments in private placements, real estate, oil and gas and venture capital; and |
| any transaction prohibited by ERISA. |
F-48
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, derivative instruments are permitted for the following reasons: hedging, creation of market exposures and management of country and asset allocation exposure. Derivative instruments are prohibited for the following reasons: leverage and unrelated speculation.
In selecting the expected long-term rate of return on assets, the Company considers the average rate of earnings expected on the funds invested or to be invested to provide for the benefits of this Plan. This includes considering the trusts asset allocation and the expected returns likely to be earned over the life of the Plan. This basis is consistent with the prior year.
Changes in the fair value of defined benefit pension plan assets, projected benefit obligation, funded status, and accumulated benefit obligation are summarized as follows:
Year Ended December 31, | ||||||||||||||||||||||||
Qualified Plan | Non-Qualified Plan | |||||||||||||||||||||||
2013 | 2012 | 2011 | 2013 | 2012 | 2011 | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Fair value of plan assets as of January 1 |
$ | 998 | $ | 1,106 | $ | 975 | $ | | $ | | $ | | ||||||||||||
Actual return (loss) on plan assets |
111 | 142 | (23 | ) | | | | |||||||||||||||||
Employer contributions |
| | 200 | 8 | 8 | 7 | ||||||||||||||||||
Settlements |
| (196 | ) | | | | | |||||||||||||||||
Benefits and administrative expenses paid |
(78 | ) | (54 | ) | (46 | ) | (8 | ) | (8 | ) | (7 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Fair value of plan assets as of December 31 |
1,031 | 998 | 1,106 | | | | ||||||||||||||||||
Projected benefit obligation |
1,026 | 1,185 | 1,118 | 107 | 116 | 109 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Pension asset (obligation) |
$ | 5 | $ | (187 | ) | $ | (12 | ) | $ | (107 | ) | $ | (116 | ) | $ | (109 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Accumulated benefit obligation |
$ | 1,026 | $ | 1,185 | $ | 1,100 | $ | 107 | $ | 116 | $ | 109 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The table below summarizes the beneficial interest in the pension asset (obligation) for the qualified and non-qualified plans between the Company and Affiliates:
Year Ended December 31, | ||||||||||||||||||||||||
Qualified Plan | Non-Qualified Plan | |||||||||||||||||||||||
2013 | 2012 | 2011 | 2013 | 2012 | 2011 | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Citizens |
$ | 56 | $ | (116 | ) | $ | 33 | $ | (101 | ) | $ | (113 | ) | $ | (107 | ) | ||||||||
Affiliates |
(51 | ) | (71 | ) | (45 | ) | (6 | ) | (3 | ) | (2 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Pension asset (obligation) |
$ | 5 | $ | (187 | ) | $ | (12 | ) | $ | (107 | ) | $ | (116 | ) | $ | (109 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
The Companys share of the 2012 single lump sum payments to vested former employees described earlier in this Note for the qualified plan was $146 million, while $15 million of the lump sum payments were due from Affiliates as of December 31, 2012. There were no balances due to or due from Affiliates as of December 31, 2013 or December 31, 2011.
F-49
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The pretax amounts recognized (for the qualified and non-qualified plans) in AOCI are as follows:
December 31, | ||||||||
2013 | 2012 | |||||||
(in millions) | ||||||||
Net prior service credit |
$ | | $ | | ||||
Net actuarial loss |
414 | 602 | ||||||
|
|
|
|
|||||
Total loss recognized in accumulated other comprehensive income |
$ | 414 | $ | 602 | ||||
|
|
|
|
Approximately $10 million of net actuarial loss recorded in AOCI as of December 31, 2013 is expected to be recognized as a component of net periodic benefit costs during 2014.
Other changes in plan assets and benefit obligations (for the qualified and non-qualified plans) recognized in OCI include the following:
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in millions) | ||||||||||||
Net periodic pension (income) / cost |
$ | (3 | ) | $ | 150 | $ | 39 | |||||
Net actuarial (gain) loss |
(174 | ) | 169 | 242 | ||||||||
Amortization of prior service credit |
| 1 | 1 | |||||||||
Amortization of net actuarial loss |
(14 | ) | (38 | ) | (20 | ) | ||||||
Settlement |
| (92 | ) | | ||||||||
|
|
|
|
|
|
|||||||
Total recognized in other comprehensive income |
(188 | ) | 40 | 223 | ||||||||
|
|
|
|
|
|
|||||||
Total recognized in net periodic pension cost and other comprehensive income |
$ | (191 | ) | $ | 190 | $ | 262 | |||||
|
|
|
|
|
|
There were no settlements for the years ended December 31, 2013 and 2011. The Companys share of the $92 million settlement was $77 million for the year ended December 31, 2012.
Weighted-average rates assumed in determining the actuarial present value of benefit obligations and net periodic benefit cost are as follows:
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Assumptions for benefit obligations: |
||||||||||||
Discount ratequalified plan |
5.00 | % | 4.125 | % | 5.25 | % | ||||||
Discount ratenon-qualified plan |
4.75 | 4.00 | 5.00 | |||||||||
Compensation increase rate |
N/A | N/A | 4.75 | |||||||||
Expected long-term rate of return on plan assets |
7.50 | 7.75 | 8.25 | |||||||||
|
|
|
|
|
|
|||||||
Assumptions for net periodic pension cost: |
||||||||||||
Discount ratequalified plan |
4.125 | 5.25 | 5.75 | |||||||||
Discount ratenon-qualified plan |
4.00 | 5.00 | 5.63 | |||||||||
Compensation increasesqualified and non-qualified plans |
N/A | 4.75 | 4.75 | |||||||||
Expected long-term rate of return on plan assets |
7.50 | 7.75 | 8.25 | |||||||||
|
|
|
|
|
|
The Company expects to contribute $8 million to its non-qualified plan in 2014.
F-50
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following benefit payments for the qualified and non-qualified plans reflect expected future service, as appropriate, that are expected to be paid, are as follows:
(in millions) | ||||
Expected benefit payments by fiscal year ended: |
||||
December 31, 2014 |
$ | 65 | ||
December 31, 2015 |
65 | |||
December 31, 2016 |
66 | |||
December 31, 2017 |
67 | |||
December 31, 2018 |
68 | |||
December 31, 2019 2023 |
361 |
Fair Value Measurements
The following valuation techniques are used to measure the qualified pension plan assets at fair value:
Cash and money market funds :
Cash and money market funds represent instruments that generally mature in one year or less and are valued at cost, which approximates fair value. Cash and money market funds are classified as Level 2.
Mutual funds :
Where observable quoted prices are available in an active market, mutual funds are classified as Level 1 in the fair value hierarchy. If quoted market prices are not available, mutual funds are classified as Level 2 because they currently trade in active markets and the Company expects all future purchases and sales to be valued at current net asset value.
Corporate bonds, municipal obligations, U.S. government obligations and Non-U.S. government obligations :
Corporate bonds, municipal obligations, U.S. government obligations and Non-U.S. government obligations are valued at the quoted market prices determined in the active markets in which the bonds are traded. If quoted market prices are not available, the fair value of the security is estimated using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. These investments are classified as Level 2, because they currently trade in active markets for similar securities and the inputs to the valuations are observable.
Limited partnerships :
Limited partnerships are valued at estimated fair value based on their proportionate share of the limited partnerships fair value as recorded in the limited partnerships audited financial statements. The limited partnerships invest primarily in readily marketable securities. The limited partnerships allocate gains, losses and expenses to the partners based on ownership percentage as described in the partnership agreements. The instruments that can be transacted at the investment net asset value are classified as Level 2 because the Company expects all future purchases and sales to be valued at current net asset value. The instruments that cannot be transacted at the investment net asset value are classified as Level 3 investments.
F-51
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common collective funds :
The fair value is estimated using the net asset value received from the investment companies. The instruments that can be transacted at the investment net asset value are classified as Level 2 because the Company expects all future purchases to be valued at current net asset value. Instruments that cannot be transacted at the investment net asset value are classified as Level 3 investments.
Derivatives-Managed portfolio :
The managed portfolio invests in certain derivatives that are valued at the settlement price determined by the relevant exchange and are classified as Level 2 in the fair value hierarchy.
The following tables present the qualified pension plan assets measured at fair value within the fair value hierarchy:
Fair Value Measurements as of December 31, 2013 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
(in millions) | ||||||||||||||||
Cash and money market funds |
$ | 8 | $ | | $ | 8 | $ | | ||||||||
Mutual funds |
||||||||||||||||
International equity funds |
28 | 28 | | | ||||||||||||
Income funds |
43 | | 43 | | ||||||||||||
Common and collective funds |
||||||||||||||||
International equity common and collective funds |
115 | | 115 | | ||||||||||||
Balanced common and collective funds |
474 | | 474 | | ||||||||||||
Fixed income common and collective funds |
117 | | 117 | | ||||||||||||
Managed Fund |
||||||||||||||||
Cash and money market funds |
1 | | 1 | | ||||||||||||
Corporate bonds |
105 | | 105 | | ||||||||||||
Municipal obligations |
2 | | 2 | | ||||||||||||
U.S. government obligations |
9 | | 9 | | ||||||||||||
Non-U.S. government obligations |
3 | | 3 | | ||||||||||||
Limited partnerships |
126 | | 126 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets measured at fair value |
$ | 1,031 | $ | 28 | $ | 1,003 | $ | | ||||||||
|
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|
|
|
|
|
|
F-52
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements as of December 31, 2012 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
(in millions) | ||||||||||||||||
Cash and money market funds |
$ | 20 | $ | | $ | 20 | $ | | ||||||||
Mutual funds |
||||||||||||||||
International equity funds |
31 | 31 | | | ||||||||||||
Income funds |
49 | | 49 | | ||||||||||||
Common and collective funds |
||||||||||||||||
International equity common and collective funds |
115 | | 115 | | ||||||||||||
Balanced common and collective funds |
395 | | 395 | | ||||||||||||
Fixed income common and collective funds |
123 | | 123 | | ||||||||||||
Managed Fund |
||||||||||||||||
Cash and money market funds |
5 | | 5 | | ||||||||||||
U.S. government obligations |
15 | | 15 | | ||||||||||||
Municipal obligations |
2 | | 2 | | ||||||||||||
Corporate bonds |
97 | | 97 | | ||||||||||||
Non-U.S. government obligations |
4 | | 4 | | ||||||||||||
Derivative assets- swaps |
1 | | 1 | | ||||||||||||
Derivative liabilities- swaps |
(1 | ) | | (1 | ) | | ||||||||||
Limited partnerships |
142 | | 142 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets measured at fair value |
$ | 998 | $ | 31 | $ | 967 | $ | | ||||||||
|
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|
|
|
|
|
|
In keeping with the Plans fixed income strategic objectives, the December 31, 2013 holdings of the managed fund included exchange traded Eurodollar futures contracts with a notional value of $324 million and an unrealized gain (fair value) of under $1 million. There were no transfers among Levels 1, 2 or 3 during the years ended December 31, 2013, 2012, and 2011.
The fair values of participation units in the common and collective trusts are based on net asset value after adjustments to reflect all fund investments at fair value. The unfunded commitments, redemption frequency, and redemption notice period for those Plan investments that utilize net asset value to determine the fair value as of December 31, 2013 and 2012, are as follows:
Investments |
Fair Value Estimated Using Net Asset Value per Share as of December 31 | |||||||||||||||||
2013 | 2012 |
Unfunded
Commitment |
Redemption
Frequency |
Redemption
Restrictions |
Notice Period | |||||||||||||
(dollars in millions) | ||||||||||||||||||
Equity Mutual Fund (1) |
$ | 43 | $ | 49 | $ | | Daily | None | 1-7 days | |||||||||
Common and Collective Funds: |
||||||||||||||||||
Domestic equity funds (2) |
| | | Daily | None | 5-15 days | ||||||||||||
International equity funds (3) |
115 | 115 | | Monthly | None | 3 days | ||||||||||||
Balanced funds (4) |
474 | 395 | | Daily | None | 2-3 days | ||||||||||||
Fixed income fund (5) |
117 | 123 | | Daily | None | 3 days | ||||||||||||
Limited Partnerships: |
||||||||||||||||||
International Equity (6) |
116 | 130 | | Daily | None | 10 days | ||||||||||||
Offshore Feeder Fund (7) |
10 | 12 | | Monthly | None | 14 days | ||||||||||||
|
|
|
|
|
|
|||||||||||||
Total |
$ | 875 | $ | 824 | $ | | ||||||||||||
|
|
|
|
|
|
(1) | The equity mutual fund seeks to offer participants capital appreciation by primarily investing in common stocks via investments in several underlying funds of the same fund family. The principle investment objective is to generate positive total return. |
F-53
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) | The domestic equity funds seek to offer participants capital appreciation by primarily investing in common stocks of companies domiciled in the U.S. Strategies may also include total return while limiting the exposure to the equity market risk. |
(3) | The international equity funds seek medium to long-term capital appreciation principally through global investments in readily marketable high-quality equity securities of companies with improving fundamentals and attractive valuations. |
(4) | The balanced funds seek to maximize total return by investing in global equities and fixed income transferable securities that may include some high yield fixed income transferable securities. The fund may invest in securities denominated in currencies other than U.S. dollars. |
(5) | The fixed income fund seeks to outperform the Barclays Capital U.S. Corporate Investment Grade Bond Index or similar benchmark. |
(6) | The international equity limited partnership focuses on global and agribusiness strategies, blending a thematic framework with security-level analysis and customized valuation techniques. The fund conducts primary research to identify investable themes that provide clients with diversification benefits and help create opportunities for outperformance over a market cycle. |
(7) | The offshore feeder fund operates under a master / feeder structure whereby it invests substantially all assets in the GMO Multi-Strategy Fund (Onshore) (the master fund). The investment objective of the master fund is capital appreciation with a target performance of the Citigroup Three-Month Treasury Bill plus 8% with a standard deviation of 5%. The investment advisor plans to pursue the master funds objective through a combination of investments in other pooled vehicles. |
Postretirement Benefits
The Company and Affiliates merged their postretirement plans into a single postretirement plan in 2008 and continue to provide health care insurance benefits for certain retired employees and their spouses. Employees enrolled in medical coverage immediately prior to retirement and meeting eligibility requirements can elect retiree medical coverage. Employees and covered spouses can continue coverage at the full cost, except for a small group described below. However, coverage must be elected at the time of retirement and cannot be elected at a future date. Spouses may be covered only if the spouse is covered at the time of the employees retirement.
The Company reviews coverage on an annual basis and reserves the right to modify or cancel coverage at any renewal date. The Companys cost sharing for certain full-time employees, who were hired prior to August 1, 1993 with 25 years of service who reach retirement age (under age 65) while employed by the Company is 70%; for those with 15-24 years of service, the Companys share is 50%. Also, the Company shares in the cost for retiree medical benefits for a closed group of grandfathered arrangements from acquisitions. A small, closed group of retirees receive life insurance coverage.
The accumulated postretirement benefit obligation was $27 million and $30 million at December 31, 2013 and 2012, respectively. The funded status was a liability of $27 million and $30 million at December 31, 2013 and 2012, respectively, and is reported in other liabilities in the accompanying Consolidated Balance Sheets. The total gain recognized in OCI was $367 thousand at December 31, 2013 and a total cost recognized in OCI was $1 million at December 31, 2012.
The Company contributed and paid benefits of $3 million, $2 million, and $3 million during 2013, 2012 and 2011, respectively. The benefits expected to be paid in each of the next five years is $2 million, and $9 million is expected to be paid during the five years from 2019 through 2023. The Company expects to contribute approximately $2 million to the plan during 2014.
The weighted-average discount rate assumed in determining the actuarial present value of benefit obligations was 4.625% and 3.88% as of December 31, 2013 and 2012, respectively.
For measurement purposes, a 7.5% and 8.0% assumed annual rate of increase in the per capita cost of covered health care benefits was used for the years ended December 31, 2013 and 2012, respectively, decreasing gradually down to a 5% ultimate rate over the next several years.
F-54
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Weighted-average rates assumed in determining the net periodic benefit cost of the postretirement benefits plan are as follows:
Postretirement Benefits Plan | ||||||||
2013 | 2012 | |||||||
(dollars in millions) | ||||||||
Discount rate |
3.875 | % | 5.00 | % | ||||
Rate of compensation increase |
| | ||||||
|
|
|
|
|||||
Healthcare cost trend rate for the next year |
5.00 | 5.00 | ||||||
Effect on accumulated postretirement benefit obligation |
||||||||
One percent increase |
$ | 2 | $ | 2 | ||||
One percent decrease |
(2 | ) | (2 | ) | ||||
|
|
|
|
Postemployment Benefits
The Company provides postemployment benefits to certain former and inactive employees, primarily the Companys long-term disability plan. Effective January 1, 2013, the Company required claimants receiving long-term disability benefits for 24 months to apply for Medicare approval so that Medicare is the primary payer of medical benefits. (Benefit) Cost recorded for the years ended December 31, 2013, 2012 and 2011 were ($3) million, ($1) million, and $3 million, respectively.
401(k) Plan
The Company sponsors an employee tax-deferred 401(k) plan under which individual employee contributions to the plan are matched by the Company. For periods prior to 2012, contributions are matched at 100% up to an overall limitation of 6% on a pay period basis. Employees hired or rehired on or after January 1, 2009 receive an additional 3% of earnings, subject to limits set by the Internal Revenue Service. Effective January 1, 2013, contributions are matched at 100% up to an overall limitation of 5% on a pay period basis. Substantially all employees will receive an additional 2% of earnings, subject to limits set by the Internal Revenue Service. Amounts contributed by the Company for the years ended December 31, 2013, 2012, and 2011 were $70 million, $60 million, and $57 million, respectively.
NOTE 14INCOME TAXES
Total income tax (benefit) expense was as follows:
Year Ended
December 31, |
||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in millions) | ||||||||||||
Income tax (benefit) expense |
$ | (42 | ) | $ | 381 | $ | 272 | |||||
Tax effect of changes in OCI |
(194 | ) | 125 | 89 | ||||||||
|
|
|
|
|
|
|||||||
Total comprehensive income tax (benefit) expense |
$ | (236 | ) | $ | 506 | $ | 361 | |||||
|
|
|
|
|
|
F-55
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Components of income tax expense (benefit) are as follows:
Current | Deferred | Total | ||||||||||
(in millions) | ||||||||||||
Year Ended December 31, 2013 |
||||||||||||
U.S. federal |
$ | 3 | $ | (47 | ) | $ | (44 | ) | ||||
State and local |
8 | (6 | ) | 2 | ||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 11 | $ | (53 | ) | $ | (42 | ) | ||||
|
|
|
|
|
|
|||||||
Year Ended December 31, 2012 |
||||||||||||
U.S. federal |
$ | 19 | $ | 269 | $ | 288 | ||||||
State and local |
56 | 37 | 93 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 75 | $ | 306 | $ | 381 | ||||||
|
|
|
|
|
|
|||||||
Year Ended December 31, 2011 |
||||||||||||
U.S. federal |
$ | (22 | ) | $ | 220 | $ | 198 | |||||
State and local |
42 | 32 | 74 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 20 | $ | 252 | $ | 272 | ||||||
|
|
|
|
|
|
The effective income tax rate differed from the U.S. federal income tax rate of 35% in 2013, 2012 and 2011 as follows:
Year Ended December 31, | ||||||||||||||||||||||||
2013 | 2012 | 2011 | ||||||||||||||||||||||
Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||
U.S. Federal income tax (benefit) expense and tax rate |
$ | (1,214 | ) | 35.00 | % | $ | 359 | 35.00 | % | $ | 270 | 35.00 | % | |||||||||||
Increase (decrease) resulting from: |
||||||||||||||||||||||||
Goodwill Impairment |
1,217 | (35.09 | ) | | | | | |||||||||||||||||
State and local income taxes (net of federal benefit) |
1 | (0.03 | ) | 61 | 5.93 | 48 | 6.24 | |||||||||||||||||
Changes in uncertain tax positions |
| | | 0.01 | (1 | ) | (0.07 | ) | ||||||||||||||||
Bank-owned life insurance |
(17 | ) | 0.50 | (18 | ) | (1.76 | ) | (17 | ) | (2.21 | ) | |||||||||||||
Tax-exempt interest |
(13 | ) | 0.37 | (12 | ) | (1.14 | ) | (10 | ) | (1.23 | ) | |||||||||||||
Low income housing partnerships |
(11 | ) | 0.32 | (8 | ) | (0.76 | ) | (7 | ) | (0.93 | ) | |||||||||||||
Other |
(5 | ) | 0.14 | (1 | ) | (0.10 | ) | (11 | ) | (1.47 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total income tax (benefit) expense and rate |
$ | (42 | ) | 1.21 | % | $ | 381 | 37.18 | % | $ | 272 | 35.33 | % | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in the effective rate from 2012 to 2013 represents the tax rate impact of the 2013 goodwill impairment in addition to the tax rate impact of a 2012 state tax settlement. The state tax settlement represents 2.45% of the total tax rate for 2012 and is included in the rate reconciliation as a component of state and local income taxes (net of federal benefit).
F-56
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:
December 31,
2013 |
December 31,
2012 |
|||||||
(in millions) | ||||||||
Deferred tax assets: |
||||||||
Unrealized net loss on securities and derivatives |
$ | 397 | $ | 203 | ||||
Allowance for credit losses |
475 | 486 | ||||||
Net operating loss carryforwards |
129 | 266 | ||||||
Accrued expenses not currently deductible |
149 | 150 | ||||||
Investment and other tax credit carryforwards |
62 | 47 | ||||||
Deferred income |
35 | 23 | ||||||
Fair value marks |
30 | 23 | ||||||
Other |
| 3 | ||||||
|
|
|
|
|||||
Total deferred tax assets |
1,277 | 1,201 | ||||||
Valuation allowance |
(137 | ) | (163 | ) | ||||
|
|
|
|
|||||
Deferred tax assets, net of valuation allowance |
1,140 | 1,038 | ||||||
|
|
|
|
|||||
Deferred tax liabilities: |
||||||||
Leasing transactions |
811 | 739 | ||||||
Amortization of intangibles |
296 | 572 | ||||||
Depreciation |
124 | 95 | ||||||
Pension |
56 | 47 | ||||||
MSRs |
50 | 31 | ||||||
Other |
2 | | ||||||
|
|
|
|
|||||
Total deferred tax liabilities |
1,339 | 1,484 | ||||||
|
|
|
|
|||||
Net deferred tax liability |
$ | 199 | $ | 446 | ||||
|
|
|
|
Certain 2012 balances in the table above were restated to better conform to the current year presentation. This adjustment expanded the pension category to include other employee compensation plans that were included as accrued expenses not currently deductible in 2012.
At December 31, 2013, the Company had deferred tax assets of $191 million in connection with federal and state net operating loss and credit carryforwards. At December 31, 2013, the federal net operating loss carryforward was approximately $19 million, the state net operating loss carryforward was approximately $110 million, federal tax credit carryforwards were approximately $55 million and state tax credit carryforwards were approximately $7 million. These net operating losses and credits will expire, if not utilized, in the years 2014 through 2033, except for approximately $129 thousand of federal alternative minimum tax credits, which do not expire.
The Company had at December 31, 2013, a valuation allowance of $137 million against the deferred tax assets related to certain state temporary differences, net operating losses and credits, as it is managements current assessment that it is more likely than not that the Company will not recognize a portion of the deferred tax asset related to these items. The valuation allowance decreased $26 million during the year ended December 31, 2013.
Effective with fiscal year ended September 30, 1997, the reserve method for bad debts was no longer permitted for tax purposes. The repeal of the reserve method required the recapture of the
F-57
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
reserve balance in excess of certain base year reserve amounts attributable to years ended prior to 1988. At December 31, 2013 the Companys base year loan loss reserves attributable to years ended prior to 1988, for which no deferred income taxes have been provided, was $557 million. This base year reserve may become taxable if certain distributions are made with respect to the stock of the Company or if the Company ceases to qualify as a bank for tax purposes. No actions are planned that would cause this reserve to become wholly or partially taxable.
The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal or state and local income tax examinations by major tax authorities for years before 2008.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
December 31,
2013 |
December 31,
2012 |
December 31,
2011 |
||||||||||
(in millions) | ||||||||||||
Balance at the beginning of the period, January 1 |
$ | 34 | $ | 136 | $ | 104 | ||||||
Gross increases for tax positions related to prior years |
| 29 | 48 | |||||||||
Gross decreases for tax positions related to prior years |
| | (6 | ) | ||||||||
Decreases for tax positions relating to settlements with taxing authorities |
(1 | ) | (134 | ) | (10 | ) | ||||||
Gross increases for tax positions related to the current years |
| 3 | | |||||||||
|
|
|
|
|
|
|||||||
Balance at end of period |
$ | 33 | $ | 34 | $ | 136 | ||||||
|
|
|
|
|
|
Included in the total amount of unrecognized tax benefits at December 31, 2013, are potential benefits of $23 million that, if recognized, would affect the effective tax rate.
The Company classifies interest and penalties related to unrecognized tax benefits as a component of income taxes. The Company accrued $2 million, $14 million, and $18 million of interest expense through December 31, 2013, 2012, and 2011, respectively. The Company had approximately $14 million, $12 million, and $55 million accrued for the payment of interest at December 31, 2013, 2012, and 2011, respectively. There were no amounts accrued for penalties as of December 31, 2013, 2012, and 2011, and there were no penalties recognized during 2013, 2012, and 2011.
It is anticipated that during 2014 the Company will enter into settlement agreements with certain state taxing authorities regarding the issue of nexus. Settlement of these uncertainties would reduce the unrecognized tax benefit by $19 million. During 2012, the Company settled a state tax issue for the years 2003 through 2008 related to its real estate investment trust and various passive investment companies. Settlement of these uncertainties reduced the unrecognized tax benefit by $134 million.
NOTE 15DERIVATIVES
In the normal course of business, the Company enters into a variety of derivative transactions in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates and foreign currency exchange rates. The Company does not use derivatives for speculative purposes.
F-58
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Companys derivative instruments are recognized on the Consolidated Balance Sheets at fair value. Information regarding the valuation methodology and inputs used to estimate the fair value of the Companys derivative instruments is described in Note 19 Fair Value Measurements.
The following table identifies derivative instruments included on the Consolidated Balance Sheets in derivative assets and derivative liabilities:
December 31, 2013 | December 31, 2012 | |||||||||||||||||||||||
Notional
Amount (1) |
Derivative
Assets |
Derivative
Liabilities |
Notional
Amount (1) |
Derivative
Assets |
Derivative
Liabilities |
|||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Derivatives designated as hedging instruments: |
||||||||||||||||||||||||
Interest rate swaps |
$ | 5,500 | $ | 23 | $ | 412 | $ | 4,200 | $ | 1 | $ | 257 | ||||||||||||
Derivatives not designated as hedging instruments: |
||||||||||||||||||||||||
Interest rate swaps |
29,355 | 654 | 558 | 31,227 | 1,102 | 1,033 | ||||||||||||||||||
Foreign exchange contracts |
7,771 | 94 | 87 | 5,978 | 71 | 67 | ||||||||||||||||||
Other contracts |
569 | 7 | 10 | 2,815 | 35 | 15 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total derivatives not designated as hedging instruments |
755 | 655 | 1,208 | 1,115 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Gross derivative fair values |
778 | 1,067 | 1,209 | 1,372 | ||||||||||||||||||||
Less: Gross amounts offset in the Consolidated Balance Sheets (2) |
(128 | ) | (128 | ) | (54 | ) | (54 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total net derivative fair values presented in the Consolidated Balance Sheets (3) |
$ | 650 | $ | 939 | $ | 1,155 | $ | 1,318 | ||||||||||||||||
|
|
|
|
|
|
|
|
(1) | The notional or contractual amount of interest rate derivatives and foreign exchange contracts is the amount upon which interest and other payments under the contract are based. For interest rate derivatives, the notional amount is typically not exchanged. Therefore, notional amounts should not be taken as the measure of credit or market risk, as they tend to greatly overstate the true economic risk of these contracts. |
(2) | Amounts represent the impact of legally enforceable master netting agreements that allow the Company to settle positive and negative positions. |
(3) | The Company also offsets assets and liabilities associated with repurchase agreements on the Consolidated Balance Sheets. See Note 3 Securities for further information. |
The Companys derivative transactions are internally divided into three sub-groups: institutional, customer and residential loan.
Institutional derivatives
The institutional derivatives portfolio primarily consists of interest rate swap agreements that are used to hedge the interest rate risk associated with the Companys investment securities, loans and financing liabilities (i.e., borrowed funds, deposits, etc.). The goal of the Companys interest rate hedging activities is to manage interest rate sensitivity so that movements in interest rates do not significantly adversely affect net interest income.
F-59
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company entered into certain interest rate swap agreements to hedge the market risk associated with fixed income securities. By entering into pay-fixed / receive-floating interest rate swaps, the Company was able to minimize the variability in the fair value of these securities due to changes in interest rates. The Company also has outstanding interest rate swap agreements to hedge the interest rate risk associated with floating rate loans. By entering into pay-floating / receive-fixed interest rate swaps, the Company is able to minimize the variability in the cash flows of these assets due to changes in interest rates.
Customer derivatives
The customer derivatives portfolio consists of interest rate swap agreements and option contracts that are transacted to meet the financing needs of the Companys customers. Offsetting swap and cap agreements are simultaneously transacted to effectively eliminate the Companys market risk associated with the customer derivative products. The customer derivatives portfolio also includes foreign exchange contracts that are entered into on behalf of customers for the purpose of hedging exposure related to cash orders and loans and deposits denominated in foreign currency. The primary risks associated with these transactions arise from exposure to changes in foreign currency exchange rates and the ability of the counterparties to meet the terms of the contract. To manage this market risk, the Company simultaneously enters into offsetting foreign exchange contracts.
Residential loan derivatives
The Company enters into residential loan commitments that allow residential mortgage customers to lock in the interest rate on a residential mortgage while the loan undergoes the underwriting process. The Company also uses forward sales contracts to protect the value of residential mortgage loans and loan commitments that are being underwritten for future sale to investors in the secondary market.
The Company has certain derivative transactions that are designated as hedging instruments described as follows:
Derivatives designated as hedging instruments
The majority of the Companys institutional hedging portfolio qualifies for hedge accounting. This includes interest rate swaps that are designated in highly effective cash flow hedging relationships. The Company formally documents at inception all hedging relationships, as well as risk management objectives and strategies for undertaking various accounting hedges. Additionally, the Company uses dollar offset or regression analysis at the hedges inception, and at least quarterly thereafter to assess whether the derivatives are expected to be, or have been, highly effective in offsetting changes in the hedged items expected cash flows. The Company discontinues hedge accounting when it is determined that a derivative is not expected to be or has ceased to be effective as a hedge, and then reflects changes in fair value in earnings after termination of the hedge relationship.
Cash flow hedges
The Company enters into certain interest rate swap agreements designed to hedge a portion of the Companys floating rate assets and financing liabilities (including its borrowed funds and deposits). All of these swaps have been deemed as highly effective cash flow hedges. The effective portion of the hedging gains and losses associated with these hedges are recorded in OCI; the ineffective portion of the hedging gains and losses is recorded in earnings (other income). Hedging gains and losses on derivative contracts reclassified from OCI to current period earnings are included in the line item in the
F-60
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
accompanying consolidated statements of operations in which the hedged item is recorded, and in the same period that the hedged item affects earnings. During the next 12 months, approximately $46 million of net loss (pretax) on derivative instruments included in OCI is expected to be reclassified to net interest expense in the Consolidated Statements of Operations
Hedging gains and losses associated with the Companys cash flow hedges are immediately reclassified from OCI to current period earnings (other net gains) if it becomes probable that the hedged forecasted transactions will not occur by the originally specified time period.
The following table summarizes certain information related to the Companys cash flow hedges:
(1) | The cumulative effective gains and losses on the Companys cash flow hedging activities are included on the AOCI line item on the Consolidated Balance Sheets. |
(2) | This amount includes both (a) the amortization of effective gains and losses associated with the Companys terminated cash flow hedges and (b) the current reporting periods interest settlements realized on the Companys active cash flow hedges. Both (a) and (b) were previously included on the accumulated other comprehensive loss line item on the Consolidated Balance Sheets and were subsequently recorded as adjustments to the interest expense of the underlying hedged item. |
(3) | This amount represents hedging gains and losses that have been immediately reclassified from accumulated other comprehensive loss based on the probability that the hedged forecasted transactions would not occur by the originally specified time period. This amount is reflected in the other income line item on the Consolidated Statements of Operations. |
(4) | This amount represents the net ineffectiveness recorded during the reporting periods presented plus any amounts excluded from effectiveness testing. These amounts are reflected in the other income line item on the Consolidated Statements of Operations. |
Economic Hedges
The Companys customer derivatives are recorded on the Consolidated Balance Sheets at fair value. These include interest rate and foreign exchange derivative contracts that are transacted to meet the hedging and financing needs of the Companys customers. Mark-to-market adjustments to the fair value of customer related interest rate contracts are included in other income in the accompanying Consolidated Statements of Operations. Mark-to-market adjustments to the fair value of foreign exchange contracts relating to foreign currency loans are included in interest and fees on loans and leases in the accompanying Consolidated Statements of Operations, while all other foreign currency contract fair value changes are included in international fees. In both cases, the mark-to-market gains and losses associated with the customer derivatives are mitigated by the mark-to-market gains and losses on the offsetting interest rate and foreign exchange derivative contracts transacted.
The Companys residential loan derivatives (including residential loan commitments and forward sales contracts) are recorded on the Consolidated Balance Sheets at fair value. Mark-to-market
F-61
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
adjustments to the fair value of residential loan commitments and forward sale contracts are included in noninterest income under mortgage banking.
The following table summarizes certain information related to the Companys economic hedges:
(1) | Reported in other income on the Consolidated Statements of Operations. |
(2) | Reported in foreign exchange and trade finance fees on the Consolidated Statements of Operations. |
(3) | Reported in mortgage banking fees on the Consolidated Statements of Operations. |
NOTE 16COMMITMENTS, GUARANTEES AND CONTINGENCIES
Commitments
Commitments to extend credit are agreements to lend to customers in accordance with conditions contractually agreed upon in advance. Generally, the commitments have fixed expiration dates or termination clauses and may require payment of a fee. Since many of these commitments are expected to expire without being drawn upon, the contract amounts are not necessarily indicative of future cash requirements.
When-issued securities are agreements to purchase securities that have been authorized for issuance but not yet issued. The fair value of when-issued securities is reflected in the consolidated balance sheets at trade date.
During 2003, the Company entered into a 25-year agreement to acquire the naming and marketing rights of a baseball stadium in Pennsylvania. The Company paid $3 million in each of the years ended December 31, 2013, 2012, and 2011, and is obligated to pay $54 million over the remainder of the contract.
Letters of Credit
Standby letters of credit, both financial and performance, are issued by the Company for its customers. They are used as conditional guarantees of payment to a third party in the event the
F-62
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
customer either fails to make specific payments (financial) or fails to complete a specific project (performance). Commercial letters of credit are used to facilitate the import of goods. The commercial letter of credit is used as the method of payment to the Companys customers suppliers. The Companys exposure to credit loss in the event of counterparty nonperformance in connection with the above instruments is represented by the contractual amount of those instruments, net of the value of collateral held. Standby letters of credit and commercial letters of credit are issued for terms of up to ten years and one year, respectively.
Generally, letters of credit are collateralized by cash, accounts receivable, inventory or investment securities. Credit risk associated with letters of credit is considered in determining the appropriate amounts of reserves for unfunded commitments.
The Company recognizes a liability on the Consolidated Balance Sheets representing its obligation to stand ready to perform over the term of the standby letters of credit in the event that the specified triggering events occur. The liability for these guarantees at December 31, 2013 and 2012 is $3 million and $4 million, respectively.
Risk Participation Agreements
RPAs are guarantees issued by the Company to other parties for a fee, whereby the Company agrees to participate in the credit risk of a derivative customer of the other party. Under the terms of these agreements, the participating bank receives a fee from the lead bank in exchange for the guarantee of reimbursement if the customer defaults on an interest rate swap. The interest rate swap is transacted such that any and all exchanges of interest payments (favorable and unfavorable) are made between the lead bank and the customer. In the event that an early termination of the swap occurs and the customer is unable to make a required close out payment, the participating bank assumes that obligation and is required to make this payment.
RPAs where the Company acts as the lead bank are referred to as participations-out, in reference to the credit risk associated with the customer derivatives being transferred out of the Company. Participations-out generally occur concurrently with the sale of new customer derivatives. RPAs where the Company acts as the participating bank are referred to as participations-in, in reference to the credit risk associated with the counterpartys derivatives being assumed by the Company. The Companys maximum credit exposure is based on its proportionate share of the settlement amount of the referenced interest rate swap. Settlement amounts are generally calculated based on the fair value of the swap plus outstanding accrued interest receivables from the customer. The Companys estimate of the credit exposure associated with its risk participations-in as of December 31, 2013 and 2012 is $17 million and $30 million, respectively. The current amount of credit exposure is spread out over 71 counterparties. RPAs generally have terms ranging from 1-5 years; however, certain outstanding agreements have terms as long as 9 years.
Other Guarantees
The Company has issued a guarantee to RBS, for a fee, whereby the Company will absorb credit losses related to the sale of option contracts by RBS to customers of the Company. There were outstanding option contracts with a notional value of $2 million and $222 million at December 31, 2013 and 2012, respectively.
F-63
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of outstanding off balance sheet arrangements:
December 31,
2013 |
December 31,
2012 |
|||||||
(in millions) | ||||||||
Commitment amount: |
||||||||
Undrawn commitments to extend credit |
$ | 53,987 | $ | 50,507 | ||||
Financial standby letters of credit |
2,556 | 3,082 | ||||||
Performance letters of credit |
149 | 152 | ||||||
Commercial letters of credit |
64 | 103 | ||||||
Marketing rights |
54 | 57 | ||||||
Risk participation agreements |
17 | 30 | ||||||
Residential mortgage loans sold with recourse |
13 | 17 | ||||||
|
|
|
|
|||||
Total |
$ | 56,840 | $ | 53,948 | ||||
|
|
|
|
Contingencies
The Company operates in a legal and regulatory environment that exposes it to potentially significant risks. A certain amount of litigation ordinarily results from the nature of the Companys banking and other businesses. The Company is a party to legal proceedings, including class actions. It is also the subject of investigations, reviews, and regulatory matters arising out of its normal business operations, which, in some instances, relate to concerns about unfair and / or deceptive practices and mis-selling of certain products. In addition, the Company engages in discussions with relevant governmental and regulatory authorities on an ongoing and regular basis regarding various issues, and it is possible that any issues discussed or identified may result in investigatory or other action being taken. Litigation and regulatory matters may result in settlements, damages, fines, public or private censure, increased costs, required remediation, restriction on business activities, or other impact on the Company.
In these disputes and proceedings, the Company contests liability and the amount of damages as appropriate. Given their complex nature, it may be years before some of these matters are finally resolved. Moreover, before liability can be reasonably estimated for a claim, numerous legal and factual issues may need to be examined, including through potentially lengthy discovery and determination of important factual matters, and by addressing novel or unsettled legal issues relevant to the proceedings in question.
The Company cannot predict with certainty if, how, or when such claims will be resolved or what the eventual settlement, fine, penalty or other relief, if any, may be, particularly for claims that are at an early stage in their development or where claimants seek substantial or indeterminate damages. The Company recognizes a provision for a claim when, in the opinion of management after seeking legal advice, it is probable that a liability exists and the amount of loss can reasonably be estimated. In many proceedings, however, it is not possible to determine whether any loss is probable or to estimate the amount of any loss. In each of the matters described below, the Company is unable to estimate the liability in excess of any provision accrued, if any, that might arise or its effects on the Companys Consolidated Statements of Operations or Consolidated Cash Flows in any particular period.
Set out below are descriptions of significant legal matters involving the Company. Based on information currently available, the advice of legal and other counsel, and established reserves, management believes that the aggregate liabilities, if any, arising from these proceedings will not have a materially adverse effect on the Companys Consolidated Financial Statements.
F-64
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Consumer Products
The activities of the Companys bank subsidiaries are subject to extensive laws and regulations concerning unfair or deceptive acts or practices in connection with customer products. Certain of the bank subsidiaries practices with respect to overdraft protection and other consumer products have not met applicable standards. The bank subsidiaries have implemented and are continuing to implement changes to bring their practices in conformity with applicable laws and regulations. In April 2013, the bank subsidiaries consented to the issuance of orders by the OCC and the FDIC (the Consent Orders). In the Consent Orders (which are publicly available and will remain in effect until terminated by the regulators), the bank subsidiaries neither admitted nor denied the regulators findings that they had engaged in deceptive marketing and implementation of the banks overdraft protection program, checking rewards programs, and stop-payment process for pre-authorized recurring electronic fund transfers. Under the Consent Orders, the Companys banking subsidiaries paid a total of $10 million in civil monetary penalties, and are required to develop plans to provide restitution to affected customers (the amount of which is anticipated to be approximately $8 million), to cease and desist any operations in violation of Section 5 of the Federal Trade Commission Act, and to submit to the regulators periodic written progress reports regarding compliance with the Consent Orders. In addition, Citizens Bank, N.A. agreed to take certain remedial actions to improve its compliance risk management systems and to create a comprehensive action plan designed to achieve compliance with the Consent Order. Restitution plans have been prepared and submitted for approval and Citizens Bank, N.A. has submitted for approval, and is in the process of implementing, its action plan for compliance with the Consent Order, as well as updated policies, procedures, and programs related to its compliance risk management systems.
The Companys bank subsidiaries have also identified issues regarding, among other things, certain identity theft and debt cancellation products, certain overdraft fees, the bank subsidiaries policies and practices with respect to identifying and correcting errors in customer deposits, and the charging of cost-based credit card late payment fees. The banking subsidiaries have paid restitution, or expect to pay restitution, to certain affected customers in connection with certain of these practices. In addition, the banking subsidiaries could face formal administrative enforcement actions from their federal supervisory agencies, including the assessment of civil monetary penalties and restitution, relating to the past practices and policies identified above and other consumer products, and they could face potential civil litigation. The Company does not expect that the aggregate of amounts paid in connection with these matters will have a material adverse effect on the Companys business, financial condition and results of operations.
Fair Labor Standards Act Litigation
The Company has been named in several purported class actions brought under the FLSA and equivalent state statutes alleging that certain categories of branch employees were denied overtime for hours worked. These suits are brought by current and former branch employees alleging that either: (1) they are / were in Assistant Branch Manager positions and were improperly classified as exempt under the FLSA thereby denying them pay for all hours worked, including overtime pay; or (2) they are / were properly classified as non-exempt tellers, bankers or the like but were told not to record all of their hours, had hours they entered deleted by their managers and / or were otherwise denied pay for hours worked, including overtime pay. These cases cover the Companys entire geographic footprint, and they have been settled, subject to court approval. The settlement amount of $12 million is fully covered by an existing reserve. Separately, the Company has been named in two lawsuits brought by current and former mortgage loan officers and home loan advisors alleging that they were improperly classified as exempt under the FLSA and corresponding state laws and therefore denied pay for all
F-65
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
hours worked, including overtime pay. These cases have also been settled, and final court approval of the settlements was granted on January 29, 2014. The combined settlement amount of these two cases was $3 million and is fully covered by existing reserves.
Telephone Consumer Protection Act Litigation
The Company is a defendant in a purported class action complaint filed in December 2013 in the United States District Court for the Southern District of California pursuant to the Telephone Consumer Protection Act (TCPA). The named plaintiff purports to represent a national class of customers who allegedly received automated calls to their cell phones from the bank or its agents, without customer consent, in violation of the TCPA. The Company is vigorously defending this matter.
LIBOR Litigation
The Company is a defendant in lawsuits in which allegations have been made that its parent company, RBS Group, manipulated U.S. dollar LIBOR to the detriment of the Company customers. The lawsuits include a purported class action on behalf of borrowers of the Company whose interest rate was tied to U.S. dollar LIBOR. The plaintiffs in these cases assert various theories of liability, including fraud, negligent misrepresentation, breach of contract, and unjust enrichment. The Company is vigorously defending these matters.
Foreclosure-Related Expenses
In May 2013, the civil division of the U.S. Attorneys Office for the Southern District of New York served a subpoena pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 seeking information regarding home mortgage foreclosure expenses submitted for reimbursement to the United States Department of Housing and Urban Development, FNMA, or FHLMC. The Company is cooperating with the investigation.
Mortgage Repurchase Demands
The Company is an originator and servicer of residential mortgages and routinely sells such mortgage loans in the secondary market and to government-sponsored entities. In the context of such sales, the Company makes certain representations and warranties regarding the characteristics of the underlying loans and, as a result, may be contractually required to repurchase such loans or indemnify certain parties against losses for certain breaches of those representations and warranties. Between the start of January 2009 and the end of December 2013, the Company has received approximately $119 million in repurchase demands and $89 million in indemnification payment requests in respect of loans originated, for the most part, since 2003. Of those claims presented, $64 million was paid to repurchase residential mortgage loans, and $25 million was incurred for indemnification costs to make investors whole. The Company repurchased mortgage loans totaling $35 million and $13 million for the years ended December 31, 2013 and 2012, respectively. The Company incurred indemnification costs of $12 million and $5 million for the years ended December 31, 2013 and 2012, respectively. The Company cannot estimate what the future level of repurchase demands will be or the Companys ultimate exposure, and cannot give any assurance that the historical experience will continue in the future. It is possible that the volume of repurchase demands will increase. In addition to the above, the Company has since December 2013 been responding to subpoenas issued by the Office of the Inspector General for the Federal Housing Finance Agency seeking information about loans sold to the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation from 2003 through 2011.
F-66
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17DIVESTITURES AND BRANCH ASSETS AND LIABILITIES HELD FOR SALE
In January 2014, the Company reached an agreement to sell its Chicago-area retail branches, small business relationships and select middle market relationships. The sale included 103 branches, approximately $5.3 billion in local deposits and $1.1 billion of locally originated loans as well as related branch premises. The transaction is subject to regulatory approval and is anticipated to close in the second quarter of 2014. As a result of this transaction, the assets and liabilities related to the branches being sold have been classified as held for sale.
The following table presents the assets and liabilities held for sale related to this transaction as of:
December 31,
2013 |
||||
(in millions) | ||||
Loans held for sale: |
||||
Commercial |
$ | 551 | ||
Commercial real estate |
49 | |||
|
|
|||
Total commercial |
600 | |||
|
|
|||
Residential mortgages |
389 | |||
Other secured retail |
7 | |||
Unsecured retail |
82 | |||
|
|
|||
Total retail |
478 | |||
|
|
|||
Total loans held for sale |
1,078 | |||
|
|
|||
Other branch assets held for sale: |
||||
Properties and equipment, net |
46 | |||
|
|
|||
Total other branch assets held for sale |
46 | |||
|
|
|||
Total branch assets held for sale |
$ | 1,124 | ||
|
|
|||
Deposits held for sale: |
||||
Demand |
$ | 1,020 | ||
Checking with interest |
849 | |||
Regular savings |
504 | |||
Money market accounts |
2,013 | |||
Term deposits |
891 | |||
|
|
|||
Total deposits held for sale |
$ | 5,277 | ||
|
|
|||
Total branch liabilities held for sale |
$ | 5,277 | ||
|
|
On June 22, 2012, the Company completed the sale of 57 branches in New York. Assets and deposits totaled $16 million and $325 million, respectively. A gain of $4 million was recognized in other net gains, offset by approximately $4 million in one-time costs recognized in noninterest expense.
In June 2012, the Company entered into a series of transactions to sell substantially all of its venture capital investments. As a result, the Company de-recognized $48 million of assets and recognized losses of $14 million on the transactions, which are presented in other net gains in the accompanying Consolidated Statements of Operations.
F-67
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18RELATED PARTY TRANSACTIONS
The following is a summary of inter-company borrowed funds:
Related Party | Interest Rate | Maturity Date |
December 31,
2013 |
December 31,
2012 |
||||||||||
(dollars in millions) | ||||||||||||||
Subordinated debt |
RBSG | 4.961% | January 2024 | $ | 334 | $ | | |||||||
RBSG | 4.771% | October 2023 | 333 | | ||||||||||
RBS | 5.158% | June 2023 | 333 | | ||||||||||
RBS |
Three month
LIBOR + 1.50% |
March 2035 | | 289 |
Total interest expense recorded on inter-company subordinated debt was $16 million, $9 million, and $67 million for the years ended December 31, 2013, 2012, and 2011, respectively.
The Company maintained a $50 million revolving line of credit at December 31, 2013 and 2012 with RBS. This line of credit was not drawn upon at December 31, 2013 or 2012, expired on January 31, 2014, and was not renewed. No interest expense was incurred on this revolving line of credit for the years ended December 31, 2013, 2012, and 2011, respectively.
The Company enters into interest rate swap agreements with RBS for the purpose of reducing the Companys exposure to interest rate fluctuations. As of December 31, 2013, the total notional amount of swaps outstanding was $5.5 billion. Included in this balance were $1.5 billion which pay fixed rates ranging from 1.78% to 5.47% and receive overnight fed funds rate and one month LIBOR with maturities from 2014 through 2023. Also included in this balance were $4 billion of receive-fixed swaps that had been executed as of June 30, 2013 as part of a new hedging program implemented during the quarter ended March 31, 2013. As of December 31, 2012, the total notional amount of swaps outstanding was $4.2 billion, all of which pay fixed rates ranging from 2.94% to 5.47% and receive overnight Federal funds rate with maturities from 2013 through 2016. The Company recorded net interest expense of $146 million, $311 million, and $457 million for the years ended December 31 2013, 2012, and 2011, respectively.
In order to meet the financing needs of its customers, the Company enters into interest rate swap and cap agreements with its customers and simultaneously enters into offsetting swap and cap agreements with RBS. The Company earns a spread equal to the difference between rates charged to the customer and rates charged by RBS. The notional amount of these interest rate swap and cap agreements outstanding with RBS was $13.4 billion and $16.0 billion at December 31, 2013 and 2012, respectively. The Company recorded expense of $32 million, $285 million, and $690 million within other income for the years ended December 31, 2013, 2012, and 2011, respectively.
Also to meet the financing needs of its customers, the Company enters into a variety of foreign currency denominated products, such as loans, deposits and foreign exchange contracts. To manage the foreign exchange risk associated with these products, the Company simultaneously enters into offsetting foreign exchange contracts with RBS. The Company earns a spread equal to the difference between rates charged to the customer and rates charged by RBS. The notional amount of foreign exchange contracts outstanding with RBS was $4.6 billion and $3.4 billion at December 31, 2013 and December 31, 2012, respectively. The Company recorded expense within foreign exchange and trade finance fees of $15 million, $9 million and $1 million for the years ended December 31, 2013, 2012 and 2011, respectively.
F-68
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has issued a guarantee to RBS for a fee, whereby the Company will absorb credit losses related to the sale of foreign exchange option contracts by RBS to customers of the Company. There were outstanding foreign exchange option contracts with a notional value of $2 million and $222 million at December 31, 2013 and 2012, respectively. The Company recorded fee income of $0 million, $1 million and $2 million for the years ended December 31, 2013, 2012 and 2011, respectively.
The Company receives income for providing services and referring customers to RBS. The Company also shares office space with certain RBS entities for which rent expense and / or income is recorded in occupancy expense. The total fee income, net of occupancy expense, for the years ended December 31, 2013, 2012, and 2011 was $26 million, $28 million, and $24 million, respectively. In 2013 the Company paid $1.0 billion of common stock dividends to RBS as part of the exchange transactions described in Managements Discussion and Analysis of Financial Condition and Results of OperationsCapital included elsewhere in this prospectus and $185 million of regular dividends to RBS. In 2012, the Company paid $150 million in regular common stock dividends to RBS. There were no dividends paid in 2011.
The Company, as a matter of policy and during the ordinary course of business with underwriting terms similar to those offered to the public, has made loans to directors and executive officers and their immediate families, as well as their affiliated companies. Such loans amounted to $78 million and $92 million at December 31, 2013 and 2012, respectively.
NOTE 19FAIR VALUE MEASUREMENTS
As discussed in Significant Accounting Policies, the Company measures or monitors many of its assets and liabilities on a fair value basis. Fair value is used on a recurring basis for assets and liabilities for which fair value is the required or elected measurement basis of accounting. Additionally, fair value is used on a nonrecurring basis to evaluate assets for impairment or for disclosure purposes. Nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write-downs of individual assets. The Company also applies the fair value measurement guidance to determine amounts reported for certain disclosures in this note for assets and liabilities not required to be reported at fair value in the financial statements.
Fair Value Option, Mortgage Loans Held for Sale
The Company elected to account for residential mortgage loans held for sale at fair value. Applying fair value accounting to the residential mortgage loans held for sale better aligns the reported results of the economic changes in the value of these loans and their related hedge instruments.
The fair value of residential loans held for sale is derived from observable mortgage security prices and includes adjustments for loan servicing value, agency guarantee fees, and other loan level attributes which are mostly observable in the marketplace. Credit risk does significantly impact the valuation since loans are sold shortly after origination. Therefore, the Company classifies the residential mortgage loans held for sale in Level 2 of the fair value hierarchy.
At December 31, 2013, the fair value carrying amount of residential loans held for sale and the aggregate unpaid principal amount that the Company is contractually entitled to receive at maturity are $176 million and $173 million, respectively. At December 31, 2012, the fair value carrying amount of residential loans held for sale and the aggregate unpaid principal amount that the Company is contractually entitled to receive at maturity were $624 million and $597 million, respectively. The amount of loans past due or nonaccruing is considered insignificant.
F-69
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The loans accounted for under the fair value option are initially measured at fair value when the financial asset is recognized. Subsequent changes in fair value are recognized in current earnings. The Company recognized $(33) million, $6 million, and $14 million in mortgage banking noninterest income for the years ended December 31, 2013, 2012, and 2011, respectively. Interest income on residential loans held for sale is calculated based on the contractual interest rate of the loan and is recorded in interest income.
Recurring Fair Value Measurements
The Company utilizes a variety of valuation techniques to measure its assets and liabilities at fair value. Following is a description of valuation methodologies used for significant assets and liabilities carried on the balance sheet at fair value on a recurring basis:
Securities AFS : The fair value of securities classified as AFS is based upon quoted prices, if available. Where observable quoted prices are available in an active market, securities are classified as Level 1 in the fair value hierarchy. Classes of instruments that are valued using this market approach include debt securities issued by the U.S. Treasury. If quoted market prices are not available, the fair value for the security is estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. These instruments are classified as Level 2 because they currently trade in active markets and the inputs to the valuations are observable. The pricing models used to value securities generally begin with market prices (or rates) for similar instruments and make adjustments based on the unique characteristics of the instrument being valued. These adjustments reflect assumptions made regarding the sensitivity of each securitys value to changes in interest rates and prepayment speeds. Classes of instruments that are valued using this market approach include residential and commercial CMOs, specified pool mortgage pass-through securities and other debt securities issued by U.S. government-sponsored entities and state and political subdivisions.
A significant majority of the Companys Level 1 and 2 securities are priced using an external pricing service. The Company verifies the accuracy of the pricing provided by its primary outside pricing service on a quarterly basis. This process involves using a secondary external vendor to provide valuations for the Companys securities portfolio for comparison purposes. Any securities with discrepancies beyond a certain threshold are researched and, if necessary, valued by an independent outside broker.
In certain cases where there is limited activity or less transparency around inputs to the valuation model, securities are classified as Level 3.
Residential loans held for sale : See the Fair Value Option discussion above.
Derivatives : The majority of the Companys derivatives portfolio is comprised of plain vanilla interest rate swaps, which are traded in over-the-counter markets where quoted market prices are not readily available. For these interest rate derivatives, fair value is determined utilizing models that use primarily market observable inputs, such as swap rates and yield curves. The pricing models used to value interest rate swaps calculate the sum of each instruments fixed and variable cash flows, which are then discounted using an appropriate yield curve (i.e., LIBOR or OIS curve) to arrive at the fair value of each swap. The pricing models do not contain a high level of subjectivity as the methodologies used do not require significant judgment. The Company also considers certain adjustments to the modeled price which market participants would make when pricing each instrument, including a credit valuation adjustment that reflects the credit quality of the swap counterparty. The Company incorporates the effect of exposure to a particular
F-70
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
counterpartys credit by netting its derivative contracts with the collateral available and calculating a credit valuation adjustment on the basis of the net position with the counterparty where permitted. The determination of this adjustment requires judgment on behalf of Company management; however, the total amount of this portfolio-level adjustment is not material to the total fair value of the interest rate swaps in their entirety. Therefore, interest rate swaps are classified as Level 2 in the valuation hierarchy.
The Companys other derivatives include foreign exchange contracts. Fair value of foreign exchange derivatives uses the mid-point of daily quoted currency spot prices. A valuation model estimates fair value based on the quoted spot rates together with interest rate yield curves and forward currency rates. Since all of these inputs are observable in the market, foreign exchange derivatives are classified as Level 2 in the fair value hierarchy.
Venture capital investments : The Company values its venture capital private equity fund investments based on its capital invested in each fund, which is adjusted by management each quarter, if necessary, to arrive at its estimate of fair value. Adjustments for a funds underlying investments may be based upon comparisons to public companies, industry benchmarks, current financing round pricing, earnings multiples of comparable companies, current operating performance and future expectations, or third party valuations. Since the inputs to the valuation are difficult to independently corroborate in the marketplace, and involve a significant degree of management judgment, venture capital investments are classified as Level 3 in the fair value hierarchy.
The following table presents assets and liabilities measured at fair value, including gross derivative assets and liabilities on a recurring basis at December 31, 2013:
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
(in millions) | ||||||||||||||||
Securities available for sale: |
||||||||||||||||
Mortgage-backed securities |
$ | 15,945 | $ | | $ | 15,945 | $ | | ||||||||
State and political subdivisions |
10 | | 10 | | ||||||||||||
Equity securities |
25 | 8 | 17 | | ||||||||||||
U.S. Treasury |
15 | 15 | | | ||||||||||||
Residential loans held for sale |
176 | | 176 | | ||||||||||||
Derivative assets: |
||||||||||||||||
Interest rate swaps |
677 | | 677 | | ||||||||||||
Foreign exchange contracts |
94 | | 94 | | ||||||||||||
Other contracts |
7 | | 7 | | ||||||||||||
Venture capital investments |
5 | | | 5 | ||||||||||||
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Total assets |
$ | 16,954 | $ | 23 | $ | 16,926 | $ | 5 | ||||||||
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Derivative liabilities: |
||||||||||||||||
Interest rate swaps |
$ | 970 | $ | | $ | 970 | $ | | ||||||||
Foreign exchange contracts |
87 | | 87 | | ||||||||||||
Other contracts |
10 | | 10 | | ||||||||||||
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Total liabilities |
$ | 1,067 | $ | | $ | 1,067 | $ | | ||||||||
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F-71
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents assets and liabilities measured at fair value including gross derivative assets and liabilities on a recurring basis at December 31, 2012:
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
(in millions) | ||||||||||||||||
Securities available for sale: |
||||||||||||||||
Mortgage-backed securities |
$ | 18,301 | $ | | $ | 18,301 | $ | | ||||||||
State and political subdivisions |
21 | | 21 | | ||||||||||||
Equity securities |
19 | 7 | 12 | | ||||||||||||
U.S. Treasury |
15 | 15 | | | ||||||||||||
Residential loans held for sale |
624 | | 624 | | ||||||||||||
Derivative assets: |
||||||||||||||||
Interest rate swaps |
1,103 | | 1,103 | | ||||||||||||
Foreign exchange contracts |
71 | | 71 | | ||||||||||||
Other contracts |
35 | | 35 | | ||||||||||||
Venture capital investments |
6 | | | 6 | ||||||||||||
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Total assets |
$ | 20,195 | $ | 22 | $ | 20,167 | $ | 6 | ||||||||
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Derivative liabilities: |
||||||||||||||||
Interest rate swaps |
$ | 1,290 | $ | | $ | 1,290 | $ | | ||||||||
Foreign exchange contracts |
67 | | 67 | | ||||||||||||
Other contracts |
15 | | 15 | | ||||||||||||
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Total liabilities |
$ | 1,372 | $ | | $ | 1,372 | $ | | ||||||||
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The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows:
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in millions) | ||||||||||||
Balance as of January 1 |
$ | 6 | $ | 57 | $ | 64 | ||||||
Purchases, issuances, sales and settlements: |
||||||||||||
Purchases |
| 1 | 2 | |||||||||
Sales |
(4 | ) | (45 | ) | | |||||||
Settlements |
3 | 23 | | |||||||||
Other net losses |
| (30 | ) | (9 | ) | |||||||
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Balance as of December 31 |
$ | 5 | $ | 6 | $ | 57 | ||||||
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Net unrealized gain (loss) included in net income for the year relating to assets held at December 31 |
$ | | $ | (11 | ) | $ | 9 | |||||
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There were no transfers among Levels 1, 2 or 3 during the years ended December 31, 2013, 2012 and 2011.
F-72
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nonrecurring Fair Value Measurements
The following valuation techniques are utilized to measure significant assets for which the Company utilizes fair value on a nonrecurring basis:
Impaired Loans : The carrying amount of collateral-dependent impaired loans is compared to the appraised value of the collateral less costs to dispose. Any excess of carrying amount over the appraised value is charged to the ALLL.
MSRs : MSRs do not trade in an active market with readily observable prices. MSRs are classified as Level 3 since the valuation methodology utilizes significant unobservable inputs. At December 31, 2013 the fair value is calculated using the discounted cash flow model, the model that uses assumptions, including weighted-average life of 5.4 years (range of 1.87.4 years), weighted-average constant prepayment rate of 13% (range of 9.4%41.5%) and weighted-average discount rate of 10.8% (range of 10.2%13.1%). Refer to Note 1 Significant Accounting Policies, and Note 9 Mortgage Banking, for more information.
Foreclosed assets : Foreclosed assets consist primarily of residential properties. Foreclosed assets are carried at the lower of carrying value or fair value less costs to dispose. Fair value is based upon independent market prices or appraised values of the collateral and is classified as Level 2.
Goodwill : Goodwill is valued using unobservable inputs and is classified as Level 3. Fair value is calculated using the present value of estimated future earnings (discounted cash flow method), the model which uses assumptions including discount rate (9.5%), historical projected loss rates (commercial banking, 0.44%; retail banking, 0.57%), income tax (35%), and capital retention (7%). Refer to Note 1 Significant Accounting Policies, for a description of the goodwill valuation methodology.
Commercial loans held for sale : Commercial loans held for sale consist primarily of syndicated loans not sold at the time of funding. The mark to market is recorded in noninterest income in the Consolidated Statements of Operations.
The following table presents assets and liabilities measured at fair value on a nonrecurring basis and any gains (losses) recorded in earnings:
Carrying Value at December 31, 2013 |
Year Ended
December 31, 2013 |
|||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 |
Total (Losses)
Gains |
||||||||||||||||
(in millions) | ||||||||||||||||||||
Impaired collateral-dependent loans (1) |
$ | 74 | $ | | $ | 74 | $ | | $ | (83 | ) | |||||||||
MSRs (2) |
185 | | | 185 | 47 | |||||||||||||||
Foreclosed real estate (3) |
49 | | 49 | | (4 | ) | ||||||||||||||
Goodwill (5) |
6,876 | | | 6,876 | (4,435 | ) | ||||||||||||||
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Carrying Value at December 31, 2012 |
Year Ended
December 31, 2012 |
|||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | Total Losses | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Impaired collateral-dependent loans (1) |
$ | 292 | $ | | $ | 292 | $ | | $ | (101 | ) | |||||||||
MSRs (2) |
145 | | | 145 | (12 | ) | ||||||||||||||
Foreclosed real estate (3) |
92 | | 92 | | (6 | ) | ||||||||||||||
Commercial loans held for sale (4) |
22 | | 22 | | | |||||||||||||||
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F-73
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Carrying Value at December 31, 2011 |
Year Ended
December 31, 2011 |
|||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | Total Losses | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Impaired collateral-dependent loans (1) |
$ | 488 | $ | | $ | 488 | $ | | $ | (118 | ) | |||||||||
MSRs (2) |
157 | | | 157 | (42 | ) | ||||||||||||||
Foreclosed real estate (3) |
116 | | 116 | | (7 | ) | ||||||||||||||
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(1) | In 2013, impaired loans for which collection is dependent on the loans collateral in the amount of $161 million were written down to $74 million, resulting in an impairment charge of $83 million, which was charged to the allowance for loan and lease losses. In 2012, impaired loans for which collection is dependent on the loans collateral in the amount of $447 million were written down to their fair value of $292 million, resulting in an impairment charge of $101 million, which was charged to the allowance for loan and lease losses. In 2011, impaired loans for which collection is dependent on the loans collateral in the amount of $875 million were written down to their fair value of $488 million resulting in an impairment charge of $118 million, which was charged to the allowance for loan and lease losses. Fair value of the loans was primarily based on the appraised value of the collateral. |
(2) | In 2013, MSRs totaling $215 million were evaluated for impairment and written down to $185 million. An impairment recapture of $47 million and a total cumulative valuation allowance of $23 million were recognized. In 2012, MSRs totaling $215 million were evaluated for impairment and written down to $145 million, resulting in a charge of $12 million and a total cumulative valuation allowance of $70 million. In 2011, MSRs totaling $209 million were evaluated for impairment and written down to $157 million, resulting in an impairment charge of $42 million. The fair value of MSRs was $195 million, $147 million and $155 million at December 31, 2013, 2012, and 2011, respectively. |
(3) | In 2013, foreclosed real estate accounted for at the lower of cost or fair value less costs to sell was written down to fair value of $49 million, resulting in an impairment charge of $4 million. In 2012, foreclosed real estate accounted for at the lower of cost or fair value less costs to sell was written down to fair value of $92 million, resulting in an impairment charge of $6 million. In 2011, foreclosed real estate accounted for at the lower of cost or fair value less costs to sell was written down to fair value of $116 million, resulting in an impairment charge of $7 million. |
(4) | In 2012, commercial loans held for sale totaled $22 million; cost approximated fair value. |
(5) | In 2013, Goodwill totaling $11.3 billion was written down to its implied fair value of $6.9 billion, resulting in an impairment charge of $4.4 billion. Fair value of $6.9 billion was valued as of June 30, 2013. |
Disclosures about Fair Value of Financial Instruments
Following is a description of valuation methodologies used to estimate the fair value of financial instruments for disclosure purposes (these instruments are not recorded in the financial statements at fair value):
Loans and leases : For loans and leases not recorded at fair value on a recurring basis that are not accounted for as collateral-dependent loans impaired loans, fair value is estimated by using one of two methods: a discounted cash flow method or a securitization method. The discounted cash flow method involves discounting the expected future cash flows using current rates that a market participant would likely use to value similar pools of loans. Inputs used in this method include observable information such as contractual cash flows (net of servicing cost) and unobservable information such as estimated prepayment speeds, credit loss exposures, and discount rates. The securitization method involves utilizing market securitization data to value the assets as if a securitization transaction had been executed. Inputs used include observable market-based MBS data and pricing adjustments based on unobservable data reflecting the liquidity risk, credit loss exposure and other characteristics of the underlying loans. The internal risk-weighted balances of loans are grouped by product type for purposes of these estimated valuations. For nonaccruing loans, fair value is estimated by discounting managements estimate of future cash flows with a discount rate commensurate with the risk associated with such assets. Fair value of collateral-dependent loans is primarily based on the appraised value of the collateral.
F-74
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans held for sale : Balances are loans that were transferred to loans held for sale that are reported at book value.
Securities held to maturity : The fair value of securities classified as HTM is estimated using pricing models, quoted prices of securities with similar characteristics or discounted cash flow. The pricing models used to value these securities generally begin with market prices (or rates) for similar instruments and make adjustments based on the unique characteristics of the instrument being valued. These adjustments reflect assumptions made regarding the sensitivity of each securitys value to changes in interest rates and prepayment speeds.
Other investment securities : The cost basis carrying value of other investment securities, such as FHLB stock and FRB stock, is assumed to approximate the fair value of the securities. As a member of the FHLB and FRB, the Company is required to hold FHLB and FRB stock. The stock can be sold only to the FHLB and FRB upon termination of membership, or redeemed at the FHLBs or FRBs sole discretion.
Deposits : The fair value of demand deposits, checking with interest accounts, regular savings and money market accounts is the amount payable on demand at the balance sheet date. The fair value of term deposits is estimated by discounting the expected future cash flows using rates currently offered for deposits of similar remaining maturities.
Deposits held for sale : Balances are deposits that were transferred to held for sale that are reported at book value.
Federal funds purchased and securities sold under agreements to repurchase and borrowed funds : Rates currently available to the Company for debt of similar terms and remaining maturities are used to discount the expected cash flows of existing debt.
The following table is a summary of fair value for financial instruments not recorded at fair value in the Consolidated Financial Statements. The carrying amounts in the following table are recorded in the consolidated balance sheets under the indicated captions:
December 31, 2013 | ||||||||||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||
Carrying
Value |
Fair
Value |
Carrying
Value |
Fair
Value |
Carrying
Value |
Fair
Value |
Carrying
Value |
Fair
Value |
|||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Financial Assets: |
||||||||||||||||||||||||||||||||
Loans and leases |
$ | 85,859 | $ | 85,724 | $ | | $ | | $ | 74 | $ | 74 | $ | 85,785 | $ | 85,650 | ||||||||||||||||
Other loans held for sale |
1,078 | 1,078 | | | | | 1,078 | 1,078 | ||||||||||||||||||||||||
Securities held to maturity |
4,315 | 4,257 | | | 4,315 | 4,257 | | | ||||||||||||||||||||||||
Other investment securities |
935 | 935 | | | 935 | 935 | | | ||||||||||||||||||||||||
Financial Liabilities: |
||||||||||||||||||||||||||||||||
Deposits |
86,903 | 86,907 | | | 86,903 | 86,907 | | | ||||||||||||||||||||||||
Deposits held for sale |
5,277 | 5,277 | | | 5,277 | 5,277 | | | ||||||||||||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
4,791 | 4,791 | | | 4,791 | 4,791 | | | ||||||||||||||||||||||||
Other short-term borrowed funds |
2,251 | 2,249 | | | 2,251 | 2,249 | | | ||||||||||||||||||||||||
Long-term borrowed funds |
1,405 | 1,404 | | | 1,405 | 1,404 | | | ||||||||||||||||||||||||
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F-75
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 | ||||||||||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||
Carrying
Value |
Fair
Value |
Carrying
Value |
Fair
Value |
Carrying
Value |
Fair
Value |
Carrying
Value |
Fair
Value |
|||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Financial Assets: |
||||||||||||||||||||||||||||||||
Loans and leases |
$ | 87,248 | $ | 86,856 | $ | | $ | | $ | 292 | $ | 292 | $ | 86,956 | $ | 86,564 | ||||||||||||||||
Other investment securities |
1,061 | 1,061 | | | 1,061 | 1,061 | | | ||||||||||||||||||||||||
Financial Liabilities: |
||||||||||||||||||||||||||||||||
Deposits |
95,148 | 95,192 | | | 95,148 | 95,192 | | | ||||||||||||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
3,601 | 3,601 | | | 3,601 | 3,601 | | | ||||||||||||||||||||||||
Other short-term borrowed funds |
501 | 501 | | | 501 | 501 | | | ||||||||||||||||||||||||
Long-term borrowed funds |
694 | 693 | | | 694 | 693 | | | ||||||||||||||||||||||||
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NOTE 20REGULATORY MATTERS
As a BHC, the Company is subject to regulation and supervision by the FRBG. The primary subsidiaries of Citizens are its two insured depository institutions: Citizens Bank, N.A., a national banking association whose primary federal regulator is the OCC, and Citizens Bank of Pennsylvania, a Pennsylvania-chartered savings bank regulated by the Department of Banking of the Commonwealth of Pennsylvania and supervised by the FDIC as its primary federal regulator. Under the regulatory capital adequacy guidelines of the FDICIA, the Company and its banking subsidiaries must meet specific capital requirements. These requirements are expressed in terms of the following ratios: (1) Risk-based Total Capital (total capital/risk-weighted on- and off-balance sheet assets); (2) Risk-based Tier 1 Capital (tier 1 capital/risk-weighted on- and off-balance sheet assets); and (3) Tier 1 Leverage (tier 1 capital/adjusted average quarterly assets). To meet the regulatory capital requirements, the Company and its banking subsidiaries must maintain minimum Risk-based Total Capital, Risk-based Tier 1 Capital, and Tier 1 Leverage ratios. In addition, the Company must not be subject to a written agreement, order or capital directive with any of its regulators. Failure to meet minimum capital requirements can result in the initiation of certain actions that, if undertaken, could have a material effect on the Companys Consolidated Financial Statements.
The following table presents capital and capital ratio information:
FDIC Requirements | ||||||||||||||||||||||||
Actual |
Minimum
Capital Adequacy |
Classification
as Well Capitalized |
||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||
As of December 31, 2013 |
||||||||||||||||||||||||
Total Capital to Risk-Weighted Assets |
$ | 15,885 | 16.1 | % | $ | 7,891 | 8.0 | % | $ | 9,863 | 10.0 | % | ||||||||||||
Tier 1 Capital to Risk-Weighted Assets |
13,301 | 13.5 | % | 3,945 | 4.0 | % | 5,918 | 6.0 | % | |||||||||||||||
Tier 1 Capital to Average Assets (Leverage) |
13,301 | 11.6 | % | 3,433 | 3.0 | % | 5,721 | 5.0 | % | |||||||||||||||
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As of December 31, 2012 |
||||||||||||||||||||||||
Total Capital to Risk-Weighted Assets |
$ | 15,623 | 15.8 | % | $ | 7,901 | 8.0 | % | $ | 9,876 | 10.0 | % | ||||||||||||
Tier 1 Capital to Risk-Weighted Assets |
14,036 | 14.2 | % | 3,951 | 4.0 | % | 5,926 | 6.0 | % | |||||||||||||||
Tier 1 Capital to Average Assets (Leverage) |
14,036 | 12.1 | % | 3,475 | 3.0 | % | 5,791 | 5.0 | % | |||||||||||||||
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F-76
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with federal and state banking regulations, dividends paid by the Companys banking subsidiaries to the Company itself are generally limited to the retained earnings of the respective banking subsidiaries unless specifically approved by the appropriate bank regulator. The Company declared and paid RBS total common stock dividends of $1.2 billion in 2013. There were $150 million in common stock dividends in 2012 and no common stock dividends in 2011.
The earnings impact of goodwill impairment recognized by Citizens Bank, N.A. has put the bank subsidiary in the position of having to request specific approval from the OCC before executing capital distributions to its parent, Citizens. This requirement will be in place through the fourth quarter of 2015. Regardless of the OCCs decision regarding capital distributions by Citizens Bank, N.A., the stand-alone BHC, as of December 31, 2013, had liquid assets in excess of $554 million compared to an annual interest burden on existing subordinated debt of approximately $63 million.
NOTE 21SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is as follows:
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in millions) | ||||||||||||
Supplemental cash flow information: |
||||||||||||
Interest paid |
$ | 452 | $ | 644 | $ | 899 | ||||||
Income taxes paid (refunded) |
20 | 201 | (109 | ) | ||||||||
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Supplemental schedule of non-cash investing and financing activities: |
||||||||||||
Transfer of securities available for sale to held to maturity |
$ | 4,240 | $ | | $ | | ||||||
Transfer of other loans held for sale |
1,078 | 22 | | |||||||||
Loans securitized and transferred to securities available for sale |
106 | 21 | 62 | |||||||||
Capital contribution |
14 | 27 | 30 | |||||||||
Accrual and income tax true up related to the 2010 sale of RBS WorldPay, Inc. |
| | 12 | |||||||||
Due from broker for securities sold but not settled |
(442 | ) | (4 | ) | | |||||||
Due to broker for securities purchased but not settled |
| 2 | | |||||||||
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F-77
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table presents the changes in the balances, net of taxes, of each component of OCI:
Net Unrealized
Gains (Losses) on Derivatives |
Net Unrealized
Gains (Losses) on Securities |
Defined
Benefit Pension Plans |
Total AOCI | |||||||||||||
(in millions) | ||||||||||||||||
Balance at January 1, 2011 |
$ | (642 | ) | $ | 163 | $ | (212 | ) | $ | (691 | ) | |||||
Other comprehensive loss before reclassifications |
(112 | ) | 286 | | 174 | |||||||||||
Other than temporary impairment not recognized in earnings on securities |
| (108 | ) | | (108 | ) | ||||||||||
Amounts reclassified from other comprehensive income |
328 | (90 | ) | (141 | ) | 97 | ||||||||||
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Net other comprehensive income (loss) |
216 | 88 | (141 | ) | 163 | |||||||||||
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|||||||||
Balance at December 31, 2011 |
(426 | ) | 251 | (353 | ) | (528 | ) | |||||||||
Other comprehensive loss before reclassifications |
(26 | ) | 138 | | 112 | |||||||||||
Other than temporary impairment not recognized in earnings on securities |
| (38 | ) | | (38 | ) | ||||||||||
Amounts reclassified from other comprehensive income |
212 | (45 | ) | (25 | ) | 142 | ||||||||||
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|
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|
|||||||||
Net other comprehensive income (loss) |
186 | 55 | (25 | ) | 216 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at December 31, 2012 |
(240 | ) | 306 | (378 | ) | (312 | ) | |||||||||
Other comprehensive loss before reclassifications |
(172 | ) | (285 | ) | | (457 | ) | |||||||||
Other than temporary impairment not recognized in earnings on securities |
| (26 | ) | | (26 | ) | ||||||||||
Amounts reclassified from other comprehensive income |
114 | (86 | ) | 119 | 147 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net other comprehensive (loss) income |
(58 | ) | (397 | ) | 119 | (336 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at December 31, 2013 |
$ | (298 | ) | $ | (91 | ) | $ | (259 | ) | $ | (648 | ) | ||||
|
|
|
|
|
|
|
|
F-78
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table reports the amounts reclassified out of each component of OCI and into the Consolidated Statement of Operations:
Year Ended December 31, 2013 | ||||||
Details about AOCI Components |
Amount
Reclassified from AOCI |
Affected Line Item in the Consolidated Statements
|
||||
(in millions) | ||||||
Reclassification adjustment for net derivative gains (losses) included in net income (loss): |
$ | 56 | Interest income | |||
(235 | ) | Interest expense | ||||
(1 | ) | Other income | ||||
|
|
|||||
(180 | ) | Income before income tax (benefit) expense | ||||
(66 | ) | Income tax (benefit) expense | ||||
|
|
|||||
$ | (114 | ) | Net (loss) income | |||
|
|
|||||
Reclassification of net securities gains (losses) to net income (loss): |
$ | 144 | Securities gains, net | |||
(8 | ) | Net impairment losses recognized in earnings | ||||
|
|
|||||
136 | Income before income tax (benefit) expense | |||||
50 | Income tax (benefit) expense | |||||
|
|
|||||
$ | 86 | Net (loss) income | ||||
|
|
|||||
Reclassification of changes related to the employee benefit plan: |
$ | (190 | ) | Salaries and employee benefits | ||
|
|
|||||
(190 | ) | Income before income tax (benefit) expense | ||||
(71 | ) | Income tax (benefit) expense | ||||
|
|
|||||
$ | (119 | ) | Net (loss) income | |||
|
|
|||||
Total reclassification loss: |
$ | (147 | ) | Net (loss) income | ||
|
|
The following table presents the effects to net income of the amounts reclassified out of OCI:
Year Ended
December 31, 2013 |
||||
(in millions) | ||||
Net interest income (includes $(179) of AOCI reclassifications) |
$ | 3,058 | ||
Provision for credit losses |
479 | |||
Noninterest income (includes $135 of AOCI reclassifications) |
1,632 | |||
Noninterest expense (includes $190 of AOCI reclassifications) |
7,679 | |||
|
|
|||
Loss before income tax benefit |
(3,468 | ) | ||
Income tax benefit (includes $87 income tax net benefit from reclassification items) |
(42 | ) | ||
|
|
|||
Net loss |
$ | (3,426 | ) | |
|
|
F-79
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23EXIT COSTS AND RESTRUCTURING RESERVES
The Company continues to review its structural expense base in a companywide effort to create a more streamlined organization, reduce expense growth, and provide funds for future growth initiatives. During 2013, Citizens introduced branch image capture on the teller line, which automated several key processes within the branch network.
The following table includes the activity in the exit costs and restructuring reserves:
Severance | Facilities Costs | Fixed Assets | Other | Total | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Reserve balance as of January 1, 2011 |
$ | 9 | $ | 15 | $ | | $ | 1 | $ | 25 | ||||||||||
Additions |
9 | 43 | 9 | 4 | 65 | |||||||||||||||
Utilization |
(9 | ) | (6 | ) | (2 | ) | (5 | ) | (22 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Reserve balance as of December 31, 2011 |
9 | 52 | 7 | | 68 | |||||||||||||||
Additions |
2 | 1 | | 4 | 7 | |||||||||||||||
Reversals |
(1 | ) | (11 | ) | | | (12 | ) | ||||||||||||
Utilization |
(7 | ) | (22 | ) | | (4 | ) | (33 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Reserve balance as of December 31, 2012 |
3 | 20 | 7 | | 30 | |||||||||||||||
Additions |
6 | 15 | 7 | 3 | 31 | |||||||||||||||
Reversals |
(1 | ) | (4 | ) | | | (5 | ) | ||||||||||||
Utilization |
(6 | ) | (13 | ) | (8 | ) | (3 | ) | (30 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Reserve balance as of December 31, 2013 |
$ | 2 | $ | 18 | $ | 6 | $ | 0 | $ | 26 | ||||||||||
|
|
|
|
|
|
|
|
|
|
In the year ended December 31, 2013, the Company reversed $5 million and recorded $31 million in noninterest expense for restructuring charges. The reversed restructuring charges consisted primarily of lease termination costs of $4 million and employee termination costs of $1 million. The recorded restructuring charges consisted primarily of employee termination costs of $6 million, lease termination costs of $15 million, fixed asset writeoffs of $7 million, and $3 million of other costs.
In the year ended December 31, 2012, the Company recorded a $7 million charge to noninterest expense for other restructuring charges consisting primarily of lease termination costs of $1 million, employee termination costs of $2 million, and miscellaneous other expense of $4 million.
NOTE 24BUSINESS SEGMENTS
The Company is managed by its CEO on a divisional basis. The Companys two business segments are Consumer Banking and Commercial Banking. The business segments are determined based on the products and services provided or the type of customer served. Each division has a Vice Chairman who reports directly to the CEO. The CEO has final authority over resource allocation decisions and performance assessment. The business segments reflect this management structure and the manner in which financial information is currently evaluated by the CEO. Non-segment operations are classified as Other, which includes corporate functions, the Treasury function, the securities portfolio, wholesale funding activities, intangible assets, Community Development, non-core assets, and other unallocated assets, liabilities, revenues and expenses.
Segment results are determined based upon the Companys management reporting system, which assigns balance sheet and income statement items to each of the business segments. The process is designed around the Companys organizational and management structure and, accordingly, the
F-80
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
results derived are not necessarily comparable with similar information published by other financial institutions. A description of each reportable segment and table of financial results is presented below.
| Consumer BankingThe Consumer Banking segment focuses on retail customers and small businesses with annual revenues of up to $25 million. It offers traditional banking products and services, including checking, savings, home loans, student loans, credit cards, business loans and financial management services. It also operates an indirect auto financing business, providing financing for both new and used vehicles through auto dealerships. The segments distribution channels include a branch network, ATMs and a work force of experienced specialists ranging from financial consultants, mortgage loan officers and business banking officers to private bankers. |
| Commercial BankingThe Commercial Banking segment targets companies with annual revenues from $25 million to $2 billion and provides a full complement of financial products and solutions, including loans, leases, trade financing, deposits, cash management, foreign exchange, interest rate risk management, corporate finance and capital markets advisory capabilities. It focuses on small and middle-market companies and has dedicated teams with industry expertise in government banking, not-for-profit, healthcare, technology, asset finance, franchise finance, asset-based lending, commercial real estate, private equity and sponsor finance. While the segments business development efforts are predominantly focused on our twelve-state core footprint, some of its specialized industry teams also operate selectively on a national basis (such as healthcare, asset finance and franchise finance). Commercial Banking is organized by teams that target different client segments. A key component of the segments growth strategy is to expand its loan portfolio by originating high-quality commercial loans, which produce revenues consistent with its financial objectives and complies with its conservative credit policies. Commercial underwriting is driven by cash flow analysis supported by collateral analysis and review. The commercial lending teams offer a wide range of commercial loan products, including commercial real estate loans; working capital loans and lines of credit; demand, term and time loans; and equipment, inventory and accounts receivable financing. |
As of and for the Year Ended December 31, 2013 | ||||||||||||||||
Consumer Banking | Commercial Banking | Other | Consolidated | |||||||||||||
(in millions) | ||||||||||||||||
Net interest income (expense) |
$ | 2,176 | $ | 1,031 | $ | (149 | ) | $ | 3,058 | |||||||
Noninterest income |
1,025 | 389 | 218 | 1,632 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
3,201 | 1,420 | 69 | 4,690 | ||||||||||||
Noninterest expense |
2,522 | 635 | 4,522 | 7,679 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Profit (loss) before provision for credit losses |
679 | 785 | (4,453 | ) | (2,989 | ) | ||||||||||
Provision for credit losses |
308 | (7 | ) | 178 | 479 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income tax expense |
371 | 792 | (4,631 | ) | (3,468 | ) | ||||||||||
Income tax expense (benefit) |
129 | 278 | (449 | ) | (42 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
$ | 242 | $ | 514 | $ | (4,182 | ) | $ | (3,426 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
Total Average Assets |
$ | 46,465 | $ | 35,229 | $ | 39,172 | $ | 120,866 | ||||||||
|
|
|
|
|
|
|
|
F-81
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Year Ended December 31, 2012 | ||||||||||||||||
Consumer Banking | Commercial Banking | Other | Consolidated | |||||||||||||
(in millions) | ||||||||||||||||
Net interest income (expense) |
$ | 2,197 | $ | 1,036 | $ | (6 | ) | $ | 3,227 | |||||||
Noninterest income |
1,187 | 349 | 131 | 1,667 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
3,384 | 1,385 | 125 | 4,894 | ||||||||||||
Noninterest expense |
2,691 | 625 | 141 | 3,457 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Profit (loss) before provision for credit losses |
693 | 760 | (16 | ) | 1,437 | |||||||||||
Provision for credit losses |
408 | 63 | (58 | ) | 413 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before income tax expense |
285 | 697 | 42 | 1,024 | ||||||||||||
Income tax expense |
100 | 244 | 37 | 381 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 185 | $ | 453 | $ | 5 | $ | 643 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Average Assets |
$ | 47,824 | $ | 33,474 | $ | 46,368 | $ | 127,666 | ||||||||
|
|
|
|
|
|
|
|
As of and for the Year Ended December 31, 2011 | ||||||||||||||||
Consumer Banking | Commercial Banking | Other | Consolidated | |||||||||||||
(in millions) | ||||||||||||||||
Net interest income |
$ | 2,204 | $ | 929 | $ | 187 | $ | 3,320 | ||||||||
Noninterest income |
1,128 | 343 | 240 | 1,711 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
3,332 | 1,272 | 427 | 5,031 | ||||||||||||
Noninterest expense |
2,524 | 605 | 242 | 3,371 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Profit before provision for credit losses |
808 | 667 | 185 | 1,660 | ||||||||||||
Provision for credit losses |
400 | 92 | 390 | 882 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income tax expense |
408 | 575 | (205 | ) | 778 | |||||||||||
Income tax expense (benefit) |
143 | 202 | (73 | ) | 272 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
$ | 265 | $ | 373 | $ | (132 | ) | $ | 506 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Total Average Assets |
$ | 46,071 | $ | 29,800 | $ | 52,473 | $ | 128,344 | ||||||||
|
|
|
|
|
|
|
|
In addition to non-segment operations, Other includes certain reconciling items in order to translate the segment results that are based on management accounting practices into consolidated results. For example, Other includes goodwill and the associated $4.4 billion goodwill impairment charge recorded in 2013. Management accounting practices utilized by the Company as the basis for presentation for segment results include the following:
| FTP adjustments. The Company utilizes an FTP system to eliminate the effect of interest rate risk from the segments net interest income because such risk is centrally managed within the Treasury function. The FTP system credits (or charges) the segments with the economic value of the funds created (or used) by the segments. The FTP system provides a funds credit for sources of funds and a funds charge for the use of funds by each segment. The summation of the interest income / expense and FTP charges / credits for each segment is its designated net interest income. The variance between the Companys cumulative FTP charges and cumulative FTP credits is allocated to the individual business segments. |
F-82
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| Provision for credit losses allocations . Provision for credit losses is allocated to each business segment based on actual net charge-offs that have been recognized by the business segment. The difference between the consolidated provision for credit losses and the business segments net charge-offs is reflected in Other. |
| Income tax allocations . Income taxes are assessed to each line of business at a standard tax rate with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Other. |
| Expense allocations . Noninterest expenses incurred by centrally managed operations or business lines that directly support another business lines operations are charged to the applicable business line based on its utilization of those services. |
| Goodwill . For impairment testing purposes, the Companys allocates goodwill to its Consumer Banking and Commercial Banking reporting units. For management reporting purposes, the Company presents the goodwill balance (and any related impairment charges) in Other. |
Substantially all revenues generated and long-lived assets held by the Companys business segments are derived from clients that reside in the United States. Neither segment earns revenue from a single external customer that represents 10 percent or more of the Companys total revenues.
NOTE 25EARNINGS PER SHARE
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(dollars in millions, except share data) | ||||||||||||
Numerator: |
||||||||||||
Net (loss) income |
$ | (3,426 | ) | $ | 643 | $ | 506 | |||||
Net (loss) income available to common shareholders |
(3,426 | ) | 643 | 506 | ||||||||
|
|
|
|
|
|
|||||||
Denominator: |
||||||||||||
Weighted-average common shares outstandingbasic |
559,998,324 | 559,998,324 | 559,998,324 | |||||||||
Weighted-average common shares outstandingdiluted |
559,998,324 | 559,998,324 | 559,998,324 | |||||||||
|
|
|
|
|
|
|||||||
Earnings (loss) per common share: |
||||||||||||
Basic |
$ | (6.12 | ) | $ | 1.15 | $ | 0.90 | |||||
Diluted |
(6.12 | ) | 1.15 | 0.90 | ||||||||
|
|
|
|
|
|
The Company had 559,998,324 shares of common stock issued and outstanding as of December 31, 2013, 2012, and 2011 after reflecting the 165,582-for-1 forward stock split that was effective on August 22, 2014. The Companys authorized shares were increased to 1,000,000,000 on April 9, 2014. The Company did not have dilutive shares during the periods presented.
NOTE 26SHARE-BASED COMPENSATION
RBS Group grants stock-based compensation awards to employees of the Company pursuant to its various long-term incentive plans. These plans are administered by the Group Performance and Remuneration Committee of the RBSG Board of Directors. All stock-based compensation awards granted to employees have been settled in RBSG shares.
F-83
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Share Units
A restricted share unit is the right to receive shares of stock on a future date, which may be subject to time-based vesting conditions and/or performance-based vesting conditions. Time-based restricted share units granted historically have generally become vested ratably over a three-year period. Performance-based restricted share units granted historically have generally become vested at the end of a three-year performance period, depending on the level of performance achieved during such period as compared to specified RBS Group, divisional and/or functional performance guideposts and subject to the further adjustment at the discretion of the Group Remuneration and Performance Committee of the RBSG Board of Directors.
The fair value of each award is determined on the grant date. All awards (including those with cliff or ratable vesting) are expensed on a straight-line basis. With respect to performance-based awards, over the performance and requisite service period (i.e., vesting period) of the award, the number of shares of stock that will be issued is adjusted upward or downward based upon the probability of achievement of performance (in the case of performance-based awards) and the ultimate number of shares issued and the related compensation cost recognized as expense is based on actual performance levels.
The following table summarizes the activity related to our restricted share unit plans:
Year Ended December 31, | ||||||||||||||||||||||||
2013 | 2012 | 2011 | ||||||||||||||||||||||
Restricted
Share Units |
Weighted-
Average Grant Price |
Restricted
Share Units |
Weighted-
Average Grant Price |
Restricted
Share Units |
Weighted-
Average Grant Price |
|||||||||||||||||||
Nonvested, January 1, |
22,865,810 | $ | 6.14 | 23,490,759 | $ | 6.49 | 20,333,225 | $ | 6.23 | |||||||||||||||
Granted |
6,363,919 | 4.66 | 9,477,611 | 4.41 | 8,519,076 | 7.05 | ||||||||||||||||||
Vested |
(4,208,789 | ) | 6.68 | (8,379,848 | ) | 5.22 | (3,726,990 | ) | 6.22 | |||||||||||||||
Forfeited |
(5,241,973 | ) | 7.03 | (1,722,712 | ) | 5.93 | (1,634,552 | ) | 6.79 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Nonvested, December 31, |
19,778,967 | $ | 5.31 | 22,865,810 | $ | 6.14 | 23,490,759 | $ | 6.49 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Share Options
RBS Group awarded share options to certain employees under the ESOP, which were subject to clawback provisions and, in some cases, performance conditions. The last ESOP award was granted in 2009 and vested three years later in 2012. There are no remaining unvested ESOP awards. All unexercised options expire by April 2019.
F-84
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the activity related to share options for the periods presented:
Year Ended December 31, | ||||||||||||||||||||||||
2013 | 2012 | 2011 | ||||||||||||||||||||||
Number of
Options |
Weighted-
Average Exercise Price |
Number of
Options |
Weighted-
Average Exercise Price |
Number of
Options |
Weighted-
Average Exercise Price |
|||||||||||||||||||
Outstanding at January 1, |
1,594,237 | $ | 4.37 | 2,109,150 | $ | 4.39 | 2,136,128 | $ | 4.40 | |||||||||||||||
Exercised |
(127,469 | ) | 4.25 | | | | | |||||||||||||||||
Forfeited/Canceled |
| | (514,913 | ) | 4.47 | (26,978 | ) | 4.61 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Outstanding at December 31, |
1,466,768 | $ | 4.38 | 1,594,237 | $ | 4.37 | 2,109,150 | $ | 4.39 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Exercisable at December 31, |
1,466,768 | |||||||||||||||||||||||
|
|
Compensation expense related to the above share based plans was $27 million, $29 million, and $29 million for the years ended December 31, 2013, 2012, and 2011, respectively. At December 31, 2013, the total unrecognized compensation expense for nonvested equity awards granted was $20 million. This expense is expected to be recognized over a weighted-average period of three years. No share-based compensation costs were capitalized or dividends paid by RBS Group, during the years ended December 31, 2013, 2012 and 2011.
F-85
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 27PARENT COMPANY ONLY FINANCIALS
CFG Parent Company
Condensed Statements of Operations
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in millions) | ||||||||||||
OPERATING INCOME: |
||||||||||||
Income from bank subsidiaries and associated banks, excluding equity in undistributed income: |
||||||||||||
Dividends |
$ | 210 | $ | 175 | $ | | ||||||
Interest |
13 | 13 | 20 | |||||||||
Management and service fees |
26 | 42 | 44 | |||||||||
Income from nonbank subsidiaries and associated nonbank companies excluding equity in undistributed income: |
||||||||||||
Interest |
| | 1 | |||||||||
Securities gains |
| 1 | | |||||||||
All other operating income |
2 | 4 | 19 | |||||||||
|
|
|
|
|
|
|||||||
Total operating income |
251 | 235 | 84 | |||||||||
|
|
|
|
|
|
|||||||
OPERATING EXPENSE: |
||||||||||||
Salaries and employee benefits |
38 | 52 | 50 | |||||||||
Interest expense |
24 | 4 | | |||||||||
All other expenses |
43 | 39 | 40 | |||||||||
|
|
|
|
|
|
|||||||
Total operating expense |
105 | 95 | 90 | |||||||||
|
|
|
|
|
|
|||||||
Income (loss) before taxes and undistributed income |
146 | 140 | (6 | ) | ||||||||
|
|
|
|
|
|
|||||||
Applicable income taxes |
(22 | ) | (9 | ) | (14 | ) | ||||||
|
|
|
|
|
|
|||||||
Income before undistributed income of subsidiaries and associated companies |
168 | 149 | 8 | |||||||||
|
|
|
|
|
|
|||||||
Equity in undistributed (losses) income of subsidiaries and associated companies: |
||||||||||||
Bank |
(3,595 | ) | 501 | 488 | ||||||||
Nonbank |
1 | (7 | ) | 10 | ||||||||
|
|
|
|
|
|
|||||||
Net (loss) income |
$ | (3,426 | ) | $ | 643 | $ | 506 | |||||
|
|
|
|
|
|
|||||||
Other comprehensive (loss) income, net of income taxes: |
||||||||||||
Net pension plan activity arising during the period |
$ | 17 | $ | (7 | ) | $ | (27 | ) | ||||
Net unrealized derivative instrument gains arising during the period |
1 | | | |||||||||
|
|
|
|
|
|
|||||||
Other comprehensive income (loss) activity of the Parent Company Only, net of income taxes |
18 | (7 | ) | (27 | ) | |||||||
|
|
|
|
|
|
|||||||
Other comprehensive (loss) income activity of Bank subsidiaries, net of income taxes |
(354 | ) | 223 | 190 | ||||||||
|
|
|
|
|
|
|||||||
Total other comprehensive (loss) income, net of income taxes |
(336 | ) | 216 | 163 | ||||||||
|
|
|
|
|
|
|||||||
Total comprehensive (loss) income |
$ | (3,762 | ) | $ | 859 | $ | 669 | |||||
|
|
|
|
|
|
F-86
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with federal and state banking regulations, dividends paid by the Companys banking subsidiaries to the Company itself are generally limited to the retained earnings of the respective banking subsidiaries unless specifically approved by the appropriate bank regulator. The Company declared and paid RBS total common stock dividends of $1.2 billion in 2013. There were $150 million in common stock dividends in 2012 and no common stock dividends in 2011.
CFG Parent Company
Condensed Balance Sheets
December 31, | ||||||||
2013 | 2012 | |||||||
(in millions) | ||||||||
ASSETS: |
||||||||
Cash and due from banks |
$ | 494 | $ | 694 | ||||
Loans and advances to: |
||||||||
Bank subsidiaries |
459 | 460 | ||||||
Related bank holding companies |
1 | 8 | ||||||
Investments in subsidiaries: |
||||||||
Bank subsidiaries |
19,522 | 23,545 | ||||||
Nonbank subsidiaries |
73 | 92 | ||||||
Other assets |
178 | 184 | ||||||
|
|
|
|
|||||
TOTAL ASSETS |
$ | 20,727 | $ | 24,983 | ||||
|
|
|
|
|||||
LIABILITIES: |
||||||||
Long-term debt due to: |
||||||||
Nonbank subsidiaries |
$ | | $ | 295 | ||||
Unaffiliated companies |
350 | 350 | ||||||
Related bank holding companies |
1,000 | | ||||||
Other liabilities |
181 | 209 | ||||||
|
|
|
|
|||||
TOTAL LIABILITIES |
1,531 | 854 | ||||||
|
|
|
|
|||||
TOTAL STOCKHOLDERS EQUITY |
19,196 | 24,129 | ||||||
|
|
|
|
|||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 20,727 | $ | 24,983 | ||||
|
|
|
|
F-87
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CFG Parent Company
Condensed Cash Flow Statements
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in millions) | ||||||||||||
OPERATING ACTIVITIES |
||||||||||||
Net (loss) income |
$ | (3,426 | ) | $ | 643 | $ | 506 | |||||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
||||||||||||
Deferred income taxes |
(11 | ) | (12 | ) | (29 | ) | ||||||
Gain on sales of assets |
| (1 | ) | | ||||||||
Equity in undistributed losses (earnings) of subsidiaries |
3,594 | (494 | ) | (498 | ) | |||||||
Net change in other liabilities |
7 | 47 | (9 | ) | ||||||||
Net change in other assets |
15 | (20 | ) | 30 | ||||||||
Other operating, net |
1 | (2 | ) | | ||||||||
|
|
|
|
|
|
|||||||
Total adjustments |
3,606 | (482 | ) | (506 | ) | |||||||
|
|
|
|
|
|
|||||||
Net cash provided (used) by operating activities |
180 | 161 | | |||||||||
|
|
|
|
|
|
|||||||
INVESTING ACTIVITIES |
||||||||||||
Proceeds from sales and maturities of securities available for sale |
| 3 | 437 | |||||||||
Payments for investments in and advances to subsidiaries |
(220 | ) | (800 | ) | (508 | ) | ||||||
Sale or repayment of investments in and advances to subsidiaries |
315 | 1,164 | 22 | |||||||||
Other investing, net |
(1 | ) | (1 | ) | | |||||||
|
|
|
|
|
|
|||||||
Net cash provided (used) by investing activities |
94 | 366 | (49 | ) | ||||||||
|
|
|
|
|
|
|||||||
FINANCING ACTIVITIES |
||||||||||||
Proceeds from advances from subsidiaries |
| 5 | 22 | |||||||||
Repayment of advances from subsidiaries |
(289 | ) | (239 | ) | (13 | ) | ||||||
Proceeds from issuance of long-term debt |
1,000 | 350 | | |||||||||
Dividends paid |
(1,185 | ) | (150 | ) | | |||||||
|
|
|
|
|
|
|||||||
Net cash (used) provided by financing activities |
(474 | ) | (34 | ) | 9 | |||||||
|
|
|
|
|
|
|||||||
Net (decrease) increase in cash and due from banks |
(200 | ) | 493 | (40 | ) | |||||||
Cash and due from banks at beginning of year |
694 | 201 | 241 | |||||||||
|
|
|
|
|
|
|||||||
Cash and due from banks at end of period |
$ | 494 | $ | 694 | $ | 201 | ||||||
|
|
|
|
|
|
NOTE 28OTHER OPERATING EXPENSE
The following table presents the details of other operating expense:
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in millions) | ||||||||||||
Deposit insurance |
$ | 85 | $ | 98 | $ | 117 | ||||||
Promotional expense |
76 | 86 | 102 | |||||||||
Settlements and operating losses |
51 | 58 | 61 | |||||||||
Postage and delivery |
60 | 196 | 32 | |||||||||
Other |
256 | 271 | 370 | |||||||||
|
|
|
|
|
|
|||||||
Total other operating expense |
$ | 528 | $ | 709 | $ | 682 | ||||||
|
|
|
|
|
|
F-88
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 29SUBSEQUENT EVENTS
The Company has evaluated events that have occurred subsequent to December 31, 2013 through September 8, 2014, the date the Consolidated Financial Statements were originally issued. In January 2014, the Company reached an agreement to sell 103 retail branches, including loans, deposits, and related branch premises located in Illinois. The agreement includes the sale of approximately $1.1 billion in loans, $5.3 billion in deposits and related branch premises. The all-cash transaction is expected to close in the second quarter of 2014. As a result of this transaction, the assets and liabilities related to the branches being sold have been classified as held for sale in the Consolidated Balance Sheet at December 31, 2013. On April 9, 2014, the Company approved an increase in the number of authorized shares of common stock to 1,000,000,000. On August 22, 2014, the Company declared and made effective a 165,582-for-1 forward stock split of common stock. As a result, all share and per share data have been restated to reflect the effect of the split.
F-89
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
F-90
CITIZENS FINANCIAL GROUP, INC.
GLOSSARY OF ACRONYMS AND TERMS
GLOSSARY OF ACRONYMS AND TERMS
The following listing provides a comprehensive reference of common acronyms and terms used throughout the document:
AFS |
Available For Sale | |
ALLL |
Allowance for Loan and Lease Losses | |
AOCI |
Accumulated Other Comprehensive Income | |
ATM |
Automatic Teller Machine | |
BHC |
Bank Holding Company | |
bps |
Basis Points | |
Capital Plan Rule |
Federal Reserves Regulation Y Capital Plan Rule | |
CBNA |
Citizens Bank, National Association | |
CBPA |
Citizens Bank of Pennsylvania | |
CCAR |
Comprehensive Capital Analysis and Review | |
CCB |
Capital Conservation Buffer | |
CEB |
Commercial Enterprise Banking | |
CEO | Chief Executive Officer | |
CET1 |
Common Equity Tier 1 | |
Citizens or CFG or the Company | Citizens Financial Group, Inc. and its Subsidiaries | |
CLTV |
Combined Loan-to-Value | |
CMO |
Collateralized Mortgage Obligation | |
CRA |
Community Reinvestment Act of 1977 | |
CSA |
Credit Support Annex | |
Dodd-Frank Act (DFA) |
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 | |
EC |
Economic Capital | |
EPS |
Earnings Per Share | |
ESOP |
Executive Share Option Plan |
|
ERISA |
Employee Retirement Income Security Act of 1974 | |
Fannie Mae (FNMA) |
The Federal National Mortgage Association | |
FASB |
The Financial Accounting Standards Board | |
FDIC |
Federal Deposit Insurance Corporation | |
FDICIA |
Federal Deposit Insurance Corporation Improvement Act of 1991 | |
FFIEC |
Federal Financial Institutions Examination Council | |
FHC |
Financial Holding Company | |
FHLB |
Federal Home Loan Bank | |
FICO |
Fair Isaac Corporation (credit rating) | |
FLSA |
Fair Labor Standards Act of 1938, as amended | |
FRB |
Federal Reserve Bank | |
FRBG |
Federal Reserve Board of Governors |
F-91
Freddie Mac (FHLMC) |
The 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) |
The Government National Mortgage Association | |
GLBA |
Gramm-Leach-Bliley Act of 1999 | |
HELOC |
Home Equity Line of Credit | |
HTM |
Held To Maturity | |
ICAR |
Internal Capital Adequacy Requirement | |
IFRS |
International Financial Reporting Standards | |
ILP |
Incurred Loss Period | |
IST |
Integrated Stress Testing | |
IT |
Information Technology | |
LIBOR |
London Interbank Offered Rate | |
LOB |
Line of Business | |
LTV |
Loan-to-Value | |
MBS |
Mortgage-Backed Securities | |
MD&A |
Managements Discussion and Analysis of Financial Condition and Results of Operations | |
MERS |
Mortgage Electronic Registration Systems | |
MSR |
Mortgage Servicing Right | |
NPR |
Notice of Proposed Rulemaking | |
OCC |
Office of the Comptroller of the Currency | |
OCI |
Other Comprehensive Income | |
OIS |
Overnight Index Swap | |
OTC |
Over the Counter | |
PIMCO |
Pacific Investment Management Company, LLC | |
RBS |
The Royal Bank of Scotland plc. | |
RBS CBFM |
The Royal Bank of Scotland plc. Corporate Banking and Financial Markets | |
RBSG or RBS Group |
The Royal Bank of Scotland Group plc. and its subsidiaries | |
REIT |
Real Estate Investment Trust | |
ROTCE |
Return on Tangible Common Equity | |
RPA |
Risk Participation Agreement | |
RV |
Recreational Vehicle | |
SBO |
Serviced by Others loan portfolio | |
SIFI |
Systemically Important Financial Institutions | |
TDR |
Troubled Debt Restructuring | |
UK |
United Kingdom |
F-92
CITIZENS FINANCIAL GROUP, INC.
The accompanying Notes to Unaudited Interim Consolidated Financial Statements are an integral part of these statements.
F-93
CITIZENS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30, | ||||||||
2014
(unaudited) |
2013
(unaudited) |
|||||||
(in millions, except share data) | ||||||||
INTEREST INCOME: |
||||||||
Interest and fees on loans and leases (related party balance of $36 and $21, respectively) |
$ | 1,481 | $ | 1,510 | ||||
Interest and fees on loans held for sale |
2 | 7 | ||||||
Interest and fees on other loans held for sale |
22 | | ||||||
Investment securities |
303 | 228 | ||||||
Interest-bearing deposits in banks |
2 | 7 | ||||||
|
|
|
|
|||||
Total interest income |
1,810 | 1,752 | ||||||
|
|
|
|
|||||
INTEREST EXPENSE: |
||||||||
Deposits (related party balances of $0 and $3, respectively) |
67 | 117 | ||||||
Deposits held for sale |
4 | | ||||||
Federal funds purchased and securities sold under agreement to repurchase (related party balances of $13 and $110, respectively) |
16 | 115 | ||||||
Other short-term borrowed funds (related party balances of $44 and $0, respectively) |
49 | 1 | ||||||
Long-term borrowed funds (related party balances of $25 and $2, respectively) |
33 | 10 | ||||||
|
|
|
|
|||||
Total interest expense |
169 | 243 | ||||||
|
|
|
|
|||||
Net interest income |
1,641 | 1,509 | ||||||
Provision for credit losses |
170 | 202 | ||||||
|
|
|
|
|||||
Net interest income after provision for credit losses |
1,471 | 1,307 | ||||||
|
|
|
|
|||||
NONINTEREST INCOME: |
||||||||
Service charges and fees (related party balances of $3 and $9, respectively) |
286 | 325 | ||||||
Card fees |
117 | 114 | ||||||
Trust and investment services fees |
81 | 72 | ||||||
Foreign exchange and trade finance fees (related party balances of $(7) and $13, respectively) |
44 | 48 | ||||||
Capital markets fees (related party balances of $5 and $4, respectively) |
44 | 23 | ||||||
Mortgage banking fees |
34 | 112 | ||||||
Bank-owned life insurance income |
23 | 25 | ||||||
Securities gains, net |
25 | 94 | ||||||
Other-than-temporary impairment: |
||||||||
Total other-than-temporary impairment losses |
(39 | ) | (60 | ) | ||||
Portions of loss recognized in other comprehensive income (before taxes) |
33 | 56 | ||||||
|
|
|
|
|||||
Net impairment losses recognized in earnings |
(6 | ) | (4 | ) | ||||
Other income (related party balances of $(135) and $176, respectively) |
350 | 61 | ||||||
|
|
|
|
|||||
Total noninterest income |
998 | 870 | ||||||
|
|
|
|
|||||
NONINTEREST EXPENSE: |
||||||||
Salaries and employee benefits |
872 | 858 | ||||||
Outside services |
208 | 171 | ||||||
Occupancy (related party balances of $0 and $2, respectively) |
168 | 164 | ||||||
Equipment expense |
129 | 138 | ||||||
Amortization of software |
64 | 45 | ||||||
Goodwill impairment |
| 4,435 | ||||||
Other operating expense |
317 | 262 | ||||||
|
|
|
|
|||||
Total noninterest expense |
1,758 | 6,073 | ||||||
|
|
|
|
|||||
Income before income tax expense (benefit) |
711 | (3,896 | ) | |||||
Income tax expense (benefit) |
232 | (174 | ) | |||||
|
|
|
|
|||||
NET INCOME (LOSS) |
$ | 479 | $ | (3,722 | ) | |||
|
|
|
|
|||||
Weighted-average number of shares outstanding: |
||||||||
Basic |
559,998,324 | 559,998,324 | ||||||
Diluted |
559,998,324 | 559,998,324 | ||||||
|
|
|
|
|||||
Per common share information: |
||||||||
Basic earnings |
$ | 0.86 | $ | (6.65 | ) | |||
Diluted earnings |
0.86 | (6.65 | ) | |||||
Dividends declared and paid to parent |
0.66 | 0.76 | ||||||
|
|
|
|
The accompanying Notes to Unaudited Interim Consolidated Financial Statements are an integral part of these statements.
F-94
CITIZENS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
Six Months Ended June 30, | ||||||||
2014
(unaudited) |
2013
(unaudited) |
|||||||
(in millions) | ||||||||
Net income (loss) |
$ | 479 | $ | (3,722 | ) | |||
Other comprehensive income (loss): |
||||||||
Net unrealized derivative instrument gains (losses) arising during the periods, net of income taxes of $70 and $(81), respectively |
120 | (139 | ) | |||||
Reclassification adjustment for net derivative losses included in net income, net of income taxes of $7 and $45, respectively |
13 | 77 | ||||||
Net unrealized securities gains (losses) arising during the periods, net of income taxes of $109 and $(126), respectively |
188 | (219 | ) | |||||
Other than temporary impairment not recognized in earnings on securities, net of income taxes of $(12) and $(21), respectively |
(21 | ) | (35 | ) | ||||
Reclassification of net securities gains to net income, net of income taxes of $(7) and $(34), respectively |
(12 | ) | (56 | ) | ||||
Defined benefit pension plans: |
||||||||
Amortization of actuarial loss, net of income taxes of $1 and $3, respectively |
2 | 3 | ||||||
|
|
|
|
|||||
Total other comprehensive income (loss), net of income taxes |
290 | (369 | ) | |||||
|
|
|
|
|||||
Total comprehensive income (loss) |
$ | 769 | $ | (4,091 | ) | |||
|
|
|
|
The accompanying Notes to Unaudited Interim Consolidated Financial Statements are an integral part of these statements.
F-95
CITIZENS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
Preferred
Stock |
Common
Stock |
Additional
Paid-in Capital |
Retained
Earnings |
Accumulated
Other Comprehensive Income (Loss) |
Total | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Balance at December 31, 2012 |
$ | | $ | 6 | $ | 18,589 | $ | 5,846 | $ | (312 | ) | $ | 24,129 | |||||||||||
Dividend to parent |
| | | (95 | ) | | (95 | ) | ||||||||||||||||
Dividends to parentexchange transactions |
| | | (333 | ) | | (333 | ) | ||||||||||||||||
Total comprehensive loss: |
||||||||||||||||||||||||
Net loss |
| | | (3,722 | ) | | (3,722 | ) | ||||||||||||||||
Other comprehensive loss |
| | | | (369 | ) | (369 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total comprehensive loss |
(4,091 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at June 30, 2013 (unaudited) |
$ | | $ | 6 | $ | 18,589 | $ | 1,696 | $ | (681 | ) | $ | 19,610 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at December 31, 2013 |
$ | | $ | 6 | $ | 18,603 | $ | 1,235 | $ | (648 | ) | $ | 19,196 | |||||||||||
Dividend to parent |
| | | (35 | ) | | (35 | ) | ||||||||||||||||
Dividends to parentexchange transactions |
| | | (333 | ) | | (333 | ) | ||||||||||||||||
Total comprehensive income: |
||||||||||||||||||||||||
Net income |
| | | 479 | | 479 | ||||||||||||||||||
Other comprehensive income |
| | | | 290 | 290 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total comprehensive income |
769 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at June 30, 2014 (unaudited) |
$ | | $ | 6 | $ | 18,603 | $ | 1,346 | $ | (358 | ) | $ | 19,597 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Unaudited Interim Consolidated Financial Statements are an integral part of these statements.
F-96
CITIZENS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30, |
||||||||
2014
(unaudited) |
2013
(unaudited) |
|||||||
(in millions) | ||||||||
OPERATING ACTIVITIES |
||||||||
Net income (loss) |
$ | 479 | $ | (3,722 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||
Provision for credit losses |
170 | 202 | ||||||
Originations of mortgage loans held for sale |
(684 | ) | (2,407 | ) | ||||
Proceeds from sales of mortgage loans held for sale |
688 | 2,624 | ||||||
Amortization of terminated cash flow hedges (related party balances of $12 and $35, respectively) |
24 | 39 | ||||||
Depreciation, amortization and accretion |
196 | 205 | ||||||
Recovery of mortgage servicing rights |
(3 | ) | (39 | ) | ||||
Securities impairment |
6 | 4 | ||||||
Goodwill impairment |
| 4,435 | ||||||
Deferred income taxes |
36 | (186 | ) | |||||
Loss on disposal/impairment of premises and equipment |
11 | 7 | ||||||
Loss on sale of other branch assets held for sale |
9 | | ||||||
Gain on sales of: |
||||||||
Securities available for sale |
(25 | ) | (94 | ) | ||||
Other loans held for sale |
(11 | ) | | |||||
Deposits held for sale |
(286 | ) | | |||||
Decrease in other assets (related party balances of $47 and $8, respectively) |
57 | 801 | ||||||
Increase (decrease) in other liabilities (related party balances of $(147) and $(412), respectively) |
354 | (474 | ) | |||||
|
|
|
|
|||||
Net cash provided by operating activities |
1,021 | 1,395 | ||||||
|
|
|
|
|||||
INVESTING ACTIVITIES |
||||||||
Investment securities: |
||||||||
Purchases of securities available for sale |
(4,318 | ) | (3,251 | ) | ||||
Proceeds from maturities and paydowns of securities available for sale |
1,421 | 2,822 | ||||||
Proceeds from sales of securities available for sale |
711 | 2,441 | ||||||
Purchases of other investment securities |
(68 | ) | | |||||
Proceeds from sales of other investment securities |
55 | 91 | ||||||
Purchases of securities held to maturity |
(1,174 | ) | | |||||
Proceeds from maturities and paydowns of securities held to maturity |
120 | | ||||||
Net (increase) decrease in interest-bearing deposits in banks |
(76 | ) | 1,050 | |||||
Net (increase) decrease in loans and leases |
(2,171 | ) | 1,956 | |||||
Net increase in bank-owned life insurance |
(22 | ) | (18 | ) | ||||
Premises and equipment: |
||||||||
Purchases |
(37 | ) | (82 | ) | ||||
Proceeds from sales |
29 | | ||||||
Capitalization of software |
(80 | ) | (75 | ) | ||||
|
|
|
|
|||||
Net cash (used in) provided by investing activities |
(5,610 | ) | 4,934 | |||||
|
|
|
|
|||||
FINANCING ACTIVITIES |
||||||||
Net decrease in deposits |
(238 | ) | (3,787 | ) | ||||
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase |
2,016 | (230 | ) | |||||
Net increase (decrease) in other short-term borrowed funds |
5,450 | (500 | ) | |||||
Proceeds from issuance of long-term borrowed funds (related party balances of $333 and $333, respectively) |
333 | 333 | ||||||
Repayments of long-term borrowed funds (related party balances of $0 and $280, respectively) |
(5 | ) | (294 | ) | ||||
Dividends declared and paid to parent |
(368 | ) | (428 | ) | ||||
|
|
|
|
|||||
Net cash provided by (used in) financing activities |
7,188 | (4,906 | ) | |||||
|
|
|
|
|||||
Increase in cash and cash equivalents |
2,599 | 1,423 | ||||||
Cash and cash equivalents at beginning of period |
2,757 | 3,063 | ||||||
|
|
|
|
|||||
Cash and cash equivalents at end of period |
$ | 5,356 | $ | 4,486 | ||||
|
|
|
|
The accompanying Notes to Unaudited Interim Consolidated Financial Statements are an integral part of these statements.
F-97
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1BASIS OF PRESENTATION
Basis of Presentation
The unaudited Consolidated Financial Statements, including the notes thereto of Citizens Financial Group, Inc. (formerly RBS Citizens Financial Group, Inc., prior to April 16, 2014), 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 interim Consolidated Financial Statements and notes thereto should be read in conjunction with the Companys audited Consolidated Financial Statements and accompanying notes included elsewhere in this prospectus. The Companys principal business activity is banking, conducted through its subsidiaries, Citizens Bank, N.A. (formerly RBS Citizens, N.A., prior to April 16, 2014) and Citizens Bank of Pennsylvania.
The unaudited 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 are immaterial and have no effect on net income, total comprehensive income, total assets or total stockholders equity as previously reported.
Cash and Cash Equivalents
See Note 1 Significant Accounting Policies of the Companys audited Consolidated Financial Statements included elsewhere in this prospectus for a detailed discussion of cash and cash equivalents.
New Accounting Pronouncements
In June 2014, the FASB issued Accounting Standards Update No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This update amends the guidance on stock compensation and clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. Accordingly, an entity should not record compensation expense (measured as of the grant date without taking into account the effect of the performance target) related to an award for which a transfer to the employee is contingent on the entitys satisfaction of a performance target until it becomes probable that the performance target will be met. The amendment is effective for annual reporting periods, including interim reporting periods within those periods, beginning after December 15, 2015, and is expected to have an immaterial impact on the Companys Consolidated Financial Statements.
In June 2014, the FASB issued Accounting Standards Update No. 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosure which makes limited amendments to the guidance on accounting for certain repurchase agreements. This update requires entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements); eliminates accounting guidance on linked repurchase financing transactions; and expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers accounted for as secured borrowings. This update also amends the existing guidance to clarify that repos and securities lending transactions that do not
F-98
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
meet all of the derecognition criteria in the existing guidance should be accounted for as secured borrowings. This amendment is effective for annual reporting periods, including interim reporting periods within those periods, beginning after December 15, 2014 and is expected to have an immaterial impact on the Companys Consolidated Financial Statements.
In May 2014, the FASB issued Accounting Standards Update No. 2014- 09, Revenue From Contracts With Customers. This amendment outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance applies to all contracts with customers except those that are within the scope of other topics in GAAP. This amendment is effective for annual reporting periods, including interim reporting periods within those periods, beginning after December 15, 2016 and is expected to have an immaterial impact on the Companys Consolidated Financial Statements.
In April 2014, the FASB issued Accounting Standards Update No. 2014- 08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This amendment modifies the requirements for reporting a discontinued operation. The amended definition of discontinued operations includes only disposals, held-for-sale classifications of components, or groups of components of an entity that represent strategic shift that either has or will have a major effect on the entitys operations and financial results, such as geographic area, line of business, equity method investment or other parts of an entity. This amendment also provides disclosure guidance for situations where an entity has continuing involvement with a discontinued operation or retains an equity method investment in a component after disposal. This amendment is effective for all disposals or classifications as held for sale (including businesses or nonprofit activities that, on acquisition, are classified as held for sale) that occur in annual periods, and in interim periods within those annual periods, beginning after December 15, 2014, and is expected to have an immaterial impact on the Companys Consolidated Financial Statements.
F-99
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2SECURITIES
The following table provides the major components of securities at amortized cost and fair value:
June 30, 2014 | December 31, 2013 | |||||||||||||||||||||||||||||||
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Fair
Value |
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Fair
Value |
|||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Securities Available for Sale |
||||||||||||||||||||||||||||||||
U.S. Treasury |
$ | 15 | $ | | $ | | $ | 15 | $ | 15 | $ | | $ | | $ | 15 | ||||||||||||||||
State and political subdivisions |
10 | | | 10 | 11 | | (1 | ) | 10 | |||||||||||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||||||||||||||
Federal agencies and U.S. government sponsored entities |
17,343 | 289 | (47 | ) | 17,585 | 14,970 | 151 | (128 | ) | 14,993 | ||||||||||||||||||||||
Other/non-agency |
887 | 7 | (36 | ) | 858 | 992 | 5 | (45 | ) | 952 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total mortgage-backed securities |
18,230 | 296 | (83 | ) | 18,443 | 15,962 | 156 | (173 | ) | 15,945 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total debt securities available for sale |
18,255 | 296 | (83 | ) | 18,468 | 15,988 | 156 | (174 | ) | 15,970 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Marketable equity securities |
10 | 3 | | 13 | 10 | 3 | | 13 | ||||||||||||||||||||||||
Other equity securities |
12 | | | 12 | 12 | | | 12 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total equity securities available for sale |
22 | 3 | | 25 | 22 | 3 | | 25 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total securities available for sale |
$ | 18,277 | $ | 299 | $ | (83 | ) | $ | 18,493 | $ | 16,010 | $ | 159 | $ | (174 | ) | $ | 15,995 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Securities Held to Maturity |
||||||||||||||||||||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||||||||||||||
Federal agencies and U.S. government sponsored entities |
$ | 3,897 | $ | 16 | $ | (15 | ) | $ | 3,898 | $ | 2,940 | $ | | $ | (33 | ) | $ | 2,907 | ||||||||||||||
Other/non-agency |
1,485 | 18 | (3 | ) | 1,500 | 1,375 | | (25 | ) | 1,350 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total securities held to maturity |
$ | 5,382 | $ | 34 | $ | (18 | ) | $ | 5,398 | $ | 4,315 | $ | | $ | (58 | ) | $ | 4,257 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Other Investment Securities |
||||||||||||||||||||||||||||||||
Federal Reserve Bank stock |
$ | 470 | $ | | $ | | $ | 470 | $ | 462 | $ | | $ | | $ | 462 | ||||||||||||||||
Federal Home Loan Bank stock |
472 | | | 472 | 468 | | | 468 | ||||||||||||||||||||||||
Venture capital and other investments |
6 | | | 6 | 5 | | | 5 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total other investment securities |
$ | 948 | $ | | $ | | $ | 948 | $ | 935 | $ | | $ | | $ | 935 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-100
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company has reviewed its securities portfolio for other-than-temporary impairments. The following tables summarize those securities whose fair values are below carrying values, segregated by those that have been in a continuous unrealized loss position for less than twelve months, and those that have been in a continuous unrealized loss position for twelve months or longer:
June 30, 2014 | ||||||||||||||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||||||||||||||
Number of
Issues |
Fair
Value |
Gross
Unrealized Losses |
Number of
Issues |
Fair
Value |
Gross
Unrealized Losses |
Number of
Issues |
Fair
Value |
Gross
Unrealized Losses |
||||||||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||||||||||
U.S. Treasury |
1 | $ | 15 | $ | | | $ | | $ | | 1 | $ | 15 | $ | | |||||||||||||||||||||
State and political subdivisions |
1 | 10 | | | | | 1 | 10 | | |||||||||||||||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||||||||||||||||||
Federal agencies and U.S. government sponsored entities |
77 | 4,005 | (24 | ) | 30 | 916 | (38 | ) | 107 | 4,921 | (62 | ) | ||||||||||||||||||||||||
Other/non-agency |
10 | 407 | (5 | ) | 18 | 464 | (34 | ) | 28 | 871 | (39 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total mortgage-backed securities |
87 | 4,412 | (29 | ) | 48 | 1,380 | (72 | ) | 135 | 5,792 | (101 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total |
89 | $ | 4,437 | $ | (29 | ) | 48 | $ | 1,380 | $ | (72 | ) | 137 | $ | 5,817 | $ | (101 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013 | ||||||||||||||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||||||||||||||
Number of
Issues |
Fair
Value |
Gross
Unrealized Losses |
Number of
Issues |
Fair
Value |
Gross
Unrealized Losses |
Number of
Issues |
Fair
Value |
Gross
Unrealized Losses |
||||||||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||||||||||
State and political subdivisions |
1 | $ | 10 | $ | (1 | ) | | $ | | $ | | 1 | $ | 10 | $ | (1 | ) | |||||||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||||||||||||||||||
Federal agencies and U.S. government sponsored entities |
263 | 12,067 | (158 | ) | 7 | 20 | (2 | ) | 270 | 12,087 | (160 | ) | ||||||||||||||||||||||||
Other/non-agency |
22 | 1,452 | (34 | ) | 19 | 490 | (37 | ) | 41 | 1,942 | (71 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total mortgage-backed securities |
285 | 13,519 | (192 | ) | 26 | 510 | (39 | ) | 311 | 14,029 | (231 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total |
286 | $ | 13,529 | $ | (193 | ) | 26 | $ | 510 | $ | (39 | ) | 312 | $ | 14,039 | $ | (232 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 securitys 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 Companys intent to sell (or not sell) the debt security.
If the Company intends to sell the impaired debt security, the impairment loss recognized in current period earnings equals the difference between the debt securitys 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.
F-101
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 as of:
Six Months Ended
June 30, |
||||||||
2014 | 2013 | |||||||
(in millions) | ||||||||
Cumulative balance through January 1 |
$ | 56 | $ | 55 | ||||
Credit impairments recognized in earnings on debt securities that have been previously impaired |
6 | 4 | ||||||
Reductions due to increases in cash flow expectations on impaired securities |
(2 | ) | (3 | ) | ||||
|
|
|
|
|||||
Cumulative balance at end of period |
$ | 60 | $ | 56 | ||||
|
|
|
|
Cumulative credit losses recognized in earnings for impaired AFS debt securities held as of June 30, 2014 and 2013 were $60 million and $56 million, respectively. There were no credit losses recognized in earnings for the Companys HTM portfolio as of June 30, 2014 and 2013. The Company recognized $6 million and $4 million of credit related other-than-temporary impairment losses in earnings for the six months ended June 30, 2014 and 2013, respectively, related to non-agency MBS in the AFS portfolio. No impaired debt securities were sold during June 30, 2014 or 2013. Reductions in credit losses due to increases in cash flow expectations were $2 million and $3 million for the six months ended June 30, 2014 and 2013, respectively, and are presented in investment securities interest income 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. As of June 30, 2014 and 2013, $33 million and $56 million, respectively, of pretax non-credit related losses were deferred in OCI.
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. Additionally, any subsequent increases in the valuation of impaired debt securities do not impact their recorded cost bases.
F-102
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The amortized cost and fair value of debt securities at June 30, 2014 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 call or prepayment penalties.
Distribution of Maturities | ||||||||||||||||||||
1 Year
or Less |
1-5
Years |
5-10
Years |
After 10
Years |
Total | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Amortized Cost: |
||||||||||||||||||||
Debt securities available for sale |
||||||||||||||||||||
U.S. Treasury |
$ | 15 | $ | | $ | | $ | | $ | 15 | ||||||||||
State and political subdivisions |
| | | 10 | 10 | |||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||
Federal agencies and U.S. government sponsored entities |
3 | 35 | 2,603 | 14,702 | 17,343 | |||||||||||||||
Other/non-agency |
| 61 | 76 | 750 | 887 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total debt securities available for sale |
18 | 96 | 2,679 | 15,462 | 18,255 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Debt securities held to maturity |
||||||||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||
Federal agencies and U.S. government sponsored entities |
| | | 3,897 | 3,897 | |||||||||||||||
Other/non-agency |
| | | 1,485 | 1,485 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total debt securities held to maturity |
| | | 5,382 | 5,382 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total amortized cost of debt securities |
$ | 18 | $ | 96 | $ | 2,679 | $ | 20,844 | $ | 23,637 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Fair Value: |
||||||||||||||||||||
Debt securities available for sale |
||||||||||||||||||||
U.S. Treasury |
$ | 15 | $ | | $ | | $ | | $ | 15 | ||||||||||
State and political subdivisions |
| | | 10 | 10 | |||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||
Federal agencies and U.S. government sponsored entities |
4 | 37 | 2,626 | 14,918 | 17,585 | |||||||||||||||
Other/non-agency |
| 63 | 77 | 718 | 858 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total debt securities available for sale |
19 | 100 | 2,703 | 15,646 | 18,468 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Debt securities held to maturity |
||||||||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||
Federal agencies and U.S. government sponsored entities |
| | | 3,898 | 3,898 | |||||||||||||||
Other/non-agency |
| | | 1,500 | 1,500 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total debt securities held to maturity |
| | | 5,398 | 5,398 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total fair value of debt securities |
$ | 19 | $ | 100 | $ | 2,703 | $ | 21,044 | $ | 23,866 | ||||||||||
|
|
|
|
|
|
|
|
|
|
The Company recognized $303 million and $228 million of interest income from taxable investment securities in earnings for the six months ended June 30, 2014 and 2013, respectively. No interest income was recognized from non-taxable investment securities in earnings for the six months ended June 30, 2014 and 2013.
F-103
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company recognized $25 million and $94 million of gains on sale of debt securities in earnings for the six months ended June 30, 2014 and 2013, respectively.
The amortized cost and fair value of securities pledged are shown below:
June 30, 2014 | December 31, 2013 | |||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
(in millions) | ||||||||||||||||
Pledged against repurchase agreements |
$ | 7,396 | $ | 7,511 | $ | 5,016 | $ | 4,998 | ||||||||
Pledged against Federal Home Loan Bank borrowed funds |
1 | 1 | 1 | 1 | ||||||||||||
Pledged against derivatives to qualify for fiduciary powers, and to secure public and other deposits as required by law |
3,190 | 3,247 | 2,818 | 2,853 |
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 Companys repurchase agreements are typically short-term transactions (e.g., overnight), but they may be extended to longer terms to maturity. Such transactions are accounted for as secured borrowed funds on the Companys financial statements. When permitted by GAAP, the Company offsets the short-term receivables associated with its reverse repurchase agreements with the short-term payables associated with its repurchase agreements.
The effects of this offsetting on the Consolidated Balance Sheets are presented in the following table:
June 30, 2014 | December 31, 2013 | |||||||||||||||||||||||
Gross
Assets (Liabilities) |
Gross
Assets (Liabilities) Offset |
Net
Amounts of Assets (Liabilities) |
Gross
Assets (Liabilities) |
Gross
Assets (Liabilities) Offset |
Net
Amounts of Assets (Liabilities) |
|||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Reverse repurchase and similar arrangements |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
Repurchase and similar arrangements |
(5,850 | ) | | (5,850 | ) | (3,000 | ) | | (3,000 | ) |
Note: | The Company also offsets certain derivative assets and derivative liabilities on the Consolidated Balance Sheets. See Note 11 Derivatives, for further information. |
F-104
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 3LOANS AND LEASES
A summary of the loans and leases portfolio follows:
June 30,
2014 |
December 31,
2013 |
|||||||
(in millions) | ||||||||
Commercial |
$ | 30,076 | $ | 28,667 | ||||
Commercial real estate |
7,158 | 6,948 | ||||||
Leases |
3,740 | 3,780 | ||||||
|
|
|
|
|||||
Total commercial |
40,974 | 39,395 | ||||||
|
|
|
|
|||||
Residential, including originated home equity products |
30,116 | 29,694 | ||||||
Home equity products serviced by others |
1,972 | 2,171 | ||||||
Other secured retail |
12,180 | 10,700 | ||||||
Unsecured retail |
3,587 | 3,899 | ||||||
|
|
|
|
|||||
Total retail |
47,855 | 46,464 | ||||||
|
|
|
|
|||||
Total loans and leases (1)(2) |
$ | 88,829 | $ | 85,859 | ||||
|
|
|
|
(1) | Excluded from the table above are loans held for sale totaling $262 million as of June 30, 2014 and $1.3 billion as of December 31, 2013. The December 31, 2013 loans held for sale balance primarily related to the Companys sale of certain assets and liabilities associated with its Chicago-area retail branches. For further discussion, see Note 13 Divestitures and Branch Assets and Liabilities Held for Sale. |
(2) | Mortgage loans serviced for other by the Companys subsidiaries are not included above, and amounted to $18.3 billion and $18.7 billion at June 30, 2014 and December 31, 2013, respectively. |
Loans held for sale, excluding the loans related to the sale of the Chicago-area retail branches, totaled $173 million and $176 million at June 30, 2014 and December 31, 2013, respectively. Other loans held for sale totaled $89 million and $1.1 billion at June 30, 2014 and December 31, 2013, respectively. The other loans held for sale balance at December 31, 2013 primarily related to the Companys sale of certain assets and liabilities associated with its Chicago-area retail branches. See Note 13 Divestitures and Branch Assets and Liabilities Held for Sale, for further details.
Loans pledged as collateral for FHLB borrowed funds totaled $21.0 billion and $19.0 billion at June 30, 2014 and December 31, 2013, 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 $13.3 billion and $13.9 billion at June 30, 2014 and December 31, 2013, respectively.
During the six months ended June 30, 2014 the Company purchased a portfolio of residential loans with an outstanding principal balance of $878 million, a portfolio of auto loans with an outstanding principal balance of $759 million and a portfolio of student loans with an outstanding principal balance of $59 million. In addition to the $1.1 billion loans sold as part of the Companys 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 $132 million during the six months ended June 30, 2014. The Company had no loan portfolio purchase or sale transactions during the six months ended June 30, 2013.
F-105
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 4ALLOWANCE FOR CREDIT LOSSES, NONPERFORMING ASSETS, AND CONCENTRATIONS OF CREDIT RISK
The ALLL is increased through a provision for credit losses that is charged to earnings, based on the Companys 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 of the Companys audited Consolidated Financial Statements, included elsewhere in this prospectus for a detailed discussion of ALLL 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. As of June 30, 2014, changes in these factors led to an increase in the allowance for credit losses which was offset by a decrease reflecting asset quality improvements and lower charge-offs.
During 2013, the Company modified the way that it establishes the ALLL. The ALLL is reviewed separately for commercial and retail loan portfolios, and the ALLL for each includes an adjustment for qualitative reserves that includes certain risks, factors and events that might not be measured in the statistical analysis. As a result of this change, the unallocated reserve was absorbed into the separately measured commercial and retail qualitative reserves.
There were no other material changes in assumptions or estimation techniques compared with prior periods that impacted the determination of the current periods ALLL and the reserve for unfunded lending commitments.
The following is a summary of changes in the allowance for credit losses:
Six Months Ended June 30, 2014 | ||||||||||||
Commercial | Retail | Total | ||||||||||
(in millions) | ||||||||||||
Allowance for loan and lease losses as of January 1, 2014 |
$ | 498 | $ | 723 | $ | 1,221 | ||||||
Charge-offs |
(14 | ) | (231 | ) | (245 | ) | ||||||
Recoveries |
35 | 55 | 90 | |||||||||
|
|
|
|
|
|
|||||||
Net recoveries (charge-offs) |
21 | (176 | ) | (155 | ) | |||||||
Provision charged to income |
(11 | ) | 155 | 144 | ||||||||
|
|
|
|
|
|
|||||||
Allowance for loan and lease losses as of June 30, 2014 |
508 | 702 | 1,210 | |||||||||
|
|
|
|
|
|
|||||||
Reserve for unfunded lending commitments as of January 1, 2014 |
39 | | 39 | |||||||||
Provision for unfunded lending commitments |
26 | | 26 | |||||||||
|
|
|
|
|
|
|||||||
Reserve for unfunded lending commitments as of June 30, 2014 |
65 | | 65 | |||||||||
|
|
|
|
|
|
|||||||
Total allowance for credit losses as of June 30, 2014 |
$ | 573 | $ | 702 | $ | 1,275 | ||||||
|
|
|
|
|
|
F-106
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Six Months Ended June 30, 2013 | ||||||||||||||||
Commercial | Retail | Unallocated | Total | |||||||||||||
(in millions) | ||||||||||||||||
Allowance for loan and lease losses as of January 1, 2013 |
$ | 509 | $ | 657 | $ | 89 | $ | 1,255 | ||||||||
Charge-offs |
(49 | ) | (313 | ) | | (362 | ) | |||||||||
Recoveries |
51 | 56 | | 107 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net recoveries (charge-offs) |
2 | (257 | ) | | (255 | ) | ||||||||||
Provision charged to income |
(49 | ) | 235 | 14 | 200 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Allowance for loan and lease losses as of June 30, 2013 |
462 | 635 | 103 | 1,200 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Reserve for unfunded lending commitments as of January 1, 2013 |
40 | | | 40 | ||||||||||||
Provision for unfunded lending commitments |
2 | | | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Reserve for unfunded lending commitments as of June 30, 2013 |
42 | | | 42 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total allowance for credit losses as of June 30, 2013 |
$ | 504 | $ | 635 | $ | 103 | $ | 1,242 | ||||||||
|
|
|
|
|
|
|
|
The recorded investment in loans and leases based on the Companys evaluation methodology is as follows:
June 30, 2014 | December 31, 2013 | |||||||||||||||||||||||
Commercial | Retail | Total | Commercial | Retail | Total | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Individually evaluated |
$ | 254 | $ | 1,218 | $ | 1,472 | $ | 239 | $ | 1,200 | $ | 1,439 | ||||||||||||
Formula-based evaluation |
40,720 | 46,637 | 87,357 | 39,156 | 45,264 | 84,420 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 40,974 | $ | 47,855 | $ | 88,829 | $ | 39,395 | $ | 46,464 | $ | 85,859 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of the allowance for credit losses by evaluation method:
June 30, 2014 | December 31, 2013 | |||||||||||||||||||||||
Commercial | Retail | Total | Commercial | Retail | Total | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Individually evaluated |
$ | 23 | $ | 116 | $ | 139 | $ | 23 | $ | 108 | $ | 131 | ||||||||||||
Formula-based evaluation |
550 | 586 | 1,136 | 514 | 615 | 1,129 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Allowance for credit losses |
$ | 573 | $ | 702 | $ | 1,275 | $ | 537 | $ | 723 | $ | 1,260 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
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 loans 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.
F-107
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The recorded investment in classes of commercial loans and leases based on regulatory classification ratings is as follows:
June 30, 2014 | ||||||||||||||||||||
Criticized | ||||||||||||||||||||
Pass |
Special
Mention |
Substandard | Doubtful | Total | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Commercial |
$ | 28,816 | $ | 722 | $ | 406 | $ | 132 | $ | 30,076 | ||||||||||
Commercial real estate |
6,707 | 229 | 110 | 112 | 7,158 | |||||||||||||||
Leases |
3,676 | 13 | 51 | | 3,740 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 39,199 | $ | 964 | $ | 567 | $ | 244 | $ | 40,974 | ||||||||||
|
|
|
|
|
|
|
|
|
|
December 31, 2013 | ||||||||||||||||||||
Criticized | ||||||||||||||||||||
Pass |
Special
Mention |
Substandard | Doubtful | Total | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Commercial |
$ | 27,433 | $ | 588 | $ | 541 | $ | 105 | $ | 28,667 | ||||||||||
Commercial real estate |
6,366 | 339 | 116 | 127 | 6,948 | |||||||||||||||
Leases |
3,679 | 40 | 61 | | 3,780 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 37,478 | $ | 967 | $ | 718 | $ | 232 | $ | 39,395 | ||||||||||
|
|
|
|
|
|
|
|
|
|
The recorded investment in classes of retail loans, categorized by delinquency status is as follows:
June 30, 2014 | ||||||||||||||||||||
Current |
1-29 Days
Past Due |
30-89 Days
Past Due |
90 Days or More
Past Due |
Total | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Residential, including originated home equity products |
$ | 28,395 | $ | 849 | $ | 208 | $ | 664 | $ | 30,116 | ||||||||||
Home equity products serviced by others |
1,735 | 143 | 39 | 55 | 1,972 | |||||||||||||||
Other secured retail |
11,495 | 608 | 66 | 11 | 12,180 | |||||||||||||||
Unsecured retail |
3,405 | 106 | 45 | 31 | 3,587 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 45,030 | $ | 1,706 | $ | 358 | $ | 761 | $ | 47,855 | ||||||||||
|
|
|
|
|
|
|
|
|
|
December 31, 2013 | ||||||||||||||||||||
Current |
1-29 Days
Past Due |
30-89 Days
Past Due |
90 Days or More
Past Due |
Total | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Residential, including originated home equity products |
$ | 27,912 | $ | 861 | $ | 259 | $ | 662 | $ | 29,694 | ||||||||||
Home equity products serviced by others |
1,901 | 167 | 43 | 60 | 2,171 | |||||||||||||||
Other secured retail |
10,068 | 550 | 66 | 16 | 10,700 | |||||||||||||||
Unsecured retail |
3,593 | 185 | 67 | 54 | 3,899 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 43,474 | $ | 1,763 | $ | 435 | $ | 792 | $ | 46,464 | ||||||||||
|
|
|
|
|
|
|
|
|
|
F-108
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Nonperforming Assets
A summary of nonperforming loans and leases by class is as follows:
June 30, 2014 | December 31, 2013 | |||||||||||||||||||||||
Nonaccruing |
Accruing
and 90 Days or More Delinquent |
Total
Nonperforming Loans and Leases |
Nonaccruing |
Accruing
and 90 Days or More Delinquent |
Total
Nonperforming Loans and Leases |
|||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Commercial |
$ | 63 | $ | | $ | 63 | $ | 96 | $ | | $ | 96 | ||||||||||||
Commercial real estate |
129 | 1 | 130 | 169 | | 169 | ||||||||||||||||||
Leases |
| 2 | 2 | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
192 | 3 | 195 | 265 | | 265 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Residential, including originated home equity products |
876 | | 876 | 981 | | 981 | ||||||||||||||||||
Home equity products serviced by others |
80 | | 80 | 89 | | 89 | ||||||||||||||||||
Other secured retail |
18 | | 18 | 26 | | 26 | ||||||||||||||||||
Unsecured retail |
22 | 9 | 31 | 22 | 33 | 55 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total retail |
996 | 9 | 1,005 | 1,118 | 33 | 1,151 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 1,188 | $ | 12 | $ | 1,200 | $ | 1,383 | $ | 33 | $ | 1,416 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
A summary of other nonperforming assets is as follows:
June 30,
2014 |
December 31,
2013 |
|||||||
(in millions) | ||||||||
Nonperforming assets, net of valuation allowance: |
||||||||
Commercial |
$ | 4 | $ | 10 | ||||
Retail |
37 | 40 | ||||||
|
|
|
|
|||||
Nonperforming assets, net of valuation allowance |
$ | 41 | $ | 50 | ||||
|
|
|
|
Nonperforming assets consists primarily of other real estate owned and is presented in other assets on the Consolidated Balance Sheets.
A summary of key performance indicators is as follows:
June 30,
2014 |
December 31,
2013 |
|||||||
Nonperforming commercial loans and leases as a percentage of total loans and leases |
0.22 | % | 0.31 | % | ||||
Nonperforming retail loans as a percentage of total loans and leases |
1.13 | 1.34 | ||||||
|
|
|
|
|||||
Total nonperforming loans and leases as a percentage of total loans and leases |
1.35 | 1.65 | ||||||
|
|
|
|
|||||
Nonperforming commercial assets as a percentage of total assets |
0.15 | 0.23 | ||||||
Nonperforming retail assets as a percentage of total assets |
0.80 | 0.97 | ||||||
|
|
|
|
|||||
Total nonperforming assets as a percentage of total assets |
0.95 | % | 1.20 | % | ||||
|
|
|
|
F-109
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following is an analysis of the age of the past due amounts (accruing and nonaccruing):
June 30, 2014 | December 31, 2013 | |||||||||||||||||||||||
30-89 Days
Past Due |
90 Days or
More Past Due |
Total
Past Due |
30-89 Days
Past Due |
90 Days or
More Past Due |
Total
Past Due |
|||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Commercial |
$ | 24 | $ | 63 | $ | 87 | $ | 61 | $ | 96 | $ | 157 | ||||||||||||
Commercial real estate |
57 | 130 | 187 | 34 | 169 | 203 | ||||||||||||||||||
Leases |
2 | 2 | 4 | 24 | | 24 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
83 | 195 | 278 | 119 | 265 | 384 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Residential, including originated home equity products |
208 | 664 | 872 | 259 | 662 | 921 | ||||||||||||||||||
Home equity products serviced by others |
39 | 55 | 94 | 43 | 60 | 103 | ||||||||||||||||||
Other secured retail |
66 | 11 | 77 | 66 | 16 | 82 | ||||||||||||||||||
Unsecured retail |
45 | 31 | 76 | 67 | 54 | 121 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total retail |
358 | 761 | 1,119 | 435 | 792 | 1,227 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 441 | $ | 956 | $ | 1,397 | $ | 554 | $ | 1,057 | $ | 1,611 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans include (1) nonaccruing larger balance commercial loans (greater than $3 million carrying value) and (2) commercial and retail TDRs. The following is a summary of impaired loan information by class:
June 30, 2014 | ||||||||||||||||||||
Impaired
Loans With a Related Allowance |
Allowance
on Impaired Loans |
Impaired
Loans Without a Related Allowance |
Unpaid
Contractual Balance |
Total
Recorded Investment in Impaired Loans |
||||||||||||||||
(in millions) | ||||||||||||||||||||
Commercial |
$ | 124 | $ | 15 | $ | 35 | $ | 163 | $ | 159 | ||||||||||
Commercial real estate |
56 | 8 | 39 | 262 | 95 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
180 | 23 | 74 | 425 | 254 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Residential, including originated home equity products |
364 | 57 | 514 | 1,123 | 878 | |||||||||||||||
Home equity products serviced by others |
86 | 14 | 23 | 122 | 109 | |||||||||||||||
Other secured retail |
21 | 4 | 10 | 40 | 31 | |||||||||||||||
Unsecured retail |
200 | 41 | | 200 | 200 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total retail |
671 | 116 | 547 | 1,485 | 1,218 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 851 | $ | 139 | $ | 621 | $ | 1,910 | $ | 1,472 | ||||||||||
|
|
|
|
|
|
|
|
|
|
F-110
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December 31, 2013 | ||||||||||||||||||||
Impaired
Loans With a Related Allowance |
Allowance
on Impaired Loans |
Impaired
Loans Without a Related Allowance |
Unpaid
Contractual Balance |
Total
Recorded Investment in Impaired Loans |
||||||||||||||||
(in millions) | ||||||||||||||||||||
Commercial |
$ | 86 | $ | 15 | $ | 33 | $ | 214 | $ | 119 | ||||||||||
Commercial real estate |
76 | 8 | 44 | 221 | 120 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
162 | 23 | 77 | 435 | 239 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Residential, including originated home equity products |
355 | 59 | 497 | 1,081 | 852 | |||||||||||||||
Home equity products serviced by others |
91 | 11 | 21 | 125 | 112 | |||||||||||||||
Other secured retail |
23 | 3 | 12 | 43 | 35 | |||||||||||||||
Unsecured retail |
201 | 35 | | 201 | 201 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total retail |
670 | 108 | 530 | 1,450 | 1,200 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 832 | $ | 131 | $ | 607 | $ | 1,885 | $ | 1,439 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Additional information on impaired loans is as follows:
For the Six Months Ended June 30, | ||||||||||||||||
2014 | 2013 | |||||||||||||||
Interest Income
Recognized |
Average Recorded
Investment |
Interest Income
Recognized |
Average Recorded
Investment |
|||||||||||||
(in millions) | ||||||||||||||||
Commercial |
$ | 1 | $ | 102 | $ | 1 | $ | 201 | ||||||||
Commercial real estate |
| 96 | 1 | 176 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial |
1 | 198 | 2 | 377 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Residential, including originated home equity products |
13 | 843 | 3 | 733 | ||||||||||||
Home equity products serviced by others |
3 | 108 | 3 | 126 | ||||||||||||
Other secured retail |
| 31 | 4 | 177 | ||||||||||||
Unsecured retail |
5 | 192 | 2 | 48 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total retail |
21 | 1,174 | 12 | 1,084 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 22 | $ | 1,372 | $ | 14 | $ | 1,461 | ||||||||
|
|
|
|
|
|
|
|
Troubled Debt Restructurings
A loan modification is identified as a TDR when the Company or a bankruptcy court grants the borrower a concession the Company would not otherwise make in response to the borrowers financial difficulties. TDRs typically result from the Companys loss mitigation efforts and are undertaken in order to improve the likelihood of recovery and continuity of the relationship. Citizens loan modifications are handled on a case-by-case basis and are negotiated to achieve mutually agreeable terms that maximize loan collectability and meet the borrowers financial needs. Concessions granted in TDRs for all classes of loans may include lowering the interest rate, forgiving a portion of principal, extending the loan term, lowering scheduled payments for a specified period of time, principal forbearance, or
F-111
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
capitalizing past due amounts. A rate increase can be a concession if the increased rate is lower than a market rate for debt with risk similar to that of the restructured loan. TDRs for commercial loans and leases may also involve creating a multiple note structure, accepting non-cash assets, accepting an equity interest, or receiving a performance-based fee. In some cases a TDR may involve multiple concessions. The financial effects of TDRs for all loan classes may include lower income (either due to a lower interest rate or a delay in the timing of cash flows), larger loan loss provisions, and accelerated charge-offs if the modification renders the loan collateral-dependent. In some cases interest income throughout the term of the loan may increase if, for example, the loan is extended or the interest rate is increased as a result of the restructuring.
Because TDRs are impaired loans, the Company measures impairment by comparing the present value of expected future cash flows, or, when appropriate, collateral value, to the loans recorded investment. Any excess of recorded investment over the present value of expected future cash flows or collateral value is recognized by creating a valuation allowance or increasing an existing valuation allowance. Any portion of the loans recorded investment the Company does not expect to collect as a result of the modification is charged off at the time of modification.
Commercial TDRs were $194 million and $167 million on June 30, 2014 and December 31, 2013, respectively. Retail TDRs totaled $1.2 billion on June 30, 2014 and December 31, 2013. Commitments to lend additional funds to debtors owing receivables which were TDRs were $46 million and $52 million on June 30, 2014 and December 31, 2013, respectively.
The following table summarizes how loans were modified during the six months ended June 30, 2014, the charge-offs related to the modifications, and the impact on the ALLL. The reported balances include loans that became TDRs during 2014, and were paid off in full, charged off, or sold prior to June 30, 2014.
Primary Modification Types | ||||||||||||||||||||||||
Interest Rate Reduction (1) | Maturity Extension (2) | |||||||||||||||||||||||
Number of
Contracts |
Pre-
Modification Outstanding Recorded Investment |
Post-
Modification Outstanding Recorded Investment |
Number of
Contracts |
Pre-
Modification Outstanding Recorded Investment |
Post-
Modification Outstanding Recorded Investment |
|||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||
Commercial |
15 | $ | 7 | $ | 7 | 28 | $ | 2 | $ | 2 | ||||||||||||||
Commercial real estate |
2 | | | 2 | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
17 | 7 | 7 | 30 | 2 | 2 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Residential, including originated home equity products |
136 | 14 | 14 | 266 | 18 | 16 | ||||||||||||||||||
Home equity products serviced by others |
21 | 1 | 1 | 1 | | | ||||||||||||||||||
Other secured retail |
58 | 1 | 1 | 7 | | | ||||||||||||||||||
Unsecured retail |
1,185 | 6 | 6 | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total retail |
1,400 | 22 | 22 | 274 | 18 | 16 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
1,417 | $ | 29 | $ | 29 | 304 | $ | 20 | $ | 18 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
F-112
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Primary Modification Types | ||||||||||||||||||||
Other (3) | ||||||||||||||||||||
Number of
Contracts |
Pre-
Modification Outstanding Recorded Investment |
Post-
Modification Outstanding Recorded Investment |
Net Change to
ALLL Resulting from Modification |
Charge-offs
Resulting from Modification |
||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Commercial |
2 | $ | | $ | | $ | | $ | | |||||||||||
Commercial real estate |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
2 | | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Residential, including originated home equity products |
921 | 73 | 69 | | 5 | |||||||||||||||
Home equity products serviced by others |
109 | 4 | 4 | | | |||||||||||||||
Other secured retail |
446 | 7 | 5 | | 2 | |||||||||||||||
Unsecured retail |
853 | 16 | 16 | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total retail |
2,329 | 100 | 94 | | 7 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
2,331 | $ | 100 | $ | 94 | $ | | $ | 7 | |||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | Includes modifications that consist of multiple concessions, one of which is an interest rate reduction. |
(2) | Includes modifications that consist of multiple concessions, one of which is a maturity extension (unless one of the other concessions was an interest rate reduction). |
(3) | Includes modifications other than interest rate reductions or maturity extensions, such as lowering scheduled payments for a specified period of time, principal forbearance, capitalizing arrearages, and principal forgiveness. Also included are the following: deferrals, trial modifications, certain bankruptcies, loans in forbearance and prepayment plans. Modifications can include the deferral of accrued interest resulting in post modification balances being higher than pre-modification. |
The following table summarizes how loans were modified during the six months ended June 30, 2013, the charge-offs related to the modifications, and the impact on the ALLL. The reported balances include loans that became TDRs during 2013, and were paid off in full, charged off, or sold prior to June 30, 2013.
Primary Modification Types | ||||||||||||||||||||||||
Interest Rate Reduction (1) | Maturity Extension (2) | |||||||||||||||||||||||
Number of
Contracts |
Pre-
Modification Outstanding Recorded Investment |
Post-
Modification Outstanding Recorded Investment |
Number of
Contracts |
Pre-
Modification Outstanding Recorded Investment |
Post-
Modification Outstanding Recorded Investment |
|||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||
Commercial |
71 | $ | 4 | $ | 4 | 84 | $ | 4 | $ | 4 | ||||||||||||||
Commercial real estate |
4 | 3 | 3 | 1 | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
75 | 7 | 7 | 85 | 4 | 4 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Residential, including originated home equity products |
238 | 27 | 29 | 80 | 7 | 7 | ||||||||||||||||||
Home equity products serviced by others |
19 | 1 | 1 | 1 | | | ||||||||||||||||||
Other secured retail |
195 | 2 | 2 | 2 | | | ||||||||||||||||||
Unsecured retail |
1,342 | 7 | 7 | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total retail |
1,794 | 37 | 39 | 83 | 7 | 7 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
1,869 | $ | 44 | $ | 46 | 168 | $ | 11 | $ | 11 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
F-113
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Primary Modification Types | ||||||||||||||||||||
Other (3) | ||||||||||||||||||||
Number of
Contracts |
Pre-Modification
Outstanding Recorded Investment |
Post-Modification
Outstanding Recorded Investment |
Net Change to
ALLL Resulting from Modification |
Charge-offs
Resulting from Modification |
||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Commercial |
3 | $ | | $ | | $ | | $ | | |||||||||||
Commercial real estate |
| | | (1 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
3 | | | (1 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Residential, including originated home equity products |
1,050 | 85 | 80 | 1 | 6 | |||||||||||||||
Home equity products serviced by others |
145 | 7 | 5 | | 2 | |||||||||||||||
Other secured retail |
847 | 8 | 7 | | 1 | |||||||||||||||
Unsecured retail |
1,536 | 28 | 28 | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total retail |
3,578 | 128 | 120 | 1 | 9 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
3,581 | $ | 128 | $ | 120 | $ | | $ | 9 | |||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | Includes modifications that consist of multiple concessions, one of which is an interest rate reduction. |
(2) | Includes modifications that consist of multiple concessions, one of which is a maturity extension (unless one of the other concessions was an interest rate reduction). |
(3) | Includes modifications other than interest rate reductions or maturity extensions, such as lowering scheduled payments for a specified period of time, principal forbearance, capitalizing arrearages, and principal forgiveness. Also included are the following: deferrals, trial modifications, certain bankruptcies, loans in forbearance and prepayment plans. Modifications can include the deferral of accrued interest resulting in post modification balances being higher than pre-modification. |
The table below summarizes TDRs that defaulted during the six months ended June 30, 2014 and 2013 within 12 months of their modification date. For purposes of this table, a payment default is defined as being past due 90 days or more under the modified terms. Amounts represent the loans recorded investment at the time of payment default. Loan data in this table includes loans meeting the criteria that were paid off in full, charged off, or sold prior to June 30, 2014 and 2013. If a TDR of any loan type becomes 90 days past due after being modified, the loan is written down to the fair value of collateral less cost to sell. The amount written off is charged to the ALLL.
June 30, 2014 | June 30, 2013 | |||||||||||||||
Number of
Contracts |
Balance
Defaulted |
Number of
Contracts |
Balance
Defaulted |
|||||||||||||
(dollars in millions) | ||||||||||||||||
Commercial |
17 | $ | 3 | 1 | $ | | ||||||||||
Commercial real estate |
1 | 1 | 1 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial |
18 | 4 | 2 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Residential, including originated home equity products |
429 | 33 | 1,124 | 85 | ||||||||||||
Home equity products serviced by others |
46 | 1 | 150 | 4 | ||||||||||||
Other secured retail |
67 | 1 | 130 | 1 | ||||||||||||
Unsecured retail |
504 | 5 | 592 | 8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total retail |
1,046 | 40 | 1,996 | 98 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
1,064 | $ | 44 | 1,998 | $ | 98 | ||||||||||
|
|
|
|
|
|
|
|
F-114
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Concentrations of Credit Risk
Most of the Companys business activity is with customers located in the New England, Mid-Atlantic and Mid-West regions. Generally, loans are collateralized by assets including real estate, inventory, accounts receivable, other personal property and investment securities. As of June 30, 2014 and December 31, 2013, the Company had a significant amount of loans collateralized by residential and commercial real estate. There are no significant concentrations to particular industries within the commercial loan portfolio. Exposure to credit losses arising from lending transactions may fluctuate with fair values of collateral supporting loans, which fail to perform according to contractual agreements. The Companys policy is to collateralize loans to the extent necessary; however, unsecured loans are also granted on the basis of the financial strength of the applicant and the facts surrounding the transaction.
Certain loan products, including residential mortgages, home equity loans and lines of credit, and credit cards, have contractual features that may increase credit exposure to the Company in the event of an increase in interest rates or a decline in housing values. These products include loans that exceed 90% of the value of the underlying collateral (high LTV loans), interest-only and negative amortization residential mortgages, and loans with low introductory rates. Certain loans have more than one of these characteristics.
The following table presents balances of loans with these characteristics:
June 30, 2014 | ||||||||||||||||||||
Residential
Mortgages |
Home
Equity Loans and Lines of Credit |
Home
Equity Products serviced by others |
Credit
Cards |
Total | ||||||||||||||||
(in millions) | ||||||||||||||||||||
High loan-to-value |
$ | 1,003 | $ | 2,574 | $ | 1,413 | $ | | $ | 4,990 | ||||||||||
Interest only/negative amortization |
875 | | | | 875 | |||||||||||||||
Low introductory rate |
| | | 106 | 106 | |||||||||||||||
Multiple characteristics and other |
76 | | | | 76 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 1,954 | $ | 2,574 | $ | 1,413 | $ | 106 | $ | 6,047 | ||||||||||
|
|
|
|
|
|
|
|
|
|
December 31, 2013 | ||||||||||||||||||||
Residential
Mortgages |
Home
Equity Loans and Lines of Credit |
Home
Equity Products serviced by others |
Credit
Cards |
Total | ||||||||||||||||
(in millions) | ||||||||||||||||||||
High loan-to-value |
$ | 1,054 | $ | 2,798 | $ | 1,581 | $ | | $ | 5,433 | ||||||||||
Interest only/negative amortization |
882 | | | | 882 | |||||||||||||||
Low introductory rate |
| | | 119 | 119 | |||||||||||||||
Multiple characteristics and other |
96 | | | | 96 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 2,032 | $ | 2,798 | $ | 1,581 | $ | 119 | $ | 6,530 | ||||||||||
|
|
|
|
|
|
|
|
|
|
F-115
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 5GOODWILL
Goodwill represents the excess of fair value of assets purchased over the purchase price. Since 1988, the Company has closed 26 acquisitions of banks or assets of banks. The changes in the carrying value of goodwill for the six months ended June 30, 2014 and 2013 were:
Consumer
Banking |
Commercial
Banking |
Total | ||||||||||
(in millions) | ||||||||||||
Balance at December 31, 2012 |
$ | 6,393 | $ | 4,918 | $ | 11,311 | ||||||
Impairment losses based on results of interim impairment testing |
(4,435 | ) | | (4,435 | ) | |||||||
Transfers |
178 | (178 | ) | | ||||||||
|
|
|
|
|
|
|||||||
Balance at June 30, 2013 |
$ | 2,136 | $ | 4,740 | $ | 6,876 | ||||||
|
|
|
|
|
|
|||||||
Balance at December 31, 2013 |
$ | 2,136 | $ | 4,740 | $ | 6,876 | ||||||
Adjustments |
| | | |||||||||
|
|
|
|
|
|
|||||||
Balance at June 30, 2014 |
$ | 2,136 | $ | 4,740 | $ | 6,876 | ||||||
|
|
|
|
|
|
Accumulated impairment losses related to the Consumer Banking reporting unit totaled $5.9 billion at June 30, 2014, and 2013. The accumulated impairment losses related to the Commercial Banking unit totaled $50 million at June 30, 2014 and 2013.
The Company performs an annual test for impairment of goodwill at a level of reporting referred to as a reporting unit. The Company has identified and allocated goodwill to the following reporting units based upon reviews of the structure of the Companys executive team and supporting functions, resource allocations and financial reporting processes:
| Consumer Banking |
| Commercial Banking |
The Company tested the value of goodwill as of June 30, 2013, and recorded an impairment charge of $4.4 billion relating to the Consumer Banking reporting unit. The impairment charge, which was a non-cash item, had minimal impact on the Companys regulatory capital ratios and liquidity, and for segment reporting purposes was included in Other. Refer to Note 19 Business Segments, for information regarding segment reporting.
The valuation of goodwill is dependent on forward-looking expectations related to the performance of the U.S. economy and the associated financial performance of the Company. The prolonged delay in the full recovery of the U.S. economy, and the impact of that delay on earnings expectations, prompted a goodwill impairment test as of June 30, 2013. Although the U.S. economy has demonstrated signs of recovery, notably improvements in unemployment and housing, the pace and extent of these indicators, as well as in overall Gross Domestic Product, have lagged previous expectations. The impact of the slow recovery is most evident in the Companys Consumer Banking reporting unit. Forecasted economic growth for the U.S., coupled with the continuing impact of the new regulatory framework in the financial industry, have resulted in a deceleration of expected growth for the Consumer Banking reporting units future profits, and an associated goodwill impairment. Refer to Note 1 Significant Accounting Policies, in the Companys audited Consolidated Financial Statements included elsewhere in this prospectus for information regarding the impairment test.
F-116
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 6MORTGAGE BANKING
In its mortgage banking business, the Company sells residential mortgage loans to government-sponsored entities and other parties, who may issue securities backed by pools of such loans. The Company retains no beneficial interests in these sales, but may retain the servicing rights of the loans sold. The Company is obligated to subsequently repurchase a loan if the purchaser discovers a standard representation or warranty violation such as noncompliance with eligibility requirements, customer fraud, or servicing violations. This primarily occurs during a loan file review.
The Company received $688 million and $2.6 billion of proceeds from the sale of residential mortgages in the six months ended June 30, 2014 and 2013, respectively and recognized gains on such sales of $17 million and $47 million in the six months then ended, respectively. Pursuant to the standard representations and warranties obligations discussed in the preceding paragraph, the Company repurchased mortgage loans totaling $17 million and $26 million for the six months ended June 30, 2014 and 2013, respectively.
Mortgage servicing fees, a component of mortgage banking fees, were $30 million and $32 million for the six months ended June 30, 2014 and 2013, respectively. The Company recorded a valuation recovery of $3 million compared to a recovery of $39 million for its MSRs for the six months ended June 30, 2014 and 2013, respectively.
Changes related to MSRs were as follows:
Six Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
(in millions) | ||||||||
MSRs: |
||||||||
Balance as of January 1 |
$ | 208 | $ | 215 | ||||
Amount capitalized |
8 | 26 | ||||||
Amortization |
(21 | ) | (29 | ) | ||||
|
|
|
|
|||||
Carrying amount before valuation allowance |
195 | 212 | ||||||
|
|
|
|
|||||
Valuation allowance for servicing assets: |
||||||||
Balance as of January 1 |
23 | 70 | ||||||
Valuation recovery |
(3 | ) | (39 | ) | ||||
|
|
|
|
|||||
Balance at end of period |
20 | 31 | ||||||
|
|
|
|
|||||
Net carrying value of MSRs |
$ | 175 | $ | 181 | ||||
|
|
|
|
MSRs are presented in other assets on the Consolidated Balance Sheets.
The fair value of MSRs is estimated using a valuation model that calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors, which are determined based on current market conditions. The valuation model uses a static discounted cash flow methodology incorporating current market interest rates. A static model does not attempt to forecast or predict the future direction of interest rates; rather it estimates the amount and timing of future servicing cash flows using current market interest rates. The current mortgage interest rate influences the expected prepayment rate and therefore, the length of the cash flows associated with the servicing asset, while the discount rate determines the present value of those cash flows. Expected mortgage
F-117
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
loan prepayment assumptions are obtained using the QRM Multi Component prepayment model. The Company periodically obtains third-party valuations of its MSRs to assess the reasonableness of the fair value calculated by the valuation model.
The key economic assumptions used to estimate the value of MSRs are presented in the following table:
As of June 30, | ||||||||
2014 | 2013 | |||||||
(dollars in millions) | ||||||||
Fair value |
$ | 186 | $ | 188 | ||||
Weighted average life (in years) |
5.2 | 5.2 | ||||||
Weighted average constant prepayment rate |
13.0 | % | 14.1 | % | ||||
Weighted average discount rate |
10.3 | % | 10.4 | % |
The key economic assumptions used in estimating the fair value of MSRs capitalized during the period were as follows:
Six Months Ended
June 30, |
||||||||
2014 | 2013 | |||||||
Weighted average life (in years) |
5.4 | 6.3 | ||||||
Weighted average constant prepayment rate |
12.1 | % | 13.3 | % | ||||
Weighted average discount rate |
10.3 | % | 10.5 | % |
The sensitivity analysis below as of June 30, 2014 and 2013, presents the impact to current fair value of an immediate 50 basis points and 100 basis points adverse change in the key economic assumptions and presents the decline in fair value that would occur if the adverse change were realized. These sensitivities are hypothetical. The effect of a variation in a particular assumption on the fair value of the mortgage servicing rights is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, changes in interest rates, which drive changes in prepayment speeds, could result in changes in the discount rates), which might amplify or counteract the sensitivities. The primary risk inherent in the Companys MSRs is an increase in prepayments of the underlying mortgage loans serviced, which is dependent upon market movements of interest rates.
Six Months Ended
June 30, |
||||||||
2014 | 2013 | |||||||
(in millions) | ||||||||
Prepayment rate: |
||||||||
Decline in fair value from 50 basis points adverse change in interest rates |
$ | 8 | $ | 11 | ||||
Decline in fair value from 100 basis points adverse change in interest rates |
$ | 14 | $ | 22 | ||||
Weighted average discount rate: |
||||||||
Decline in fair value from 50 basis points adverse change |
$ | 3 | $ | 3 | ||||
Decline in fair value from 100 basis points adverse change |
$ | 6 | $ | 6 |
F-118
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 7-BORROWED FUNDS
The following is a summary of the Companys short-term borrowed funds:
As of
June 30, 2014 |
As of
December 31, 2013 |
|||||||
(in millions) | ||||||||
Federal funds purchased |
$ | | $ | 689 | ||||
Securities sold under agreements to repurchase |
6,807 | 4,102 | ||||||
Other short-term borrowed funds |
7,702 | 2,251 | ||||||
|
|
|
|
|||||
Total short-term borrowed funds |
$ | 14,509 | $ | 7,042 | ||||
|
|
|
|
Key data related to short-term borrowed funds is presented in the following table:
As of and
For the Six Months Ended June 30, 2014 |
As of and
For the Year Ended December 31, 2013 |
|||||||
(dollars in millions) | ||||||||
Weighted-average interest rate at period end: |
||||||||
Federal funds purchased and securities sold under agreements to repurchase |
0.12 | % | 0.09 | % | ||||
Other short-term borrowed funds |
0.27 | % | 0.20 | % | ||||
Maximum amount outstanding at month-end during the period: |
||||||||
Federal funds purchased and securities sold under agreements to repurchase |
$ | 7,022 | $ | 5,114 | ||||
Other short-term borrowed funds |
7,702 | 2,251 | ||||||
Average amount outstanding during the period: |
||||||||
Federal funds purchased and securities sold under agreements to repurchase |
$ | 5,708 | $ | 2,400 | ||||
Other short-term borrowed funds |
4,838 | 259 | ||||||
Weighted-average interest rate during the period: |
||||||||
Federal funds purchased and securities sold under agreements to repurchase |
0.11 | % | 0.31 | % | ||||
Other short-term borrowed funds |
0.26 | % | 0.44 | % |
The following is a summary of the Companys long-term borrowed funds:
June 30,
2014 |
December 31,
2013 |
|||||||
(in millions) | ||||||||
Citizens Financial Group, Inc.: |
||||||||
4.150% fixed rate subordinated debt, due 2022 |
$ | 350 | $ | 350 | ||||
5.158% fixed-to-floating rate subordinated debt, (LIBOR + 3.56%) callable, due 2023 |
333 | 333 | ||||||
4.771% fixed rate subordinated debt, due 2023 |
333 | 333 | ||||||
4.691% fixed rate subordinated debt, due 2024 |
334 | 334 | ||||||
4.153% fixed rate subordinated debt due 2024 |
333 | | ||||||
Banking Subsidiaries: |
||||||||
Federal Home Loan advances due through 2033 |
24 | 25 | ||||||
Other |
25 | 30 | ||||||
|
|
|
|
|||||
Total long-term borrowed funds |
$ | 1,732 | $ | 1,405 | ||||
|
|
|
|
F-119
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Advances, lines of credit, and letters of credit from the FHLB are collateralized by pledged mortgages and pledged securities at least sufficient to satisfy the collateral maintenance level established by the FHLB. The utilized borrowing capacity for FHLB advances and letters of credit was $11.1 billion and $4.2 billion at June 30, 2014 and December 31, 2013, respectively. The Companys available FHLB borrowing capacity was $1.6 billion and $8.2 billion at June 30, 2014 and December 31, 2013, respectively. The Company can also borrow from the FRB discount window to meet short-term liquidity requirements. Collateral, such as investment securities and loans, is pledged to provide borrowing capacity at the FRB. At June 30, 2014, the Companys unused secured borrowing capacity was approximately $22.4 billion, which includes free securities, FHLB borrowing capacity, and FRB discount window capacity.
The following is a summary of maturities for the Companys long-term borrowed funds at June 30, 2014:
Year |
(in millions) | |||
2015 or on demand |
$ | 2 | ||
2016 |
6 | |||
2017 |
14 | |||
2018 |
11 | |||
2019 |
1 | |||
2020 and thereafter |
1,698 | |||
|
|
|||
Total |
$ | 1,732 | ||
|
|
NOTE 8PREFERRED STOCK
As of June 30, 2014, the Company had authorized 100,000,000 shares of $25 par value undesignated preferred stock. These undesignated shares were authorized on April 9, 2014, by resolution of the Board of Directors. The Board of Directors or any authorized committee thereof are authorized to provide for the issuance of these shares in one or more series, and by filing a certificate pursuant to applicable law of the State of Delaware, to establish or change from time to time the number of shares of each such series, and to fix the designations, powers, including voting powers, full or limited, or no voting powers, preferences and the relative, participating, optional or other special rights of the shares of each series and any qualifications, limitations and restrictions thereof.
Prior to April 9, 2014, the Company had authorized 30,000 of $1 par value non-cumulative, non-voting perpetual preferred stock. That preferred stock ranked senior to the common stock of the Company with respect to dividend rights upon liquidation or dissolution of the Company. The stock was not convertible into any other property of the Company, nor was it redeemable by either the Company or the holder thereof. Dividends were non-cumulative and were payable quarterly at LIBOR plus 180 bps, if and when declared by the Companys Board of Directors. In the event of any liquidation, dissolution or winding up of the Company, holders of each share of the preferred stock outstanding were entitled to be paid, out of the assets of the Company available for distribution to stockholders, before any payment was made to the holders of common stock, an amount equal to $100,000 per share of preferred stock then issued and outstanding.
There were no shares issued and outstanding during 2014 or 2013.
F-120
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 9EMPLOYEE BENEFITS
The Company maintains a non-contributory pension plan (the Plan or qualified plan) that was closed to new hires and re-hires effective January 1, 2009 and frozen to all participants effective December 31, 2012. Benefits under the Plan are based on employees years of service and highest 5-year average eligible compensation. The Plan is funded on a current basis, in compliance with the requirements of the ERISA. The Company also provides an unfunded, non-qualified supplemental retirement plan (the non-qualified plan), which was closed and frozen consistent with the qualified plan.
The following table presents the components of net periodic (income) cost for the Companys qualified and non-qualified plans:
Six Months Ended June 30, | ||||||||||||||||||||||||
Qualified
Plan |
Non-Qualified
Plan |
Total | ||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 | 2013 | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Service cost |
$ | 2 | $ | 2 | $ | | $ | | $ | 2 | $ | 2 | ||||||||||||
Interest cost |
22 | 21 | 2 | 2 | 24 | 23 | ||||||||||||||||||
Expected return on plan assets |
(35 | ) | (34 | ) | | | (35 | ) | (34 | ) | ||||||||||||||
Amortization of actuarial loss |
4 | 6 | 1 | 1 | 5 | 7 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net periodic pension (income) cost |
$ | (7 | ) | $ | (5 | ) | $ | 3 | $ | 3 | $ | (4 | ) | $ | (2 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 10INCOME TAXES
Income Tax Provision (Benefit)
The provision (benefit) for income taxes was $232 million and $(174) million for the six months ended June 30, 2014 and 2013, respectively. The provision represented an effective tax rate of 33% and 4% for the six months ended June 30, 2014 and 2013, respectively. For the six months ended June 30, 2014, the effective tax rate compared favorably to the statutory rate of 35% primarily as a result of tax credits and the permanent benefit of tax-exempt income. For the six months ended June 30, 2013, the effective tax rate compared favorably to the statutory rate of 35% primarily as a result of the tax rate impact of a goodwill impairment charge.
Deferred Tax Liability
At June 30, 2014, the Company reported a net deferred tax liability of $403 million, compared to a $199 million liability as of December 31, 2013. The increase in the net deferred tax liability is primarily attributable to the utilization of net operating loss and tax credit carryforwards, in addition to a decrease in the unrealized loss reported on securities available for sale, derivative instruments, and hedging activities.
NOTE 11DERIVATIVES
In the normal course of business, the Company enters into a variety of derivative transactions in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates and foreign currency exchange rates. The Company does not use derivatives for speculative purposes.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Companys derivative instruments are recognized on the Consolidated Balance Sheets at fair value. Information regarding the valuation methodology and inputs used to estimate the fair value of the Companys derivative instruments is described in Note 15 Fair Value Measurements.
The following table identifies derivative instruments included on the Consolidated Balance Sheets in derivative assets and derivative liabilities:
June 30, 2014 | December 31, 2013 | |||||||||||||||||||||||
Notional
Amount 1 |
Derivative
Assets |
Derivative
Liabilities |
Notional
Amount 1 |
Derivative
Assets |
Derivative
Liabilities |
|||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Derivatives designated as hedging instruments: |
||||||||||||||||||||||||
Interest rate swaps |
$ | 5,000 | $ | 23 | $ | 223 | $ | 5,500 | $ | 23 | $ | 412 | ||||||||||||
Derivatives not designated as hedging instruments: |
||||||||||||||||||||||||
Interest rate swaps |
28,381 | 611 | 522 | 29,355 | 654 | 558 | ||||||||||||||||||
Foreign exchange contracts |
8,395 | 74 | 69 | 7,771 | 94 | 87 | ||||||||||||||||||
Other contracts |
731 | 8 | 14 | 569 | 7 | 10 | ||||||||||||||||||
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|
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Total derivatives not designated as hedging instruments |
693 | 605 | 755 | 655 | ||||||||||||||||||||
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Gross derivative fair values |
716 | 828 | 778 | 1,067 | ||||||||||||||||||||
Less: Gross amounts offset in the Consolidated Balance Sheets 2 |
(81 | ) | (81 | ) | (128 | ) | (128 | ) | ||||||||||||||||
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Total net derivative fair values presented in the Consolidated Balance Sheets 3 |
$ | 635 | $ | 747 | $ | 650 | $ | 939 | ||||||||||||||||
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1 | The notional or contractual amount of interest rate derivatives and foreign exchange contracts is the amount upon which interest and other payments under the contract are based. For interest rate derivatives, the notional amount is typically not exchanged. Therefore, notional amounts should not be taken as the measure of credit or market risk, as they tend to greatly overstate the true economic risk of these contracts. |
2 | Amounts represent the impact of legally enforceable master netting agreements that allow the Company to settle positive and negative positions. |
3 | The Company also offsets assets and liabilities associated with repurchase agreements on the Consolidated Balance Sheets. See Note 2 Securities, for further information. |
The Companys derivative transactions are internally divided into three sub-groups: institutional, customer and residential loan.
Institutional derivatives
The institutional derivatives portfolio primarily consists of interest rate swap agreements that are used to hedge the interest rate risk associated with the Companys investment securities, loans and financing liabilities (i.e., borrowed funds, deposits, etc.). The goal of the Companys interest rate hedging activities is to manage interest rate sensitivity so that movements in interest rates do not significantly adversely affect net interest income.
The Company enters into certain interest rate swap agreements to hedge the risk associated with floating rate loans. By entering into pay-floating/receive-fixed interest rate swaps, the Company was
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CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
able to minimize the variability in the cash flows of these assets due to changes in interest rates. The Company has outstanding interest rate swap agreements designed to hedge a portion of the Companys borrowed funds and deposits. By entering into a pay-fixed/receive-floating interest rate swap, a portion of these liabilities has been effectively converted to a fixed rate liability for the term of the interest rate swap agreement.
Customer derivatives
The customer derivatives portfolio consists of interest rate swap agreements and option contracts that are transacted to meet the financing needs of the Companys customers. Offsetting swap and cap agreements are simultaneously transacted to effectively eliminate the Companys market risk associated with the customer derivative products. The customer derivatives portfolio also includes foreign exchange contracts that are entered into on behalf of customers for the purpose of hedging exposure related to cash orders and loans and deposits denominated in foreign currency. The primary risks associated with these transactions arise from exposure to changes in foreign currency exchange rates and the ability of the counterparties to meet the terms of the contract. To manage this market risk, the Company simultaneously enters into offsetting foreign exchange contracts.
Residential loan derivatives
The Company enters into residential loan commitments that allow residential mortgage customers to lock in the interest rate on a residential mortgage while the loan undergoes the underwriting process. The Company also uses forward sales contracts to protect the value of residential mortgage loans and loan commitments that are being underwritten for future sale to investors in the secondary market.
The Company has certain derivative transactions that are designated as hedging instruments described as follows:
Derivatives designated as hedging instruments
The majority of the Companys institutional hedging portfolio qualifies for hedge accounting. This includes interest rate swaps that are designated in highly effective cash flow hedging relationships. The Company formally documents at inception all hedging relationships, as well as risk management objectives and strategies for undertaking various accounting hedges. Additionally, the Company uses dollar offset or regression analysis at the hedges inception, and at least quarterly thereafter to assess whether the derivatives are expected to be, or have been, highly effective in offsetting changes in the hedged items expected cash flows. The Company discontinues hedge accounting when it is determined that a derivative is not expected to be or has ceased to be effective as a hedge, and then reflects changes in fair value in earnings after termination of the hedge relationship.
Cash flow hedges
The Company has outstanding interest rate swap agreements designed to hedge a portion of the Companys floating rate assets and financing liabilities (including its borrowed funds and deposits). All of these swaps have been deemed as highly effective cash flow hedges. The effective portion of the hedging gains and losses associated with these hedges are recorded in OCI; the ineffective portion of the hedging gains and losses is recorded in earnings (other income). Hedging gains and losses on derivative contracts reclassified from OCI to current period earnings are included in the line item in the accompanying consolidated statements of operations in which the hedged item is recorded, and in the same period that the hedged item affects earnings. During the next 12 months, approximately
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CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
$33 million of net loss (pretax) on derivative instruments included in OCI is expected to be reclassified to net interest expense in the Consolidated Statements of Operations.
Hedging gains and losses associated with the Companys cash flow hedges are immediately reclassified from OCI to current period earnings (other income) if it becomes probable that the hedged forecasted transactions will not occur by the originally specified time period.
The following table summarizes certain information related to the Companys cash flow hedges:
1 | The cumulative effective gains and losses on the Companys cash flow hedging activities are included on the accumulated other comprehensive loss line item on the Consolidated Balance Sheets. |
2 | This amount includes both (a) the amortization of effective gains and losses associated with the Companys terminated cash flow hedges and (b) the current reporting periods interest settlements realized on the Companys active cash flow hedges. Both (a) and (b) were previously included on the accumulated other comprehensive loss line item on the Consolidated Balance Sheets and were subsequently recorded as adjustments to the interest expense of the underlying hedged item. |
3 | This amount represents hedging gains and losses that have been immediately reclassified from accumulated other comprehensive loss based on the probability that the hedged forecasted transactions would not occur by the originally specified time period. This amount is reflected in the other income line item on the Consolidated Statements of Operations. |
Economic Hedges
The Companys customer derivatives are recorded on the Consolidated Balance Sheets at fair value. These include interest rate and foreign exchange derivative contracts that are transacted to meet the hedging and financing needs of the Companys customers. Mark-to-market adjustments to the fair value of customer related interest rate contracts are included in other income in the accompanying Consolidated Statements of Operations. Mark-to-market adjustments to the fair value of foreign exchange contracts relating to foreign currency loans are included in interest and fees on loans and leases in the accompanying Consolidated Statements of Operations, while all other foreign currency contract fair value changes are included in foreign exchange and trade finance fees. In both cases, the mark-to-market gains and losses associated with the customer derivatives are mitigated by the mark-to-market gains and losses on the offsetting interest rate and foreign exchange derivative contracts transacted.
The Companys residential loan derivatives (including residential loan commitments and forward sales contracts) are recorded on the Consolidated Balance Sheets at fair value. Mark-to-market adjustments to the fair value of residential loan commitments and forward sale contracts are included in noninterest income under mortgage banking fees.
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CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table summarizes certain information related to the Companys economic hedges:
The Effect of Customer Derivatives and Economic Hedges on Net Income |
||||||||
Amounts Recognized in
Noninterest Income for the Six Months Ended June 30, |
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2014 | 2013 | |||||||
(in millions) | ||||||||
Customer derivative contracts |
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Customer interest rate contracts 1 |
$ | 149 | $ | (150 | ) | |||
Customer foreign exchange contracts 1 |
6 | (10 | ) | |||||
Residential loan commitments 3 |
8 | (40 | ) | |||||
Economic hedges |
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Offsetting derivatives transactions to hedge interest rate risk on customer interest rate contracts 1 |
(135 | ) | 178 | |||||
Offsetting derivatives transactions to hedge foreign exchange risk on customer foreign exchange contracts 2 |
(7 | ) | 13 | |||||
Forward sale contracts 3 |
(4 | ) | 40 | |||||
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Total |
$ | 17 | $ | 31 | ||||
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1 | Reported in other income on the Consolidated Statements of Operations. |
2 | Reported in foreign exchange and trade finance fees on the Consolidated Statements of Operations. |
3 | Reported in mortgage banking fees on the Consolidated Statements of Operations. |
NOTE 12COMMITMENTS, GUARANTEES AND CONTINGENCIES
Commitments
Commitments to extend credit are agreements to lend to customers in accordance with conditions contractually agreed upon in advance. Generally, the commitments have fixed expiration dates or termination clauses and may require payment of a fee. Since many of these commitments are expected to expire without being drawn upon, the contract amounts are not necessarily indicative of future cash requirements.
When-issued securities are agreements to purchase securities that have been authorized for issuance but not yet issued. The fair value of when-issued securities is reflected in the consolidated balance sheets at trade date.
On May 29, 2014, the Company entered into an agreement to purchase auto loans on a quarterly basis in future periods. For the first year, the agreement requires the purchase of a minimum of $250 million of outstanding balances to a maximum of $600 million per quarterly period. For quarterly periods after the first year, the minimum and maximum purchases are $400 million and $600 million, respectively. The agreement automatically renews until terminated by either party. The Company may cancel the agreement at will with payment of a variable termination fee. After 3 years, there is no termination fee.
During 2003, the Company entered into a 25-year agreement to acquire the naming and marketing rights of a baseball stadium in Pennsylvania. The Company has not made any payments on this contract for the six months ended June 30, 2014. The Company paid $3 million for the year ended December 31, 2013, and is obligated to pay $54 million over the remainder of the contract.
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CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Letters of Credit
Standby letters of credit, both financial and performance, are issued by the Company for its customers. They are used as conditional guarantees of payment to a third party in the event the customer either fails to make specific payments (financial) or fails to complete a specific project (performance). Commercial letters of credit are used to facilitate the import of goods. The commercial letter of credit is used as the method of payment to the Companys customers suppliers. The Companys exposure to credit loss in the event of counterparty nonperformance in connection with the above instruments is represented by the contractual amount of those instruments, net of the value of collateral held. Standby letters of credit and commercial letters of credit are issued for terms of up to ten years and one year, respectively.
Generally, letters of credit are collateralized by cash, accounts receivable, inventory or investment securities. Credit risk associated with letters of credit is considered in determining the appropriate amounts of reserves for unfunded commitments.
The Company recognizes a liability on the Consolidated Balance Sheets representing its obligation to stand ready to perform over the term of the standby letters of credit in the event that the specified triggering events occur. The liability for these guarantees at June 30, 2014 and December 31, 2013 is $3 million.
Risk Participation Agreements
RPAs are guarantees issued by the Company to other parties for a fee, whereby the Company agrees to participate in the credit risk of a derivative customer of the other party. Under the terms of these agreements, the participating bank receives a fee from the lead bank in exchange for the guarantee of reimbursement if the customer defaults on an interest rate swap. The interest rate swap is transacted such that any and all exchanges of interest payments (favorable and unfavorable) are made between the lead bank and the customer. In the event that an early termination of the swap occurs and the customer is unable to make a required close out payment, the participating bank assumes that obligation and is required to make this payment.
RPAs where the Company acts as the lead bank are referred to as participations-out, in reference to the credit risk associated with the customer derivatives being transferred out of the Company. Participations-out generally occur concurrently with the sale of new customer derivatives. RPAs where the Company acts as the participating bank are referred to as participations-in, in reference to the credit risk associated with the counterpartys derivatives being assumed by the Company. The Companys maximum credit exposure is based on its proportionate share of the settlement amount of the referenced interest rate swap. Settlement amounts are generally calculated based on the fair value of the swap plus outstanding accrued interest receivables from the customer. The Companys estimate of the credit exposure associated with its risk participations-in as of June 30, 2014 and December 31, 2013 is $20 million and $17 million, respectively. The current amount of credit exposure is spread out over 74 counterparties. RPAs generally have terms ranging from 1-5 years; however, certain outstanding agreements have terms as long as 9 years.
Other Guarantees
The Company has issued a guarantee to RBS, for a fee, whereby the Company will absorb credit losses related to the sale of option contracts by RBS to customers of the Company. There were outstanding option contracts with a notional value of $1 million and $2 million at June 30, 2014 and December 31, 2013, respectively.
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CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following is a summary of outstanding off balance sheet arrangements:
June 30, 2014 | December 31, 2013 | |||||||
(in millions) | ||||||||
Commitment amount: |
||||||||
Undrawn commitments to extend credit |
$ | 54,353 | $ | 53,987 | ||||
Financial standby letters of credit |
2,622 | 2,556 | ||||||
Performance letters of credit |
118 | 149 | ||||||
Commercial letters of credit |
56 | 64 | ||||||
Marketing rights |
54 | 54 | ||||||
Risk participation agreements |
20 | 17 | ||||||
Residential mortgage loans sold with recourse |
12 | 13 | ||||||
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Total |
$ | 57,235 | $ | 56,840 | ||||
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Contingencies
The Company operates in a legal and regulatory environment that exposes it to potentially significant risks. A certain amount of litigation ordinarily results from the nature of the Companys banking and other businesses. The Company is a party to legal proceedings, including class actions. It is also the subject of investigations, reviews, and regulatory matters arising out of its normal business operations, which, in some instances, relate to concerns about unfair and/or deceptive practices and mis-selling of certain products. In addition, the Company engages in discussions with relevant governmental and regulatory authorities on an ongoing and regular basis regarding various issues, and it is possible that any issues discussed or identified may result in investigatory or other action being taken. Litigation and regulatory matters may result in settlements, damages, fines, public or private censure, increased costs, required remediation, restriction on business activities, or other impact on the Company.
In these disputes and proceedings, the Company contests liability and the amount of damages as appropriate. Given their complex nature, it may be years before some of these matters are finally resolved. Moreover, before liability can be reasonably estimated for a claim, numerous legal and factual issues may need to be examined, including through potentially lengthy discovery and determination of important factual matters, and by addressing novel or unsettled legal issues relevant to the proceedings in question.
The Company cannot predict with certainty if, how, or when such claims will be resolved or what the eventual settlement, fine, penalty or other relief, if any, may be, particularly for claims that are at an early stage in their development or where claimants seek substantial or indeterminate damages. The Company recognizes a provision for a claim when, in the opinion of management after seeking legal advice, it is probable that a liability exists and the amount of loss can reasonably be estimated. In many proceedings, however, it is not possible to determine whether any loss is probable or to estimate the amount of any loss. In each of the matters described below, the Company is unable to estimate the liability in excess of any provision accrued, if any, that might arise or its effects on the Companys Consolidated Statements of Operations or Consolidated Cash Flows in any particular period.
Set out below are descriptions of significant legal matters involving the Company. Based on information currently available, the advice of legal and other counsel, and established reserves, management believes that the aggregate liabilities, if any, arising from these proceedings will not have a materially adverse effect on the Companys Consolidated Financial Statements.
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CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consumer Products
The activities of the Companys bank subsidiaries are subject to extensive laws and regulations concerning unfair or deceptive acts or practices in connection with customer products. Certain of the bank subsidiaries practices with respect to overdraft protection and other consumer products have not met applicable standards. The bank subsidiaries have implemented and are continuing to implement changes to bring their practices in conformity with applicable laws and regulations.
In April 2013, the bank subsidiaries consented to the issuance of orders by the OCC and the FDIC (the Consent Orders). In the Consent Orders (which are publicly available and will remain in effect until terminated by the regulators), the bank subsidiaries neither admitted nor denied the regulators findings that they had engaged in deceptive marketing and implementation of the banks overdraft protection program, checking rewards programs, and stop-payment process for pre-authorized recurring electronic fund transfers. Under the Consent Orders, the bank subsidiaries paid a total of $10 million in civil monetary penalties and are required to develop plans to provide restitution to affected customers (the amount of which is anticipated to be approximately $8 million) to cease and desist any operations in violation of Section 5 of the Federal Trade Commission Act, and to submit to the regulators periodic written progress reports regarding compliance with the Consent Orders. In addition, Citizens Bank, N.A. agreed to take certain remedial actions to improve its compliance risk management systems and to create a comprehensive action plan designed to achieve compliance with one of the Consent Orders. Restitution plans have been prepared and submitted for approval and Citizens Bank, N.A. has submitted for approval, and is in the process of implementing, its action plan for compliance with such Consent Order, as well as updated policies, procedures, and programs related to its compliance risk management systems.
The Companys bank subsidiaries have also identified issues regarding, among other things, certain identity theft and debt cancellation products, certain overdraft fees, signature debit card fees, the bank subsidiaries policies and practices with respect to consumer complaints process, identifying and correcting errors in customer deposits, and the charging of cost-based credit card late payment fees. The banking subsidiaries have paid restitution and expect to pay additional restitution to certain affected customers in connection with certain of these practices. In addition, the banking subsidiaries could face formal administrative enforcement actions from their federal supervisory agencies, including the assessment of civil monetary penalties and restitution, relating to the past practices and policies identified above and other consumer products, and they could face potential civil litigation. The Company does not expect that the aggregate of amounts paid in connection with these matters will have a material adverse effect on the Companys Consolidated Financial Statements.
Fair Labor Standards Act Litigation
The Company was named in several purported class actions brought under the FLSA and equivalent state statutes alleging that certain categories of branch employees were denied overtime for hours worked. These suits were brought by current and former branch employees alleging that either: (1) they were in Assistant Branch Manager positions and were improperly classified as exempt under the FLSA thereby denying them pay for all hours worked, including overtime pay; or (2) they were properly classified as non-exempt tellers, bankers or the like but were told not to record all of their hours, had hours they entered deleted by their managers and/or were otherwise denied pay for hours worked, including overtime pay. These cases cover the Companys entire footprint, and they have been settled with final court approval of the settlements granted on May 5, 2014. The settlement amount ($12 million), which had been fully covered by an existing reserve, has been paid by the Company and is in the process of being distributed pursuant to the terms of the settlement. Separately,
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CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
the Company was named in two lawsuits brought by current and former mortgage loan officers and home loan advisors alleging that they were improperly classified as exempt under the FLSA and corresponding state laws and therefore denied pay for all hours worked, including overtime pay. These cases have been settled, and final court approval of the settlements was granted on January 29, 2014. The combined settlement amount of these two cases ($3 million) which had been fully covered by existing reserves, has been paid by the Company and distributed pursuant to the terms of the settlements.
Telephone Consumer Protection Act Litigation
The Company is a defendant in a purported class action complaint filed in December 2013 in the United States District Court for the Southern District of California pursuant to the Telephone Consumer Protection Act. The named plaintiff purports to represent a national class of customers who allegedly received automated calls to their cell phones from the bank or its agents, without customer consent, in violation of the Telephone Consumer Protection Act. The Company is vigorously defending this matter.
LIBOR Litigation
The Company is a defendant in lawsuits in which allegations have been made that its parent company, RBS Group, manipulated U.S. dollar LIBOR to the detriment of the Companys customers. The lawsuits include a purported class action on behalf of borrowers of the Company whose interest rates were tied to U.S. dollar LIBOR. The plaintiffs in these cases assert various theories of liability, including fraud, negligent misrepresentation, breach of contract, and unjust enrichment. The Company is vigorously defending these matters.
Foreclosure-Related Expenses
In May 2013, the civil division of the U.S. Attorneys Office for the Southern District of New York served a subpoena pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 seeking information regarding home mortgage foreclosure expenses submitted for reimbursement to the United States Department of Housing and Urban Development, FNMA, or FHLMC. The Company is cooperating with the investigation.
Mortgage Repurchase Demands
The Company is an originator and servicer of residential mortgages and routinely sells such mortgage loans in the secondary market and to government-sponsored entities. In the context of such sales, the Company makes certain representations and warranties regarding the characteristics of the underlying loans and, as a result, may be contractually required to repurchase such loans or indemnify certain parties against losses for certain breaches of those representations and warranties. Between the start of January 2009 and the end of June 30, 2014, the Company has received approximately $146 million in repurchase demands and $97 million in indemnification payment requests in respect of loans originated, for the most part, since 2003. Of those claims presented, $81 million was paid to repurchase residential mortgage loans, and $32 million was incurred for indemnification costs to make investors whole. The Company repurchased mortgage loans totaling $17 million and $26 million for the six months ended June 30, 2014 and 2013, respectively. The Company incurred indemnification costs of $7 million and $6 million for the six months ended June 30, 2014 and 2013, respectively. The Company cannot estimate what the future level of repurchase demands will be or the Companys
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CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ultimate exposure, and cannot give any assurance that the historical experience will continue in the future. It is possible that the volume of repurchase demands will increase. In addition to the above, the Company has since December 2013 been responding to subpoenas issued by the Office of the Inspector General for the Federal Housing Finance Agency seeking information about loans sold to Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation from 2003 through 2011.
NOTE 13DIVESTITURES AND BRANCH ASSETS AND LIABILITIES HELD FOR SALE
In June 2014, the Company sold 103 retail branches located in Illinois, including certain customer deposit liabilities of $4.8 billion and selected loans of $1.0 billion (primarily middle market, small business, home equity and credit card balances). As a result of this transaction, the Company recorded a gain on sale of $288 million consisting of $286 million related to the deposits, a gain on sale of $11 million related to the loans and $9 million loss on sale of other branch assets. For the six months ended June 30, 2014, the corresponding interest and fees on these loans was $20 million and interest expense on deposits was $4 million. The Company has agreed to service the credit card accounts sold to the purchaser until September 2014. At such time, the Company is expected to complete all exit activities associated with this transaction. As a result of this transaction, the related assets and liabilities were classified as held for sale as of December 31, 2013. See Note 17 Divestitures and Branch Assets and Liabilities Held for Sale, in the Companys audited Consolidated Financial Statements included elsewhere in this prospectus for further details.
NOTE 14RELATED PARTY TRANSACTIONS
The following is a summary of inter-company borrowed funds:
Related Party | Interest Rate | Maturity Date |
June 30,
2014 |
December 31,
2013 |
||||||||||||
(dollars in millions) | ||||||||||||||||
Subordinated debt |
RBSG | 4.153 | % | July 2024 | $ | 333 | $ | | ||||||||
RBSG | 4.961 | % | January 2024 | 334 | 334 | |||||||||||
RBSG | 4.771 | % | October 2023 | 333 | 333 | |||||||||||
RBS | 5.158 | % | June 2023 | 333 | 333 |
Total interest expense recorded on inter-company subordinated debt was $25 million and $2 million for the six months ended June 30, 2014 and 2013, respectively.
The Company maintained a $50 million revolving line of credit at December 31, 2013 with RBS. This line of credit was not drawn upon at December 31, 2013, expired on January 31, 2014, and was not renewed. No interest expense was incurred on this revolving line of credit for the six months ended June 30, 2013.
The Company enters into interest rate swap agreements with RBS for the purpose of reducing the Companys exposure to interest rate fluctuations. As of June 30, 2014, the total notional amount of swaps outstanding was $5 billion which pay fixed rates ranging from 1.78% to 4.30% and receive overnight fed funds rate and one month LIBOR with maturities from 2016 through 2023. As of December 31, 2013, the total notional amount of swaps outstanding was $5.5 billion, all of which paid fixed rates ranging from 1.78% to 5.47% and received overnight Federal funds rate with maturities from 2014 through 2023. Included in these balances were $4 billion of receive-fixed swaps that had been executed as of June 30, 2014 and 2013 as part of a new hedging program implemented during the quarter ended March 31, 2013. The Company recorded net interest expense of $21 million and $92 million for the six months ended June 30, 2014 and 2013, respectively.
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CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In order to meet the financing needs of its customers, the Company enters into interest rate swap and cap agreements with its customers and simultaneously enters into offsetting swap and cap agreements with RBS. The Company earns a spread equal to the difference between rates charged to the customer and rates charged by RBS. The notional amount of these interest rate swap and cap agreements outstanding with RBS was $11.7 billion and $13.4 billion at June 30, 2014 and December 31, 2013, respectively. The Company recorded expense of $135 million for the six months ended June 30, 2014 and income of $176 million for the six months ended June 30, 2013 within other income.
Also to meet the financing needs of its customers, the Company enters into a variety of foreign currency denominated products, such as loans, deposits and foreign exchange contracts. To manage the foreign exchange risk associated with these products, the Company simultaneously enters into offsetting foreign exchange contracts with RBS. The Company earns a spread equal to the difference between rates charged to the customer and rates charged by RBS. The notional amount of foreign exchange contracts outstanding with RBS was $4.9 billion and $4.6 billion at June 30, 2014 and December 31, 2013, respectively. The Company recorded expense within foreign exchange and trade finance fees of $7 million for the six months ended June 30, 2014 and income of $13 million for the six months ended June 30, 2013.
The Company has issued a guarantee to RBS for a fee, whereby the Company will absorb credit losses related to the sale of option contracts by RBS to customers of the Company. There were outstanding option contracts with a notional value of $1 million and $2 million at June 30, 2014 and December 31, 2013, respectively.
The Company receives income for providing services and referring customers to RBS. The Company also shares office space with certain RBS entities for which rent expense and/or income is recorded in occupancy expense. The total fee income, net of occupancy expense, for the six months ended June 30, 2014 and 2013 was $8 million and $12 million, respectively.
For the six months ended June 30, 2014 and 2013, the Company paid $333 million of common stock dividends to RBS as part of the exchange transactions described in the Managements Discussion and Analysis of Financial Condition and Results of OperationsCapital included elsewhere in this prospectus. Additionally, the Company paid $35 million and $95 million of regular dividends to RBS for the six months ended June 30, 2014 and 2013, respectively.
The Company, as a matter of policy and during the ordinary course of business with underwriting terms similar to those offered to the public, has made loans to directors and executive officers and their immediate families, as well as their affiliated companies. Such loans amounted to $126 million and $78 million at June 30, 2014 and December 31, 2013, respectively.
NOTE 15FAIR VALUE MEASUREMENTS
As discussed in Note 1 Significant Accounting Policies in the Companys audited Consolidated Financial Statements included elsewhere in this prospectus, the Company measures or monitors many of its assets and liabilities on a fair value basis. Fair value is used on a recurring basis for assets and liabilities for which fair value is the required or elected measurement basis of accounting. Additionally, fair value is used on a nonrecurring basis to evaluate assets for impairment or for disclosure purposes. Nonrecurring fair value adjustments typically involve the application of lower of cost or market
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CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
accounting or write-downs of individual assets. The Company also applies the fair value measurement guidance to determine amounts reported for certain disclosures in this note for assets and liabilities not required to be reported at fair value in the financial statements.
Fair Value Option, Mortgage Loans Held for Sale
The Company elected to account for residential mortgage loans held for sale at fair value. Applying fair value accounting to the residential mortgage loans held for sale better aligns the reported results of the economic changes in the value of these loans and their related hedge instruments.
The fair value of residential loans held for sale is derived from observable mortgage security prices and includes adjustments for loan servicing value, agency guarantee fees, and other loan level attributes which are mostly observable in the marketplace. Credit risk does not significantly impact the valuation since loans are sold shortly after origination. Therefore, the Company classifies the residential mortgage loans held for sale in Level 2 of the fair value hierarchy.
The following table summarizes the difference between the aggregate fair value and the aggregate unpaid principal balance for residential mortgage loans held for sale measured at fair value:
June 30, 2014 | December 31, 2013 | |||||||||||||||||||||||
Aggregate
Fair Value |
Aggregate
Unpaid Principal |
Aggregate
Fair Value Less Aggregate Unpaid Principal |
Aggregate
Fair Value |
Aggregate
Unpaid Principal |
Aggregate
Fair Value Less Aggregate Unpaid Principal |
|||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Residential mortgage loans held for sale, at fair value |
$ | 173 | $ | 166 | $ | 7 | $ | 176 | $ | 173 | $ | 3 |
The loans accounted for under the fair value option are initially measured at fair value when the financial asset is recognized. Subsequent changes in fair value are recognized in current earnings. The Company recognized $5 million, and $(36) million in mortgage banking noninterest income for the six months ended June 30, 2014, and 2013, respectively. Interest income on residential mortgage loans held for sale is calculated based on the contractual interest rate of the loan and is recorded in interest income.
Additional information regarding the companys significant accounting policies for determining fair value is provided in Note 1 Significant Accounting Policies in the Companys audited Consolidated Financial Statements included elsewhere in this prospectus.
Recurring Fair Value Measurements
The Company utilizes a variety of valuation techniques to measure its assets and liabilities at fair value. Following is a description of valuation methodologies used for significant assets and liabilities carried on the balance sheet at fair value on a recurring basis:
Securities AFS : The fair value of securities classified as AFS is based upon quoted prices, if available. Where observable quoted prices are available in an active market, securities are classified as Level 1 in the fair value hierarchy. Classes of instruments that are valued using this market approach include debt securities issued by the U.S. Treasury. If quoted market prices are not available, the fair value for the security is estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. These instruments are classified as Level 2 because they currently trade in active markets and the inputs to the valuations are
F-132
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
observable. The pricing models used to value securities generally begin with market prices (or rates) for similar instruments and make adjustments based on the unique characteristics of the instrument being valued. These adjustments reflect assumptions made regarding the sensitivity of each securitys value to changes in interest rates and prepayment speeds. Classes of instruments that are valued using this market approach include residential and commercial CMOs, specified pool mortgage pass-through securities and other debt securities issued by U.S. government-sponsored entities and state and political subdivisions.
A significant majority of the Companys Level 1 and 2 securities are priced using an external pricing service. The Company verifies the accuracy of the pricing provided by its primary outside pricing service on a quarterly basis. This process involves using a secondary external vendor to provide valuations for the Companys securities portfolio for comparison purposes. Any securities with discrepancies beyond a certain threshold are researched and, if necessary, valued by an independent outside broker.
In certain cases where there is limited activity or less transparency around inputs to the valuation model, securities are classified as Level 3.
Residential loans held for sale : See the Fair Value Option discussion above.
Derivatives : The majority of the Companys derivatives portfolio is comprised of plain vanilla interest rate swaps, which are traded in over-the-counter markets where quoted market prices are not readily available. For these interest rate derivatives, fair value is determined utilizing models that use primarily market observable inputs, such as swap rates and yield curves. The pricing models used to value interest rate swaps calculate the sum of each instruments fixed and variable cash flows, which are then discounted using an appropriate yield curve (i.e., LIBOR or OIS curve) to arrive at the fair value of each swap. The pricing models do not contain a high level of subjectivity as the methodologies used do not require significant judgment. The Company also considers certain adjustments to the modeled price which market participants would make when pricing each instrument, including a credit valuation adjustment that reflects the credit quality of the swap counterparty. The Company incorporates the effect of exposure to a particular counterpartys credit by netting its derivative contracts with the collateral available and calculating a credit valuation adjustment on the basis of the net position with the counterparty where permitted. The determination of this adjustment requires judgment on behalf of Company management; however, the total amount of this portfolio-level adjustment is not material to the total fair value of the interest rate swaps in their entirety. Therefore, interest rate swaps are classified as Level 2 in the valuation hierarchy.
The Companys other derivatives include foreign exchange contracts. Fair value of foreign exchange derivatives uses the mid-point of daily quoted currency spot prices. A valuation model estimates fair value based on the quoted spot rates together with interest rate yield curves and forward currency rates. Since all of these inputs are observable in the market, foreign exchange derivatives are classified as Level 2 in the fair value hierarchy.
Venture capital investments : The Company values its venture capital private equity fund investments based on its capital invested in each fund, which is adjusted by management each quarter, if necessary, to arrive at its estimate of fair value. Adjustments for a funds underlying investments may be based upon comparisons to public companies, industry benchmarks, current financing round pricing, earnings multiples of comparable companies, current operating performance and future expectations, or third-party valuations. Since the inputs to the valuation are difficult to independently corroborate in the marketplace, and involve a significant degree of management judgment, venture capital investments are classified as Level 3 in the fair value hierarchy.
F-133
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents assets and liabilities measured at fair value, including gross derivative assets and liabilities on a recurring basis at June 30, 2014:
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
(in millions) | ||||||||||||||||
Securities available for sale: |
||||||||||||||||
Mortgage-backed securities |
$ | 18,443 | $ | | $ | 18,443 | $ | | ||||||||
State and political subdivisions |
10 | | 10 | | ||||||||||||
Equity securities |
25 | 8 | 17 | | ||||||||||||
U.S. Treasury |
15 | 15 | | | ||||||||||||
Residential loans held for sale |
173 | | 173 | | ||||||||||||
Derivative assets: |
||||||||||||||||
Interest rate swaps |
634 | | 634 | | ||||||||||||
Foreign exchange contracts |
74 | | 74 | | ||||||||||||
Other contracts |
8 | | 8 | | ||||||||||||
Venture capital investments |
6 | | | 6 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 19,388 | $ | 23 | $ | 19,359 | $ | 6 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Derivative liabilities: |
||||||||||||||||
Interest rate swaps |
$ | 745 | $ | | $ | 745 | $ | | ||||||||
Foreign exchange contracts |
69 | | 69 | | ||||||||||||
Other contracts |
14 | | 14 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities |
$ | 828 | $ | | $ | 828 | $ | | ||||||||
|
|
|
|
|
|
|
|
The following table presents assets and liabilities measured at fair value including gross derivative assets and liabilities on a recurring basis at December 31, 2013:
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
(in millions) | ||||||||||||||||
Securities available for sale: |
||||||||||||||||
Mortgage-backed securities |
$ | 15,945 | $ | | $ | 15,945 | $ | | ||||||||
State and political subdivisions |
10 | | 10 | | ||||||||||||
Equity securities |
25 | 8 | 17 | | ||||||||||||
U.S. Treasury |
15 | 15 | | | ||||||||||||
Residential loans held for sale |
176 | | 176 | | ||||||||||||
Derivative assets: |
||||||||||||||||
Interest rate swaps |
677 | | 677 | | ||||||||||||
Foreign exchange contracts |
94 | | 94 | | ||||||||||||
Other contracts |
7 | | 7 | | ||||||||||||
Venture capital investments |
5 | | | 5 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 16,954 | $ | 23 | $ | 16,926 | $ | 5 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Derivative liabilities: |
||||||||||||||||
Interest rate swaps |
$ | 970 | $ | | $ | 970 | $ | | ||||||||
Foreign exchange contracts |
87 | | 87 | | ||||||||||||
Other contracts |
10 | | 10 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities |
$ | 1,067 | $ | | $ | 1,067 | $ | | ||||||||
|
|
|
|
|
|
|
|
F-134
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows:
Six Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
(in millions) | ||||||||
Balance as of January 1, |
$ | 5 | $ | 6 | ||||
Purchases, issuances, sales and settlements: |
||||||||
Sales |
| (4 | ) | |||||
Settlements |
| 3 | ||||||
Other net gains |
1 | | ||||||
|
|
|
|
|||||
Balance as of period end |
$ | 6 | $ | 5 | ||||
|
|
|
|
|||||
Net unrealized gain (loss) included in net income for the period relating to assets held at period end |
$ | | $ | |
There were no transfers among Levels 1, 2 or 3 during the six months ended June 30, 2014 and 2013.
Nonrecurring Fair Value Measurements
The following valuation techniques are utilized to measure significant assets for which the Company utilizes fair value on a nonrecurring basis:
Impaired Loans : The carrying amount of collateral-dependent impaired loans is compared to the appraised value of the collateral less costs to dispose and is classified as Level 2. Any excess of carrying amount over the appraised value is charged to the ALLL.
MSRs : MSRs do not trade in an active market with readily observable prices. MSRs are classified as Level 3 since the valuation methodology utilizes significant unobservable inputs. At June 30, 2014 the fair value is calculated using the discounted cash flow model, the model which uses assumptions, including weighted average life of 5.2 years (range of 1.77 years), weighted average constant prepayment rate of 13.0% (range of 9.8%44.5%) and weighted average discount rate of 10.3% (range of 9.6%12.6%). At December 31, 2013 the fair value is calculated using the discounted cash flow model, the model which uses assumptions, including weighted average life of 5.4 years (range of 1.8 - 7.4 years), weighted average constant prepayment rate of 13.0% (range of 9.4%41.5%) and weighted average discount rate of 10.8% (range of 10.2%13.1%). Refer to Note 1 Significant Accounting Policies, and Note 9 Mortgage Banking, in the Companys audited Consolidated Financial Statements included elsewhere in this prospectus.
Foreclosed assets : Foreclosed assets consist primarily of residential properties. Foreclosed assets are carried at the lower of carrying value or fair value less costs to dispose. Fair value is based upon independent market prices or appraised values of the collateral and is classified as Level 2.
Goodwill : Goodwill is valued using unobservable inputs and is classified as Level 3. Fair value is calculated using the present value of estimated future earnings (discounted cash flow method). On a quarterly basis, the Company assesses whether or not impairment indicators are present.
The Company monitored events and circumstances during the first half of 2014 and did not observe any factors that would more likely than not reduce the fair value of one or more reporting units below its respective carrying value. Accordingly, goodwill was not tested for impairment during the first half of 2014. For additional information on the Companys goodwill impairment
F-135
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
testing and the most recent goodwill impairment test, see Note 1 Significant Accounting Policies, Note 5 Goodwill, Note 19 Fair Value Measurements and Note 8 Goodwill included in the Companys audited Consolidated Financial Statements included elsewhere in this prospectus.
The following table presents gains (losses) on assets and liabilities measured at fair value on a nonrecurring basis and recorded in earnings:
Six Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
(in millions) | ||||||||
Impaired collateral-dependent loans |
$ | (94 | ) | $ | (58 | ) | ||
MSRs |
3 | 39 | ||||||
Foreclosed assets |
1 | 2 | ||||||
Goodwill impairment |
| (4,435 | ) |
The following tables present assets and liabilities measured at fair value on a nonrecurring basis:
June 30, 2014 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
(in millions) | ||||||||||||||||
Impaired collateral-dependent loans 1 |
$ | 70 | $ | | $ | 70 | $ | | ||||||||
MSRs 2 |
175 | | | 175 | ||||||||||||
Foreclosed assets 3 |
40 | | 40 | | ||||||||||||
Goodwill 4 |
6,876 | | | 6,876 |
December 31, 2013 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
(in millions) | ||||||||||||||||
Impaired collateral-dependent loans 1 |
$ | 74 | $ | | $ | 74 | $ | | ||||||||
MSRs 2 |
185 | | | 185 | ||||||||||||
Foreclosed assets 3 |
49 | | 49 | | ||||||||||||
Goodwill 4 |
6,876 | | | 6,876 |
1 | In the first six months of 2014, impaired loans for which collection is dependent on the loans collateral in the amount of $121 million were written down to $70 million, resulting in an impairment charge of $37 million, which was charged to the ALLL. In the year ended 2013, impaired loans for which collection is dependent on the loans collateral in the amount of $161 million were written down to their fair value of $74 million, resulting in an impairment charge of $83 million, which was charged to the ALLL. |
2 | In the first six months of 2014, MSRs totaling $208 million were evaluated for impairment and written down to $175 million, resulting in an impairment recapture of $3 million and a total cumulative valuation allowance of $19 million. In the year ended 2013, MSRs totaling $215 million were evaluated for impairment and written down to $185 million, resulting in an impairment (charge) of $47 million and a total cumulative valuation allowance of $23 million. |
3 | In the first six months of 2014, foreclosed real estate accounted for at the lower of cost or fair value less costs to sell was written down to fair value of $40 million, resulting in impairment charges of $1 million. In the year ended 2013, foreclosed real estate accounted for at the lower of cost or fair value less costs to sell was written down to fair value of $49 million, resulting in an impairment charge of $4 million. |
4 | In the year ended 2013, Goodwill totaling $11.3 billion was written down to its implied fair value of $6.9 billion, resulting in an impairment charge of $4.4 billion. |
F-136
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Disclosures about Fair Value of Financial Instruments
Following is a description of valuation methodologies used to estimate the fair value of financial instruments for disclosure purposes (these instruments are not recorded in the financial statements at fair value):
Loans and leases : For loans and leases not recorded at fair value on a recurring basis that are not accounted for as collateral-dependent impaired loans, fair value is estimated by using one of two methods: a discounted cash flow method or a securitization method. The discounted cash flow method involves discounting the expected future cash flows using current rates which a market participant would likely use to value similar pools of loans. Inputs used in this method include observable information such as contractual cash flows (net of servicing cost) and unobservable information such as estimated prepayment speeds, credit loss exposures, and discount rates. The securitization method involves utilizing market securitization data to value the assets as if a securitization transaction had been executed. Inputs used include observable market-based MBS data and pricing adjustments based on unobservable data reflecting the liquidity risk, credit loss exposure and other characteristics of the underlying loans. The internal risk-weighted balances of loans are grouped by product type for purposes of these estimated valuations. For nonaccruing loans, fair value is estimated by discounting managements estimate of future cash flows with a discount rate commensurate with the risk associated with such assets. Fair value of collateral-dependent loans is primarily based on the appraised value of the collateral.
Loans held for sale : Balances are loans that were transferred to loans held for sale that are reported at book value.
Securities held to maturity : The fair value of securities classified as HTM is estimated using pricing models, quoted prices of securities with similar characteristics or discounted cash flow. The pricing models used to value these securities generally begin with market prices (or rates) for similar instruments and make adjustments based on the unique characteristics of the instrument being valued. These adjustments reflect assumptions made regarding the sensitivity of each securitys value to changes in interest rates and prepayment speeds.
Other investment securities : The cost basis carrying value of other investment securities, such as FHLB stock and FRB stock, is assumed to approximate the fair value of the securities. As a member of the FHLB and FRB, the Company is required to hold FHLB and FRB stock. The stock can be sold only to the FHLB and FRB upon termination of membership, or redeemed at the FHLBs or FRBs sole discretion.
Deposits : The fair value of demand deposits, checking with interest accounts, regular savings and money market accounts is the amount payable on demand at the balance sheet date. The fair value of term deposits is estimated by discounting the expected future cash flows using rates currently offered for deposits of similar remaining maturities.
Deposits held for sale : Balances are deposits that were transferred to held for sale that are reported at book value.
Federal funds purchased and securities sold under agreements to repurchase, other short-term borrowed funds, and long-term borrowed funds : Rates currently available to the Company for debt of similar terms and remaining maturities are used to discount the expected cash flows of existing debt.
F-137
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table is a summary of fair value for financial instruments not recorded at fair value in the Consolidated Financial Statements. The carrying amounts in the following table are recorded in the Consolidated Balance Sheets under the indicated captions:
June 30, 2014 | ||||||||||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||
Carrying
Value |
Fair
Value |
Carrying
Value |
Fair
Value |
Carrying
Value |
Fair
Value |
Carrying
Value |
Fair
Value |
|||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Financial Assets: |
||||||||||||||||||||||||||||||||
Loans and leases |
$ | 88,829 | $ | 89,580 | $ | | $ | | $ | 70 | $ | 70 | $ | 88,759 | $ | 89,510 | ||||||||||||||||
Other loans held for sale |
89 | 89 | | | | | 89 | 89 | ||||||||||||||||||||||||
Securities held to maturity |
5,382 | 5,398 | | | 5,382 | 5,398 | | | ||||||||||||||||||||||||
Other investment securities |
948 | 948 | | | 948 | 948 | | | ||||||||||||||||||||||||
Financial Liabilities: |
||||||||||||||||||||||||||||||||
Deposits |
91,656 | 91,936 | | | 91,656 | 91,936 | | | ||||||||||||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
6,807 | 6,830 | | | 6,807 | 6,830 | | | ||||||||||||||||||||||||
Other short-term borrowed funds |
7,702 | 7,705 | | | 7,702 | 7,705 | | | ||||||||||||||||||||||||
Long-term borrowed funds |
1,732 | 1,733 | | | 1,732 | 1,733 | | |
December 31, 2013 | ||||||||||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||
Carrying
Value |
Fair
Value |
Carrying
Value |
Fair
Value |
Carrying
Value |
Fair
Value |
Carrying
Value |
Fair
Value |
|||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Financial Assets: |
||||||||||||||||||||||||||||||||
Loans and leases |
$ | 85,859 | $ | 85,724 | $ | | $ | | $ | 74 | $ | 74 | $ | 85,785 | $ | 85,650 | ||||||||||||||||
Other loans held for sale |
1,078 | 1,078 | | | | | 1,078 | 1,078 | ||||||||||||||||||||||||
Securities held to maturity |
4,315 | 4,257 | | | 4,315 | 4,257 | | | ||||||||||||||||||||||||
Other investment securities |
935 | 935 | | | 935 | 935 | | | ||||||||||||||||||||||||
Financial Liabilities: |
||||||||||||||||||||||||||||||||
Deposits |
86,903 | 86,907 | | | 86,903 | 86,907 | | | ||||||||||||||||||||||||
Deposits held for sale |
5,277 | 5,277 | | | 5,277 | 5,277 | | | ||||||||||||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
4,791 | 4,791 | | | 4,791 | 4,791 | | | ||||||||||||||||||||||||
Other short-term borrowed funds |
2,251 | 2,249 | | | 2,251 | 2,249 | | | ||||||||||||||||||||||||
Long-term borrowed funds |
1,405 | 1,404 | | | 1,405 | 1,404 | | |
NOTE 16REGULATORY MATTERS
As a BHC, the Company is subject to regulation and supervision by the FRB. The primary subsidiaries of Citizens are its two insured depository institutions CBNA, a national banking association whose primary federal regulator is the OCC, and CBPA, a Pennsylvania-chartered savings bank regulated by the Department of Banking of the Commonwealth of Pennsylvania and supervised by the FDIC as its primary federal regulator. Under the regulatory capital adequacy guidelines of the FDICIA,
F-138
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
the Company and its banking subsidiaries must meet specific capital requirements. These requirements are expressed in terms of the following ratios: (1) Total Risk-Based Capital (total capital/risk-weighted on- and off-balance sheet assets); (2) Tier 1 Risk-Based Capital (tier 1 capital/risk-weighted on- and off-balance sheet assets); and (3) Tier 1 Leverage (tier 1 capital/adjusted average quarterly assets). To meet the regulatory capital requirements, the Company and its banking subsidiaries must maintain minimum Total Risk-Based Capital, Tier 1 Risk-Based Capital, and Tier 1 Leverage ratios. In addition, the Company must not be subject to a written agreement, order or capital directive with any of its regulators. Failure to meet minimum capital requirements can result in the initiation of certain actions that, if undertaken, could have a material effect on the Companys Consolidated Financial Statements.
The following table presents capital and capital ratio information:
FDIC Requirements | ||||||||||||||||||||||||
Actual |
Minimum
Capital Adequacy |
Classification
as Well Capitalized |
||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||
As of June 30, 2014 |
||||||||||||||||||||||||
Total Capital to Risk-Weighted Assets |
$ | 16,400 | 16.2 | % | $ | 8,112 | 8.0 | % | $ | 10,140 | 10.0 | % | ||||||||||||
Tier 1 Capital to Risk-Weighted Assets |
13,448 | 13.3 | 4,056 | 4.0 | 6,084 | 6.0 | ||||||||||||||||||
Tier 1 Capital to Average Assets (Leverage) |
13,448 | 11.1 | 3,638 | 3.0 | 6,064 | 5.0 | ||||||||||||||||||
As of December 31, 2013 |
||||||||||||||||||||||||
Total Capital to Risk-Weighted Assets |
$ | 15,885 | 16.1 | % | $ | 7,891 | 8.0 | % | $ | 9,863 | 10.0 | % | ||||||||||||
Tier 1 Capital to Risk-Weighted Assets |
13,301 | 13.5 | 3,945 | 4.0 | 5,918 | 6.0 | ||||||||||||||||||
Tier 1 Capital to Average Assets (Leverage) |
13,301 | 11.6 | 3,433 | 3.0 | 5,721 | 5.0 |
In accordance with federal and state banking regulations, dividends paid by the Companys banking subsidiaries to the Company itself are generally limited to the retained earnings of the respective banking subsidiaries unless specifically approved by the appropriate bank regulator. The Company declared and paid RBS total common stock dividends of $368 million in the six months ended June 30, 2014. There were $1.2 billion in common stock dividends declared and paid for the year ended December 31, 2013. For the six months ended June 30, 2013, the Company declared and paid RBS total common stock dividends of $428 million.
The earnings impact of goodwill impairment recognized by CBNA has put the bank subsidiary in the position of having to request specific approval from the OCC before executing capital distributions to its parent, Citizens. This requirement will be in place through the fourth quarter of 2015. As of June 30, 2014, the unconsolidated BHC had liquid assets in excess of $399 million compared to an annual interest burden on existing subordinated debt of approximately $77 million on a non-consolidated basis.
The OCC recently determined that CBNA no longer meets both conditions necessary to own a financial subsidiary. CBNA must be both well capitalized and well managed to own a financial subsidiary. A financial subsidiary is permitted to engage in a broader range of activities, similar to those of a financial holding company, than those permissible for a national bank. CBNA has two financial subsidiaries, Citizens Securities, Inc., a registered broker-dealer, and RBS Citizens Insurance Agency, Inc., a dormant entity although it continues to collect commissions on certain outstanding policies. CBNA has entered into an agreement with the OCC (the OCC Agreement) pursuant to which it must
F-139
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
develop a remediation plan, which must be submitted to the OCC, setting forth the specific actions it will take to bring itself back into compliance with the conditions to own a financial subsidiary and the schedule for achieving that objective. Until CBNA satisfactorily addresses the deficiencies, CBNA may not consolidate its assets and liabilities with those of the financial subsidiaries for purposes of determining and reporting regulatory capital. In addition, CBNA will be subject to restrictions on its ability to acquire control or hold an interest in any new financial subsidiary and to commence new activities in any existing financial subsidiary, without the prior consent of the OCC. If CBNA fails to remediate the deficiencies within 180 days from March 13, 2014, or such longer period as the OCC may permit, it may have to divest itself of its financial subsidiaries and comply with any additional limitations or conditions on its conduct as the OCC may impose. CBNA has implemented a comprehensive enterprise-wide program that seeks to address these deficiencies.
NOTE 17SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is as follows:
Six Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
(in millions) | ||||||||
Supplemental cash flow information: |
||||||||
Interest paid |
$ | 163 | $ | 250 | ||||
Income taxes paid |
88 | 10 | ||||||
Supplemental schedule of non-cash investing and financing activities: |
||||||||
Due to broker for securities purchased but not settled |
$ | 87 | $ | 524 |
NOTE 18RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME
The following tables present the changes in the balances, net of taxes, of each component of OCI:
Net Unrealized
Gains (Losses) on Derivatives |
Net Unrealized
Gains (Losses) on Securities |
Defined
Benefit Pension Plans |
Total AOCI | |||||||||||||
(in millions) | ||||||||||||||||
Balance at December 31, 2012 |
$ | (240 | ) | $ | 306 | $ | (378 | ) | $ | (312 | ) | |||||
Other comprehensive loss before reclassifications |
(139 | ) | (219 | ) | | (358 | ) | |||||||||
Other than temporary impairment not recognized in earnings on securities |
| (35 | ) | | (35 | ) | ||||||||||
Amounts reclassified from other comprehensive income |
77 | (56 | ) | 3 | 24 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net other comprehensive (loss) income |
(62 | ) | (310 | ) | 3 | (369 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at June 30, 2013 |
$ | (302 | ) | $ | (4 | ) | $ | (375 | ) | $ | (681 | ) | ||||
|
|
|
|
|
|
|
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F-140
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Net Unrealized
Gains (Losses) on Derivatives |
Net Unrealized
Gains (Losses) on Securities |
Defined
Benefit Pension Plans |
Total AOCI | |||||||||||||
(in millions) | ||||||||||||||||
Balance at December 31, 2013 |
$ | (298 | ) | $ | (91 | ) | $ | (259 | ) | $ | (648 | ) | ||||
Other comprehensive income before reclassifications |
120 | 188 | | 308 | ||||||||||||
Other than temporary impairment not recognized in earnings on securities |
| (21 | ) | | (21 | ) | ||||||||||
Amounts reclassified from other comprehensive income |
13 | (12 | ) | 2 | 3 | |||||||||||
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Net other comprehensive income |
133 | 155 | 2 | 290 | ||||||||||||
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|||||||||
Balance at June 30, 2014 |
$ | (165 | ) | $ | 64 | $ | (257 | ) | $ | (358 | ) | |||||
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The following table reports the amounts reclassified out of each component of OCI and into the Consolidated Statement of Operations:
Six Months Ended June 30, | ||||||||||
2014 | 2013 | |||||||||
Details about AOCI Components |
Amount Reclassified
from AOCI |
Affected Line Item in the Consolidated Statements of Operations |
||||||||
(in millions) | ||||||||||
Reclassification adjustment for net derivative gains (losses) included in net income (loss): |
$ | 36 | $ | (22 | ) | Interest income | ||||
(56 | ) | (98 | ) | Interest expense | ||||||
| (2 | ) | Other income | |||||||
|
|
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|||||||
(20 | ) | (122 | ) | Income before income tax expense (benefit) | ||||||
(7 | ) | (45 | ) | Income tax expense (benefit) | ||||||
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|||||||
$ | (13 | ) | $ | (77 | ) | Net income (loss) | ||||
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Reclassification of net securities gains (losses) to net income (loss): |
$ | 25 | $ | 94 | Securities gains, net | |||||
(6 | ) | (4 | ) | Net impairment losses recognized in earnings | ||||||
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19 | 90 | Income before income tax expense (benefit) | ||||||||
7 | 34 | Income tax expense (benefit) | ||||||||
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$ | 12 | $ | 56 |
Net income (loss) |
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Reclassification of changes related to the employee benefit plan: |
$ | (3 | ) | $ | (6 | ) | Salaries and employee benefits | |||
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(3 | ) | (6 | ) | Income before income tax expense (benefit) | ||||||
(1 | ) | (3 | ) | Income tax expense (benefit) | ||||||
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|||||||
$ | (2 | ) | $ | (3 | ) | Net income (loss) | ||||
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Total reclassification losses |
$ | (3 | ) | $ | (24 | ) | Net income (loss) | |||
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F-141
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents the effects to net income of the amounts reclassified out of OCI:
Six Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
(in millions) | ||||||||
Net interest income (includes $(20) and $(120) of AOCI reclassifications, respectively) |
$ | 1,641 | $ | 1,509 | ||||
Provision for credit losses |
170 | 202 | ||||||
Noninterest income (includes $19 and $88 of AOCI reclassifications, respectively) |
998 | 870 | ||||||
Noninterest expense (includes $3 and $6 of AOCI reclassifications, respectively) |
1,758 | 6,073 | ||||||
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|
|
|||||
Income (loss) before income tax expense |
711 | (3,896 | ) | |||||
Income tax expense (benefit) (includes $(1) and $(14) income tax net expense and (benefit) from reclassification items, respectively) |
232 | (174 | ) | |||||
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|
|||||
Net income (loss) |
$ | 479 | $ | (3,722 | ) | |||
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NOTE 19BUSINESS SEGMENTS
The Company is managed by its CEO on a divisional basis. The Companys two business segments are Consumer Banking and Commercial Banking. The business segments are determined based on the products and services provided, or the type of customer served. Each division has a Vice Chairman who reports directly to the CEO. The CEO has final authority over resource allocation decisions and performance assessment. The business segments reflect this management structure and the manner in which financial information is currently evaluated by the CEO. Non-segment operations are classified as Other, which includes corporate functions, the Treasury function, the securities portfolio, wholesale funding activities, intangible assets, Community Development, Non-Core assets, and other unallocated assets, liabilities, revenues and expenses.
Segment results are determined based upon the Companys management reporting system, which assigns balance sheet and income statement items to each of the business segments. The process is designed around the Companys organizational and management structure and, accordingly, the results derived are not necessarily comparable with similar information published by other financial institutions. A description of each reportable segment and table of financial results is presented below.
| Consumer BankingThe Consumer Banking segment focuses on retail customers and small businesses with annual revenues of up to $25 million. It offers traditional banking products and services, including checking, savings, home loans, student loans, credit cards, business loans and financial management services. It also operates an indirect auto financing business, providing financing for both new and used vehicles through auto dealerships. The segments distribution channels include a branch network, ATMs and a work force of experienced specialists ranging from financial consultants, mortgage loan officers and business banking officers to private bankers. |
|
Commercial BankingThe Commercial Banking segment primarily targets companies with annual revenues from $25 million to $2.5 billion and provides a full complement of financial products and solutions, including loans, leases, trade financing, deposits, cash management, foreign exchange, interest rate risk management, corporate finance and capital markets advisory capabilities. It focuses on small and middle-market companies and has dedicated |
F-142
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
teams with industry expertise in government banking, not-for-profit, healthcare, technology, asset finance, franchise finance, asset-based lending, commercial real estate, private equity and sponsor finance. While the segments business development efforts are predominantly focused on the Companys twelve-state core footprint, some of its specialized industry businesses also operate selectively on a national basis (such as healthcare, asset finance and franchise finance). Commercial Banking is organized by teams that target different client segments. A key component of the segments growth strategy is to expand its loan portfolio by originating high-quality commercial loans, which produce revenues consistent with its financial objectives and complies with its conservative credit policies. Commercial underwriting is driven by cash flow analysis supported by collateral analysis and review. The commercial lending teams offer a wide range of commercial loan products, including commercial real estate loans; working capital loans and lines of credit; demand, term and time loans; and equipment, inventory and accounts receivable financing. |
As of and for the Six Months Ended June 30, 2014 | ||||||||||||||||
Consumer Banking | Commercial Banking | Other | Consolidated | |||||||||||||
(in millions) | ||||||||||||||||
Net interest income |
$ | 1,083 | $ | 520 | $ | 38 | $ | 1,641 | ||||||||
Noninterest income |
455 | 214 | 329 | 998 | ||||||||||||
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Total revenue |
1,538 | 734 | 367 | 2,639 | ||||||||||||
Noninterest expense |
1,293 | 310 | 155 | 1,758 | ||||||||||||
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Profit before provision for credit losses |
245 | 424 | 212 | 881 | ||||||||||||
Provision for credit losses |
129 | (7 | ) | 48 | 170 | |||||||||||
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Income before income tax expense |
116 | 431 | 164 | 711 | ||||||||||||
Income tax expense |
40 | 149 | 43 | 232 | ||||||||||||
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Net income |
$ | 76 | $ | 282 | $ | 121 | $ | 479 | ||||||||
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Total Average Assets |
$ | 48,085 | $ | 37,491 | $ | 39,959 | $ | 125,535 |
As of and for the Six Months Ended June 30, 2013 | ||||||||||||||||
Consumer Banking | Commercial Banking | Other | Consolidated | |||||||||||||
(in millions) | ||||||||||||||||
Net interest income (expense) |
$ | 1,090 | $ | 508 | $ | (89 | ) | $ | 1,509 | |||||||
Noninterest income |
544 | 191 | 135 | 870 | ||||||||||||
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Total revenue |
1,634 | 699 | 46 | 2,379 | ||||||||||||
Noninterest expense |
1,262 | 315 | 4,496 | 6,073 | ||||||||||||
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Profit (loss) before provision for credit losses |
372 | 384 | (4,450 | ) | (3,694 | ) | ||||||||||
Provision for credit losses |
156 | (24 | ) | 70 | 202 | |||||||||||
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Income (loss) before income tax expense (benefit) |
216 | 408 | (4,520 | ) | (3,896 | ) | ||||||||||
Income tax expense (benefit) |
76 | 144 | (394 | ) | (174 | ) | ||||||||||
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Net income (loss) |
$ | 140 | $ | 264 | $ | (4,126 | ) | $ | (3,722 | ) | ||||||
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Total Average Assets |
$ | 46,737 | $ | 34,897 | $ | 41,241 | $ | 122,875 |
F-143
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In addition to non-segment operations, Other includes certain reconciling items in order to translate the segment results that are based on management accounting practices into consolidated results. For example, Other includes goodwill and the associated $4.4 billion goodwill impairment charge recorded in 2013. Management accounting practices utilized by the Company as the basis for presentation for segment results include the following:
| FTP adjustments: The Company utilizes an FTP system to eliminate the effect of interest rate risk from the segments net interest income because such risk is centrally managed within the Treasury function. The FTP system credits (or charges) the segments with the economic value of the funds created (or used) by the segments. The FTP system provides a funds credit for sources of funds and a funds charge for the use of funds by each segment. The summation of the interest income/expense and FTP charges/credits for each segment is its designated net interest income. The variance between the Companys cumulative FTP charges and cumulative FTP credits is allocated to the individual business segments. |
| Provision for credit losses allocations: Provision for credit losses is allocated to each business segment based on actual net charge-offs that have been recognized by the business segment. The difference between the consolidated provision for credit losses and the business segments net charge-offs is reflected in Other. |
| Income tax allocations: Income taxes are assessed to each line of business at a standard tax rate with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Other. |
| Expense allocations: Noninterest expenses incurred by centrally managed operations or business lines that directly support another business lines operations are charged to the applicable business line based on its utilization of those services. |
| Goodwill: For impairment testing purposes, the Company allocates goodwill to its Consumer Banking and Commercial Banking reporting units. For management reporting purposes, the Company presents the goodwill balance (and any related impairment charges) in Other. |
Substantially all revenues generated and long-lived assets held by the Companys business segments are derived from clients that reside in the United States. Neither segment earns revenue from a single external customer that represents 10 percent or more of the Companys total revenues.
NOTE 20SHARE-BASED COMPENSATION
RBS Group grants stock-based compensation awards to employees of the Company pursuant to its various long-term incentive plans. These plans are administered by the Group Performance and Remuneration Committee of the RBS Group Board of Directors. All stock-based compensation awards granted to employees have been settled in RBS Group shares. For more information, refer to Note 26 Share Based Compensation, in the Companys audited Consolidated Financial Statements included elsewhere in this prospectus.
In March 2014, the Company granted special Initial Public Offering (IPO) awards. The awards were granted half in rights to receive RBS Group shares and half as a fixed convertible bond. These special IPO awards will convert into a right to receive the Companys shares at the closing of the IPO. The special IPO awards are scheduled to vest 50% in March 2016 and 50% in March 2017, subject to certain conditions, including the occurrence of the IPO on or by December 31, 2014.
F-144
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company awarded 9,246,927 and 6,788,959 shares to employees during the periods ended June 30, 2014 and 2013, respectively. The grant date fair value of the shares was $51 million and $32 million for the six months ended June 30, 2014 and 2013, respectively. Grant date fair value for all awards is estimated using the fair value of RBS Group shares on grant date. Compensation expense related to share based plans was $19 million and $15 million for the six months ended June 30, 2014 and 2013, respectively.
NOTE 21EARNINGS PER SHARE
Six Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
(dollars in millions, except share data) | ||||||||
Numerator: |
||||||||
Net income (loss) |
$ | 479 | $ | (3,722 | ) | |||
Net income available to common shareholders |
479 | (3,722 | ) | |||||
Denominator: |
||||||||
Weighted-average common shares outstandingbasic |
559,998,324 | 559,998,324 | ||||||
Weighted-average common shares outstandingdiluted |
559,998,324 | 559,998,324 | ||||||
Earnings per common share: |
||||||||
Basic |
$ | 0.86 | $ | (6.65 | ) | |||
Diluted |
0.86 | (6.65 | ) |
The Company had 559,998,324 shares of common stock issued and outstanding as of June 30, 2014 and 2013, after reflecting the 165,582-for-1 forward stock split that was effective on August 22, 2014. The Companys authorized shares were increased to 1,000,000,000 on April 9, 2014.
NOTE 22OTHER OPERATING EXPENSE
The following table presents the details of other operating expense:
Six Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
(in millions) | ||||||||
Deposit insurance |
$ | 46 | $ | 49 | ||||
Promotional expense |
41 | 38 | ||||||
Settlements and operating losses |
64 | 23 | ||||||
Postage and delivery |
25 | 26 | ||||||
Other |
141 | 126 | ||||||
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Total other operating expense |
$ | 317 | $ | 262 | ||||
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NOTE 23EXIT COSTS AND RESTRUCTURING RESERVES
In 2014, the Company began the implementation of a restructuring initiative designed to achieve operating efficiencies and reduce expense growth. As a result of this program, the Company expects to incur total restructuring costs of approximately $121 million through December 31, 2015, consisting of $41 million of employee compensation, $40 million of facilities costs and $40 million of other costs, primarily consulting and technology services. For the six months ended June 30, 2014, the Company incurred $87 million of restructuring costs, consisting of $41 million of employee compensation reported in salaries and employee benefits, $9 million of facilities costs (including $6 million of building impairment) reported in occupancy, $26 million reported in outside services, and $11 million in other operating expenses.
F-145
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In 2014, as a result of the sale of retail branches located in Illinois (see Note 13 Divestitures and Branch Assets and Liabilities Held for Sale for further information), the Company incurred total costs of approximately $17 million for the six months ended June 30, 2014, consisting of $3 million of employee compensation reported in salaries and employee benefits, $3 million of fixed assets expenses reported in equipment, $4 million reported in outside services and $7 million reported in other operating expenses.
For segment reporting all of these restructuring costs are reported within Other. See Note 19 Business Segments for further information.
The following table includes the activity in the exit costs and restructuring reserves:
Salaries &
Employee Benefits |
Occupancy &
Equipment |
Other | Total | |||||||||||||
(in millions) | ||||||||||||||||
Reserve balance as of December 31, 2012 |
$ | 3 | $ | 27 | $ | | $ | 30 | ||||||||
Additions |
6 | 22 | 3 | 31 | ||||||||||||
Reversals |
(1 | ) | (4 | ) | | (5 | ) | |||||||||
Utilization |
(6 | ) | (21 | ) | (3 | ) | (30 | ) | ||||||||
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Reserve balance as of December 31, 2013 |
2 | 24 | | 26 | ||||||||||||
Additions |
44 | 12 | 48 | 104 | ||||||||||||
Reversals |
(1 | ) | | | (1 | ) | ||||||||||
Utilization |
(7 | ) | (15 | ) | (8 | ) | (30 | ) | ||||||||
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Reserve balance as of June 30, 2014 |
$ | 38 | $ | 21 | $ | 40 | $ | 99 | ||||||||
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NOTE 24SUBSEQUENT EVENTS
The Company has evaluated the impact of events that have occurred subsequent to June 30, 2014 through September 8, 2014, the date the Consolidated Financial Statements were filed with the United States Securities and Exchange Commission. Based on this evaluation, the Company has determined that none of these events were required to be recognized or disclosed in the Consolidated Financial Statements and related Notes, other than that on August 1, 2014, we declared and paid a special common dividend of $333 million to RBS and issued $333 million of 10-year subordinated debt (4.023% fixed rate subordinated debt, due 2024) to RBS Group. Refer to Managements Discussion and Analysis of Financial Condition and Results of OperationsCapital included elsewhere in this prospectus for further details. On April 9, 2014, the Company approved an increase in the number of authorized shares of common stock to 1,000,000,000. On August 22, 2014, the Company declared and made effective a 165,582-for-1 forward stock split of common stock. As a result, all share and per share data have been restated to reflect the effect of the split.
F-146
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. | Other Expenses of Issuance and Distribution. |
Amount
to be paid |
||||
Registration fee |
$518,420 | |||
FINRA filing fee |
225,500 | |||
Listing fee |
250,000 | |||
Transfer agents fees |
3,500 | |||
Printing and engraving expenses |
500,000 | |||
Legal fees and expenses |
6,653,000 | |||
Accounting fees and expenses |
1,500,000 | |||
Blue Sky fees and expenses |
| |||
Miscellaneous |
2,695,000 | |||
|
|
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Total |
$12,345,420 | |||
|
|
Each of the amounts set forth above, other than the Registration fee and the FINRA filing fee, is an estimate.
Item 14. | Indemnification of Directors and Officers. |
Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with any threatened, pending or completed actions, suits or proceedings in which such person is made a party by reason of such person being or having been a director, officer, employee or agent to the Registrant. The Delaware General Corporation Law provides that Section 145 is not exclusive of other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise. The Registrants Certificate of Incorporation and Bylaws provides for indemnification by the Registrant of its directors, officers and employees to the fullest extent permitted by the Delaware General Corporation Law.
Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the directors duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases, redemptions or other distributions or (iv) for any transaction from which the director derived an improper personal benefit. The Registrants Certificate of Incorporation provides for such limitation of liability.
The Registrant maintains policies of insurance under which coverage is provided (a) to its directors and officers, in their respective capacities as such, against loss arising from a claim made for any actual or alleged wrongful act, and (b) to the Registrant with respect to payments which may be made by the Registrant to such officers and directors pursuant to the above indemnification provision or otherwise as a matter of law.
II-1
The proposed form of Underwriting Agreement filed as Exhibit 1 to this Registration Statement provides for indemnification of directors and officers of the Registrant by the underwriters against certain liabilities. In addition, the Registrant intends to enter into indemnification agreements with its directors and officers that require the Registrant, among other things, to indemnify such persons against certain liabilities which may arise by reason of their status or service as a director or officer and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified.
Item 15. | Recent Sales of Unregistered Securities. |
Since three years before the date of the initial filing of this Registration Statement, the Registrant has sold the following securities without registration under the Securities Act of 1933, as amended:
| On September 28, 2012, the Registrant issued and sold $350,000,000 aggregate principal amount of 4.150% Fixed Rate Subordinated Notes due 2022 pursuant to Rule 144A under the Securities Act. Net proceeds to the Registrant from the sale of the notes, after deduction of the discount, was $346,391,500. Net proceeds were used for general corporate purposes. Merrill Lynch, Pierce, Fenner & Smith Incorporated and RBS Securities Inc. acted as representatives of the initial purchasers. |
| On June 28, 2013, the Registrant issued and sold $333,000,000 aggregate principal amount of 5.158% Fixed-to-Floating Rate Callable Subordinated Notes due 2023 pursuant to Rule 144A under the Securities Act. The principal amount of this subordinated debt was equal to a special dividend paid to RBS on the same day. Together, these actions reduced the Registrants common equity without reducing total regulatory capital. |
| On September 30, 2013, the Registrant issued and sold $333,000,000 aggregate principal amount of 4.771% Fixed Rate Subordinated Notes due 2023 pursuant to Rule 144A under the Securities Act. The principal amount of this subordinated debt was equal to a special dividend paid to RBS on the same day. Together, these actions reduced the Registrants common equity without reducing total regulatory capital. |
| On December 2, 2013, the Registrant issued and sold $334,000,000 aggregate principal amount of 4.691% Fixed Rate Subordinated Notes due 2024 pursuant to Rule 144A under the Securities Act. The principal amount of this subordinated debt was equal to a special dividend paid to RBS on the same day. Together, these actions reduced the Registrants common equity without reducing total regulatory capital. |
| On June 26, 2014, the Registrant issued and sold $333,000,000 aggregate principal amount of 4.153% Fixed Rate Subordinated Notes due 2024 pursuant to Rule 144A under the Securities Act. The principal amount of this subordinated debt was equal to a special dividend paid to RBS on the same day. Together, these actions reduced the Registrants common equity without reducing total regulatory capital. |
| On August 1, 2014, the Registrant issued and sold $333,000,000 aggregate principal amount of 4.023% Fixed Rate Subordinated Notes due 2024 pursuant to Rule 144A under the Securities Act. The principal amount of this subordinated debt was equal to a special dividend paid to RBS on the same day. Together, these actions reduced the Registrants common equity without reducing total regulatory capital. |
II-2
Item 16. | Exhibits and Financial Statement Schedules. |
(a) | The following exhibits are filed as part of this Registration Statement: |
Exhibit
|
Description |
|
1.1 | Form of Underwriting Agreement | |
3.1 | Form of Amended and Restated Certificate of Incorporation of the Registrant | |
3.2 | Form of Amended and Restated Bylaws of the Registrant | |
5.1 | Opinion of Davis Polk & Wardwell LLP | |
10.1 | Form of Separation and Shareholder Agreement between the Registrant and The Royal Bank of Scotland Group plc | |
10.2 | Form of Transitional Services Agreement between the Registrant and The Royal Bank of Scotland Group plc | |
10.3 | Form of Trademark License Agreement between the Registrant and The Royal Bank of Scotland Group plc | |
10.4 | Form of Registration Rights Agreement between the Registrant and The Royal Bank of Scotland Group plc | |
10.5 | Form of Indemnification Agreement | |
10.6 | Employment Agreement, dated October 1, 2013, between the Registrant and Bruce Van Saun | |
10.7 | Offer Letter, dated November 6, 2013, between The Royal Bank of Scotland Group, plc and Bruce Van Saun | |
10.8 | Employment Agreement, dated March 21, 2007, between RBS North America Services, Inc. and Ellen Alemany | |
10.9 | Side Letter, dated March 21, 2007, between RBS North America Services, Inc. and Ellen Alemany | |
10.10 | Separation and Release Agreement, dated May 13, 2013, between the Registrant, The Royal Bank of Scotland Group, plc and Ellen Alemany | |
10.11 | Offer Letter, dated August 28, 2007, between RBS North America Services, Inc. and Robert D. Matthews, Jr. | |
10.12 | Side Letter, dated May 17, 2010, between the Registrant and Robert D. Matthews, Jr. | |
10.13 | Offer Letter, dated September 18, 2007, between RBS North America Services, Inc. and John Fawcett | |
10.14 | Offer Letter, dated May 23, 2008, between the Registrant and Brad Conner | |
10.15 | Offer Letter, dated September 13, 2010, between the Registrant and Nancy Shanik | |
10.16 | The Royal Bank of Scotland Group, plc 2007 Executive Share Option Plan | |
10.17 | Form of The Royal Bank of Scotland Group, plc 2007 Executive Share Option Plan Award Certificate | |
10.18 | Amended and Restated RBS Americas Deferred Compensation Plan, effective January 1, 2009, as amended August 30, 2013 | |
10.19 | Amended and Restated Deferred Compensation Plan for Directors of Citizens Financial Group, Inc., effective January 1, 2009 |
II-3
Exhibit
|
Description |
|
10.20 | Amended and Restated Citizens Financial Group, Inc. Deferred Compensation Plan, effective January 1, 2009 | |
10.21 | Citizens Financial Group, Inc. Executive Severance Practice | |
10.22 | The Royal Bank of Scotland Group, plc 2010 Deferral Plan Rules | |
10.23 | Form of The Royal Bank of Scotland Group, plc 2010 Deferral Plan Award Certificate | |
10.24 | Rules of The Royal Bank of Scotland Group, plc 2010 Long Term Incentive Plan | |
10.25 | Form of The Royal Bank of Scotland Group, plc 2010 Long Term Incentive Plan Award Certificate | |
10.26 | Form of The Royal Bank of Scotland Group, plc 2010 Long Term Incentive Plan Award Certificate for Bruce Van Saun | |
10.27 | Form of The Citizens Financial Group, Inc. Converted Equity 2010 Deferral Plan | |
10.28 | Form of the Citizens Financial Group, Inc. Converted Equity 2010 Long Term Incentive Plan | |
10.29 | Form of Citizens Financial Group, Inc. 2014 Omnibus Incentive Plan | |
10.30 | Form of Citizens Financial Group, Inc. 2014 Non-Employee Directors Compensation Plan | |
10.31 | Form of Citizens Financial Group, Inc. 2014 Non-Employee Directors Compensation Plan Award Agreement | |
10.32 | Form of Citizens Financial Group, Inc. 2014 Employee Stock Purchase Plan | |
10.33 | Form of Citizens Financial Group, Inc. Non-Employee Directors Compensation Policy | |
10.34 | RBS Citizens Financial Group, Inc. Performance Formula and Incentive Plan | |
10.35 | Form of The Royal Bank of Scotland Group, plc CFG Special (IPO) Award Certificate | |
10.36 | Form of Role Based Allowance Letter | |
10.37 | Supplemental Retirement Agreement, dated October 31, 1995, as amended, between Charter One Financial, Inc. and Charles J. Koch | |
10.38 | Form of Amended and Restated Master Service Agreement between Citizens Bank, N.A. and RBS Business Services Private LTD | |
10.39 | Form of Transitional Services Agreement between Citizens Bank, N.A. and RBS Global Trade Service Centre Private Limited | |
21.1 | Subsidiaries of the Registrant | |
23.1 | Consent of Deloitte & Touche LLP | |
23.2 | Consent of Davis Polk & Wardwell LLP (included in Exhibit 5.1) | |
24.1 | Power of Attorney (included on signature page to this Registration Statement) |
| Previously filed. |
(b) No financial statement schedules are provided because the information called for is not required or is shown either in the financial statements or the notes thereto.
Item 17. | Undertakings |
The undersigned hereby undertakes the following:
(a) The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.
II-4
(b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions referenced in Item 14 of this Registration Statement, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Stamford, State of Connecticut, on the 8 day of September, 2014.
CITIZENS FINANCIAL GROUP, INC. |
||
By: | /s/ Bruce Van Saun | |
Name:Bruce Van Saun |
||
Title: Chairman and Chief Executive Officer |
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Bruce Van Saun and John Fawcett, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power to act separately and full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement and all additional registration statements pursuant to Rule 462(b) of the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agent full power and authority to do and perform each and every act in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them or his or her or their substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Signature |
Title |
Date |
||
/s/ Bruce Van Saun Bruce Van Saun |
Chairman and Chief Executive Officer
(principal executive officer) |
September 8, 2014 | ||
* Mark Casady |
Director |
September 8, 2014 |
||
* Anthony Di Iorio |
Director |
September 8, 2014 |
||
* Robert Gillespie |
Director |
September 8, 2014 |
||
* William P. Hankowsky |
Director |
September 8, 2014 |
||
* Howard W. Hanna III |
Director |
September 8, 2014 |
||
/s/ Leo I. Higdon Leo I. Higdon |
Director |
September 8, 2014 |
||
* Charles J. Koch |
Director |
September 8, 2014 |
II-6
Signature |
Title |
Date |
||
* Robert D. Matthews, Jr. |
Director |
September 8, 2014 |
||
* Arthur F. Ryan |
Director |
September 8, 2014 |
||
* Shivan S. Subramaniam |
Director |
September 8, 2014 |
||
* Wendy A. Watson |
Director |
September 8, 2014 |
||
* Marita Zuraitis |
Director |
September 8, 2014 |
||
* John Fawcett |
Executive Vice President and
|
September 8, 2014 |
||
* Ronald S. Ohsberg |
Executive Vice President and Controller
|
September 8, 2014 |
*By: | /s/ Bruce Van Saun | |
Name:Bruce Van Saun |
||
Title: Attorney in Fact |
II-7
EXHIBIT INDEX
Exhibit
|
Description |
|
1.1 | Form of Underwriting Agreement | |
3.1 | Form of Amended and Restated Certificate of Incorporation of the Registrant | |
3.2 | Form of Amended and Restated Bylaws of the Registrant | |
5.1 | Opinion of Davis Polk & Wardwell LLP | |
10.1 | Form of Separation and Shareholder Agreement between the Registrant and The Royal Bank of Scotland Group plc | |
10.2 | Form of Transitional Services Agreement between the Registrant and The Royal Bank of Scotland Group plc | |
10.3 | Form of Trademark License Agreement between the Registrant and The Royal Bank of Scotland Group plc | |
10.4 | Form of Registration Rights Agreement between the Registrant and The Royal Bank of Scotland Group plc | |
10.5 | Form of Indemnification Agreement | |
10.6 | Employment Agreement, dated October 1, 2013, between the Registrant and Bruce Van Saun | |
10.7 | Offer Letter, dated November 6, 2013, between The Royal Bank of Scotland Group, plc and Bruce Van Saun | |
10.8 | Employment Agreement, dated March 21, 2007, between RBS North America Services, Inc. and Ellen Alemany | |
10.9 | Side Letter, dated March 21, 2007, between RBS North America Services, Inc. and Ellen Alemany | |
10.10 | Separation and Release Agreement, dated May 13, 2013, between the Registrant, The Royal Bank of Scotland Group, plc and Ellen Alemany | |
10.11 | Offer Letter, dated August 28, 2007, between RBS North America Services, Inc. and Robert D. Matthews, Jr. | |
10.12 | Side Letter, dated May 17, 2010, between the Registrant and Robert D. Matthews, Jr. | |
10.13 | Offer Letter, dated September 18, 2007, between RBS North America Services, Inc. and John Fawcett | |
10.14 | Offer Letter, dated May 23, 2008, between the Registrant and Brad Conner | |
10.15 | Offer Letter, dated September 13, 2010, between the Registrant and Nancy Shanik | |
10.16 | The Royal Bank of Scotland Group, plc 2007 Executive Share Option Plan | |
10.17 | Form of The Royal Bank of Scotland Group, plc 2007 Executive Share Option Plan Award Certificate | |
10.18 | Amended and Restated RBS Americas Deferred Compensation Plan, effective January 1, 2009, as amended August 30, 2013 | |
10.19 | Amended and Restated Deferred Compensation Plan for Directors of Citizens Financial Group, Inc., effective January 1, 2009 |
II-8
Exhibit
|
Description |
|
10.20 | Amended and Restated Citizens Financial Group, Inc. Deferred Compensation Plan, effective January 1, 2009 | |
10.21 | Citizens Financial Group, Inc. Executive Severance Practice | |
10.22 | The Royal Bank of Scotland Group, plc 2010 Deferral Plan Rules | |
10.23 | Form of The Royal Bank of Scotland Group, plc 2010 Deferral Plan Award Certificate | |
10.24 | Rules of The Royal Bank of Scotland Group, plc 2010 Long Term Incentive Plan | |
10.25 | Form of The Royal Bank of Scotland Group, plc 2010 Long Term Incentive Plan Award Certificate | |
10.26 | Form of The Royal Bank of Scotland Group, plc 2010 Long Term Incentive Plan Award Certificate for Bruce Van Saun | |
10.27 | Form of The Citizens Financial Group, Inc. Converted Equity 2010 Deferral Plan | |
10.28 | Form of the Citizens Financial Group, Inc. Converted Equity 2010 Long Term Incentive Plan | |
10.29 | Form of Citizens Financial Group, Inc. 2014 Omnibus Incentive Plan | |
10.30 | Form of Citizens Financial Group, Inc. 2014 Non-Employee Directors Compensation Plan | |
10.31 | Form of Citizens Financial Group, Inc. 2014 Non-Employee Directors Compensation Plan Award Agreement | |
10.32 | Form of Citizens Financial Group, Inc. 2014 Employee Stock Purchase Plan | |
10.33 | Form of Citizens Financial Group, Inc. Non-Employee Directors Compensation Policy | |
10.34 | RBS Citizens Financial Group, Inc. Performance Formula and Incentive Plan | |
10.35 | Form of The Royal Bank of Scotland Group, plc CFG Special (IPO) Award Certificate | |
10.36 | Form of Role Based Allowance Letter | |
10.37 | Supplemental Retirement Agreement, dated October 31, 1995, as amended, between Charter One Financial, Inc. and Charles J. Koch | |
10.38 | Form of Amended and Restated Master Service Agreement between Citizens Bank, N.A. and RBS Business Services Private LTD | |
10.39 | Form of Transitional Services Agreement between Citizens Bank, N.A. and RBS Global Trade Service Centre Private Limited | |
21.1 | Subsidiaries of the Registrant | |
23.1 | Consent of Deloitte & Touche LLP | |
23.2 | Consent of Davis Polk & Wardwell LLP (included in Exhibit 5.1) | |
24.1 | Power of Attorney (included on signature page to this Registration Statement) |
| Previously filed. |
II-9
Exhibit 1.1
140,000,000 Shares
CITIZENS FINANCIAL GROUP, INC.
COMMON STOCK, PAR VALUE $0.01 PER SHARE
UNDERWRITING AGREEMENT
[ ], 2014
[ ], 2014
Morgan Stanley & Co. LLC
Goldman, Sachs & Co.
J.P. Morgan Securities LLC
c/o | Morgan Stanley & Co. LLC |
1585 Broadway
New York, New York 10036
Goldman, Sachs & Co.
200 West Street
New York, New York 10282
J.P. Morgan Securities LLC
383 Madison Avenue
New York, New York 10179
Ladies and Gentlemen:
Certain shareholders of Citizens Financial Group, Inc. (the Company ) named in Schedule I hereto (each, a Selling Shareholder and together, the Selling Shareholders ) severally propose to sell to the several underwriters named in Schedule II hereto (the Underwriters ), for whom Morgan Stanley & Co. LLC ( Morgan Stanley ), Goldman, Sachs & Co. and J.P. Morgan Securities LLC are acting as representatives (collectively, the Representatives ), an aggregate of 140,000,000 shares of the common stock, par value $0.01 per share, of the Company (the Firm Shares ), each Selling Shareholder selling the amount set forth opposite such Selling Shareholders name in Schedule I hereto.
RBSG International Holdings Limited ( RBSH ), one of the Selling Shareholders, also proposes to sell to the several Underwriters not more than an additional 21,000,000 shares of the Companys common stock, par value $0.01 per share (the Additional Shares ) if and to the extent that you, as Representatives of the offering, shall have determined to exercise, on behalf of the Underwriters, the right to purchase such shares of common stock granted to the Underwriters in Section 3 hereof. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the Shares. The shares of common stock, par value $0.01 per share, of the Company are hereinafter referred to as the Common Stock .
The Company has filed with the Securities and Exchange Commission (the Commission ) a registration statement, including a prospectus, relating to the Shares. The registration statement as amended at the time it becomes effective, including the information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Securities Act of 1933, as amended (the
Securities Act ), is hereinafter referred to as the Registration Statement ; the prospectus in the form first used to confirm sales of Shares (or in the form first made available to the Underwriters by the Company to meet requests of purchasers pursuant to Rule 173 under the Securities Act) is hereinafter referred to as the Prospectus . If the Company has filed an abbreviated registration statement to register additional shares of Common Stock pursuant to Rule 462(b) under the Securities Act (the Rule 462 Registration Statement ), then any reference herein to the term Registration Statement shall be deemed to include such Rule 462 Registration Statement.
For purposes of this Agreement, free writing prospectus has the meaning set forth in Rule 405 under the Securities Act, Time of Sale Prospectus means the preliminary prospectus contained in the Registration Statement together with the documents and pricing information set forth in Section A of Schedule III hereto, and broadly available road show means a bona fide electronic road show as defined in Rule 433(h)(5) under the Securities Act that has been made available without restriction to any person. As used herein, the terms Registration Statement, preliminary prospectus, Time of Sale Prospectus and Prospectus shall include the documents, if any, incorporated by reference therein as of the date hereof. The Company and the Selling Shareholders agree and confirm that references to affiliates of Morgan Stanley that appear in this Agreement shall be understood to include Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.
Morgan Stanley has agreed to reserve a portion of the Shares to be purchased by it under this Agreement for sale to the Companys directors, officers, employees and business associates and other parties related to the Company (collectively, Participants ), as set forth in the Prospectus under the heading Underwriting (the Directed Share Program ). The Shares to be sold by Morgan Stanley and its affiliates pursuant to the Directed Share Program are referred to hereinafter as the Directed Shares . Any Directed Shares not orally confirmed for purchase by any Participant by the end of the business day on which this Agreement is executed will be offered to the public by the Underwriters as set forth in the Prospectus.
1. Representations and Warranties of the Company . The Company represents and warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or threatened by the Commission.
(b) (i) The Registration Statement, when it became effective, did not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the Registration Statement and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder, (iii) the Time of Sale Prospectus does not, and at the time of each sale of the Shares in connection with the offering when the Prospectus is not yet
2
available to prospective purchasers and at the Closing Date (as defined in Section 5), the Time of Sale Prospectus, as then amended or supplemented by the Company, if applicable, will not, contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, (iv) each broadly available road show, if any, when considered together with the Time of Sale Prospectus, does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading and (v) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in the Registration Statement, the Time of Sale Prospectus or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein.
(c) The Company is not an ineligible issuer in connection with the offering pursuant to Rules 164, 405 and 433 under the Securities Act. Any free writing prospectus that the Company is required to file pursuant to Rule 433(d) under the Securities Act has been, or will be, filed with the Commission in accordance with the requirements of the Securities Act and the applicable rules and regulations of the Commission thereunder. Each free writing prospectus that the Company has filed, or is required to file, pursuant to Rule 433(d) under the Securities Act or that was prepared by or on behalf of or used or referred to by the Company complies or will comply in all material respects with the requirements of the Securities Act and the applicable rules and regulations of the Commission thereunder. Except for the free writing prospectuses, if any, identified in Schedule III hereto, and electronic road shows, if any, each furnished to you before first use, the Company has not prepared, used or referred to, and will not, without your prior consent, prepare, use or refer to, any free writing prospectus.
(d) The Company and each of its significant subsidiaries as defined in Rule 1-02 of Regulation S-X under the Securities Act (each a Significant Subsidiary ) (i) has been duly organized and is validly existing and in good standing (to the extent that such concept is applicable) under the laws of the jurisdiction of its incorporation and (ii) is duly qualified to do business and is in good standing (to the extent that such concept is applicable) in each jurisdiction in which its ownership or lease of property or the conduct of its business requires such qualification, and has all power and authority necessary to own or hold its properties and to conduct its business as described in the Time of Sale Prospectus, except where the failure to be so qualified or be in good standing (to the extent such concept is applicable) or have such power or authority would not, individually or in the aggregate, have a material adverse effect on the condition (financial or otherwise), business, properties, management, stockholders equity, prospects or results of operations, whether or not arising from transactions in the ordinary course of business, of the Company and its subsidiaries, taken as a whole (a Material Adverse Effect ).
3
(e) The Company has no Significant Subsidiaries other than those listed on Schedule IV hereto.
(f) (i) The Company is duly registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the Bank Holding Company Act ) and the regulations of the Board of Governors of the Federal Reserve System (the Federal Reserve Board ) and has made an effective election to become a financial holding company under the Bank Holding Company Act and the Federal Reserve Boards Regulation Y; (ii) Citizens, N.A. is validly existing as a national banking association under the laws of the United States of America and (iii) Citizens Bank of Pennsylvania is validly existing as a bank under the laws of the Commonwealth of Pennsylvania.
(g) This Agreement has been duly authorized, executed and delivered by the Company.
(h) The authorized capital stock of the Company conforms as to legal matters to the description thereof contained in each of the Time of Sale Prospectus and the Prospectus; the shares of Common Stock outstanding (including the Shares to be sold by the Selling Shareholders) have been duly authorized and are validly issued, fully paid and non-assessable; all of the issued shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and are owned directly by the Company, free and clear of all liens, encumbrances, equities or claims.
(i) The statements relating to legal matters, documents or proceedings included in (A) the Time of Sale Prospectus and the Prospectus under the caption Description of Capital Stock and Regulation and Supervision, and (B) the Registration Statement in Items 14 and 15, in each case insofar as such statements constitute summaries of the legal matters, document or proceedings referred to therein, fairly summarize in all material respects such matters, documents or proceedings and the statements in the Time of Sale Prospectus and Prospectus under the heading Material U.S. Federal Tax Considerations insofar as such statements purport to summarize certain federal income tax laws of the United States, constitute a fair summary of the principal U.S. federal income tax consequences of an investment in the Shares.
(j) The execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement will not contravene any provision of (i) the certificate of incorporation or by-laws of the Company, (ii) any agreement or other instrument binding upon the Company or any of its subsidiaries or (iii) any applicable law or judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company or any of its subsidiaries, except, in the case of clauses (ii) and (iii) above, that would not, individually or in the aggregate, have a Material Adverse Effect or a material adverse effect on the power or ability of the Company to perform its obligations under this Agreement.
(k) No consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by the Company of its
4
obligations under this Agreement, except for the registration of the Shares under the Securities Act and such consents, approvals, authorizations, orders or qualifications as have been obtained or may be required by the Financial Industry Regulatory Authority, Inc. ( FINRA ) and applicable state securities laws and foreign securities laws in connection with the offer and sale of the Shares.
(l) There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, business, management or operations of the Company and its subsidiaries, taken as a whole, from that set forth in the Time of Sale Prospectus.
(m) Except as described in the Registration Statement, the Time of Sale Prospectus and the Prospectus, (i) there are no legal, governmental or regulatory investigations, actions, demands, claims, suits, arbitrations, inquiries or proceedings ( Actions ) pending or threatened or, to the best knowledge of the Company, contemplated by any governmental or regulatory authority or by others, to which the Company or any of its subsidiaries is a party or to which any property or asset of the Company or any of its subsidiaries is or may be the subject that, individually or in the aggregate, if determined adversely to the Company or any of its subsidiaries, could reasonably be expected to have a Material Adverse Effect or a material adverse effect on the power or ability of the Company to perform its obligations under this Agreement; and (ii) there are no current or pending Actions or statutes, regulations, contracts or other documents that are required under the Securities Act to be described in or filed as exhibits to the Registration Statement, the Time of Sale Prospectus or the Prospectus that are not so described in the Registration Statement, the Time of Sale Prospectus and the Prospectus or filed with the Registration Statement.
(n) Each preliminary prospectus filed as part of the registration statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Securities Act, complied when so filed in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder.
(o) The Company is not, and after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus will not be, required to register as an investment company as such term is defined in the Investment Company Act of 1940, as amended.
(p) The Company and its subsidiaries are not subject to any claim in connection with their respective businesses, operations or properties, alleging liability or responsibility for violation of any Federal, state, local or foreign statute, law, regulation, ordinance, rule, judgment, order, decree, permit, concession, grant, franchise, license, agreement or governmental restriction relating to pollution and the protection of the environment or the release of any materials into the environment, including those related to hazardous substances or wastes, air emissions and discharges to waste or public systems, except for claims which, if adversely determined, would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
5
(q) Except as described in the Registration Statement, the Time of Sale Prospectus and the Prospectus, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement.
(r) Neither the Company nor any of its subsidiaries or affiliates under the control of the Company (controlled affiliates), nor, to the knowledge of the Company, any director, officer, employee, agent or representative of the Company or of any of its subsidiaries or controlled affiliates or other person associated with or acting on behalf of the Company or any of its subsidiaries or controlled affiliates, has (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity, (ii) taken any action in furtherance of an offer, payment, promise to pay, or authorization or approval of the payment or giving of money, property, gifts or anything else of value, directly or indirectly, to any foreign or domestic government official (including any officer or employee of a government or government-owned or controlled entity or of a public international organization, or any person acting in an official capacity for or on behalf of any of the foregoing, or any political party or party official or candidate for political office) to influence official action or secure an improper advantage, (iii) violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977, as amended, or any applicable law or regulations implementing the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, or committed an offence under the Bribery Act 2010 of the United Kingdom, or any other applicable anti-bribery or anti-corruption law, or (iv) made, offered, agreed, requested or taken an act in furtherance of any unlawful bribe or other unlawful benefit, including, without limitation, any rebate, payoff, influence payment, kickback or other unlawful or improper payment or benefit. The Company and its subsidiaries and controlled affiliates have conducted their businesses in compliance with all applicable anti-bribery and anti-corruption laws and have instituted policies and procedures designed to promote and achieve compliance with such laws and with the representation and warranty contained herein.
(s) The operations of the Company and its subsidiaries are and have been conducted at all times in compliance with all applicable financial recordkeeping and reporting requirements, including those of the Currency and Foreign Transactions Reporting Act of 1970, as amended, commonly known as the Bank Secrecy Act, as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), and the applicable anti-money laundering statutes of jurisdictions where the Company and its subsidiaries conduct business, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the Anti-Money Laundering Laws ), and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its subsidiaries with respect to the Anti-Money Laundering Laws is pending or, to the best knowledge of the Company, threatened.
6
(t) (i) Neither the Company nor any of its subsidiaries, nor, to the Companys knowledge, any director, officer, employee, agent, controlled affiliate or representative of the Company or any of its subsidiaries, is an individual or entity ( Person ) that is, or is owned or controlled by a Person that is:
(A) the subject or target of any sanctions administered or enforced by the U.S. Department of Treasurys Office of Foreign Assets Control ( OFAC )), the U.S. Department of State (including, without limitation, through designation as a specially designated national or blocked person), the United Nations Security Council ( UNSC ), the European Union ( EU ), or Her Majestys Treasury ( HMT ) (collectively, Sanctions ), or
(B) located, organized or resident in a country or territory that is the subject or target of Sanctions (currently, Cuba, Iran, North Korea, Sudan and Syria).
(ii) For the past 5 years, the Company and its subsidiaries have not knowingly engaged in and are not now knowingly engaged in any dealings or transactions with any Person, or in any country or territory, that at the time of the dealing or transaction is or was the subject or target of Sanctions.
(u) Subsequent to the respective dates as of which information is given in each of the Registration Statement, the Time of Sale Prospectus and the Prospectus, (i) the Company and its subsidiaries have not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction; (ii) the Company has not purchased any of its outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock other than ordinary and customary dividends; and (iii) there has not been any material change in the capital stock, short-term debt or long-term debt of the Company and its subsidiaries, except in each case as described in each of the Registration Statement, the Time of Sale Prospectus and the Prospectus, respectively.
(v) The Company and its subsidiaries have good and marketable title in fee simple to, or have valid rights to lease or otherwise use, all items of real and personal property that are material to the business of the Company and its subsidiaries, in each case free and clear of all liens, encumbrances, claims and defects and imperfections of title except those that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(w) The Company and its subsidiaries own or possess, or can acquire on reasonable terms, all material patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names necessary to conduct the business now operated by them, and neither the Company nor any of its subsidiaries has received any notice of infringement, misappropriation or violation of the asserted rights of others with respect to any of the foregoing which, individually or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would reasonably be expected to have a Material Adverse Effect.
7
(x) No labor disturbance by or dispute with employees of the Company or any of its subsidiaries exists or, to the best knowledge of the Company, is contemplated or threatened and the Company is not aware of any existing, threatened or imminent labor disturbance by, or dispute with, the employees of any of the Companys or any of the Companys subsidiaries principal suppliers, contractors or customers, except as would not have a Material Adverse Effect.
(y) Except as disclosed in the Registration Statement and the Time of Sale Prospectus, the Company and each of its subsidiaries are in compliance with all applicable laws administrated by the Federal Reserve Board, the Office of the Comptroller of the Currency (the OCC), the Federal Deposit Insurance Corporation (the FDIC), the Consumer Financial Protection Bureau (the CFPB), the Department of Banking of the Commonwealth of Pennsylvania (the PA Banking Department), and any other federal, non-U.S. or state bank regulatory authorities with jurisdiction over the Company and its subsidiaries (together with the Federal Reserve Board, the OCC, the FDIC, the CFPB and the PA Banking Department, Bank Regulatory Authorities) and securities, commodities and other financial regulatory authorities with jurisdiction over the Company or any of its subsidiaries, except to the extent that noncompliance would not have, and would not be reasonably expected to have, a Material Adverse Effect. The deposit accounts that are eligible for FDIC insurance of each of the depository institution subsidiaries of the Company are insured to the fullest extent permitted by law and the rules and regulations of the FDIC and there are no proceedings for the termination or revocation of such insurance pending or, to the best knowledge of the Company, threatened. Neither the Company nor any of its subsidiaries is a party to or otherwise subject to any consent decree, memorandum of understanding, cease and desist order, order of prohibition or suspension, written commitment, supervisory agreement, or written agreement or other written statement as described under 12 U.S.C. 1818(u) (a Regulatory Order) with any of the Bank Regulatory Authorities nor have the Company or any of its Subsidiaries (i) been advised in writing by any of the Bank Regulatory Authorities or (ii) to the knowledge of the Company been advised other than in writing by any of the Bank Regulatory Authorities that it is contemplating issuing or requesting any of the foregoing, in each case except as described in the Registration Statement and the Time of Sale Prospectus (provided that in the case of any agreement that the Company is prohibited from disclosing, such description in the Registration Statement and the Time of Sale Prospectus may be limited to the material effects of such agreement).
(z) The Company and each of its depository institution subsidiaries is well capitalized, as defined under the applicable Federal Reserve Board, OCC and FDIC regulations. Each of Citizens Bank, N.A. and Citizens Bank of Pennsylvania has a Community Reinvestment Act rating of at least Satisfactory.
(aa) The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as
8
are prudent and customary in the businesses in which they are engaged; neither the Company nor any of its subsidiaries has been refused any insurance coverage sought or applied for; and neither the Company nor any of its subsidiaries has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect.
(bb) The Company and its subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Material Adverse Effect, except as described in the Time of Sale Prospectus.
(cc) The Company and its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with managements general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with managements general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as described in the Time of Sale Prospectus, since the end of the Companys most recent audited fiscal year, there has been (i) no material weakness in the Companys internal control over financial reporting (whether or not remediated) and (ii) no change in the Companys internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
(dd) The financial statements (including the related notes thereto) of the Company and its consolidated subsidiaries included in the Registration Statement, the Time of Sale Prospectus and the Prospectus comply in all material respects with the applicable requirements of the Securities Act and present fairly in all material respects the consolidated financial position of the Company and its subsidiaries as of the dates indicated and the results of their operations and the changes in their cash flows for the periods specified; such financial statements have been prepared in conformity with generally accepted accounting principles in the United States applied on a consistent basis throughout the periods covered thereby; and the other financial information included in the Registration Statement, the Time of Sale Prospectus and the Prospectus has been derived from the accounting records of the Company and its subsidiaries and presents fairly in all material respects the information shown thereby. Non-GAAP financial information included in the Registration Statement, the Prospectus or the Time of Sale Prospectus, if any, complies with the requirements of Regulation G of the Exchange Act and Item 10 of Regulation S-K under the Securities Act. The selected financial data and the summary financial information included in the Registration Statement, the Prospectus and the Time of Sale Prospectus present fairly the information
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shown therein and have been compiled on a basis consistent with that of the audited consolidated financial statements included therein. Except as included therein, no historical or pro forma financial statements or supporting schedules are required to be included in the Registration Statement, the Prospectus or the Time of Sale Prospectus under the Securities Act or the applicable rules and regulations of the Commission thereunder.
(ee) Deloitte & Touche LLP, who has audited certain of the Companys consolidated financial statements, is an independent auditor with respect to the Company and its subsidiaries within the meaning of the Securities Act (and the applicable rules and regulations of the Commission thereunder) and the Public Company Accounting Oversight Board (United States).
(ff) Except as described in the Time of Sale Prospectus, the Company has not sold, issued or distributed any shares of Common Stock during the six-month period preceding the date hereof, including any sales pursuant to Rule 144A under, or Regulation D or S of, the Securities Act, other than shares issued pursuant to employee benefit plans, qualified stock option plans or other employee compensation plans or pursuant to outstanding options, rights or warrants.
(gg) The Registration Statement, the Prospectus, the Time of Sale Prospectus and any preliminary prospectus comply, and any amendments or supplements thereto will comply, with any applicable laws or regulations of foreign jurisdictions in which the Prospectus, the Time of Sale Prospectus or any preliminary prospectus, as amended or supplemented, if applicable, are distributed in connection with the Directed Share Program.
(hh) No consent, approval, authorization or order of, or qualification with, any governmental body or agency, other than those obtained, is required in connection with the offering of the Directed Shares in any jurisdiction where the Directed Shares are being offered.
(ii) The Company has not offered, or caused Morgan Stanley or any Morgan Stanley Entity as defined in Section 12 to offer, Shares to any person pursuant to the Directed Share Program with the specific intent to unlawfully influence (i) a customer or supplier of the Company to alter the customers or suppliers level or type of business with the Company, or (ii) a trade journalist or publication to write or publish favorable information about the Company or its products.
(jj) The Company and each of its subsidiaries have filed all federal, state, local and foreign tax returns required to be filed through the date of this Agreement or have requested extensions thereof (except where the failure to file would not, individually or in the aggregate, have a Material Adverse Effect) and have paid all taxes required to be paid thereon (except for cases in which the failure to file or pay would not have a material adverse effect, or, except as currently being contested in good faith and for which reserves required by U.S. GAAP have been created in the financial statements of the Company), and, except as described in the Time of Sale Prospectus, no tax deficiency has
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been determined adversely to the Company or any of its subsidiaries which has (nor does the Company nor any of its subsidiaries have any notice or knowledge of any tax deficiency which could reasonably be expected to be determined adversely to the Company or its subsidiaries and which would reasonably be expected to have) a Material Adverse Effect.
2. Representations and Warranties of the Selling Shareholders .
(a) Each Selling Shareholder represents and warrants to and agrees with each of the Underwriters that:
(i) This Agreement has been duly authorized, executed and delivered by or on behalf of such Selling Shareholder.
(ii) The execution and delivery by such Selling Shareholder of, and the performance by such Selling Shareholder of its obligations under, this Agreement will not contravene any provision of (i) the certificate of incorporation or by-laws of such Selling Shareholder, (ii) any agreement or other instrument binding upon such Selling Shareholder or (iii) any applicable law or judgment, order or decree of any governmental body, agency or court having jurisdiction over such Selling Shareholder, except, in the case of clauses (ii) and (iii) above, that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect or a material adverse effect on the power or ability of such Selling Shareholder to perform its obligations under this Agreement.
(iii) No consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by such Selling Shareholder of its obligations under this Agreement, except for (i) the registration of the Shares under the Securities Act and such consents, approvals, authorizations, orders or qualifications as have been obtained or may be required by FINRA and applicable state securities laws and foreign securities laws in connection with the offer and sale of the Shares.
(iv) Such Selling Shareholder has, and on the Closing Date will have, valid title to, or a valid security entitlement within the meaning of Section 8-501 of the New York Uniform Commercial Code in respect of, the Shares to be sold by such Selling Shareholder free and clear of all security interests, claims, liens, equities or other encumbrances and the legal right and power, and all authorization and approval required by law, to enter into this Agreement and to sell, transfer and deliver the Shares to be sold by such Selling Shareholder or a security entitlement in respect of such Shares.
(v) Upon payment for the Shares to be sold by such Selling Shareholder pursuant to this Agreement, delivery of such Shares, as directed by the Underwriters, to Cede & Co. ( Cede ) or such other nominee as may be designated by the Depository Trust Company ( DTC ), registration of such Shares in the name of Cede or such other nominee and the crediting of such
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Shares on the books of DTC to securities accounts of the Underwriters (assuming that neither DTC nor any such Underwriter has notice of any adverse claim (within the meaning of Section 8-105 of the New York Uniform Commercial Code (the UCC )) to such Shares), (A) DTC shall be a protected purchaser of such Shares within the meaning of Section 8-303 of the UCC, (B) under Section 8-501 of the UCC, the Underwriters will acquire a valid security entitlement in respect of such Shares and (C) no action based on any adverse claim, within the meaning of Section 8-102 of the UCC, to such Shares may be asserted against the Underwriters with respect to such security entitlement; for purposes of this representation, such Selling Shareholder may assume that when such payment, delivery and crediting occur, (x) such Shares will have been registered in the name of Cede or another nominee designated by DTC, in each case on the Companys share registry in accordance with its certificate of incorporation, bylaws and applicable law, (y) DTC will be registered as a clearing corporation within the meaning of Section 8-102 of the UCC and (z) appropriate entries to the accounts of the several Underwriters on the records of DTC will have been made pursuant to the UCC.
(vi) Such Selling Shareholder is familiar with the Registration Statement, the Time of Sale Prospectus and the Prospectus and has no knowledge of any material fact, condition or information not disclosed in the Time of Sale Prospectus or the Prospectus that has had, or may have, a Material Adverse Effect. Such Selling Shareholder is not prompted by any material information concerning the Company or its subsidiaries which is not set forth in the Time of Sale Prospectus to sell its Shares pursuant to this Agreement.
(vii) (i) Solely to the extent that any statements in, or omissions from, the Registration Statement are made in reliance upon and in conformity with information furnished to the Company by such Selling Shareholder expressly for use therein, the Registration Statement, when it became effective, did not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) solely to the extent that any statements in, or omissions from, the Time of Sale Prospectus are made in reliance upon and in conformity with information furnished to the Company by such Selling Shareholder expressly for use therein, the Time of Sale Prospectus does not, and at the time of each sale of the Shares in connection with the offering when the Prospectus is not yet available to prospective purchasers, the Time of Sale Prospectus, as then amended or supplemented by the Company, if applicable, will not, contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and (iii) solely to the extent that any statements in, or omissions from, the Prospectus are made in reliance upon and in conformity with information furnished to the Company by such Selling Shareholder expressly for use therein, the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to
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make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph 2(a)(vii) do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein.
(viii) Having made reasonable inquiry, such Selling Shareholder is not aware of any facts that would cause the representations and warranties of the Company contained in Section 1 to not be true and correct in all material respects.
3. Agreements to Sell and Purchase . Each of the Selling Shareholders, severally and not jointly, hereby agrees to sell to the several Underwriters, and each Underwriter, upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, agrees, severally and not jointly, to purchase from such Selling Shareholder at $[ ] a share (the Purchase Price ) the number of Firm Shares (subject to such adjustments to eliminate fractional shares as you may determine) that bears the same proportion to the number of Firm Shares to be sold by such Selling Shareholder as the number of Firm Shares set forth in Schedule II hereto opposite the name of such Underwriter bears to the total number of Firm Shares.
On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, RBSH agrees to sell to the Underwriters, and the Underwriters shall have the right to purchase, severally and not jointly, up to 21,000,000 Additional Shares at the Purchase Price, provided, however, that the amount paid by the Underwriters for any Additional Shares shall be reduced by an amount per share equal to any dividends declared by the Company and payable on the Firm Shares but not payable on such Additional Shares. You may exercise this right on behalf of the Underwriters in whole or from time to time in part by giving written notice not later than 30 days after the date of this Agreement. Any exercise notice shall specify the number of Additional Shares to be purchased by the Underwriters and the date on which such shares are to be purchased. Unless otherwise agreed among you, RBSH and the Company, the purchase date must be at least two business days after the written notice is given and may not be earlier than the closing date for the Firm Shares nor later than ten business days after the date of such notice. Additional Shares may be purchased as provided in Section 5 hereof solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. On each day, if any, that Additional Shares are to be purchased (an Option Closing Date ), each Underwriter agrees, severally and not jointly, to purchase the number of Additional Shares (subject to such adjustments to eliminate fractional shares as you may determine) that bears the same proportion to the total number of Additional Shares to be purchased on such Option Closing Date as the number of Firm Shares set forth in Schedule II hereto opposite the name of such Underwriter bears to the total number of Firm Shares.
Each of the Company and the Selling Shareholders hereby agrees that, subject to the paragraph below, without the prior written consent of the Representatives on behalf of the Underwriters, it will not, during the period ending 180 days after the date of the
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Prospectus (the Restricted Period ), (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock beneficially owned (as such term is used in Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the Exchange Act ) or any other securities so owned convertible into or exercisable or exchangeable for Common Stock or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise or (3) file any registration statement with the Commission relating to the offering of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock.
The restrictions contained in the preceding paragraph shall not apply to (a) the Shares to be sold hereunder, (b) the issuance, delivery, transfer or sale by the Company or by a Selling Shareholder, as applicable, of shares of Common Stock upon the exercise of any option, stock appreciation right or warrant or upon the conversion, exchange, vesting or settlement of any securities outstanding on or before the Closing Date of which the Underwriters have been advised in writing or which are outstanding under any equity compensation, share, option or incentive plan described in the Time of Sale Prospectus, (c) transactions by a Selling Shareholder relating to shares of Common Stock or other securities acquired in open market transactions after the completion of the offering of the Shares, (d) transfers by a Selling Shareholder of shares of Common Stock or any securities convertible into, exercisable or exchangeable for, Common Stock as a bona fide gift, (e) distributions by a Selling Shareholder of shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock to its affiliates, limited partners or stockholders; provided that in the case of any transfer or distribution pursuant to clauses (d) or (e), each donee or distributee shall enter into a written agreement accepting the restrictions set forth in the preceding paragraph and this paragraph as if it were a Selling Shareholder, (f) grants made by the Company under any equity compensation, share, option or incentive plan described in the Time of Sale Prospectus, (g) the conversion of equity-based awards held by the Companys or any of its subsidiaries current or former service providers as applicable in the form of securities of The Royal Bank of Scotland Group plc (or American Depositary Shares representing such securities) into securities or equity-based awards of the Company, (h) the establishment of any trading plan pursuant to Rule 10b5-1 under the Exchange Act for the transfer of shares of Common Stock, provided that such plan does not provide for the transfer of shares of Common Stock during the Restricted Period, (i) the filing with the Commission of one or more registration statements on Form S-8 registering securities issuable, outstanding, exercisable or available for issuance under any equity compensation, share, option or incentive plan, which is described in the Time of Sale Prospectus, (j) transfers, sales, tenders or other dispositions by a Selling Shareholder of shares of Common Stock or any securities convertible into shares of Common Stock to a bona-fide third party pursuant to (i) a tender or exchange offer for securities of the Company or (ii) another transaction, including, without limitation, a merger, consolidation or other business combination, in each case (under clause (i) or (ii)) that
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results in a change in control (including, without limitation, entering into any lock-up, voting or similar agreement pursuant to which the Selling Shareholder may agree to transfer, sell, tender or otherwise dispose of such Selling Shareholders shares of Common Stock in connection with any such transaction, or vote any of the Selling Shareholders shares of Common Stock in favor of any such transaction), provided that all of the Selling Shareholders securities subject to this Lock-Up Agreement that are not so transferred, sold, tendered or otherwise disposed of remain subject to this Lock-Up Agreement; and provided , further , that it shall be a condition of transfer, sale, tender or other disposition that if such tender offer or other transaction is not completed, any of such Selling Shareholders securities subject to these restrictions shall remain subject to the restrictions herein, (k) any issuance or transfer of shares of Common Stock or securities convertible into or exercisable or exchangeable for shares of Common Stock by the Company as consideration for a merger, acquisition, asset transfer or similar transaction, provided that the aggregate amount represented by the securities that the Company may issue or transfer or agree to issue or transfer pursuant to this clause (k) shall not exceed five percent (5%) of the total number of shares of the Companys Common Stock issued and outstanding immediately following the completion of the transactions contemplated by this Agreement, and provided further , that the Company shall cause the recipient of such securities to execute and deliver to you, on or prior to the issuance of such securities, a lock-up agreement, substantially in the form of Exhibit A hereto; (l) transfers by a Selling Shareholder to any third party pledgee in a bona fide transaction as collateral to secure obligations pursuant to lending or other arrangements between such third parties (or their affiliates or designees) and such Selling Shareholder or its affiliates or any similar arrangement relating to a financing arrangement for the benefit of such Selling Shareholder or its affiliates, provided, that the Selling Shareholder shall cause any such third party pledgee to execute and deliver to the Representatives, on or prior to the pledging of such collateral, a lock-up agreement, substantially in the form of Exhibit A hereto, and (m) transfers by a Selling Shareholder if required to occur during the Restricted Period under the European Commissions State Aid Amendment Decision dated April 9, 2014 or as otherwise directed by such Selling Shareholders regulators; provided that any filing or announcement by the Company or a Selling Shareholder relating to a transfer or distribution under clause (c)-(e), (h) or (m) of this Section 3 shall briefly note the applicable circumstances that cause such clause to apply and explain that the filing or announcement relates solely to transfers or distributions falling within the category described in the relevant clause (including, in the case of clause (h) a statement to the effect that no transfer of shares of Common Stock may be made under such plan during the Restricted Period).
In addition, each Selling Shareholder, agrees that, without the prior written consent of the Representatives on behalf of the Underwriters, it will not, during the Restricted Period, make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock. Each Selling Shareholder consents to the entry of stop transfer instructions with the Companys transfer agent and registrar against the transfer of any Shares held by such Selling Shareholder except in compliance with the foregoing restrictions. Notwithstanding the foregoing, if (1) during the last 17
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days of the Restricted Period the Company issues an earnings release or material news or a material event relating to the Company occurs; or (2) prior to the expiration of the Restricted Period, the Company announces that it will release earnings results during the 16-day period beginning on the last day of the Restricted Period, the restrictions imposed by this agreement shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event. The Company shall provide the Representatives and each individual subject to the Restricted Period pursuant to the lock-up letters described in Section 6(j) with prior notice of any such announcement that gives rise to an extension of the initial Restricted Period.
If the Representatives, in their sole discretion, agree to release or waive the restrictions set forth in a lock-up letter described in Section 6(j) hereof for an officer or director of the Company and provide the Company with notice of the impending release or waiver at least three business days before the effective date of the release or waiver, the Company agrees to announce the impending release or waiver by a press release substantially in the form of Exhibit B hereto through a major news service at least two business days before the effective date of the release or waiver.
4. Terms of Public Offering . The Selling Shareholders are advised by you that the Underwriters propose to make a public offering of their respective portions of the Shares as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable. The Selling Shareholders are further advised by you that the Shares are to be offered to the public initially at $[ ] a share (the Public Offering Price ) and to certain dealers selected by you at a price that represents a concession not in excess of $[ ] a share under the Public Offering Price, and that any Underwriter may allow, and such dealers may reallot, a concession, not in excess of $[ ] a share, to any Underwriter or to certain other dealers.
5. Payment and Delivery . Payment for the Firm Shares to be sold by each Selling Shareholder shall be made to such Selling Shareholder in Federal or other funds immediately available in New York City against delivery of such Firm Shares for the respective accounts of the several Underwriters at 10:00 a.m., New York City time, on [ ], 2014, or at such other time on the same or such other date, not later than [ ], 2014, as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the Closing Date .
Payment for any Additional Shares shall be made to RBSH in Federal or other funds immediately available in New York City against delivery of such Additional Shares for the respective accounts of the several Underwriters at 10:00 a.m., New York City time, on the date specified in the corresponding notice described in Section 3 or at such other time on the same or on such other date, in any event not later than [ ], 2014, as shall be designated in writing by you.
The Firm Shares and Additional Shares shall be registered in such names and in such denominations as you shall request in writing not later than one full business day prior to the Closing Date or the applicable Option Closing Date, as the case may be. The Firm Shares and Additional Shares shall be delivered to you on the Closing Date or an
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Option Closing Date, as the case may be, for the respective accounts of the several Underwriters. The Purchase Price payable by the Underwriters shall be reduced by any withholding required by law.
6. Conditions to Obligations . The obligations of the Selling Shareholders to sell the Shares to the Underwriters and the several obligations of the Underwriters to purchase and pay for the Shares on the Closing Date are subject to the condition that the Registration Statement shall have become effective not later than [ ] (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the following further conditions:
(a) No stop order suspending the effectiveness of the Registration Statement shall be in effect, and no proceedings for such purpose shall be pending before or threatened by the Commission.
(b) The representations and warranties of the Company and the Selling Shareholders contained in this Agreement shall be true and correct as of the date hereof and as of the Closing Date, and each of the Company and the Selling Shareholders shall have complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date.
(c) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible change (other than a notice of a possible upgrading), in the rating accorded any of the securities of the Company or any of its subsidiaries or affiliates by any nationally recognized statistical rating organization, as such term is defined in Section 3(a)(62) of the Exchange Act; and
(ii) there shall not have occurred any change, or any development involving a prospective change, in the condition, financial or otherwise, or in the earnings, business, management or operations of the Company and its subsidiaries, taken as a whole, from that set forth in the Time of Sale Prospectus that, in the judgment of the Representatives, is material and adverse and that makes it, in the judgment of the Representatives, impracticable to market the Shares on the terms and in the manner contemplated in the Time of Sale Prospectus.
(d) The Underwriters shall have received on the Closing Date a certificate, dated the Closing Date and signed by an executive officer of the Company, to the effect set forth in Section 6(c)(i) above and to the effect that the representations and warranties of the Company contained in this Agreement are true and correct as of the Closing Date and that the Company has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date. The officer signing and delivering such certificate may rely upon the best of his or her knowledge as to proceedings threatened.
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(e) The Underwriters shall have received on the Closing Date a certificate, dated the Closing Date and signed by an executive officer of each of the Selling Shareholders, to the effect that the representations and warranties of such Selling Shareholder contained in this Agreement are true and correct as of the Closing Date and that the Selling Shareholder has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date. The officer signing and delivering such certificate may rely upon the best of his or her knowledge as to proceedings threatened.
(f) The Underwriters shall have received on the Closing Date (i) an opinion and 10b-5 statement of Davis Polk & Wardwell LLP, outside counsel for the Company and the Selling Shareholders and (ii) CMS Cameron McKenna LLP, counsel for RBSH, in each case dated the Closing Date, with respect to such matters and in such form as is reasonably satisfactory to the Representatives. The opinions of Davis Polk & Wardwell LLP and CMS Cameron McKenna LLP described in this Section 6(f) shall be rendered to the Underwriters at the request of the Company or one or more of the Selling Shareholders, as the case may be, and shall so state therein.
(g) The Underwriters shall have received on the Closing Date an opinion of Stephen T. Gannon, Executive Vice President, General Counsel and Chief Legal Officer of the Company or Robin S. Elkowitz, Executive Vice President and Corporate Secretary, with respect to such matters and in such form as is reasonably satisfactory to the Representatives.
(h) The Underwriters shall have received on the Closing Date an opinion of Cleary Gottlieb Steen & Hamilton LLP, counsel for the Underwriters, dated the Closing Date, with respect to such matters and in such form as is reasonably satisfactory to the Representatives, and the Company and each Selling Shareholder shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters.
(i) The Underwriters shall have received, on each of the date hereof and the Closing Date, a letter dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to the Underwriters, from Deloitte & Touche LLP, independent public accountants, containing statements and information of the type ordinarily included in accountants comfort letters to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement, the Time of Sale Prospectus and the Prospectus; provided that the letter delivered on the Closing Date shall use a cut-off date not earlier than the date hereof.
(j) The lock-up agreements, each substantially in the form of Exhibit A hereto, between you and the officers and directors of the Company listed on Schedule V hereto relating to sales and certain other dispositions of shares of Common Stock or certain other securities, delivered to you on or before the date hereof, shall be in full force and effect on the Closing Date.
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(k) The Underwriters shall have received such other documents as you may reasonably request with respect to other matters related to the sale of the Shares.
(l) The several obligations of the Underwriters to purchase Additional Shares hereunder are subject to the representations and warranties of the Company and the Selling Shareholders contained in this Agreement being true and correct as of the date hereof and as of the applicable Option Closing Date, the compliance by each of the Company and the Selling Shareholders with all of the agreements and satisfaction of all of the conditions on its part to be performed or satisfied hereunder on or before the applicable Option Closing Date and the delivery to the Representatives on the applicable Option Closing Date of the following:
(i) a certificate, dated the Option Closing Date and signed by an executive officer of the Company, confirming that the certificate delivered on the Closing Date pursuant to Section 6(d) hereof remains true and correct as of such Option Closing Date;
(ii) a certificate, dated the Option Closing Date and signed by an executive officer of each of the Selling Shareholders, confirming that the certificate delivered on the Closing Date pursuant to Section 6(e) hereof remains true and correct as of such Option Closing Date;
(iii) (i) an opinion and 10b-5 letter of Davis Polk & Wardwell LLP, outside counsel for the Company and the Selling Shareholders, and (ii) CMS Cameron McKenna LLP, counsel for RBSH, in each case dated the Option Closing Date, relating to the Additional Shares to be purchased on such Option Closing Date and otherwise to the same effect as the opinions required by Section 6(f) hereof;
(iv) an opinion of Stephen T. Gannon, Executive Vice President, General Counsel and Chief Legal Officer of the Company or Robin S. Elkowitz, Executive Vice President and Corporate Secretary, dated the Option Closing Date, relating to the Additional Shares to be purchased on such Option Closing Date and otherwise to the same effect as the opinion required by Section 6(g) hereof;
(v) an opinion of Cleary Gottlieb Steen & Hamilton, counsel for the Underwriters, dated the Option Closing Date, relating to the Additional Shares to be purchased on such Option Closing Date and otherwise to the same effect as the opinion required by Section 6(h) hereof;
(vi) a letter dated the Option Closing Date, in form and substance satisfactory to the Underwriters, from Deloitte & Touch LLP, independent public accountants, substantially in the same form and substance as the letter furnished to the Underwriters pursuant to Section 6(i) hereof; provided that the letter delivered on the Option Closing Date shall use a cut-off date not earlier than three business days prior to such Option Closing Date; and
(vii) such other documents as you may commercially reasonably request with respect to other matters related to the sale of the Shares.
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7. Covenants of the Company . The Company covenants with each Underwriter as follows:
(a) To furnish to you, without charge, 4 signed copies of the Registration Statement (excluding exhibits thereto) and to furnish to you in New York City, without charge, prior to 10:00 a.m. New York City time on the business day next succeeding the date of this Agreement and during the period mentioned in Section 7(e) or 7(f) below, as many copies of the Time of Sale Prospectus, the Prospectus and any supplements and amendments thereto or to the Registration Statement as you may reasonably request.
(b) Before amending or supplementing the Registration Statement, the Time of Sale Prospectus or the Prospectus, to furnish to you a copy of each such proposed amendment or supplement and not to file any such proposed amendment or supplement to which you reasonably object, and to file with the Commission within the applicable period specified in Rule 424(b) under the Securities Act any prospectus required to be filed pursuant to such Rule.
(c) To furnish to you a copy of each proposed free writing prospectus to be prepared by or on behalf of, used by, or referred to by the Company and not to (i) make any offer relating to the Shares that would constitute a free writing prospectus or (ii) use or refer to any proposed free writing prospectus, in each case without your prior consent.
(d) Not to take any action that would result in an Underwriter or the Company being required to file with the Commission pursuant to Rule 433(d) under the Securities Act a free writing prospectus prepared by or on behalf of the Underwriter that the Underwriter otherwise would not have been required to file thereunder.
(e) If the Time of Sale Prospectus is being used to solicit offers to buy the Shares at a time when the Prospectus is not yet available to prospective purchasers and any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Time of Sale Prospectus in order to make the statements therein, in the light of the circumstances, not misleading, or if during such time any event shall occur or condition exist as a result of which the Time of Sale Prospectus conflicts with the information contained in the Registration Statement then on file, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Time of Sale Prospectus to comply with applicable law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to any dealer upon request, either amendments or supplements to the Time of Sale Prospectus so that the statements in the Time of Sale Prospectus as so amended or supplemented will not, in the light of the circumstances when the Time of Sale Prospectus is delivered to a prospective purchaser, be misleading or so that the Time of Sale Prospectus, as amended or supplemented, will no longer conflict with the Registration Statement, or so that the Time of Sale Prospectus, as amended or supplemented, will comply with applicable law.
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(f) If, during such period after the first date of the public offering of the Shares as in the opinion of counsel for the Underwriters the Prospectus (or in lieu thereof the notice referred to in Rule 173(a) of the Securities Act) is required by law to be delivered in connection with sales by an Underwriter or dealer, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus (or in lieu thereof the notice referred to in Rule 173(a) of the Securities Act) is delivered to a purchaser, not misleading, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Prospectus to comply with applicable law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to the dealers (whose names and addresses you will furnish to the Company) to which Shares may have been sold by you on behalf of the Underwriters and to any other dealers upon request, either amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus (or in lieu thereof the notice referred to in Rule 173(a) of the Securities Act) is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with applicable law.
(g) To endeavor to qualify the Shares for offer and sale under state or foreign securities laws of such jurisdictions as you shall reasonably request, provided that in connection therewith, the Company shall not be required to qualify to do business in any jurisdiction where it is not now so qualified or subject itself to taxation in any such jurisdiction where it is not now so subject.
(h) To make generally available to the Companys security holders and to you as soon as practicable an earnings statement (which need not be audited) satisfying the provisions of Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder (including, at the Companys option, Rule 158).
(i) To comply with all applicable securities and other laws, rules and regulations in each jurisdiction in which the Directed Shares are offered in connection with the Directed Share Program.
(j) If any Selling Shareholder is not a U.S. person for U.S. federal income tax purposes, the Company will deliver to each Underwriter (or its agent), on or before the Closing Date, (i) a certificate with respect to the Companys status as a United States real property holding corporation, dated not more than thirty (30) days prior to the Closing Date, as described in Treasury Regulations Sections 1.897-2(h) and 1.1445-2(c)(3), and (ii) proof of delivery to the IRS of the required notice, as described in Treasury Regulations 1.897-2(h)(2).
8. Covenants of the Selling Shareholders . Each Selling Shareholder, severally and not jointly, covenants with each Underwriter it will deliver to each
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Underwriter (or its agent), prior to or at the Closing Date, a properly completed and executed Internal Revenue Service ( IRS ) Form W-9 or an IRS Form W-8, as appropriate, together with all required attachments to such form.
9. Expenses . Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, the Company agrees to pay or cause to be paid all expenses incident to the performance of its obligations under this Agreement, including: (i) the fees, disbursements and expenses of the Companys counsel, the Companys accountants and counsel for the Selling Shareholders in connection with the registration and delivery of the Shares under the Securities Act and all other fees or expenses in connection with the preparation and filing of the Registration Statement, any preliminary prospectus, the Time of Sale Prospectus, the Prospectus, any free writing prospectus prepared by or on behalf of, used by, or referred to by the Company and amendments and supplements to any of the foregoing, including all printing costs associated therewith, and the mailing and delivering of copies thereof to the Underwriters and dealers, in the quantities hereinabove specified, (ii) all costs and expenses related to the transfer and delivery of the Shares to the Underwriters, including any transfer or other taxes payable thereon, (iii) the cost of printing or producing any Blue Sky or World Sky memorandum in connection with the offer and sale of the Shares under state securities laws and all expenses in connection with the qualification of the Shares for offer and sale under state or foreign jurisdictions securities laws as provided in Section 7(g) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in an amount not to exceed $15,000, in the aggregate, connection with such qualification and in connection with the Blue Sky or World Sky memorandum, (iv) all filing fees and the reasonable fees and disbursements of counsel to the Underwriters in an amount (in the case of reimbursable fees and disbursements of counsel to the Underwriters) not to exceed $50,000 in the aggregate, incurred in connection with the review and qualification of the offering of the Shares by FINRA, (v) all fees and expenses in connection with the preparation and filing of the registration statement on Form 8-A relating to the Common Stock and all costs and expenses incident to listing the Shares on the New York Stock Exchange, (vi) the cost of printing certificates representing the Shares, (vii) the costs and charges of any transfer agent, registrar or depositary, (viii) the costs and expenses of the Company relating to investor presentations on any road show undertaken in connection with the marketing of the offering of the Shares, provided, however, that 50% of the cost of any aircraft chartered in connection with the road show shall be paid by the Underwriters, (ix) the document production charges and expenses associated with printing this Agreement, (x) all fees and disbursements of counsel incurred by the Underwriters in connection with the Directed Share Program and stamp duties, similar taxes or duties or other taxes, if any, incurred by the Underwriters in connection with the Directed Share Program and (xi) all other costs and expenses incident to the performance of the obligations of the Company and the Selling Shareholders hereunder for which provision is not otherwise made in this Section. In connection with the preceding sentence, the Underwriters agree to timely and properly pay the New York state stock transfer tax, and the Selling Shareholders agree to reimburse the Underwriters for associated carrying costs if such tax payment is not rebated on the day of payment and for any portion of such tax payment not rebated. It is understood, however, that except as provided in this Section, Section 11 entitled
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Indemnity and Contribution, Section 12 entitled Directed Share Program Indemnification and the last paragraph of Section 14 below, the Underwriters will pay all of their costs and expenses, including fees and disbursements of their counsel, stock transfer taxes payable on resale of any of the Shares by them and any advertising expenses connected with any offers they may make.
The provisions of this Section shall not supersede or otherwise affect any agreement that the Company and the Selling Shareholders may otherwise have for the allocation of such expenses among themselves.
10. Covenants of the Underwriters . Each Underwriter severally covenants with the Company not to take any action that would result in the Company being required to file with the Commission under Rule 433(d) a free writing prospectus prepared by or on behalf of such Underwriter that otherwise would not be required to be filed by the Company thereunder, but for the action of the Underwriter.
11. Indemnity and Contribution . (a) The Company agrees to indemnify and hold harmless each Underwriter, its officers and directors, each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, and each affiliate of any Underwriter within the meaning of Rule 405 under the Securities Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus, the Time of Sale Prospectus or any amendment or supplement thereto, any issuer free writing prospectus as defined in Rule 433(h) under the Securities Act, any Company information that the Company has filed, or is required to file, pursuant to Rule 433(d) under the Securities Act, any road show as defined in Rule 433(h) under the Securities Act (a road show), or the Prospectus or any amendment or supplement thereto, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein.
(b) The Selling Shareholder agrees to indemnify and hold harmless each Underwriter, its officers and directors, each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, and each affiliate of any Underwriter within the meaning of Rule 405 under the Securities Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus, the Time of Sale Prospectus or any amendment or supplement thereto, any issuer free writing
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prospectus as defined in Rule 433(h) under the Securities Act, any Company information that the Company has filed, or is required to file, pursuant to Rule 433(d) under the Securities Act, any road show, or the Prospectus or any amendment or supplement thereto, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent (and only to the extent) that such untrue statement or omission or alleged untrue statement or omission was made in the Registration Statement or any amendment thereof, any preliminary prospectus, the Time of Sale Prospectus or any amendment or supplement thereto, any issuer free writing prospectus, or the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with information furnished to the Company in writing by the Selling Shareholder expressly for use therein; and except insofar as such losses, claims, damages or liabilities arise out of or are based upon any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. The liability of each Selling Shareholder under the indemnity agreement contained in this paragraph shall be limited to an amount equal to the net proceeds received by such Selling Shareholder from the sale of its Shares under this Agreement.
(c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, the Selling Shareholders, the directors of the Company, the officers of the Company who sign the Registration Statement and each person, if any, who controls the Company or any Selling Shareholder within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus, the Time of Sale Prospectus or any amendment or supplement thereto, any issuer free writing prospectus as defined in Rule 433(h) under the Securities Act, any Company information that the Company has filed, or is required to file, pursuant to Rule 433(d) under the Securities Act, any road show or the Prospectus or any amendment or supplement thereto, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only with reference to information relating to such Underwriter furnished to the Company in writing by such Underwriter through you expressly for use in the Registration Statement, any preliminary prospectus, the Time of Sale Prospectus, any issuer free writing prospectus, road show, or the Prospectus or any amendment or supplement thereto.
(d) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to Section 11(a), 11(b) or 11(c), such person (the indemnified party ) shall promptly notify the person against whom such indemnity may be sought (the indemnifying party ) in writing and the indemnifying party shall be entitled to participate in such proceeding and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to
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such indemnified party, and, except as provided in the following sentence, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them, (iii) the indemnifying party has failed within a reasonable time to retain counsel reasonably satisfactory to the indemnified party or (iv) the indemnified party shall have reasonably concluded there may be legal defenses available to it that are different from or additional to those available to the indemnifying party. It is understood that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for (i) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Underwriters and all persons, if any, who control any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act or who are affiliates of any Underwriter within the meaning of Rule 405 under the Securities Act, (ii) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either such Section and (iii) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Selling Shareholders and all persons, if any, who control any Selling Shareholder within the meaning of either such Section, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Underwriters and such control persons and affiliates of any Underwriters, such firm shall be designated in writing by the Representatives. In the case of any such separate firm for the Company, and such directors, officers and control persons of the Company, such firm shall be designated in writing by the Company. In the case of any such separate firm for the Selling Shareholders and such control persons of any Selling Shareholders, such firm shall be designated in writing by the Selling Shareholders. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 60 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed
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the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement (x) includes an unconditional release of such indemnified party, in form and substance reasonably satisfactory to such indemnified party, from all liability on claims that are the subject matter of such proceeding and (y) does not include any statement as to or admission of fault, culpability or failure to act by or on behalf of any indemnified party.
(e) To the extent the indemnification provided for in Section 11(a), 11(b) or 11(c) is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party or parties on the other hand from the offering of the Shares or (ii) if the allocation provided by clause 11(e)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 11(e)(i) above but also the relative fault of the indemnifying party or parties on the one hand and of the indemnified party or parties on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Shareholders on the one hand and the Underwriters on the other hand in connection with the offering of the Shares shall be deemed to be in the same respective proportions as the net proceeds from the offering of the Shares (before deducting expenses) received by each Selling Shareholder and the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover of the Prospectus, bear to the aggregate Public Offering Price of the Shares. The relative fault of the Company and the Selling Shareholders on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Shareholders or by the Underwriters and the parties relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Underwriters respective obligations to contribute pursuant to this Section 11 are several in proportion to the respective number of Shares they have purchased hereunder, and not joint. The liability of each Selling Shareholder under the contribution agreement contained in this paragraph shall be limited to an amount equal to the aggregate Public Offering Price of the Shares sold by such Selling Shareholder under this Agreement
(f) The Company and the Selling Shareholders and the Underwriters agree that it would not be just or equitable if contribution pursuant to this Section 11 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the
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equitable considerations referred to in Section 11(e). The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in Section 11(e) shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 11, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 11 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity.
(g) The indemnity and contribution provisions contained in this Section 11 and the representations, warranties and other statements of the Company and the Selling Shareholders contained in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Underwriter, any person controlling any Underwriter or any affiliate of any Underwriter, any Selling Shareholder or any person controlling any Selling Shareholder, or the Company, its officers or directors or any person controlling the Company and (iii) acceptance of and payment for any of the Shares.
12. Directed Share Program Indemnification . (a) The Company agrees to indemnify and hold harmless Morgan Stanley, each person, if any, who controls Morgan Stanley within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act and each affiliate of Morgan Stanley within the meaning of Rule 405 of the Securities Act ( Morgan Stanley Entities ) from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) (i) caused by any untrue statement or alleged untrue statement of a material fact contained in any material prepared by or with the consent of the Company for distribution to Participants in connection with the Directed Share Program or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) caused by the failure of any Participant to pay for and accept delivery of Directed Shares that the Participant agreed to purchase; or (iii) related to, arising out of, or in connection with the Directed Share Program, other than losses, claims, damages or liabilities (or expenses relating thereto) that are finally judicially determined to have resulted from the bad faith or gross negligence of Morgan Stanley Entities.
(b) In case any proceeding (including any governmental investigation) shall be instituted involving any Morgan Stanley Entity in respect of which indemnity may be sought pursuant to Section 12(a), the Morgan Stanley Entity seeking indemnity, shall promptly notify the Company in writing and the Company shall be entitled to participate
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in such proceeding and, to the extent that it shall wish, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and except as provided in the following sentence, after notice from the Company to the Morgan Stanley Entity of its election so to assume the defense thereof, the Company shall not be liable to the Morgan Stanley Entity under such subsection for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by the Morgan Stanley Entity, in connection with the defense thereof other than reasonable costs of investigation. In any such proceeding, any Morgan Stanley Entity shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Morgan Stanley Entity unless (i) the Company and the Morgan Stanley Entity shall have mutually agreed to the retention of such counsel, (ii) the named parties to any such proceeding (including any impleaded parties) include both the Company and the Morgan Stanley Entity and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them, (iii) the Company has failed within a reasonable time to retain counsel reasonably satisfactory to the Morgan Stanley Entity or (iv) the Morgan Stanley Entity shall have reasonably concluded there may be legal defenses available to it that are different from or additional to those available to the Company. The Company shall not, in respect of the legal expenses of the Morgan Stanley Entities in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all Morgan Stanley Entities. Any such separate firm for the Morgan Stanley Entities shall be designated in writing by Morgan Stanley. The Company shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the Company agrees to indemnify the Morgan Stanley Entities from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time a Morgan Stanley Entity shall have requested the Company to reimburse it for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the Company agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 60 days after receipt by the Company of the aforesaid request and (ii) the Company shall not have reimbursed the Morgan Stanley Entity in accordance with such request prior to the date of such settlement. The Company shall not, without the prior written consent of Morgan Stanley, effect any settlement of any pending or threatened proceeding in respect of which any Morgan Stanley Entity is or could have been a party and indemnity could have been sought hereunder by such Morgan Stanley Entity, unless such settlement (x) includes an unconditional release of the Morgan Stanley Entities from all liability on claims that are the subject matter of such proceeding and (y) does not include any statement as to or admission of fault, culpability or failure to act by or on behalf of any Morgan Stanley Entity.
(c) To the extent the indemnification provided for in Section 12(a) is unavailable to a Morgan Stanley Entity or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then the Company in lieu of indemnifying the Morgan Stanley Entity thereunder, shall contribute to the amount paid or payable by the Morgan Stanley Entity as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on
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the one hand and the Morgan Stanley Entities on the other hand from the offering of the Directed Shares or (ii) if the allocation provided by clause 12(c)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 12(c)(i) above but also the relative fault of the Company on the one hand and of the Morgan Stanley Entities on the other hand in connection with any statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Morgan Stanley Entities on the other hand in connection with the offering of the Directed Shares shall be deemed to be in the same respective proportions as the net proceeds from the offering of the Directed Shares (before deducting expenses) and the total underwriting discounts and commissions received by the Morgan Stanley Entities for the Directed Shares, bear to the aggregate Public Offering Price of the Directed Shares. If the loss, claim, damage or liability is caused by an untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact, the relative fault of the Company on the one hand and the Morgan Stanley Entities on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement or the omission or alleged omission relates to information supplied by the Company or by the Morgan Stanley Entities and the parties relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.
(d) The Company and the Morgan Stanley Entities agree that it would not be just or equitable if contribution pursuant to this Section 12 were determined by pro rata allocation (even if the Morgan Stanley Entities were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in Section 12(c). The amount paid or payable by the Morgan Stanley Entities as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by the Morgan Stanley Entities in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 12, no Morgan Stanley Entity shall be required to contribute any amount in excess of the amount by which the total price at which the Directed Shares distributed to the public were offered to the public exceeds the amount of any damages that such Morgan Stanley Entity has otherwise been required to pay. The remedies provided for in this Section 12 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity.
The indemnity and contribution provisions contained in this Section 12 shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Morgan Stanley Entity or the Company, its officers or directors or any person controlling the Company and (iii) acceptance of and payment for any of the Directed Shares.
13. Termination . The Underwriters may terminate this Agreement by notice given by you to the Company and the Selling Shareholders, if after the execution and delivery of this Agreement and prior to the Closing Date (i) trading generally shall have
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been suspended or materially limited on, or by, as the case may be, any of the New York Stock Exchange or the NASDAQ Global Market, (ii) trading of any securities of the Company shall have been suspended on any national exchange, (iii) a material disruption in securities settlement, payment or clearance services in the United States shall have occurred, (iv) any moratorium on commercial banking activities shall have been declared by Federal, New York State or Commonwealth of Pennsylvania authorities or (v) there shall have occurred any outbreak or escalation of hostilities, or any change in financial markets, or any calamity or crisis that, in your judgment, is material and adverse and which, singly or together with any other event specified in this clause (v), makes it, in the Representatives judgment, impracticable or inadvisable to proceed with the offer, sale or delivery of the Shares on the terms and in the manner contemplated in the Time of Sale Prospectus or the Prospectus.
14. Effectiveness; Defaulting Underwriters . This Agreement shall become effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or an Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares that it has or they have agreed to purchase hereunder on such date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of the Shares to be purchased on such date, the other Underwriters shall be obligated severally in the proportions that the number of Firm Shares set forth opposite their respective names in Schedule II bears to the aggregate number of Firm Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as you may specify, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; provided that in no event shall the number of Shares that any Underwriter has agreed to purchase pursuant to this Agreement be increased pursuant to this Section 14 by an amount in excess of one-ninth of such number of Shares without the written consent of such Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Firm Shares to be purchased on such date, and arrangements satisfactory to you, the Company and the Selling Shareholders for the purchase of such Firm Shares are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter, the Company or the Selling Shareholders. In any such case either you or the relevant Selling Shareholders shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement, in the Time of Sale Prospectus, in the Prospectus or in any other documents or arrangements may be effected. If, on an Option Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Additional Shares and the aggregate number of Additional Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Additional Shares to be purchased on such Option Closing Date, the non-defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase the Additional Shares to be sold on such Option Closing Date or (ii) purchase not less than the number of Additional Shares that
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such non-defaulting Underwriters would have been obligated to purchase in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of them, because of any failure or refusal on the part of the Company or any Selling Shareholder to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason the Company or any Selling Shareholder shall be unable to perform its obligations under this Agreement which, for the purposes of this Section 14, shall not include termination by the Underwriters under clauses (i), (iii), (iv) or (v) of Section 13, the Company and the Selling Shareholders will reimburse the Underwriters or such Underwriters as have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses (including the reasonable fees and disbursements of their counsel) reasonably incurred by such Underwriters in connection with this Agreement or the offering contemplated hereunder.
15. Entire Agreement . (a) This Agreement, together with any contemporaneous written agreements and any prior written agreements (to the extent not superseded by this Agreement) that relate to the offering of the Shares, represents the entire agreement between the Company and the Selling Shareholders, on the one hand, and the Underwriters, on the other, with respect to the preparation of any preliminary prospectus, the Time of Sale Prospectus, the Prospectus, the conduct of the offering, and the purchase and sale of the Shares.
(b) The Company acknowledges that in connection with the offering of the Shares: (i) the Underwriters have acted at arms length, are not agents of, and owe no fiduciary duties to, the Company or any other person, (ii) the Underwriters owe the Company only those duties and obligations set forth in this Agreement and prior written agreements (to the extent not superseded by this Agreement), if any, and (iii) the Underwriters may have interests that differ from those of the Company. The Company waives to the full extent permitted by applicable law any claims it may have against the Underwriters arising from an alleged breach of fiduciary duty in connection with the offering of the Shares.
16. Counterparts . This Agreement may be signed in two or more counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
17. Applicable Law . This Agreement and any claim, controversy or dispute arising under or related to this Agreement shall be governed by and construed in accordance with the internal laws of the State of New York.
18. Submission to Jurisdiction; Appointment of Agent for Service . RBSH hereby irrevocably submits to the exclusive jurisdiction of the U.S. Federal and state courts in the Borough of Manhattan in The City of New York (each, a New York Court ) in any suit or proceeding arising out of or relating to this Agreement, the Time
31
of Sale Prospectus, the Prospectus, the Registration Statement, the offering of the Shares or any transactions contemplated hereby. RBSH irrevocably and unconditionally waives any objection to the laying of venue of any such suit or proceeding arising out of or relating to this Agreement, the Time of Sale Prospectus, the Prospectus, the Registration Statement, the offering of the Shares or any transactions contemplated hereby in a New York Court, and irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such suit or proceeding in any such court has been brought in an inconvenient forum. RBSH irrevocably appoints RBS CBFM North America Corporation, located at 340 Madison Avenue, New York, NY 10173, as its authorized agent (the Authorized Agent ) in the Borough of Manhattan in The City of New York upon which process may be served in any such suit or proceeding, and agrees that service of process in any manner permitted by applicable law upon such agent shall be deemed in every respect effective service of process upon RBSH in any such suit or proceeding. RBSH further agrees to take any and all action as may be necessary to maintain such designation and appointment of such agent in full force and effect for a period of ten years from the date of this Agreement. The Company and each Selling Shareholder and each Underwriter irrevocably waives, to the fullest extent permitted by law, any and all rights to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.
19. Headings . The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed a part of this Agreement.
20. Notices. All communications hereunder shall be in writing and effective only upon receipt and if to the Underwriters shall be delivered, mailed or sent to you in care of (a) Morgan Stanley & Co. LLC, 1585 Broadway, New York, New York 10036, Attention: Equity Syndicate Desk, with a copy to the Legal Department, (b) Goldman, Sachs & Co., Prospectus Department, 200 West Street, New York, New York 10282 (Tel: (866) 471-2526, Fax: (212) 902 9316, Email: prospectus-ny@ny.email.gs.com) and (c) J.P. Morgan Securities LLC, 383 Madison Avenue, New York, New York 10179 (Fax: (212) 622-358), Attention: Equity Syndicate Desk; if to the Company shall be delivered, mailed or sent to Law Department, 28 State Street, 13th Floor, Boston, MA 02109, Attention: General Counsel, if to the Selling Shareholders shall be delivered, mailed or sent to Business House G, First Floor, RBS Gogarburn, PO Box 1000, Edinburgh EH12 1HQ, Scotland, Attention: Group General Counsel, with a copy to General Counsel, Corporate / M&A.
Very truly yours, | ||
Citizens Financial Group, Inc. | ||
By: |
|
|
Name: | ||
Title: |
32
RBSG International Holdings Limited | ||
By: |
|
|
Name: | ||
Title: | ||
RBS CBFM North America Corporation | ||
By: |
|
|
Name: | ||
Title: |
33
Accepted as of the date hereof
34
SCHEDULE I
Selling Shareholder |
Number of Firm Shares
To Be Sold |
|||
RBSG International Holdings Limited |
[ | ] | ||
RBS CBFM North America Corporation |
[ | ] | ||
|
|
|||
Total: |
[ | ] | ||
|
|
Sch I-1
SCHEDULE II
Underwriter |
Number of Firm Shares
To Be Purchased |
|||
Morgan Stanley & Co. LLC |
[ | ] | ||
Goldman, Sachs & Co. |
[ | ] | ||
J.P. Morgan Securities LLC |
[ | ] | ||
Barclays Capital Inc. |
[ | ] | ||
Citigroup Global Markets Inc. |
[ | ] | ||
Deutsche Bank Securities Inc. |
[ | ] | ||
RBS Securities Inc. |
[ | ] | ||
Wells Fargo Securities, LLC |
[ | ] | ||
Credit Suisse Securities (USA) LLC |
[ | ] | ||
UBS Securities LLC |
[ | ] | ||
Jefferies LLC |
[ | ] | ||
Keefe, Bruyette & Woods, Inc. |
[ | ] | ||
Oppenheimer & Co. Inc. |
[ | ] | ||
RBC Capital Markets, LLC |
[ | ] | ||
Sandler ONeill & Partners, L.P. |
[ | ] | ||
Evercore Group L.L.C. |
[ | ] | ||
ING Financial Markets LLC |
[ | ] | ||
Sanford C. Bernstein & Co., LLC |
[ | ] | ||
Guggenheim Securities, LLC |
[ | ] | ||
Lebenthal & Co., LLC |
[ | ] | ||
The Williams Capital Group, L.P. |
[ | ] | ||
|
|
|||
Total: |
[ | ] | ||
|
|
Sch II-1
SCHEDULE III
A. Time of Sale Prospectus
1. | Preliminary Prospectus issued [date] |
2. | [Price per share and size of offering] |
B. Free Writing Prospectus
1. | Free Writing Prospectus issued filed by the Company under Rule 433(d) of the Securities Act on May 16, 2014 |
Sch III-1
SCHEDULE IV
Significant Subsidiaries
Sch IV-1
SCHEDULE V
Officers and Directors
Sch V-1
EXHIBIT A
[FORM OF LOCK-UP LETTER]
[ ], 2014
Morgan Stanley & Co. LLC
Goldman, Sachs & Co.
J.P. Morgan Securities LLC
c/o | Morgan Stanley & Co. LLC |
1585 Broadway
New York, New York 10036
Goldman, Sachs & Co.
200 West Street
New York, New York 10282
J.P. Morgan Securities LLC
383 Madison Avenue
New York, New York 10179
Ladies and Gentlemen:
The undersigned understands that Morgan Stanley & Co. LLC ( Morgan Stanley ), Goldman, Sachs & Co. ( Goldman Sachs ) and J.P. Morgan Securities LLC ( J.P. Morgan , and together with Morgan Stanley and Goldman Sachs, the Representatives ) propose to enter into an Underwriting Agreement (the Underwriting Agreement ) with Citizens Financial Group, Inc., a Delaware corporation (the Company ) and the Selling Shareholders (as defined in the Underwriting Agreement), providing for the public offering (the Public Offering ) by the several Underwriters, including Morgan Stanley, Goldman Sachs and J.P. Morgan (the Underwriters ), of 140,000,000 shares (the Shares ) of the common stock, par value $0.01 per share of the Company (the Common Stock ).
To induce the Underwriters that may participate in the Public Offering to continue their efforts in connection with the Public Offering, the undersigned hereby agrees that, without the prior written consent of the Representatives on behalf of the Underwriters, it will not, during the period commencing on the date hereof and ending 180 days after the date of the final prospectus (the Restricted Period ) relating to the Public Offering (the Prospectus ), (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock beneficially owned (as such term is used in Rule 13d-3 of the Securities
Ex A-1
Exchange Act of 1934, as amended (the Exchange Act )), by the undersigned or any other securities so owned convertible into or exercisable or exchangeable for shares of Common Stock or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the shares of Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of shares of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (a) transactions relating to shares of Common Stock or other securities acquired in open market transactions after the completion of the Public Offering, (b) if the undersigned is a corporation, partnership, limited liability company or other business entity, a disposition, transfer or distribution of shares of Common Stock or any security convertible into or exchange or exercisable for shares of Common Stock to its affiliates, limited or general partners, members, shareholders or other equity holders of the undersigned, (c) if the undersigned is an individual, transfers of shares of Common Stock or any security convertible into or exercisable or exchangeable for shares of Common Stock by gift to immediate family members of the undersigned or to a trust the beneficiaries of which are exclusively the undersigned or immediate family members of the undersigned or as a bona fide gift, (d) if the undersigned is an individual, transfers of shares of Common Stock or any security convertible into or exchange or exercisable for shares of Common Stock by will or intestacy, (e) transfers to the Company, as permitted or required under any benefit plans or the Companys certificate of incorporation or bylaws in connection with the repurchase or forfeiture of shares of Common Stock or any security convertible into or exchangeable or exercisable for shares of Common Stock issued pursuant to any benefit plans as in effect on the date of the final prospectus relating to the Public Offering or pursuant to the agreements pursuant to which such shares of Common Stock were issued, as in effect in all material respects on the date the final prospectus relating to the Public Offering, (f) the exercise of options, stock appreciation rights or warrants to purchase shares of Common Stock or the vesting, conversion, exchange, settlement or delivery of shares of Common Stock in connection with any other equity-based awards pursuant to any benefit plans on the terms of such plans as described in the final prospectus relating to the Public Offering, (g) one or more sales of shares of Common Stock, or net share settlement, to satisfy tax withholding or similar obligations in connection with the vesting of any equity-based awards vesting within or within 30 days before the Restricted Period, or (h) the establishment of a trading plan pursuant to Rule 10b5-1 under the Exchange Act for the transfer, sale or any other disposition of shares of Common Stock; provided that (A) in the case of any transfer or distribution pursuant to clauses (b) and (c) above, each donee, distribute or pledgee shall sign and deliver a lock-up letter substantially in the form of this letter, (B) in the case of clause (f) above, that any shares of Common Stock received upon such exercise, vesting, conversion, exchange or settlement shall be subject to all of the restrictions set forth in this agreement, (C) in the case of clause (h) above such plan does not provide for the transfer of shares of Common Stock during the Restricted Period (other than as permitted under clause (g) above) and, (D) any filing or announcement by the Company or the undersigned relating to a transfer or distribution under clauses (a), (b), (c), (g) or (h) above shall briefly note the applicable circumstances that cause such clause to apply and explain that the filing or announcement relates solely to transfers or distributions falling within the category described in the relevant clause
Ex A-2
(including, in the case of clause (h) a statement to the effect that no transfer of shares of Common Stock may be made under such plan during the Restricted Period (other than as permitted under clause (g) above). In addition, the undersigned agrees that, without the prior written consent of the Representatives on behalf of the Underwriters, it will not, during the Restricted Period, make any demand for or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for shares of Common Stock that is publicly disclosed (or required to be publicly disclosed) by the undersigned or any of its affiliates prior to the expiration of the Lock-Up Period. For the avoidance of doubt, the foregoing sentence shall not be taken to prohibit the preparation, execution or filing of registration statement(s) on Form(s) S-8 to register shares issued or issuable pursuant to the Companys compensation and/or equity plans.
Notwithstanding the foregoing, (i) the undersigned shall be permitted to make transfers, sales, tenders or other dispositions of undersigneds shares of Common Stock or any security convertible into or exercisable or exchangeable for shares of Common Stock to a bona-fide third party pursuant to (x) a tender or exchange offer for securities of the Company or (y) another transaction, including, without limitation, a merger, consolidation or other business combination, in each case (under clause (x) or (y)) that results in a change in control (including, without limitation, entering into any lock-up, voting or similar agreement pursuant to which the undersigned may agree to transfer, sell, tender or otherwise dispose of the undersigneds shares of Common Stock or any security convertible into or exchange or exercisable for shares of Common Stock in connection with any such transaction, or vote any of the undersigneds shares of Common Stock or any security convertible into or exchange or exercisable for shares of Common Stock in favor of any such transaction), provided that all of the undersigneds shares of Common Stock or any security convertible into or exchange or exercisable for shares of Common Stock subject to this agreement that are not so transferred, sold, tendered or otherwise disposed of remain subject to this agreement; and provided , further , that it shall be a condition of transfer, sale, tender or other disposition that if such tender offer or other transaction is not completed, any of the undersigneds shares of Common Stock or any security convertible into or exchange or exercisable for shares of Common Stock subject to this agreement shall remain subject to the restrictions herein and (ii) nothing in this agreement shall prevent the undersigned from making a demand for, or exercising any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for shares of Common Stock, except for any such demand or any such exercise that is publicly disclosed (or required to be publicly disclosed) by the undersigned or any of its affiliates prior to the expiration of the Lock-Up Period; provided that in no event shall the Company be required or permitted to file a registration statement pursuant to such demand or such exercise prior to the expiration of the Lock-Up Period without the prior written consent of the Representatives on behalf of the Underwriters.
The undersigned also agrees and consents to the entry of stop transfer instructions with the Companys transfer agent and registrar against the transfer of the undersigneds shares of Common Stock except in compliance with the foregoing restrictions.
Ex A-3
If the undersigned is an officer or director of the Company, the undersigned further agrees that the foregoing provisions shall be equally applicable to any issuer-directed Shares the undersigned may purchase in the offering.
If the undersigned is an officer or director of the Company, (i) the Representatives agree that, at least three business days before the effective date of any release or waiver of the foregoing restrictions in connection with a transfer of shares of Common Stock, they will notify the Company of the impending release or waiver, and (ii) the Company has agreed in the Underwriting Agreement to announce the impending release or waiver by press release through a major news service at least two business days before the effective date of the release or waiver. Any release or waiver granted by the Representatives hereunder to any such officer or director shall only be effective two business days after the publication date of such press release. The provisions of this paragraph will not apply if (a) the release or waiver is effected solely to permit a transfer not for consideration and (b) the transferee has agreed in writing to be bound by the same terms described in this letter to the extent and for the duration that such terms remain in effect at the time of the transfer.
If:
(1) during the last 17 days of the Restricted Period the Company issues an earnings release or material news or a material event relating to the Company occurs; or
(2) prior to the expiration of the Restricted Period, the Company announces that it will release earnings results during the 16-day period beginning on the last day of the Restricted Period;
the restrictions imposed by this agreement shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event. The undersigned hereby acknowledges that the Company has agreed in the Underwriting Agreement to provide written notice of any event that would result in an extension of the initial Restricted Period and agrees that any such notice properly delivered will be deemed to have been given to, and received by, the undersigned.
The undersigned shall not engage in any transaction that may be restricted by this agreement during the 34-day period beginning on the last day of the initial Restricted Period unless the undersigned requests and receives prior written confirmation from the Company or the Representatives that the restrictions imposed by this agreement have expired.
The undersigned understands that the Company and the Underwriters are relying upon this agreement in proceeding toward consummation of the Public Offering. The undersigned further understands that this agreement is irrevocable and shall be binding upon the undersigneds heirs, legal representatives, successors and assigns.
Ex A-4
Notwithstanding anything herein to the contrary, this agreement shall be of no further force or effect and the undersigned shall be released from all obligations under this agreement if (i) the closing of the Public Offering has not occurred on or prior to 5:00 p.m. New York City time on October 31, 2014, (ii) prior to the execution of the Underwriting Agreement by the parties thereto, either the Representatives, on the one hand, or the Company, on the other hand, notifies the other(s) in writing that it does not intend to proceed with the Public Offering, or (iii) the Underwriting Agreement (other than the provisions thereof which survive termination) shall terminate or be terminated prior to payment for and delivery of the shares of Common Stock to be sold thereunder.
Ex A-5
This agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to its conflict of law provisions.
Very truly yours, |
|
(Name) |
|
(Address) |
Ex A-6
EXHIBIT B
FORM OF WAIVER OF LOCK-UP
, 20
[Name and Address of
Officer or Director
Requesting Waiver]
Dear Mr./Ms. [Name]:
This letter is being delivered to you in connection with the offering (the Offering) by RBSG International Holdings Limited and RBS CBFM North America Corporation (the Selling Shareholders ) of 140,000,000 shares of common stock, $0.01 par value (the Common Stock ), of Citizens Financial Group, Inc. (the Company ) and the lock-up letter dated [ , 20 ] (the Lock-up Letter ), executed by you in connection with such offering, and your request for a [waiver] [release] dated [ ], with respect to [ ] shares of Common Stock (the Shares ).
Morgan Stanley & Co. LLC, Goldman, Sachs & Co. and J.P. Morgan Securities LLC hereby agree to [waive] [release] the transfer restrictions set forth in the Lock-up Letter, but only with respect to the Shares, effective [ ]; provided, however, that such [waiver] [release] is conditioned on the Company announcing the impending [waiver] [release] by press release through a major news service at least two business days before effectiveness of such [waiver] [release]. This letter will serve as notice to the Company and the Selling Shareholders of the impending [waiver] [release].
Ex B-1
Except as expressly [waived] [released] hereby, the Lock-up Letter shall remain in full force and effect.
cc: Company and Selling Shareholders
Ex B-2
FORM OF PRESS RELEASE
Citizens Financial Group, Inc.
[Date]
Citizens Financial Group, Inc. (the Company ) announced today that [ ], the lead book-running manager[s] in the recent public sale by RBSG International Holdings Limited and RBS CBFM North America Corporation of the shares of the Companys common stock [is][are] [waiving][releasing] a lock-up restriction with respect to shares of the Companys common stock held by [certain officers or directors] [an officer or director] of the Company. The [waiver][release] will take effect on , 20 , and the shares may be sold on or after such date.
This press release is not an offer for sale of the securities in the United States or in any other jurisdiction where such offer is prohibited, and such securities may not be offered or sold in the United States absent registration or an exemption from registration under the United States Securities Act of 1933, as amended.
Ex B-3
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CITIZENS FINANCIAL GROUP, INC.
Pursuant to the provisions of §242 and §245 of the
General Corporation Law of the State of Delaware
FIRST: The present name of the corporation is Citizens Financial Group, Inc. (the Corporation ). The date of filing of the original Certificate of Incorporation of the Corporation with the Secretary of State of the State of Delaware was November 21, 1984.
SECOND: The Amended and Restated Certificate of Incorporation of the Corporation is hereby amended in its entirety as set forth in the Amended and Restated Certificate of Incorporation hereinafter provided for (the Certificate of Incorporation ).
THIRD: The Certificate of Incorporation herein certified has been duly adopted by the stockholders in accordance with the provisions of §228, 242 and 245 of the General Corporation Law of the State of Delaware.
FOURTH: This Certificate shall become effective as of August 22, 2014 (the Effective Time ).
ARTICLE 1
N AME
Section 1.01. Name . The name of the corporation is Citizens Financial Group, Inc. (the Corporation ).
ARTICLE 2
R EGISTERED O FFICE AND A GENT
Section 2.01. Address and Name . The address of its registered office in the State of Delaware is 2711 Centerville Road, Ste. 400, City of Wilmington, County of New Castle, Delaware 19808. The name of its registered agent at such address is The Corporation Service Company.
ARTICLE 3
P URPOSE AND P OWERS
Section 3.01. Purpose and Powers . The purpose for which the Corporation is organized is to act as a bank holding company, to act as a savings and loan holding company, and to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended ( Delaware Law ).
ARTICLE 4
C APITAL S TOCK
Section 4.01. Authorized Shares .
(a) Classes of Stock . The total number of shares of stock that the Corporation shall have authority to issue is 1,100,000,000, consisting of 1,000,000,000 shares of Common Stock, par value $0.01 per share (the Common Stock ), and 100,000,000 shares of Preferred Stock, par value $25.00 per share (the Preferred Stock ).
Upon this Certificate of Incorporation becoming effective pursuant to Delaware Law at the Effective Time, each share of Common Stock of the Corporation issued immediately prior to the Effective Time will be reclassified into 165,582 issued, fully paid and nonassessable shares of Common Stock, without any action required on the part of the Corporation or the holders of such Common Stock. No fractional shares of Common Stock will be issued in connection with the reclassification of shares of Common Stock provided herein. In lieu of fractional shares, holders of such Common Stock will receive a cash payment equal to the fair value of such fractional shares, as determined in good faith by the Board of Directors of the Corporation (the Board of Directors ). From and after the Effective Time, stock certificates representing the Common Stock issued immediately prior to the Effective Time, if any, shall represent the number of whole shares of Common Stock into which such Common Stock shall have been reclassified pursuant to this Certificate of Incorporation.
(b) Preferred Stock . The Board of Directors is hereby empowered, without any action or vote by the Corporations stockholders (except as may otherwise be provided by the terms of any class or series of Preferred Stock then outstanding), to authorize by resolution or resolutions from time to time the issuance of one or more classes or series of Preferred Stock and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemptions, redemption prices and liquidation preferences with respect to each such class or series of Preferred Stock and the number of shares constituting each such class or series, and to increase or decrease the number of shares of any such class or series to the extent permitted by Delaware Law.
Section 4.02. Voting Rights . Each holder of Common Stock, as such, shall be entitled to one vote for each share of Common Stock held of record by such holder on all matters on which stockholders generally are entitled to vote; provided , however , that, except as otherwise required by law, holders of Common Stock, as such, shall not be entitled to vote on any amendment to this Certificate of Incorporation (including any certificate of designations relating to any class or series of Preferred Stock) that relates solely to the terms of one or more outstanding classes or series of Preferred Stock if the holders of such affected class or series are entitled, either separately or together with the holders of one or more other such classes or series, to vote thereon pursuant to this Certificate of Incorporation (including any certificate of designations relating to any class or series of Preferred Stock) or pursuant to Delaware Law.
2
Except as otherwise required by law, holders of any class or series of Preferred Stock, as such, shall be entitled only to such voting rights, if any, as shall expressly be granted thereto by this Certificate of Incorporation (including any certificate of designations relating to such series of Preferred Stock).
Section 4.03. Dividends and Distributions . Subject to applicable law and the rights, if any, of the holders of any outstanding class or series of Preferred Stock or any class or series of stock having a preference over or the right to participate with the Common Stock with respect to the payment of dividends and other distributions in cash, property of the Corporation or shares of stock of the Corporation, such dividends and other distributions may be declared and paid on the Common Stock out of the assets of the Corporation that are by law available therefor at such times and in such amounts as the Board of Directors in its discretion shall determine.
Section 4.04. Liquidation, Dissolution or Winding Up . In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, after payment or provision for payment of the debts and other liabilities of the Corporation and of the preferential and other amounts, if any, to which the holders of Preferred Stock shall be entitled, the holders of all outstanding shares of Common Stock shall be entitled to receive the remaining assets of the Corporation available for distribution ratably in proportion to the number of shares held by each such stockholder.
ARTICLE 5
B YLAWS
Section 5.01. Bylaws . The Board of Directors shall have the power to adopt, amend or repeal the bylaws of the Corporation (the Bylaws ).
ARTICLE 6
B OARD OF D IRECTORS
Section 6.01. Power of the Board of Directors . The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors.
Section 6.02. Number of Directors . The number of directors that shall constitute the Board of Directors shall, as of the Effective Time, consist of not less than five nor more than twenty-five persons. The exact number of directors that shall constitute the Board of Directors shall be fixed exclusively by one or more resolutions adopted from time to time solely by the affirmative vote of a majority of the Board of Directors.
Section 6.03. Election of Directors . There shall be no cumulative voting in the election of directors. Election of directors need not be by written ballot unless the Bylaws so provide.
3
Section 6.04. Vacancies . Vacancies on the Board of Directors resulting from death, resignation, removal or otherwise and newly created directorships resulting from any increase in the number of directors shall, except as otherwise required by law, be filled solely by a majority of the directors then in office (although less than a quorum) or by the sole remaining director, and each director so elected shall hold office until the next election of directors.
Section 6.05. Removal . Any director may be removed, with or without cause, by an affirmative vote of the holders of not less than a majority of the total voting power of all outstanding securities of the Corporation generally entitled to vote in the election of directors, voting together as a single class.
Section 6.06. Preferred Stock Directors . Notwithstanding anything else contained herein, whenever the holders of one or more classes or series of Preferred Stock shall have the right, voting separately as a class or series, to elect directors, the election, term of office, filling of vacancies, removal and other features of such directorships shall be governed by the terms of such class or series of Preferred Stock adopted by resolution or resolutions adopted by the Board of Directors pursuant to Section 4.01 hereto, and such directors so elected shall not be subject to the provisions of this Article 6 unless otherwise provided therein.
ARTICLE 7
M EETINGS OF S TOCKHOLDERS
Section 7.01. Annual Meetings . An annual meeting of stockholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held at such place, on such date, and at such time as the Board of Directors shall determine.
Section 7.02. Special Meetings . For so long as The Royal Bank of Scotland Group plc ( Parent ) continues to beneficially own, directly or indirectly, securities representing at least 50% of the total voting power of all the then outstanding securities of the Corporation entitled to vote generally in the election of directors, voting together as a single class, special meetings of the stockholders may be called by a majority of the total voting power of all the then outstanding securities of the Corporation entitled to vote generally in the election of directors, voting together as a single class. From and after the date on which Parent ceases to beneficially own, directly or indirectly, securities representing at least 50% of the total voting power of all the then outstanding securities of the Corporation entitled to vote generally in the election of directors, voting together as a single class, special meetings of the stockholders may be called only by or at the direction of the chairman of the Board of Directors, the chief executive officer of the Corporation or the Board of Directors acting pursuant to a resolution adopted by a majority of the Board of Directors. Notwithstanding the foregoing, whenever holders of one or more classes or series of Preferred Stock shall have the right, voting separately as a class or series, to elect directors, such holders may call, pursuant to the terms of such class or series of Preferred Stock adopted by resolution or resolutions of the Board of Directors pursuant to Section 4.01 hereto, special meetings of holders of such Preferred Stock.
4
Section 7.03. Action by Written Consent . For so long as Parent continues to beneficially own, directly or indirectly, securities representing at least 50% of the total voting power of all the then outstanding securities of the Corporation entitled to vote generally in the election of directors, voting together as a single class, any action required or permitted to be taken at any annual or special meeting of stockholders may be effected by written consent without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action to be so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all securities entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or to an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporations registered office shall be by hand or by certified or registered mail, return receipt requested. From and after the date on which Parent ceases to beneficially own, directly or indirectly, securities representing at least 50% of the total voting power of all the then outstanding securities of the Corporation entitled to vote generally in the election of directors, voting together as a single class, any action required or permitted to be taken at any annual or special meeting of stockholders may be effected only upon the vote of stockholders at an annual or special meeting duly noticed and called in accordance with Delaware Law, as amended from time to time, and this Article 7 and may not be taken by written consent of stockholders without a meeting. Notwithstanding the foregoing, holders of one or more classes or series of Preferred Stock may, to the extent permitted by and pursuant to the terms of such class or series of Preferred Stock adopted by resolution or resolutions of the Board of Directors pursuant to Section 4.01 hereto, take action by written consent.
ARTICLE 8
I NDEMNIFICATION
Section 8.01. Limited Liability . A director or officer of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director to the fullest extent permitted by Delaware Law. Neither the amendment nor the repeal of this Article 8 shall eliminate or reduce the effect thereof in respect of any state of facts existing or act or omission occurring, or any cause of action, suit or claim that, but for this Article 8, would accrue or arise, prior to such amendment or repeal.
Section 8.02. Right to Indemnification .
(a) Each person (and the heirs, executors or administrators of such person) who was or is a party or is threatened to be made a party to, or is involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director or
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officer of another corporation, partnership, joint venture, trust or other enterprise, shall be indemnified and held harmless by the Corporation to the fullest extent permitted by Delaware Law. The right to indemnification conferred in this Article 8 shall also include the right to be paid by the Corporation the expenses incurred in connection with any such proceeding in advance of its final disposition to the fullest extent authorized by Delaware Law.
(b) The Corporation may, by action of its Board of Directors, provide indemnification to such of the employees and agents of the Corporation to such extent and to such effect as the Board of Directors shall determine to be appropriate and authorized by Delaware Law.
Section 8.03. Insurance . The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss incurred by such person in any such capacity or arising out of such persons status as such, whether or not the Corporation would have the power to indemnify such person against such liability under Delaware Law.
Section 8.04. Nonexclusivity of Rights . The rights and authority conferred in this Article 8 shall not be exclusive of any other right that any person may otherwise have or hereafter acquire.
Section 8.05. Preservation of Rights . Neither the amendment nor repeal of this Article 8, nor the adoption of any provision of this Certificate of Incorporation or the Bylaws, nor, to the fullest extent permitted by Delaware Law, any modification of law, shall adversely affect any right or protection of any person granted pursuant hereto existing at, or arising out of or related to any event, act or omission that occurred prior to, the time of such amendment, repeal, adoption or modification (regardless of when any proceeding (or part thereof) relating to such event, act or omission arises or is first threatened, commenced or completed).
ARTICLE 9
M ISCELLANEOUS
Section 9.01. Certain Acknowledgement . In recognition and anticipation that (a) certain directors, principals, officers, employees and/or other representatives affiliated with Parent and its Affiliates (as defined below) may serve as directors, officers or agents of the Corporation and (b) Parent and its Affiliates may now engage and may continue to engage in the same or similar activities or related lines of business as those in which the Corporation, directly or indirectly, may engage and/or other business activities that overlap with or compete with those in which the Corporation, directly or indirectly, may engage, the provisions of this Article 9 are set forth to regulate and define the conduct of certain affairs of the Corporation with respect to certain classes or categories of business opportunities as they may involve any of Parent or its Affiliates and the powers, rights, duties and liabilities of the Corporation and its directors, officers and stockholders in connection therewith.
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Section 9.02. Competition and Corporate Opportunities; Renouncement . None of Parent or any of its Affiliates (the Persons (as defined below) identified above being referred to, collectively, as Identified Persons and, individually, as an Identified Person ) shall, to the fullest extent permitted by law or regulation, including the rules of any exchange on which the Companys securities are listed, have any duty to refrain from directly or indirectly (i) engaging in the same or similar business activities or lines of business in which the Corporation or any of its Affiliates now engages or proposes to engage or (ii) otherwise competing with the Corporation or any of its Affiliates, and, to the fullest extent permitted by law or regulation, including the rules of any exchange on which the Companys securities are listed, no Identified Person shall be liable to the Corporation or its stockholders or to any Affiliate of the Corporation for breach of any fiduciary duty solely by reason of the fact that such Identified Person engages in any such activities. To the fullest extent permitted by law or regulation, including the rules of any exchange on which the Companys securities are listed, the Corporation hereby renounces any interest or expectancy in, or right to be offered an opportunity to participate in, any business opportunity which may be a corporate opportunity for an Identified Person and the Corporation or any of its Affiliates, except as provided in Section 9.03 hereof. Subject to Section 9.03, in the event that any Identified Person acquires knowledge of a potential transaction or other business opportunity which may be a corporate opportunity for itself, herself or himself and the Corporation or any of its Affiliates, such Identified Person shall, to the fullest extent permitted by law or regulation, including the rules of any exchange on which the Companys securities are listed, have no duty to communicate or offer such transaction or other business opportunity to the Corporation or any of its Affiliates and, to the fullest extent permitted by law or regulation, including the rules of any exchange on which the Companys securities are listed, shall not be liable to the Corporation or its stockholders or to any Affiliate of the Corporation for breach of any fiduciary duty as a stockholder, director or officer of the Corporation solely by reason of the fact that such Identified Person pursues or acquires such corporate opportunity for itself, herself or himself, or offers or directs such corporate opportunity to another Person or does not provide notice of such corporate opportunity to the Corporation.
Section 9.03. Allocation of Corporate Opportunities . The Corporation does not renounce its interest in any corporate opportunity offered to any director affiliated with Parent if such opportunity is offered to such person in his or her capacity as a director or officer of the Corporation, and the provisions of Section 9.02 hereof shall not apply to any such corporate opportunity.
Section 9.04. Certain Matters Deemed Not Corporate Opportunities . In addition to and notwithstanding the foregoing provisions of this Article 9, a corporate opportunity shall not be deemed to be a potential corporate opportunity for the Corporation if it is a business opportunity that (a) the Corporation is neither financially or legally able, nor contractually permitted to undertake, (b) from its nature, is not in the line of the Corporations business or is of no practical advantage to the Corporation or (c)is one in which the Corporation has no interest or reasonable expectancy.
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Section 9.05. Certain Definitions . For purposes of this Article 9, (a) Affiliate shall mean (i) in respect of Parent, any Person that, directly or indirectly, is controlled by Parent, controls Parent or is under common control with Parent and shall include any principal, member, director, partner, stockholder, officer, employee or other representative of any of the foregoing (other than the Corporation and any entity that is controlled by the Corporation) and (ii) in respect of the Corporation, any Person that, directly or indirectly, is controlled by the Corporation; and (b) Person shall mean any individual, corporation, general or limited partnership, limited liability company, joint venture, trust, association or any other entity.
Section 9.06. Notice of this Article . To the fullest extent permitted by law or regulation, including the rules of any exchange on which the Companys securities are listed, any Person purchasing or otherwise acquiring any interest in any shares of capital stock of the Corporation shall be deemed to have notice of and to have consented to the provisions of this Article 9.
ARTICLE 10
S EVERABILITY
Section 10.01. Severability . If any provision or provisions of this Certificate of Incorporation shall be held to be invalid, illegal or unenforceable as applied to any circumstance for any reason whatsoever, the validity, legality and enforceability of such provisions in any other circumstance and of the remaining provisions of this Certificate of Incorporation (including, without limitation, each portion of any paragraph of this Certificate of Incorporation containing any such provision held to be invalid, illegal or unenforceable that is not itself held to be invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby.
ARTICLE 11
F ORUM
Section 11.01. Forum . Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall, to the fullest extent permitted by law or regulation, including the rules of any exchange on which the Companys securities are listed, be the sole and exclusive forum for (a) any derivative action or proceeding brought on behalf of the Corporation, (b) any action asserting a claim of breach of a fiduciary duty owed by any director, officer, or other employee of the Corporation to the Corporation or the Corporations stockholders, (c) any action asserting a claim arising pursuant to any provision of the Delaware Law, this Certificate of Incorporation (as it may be amended or restated) or the Bylaws or (d) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Article 11.
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ARTICLE 12
A MENDMENTS
Section 12.01. Amendments . The Corporation reserves the right to amend this Certificate of Incorporation in any manner permitted by the Delaware Law and all rights and powers conferred upon stockholders, directors and officers herein are granted subject to this reservation. Notwithstanding the foregoing, from and after the date on which Parent ceases to beneficially own, directly or indirectly, securities representing at least 50% of the total voting power of all the then outstanding securities of the Corporation entitled to vote generally in the election of directors, voting together as a single class, the provisions set forth in Section 4.02 and Articles 6, 7, 8, 9 and Article 12 may not be repealed or amended in any respect, and no other provision may be adopted, amended or repealed which would have the effect of modifying or permitting the circumvention of the provisions set forth in any of Section 4.02 and Articles 6, 7, 8, 9 and 12, unless such action is approved by the affirmative vote of the holders of not less than 75% of the total voting power of all outstanding securities of the Corporation generally entitled to vote in the election of directors, voting together as a single class.
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IN WITNESS WHEREOF, the undersigned has executed this Certificate of Incorporation this 22nd day of August, 2014.
CITIZENS FINANCIAL GROUP, INC. | ||||
By: | /s/ Robin S. Elkowitz | |||
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Name: | Robin S. Elkowitz | |||
Title: | Executive Vice President & Secretary |
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Exhibit 3.2
BYLAWS
OF
CITIZENS FINANCIAL GROUP, INC.
As Amended and Restated August 22, 2014
* * * * *
ARTICLE 1
OFFICES
Section 1.01 . Registered Office. The registered office of Citizens Financial Group, Inc. (the Corporation ) is Corporation Service Company, 2711 Centerville Road, Ste. 400, City of Wilmington, County of New Castle, Delaware 19808.
Section 1.02 . Other Offices. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors of the Corporation (the Board of Directors ) may from time to time determine or the business of the Corporation may require.
Section 1.03 . Books. The books of the Corporation may be kept within or without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require.
ARTICLE 2
MEETINGS OF STOCKHOLDERS
Section 2.01 . Time and Place of Meetings. All meetings of stockholders shall be held at such place, either within or without the State of Delaware, on such date and at such time as may be determined from time to time by the Board of Directors (or the chairman of the Board of Directors in the absence of a designation by the Board of Directors).
Section 2.02 . Annual Meetings. The annual meeting of the stockholders of the Corporation for the purpose of electing directors and for the transaction of such other business as may properly be brought before the meeting shall be held on such date, and at such time and place, if any, within or without the State of Delaware as may be designated from time to time by the Board of Directors. The Corporation may postpone, reschedule or cancel any annual meeting of stockholders previously scheduled.
Section 2.03 . Special Meetings. Except as otherwise provided by law or the Amended and Restated Certificate of Incorporation of the Corporation (the Certificate of Incorporation ), and subject to the rights of the holders of one or more series of Preferred Stock (as defined in the Certificate of Incorporation), special meetings of the stockholders of the Corporation may be called only by or at the direction of the Board of Directors, the chairman of the Board of Directors or the chief executive officer of the Corporation.
Section 2.04 . Notice of Meetings and Adjourned Meetings; Waivers of Notice.
(a) Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, if any, date and hour of the meeting, the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended ( Delaware Law ), such notice shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder of record entitled to vote at such meeting. The Board of Directors or the chairman of the meeting may adjourn the meeting to another time or place (whether or not a quorum is present), and notice need not be given of the adjourned meeting if the time, place, if any, and the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting, are announced at the meeting at which such adjournment is made. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 30 days, or after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.
(b) A written waiver of any such notice signed by the person entitled thereto, or a waiver by electronic transmission by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice.
Section 2.05 . Quorum. Unless otherwise provided under the Certificate of Incorporation or these Amended and Restated Bylaws (the Bylaws ) and subject to Delaware Law, the presence, in person or by proxy, of the holders of a majority of the total voting power of all outstanding securities of the Corporation generally entitled to vote at a meeting of stockholders shall constitute a quorum
for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the chairman of the meeting or a majority in voting interest of the stockholders present in person or represented by proxy may adjourn the meeting, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted that might have been transacted at the meeting as originally notified.
Section 2.06 . Voting.
(a) Unless otherwise provided in the Certificate of Incorporation and subject to Delaware Law, each stockholder shall be entitled to one vote for each outstanding share of capital stock of the Corporation held by such stockholder. Any share of capital stock of the Corporation held by the Corporation shall have no voting rights. Except as otherwise required by law, the Certificate of Incorporation or these Bylaws, the affirmative vote of the holders of a majority of the votes cast at the meeting on the subject matter shall be the act of the stockholders. Abstentions and broker non-votes shall not be counted as votes cast. Subject to the rights of the holders of any class or series of Preferred Stock to elect additional directors under specific circumstances, as may be set forth in the certificate of designations for such class or series of Preferred Stock, directors shall be elected by a plurality of the votes of the shares of capital stock of the Corporation present in person or represented by proxy at the meeting and entitled to vote on the election of directors.
(b) Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to a corporate action in writing without a meeting may authorize another person or persons to act for such stockholder by proxy, appointed by an instrument in writing, subscribed by such stockholder or by his attorney thereunto authorized, or by proxy sent by cable, telegram or by any means of electronic communication permitted by law, which results in a writing from such stockholder or by his attorney, and delivered to the secretary of the meeting. No proxy shall be voted after three (3) years from its date, unless said proxy provides for a longer period.
Section 2.07 . Action by Written Consent. Except as otherwise provided by law or the Certificate of Incorporation, and subject to the rights of the holders of one or more series of Preferred Stock, any action required or permitted to be taken at any annual or special meeting of stockholders may be effected only upon the vote of stockholders at an annual or special meeting duly noticed and called in accordance with Delaware Law, and this Article 2 and may not be taken by written consent of stockholders without a meeting.
Section 2.08 . Organization. At each meeting of stockholders, the chairman of the Board of Directors, if one shall have been elected, or in the chairman of the Board of Directors absence or if one shall not have been elected, the Lead Director, or in the Lead Directors absence or if one shall not have been
elected, the director designated by the vote of the majority of the directors present at such meeting, shall act as chairman of the meeting. The Secretary of the Corporation (the Secretary ) (or in the Secretarys absence or inability to act, the person whom the chairman of the meeting shall appoint secretary of the meeting) shall act as secretary of the meeting and keep the minutes thereof.
Section 2.09 . Order of Business. The order of business at all meetings of stockholders shall be as determined by the chairman of the meeting.
Section 2.10. Nomination of Directors and Proposal of Other Business.
(a) Annual Meetings of Stockholders .
(i) Nominations of persons for election to the Board of Directors or the proposal of other business to be transacted by the stockholders at an annual meeting of stockholders may be made only (A) as provided in the Separation and Shareholder Agreement, dated [ ], 2014 (the Separation Agreement ), between the Corporation and The Royal Bank of Scotland Group plc ( Parent ), as may be amended from time to time, (B) pursuant to the Corporations notice of meeting (or any supplement thereto), (C) by or at the direction of the Board of Directors or any committee thereof, (D) as may be provided in the certificate of designations for any class or series of Preferred Stock, and (E) by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in paragraph (ii) of this Section 2.10(a) and at the time of the annual meeting, who shall be entitled to vote at the meeting and who complies with the procedures set forth in this Section 2.10(a), and, except as otherwise required by law, any failure to comply with these procedures shall result in the nullification of such nomination or proposal.
(ii) For nominations or other business to be properly brought before an annual meeting of stockholders by a stockholder pursuant to clause (E) of paragraph (i) of this Section 2.10(a), the stockholder must have given timely notice thereof in writing to the Secretary and any such proposed business (other than the nominations of persons for election to the Board of Directors) must constitute a proper matter for stockholder action. To be timely, a stockholders notice shall be delivered to, or mailed and received by, the Secretary at the principal executive offices of the Corporation not less than 120 days nor more than 150 days prior to the first anniversary of the preceding years annual meeting of stockholders; provided, however , that in the event that the date of the annual meeting is advanced more than 30 days prior to such anniversary date or delayed more than 70 days after such anniversary date then to be timely such notice must be received by the Corporation no earlier than 120 days prior to such annual meeting and no later than the later of 70 days prior to the date of the meeting or the 10 th day following the day on which public
announcement of the date of the meeting was first made by the Corporation. In no event shall the adjournment or postponement of any meeting, or any announcement thereof, commence a new time period (or extend any time period) for the giving of a stockholders notice as described above.
(iii) A stockholders notice to the Secretary shall set forth (A) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934 (as amended (together with the rules and regulations promulgated thereunder), the Exchange Act )) including such persons written consent to being named in the proxy statement as a nominee and to serving as a director if elected, (B) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the text of the proposal or business (including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend these Bylaws, the text of the proposed amendment), the reasons for conducting such business and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made and (C) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the proposal is made:
(1) the name and address of such stockholder (as they appear on the Corporations books) and any such beneficial owner;
(2) for each class or series, the number of shares of capital stock of the Corporation that are held of record or are beneficially owned by such stockholder and by any such beneficial owner;
(3) a description of any agreement, arrangement or understanding between or among such stockholder and any such beneficial owner, any of their respective affiliates or associates, and any other person or persons (including their names) in connection with the proposal of such nomination or other business;
(4) a description of any agreement, arrangement or understanding (including, regardless of the form of settlement, any derivative, long or short positions, profit interests, forwards, futures, swaps, options, warrants, convertible securities, stock appreciation or similar rights, hedging transactions and borrowed or loaned shares) that has been entered into by or on behalf of, or any other agreement, arrangement or understanding that has been made, the effect or intent of which is to create or mitigate loss to,
manage risk or benefit of share price changes for, or increase or decrease the voting power of, such stockholder or any such beneficial owner or any such nominee with respect to the Corporations securities;
(5) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to bring such nomination or other business before the meeting;
(6) a representation as to whether such stockholder or any such beneficial owner intends or is part of a group that intends to (i) deliver a proxy statement and/or form of proxy to holders of at least the percentage of the voting power of the Corporations outstanding capital stock required to approve or adopt the proposal or to elect each such nominee and/or (ii) otherwise to solicit proxies from stockholders in support of such proposal or nomination;
(7) any other information relating to such stockholder, beneficial owner, if any, or director nominee or proposed business that would be required to be disclosed in a proxy statement or other filing required to be made in connection with the solicitation of proxies in support of such nominee or proposal pursuant to Section 14 of the Exchange Act; and
(8) such other information relating to any proposed item of business as the Corporation may reasonably require to determine whether such proposed item of business is a proper matter for stockholder action.
If requested by the Corporation, the information required under clauses 2.10(a)(iii)(C)(2), (3) and (4) of the preceding sentence of this Section 2.10 shall be supplemented by such stockholder and any such beneficial owner not later than 10 days after the record date for the meeting to disclose such information as of the record date.
(b) Special Meetings of Stockholders . If the election of directors is included as business to be brought before a special meeting in the Corporations notice of meeting, then nominations of persons for election to the Board of Directors at a special meeting of stockholders may be made by any stockholder who is a stockholder of record at the time of giving of notice provided for in this Section 2.10(b) and at the time of the special meeting, who shall be entitled to vote at the meeting and who complies with the procedures set forth in this Section 2.10(b). For nominations to be properly brought by a stockholder before a special meeting of stockholders pursuant to this Section 2.10(b), the stockholder must have given timely notice thereof in writing to the Secretary. To be timely, a
stockholders notice shall be delivered to or mailed and received at the principal executive offices of the Corporation (A) not earlier than 150 days prior to the date of the special meeting nor (B) later than the later of 120 days prior to the date of the special meeting or the 10 th day following the day on which public announcement of the date of the special meeting was first made. A stockholders notice to the Secretary shall comply with the notice requirements of Section 2.10(a)(iii).
(c) General .
(i) Other than a director nominated by Parent pursuant to the terms of the Separation Agreement, to be eligible to be a nominee for election as a director, the proposed nominee must provide to the Secretary in accordance with the applicable time periods prescribed for delivery of notice under Section 2.10(a)(ii) or Section 2.10(b): (1) a completed directors and officers (D&O) questionnaire (in the form provided by the Secretary at the request of the nominating stockholder) containing information regarding the nominees background and qualifications and such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a director of the Corporation or to serve as an independent director of the Corporation, (2) a representation that, unless previously disclosed to the Corporation, the nominee is not and will not become a party to any voting agreement, arrangement or understanding with any person or entity as to how such nominee, if elected as a director, will vote on any issue or that could interfere with such persons ability to comply, if elected as a director, with his/her fiduciary duties under applicable law and (3) a representation that, if elected as a director, such nominee would be in compliance and will continue to comply with the Corporations corporate governance guidelines as disclosed on the Corporations website, as amended from time to time. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary the information that is required to be set forth in a stockholders notice of nomination that pertains to the nominee.
(ii) No person shall be eligible to be nominated by a stockholder to serve as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 2.10 (or, in the case of Parent, pursuant to the terms of the Separation Agreement). No business proposed by a stockholder shall be conducted at a stockholder meeting except in accordance with this Section 2.10
(iii) The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws or that business was not properly brought before the meeting, and if he/she should so determine, he/she shall so declare to the meeting and the defective
Section 2.10, unless otherwise required by law, if the stockholder (or a qualified representative of the stockholder), other than Parent in respect of a nomination made pursuant to the terms of the Separation Agreement, does not appear at the annual or special meeting of stockholders of the Corporation to present a nomination or other proposed business, such nomination shall be disregarded or such proposed business shall not be transacted, as the case may be, notwithstanding that proxies in respect of such vote may have been received by the Corporation and counted for purposes of determining a quorum. For purposes of this Section 2.10, to be considered a qualified representative of the stockholder, a person must be a duly authorized officer, manager or partner of such stockholder or must be authorized by a writing executed by such stockholder or an electronic transmission delivered by such stockholder to act for such stockholder as proxy at the meeting of stockholders and such person must produce such writing or electronic transmission, or a reliable reproduction of the writing or electronic transmission, at the meeting of stockholders.
(iv) Without limiting the foregoing provisions of this Section 2.10, a stockholder shall also comply with all applicable requirements of the Exchange Act with respect to the matters set forth in this Section 2.10; provided , however , that any references in these Bylaws to the Exchange Act are not intended to and shall not limit any requirements applicable to nominations or proposals as to any other business to be considered pursuant to this Section 2.10, and compliance with paragraphs (a)(i)(C) and (b) of this Section 2.10 shall be the exclusive means for a stockholder to make nominations or submit other business (other than as provided in Section 2.10(c)(v)).
(v) Notwithstanding anything to the contrary, the notice requirements set forth herein with respect to the proposal of any business pursuant to this Section 2.10 shall be deemed satisfied by a stockholder if such stockholder has submitted a proposal to the Corporation in compliance with Rule 14a-8 under the Exchange Act, and such stockholders proposal has been included in a proxy statement that has been prepared by the Corporation to solicit proxies for the meeting of stockholders.
ARTICLE 3
DIRECTORS
Section 3.01 . General Powers. Except as otherwise provided in Delaware Law or the Certificate of Incorporation, the business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors.
Section 3.02 . Number, Election and Term Of Office. The Board of Directors shall consist, subject to the Certificate of Incorporation, of such number of directors as shall from time to time be fixed exclusively by resolution adopted by the Board of Directors. Directors shall (except as hereinafter provided for the filling of vacancies and newly created directorships and except as otherwise expressly provided in the Certificate of Incorporation) be elected by a plurality of the votes of the shares of capital stock of the Corporation present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Directors need not be stockholders.
Section 3.03 . Quorum and Manner of Acting. Unless the Certificate of Incorporation or these Bylaws require a greater number, a majority of the Board of Directors shall constitute a quorum for the transaction of business at any meeting of the Board of Directors and, except as otherwise expressly required by law or by the Certificate of Incorporation, the act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. When a meeting is adjourned to another time or place (whether or not a quorum is present), notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Board of Directors may transact any business which might have been transacted at the original meeting. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat shall adjourn the meeting, from time to time, without notice other than announcement at the meeting, until a quorum shall be present.
Section 3.04 . Time and Place of Meetings. The Board of Directors shall hold its meetings at such place, either within or without the State of Delaware, and at such time as may be determined from time to time by the Board of Directors (or the chairman of the Board of Directors in the absence of a determination by the Board of Directors).
Section 3.05 . Annual Meeting. The Board of Directors shall meet for the purpose of organization, the election of officers and the transaction of other business, as soon as practicable after each annual meeting of stockholders, on the same day and at the same place where such annual meeting shall be held. Notice of such meeting need not be given. In the event such annual meeting is not so held, the annual meeting of the Board of Directors may be held at such place either within or without the State of Delaware, on such date and at such time as shall be specified in a notice thereof given as hereinafter provided in Section 3.07 herein or in a waiver of notice thereof signed by any director who chooses to waive the requirement of notice.
Section 3.06 . Regular Meetings. After the place and time of regular meetings of the Board of Directors shall have been determined and notice thereof shall have been once given to each member of the Board of Directors, regular meetings may be held without further notice being given.
Section 3.07 . Special Meetings. Special meetings of the Board of Directors may be called by the chairman of the Board of Directors and shall be called by the chairman of the Board of Directors or the Secretary on the written request of three directors. Notice of special meetings of the Board of Directors shall be given to each director at least 48 hours before the date of the meeting in such manner as is determined by the Board of Directors.
Section 3.08 . Committees. The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to the following matters: (a) approving or adopting, or recommending to the stockholders, any action or matter expressly required by Delaware Law to be submitted to the stockholders for approval or (b) adopting, amending or repealing any Bylaw of the Corporation. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required.
Section 3.09 . Action by Consent. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions, are filed with the minutes of proceedings of the Board of Directors or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.
Section 3.10 . Telephonic Meetings. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or such committee, as the case may be, by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting.
Section 3.11 . Resignation. Any director may resign at any time by giving notice in writing or by electronic transmission to the Board of Directors or to the Secretary. The resignation of any director shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.
Section 3.12 . Vacancies. Unless otherwise provided in the Certificate of Incorporation, vacancies on the Board of Directors resulting from death, resignation, removal or otherwise and newly created directorships resulting from any increase in the number of directors shall, except as otherwise required by law, be filled solely by a majority of the directors then in office (although less than a quorum) or by the sole remaining director, and each director so elected shall hold office for a term that shall coincide with the term to which such director shall have been elected. If there are no directors in office, then an election of directors may be held in accordance with Delaware Law. Unless otherwise provided in the Certificate of Incorporation, when one or more directors shall resign from the Board of Directors, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have the power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in the filling of the other vacancies.
Section 3.13 . Compensation. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the Board of Directors shall have authority to fix the compensation of directors, including fees and reimbursement of expenses.
Section 3.14 . Preferred Stock Directors. Notwithstanding anything else contained herein, whenever the holders of one or more classes or series of Preferred Stock shall have the right, voting separately as a class or series, to elect directors, the election, term of office, filling of vacancies, removal and other features of such directorships shall be governed by the terms of the resolutions applicable thereto adopted by the Board of Directors pursuant to the Certificate of Incorporation, and such directors so elected shall not be subject to the provisions of Sections 3.02 and 3.12 of this Article 3 unless otherwise provided therein.
ARTICLE 4
OFFICERS
Section 4.01 . Principal Officers. The principal officers of the Corporation shall be a chief executive officer, a chief financial officer, one or more vice chairpersons, a chief risk officer and a Secretary who shall have the duty, among other things, to record the proceedings of the meetings of stockholders and directors in a book kept for that purpose. The Corporation may also have such other principal officers, including one or more chief accounting
officer or controllers, as the Board of Directors may in its discretion appoint. One person may hold the offices and perform the duties of any two or more of said offices, except that no one person shall hold the offices and perform the duties of chief executive officer and Secretary.
Section 4.02 . Appointment, Term of Office and Remuneration. The principal officers of the Corporation shall be appointed by the Board of Directors in the manner determined by the Board of Directors. Each such officer shall hold office until his or her successor is appointed, or until his or her earlier death, resignation or removal. The remuneration of all officers of the Corporation shall be fixed by the Board of Directors. Any vacancy in any office shall be filled in such manner as the Board of Directors shall determine.
Section 4.03 . Subordinate Officers. In addition to the principal officers enumerated in Section 4.01 herein, the Corporation may have one or more subordinate officers, agents and employees as the Board of Directors may deem necessary, each of whom shall hold office for such period as the Board of Directors may from time to time determine. The Board of Directors may delegate to any principal officer the power to appoint and to remove any such subordinate officers, agents or employees.
Section 4.04 . Removal. Except as otherwise permitted with respect to subordinate officers, any officer may be removed, with or without cause, at any time, by resolution adopted by the Board of Directors.
Section 4.05 . Resignations. Any officer may resign at any time by giving written notice to the Board of Directors (or to a principal officer if the Board of Directors has delegated to such principal officer the power to appoint and to remove such officer). The resignation of any officer shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.
Section 4.06 . Powers and Duties. The officers of the Corporation shall have such powers and perform such duties incident to each of their respective offices and such other duties as may from time to time be conferred upon or assigned to them by the Board of Directors.
ARTICLE 5
C APITAL S TOCK
Section 5.01 . Certificates for Stock; Uncertificated Shares . The shares of the Corporation shall be represented by certificates, provided that the Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares or a combination of certificated and uncertificated shares. Any such resolution that shares of a class or
series will only be uncertificated shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. Except as otherwise required by law, the rights and obligations of the holders of uncertificated shares and the rights and obligations of the holders of shares represented by certificates of the same class and series shall be identical. Every holder of stock represented by certificates shall be entitled to have a certificate signed by, or in the name of the Corporation by the (i) chairman of the Board of Directors, or the chief executive officer or vice chairman and (ii) treasurer or an assistant treasurer or the Secretary or an assistant secretary of the Corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. The Corporation shall not have power to issue a certificate in bearer form.
Section 5.02 . Transfer of Shares. Shares of the stock of the Corporation may be transferred on the record of stockholders of the Corporation by the holder thereof or by such holders duly authorized attorney upon surrender of a certificate therefor properly endorsed or upon receipt of proper transfer instructions from the registered holder of uncertificated shares or by such holders duly authorized attorney and upon compliance with appropriate procedures for transferring shares in uncertificated form, unless waived by the Corporation.
Section 5.03 . Authority for Additional Rules Regarding Transfer. The Board of Directors shall have the power and authority to make all such rules and regulations as they may deem expedient concerning the issue, transfer and registration of certificated or uncertificated shares of the stock of the Corporation, as well as for the issuance of new certificates in lieu of those which may be lost or destroyed, and may require of any stockholder requesting replacement of lost or destroyed certificates, bond in such amount and in such form as they may deem expedient to indemnify the Corporation, and/or the transfer agents, and/or the registrars of its stock against any claims arising in connection therewith.
ARTICLE 6
GENERAL PROVISIONS
Section 6.01 . Fixing the Record Date.
(a) In order that the Corporation may determine the stockholders entitled to notice of any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing such record date is adopted by the Board of Directors, and which record date shall not be more than 60 nor less than 10 days before the date of such meeting. If the Board of Directors so fixes a date, such
date shall also be the record date for determining the stockholders entitled to vote at such meeting unless the Board of Directors determines, at the time it fixes such record date, that a later date on or before the date of the meeting shall be the date for making such determination. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided that the Board of Directors may in its discretion or as required by law fix a new record date for determination of stockholders entitled to vote at the adjourned meeting, and in such case shall fix the same date or an earlier date as the record date for stockholders entitled to notice of such adjourned meeting.
(b) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.
Section 6.02 . Dividends. Subject to limitations contained in Delaware Law, other applicable law and regulations and the Certificate of Incorporation, the Board of Directors may declare and pay dividends upon the shares of capital stock of the Corporation, which dividends may be paid either in cash, in property or in shares of the capital stock of the Corporation.
Section 6.03 . Year. The fiscal year of the Corporation shall commence on January 1 and end on December 31 of each year.
Section 6.04 . Corporate Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words Corporate Seal, Delaware . The seal may be used by causing it or a facsimile thereof to be impressed, affixed or otherwise reproduced.
Section 6.05 . Voting of Stock Owned by the Corporation. The Board of Directors may authorize any person, on behalf of the Corporation, to attend, vote at and grant proxies to be used at any meeting of stockholders of any corporation (except this Corporation) in which the Corporation may hold stock.
Section 6.06 . Amendments. These Bylaws or any of them, may be altered, amended or repealed, or new Bylaws may be made, by the stockholders entitled to
vote thereon at any annual or special meeting thereof or by the Board of Directors. Unless a higher percentage is required by the Certificate of Incorporation as to any matter that is the subject of these Bylaws, all such amendments must be approved by the affirmative vote of the holders of a majority of the total voting power of all outstanding securities of the Corporation, generally entitled to vote in the election of directors, voting together as a single class, or by a majority of the Board of Directors; provided that from and after the date on which Parent ceases to beneficially own, directly or indirectly, securities representing at least 50% of the total voting power of all the then outstanding securities of the Corporation entitled to vote generally in the election of directors, voting together as a single class, the provisions set forth in Articles 2, 3 and 4 and this Section 6.06 may not be repealed or amended in any respect, and no other provision may be adopted, amended or repealed which would have the effect of modifying or permitting the circumvention of the provisions set forth in any of Articles 2, 3 and 4 and this Section 6.06, unless such action is approved by the affirmative vote of the holders of not less than 75% of the total voting power of all outstanding securities of the Corporation generally entitled to vote in the election of directors, voting together as a single class.
Exhibits 5.1 and 23.2
OPINION OF DAVIS POLK & WARDWELL LLP
September 8, 2014
Citizens Financial Group, Inc.
One Citizens Plaza
Providence, RI 02903
Ladies and Gentlemen:
Citizens Financial Group, Inc., a Delaware corporation (the Company ), is filing with the Securities and Exchange Commission a Registration Statement on Form S-1 (the Registration Statement ) for the purpose of registering under the Securities Act of 1933, as amended (the Securities Act ), 161,000,000 shares of its common stock, par value $0.01 per share (the Securities ), including 21,000,000 shares subject to the underwriters over-allotment option, as described in the Registration Statement.
We, as your counsel, have examined originals or copies of such documents, corporate records, certificates of public officials and other instruments as we have deemed necessary or advisable for the purpose of rendering this opinion.
In rendering the opinion expressed herein, we have, without independent inquiry or investigation, assumed that (i) all documents submitted to us as originals are authentic and complete, (ii) all documents submitted to us as copies conform to authentic, complete originals, (iii) all signatures on all documents that we reviewed are genuine, (iv) all natural persons executing documents had and have the legal capacity to do so, (v) all statements in certificates of public officials and officers of the Company that we reviewed were and are accurate and (vi) all representations made by the Company as to matters of fact in the documents that we reviewed were and are accurate.
Based on the foregoing, we advise you that, in our opinion, when the price at which the Securities to be sold has been approved by or on behalf of the Board of Directors of the Company and when the Securities have been issued and delivered against payment therefor in accordance with the terms of the Underwriting Agreement referred to in the Prospectus which is a part of the Registration Statement, the Securities will be validly issued, fully paid and non-assessable.
We are members of the Bar of the State of New York and the foregoing opinion is limited to the General Corporation Law of the State of Delaware.
We hereby consent to the filing of this opinion as an Exhibit to the Registration Statement and further consent to the reference to our name under the caption Validity of Common Stock in the Prospectus which is a part of the Registration Statement. In giving this consent, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act.
Very truly yours, |
/s/ Davis Polk & Wardwell LLP |
Exhibit 10.1
SEPARATION AND SHAREHOLDER AGREEMENT
dated as of [ ], 2014,
by and between
THE ROYAL BANK OF SCOTLAND GROUP PLC,
a public limited company,
and
CITIZENS FINANCIAL GROUP, INC.,
a Delaware corporation
TABLE OF CONTENTS
P AGE | ||||||
ARTICLE 1 | ||||||
D EFINITIONS | ||||||
Section 1.01. |
Certain Definitions |
1 | ||||
Section 1.02. |
Rules of Construction |
12 | ||||
ARTICLE 2 | ||||||
T HE IPO AND A CTIONS P ENDING THE IPO; O THER T RANSACTIONS | ||||||
Section 2.01. |
The IPO |
13 | ||||
Section 2.02. |
Termination of IPO Process |
13 | ||||
Section 2.03. |
Subsequent Dispositions |
13 | ||||
ARTICLE 3 | ||||||
T HE S EPARATION | ||||||
Section 3.01. |
Termination of Agreements |
14 | ||||
Section 3.02. |
Bank Accounts; Cash Balances |
14 | ||||
Section 3.03. |
Transfer of Intellectual Property Rights; Licenses |
15 | ||||
Section 3.04. |
Other Ancillary Agreements |
16 | ||||
Section 3.05. |
Guarantees |
16 | ||||
ARTICLE 4 | ||||||
R EPRESENTATIONS AND W ARRANTIES | ||||||
Section 4.01. |
Organization and Authority |
17 | ||||
Section 4.02. |
No Conflict |
18 | ||||
Section 4.03. |
No Other Representations or Warranties |
18 | ||||
ARTICLE 5 | ||||||
B OARD OF D IRECTORS AND C ORPORATE G OVERNANCE | ||||||
Section 5.01. |
Charter |
18 | ||||
Section 5.02. |
By-Laws |
18 | ||||
Section 5.03. |
Company Board |
18 | ||||
Section 5.04. |
Board and Other Committees |
20 | ||||
Section 5.05. |
Significant Actions |
20 | ||||
Section 5.06. |
EU Control Period |
24 | ||||
Section 5.07. |
Implementation |
25 |
i
ARTICLE 6 | ||||||
C OMPLIANCE , I NFORMATION AND C ONTROLS | ||||||
Section 6.01. |
Policy Compliance and Compliance with Prudential Supervisory Requirements |
25 | ||||
Section 6.02. |
RBS Information Rights |
26 | ||||
Section 6.03. |
RBS Access Rights |
27 | ||||
Section 6.04. |
Access by Governmental Authorities |
28 | ||||
Section 6.05. |
Remuneration Governance Procedures, Compensation, Tax Responsibility and In-Scope Arrangements |
28 | ||||
Section 6.06. |
Cooperation on Public Filings |
29 | ||||
Section 6.07. |
Conformance of Information |
30 | ||||
Section 6.08. |
Disclosure Controls |
31 | ||||
Section 6.09. |
Special Reports of Deficiencies, Violations or Unscheduled Events |
32 | ||||
Section 6.10. |
Company Information Rights |
32 | ||||
Section 6.11. |
Access to Historical Records |
33 | ||||
Section 6.12. |
Expenses |
33 | ||||
Section 6.13. |
Additional Matters |
33 | ||||
ARTICLE 7 | ||||||
C ERTAIN B USINESS M ATTERS | ||||||
Section 7.01. |
Insurance Matters |
34 | ||||
Section 7.02. |
No Restriction on Competition |
35 | ||||
Section 7.03. |
No Solicitation of Employees |
35 | ||||
Section 7.04. |
Company Capital Reduction |
35 | ||||
Section 7.05. |
Non-Control Determination |
36 | ||||
Section 7.06. |
Deconsolidation Date Determination |
36 | ||||
Section 7.07. |
Mutual Agreement Procedure Claim |
36 | ||||
ARTICLE 8 | ||||||
C ONFIDENTIALITY ; P RESERVATION OF P RIVILEGE | ||||||
Section 8.01. |
Confidentiality |
36 | ||||
Section 8.02. |
Protective Arrangements |
37 | ||||
Section 8.03. |
Preservation of Legal Privileges |
38 | ||||
ARTICLE 9 | ||||||
M UTUAL R ELEASES ; I NDEMNIFICATION ; C OOPERATION | ||||||
Section 9.01. |
Release of Pre-Closing Claims |
39 | ||||
Section 9.02. |
Pending, Threatened and Unasserted Claims |
41 | ||||
Section 9.03. |
Indemnification by the Company |
42 | ||||
Section 9.04. |
Indemnification by RBS |
42 | ||||
Section 9.05. |
Indemnification Obligations Net of Insurance Proceeds and Other Amounts |
43 | ||||
Section 9.06. |
Procedures for Indemnification of Third Party Claims |
44 |
ii
Section 9.07. |
Additional Matters |
46 | ||||
Section 9.08. |
Remedies Cumulative |
46 | ||||
Section 9.09. |
Special Damages |
46 | ||||
Section 9.10. |
Production of Witnesses; Records; Cooperation |
47 | ||||
Section 9.11. |
Company Warranty in respect of Pre-Closing Claims |
48 | ||||
Section 9.12. |
RBS Warranty in respect of Pre-Closing Claims |
48 | ||||
ARTICLE 10 | ||||||
D ISPUTE R ESOLUTION | ||||||
Section 10.01. |
Disputes |
48 | ||||
Section 10.02. |
Escalation; Mediation |
48 | ||||
Section 10.03. |
Court Actions |
49 | ||||
ARTICLE 11 | ||||||
F URTHER A SSURANCES | ||||||
Section 11.01. |
Further Assurances |
49 | ||||
ARTICLE 12 | ||||||
T ERMINATION | ||||||
Section 12.01. |
Termination |
50 | ||||
Section 12.02. |
Effect of Termination; Survival |
50 | ||||
ARTICLE 13 | ||||||
M ISCELLANEOUS | ||||||
Section 13.01. |
Counterparts; Entire Agreement; Conflicting Agreements |
50 | ||||
Section 13.02. |
No Construction Against Drafter |
51 | ||||
Section 13.03. |
Governing Law |
51 | ||||
Section 13.04. |
Transferability; Assignability |
51 | ||||
Section 13.05. |
Third Party Beneficiaries |
51 | ||||
Section 13.06. |
Notices |
52 | ||||
Section 13.07. |
Severability |
53 | ||||
Section 13.08. |
Force Majeure |
53 | ||||
Section 13.09. |
Late Payments |
53 | ||||
Section 13.10. |
Expenses |
53 | ||||
Section 13.11. |
Headings |
53 | ||||
Section 13.12. |
Waivers of Default |
53 | ||||
Section 13.13. |
Remedies |
53 | ||||
Section 13.14. |
Amendments |
54 | ||||
Section 13.15. |
Interpretation |
54 | ||||
Section 13.16. |
Waiver of Jury Trial |
54 | ||||
Section 13.17. |
Submission to Jurisdiction; Waivers |
55 |
iii
Exhibit A | Form of Registration Rights Agreement | |
Exhibit B | Amended and Restated Certificate of Incorporation | |
Exhibit C | Amended and Restated Bylaws | |
Exhibit D | Form of RBS Non-Voting Attendee Confidentiality Agreement | |
Schedule 1.01(a) | Company Group Policy Framework | |
Schedule 1.01(b) | Remuneration Governance Procedures | |
Schedule 1.01(c) | Transferred Intellectual Property Rights | |
Schedule 1.01(d) | Retained RBS Domain Names | |
Schedule 3.01(b)(iii) | Surviving Contracts | |
Schedule 5.05(d) | Nontransferable Securities | |
Schedule 6.01(a)(i)(B) | Functional Requirements | |
Schedule 7.01 | Company Insurance Policies | |
Schedule 7.07 | Mutual Agreement Procedure Claim | |
Schedule 13.10 | Expenses |
iv
SEPARATION AND SHAREHOLDER AGREEMENT
THIS SEPARATION AND SHAREHOLDER AGREEMENT, dated as of [ ], 2014, is by and between THE ROYAL BANK OF SCOTLAND GROUP PLC, a public limited company organized under the laws of Scotland (Company Number SC045551) ( RBS ), and CITIZENS FINANCIAL GROUP, INC., a Delaware corporation (the Company ). Capitalized terms used herein shall have the respective meanings assigned to them in Article 1 hereof.
R E C I T A L S
WHEREAS, RBS is the indirect owner of all of the issued and outstanding Common Stock of the Company on the date hereof;
WHEREAS, immediately following the Effective Date, RBS will continue to own a majority of the outstanding Common Stock, which it intends to fully divest over time; and
WHEREAS, the Parties wish to set forth certain agreements that will govern certain matters between them following the Effective Date.
NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained in this Agreement, the Parties, intending to be legally bound, hereby agree as follows:
ARTICLE 1
D EFINITIONS
Section 1.01. Certain Definitions . For the purpose of this Agreement the following terms shall have the following meanings:
Action means any demand, action, suit, countersuit, arbitration, inquiry, proceeding or investigation by or before any Governmental Authority or any federal, state, local, foreign or international arbitration or mediation tribunal.
Additional Shares means any shares of Common Stock as to which RBS acquires beneficial ownership on or after the Effective Date other than (i) any such shares issued to RBS by the Company, including in connection with rights offerings, capital raisings and similar transactions, or (ii) any such shares otherwise acquired by RBS after the Effective Date in order to (x) comply with its legal, regulatory, divestment, compliance, tax and risk management obligations or (y) meet the requirements of any Governmental Authority or securities exchange to which it is subject.
Affiliate of any Person means a Person that controls, is controlled by, or is under common control with such Person. As used herein, control means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such entity, whether through ownership of voting securities or other interests, by contract or otherwise.
Agreement means this Separation and Shareholder Agreement, including all of the schedules and exhibits hereto.
Ancillary Agreements means, collectively, the Transitional Services Agreement, the Trademark License Agreement, the Registration Rights Agreement, the Underwriting Agreement, the Commercial Services Agreement, the India Transitional Services Agreements and other agreements related thereto.
Audit Committee means the Audit Committee of the Company Board.
Bank Boards means the Board of Directors of CBNA and the Board of Directors of CBPA, collectively.
Business Day means any day other than a Saturday, Sunday or a day on which banking institutions are authorized or obligated by Law to be closed in New York, New York or London, United Kingdom.
Capital Stock means, with respect to any Person, any and all shares, interests, participations, rights in or other equivalents (however designated) of such Persons capital stock, and any rights, warrants or options exercisable or exchangeable for or convertible into such capital stock.
Cause means, with respect to the removal of any RBS Designee from the Company Board, any removal by reason of such RBS Designees malfeasance in office, conviction of, or plea of guilty or nolo contendere to, a felony, gross misconduct, willful conversion of corporate funds or moral turpitude.
CBNA means Citizens Bank, N.A.
CBPA means Citizens Bank of Pennsylvania.
Closing means the closing of the IPO.
Commercial Services Agreement means the Commercial Services Agreement, dated as of the Closing, by and between RBS and the Company.
Commission means the U.S. Securities and Exchange Commission.
Common Stock shall mean the shares of common stock, $0.01 par value per share, of the Company.
Company has the meaning set forth in the preamble hereto.
Company Accounts has the meaning set forth in Section 3.02(a).
Company ALCO means the Asset-Liability Committee of the Company.
2
Company Auditors means the Companys independent certified public accountants, which, as of the date hereof, is Deloitte & Touche LLP.
Company Board means the Board of Directors of the Company.
Company Business means any business or operations of the Company Group (whether conducted independently or in association with one or more third parties through a partnership, joint venture or other mutual enterprise) as carried out by the Company Group from time to time.
Company Funding and Liquidity Metrics means the funding and liquidity metrics and supplemental monitoring information set forth in the document dated August 20, 2014 provided under cover of an email dated September 3, 2014 from David Lindenauer of the Company to Mark McLellan of RBS.
Company Group means the Company, each Subsidiary of the Company and each other Person that either (x) is controlled directly or indirectly by the Company immediately as of the Effective Date or (y) becomes directly or indirectly controlled by the Company following the Effective Date.
Company Group Policy Framework means the policies adopted by the Company, as agreed by RBS, identified on Schedule 1.01(a) hereto, as such policies may be amended from time to time by mutual consent of the Parties or pursuant to Section 5.05(c).
Company Indemnitees has the meaning set forth in Section 9.04.
CompCo means the Compensation and Human Resources Committee of the Company Board established pursuant to Section 5.04(a).
Company Warrantors has the meaning set forth in Section 9.11.
Confidential Information means information in written, oral, electronic or other tangible or intangible forms, stored in any medium, including studies, reports, records, books, Contracts, instruments, surveys, discoveries, ideas, concepts, know-how, techniques, designs, specifications, drawings, blueprints, diagrams, models (financial or otherwise), flow charts, data, computer data, disks, diskettes, tapes, computer programs or other software, marketing plans, customer names, communications by or to attorneys (including Privileged communications), memoranda and other materials prepared by attorneys or under their direction (including attorney work product), and other technical, financial, employee or business information or data.
Consents means any consents, waivers or approvals from any Person other than a member of either Group.
Contract means any written or oral commitment, contract, subcontract, agreement, lease, sublease, license, understanding, sales order, purchase order, instrument, indenture, note or other commitment that is binding on any Person or any part of its property under applicable Law.
3
Covered Claims has the meaning set forth in Section 7.01(b).
Deconsolidation Date means the date on which RBS ceases to consolidate the Company Groups financial statements with its financial statements under IFRS.
Director means a member of the Company Board.
Disclosing Party has the meaning set forth in Section 8.01(a).
Disclosure Documents shall mean (i) any form, statement, schedule or other material filed with or furnished to the Commission, any other Governmental Authority or any securities exchange by or on behalf of any Party or any of its Affiliates, including the IPO Registration Statement, and (ii) any information statement, prospectus, offering memorandum, offering circular or similar disclosure document, free writing prospectus, roadshow and any schedule thereto or amendment thereof or document incorporated by reference therein, whether or not filed with or furnished to the Commission, any other Governmental Authority or any securities exchange by or on behalf of any Party or any of its Affiliates.
Effective Date means the Business Day immediately preceding the date of the Closing.
Escalation Notice has the meaning set forth in Section 10.02(a).
EU Acquisition has the meaning set forth in Section 5.06.
EU Acquisition Notice has the meaning set forth in Section 5.06.
EU Control Period has the meaning set forth in Section 5.05(b)(iv)(A).
Exchange means the New York Stock Exchange.
Exchange Act means the Securities Exchange Act of 1934, as amended.
Exchange Manual means the Listed Company Manual of the Exchange.
Federal Reserve Board means the Board of Governors of the United States Federal Reserve System or any successor thereto.
Final Withdrawal Date means the earlier of (i) the first date on which RBS ceases to directly or indirectly own (within the meaning of Section 2 of the Bank Holding Company Act of 1956, as amended) such number of shares of Common Stock representing at least 4.99% of the voting power of all outstanding shares of Common Stock and (ii) the date on which RBS receives written notice from the Federal Reserve Board that RBS is not deemed to control the Company for purposes of the Bank Holding Company Act of 1956, as amended.
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Financial Institution means any company whose principal activities include the supply of loans, credit cards, current accounts, savings accounts or mortgages, whether the product is supplied through a branch or direct (but excluding any specialist products (including insurance, investment, pensions and protection products)). It also includes any company whose principal activities include broking or investment advice.
First Threshold Date means the first date on which RBS ceases to beneficially own such number of shares of Common Stock (excluding (x) any Additional Shares and (y) any Third Party Shares) representing at least 50% of the voting power of all outstanding shares of Common Stock.
Functional Requirements means the information, access, and controls requirements as agreed to by the Parties prior to the Effective Date and set forth on Schedule 6.01(a)(i)(B) hereto.
Governmental Approvals means any notices, reports or other filings to be made, or any consents, registrations, approvals, licenses, permits or authorizations to be obtained from, any Governmental Authority.
Governmental Authority means any nation or government, any state, municipality or other political subdivision thereof, and any entity, body, agency, commission, department, board, bureau, court, tribunal or other instrumentality, whether federal, state, local, domestic, foreign or multinational, exercising executive, legislative, judicial, regulatory, administrative or other similar functions of, or pertaining to, government and any executive official thereof.
Group means either the Company Group or the RBS Group, as the context requires.
Guarantee has the meaning set forth in Section 3.05(a).
IFRS means the International Financial Reporting Standards issued by the International Accounting Standards Board and interpretations issued by the IFRS Interpretation Committee of the IASB and adopted by the RBS Group.
India Transitional Services Agreements means, collectively, the Amended and Restated Master Services Agreement by and between RBS Business Services Private Ltd and Citizens Bank, N.A., dated as of the Closing, and the Transitional Services Agreement by and between RBS Global Trade Service Centre Private Limited and Citizens Bank, N.A., dated as of the Closing.
Indemnifying Party has the meaning set forth in Section 9.05(a).
Indemnitee has the meaning set forth in Section 9.05(a).
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Indemnity Payment has the meaning set forth in Section 9.05(a).
Independent Director means a Director who is independent within the meaning of that term as used in Rule 303A.02 of the Listed Company Manual of the New York Stock Exchange, as amended.
In-Scope Arrangements means any options or other incentive awards granted to, or other remuneration arrangements implemented in respect of, current new, or former officers, directors, employees or consultants of the Company or any member of the Company Group, prior to the Remuneration Governance Termination Date (including, for the avoidance of doubt, any In-Scope Arrangements that are converted into equity awards in respect of shares of Common Stock at Closing).
Insurance Policies or Insurance Policy shall mean insurance policies and insurance contracts of any kind, including primary, excess and umbrella, comprehensive general liability, directors and officers, automobile, products, workers compensation, employee dishonesty, property and crime insurance policies and self-insurance and captive insurance company arrangements, together with the rights, benefits and privileges thereunder.
Insurance Proceeds means those monies:
(a) received by an insured (or its successor-in-interest) from an insurance carrier;
(b) paid by an insurance carrier on behalf of the insured (or its successor-in-interest); or
(c) received (including by way of setoff) from any third party in the nature of insurance, contribution or indemnification in respect of any Liability;
in each such case net of any applicable premium adjustments (including reserves and retrospectively rated premium adjustments) and net of any costs or expenses incurred in the collection thereof and including, for the avoidance of doubt, proceeds from any self-insurance, captive insurance or similar program.
Insurance Separation Date means June 30, 2014.
Intellectual Property Rights means all intellectual property rights throughout the world, including all U.S. and foreign (i) Patents, (ii) Trademarks, (iii) copyrights and copyrightable subject matter and all applications and registrations therefor and (iv) any and all trade secrets and know-how.
Intercompany Accounts has the meaning set forth in Section 3.01(a).
IPO means the initial public offering of shares of Common Stock pursuant to the IPO Registration Statement.
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IPO Registration Statement means the registration statement on Form S-1 (File No. 333-195900) filed under the Securities Act, pursuant to which the Common Stock to be sold by the Selling Stockholders in the IPO will be registered, together with all amendments thereto (including post-effective amendments and registration statements filed pursuant to Rule 462(b) under the Securities Act).
Law means any federal, national, supranational, state, provincial, local or similar law (including common law), statute, ordinance, regulation, rule, code, order, treaty, license, permit, authorization, registration, approval, consent, decree, injunction, judgment, notice of liability, request for information, binding judicial or administrative interpretation or other requirement, in each case, enacted, promulgated, issued, entered or otherwise put into effect by a Governmental Authority.
Liabilities means any and all indebtedness, claims, debts, taxes, liabilities, demands, causes of action, and obligations, whether accrued, fixed or contingent, mature or inchoate, known or unknown, reflected on a balance sheet or otherwise, including, without limitation, those arising under any Law, Action or any judgment of any court of any kind or any award of any arbitrator of any kind, and those arising under any Contract, commitment or undertaking.
Licensable means, with respect to any Intellectual Property Rights, that the Licensing Party and/or any its Subsidiaries, as applicable, has the power and authority to grant a license, sublicense or covenant as to such Intellectual Property Rights to the Licensed Party as provided for herein without (i) violating the terms of any agreement or other arrangement with any third party, (ii) requiring any consent, approval or waiver from any third party, (iii) materially impairing any of the existing rights in respect of such Intellectual Property Rights of the Licensing Party and/or any of its Subsidiaries, (iv) imposing any additional material obligations on the Licensing Party and/or any of its Subsidiaries relating to such Intellectual Property Rights, and/or (v) requiring the payment of any compensation to any third party.
Licensable Company Intellectual Property Rights means (i) any and all Intellectual Property Rights (other than Trademarks) of the Company and its Subsidiaries but solely to the extent such Intellectual Property Rights (A) are Licensable to RBS and its Subsidiaries and (B) are or have been used or held for use by RBS and its Subsidiaries at any time in the twelve month period immediately prior to the Effective Date (but in each case excluding any Transferred Intellectual Property Rights) and (ii) the Licensable Company Patents.
Licensable Company Patents means any and all Patents which are now or hereafter Licensable by the Company or any of its Subsidiaries that have a first effective filing date during the Patent Capture Period.
Licensable RBS Intellectual Property Rights means (i) any and all Intellectual Property Rights (other than Trademarks) of RBS and its Subsidiaries but solely to the extent such Intellectual Property Rights (A) are Licensable to the Company
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and its Subsidiaries and (B) are or have been used or held for use by the Company and its Subsidiaries at any time in the twelve month period immediately prior to the Effective Date (but in each case excluding any Transferred Intellectual Property Rights) and (ii) the Licensable RBS Patents.
Licensable RBS Patents means any and all Patents which are now or hereafter Licensable by RBS or any of its Subsidiaries that have a first effective filing date during the Patent Capture Period.
Licensed Party means (i) RBS in its capacity as a licensee for the purposes of the licenses granted in Section 3.03(c) and (ii) the Company in its capacity as a licensee for the purposes of the licenses granted in Section 3.03(d).
Licensing Party means (i) RBS in its capacity as a licensor for the purposes of the licenses granted in Section 3.03(d) and (ii) the Company in its capacity as a licensor for the purposes of the licenses granted in Section 3.03(c).
Losses means any and all damages, losses, deficiencies, taxes, obligations, penalties, judgments, settlements, claims, payments, fines, charges, interest, costs and expenses, whether or not resulting from third party claims, including the costs and expenses of any and all Actions and demands, assessments, judgments, settlements and compromises relating thereto and the costs and expenses of attorneys, accountants, consultants and other professionals fees and expenses incurred in the investigation or defense thereof or the enforcement of rights hereunder.
Material Risk Takers means persons identified as meeting the criteria of material risk takers as set out in the European Banking Authority regulatory technical standard and consequently subject to the requirements of the Remuneration Code.
Notice means any obligation to deliver a notification to any Person other than a member of either Group.
Party means each of RBS and the Company.
Patent Capture Period means any time on or prior to the second anniversary of the Effective Date.
Patents means any and all U.S. and foreign patents, invention disclosures and all related continuations, continuations-in-part, divisionals, provisionals, renewals, reissues, re-examinations, additions and extensions (including all supplementary protection certificates), and all applications and registrations therefor.
Person means an individual, a general or limited partnership, a corporation, a trust, a joint venture, an unincorporated organization, a limited liability entity, any other entity and any Governmental Authority.
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Policy Representative means, as of the Effective Date, each of the Chief Operating Officer and Head of Risk Policy and Governance of the Company, and each of the Head of Enterprise Wide Risk Management and Head of Enterprise Policy and Framework of RBS, and in each case, their successors as appointed by the Company or RBS, as applicable.
PRA means the Prudential Regulation Authority of the United Kingdom.
Prime Rate shall mean the Wall Street Journal Published Prime (if published in a range, the lowest number in the range will be used) in effect on the fourth (4 th ) Tuesday of the month prior to the beginning of each calendar quarter.
Privilege has the meaning set forth in Section 8.03(a).
Prudential Supervisory Requirements means applicable Law, regulation, regulatory constraint, obligation or rule (including any binding code of conduct and binding statement of principle incorporated and contained in such rules) as promulgated or enforced by or through the PRA, the Financial Conduct Authority, the Federal Reserve Board, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, in each case, which has jurisdiction over RBS or other members of the RBS Group or the Company or other members of the Company Group, as may be amended from time to time, other than as set out in the Remuneration Governance Procedures.
Public Filings has the meaning set forth in Section 6.06(a).
RBS has the meaning set forth in the preamble hereto.
RBS Accounts has the meaning set forth in Section 3.02(a).
RBS Board means the Board of Directors of RBS.
RBS Business means any business or operations of the RBS Group (whether conducted independently or in association with one or more third parties through a partnership, joint venture or other mutual enterprise) other than the Company Business.
RBS Designee means the Director designated by RBS pursuant to its nomination rights set forth in Section 5.03.
RBS Group means RBS, each Subsidiary of RBS and each other Person that either (x) is controlled directly or indirectly by RBS immediately after the Effective Date or (y) becomes directly or indirectly controlled by RBS following the Effective Date; provided, however , that neither the Company nor any other member of the Company Group shall be members of the RBS Group.
RBS Group Policy Framework means the policy framework as implemented and enforced by RBS from time to time.
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RBS Indemnitees has the meaning set forth in Section 9.03.
RBS Intellectual Property Rights means any Intellectual Property Rights owned by RBS or any of its Subsidiaries.
RBS Non-Voting Attendee means the non-voting, participating observer in all functions of the Company Board designated at any time and from time to time by RBS pursuant to its nomination rights set forth in Section 5.03.
RBS Principals has the meaning set forth in Section 5.07.
RBS Warrantors has the meaning set forth in Section 9.12.
Receiving Party has the meaning set forth in Section 8.01(a).
Registration Rights Agreement means the Registration Rights Agreement to be entered into by and between RBS and the Company in the form of Exhibit A hereto.
RemCo means the RBS Group Performance and Remuneration Committee.
Remuneration Code means the Remuneration Code of the PRA and the Financial Conduct Authority (SYSC 19A).
Remuneration Governance Procedures means the procedures agreed upon by RemCo and CompCo, as summarized in Schedule 1.01(b) hereto, to ensure compliance with the Remuneration Code.
Remuneration Governance Termination Date means the date from which the Company will no longer be under the supervision of the PRA for future remuneration matters. The Company shall be promptly notified of such date by RBS in writing following consultation with the PRA, with such consultation to be initiated around the First Threshold Date, unless RBS determines, using its reasonable discretion, that it would adversely impact on RBS to do so.
Retained RBS Domain Names means those domain names set forth on Schedule 1.01(d) to the extent recorded in the name of the Company and its Subsidiaries as of the Effective Date.
Second Threshold Date means the first date on which RBS ceases to beneficially own such number of shares of Common Stock (excluding (x) any Additional Shares and (y) any Third Party Shares) representing at least 20% of the voting power of all outstanding shares of Common Stock.
Securities Act means the Securities Act of 1933.
Selling Stockholders means RBSG International Holdings Limited, a private limited company organized under the laws of Scotland, and RBS CBFM North America Corp., a Delaware corporation.
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Shared Insurance Policies shall mean Insurance Policies in existence prior to the Insurance Separation Date where both the Company Business and the RBS Business and/or where the employees, directors or agents of both the Company Business and the RBS Business are eligible for coverage.
Significant Stockholder means any Person, other than a member of the RBS Group, who together with its Affiliates (other than members of the RBS Group) beneficially owns such number of shares of Common Stock representing at least 20% of the voting power of all outstanding shares of Common Stock.
Subsequent Disposition has the meaning set forth in Section 2.03.
Subsidiary means, when used with respect to any Person, (a) a corporation in which such Person or one or more Subsidiaries of such Person, directly or indirectly, owns capital stock having a majority of the total voting power in the election of directors of all outstanding shares of all classes and series of capital stock of such corporation entitled generally to vote in such election; and (b) any other Person (other than a corporation) in which such Person or one or more Subsidiaries of such Person, directly or indirectly, has (i) a majority ownership interest or (ii) the power to elect or direct the election of a majority of the members of the governing body of such first-named Person.
Surviving Contracts has the meaning set forth in Section 3.01(b).
Third Party Claim has the meaning set forth in Section 9.06(a).
Third Party Shares means any shares of Common Stock with regard to which RBS has beneficial ownership pursuant to an investment advisory arrangement under which RBS provides investment advisory services to a non-related third party in connection with such shares and does not derive a benefit from such shares other than customary advisory fees.
Trademark License Agreement means the Trade Mark License Agreement (RBS as Licensor), dated as of the Closing, by and between RBS and the Company.
Trademarks means any and all U.S. and foreign trademarks, service marks, corporate names, trade names, domain names, logos, slogans, trade dress, design rights, and other similar designations of source or origin, and all applications and registrations therefor, together with the goodwill symbolized by any of the foregoing.
Transferred Intellectual Property Rights means (a) RBS Intellectual Property Rights (other than Patents and Trademarks) as of the Effective Date which are or have been used or held for use exclusively by the Company and its Subsidiaries, including any such RBS Intellectual Property Rights set forth on Schedule 1.01(c) and (b) those Trademarks set forth on Schedule 1.01(c) to the extent owned by RBS and its Subsidiaries as of the Effective Date, including, in the case of each of clause (a) and (b) all rights to sue or recover and retain damages and costs and attorneys fees for past, present and future infringement or misappropriation of any of the foregoing.
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Transitional Services Agreement means the Transitional Services Agreement, dated as of the Closing, by and between RBS and the Company.
Underwriters means the underwriters for the IPO set forth in the Underwriting Agreement.
Underwriting Agreement means the underwriting agreement to be entered into among the representatives of the Underwriters, the Company and the Selling Stockholders with respect to the IPO.
U.S. GAAP means accounting principles generally accepted in the United States of America, applied on a consistent basis.
Section 1.02. Rules of Construction . Unless the context otherwise requires or except as otherwise expressly provided,
(a) herein, hereof and other words of similar import refer to the Agreement as a whole and not to any particular Section, Article or other subdivision;
(b) all references to Sections or Articles or Exhibits refer to Sections or Articles or Exhibits of or to the Agreement unless otherwise indicated;
(c) references to statutes include the rules and regulations thereunder;
(d) references to agreements or instruments, or to statutes or regulations, are to such agreements or instruments, or statutes or regulations, as amended from time to time (or to successor statutes and regulations);
(e) references to any Person include the successors and permitted assigns of that Person;
(f) RBS shall:
(i) Be deemed to beneficially own securities which are beneficially owned by RBSs Subsidiaries; and
(ii) Be deemed to be acting on behalf of the Selling Stockholders in its capacity as holder of legal and economic interests, respectively, in Common Stock; and
(g) Unless otherwise noted, the Company makes the representations, warranties, undertakings and covenants contained herein on behalf of itself and each other applicable member of the Company Group that may be required to take any action necessary for the accuracy of such representations and warranties or compliance with the obligations undertaken by the Company hereunder.
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ARTICLE 2
T HE IPO AND A CTIONS P ENDING THE IPO; O THER T RANSACTIONS
Section 2.01. The IPO . The Company shall cooperate with, and take all actions reasonably requested by, RBS in connection with the IPO. In furtherance thereof, to the extent not undertaken and completed prior to the execution of this Agreement:
(a) The Company shall file such amendments or supplements to the IPO Registration Statement as may be necessary in order to cause the same to remain effective as required by the Underwriting Agreement. The Company shall also prepare, file with the Commission and cause to become effective any registration statements or amendments thereof that are required to reflect the establishment of, or amendments to, any employee benefit and other plans necessary or appropriate in connection with the IPO or the other transactions contemplated by this Agreement and the Ancillary Agreements.
(b) The Company shall comply with its obligations under the Underwriting Agreement.
(c) The Company shall use its best efforts to take all such action as may be necessary or appropriate under state securities and blue sky laws of the United States (and any comparable Laws under any foreign jurisdictions) in connection with the IPO; provided that the Company shall not be required to qualify as a foreign corporation in any state or jurisdiction or consent to service of process in any state or jurisdiction other than with respect to claims arising out of the IPO.
Section 2.02. Termination of IPO Process . Notwithstanding anything to the contrary contained herein, prior to the Closing, as between the Company and RBS, RBS may in its sole discretion terminate or abandon any aspect of the IPO and the other transactions contemplated hereby or by an Ancillary Agreement in connection with the IPO and the Company shall, subject to compliance with its obligations under the Underwriting Agreement, take all actions directed by RBS in that regard.
Section 2.03. Subsequent Dispositions . The Parties shall execute and deliver, concurrently with the execution and delivery of this Agreement, the Registration Rights Agreement. In addition to any obligations of the Company pursuant to the Registration Rights Agreement, the Company agrees that it will, and will cause each other member of the Company Group to, provide such cooperation, information and assistance as RBS may reasonably request to ensure that dispositions by RBS or any other member of the RBS Group of any remaining beneficially owned shares of Common Stock are achieved in a timely and efficient manner, including any dispositions pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act (any such disposition, a Subsequent Disposition ); provided that such cooperation and assistance shall not include any obligation to enter into agreements with any acquiror of Common Stock in any such disposition by RBS or any other member of the RBS Group that are to be performed after such disposition other than any agreements that (i) are
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contemplated by the Registration Rights Agreement or (ii) are of the nature of agreements customarily included in underwriting agreements (e.g., standstill or lockup obligations) entered into in connection with follow-on stock offerings by publicly traded companies.
ARTICLE 3
T HE S EPARATION
Section 3.01. Termination of Agreements . (a) Except as set forth in Section 3.01(b), in furtherance of the releases and other provisions of Section 9.01 hereof: (i) the Company and each Person in the Company Group, on the one hand, and RBS and each Person in the RBS Group, on the other hand, hereby terminate any and all agreements, arrangements, commitments or understandings, whether or not in writing, between or among the Company and any Person in the Company Group, on the one hand, and RBS and any Person in the RBS Group, on the other hand, effective as of the Effective Date. No such terminated agreement, arrangement, commitment or understanding (including any provision thereof which purports to survive termination) shall be of any further force or effect after the Effective Date and (ii) all intercompany accounts or balances arising on or prior to the Effective Date (collectively, Intercompany Accounts ), between any member of the Company Group and any member of the RBS Group shall be invoiced promptly after the Effective Date and paid within forty-five (45) days of receipt of invoice. Each Party shall, at the reasonable request of any other Party, take, or cause to be taken, such other actions as may be necessary to effect the foregoing.
(b) The provisions of Section 3.01(a) shall not apply to any of the following agreements, arrangements, commitments, understandings or Intercompany Accounts (or to any of the provisions thereof): (i) this Agreement; (ii) the Ancillary Agreements (and each other agreement or instrument expressly contemplated by this Agreement, or any Ancillary Agreement to be entered into by any of the Parties or any Person in their respective Groups); (iii) any agreements, arrangements, commitments or understandings set forth or described on Schedule 3.01(b)(iii); (iv) any In-Scope Arrangements; and (v) any other agreements, arrangements, commitments, understandings or Intercompany Accounts that this Agreement or any Ancillary Agreement expressly contemplates will survive the Effective Date (collectively, the Surviving Contracts ).
(c) Notwithstanding anything in this Agreement to the contrary, in the event the Parties agree in writing that an agreement, arrangement, commitment or understanding terminated pursuant to Section 3.01(a) should have remained in force or effect after the Effective Date, such agreement, arrangement, commitment or understanding shall pursuant to this Section 3.01(c) be deemed a Surviving Contract and each Party shall, at the reasonable request of any other Party, take, or cause to be taken, such other actions as may be necessary to effect the foregoing.
Section 3.02. Bank Accounts; Cash Balances . (a) To the extent not completed prior to the Effective Date, RBS and the Company each agrees to take, or cause the respective members of their respective Groups to take, at or as soon as practicable after
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the Effective Date, all actions necessary to amend all Contracts governing each bank and brokerage account owned by the Company or any other member of the Company Group (collectively, the Company Accounts ) so that such Company Accounts, if linked (whether by automatic withdrawal, automatic deposit or any other authorization to transfer funds from or to, hereinafter linked) to any bank or brokerage account owned by RBS or any other member of the RBS Group (collectively, the RBS Accounts ) are de-linked from the RBS Accounts.
(b) It is intended that, following consummation of the actions contemplated by Section 3.02(a), the Company and RBS will maintain separate bank accounts and separate cash management processes.
(c) With respect to any outstanding checks issued by RBS, the Company, or any of their respective Subsidiaries prior to the Effective Date, such outstanding checks shall be honored following the Effective Date by the Person or Group owning the account on which the check is drawn.
(d) Other than in connection with the Surviving Contracts, as between RBS and the Company (and the members of their respective Groups), all payments made and reimbursements received after the Effective Date by either Party (or member of its Group) that relate to a business, asset or Liability of the other Party (or member of its Group), shall be held by such Party in trust for the use and benefit of the Party entitled thereto and, promptly upon receipt by such Party of any such payment or reimbursement, such Party shall pay over, or shall cause the applicable member of its Group to pay over to the other Party the amount of such payment or reimbursement without right of set-off.
Section 3.03. Transfer of Intellectual Property Rights; Licenses . (a) Subject to the terms and conditions set forth in this Agreement, as of the Effective Date, RBS, on behalf of itself and its Subsidiaries, hereby transfers, conveys and assigns to the Company, and the Company hereby accepts from RBS and its Subsidiaries, all right, title and interest of RBS and its Subsidiaries in and to the Transferred Intellectual Property Rights. With respect to any domain names included in the Transferred Intellectual Property Rights (as set forth on Schedule 1.01(c)), RBS shall promptly take or cause to be taken (and shall cause its Subsidiaries to promptly take or cause to be taken) all steps necessary to update the records of the applicable domain name registrar to ensure that such transfer, conveyance and assignment has been recorded and that the Company is the sole and exclusive owner of such domain names.
(b) Notwithstanding anything in this Agreement to the contrary, the Parties acknowledge and agree that all RBS Intellectual Property Rights (other than the Transferred Intellectual Property Rights) which are or have been used or held for use by the Company and its Subsidiaries at any time prior to or as of the Effective Date shall vest and remain vested in RBS or the relevant Subsidiary of RBS.
(c) With respect to the Licensable Company Intellectual Property Rights, the Company, on behalf of itself and its Subsidiaries, hereby grants to RBS and its
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Subsidiaries a perpetual, non-exclusive, world-wide, royalty-free, irrevocable license (with the right to sub-license) to use solely in connection with the business of RBS and its Subsidiaries (or any part of it).
(d) With respect to the Licensable RBS Intellectual Property Rights, RBS, on behalf of itself and its Subsidiaries, hereby grants to the Company and its Subsidiaries a perpetual, non-exclusive, world-wide, royalty-free, irrevocable license (with the right to sub-license) to use solely in connection with the business of the Company and its Subsidiaries (or any part of it).
(e) Except as provided in (i) Section 3.03(d) and/or (ii) the Trademark License Agreement and any licenses of Intellectual Property Rights entered into between the Parties or any of their respective Subsidiaries pursuant to any other Ancillary Agreement, the Company, on behalf of itself and its Subsidiaries, hereby acknowledges and agrees that any and all licenses granted by RBS or any of its Subsidiaries to the Company or any of its Subsidiaries in respect of any Intellectual Property Rights shall terminate as of the Effective Date.
(f) Except as provided in (i) Section 3.03(c) and/or (ii) any licenses of Intellectual Property Rights entered into between the Parties or any of their respective Subsidiaries pursuant to any Ancillary Agreement, RBS, on behalf of itself and its Subsidiaries, hereby acknowledges and agrees that any and all licenses granted by the Company or any of its Subsidiaries to RBS or any of its Subsidiaries in respect of any Intellectual Property Rights shall terminate as of the Effective Date.
(g) Subject to the terms and conditions set forth in this Agreement, as of the Effective Date, the Company, on behalf of itself and its Subsidiaries, hereby transfers, conveys and assigns to RBS, and RBS hereby accepts from the Company and its Subsidiaries, all right, title and interest of the Company and its Subsidiaries in and to the Retained RBS Domain Names. The Company shall promptly take or cause to be taken (and shall cause its Subsidiaries to promptly take or cause to be taken) all steps necessary to update the records of the applicable domain name registrar to ensure that such transfer, conveyance and assignment has been recorded and that RBS is the sole and exclusive owner of the Retained RBS Domain Names.
Section 3.04. Other Ancillary Agreements . Each of RBS and the Company will execute and deliver, and cause each of their applicable Subsidiaries to execute and deliver, as applicable, all Ancillary Agreements to which it is a party, in each case to be effective as of the Effective Date.
Section 3.05. Guarantees . (a) RBS and the Company shall each use their reasonable best efforts to cause a member of the Company Group to be substituted in all respects for a member of the RBS Group, as applicable, and for the members of the RBS Group, as applicable, to be otherwise removed or released, effective as of the Effective Date, in respect of all obligations of any member of the Company Group under each guarantee, indemnity, surety bond, letter of credit and letter of comfort (each, a
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Guarantee ), given or obtained by any member of the RBS Group for the benefit of any member of the Company Group or the Company Business. If RBS and the Company have been unable to effect any such substitution, removal, release and termination with respect to any such Guarantee as of the Effective Date then, following the Effective Date, the Company shall effect such substitution, removal, release and termination as soon as reasonably practicable after the Effective Date; provided that from and after Effective Date, the Company shall indemnify against, hold harmless and promptly reimburse the members of the RBS Group for any payments made by members of the RBS Group and for any and all Liabilities of the members of the RBS Group arising out of, or in performing, in whole or in part, any performance obligation in accordance with the underlying obligation under any such Guarantee (except to the extent the performance obligation under any such Guarantee shall have been triggered solely by an act or failure to act of the applicable guarantor (rather than the underlying obligor)).
(b) RBS and the Company shall each use their reasonable best efforts to cause a member of the RBS Group to be substituted in all respects for a member of the Company Group, as applicable, and for the members of the Company Group, as applicable, to be otherwise removed or released, effective as of the Effective Date, in respect of all obligations of any member of the RBS Group under each Guarantee, given or obtained by any member of the Company Group for the benefit of any member of the RBS Group or the RBS Business. If RBS and the Company have been unable to effect any such substitution, removal, release and termination with respect to any such Guarantee as of the Effective Date then, following the Effective Date, RBS shall effect such substitution, removal, release and termination as soon as reasonably practicable after the Effective Date; provided that from and after Effective Date, RBS shall indemnify against, hold harmless and promptly reimburse the members of the Company Group for any payments made by members of the Company Group and for any and all Liabilities of the members of the Company Group arising out of, or in performing, in whole or in part, any performance obligation in accordance with the underlying obligation under any such Guarantee (except to the extent the performance obligation under any such Guarantee shall have been triggered solely by an act or failure to act of the applicable guarantor (rather than the underlying obligor)).
ARTICLE 4
R EPRESENTATIONS AND W ARRANTIES
Each Party represents and warrants to the other Party that, as of the date hereof and as of the Effective Date:
Section 4.01. Organization and Authority . (a) It is duly constituted, organized and validly existing under the laws of the jurisdiction of its incorporation;
(b) It has the legal right and full power and authority to execute and deliver, and it and the members of its respective Group, as applicable, have the legal right and full power and authority to exercise its and their rights and perform its and their obligations under this Agreement, the Ancillary Agreements and any documents or agreements expressly contemplated by this Agreement or the Ancillary Agreements;
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(c) This Agreement has been, and each of the Ancillary Agreements will be, duly authorized, executed and delivered by each Party and each other member of its respective Group that is a party thereto and, assuming due authorization, execution and delivery by all other parties to such agreement, each of this Agreement and such Ancillary Agreements constitutes or will constitute, as the case may be, the valid and legally binding obligations of each Party and such members of their respective Groups who are parties thereto, enforceable in accordance with its or their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors rights and to general equity principles.
Section 4.02. No Conflict . The authorization, execution, delivery and performance of this Agreement and the Ancillary Agreements by each Party and such members of their respective Groups that are parties thereto do not (i) violate, conflict with or result in the breach of any provision of the certificate of incorporation, the memorandum or association or by-laws (or similar organizational documents) of such Party or member of its respective Group or (ii) conflict with or violate in any material respect any Law applicable to such Party or member of its respective Group or any of their respective assets or businesses.
Section 4.03. No Other Representations or Warranties . Except for the representations and warranties contained in this Agreement and the Ancillary Agreements, neither Party nor any other Person makes any express or implied representation or warranty on behalf of such Party or any other member of its respective Group, and each Party hereby disclaims any representation or warranty not contained herein or therein.
ARTICLE 5
B OARD OF D IRECTORS AND C ORPORATE G OVERNANCE
Section 5.01. Charter . Prior to the Effective Date, the Company shall file with the Secretary of the State of Delaware, and cause to become effective, the amended and restated certificate of incorporation of the Company attached hereto as Exhibit B.
Section 5.02. By-Laws . Prior to the Effective Date, the Company Board shall adopt the amended and restated by-laws of the Company attached hereto as Exhibit C.
Section 5.03. Company Board . (a) From the Effective Date until the Second Threshold Date, the Company and RBS shall (i) use their best efforts to cause the Company Chief Executive Officer and the RBS Designee (who may, at the sole discretion of RBS, be an Independent Director) to be members of the Company Board and (ii) cause the RBS Designee to be a member of each of the Bank Boards.
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(b) Until the Second Threshold Date, RBS shall have the right (i) to designate for nomination by the Company Board (or any nominating committee thereof) for election to the Company Board the RBS Designee and (ii) to appoint, at any time and from time to time, one RBS Non-Voting Attendee who shall be entitled to receive notice of, and, subject to such persons execution of a confidentiality agreement substantially in the form attached as Exhibit D hereto, attend all meetings of, the Company Board, the Bank Boards and committees thereof, and shall be entitled to receive and review all materials, reports, notifications, papers and agendas related thereto that directors receive (but only to the extent not contrary to applicable Law); provided that (x) the RBS Non-Voting Attendee shall not have the right to vote on any matters presented to the Company Board, the Bank Boards or committees thereof for a vote and (y) the RBS Non-Voting Attendee shall recuse himself or herself from any matter presented to the Company Board, the Bank Boards or any committee thereof if the RBS Designee recuses himself or herself from such matter. In addition, in the event that the RBS Non-Voting Attendee attends a meeting of the Company Board, any Bank Board or any committee thereof at which the RBS Designee is not present, the RBS Non-Voting Attendee shall recuse himself or herself with respect to any matter presented to such meeting with respect to which the RBS Designee, if he or she were attending such meeting, would have an obligation to recuse himself or herself. The Company shall reimburse RBS for all travel and lodging expenses in connection with any RBS Non-Voting Attendee attending any Board meeting on the same terms, and subject to the same policies, as shall apply to directors of the Company Board. RBS may appoint a different person as RBS Non-Voting Attendee with respect to any meeting of the Company Board, the Bank Boards or any committees thereof, it being understood that any obligation hereunder of the Company to provide notice to the RBS Non-Voting Attendee shall be satisfied by delivery of notice to the person who was the RBS Non-Voting Attendee at the time of the most recent such meeting.
(c) Until the Second Threshold Date, the Company shall at all times exercise all authority under applicable Law to cause the RBS Designee to be nominated for election as a Company Board member by the Company Board (or any nominating committee thereof). Until the Second Threshold Date, the Company shall cause the RBS Designee to be included in the slate of nominees recommended by the Company Board to holders of Common Stock (including at any special meeting of stockholders held for the election of directors) and shall use best efforts to cause the election of each such RBS Designee, including soliciting proxies in favor of the election of such persons. The Company further agrees that, until the Second Threshold Date, it shall (i) fill any vacancy on the Company Board or the Bank Boards created by the resignation, removal or incapacity of the RBS Designee with another RBS Designee identified by RBS, to the extent RBS would at such time have nomination rights (or appointment rights, in the case of the Bank Boards) for such RBS Designee pursuant this Section 5.03, and (ii) except for the removal of an RBS Designee for Cause, use its best efforts not to permit the removal from the Company Board or the Bank Boards of any RBS Designee without RBSs consent to the extent RBS would at such time have nomination rights (or appointment rights, in the case of the Bank Boards) for such RBS Designee pursuant to this Section 5.03.
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(d) On the Second Threshold Date, the RBS Designee shall submit his or her resignation from the Company Board in accordance with any applicable Corporate Governance Guidelines of the Company in effect at such time. Unless otherwise specified in such resignation, the acceptance by the Company Board of such resignation shall not be required for such resignation to take effect.
Section 5.04. Board and Other Committees . (a) As of the Effective Date and through the Final Withdrawal Date, the Company Board shall (i) without taking advantage of any of the exemptions available to a controlled company under the Exchange Manual, have established and shall maintain committees of the Board meeting the requirements of, and having the responsibilities and authority consistent with the applicable requirements of, the Exchange Act and the Exchange Manual, and such additional responsibilities and authority not inconsistent with this Agreement (including, for the avoidance of doubt, the Remuneration Governance Procedures), as shall be delegated to it by the Company Board from time to time and (ii) maintain a risk committee that shall consist of at least 5 members and that shall operate pursuant to the charter approved by the Company Board and RBS prior to the date hereof, with such changes as may be approved by RBS from time to time, provided that, after the First Threshold Date, the approval of RBS shall not be required for any de minimis change to such charter, provided , further , that the Company shall deliver written notice to RBS of any proposed change to such charter at least seven (7) Business Days before such change is sought to be adopted, such notice to specify whether or not the Company considers such change to be de minimis .
(b) As of the Effective Date and through the Second Threshold Date, to the extent the Company Board or any of the Bank Boards has a standing committee that is functionally equivalent to the existing Executive Committee of the Company Board, the RBS Designee shall be a member of such committee and shall be entitled to receive notice of, and attend any meetings of, such committee, provided that the attendance of the RBS Designee at any meeting of such committee shall not be required for a quorum.
(c) Until the Second Threshold Date, the Company shall cause to be delivered to the RBS Designee and the RBS Non-Voting Attendee all communications, notices (including notices of meetings) and other materials delivered to members of the Company Board, the Bank Boards and any committees of the Company Board and the Bank Boards in such members capacities as such no later than such communications, notices and other materials are delivered to such other members; provided that communications, notices and other materials that relate to a matter with respect to which recusal of the RBS Designee is applicable shall not be delivered pursuant to this Section 5.04(c).
(d) Until the Deconsolidation Date, the Company shall cause an individual designated by RBS from time to time to be a member of the Company ALCO.
Section 5.05. Significant Actions. (a) Until the First Threshold Date, neither the Company nor any member of the Company Group shall take, or be permitted to take, any of the following actions without the written approval of RBS:
(i) establish, adopt or approve any annual budget of the Company for any fiscal year;
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(ii) approve or adopt any amendment or modification to any approved annual budget of the Company to the extent presented to the Company Board, or any committee thereof, for approval;
(iii) (A) terminate the Companys Chief Executive Officer, Chief Financial Officer or Chief Risk Officer or (B) appoint a new Chief Executive Officer, Chief Financial Officer or Chief Risk Officer of the Company; or
(iv) enter into any agreement to do any of the foregoing in Section 5.05(a)(i)-(iii).
(b) Until the Second Threshold Date, neither the Company nor any member of the Company Group shall take, or be permitted to take, any of the following actions without the written approval of RBS:
(i) make material changes to the scope or nature of the Company Business;
(ii) enter into any direct or indirect transactions between, on the one hand, the Company or any Subsidiary of the Company and, on the other hand, (A) any Significant Stockholder or Affiliate or related Person of any Significant Stockholder (except for any transactions with such persons as clients or customers of the Company in the ordinary course of business of the Company Business on terms that are substantially the same as those prevailing at the time for comparable ordinary course transactions with or involving unaffiliated clients or customers of the Company or any Subsidiary), (B) any Affiliate of the Company (other than any wholly owned Subsidiary of the Company) or any joint venture (whether or not such joint venture is subject to RBS approval pursuant to Section 5.05(b)(v)) (except for any transactions where any such Affiliate or such joint ventures are clients or customers of the Company in the ordinary course of business of the Company Business on terms that are substantially the same as those prevailing at the time for comparable ordinary course transactions with or involving unaffiliated clients or customers of the Company or any Subsidiary); provided that any transaction to which clause (C) below is applicable shall be reviewed under that clause, or (C) any officer or director of the Company or any Subsidiary of the Company, including the modification or amendment of any existing agreement or arrangement (other than ordinary course remuneration or benefit matters, including the making of any loans to officers or directors in accordance with applicable Law, including Regulation O of the Federal Reserve Board (12 C.F.R. Part 215));
(iii) any merger, consolidation, business combination or similar transaction (or any amendment to or termination of an agreement to enter into such a transaction) involving the Company, CBNA or CBPA, on the one hand, and any other Person, on the other hand; provided that any transaction to which clause (iv) or (v) below is applicable shall be reviewed under that clause;
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(iv) any acquisition, transfer or disposition by the Company or any Subsidiary of the Company of securities, assets or liabilities, whether in a single transaction or series of related transactions (and whether effected by way of merger, consolidation, purchase, sale or other form of transfer) with a purchase price (in excess of book value) of above $500 million or where the book value of securities, assets or liabilities so acquired, transferred or disposed exceeds $4 billion; provided that:
(A) subject to Section 5.06, during the period beginning on the Effective Date and ending on the first date on which RBS would no longer be considered to exercise control over the Company for EU regulatory purposes (with control being as defined in Article 3(2) of Council Regulation 139/2004/EC of 20 January 2004 on the control of concentrations between undertakings) (the EU Control Period ), in addition to any other approval of RBS required under this Section 5.05(b)(iv), RBSs written approval shall be required for (i) any acquisition by the Company or any of its Subsidiaries of any Financial Institution or any package of assets and liabilities that together constitutes a business equivalent to a Financial Institution or (ii) any other acquisitions by the Company or any of its Subsidiaries the purpose of which is to expand its activities outside of its business model, if the aggregate purchase price (in excess of book value) of all acquisitions described in (i) and (ii) above during the EU Control Period exceeds $125 million in the aggregate for all such acquisitions; and
(B) (x) any acquisition by the Company or any wholly owned Subsidiary of the Company of securities, assets or liabilities of the Company or any wholly owned Subsidiary of the Company and (y) any disposition of securities, assets or liabilities by the Company or any wholly owned Subsidiary of the Company to the Company or any wholly owned Subsidiary of the Company shall not require such written approval of RBS;
(v) entry into any joint venture or similar transaction with any Person (other than the Company or a wholly owned Subsidiary of the Company) where any such joint venture or other entity formed by such transaction has assets or liabilities with a book value in excess of $4 billion;
(vi) the issuance of any Capital Stock of the Company or of any Subsidiary of the Company, other than (A) issuances to the Company or any of the Companys wholly owned Subsidiaries, (B) issuances of the capital stock of a newly formed joint venture entity or the entity in a similar transaction otherwise permitted pursuant to Section 5.05(b)(v) to the parties to the joint venture or
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similar transaction; or (C) (1) any proposed issuance further to the grants of incentive- or equity-based awards in respect of Common Stock or (2) issuances of Common Stock upon the exercise of stock options or stock appreciation rights or the vesting, delivery or settlement of any equity-based awards in respect of Capital Stock of the Company (including Common Stock) or any Subsidiary of the Company (including issuances pursuant to sales to satisfy taxes relating to the exercise, vesting, delivery or settlement thereof), in each case under these sub-clauses (C)(1) and (C)(2), to a current, new, or former officer, director, employee or consultant of the Company or any member of the Company Group pursuant to any incentive or equity compensation plan, employment agreement or other arrangement approved by the Company Board or a duly authorized committee thereof and provided that (x) the aggregate number of shares of Common Stock of the Company underlying any such equity-based awards shall not exceed the number of shares of Common Stock equal to 12 percent of the number of shares of Common Stock of the Company issued and outstanding as of the pricing date of the IPO (such number of shares of Common Stock shall be inclusive of any substitute awards (as defined under the terms of any applicable plan) and shall be subject to adjustment, if any, under the terms of the applicable plan) and (y) any such grants or issuances shall be in compliance with the Remuneration Governance Procedures;
(vii) any increase in the limits under, or changes in the metrics relating to, the Company Funding and Liquidity Metrics, provided that, notwithstanding Section 5.07, for so long as an individual designated by RBS is a member of the Company ALCO pursuant to Section 5.04(d), any approval of RBS required under this Section 5.05(b)(vii) shall be evidenced in a writing signed by such member of the Company ALCO;
(viii) the commencement of any liquidation, dissolution or voluntary bankruptcy, administration, recapitalization or reorganization of the Company or any of its Subsidiaries in any form of transaction, making arrangements with creditors, or consenting to the entry of an order for relief in any involuntary case, or taking the conversion of an involuntary case to a voluntary case, or consenting to the appointment or taking possession by a receiver, trustee or other custodian for all or substantially all of its property, or seeking the protection of any applicable bankruptcy or insolvency law, other than any such actions with respect to a non-material Subsidiary where, in the good faith judgment of the Board, the maintenance or preservation of such Subsidiary is no longer desirable in the conduct of the Company Business; or
(ix) the entering into of any agreement to do any of the foregoing in Section 5.05(b)(i)-(viii).
(c) Until the Final Withdrawal Date, the Company Group Policy Framework shall be amended only upon the mutual consent of the Parties (with the written consent of one Policy Representative of each of the Company and RBS evidencing the consent of
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the Company and RBS, respectively); provided that, after the First Threshold Date, the consent of RBS shall not be required for any de minimis amendment to a policy within the Company Group Policy Framework, provided , further , that the Company shall deliver written notice to each of RBSs Policy Representatives of any proposed amendment to any policy within the Company Group Policy Framework at least seven (7) Business Days before such amendment is sought to be adopted, such notice to specify whether or not the Company considers such amendment to be de minimis .
(d) Until the Deconsolidation Date, neither the Company nor any member of the Company Group shall sell, assign, dispose of or otherwise transfer the economic interest in the securities described on Schedule 5.05(d) hereto or any participation or interest therein (whether legal, beneficial or otherwise), whether directly or indirectly (including pursuant to a derivative transaction), or agree or commit to do any of the foregoing, unless the Company delivers written notice to RBS of any such transaction at least five (5) Business Days before consummating such transaction or agreeing to consummate such transaction.
(e) Neither the Company nor any member of the Company Group shall sell, assign, dispose of or otherwise transfer the economic interest in any securities classified in the consolidated financial statements of the Company as held-to-maturity securities or any participation or interest therein (whether legal, beneficial or otherwise), whether directly or indirectly (including pursuant to a derivative transaction) unless the Company delivers written notice to RBS of any such transaction at least five (5) Business Days before consummating such transaction or agreeing to consummate such transaction, such notice to include a confirmation from the Company Auditors that such transaction will not require the reclassification of the Companys portfolio of held-to-maturity securities under U.S. GAAP or IFRS.
Section 5.06. EU Control Period . During the EU Control Period, at least twelve (12) Business Days before the Company or any of its Subsidiaries enters into any definitive agreement to acquire any securities, assets or liabilities that could (whether or not the Company believes that (i) the securities, assets or liabilities constitute a Financial Institution or any package of assets and liabilities that together constitutes a business equivalent to a Financial Institution or (ii) such acquisition has a purpose of expanding the Companys activities outside of its business model) require approval of RBS pursuant to Section 5.05(b)(iv)(A) (without giving effect to the aggregate monetary threshold set forth therein) (an EU Acquisition ), the Company shall deliver a written notice (an EU Acquisition Notice ) to the RBS Principals setting forth in detail (i) if the Company has determined that the consummation of the relevant EU Acquisition does not require RBSs prior written approval under Section 5.05(b)(iv)(A), the Companys basis for such determination (including the Companys calculation of the purchase price (in excess of book value) of (x) the relevant EU Acquisition and (y) all acquisitions described in clauses (i) and (ii) of Section 5.05(b)(iv)(A) consummated during the EU Control Period as of the date of the EU Acquisition Notice), or (ii) if the Company has determined that the consummation of the relevant EU Acquisition requires RBSs prior written approval under Section 5.05(b)(iv)(A), the Companys calculation of the purchase price (in excess
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of book value) of (x) the relevant EU Acquisition and (y) all acquisitions described in clauses (i) and (ii) of Section 5.05(b)(iv)(A) consummated during the EU Control Period as of the date of the EU Acquisition Notice. The Company shall promptly provide RBS with any other information relating to the EU Acquisition that is reasonably requested by RBS. If RBS, acting reasonably and in accordance with RBSs state aid obligations, disagrees with a determination by the Company pursuant to clause (i) of the preceding sentence, then the relevant EU Acquisition shall be deemed to require RBSs prior written approval under Section 5.05(b)(iv)(A). At the request of RBS from time to time, the Company shall cause an appropriate executive officer of the Company to certify to RBS that the Company and its Subsidiaries have not entered into any definitive agreement during any specified period to acquire any securities, assets or liabilities that should have been the subject of an EU Acquisition Notice pursuant to this Section 5.06.
Section 5.07. Implementation . The consent or approval of RBS (or the determination of RBS not to provide such consent or approval) for any action for which RBS has consent or approval rights under this Article 5 (other than any such rights set forth in Section 5.05(c)) shall be evidenced in a writing signed by any of the Chief Executive Officer of RBS, the Group Finance Director of RBS or the Chief Executive of the Capital Resolution Group of RBS (collectively, the RBS Principals ), which writing shall be delivered to the Company within twelve (12) Business Days following receipt of a written request for such consent or approval from the Company by each of the RBS Principals; provided that if no response is received from an RBS Principal within such period, such consent or approval shall be deemed to have been given. Any written request for consent or approval delivered to the RBS Principals hereunder shall be delivered in writing and by email in a manner in which each RBS Principal shall have notice that such request has been concurrently delivered to the other RBS Principals.
ARTICLE 6
C OMPLIANCE , I NFORMATION AND C ONTROLS
Section 6.01. Policy Compliance and Compliance with Prudential Supervisory Requirements . (a) Until the Final Withdrawal Date, the Company agrees that it will, and will cause each other member of the Company Group to:
(i) comply with (A) the Company Group Policy Framework (unless the Company Group Policy Framework expressly contemplates a termination date other than the Final Withdrawal Date, in which case such specified date shall apply), and (B) the Functional Requirements; and
(ii) at RBSs reasonable written request, take, or refrain from taking, any actions to the extent necessary to enable RBS and each other member of the RBS Group to comply with the Prudential Supervisory Requirements or other Law applicable to RBS and each other member of the RBS Group.
(b) Until the Deconsolidation Date, the Company agrees that it will, and will cause each other member of the Company Group to, comply with the Audit / Non Audit Services Policy Standard set forth in the RBS Group Policy on Corporate Governance as in effect from time to time.
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Section 6.02. RBS Information Rights . (a) Until the Final Withdrawal Date (or, with respect to the matters set forth in Section 6.02(b), the Deconsolidation Date), the Company agrees that it will, and will cause each other member of the Company Group to, promptly, but in any case within five (5) Business Days (subject to any provision of this Agreement that requires that information be provided more promptly) of any request from RBS (unless not practicably available within such time, in which case as soon as practicable thereafter), provide to RBS (including its agents, accountants, advisors, counsel and other representatives) any information with respect to the Company Group, the Company Business and the Company Groups properties, and the financial position, results of operations and prospects of the Company or any other member of the Company Group requested by RBS to: (A) account for the beneficial ownership of the Company by the RBS Group (or any member thereof) in such Persons accounts, financial records and statements, forecasts and planning materials; (B) satisfy the legal, regulatory, compliance, tax, audit (internal and external), risk management, financial management, budgeting and accounting requirements of the RBS Group (or any member thereof); or (C) meet the requirements of any Governmental Authority or securities exchange to which RBS or any other member of the RBS Group is subject, including any Prudential Supervisory Requirements.
(b) Until the Deconsolidation Date the Company agrees that it will, and will cause each other member of the Company Group to, promptly, but in any case within five (5) Business Days (subject to any provision of this Agreement that requires that information be provided more promptly) of any request from RBS (unless not practicably available within such time, in which case as soon as practicable thereafter), provide to RBS (including its agents, accountants, advisors, counsel and other representatives) such information it may request from time to time, including, without limitation:
(i) evidence of the adequate and effective operation of internal control over financial reporting consistent with the level of information (including certification) received by RBS prior to the Effective Date and including providing appropriate Company executive confirmation to RBS in the manner provided prior to the Effective Date of compliance with RBSs requirements in relation to the Sarbanes-Oxley Act of 2002;
(ii) material communications between the Company Auditors and the Audit Committee, including (1) the Company Auditors annual management letter and management responses thereto, (2) communications by the Company Auditor pursuant to Statement of Auditing Standards Nos. 114 and 115 and AU Sections 380/AU-C260 and 325 AU-C26J (or applicable successor rules), (3) letters from the auditors required by PCAOB Rule 3526 to be delivered to the Audit Committee regarding the independent auditors communications with the Audit Committee concerning independence, (4) communications to the Audit Committee required by Rule 2-07 of Regulation S-X regarding critical accounting
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policies and practices to be used, alternative U.S. GAAP treatments for policies and practices related to material items that have been discussed with management of the Company, management letters and the schedule of unadjusted differences, and (5) non-publicly filed internal control reports prepared by management (including reports regarding the status of remediation efforts with respect to significant deficiencies and material weaknesses) and the Company Auditor and related documents;
(iii) certifications of each of the Companys principal executive and principal financial officers addressed to RBS consistent with certifications required to be included in the Companys periodic reports to be filed with the Commission pursuant to Exchange Act Rule 13a-14 and Item 601 of Regulation S-K;
(iv) Control Environment Certifications provided to RBS in the manner undertaken prior to the Effective Date; and
(v) any certifications or letters requested by RBSs independent certified public accountants.
(c) Subject to Section 8.03(b), if the Company reasonably determines that any provision of information pursuant to this Article 6 (including any information provided pursuant to the Functional Requirements) could be commercially detrimental to the Company Business, violate any Law or Contract or result in the waiver of any Privilege, the Parties shall take all reasonable measures to permit the provision of such information in a manner that avoids any such detriment, violation or waiver. If, after the Parties have taken all such measures, the Company is unable to provide any such information other than in a manner that could violate any Law or Contract, the Company shall not be required to provide such information. Any information owned by the Company that is provided to RBS pursuant to this Section 6.02 shall be deemed to remain the property of the Company.
Section 6.03. RBS Access Rights . Until the Final Withdrawal Date, the Company agrees that it will, and will cause each other member of the Company Group to, provide RBS (including its agents, accountants, advisors, counsel and other representatives) with, during regular business hours, full and prompt access to the Companys management and the Companys advisors, external auditors (including the Company Auditors), personnel (including its risk, legal, financial and compliance personnel), data, systems and internal audit function (through the Companys head of internal audit), including access to work papers and any personnel or agents of the Company and the external auditors responsible for conducting the Companys quarterly reviews and annual audit requested by RBS to: (A) account for the beneficial ownership of the Company by the RBS Group (or any member thereof) in such Persons accounts, financial records and statements, forecasts and planning materials; (B) satisfy the legal, regulatory, compliance, tax, audit (internal and external), risk management, financial management, budgeting and accounting requirements of the RBS Group (or any member
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thereof); or (C) meet the requirements of any Governmental Authority or securities exchange to which the RBS Group (or any member thereof) is subject, including any Prudential Supervisory Requirements; provided that, with respect to access to external auditors and the internal audit function, following the Deconsolidation Date, the Company shall only be required to provide RBS with reasonable access to such auditors (including the Company Auditor) and the Companys internal audit function (through the Companys head of internal audit) and shall extend all reasonably requested cooperation in connection with the RBS Groups internal and external audit functions.
Section 6.04. Access by Governmental Authorities . (a) Until the Final Withdrawal Date, the Company agrees that it will, and will cause each other member of the Company Group to:
(i) provide, as promptly as reasonably practicable but in any case within five (5) Business Days of any request from RBS (unless not practicably available within such time, in which case as soon as practicable thereafter) (subject to (i) any provision of applicable Law or this Agreement, (ii) any request of a Governmental Authority, or (iii) any requirement of a national securities exchange in each case that requires that information, records or documents be provided more promptly), any information, records or documents (x) requested or demanded by any Governmental Authority having jurisdiction or oversight authority over RBS or any member of the RBS Group or (y) deemed necessary or advisable by RBS in connection with any filing, report, response or communication made by RBS or any member of the RBS Group with or to any Governmental Authority (whether made pursuant to specific request from such authority or in the ordinary course); and
(ii) upon reasonable notice, provide access to any Governmental Authority having jurisdiction or oversight authority over any member of the RBS Group to its offices, employees and management in a reasonable manner where requested or demanded by such Governmental Authority or as required under applicable Law.
Section 6.05. Remuneration Governance Procedures, Compensation, Tax Responsibility and In-Scope Arrangements . (a) The Company agrees and acknowledges that (i) RBS shall have oversight authority as provided under the Remuneration Governance Procedures, (ii) the Company shall, and shall cause each other member of the Company Group to, comply with the Remuneration Governance Procedures and (iii) for the avoidance of doubt, CompCo shall exercise its authority in compliance with the Remuneration Governance Procedures.
(b) The Company agrees and acknowledges that it shall be responsible for the administration, conversion and satisfaction of all contractual obligations relating to, and costs incurred in connection with, the In-Scope Arrangements, and that RBS shall have no liability with respect thereto.
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(c) Each of RBS and the Company agree and acknowledge that they shall cooperate, and shall cause their respective certified public accountants to cooperate, with the other Party, with respect to tax withholding and reporting obligations relating to the In-Scope Arrangements.
Section 6.06. Cooperation on Public Filings . (a) Subject to Section 6.06(f), until the Final Withdrawal Date, each of RBS and the Company shall cooperate, and shall cause their respective independent certified public accountants to cooperate, with the other Party to the extent requested by such Party in connection with the preparation of such Partys public earnings or other press releases, quarterly and annual reports to shareholders, annual reports on Form 10-K or 20-F, any current reports on Form 8-K or Form 6-K, any reports pursuant to Section 16 of the Exchange Act and any other proxy, information and registration statements, reports, notices, prospectuses and any other filings made by either Party with any Governmental Authority, any national securities exchange or otherwise made publicly available (collectively, the Public Filings ). The Company agrees that it will, and will cause each other member of the Company Group to:
(i) provide to RBS all information that RBS reasonably requests in connection with any RBS Public Filings or that, in the judgment of RBS, is required to be disclosed or incorporated by reference therein under any Law, rule or regulation;
(ii) use its reasonable best efforts to cause the Company Auditors to consent to any reference to them as experts in any RBS Public Filings required under any Law, rule or regulation;
(iii) notify RBS in a timely manner of its intention to make any Public Filing, provide RBS a reasonable opportunity to review and comment on such Public Filing prior to such Public Filing being made and use its reasonable efforts to incorporate any such comments of RBS; provided that the Company shall not be required to take any action that will result in a violation of its disclosure or other obligations under applicable Law;
(iv) if and to the extent requested by RBS, diligently and promptly review and comment on all drafts of any RBS Public Filings or other Disclosure Documents of RBS (including to ensure that any portion of such RBS Public Filing or such Disclosure Document pertaining to the Company Group does not include any information that contains an untrue statement of a material fact or omits to state a material fact necessary to make such information not misleading) and prepare in a diligent and timely fashion any portion of such RBS Public Filing or such Disclosure Document pertaining to the Company Group; and
(v) prior to any printing or public release of any RBS Public Filing, cause an appropriate executive officer of the Company to, if timely requested by RBS, certify that the information relating to any Company Group member in such RBS Public Filing is accurate, true, complete and correct in all material respects.
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(b) The Company will, and will cause each other member of the Company Group to, provide any information requested by RBS pursuant to this Section 6.06 in a timely manner on the dates requested by RBS (which may be earlier than the dates on which the Company otherwise would be required under the provisions of this Agreement to have such information available; provided, however, that where practicable, RBS shall make its request for such information no later than five (5) Business Days prior to the date that RBS expects the Company to provide such information).
(c) With respect to any information provided by one Party to the other Party that is contained in, or used in the preparation of, any public disclosure or Disclosure Document of such other Party, neither Party shall provide any such information that contains an untrue statement of a material fact, or omits to state a material fact necessary to make such information not misleading.
(d) In the event that any member of the Company Group is required by applicable Law to publicly release information concerning such Persons financial information for a period for which RBS has yet to publicly release financial information or that otherwise conflicts with the information with respect to any Company Group member that is included in any RBS Public Filing, the Company shall provide RBS notice of such release of such information, including a copy of such intended release, as soon as practicable prior to such release of such information and in any event within five (5) Business Days prior to such release.
(e) Subject to Section 6.06(f), the Company and RBS shall consult and agree on the timing of their respective Public Filings. Prior to making any Public Filing, each Party shall give the other Party an opportunity to review such Public Filing and to comment thereon and each Party shall use reasonable efforts to incorporate any such comments of the other Party; provided that neither Party shall be required to take an action that will result in a violation of its disclosure or other obligations under applicable Law.
(f) Notwithstanding anything to the contrary in this Section 6.06, RBS shall not be required to consult or cooperate with the Company, or otherwise have any obligations under this Section 6.06, with respect to any RBS Public Filing or any portion of any RBS Public Filing that (x) does not contain information relating to the Company or the Company Business or (y) contains information relating to its ownership of Common Stock but does not otherwise contain any other information relating to the Company or the Company Business.
Section 6.07. Conformance of Information . Until the Final Withdrawal Date, all information provided by any Company Group member to RBS will be consistent in terms of format and detail and otherwise with RBSs policies with respect to the application of IFRS and U.S. GAAP, as applicable, and practices in effect on the Effective Date with respect to the provision of such information by such Company Group member to RBS (and, where appropriate, as presently presented in financial reports to the RBS Board), with such changes therein as may be requested by RBS from time to time consistent with changes in such accounting principles and practices.
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Section 6.08. Disclosure Controls . (a) Until the Final Withdrawal Date, the Company agrees that it will, and will cause each other member of the Company Group to:
(i) maintain, as of and after the Effective Date, disclosure controls and procedures and internal control over financial reporting as defined in Exchange Act Rule 13a-15;
(ii) cause each of its principal executive and principal financial officers to sign and deliver certifications to the Companys periodic reports and will include the certifications in the Companys periodic reports, as and when required pursuant to Exchange Act Rule 13a-14 and Item 601 of Regulation S-K;
(iii) cause its management to evaluate the Companys disclosure controls and procedures and internal control over financial reporting (including any change in internal control over financial reporting) as and when required pursuant to Exchange Act Rule 13a-15; and
(iv) disclose in its periodic reports filed with the Commission information concerning the Company managements responsibilities for and evaluation of the Companys disclosure controls and procedures and internal control over financial reporting (including, without limitation, the annual management report and attestation report of the Company Auditors relating to internal control over financial reporting) as and when required under Items 307 and 308 of Regulation S-K and other applicable Commission rules.
(b) Without limiting the generality of Section 6.08(a), until the Deconsolidation Date, the Company agrees that it will, and will cause each other member of the Company Group to, maintain as of and after the Effective Date internal systems and procedures that will provide reasonable assurance that:
(i) the Companys consolidated financial statements are reliable and timely prepared in accordance with U.S. GAAP and applicable Law;
(ii) all transactions of members of the Company Group are recorded as necessary to permit the preparation of the Companys consolidated financial statements in accordance with U.S. GAAP and applicable Law;
(iii) the receipts and expenditures of members of the Company Group are authorized at the appropriate level within the Company; and
(iv) unauthorized use or disposition of the assets of any member of the Company Group that could have a material effect on the Companys consolidated financial statements is prevented or detected in a timely manner.
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Section 6.09. Special Reports of Deficiencies, Violations or Unscheduled Events . (a) Until the Final Withdrawal Date, the Company agrees that it will, and will cause each other member of the Company Group to, report in reasonable detail to RBS the following events or circumstances promptly after any executive officer of the Company or any member of the Company Board becomes aware of such matter: (A) all significant deficiencies and material weaknesses in the design or operation of internal controls, whether over financial reporting or otherwise; (B) any fraud, whether or not material, that involves management or other employees who have a significant role in the Companys internal control over financial reporting; (C) any illegal act within the meaning of Section 10A(b) and (f) of the Exchange Act and (D) any material violation of Law, including for the avoidance of doubt, any report of a violation that an attorney representing any Company Group member has formally made to any officers or directors of the Company pursuant to the SECs attorney conduct rules (17 C.F.R. Part 205), or the Company Group Policy Framework.
(b) Until the Final Withdrawal Date, the Company agrees that it will, and will cause each other member of the Company Group to, report in reasonable detail to RBS promptly after any executive officer of the Company or any member of the Company Board becomes aware of any material change, or any development involving a prospective material change, in or affecting the general affairs, management, financial position, stockholders equity or results of operations of the Company Group on a consolidated basis.
Section 6.10. Company Information Rights . (a) Until the Final Withdrawal Date, RBS will, and will cause each other member of the RBS Group to, as promptly as reasonably practicable but in any case within five (5) Business Days (subject to any provision of this Agreement that requires that such action be taken more promptly) of any request from the Company (unless not practicably available within such time, in which case as soon as practicable thereafter), provide to the Company (including its agents, accountants, advisors, counsel and other representatives):
(i) Financial, accounting, taxation and other information and records of, or confirmations from, RBS and each member of the RBS Group;
(ii) Audit documents and papers of RBSs auditors as may be reasonably required by the Company from time to time; and
(iii) Access to relevant personnel of RBS and each member of the RBS Group,
in each case to the extent such information or access is necessary for the Company or any other member of the Company Group to comply with any applicable Law or to meet the requirements of any Governmental Authority or securities exchange to which the Company is subject.
(b) Subject to Section 8.03(b), if RBS reasonably determines that any provision of information pursuant to this Article 6 (including any information provided pursuant to
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the Functional Requirements) could be commercially detrimental to the RBS Business, violate any Law or Contract or result in the waiver of any Privilege, the Parties shall take all reasonable measures to permit the provision of such information in a manner that avoids any such detriment, violation or waiver. If, after the Parties have taken all such measures, RBS is unable to provide any such information other than in a manner that could violate any Law or Contract, RBS shall not be required to provide such information. Any information owned by RBS that is provided to the Company pursuant to this Section 6.10 shall be deemed to remain the property of RBS.
Section 6.11. Access to Historical Records . For a period of five years following the Final Withdrawal Date, subject to an extension of up to ten years upon the demonstration of a legal, tax or regulatory requirement for such extension by the requesting Party, RBS and the Company shall retain the right to access such records of the other which exist as a result of RBSs control or ownership of all or a portion of the Company. Upon reasonable notice and at each Partys own expense, RBS (and its authorized representatives) and the Company (and its authorized representatives) shall be afforded access to such records at reasonable times and during normal business hours and each Party (and its authorized representatives) shall be permitted, at its own expense, to make abstracts from, or copies of, any such records; provided , access to such records may be denied if (i) RBS or the Company, as the case may be, cannot demonstrate a legitimate business need (during the five year period following the Final Withdrawal Date), or a legal, tax or regulatory requirement (during the extension period described above), for such access to the records; (ii) the information contained in the records is subject to any applicable confidentiality commitment to a third party; (iii) a bona fide competitive reason exists to deny such access; (iv) the records are to be used for the initiation of, or as part of, a suit or claim against the other Party; (v) such access would serve as a waiver of any Privilege afforded to such record; or (vi) such access would unreasonably disrupt the normal operations of RBS or the Company, as the case may be. Notwithstanding the foregoing, nothing in this Section 6.11 shall require either Party to modify its record retention policy as may be in effect from time to time to retain or preserve any records that in the absence of this Section 6.11 would otherwise be exempt from such retention requirement.
Section 6.12. Expenses . Except as expressly provided in Section 6.11, the Company shall be responsible for any expenses it incurs in connection with the fulfillment of its obligations under Article 5 and this Article 6, except (i) out-of-pocket expenses reasonably incurred with respect to any specific request by RBS for information or access in excess of information or access historically provided by the Company to RBS prior to the Effective Date, unless such request relates to any action by, or inaction of, any member of the Company Group that is inconsistent with such past practice; and (ii) to the extent expressly agreed between RBS and the Company prior to the incurrence of any specific expenses.
Section 6.13. Additional Matters. (a) For the avoidance of doubt, the rights and obligations set out in this Article 6 shall be deemed to include, but are not intended to limit, or be limited by, the rights and obligations of RBS and the Company pursuant to the Functional Requirements.
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(b) For the avoidance of doubt, the rights and obligations granted under this Article 6 are subject to any specific provisions on the retention, rights to use or confidential treatment of information set forth in any Ancillary Agreement.
(c) For the avoidance of doubt, each obligation of either Party to provide information and access to information pursuant to this Article 6 shall include the obligation to provide information and access to information in any form, including, without limitation, in written, oral, electronic or other tangible or intangible forms and stored in any medium, whether in existence now or in the future.
ARTICLE 7
C ERTAIN B USINESS M ATTERS
Section 7.01. Insurance Matters . (a) The Company has since the Insurance Separation Date and shall until the Final Withdrawal Date maintain in effect the Insurance Policies set forth on Schedule 7.01. Since the Insurance Separation Date, the coverage under all Shared Insurance Policies has and shall continue in force only for the benefit of RBS and other members of the RBS Group and not for the benefit of the Company or any other member of the Company Group. Effective from and after the Insurance Separation Date, the Company has and shall continue to arrange for its own Insurance Policies with respect to the Company Business covering all periods (whether prior to or following the Insurance Separation Date) and agrees not to seek, through any means, benefit from any of RBSs or its Affiliates Insurance Policies that may provide coverage for claims relating in any way to the Company Business following the Insurance Separation Date.
(b) Where Shared Insurance Policies with an insurer cover Liabilities related to the Company Business reported after the Insurance Separation Date with respect to an occurrence prior to the Insurance Separation Date under an occurrence-based Shared Insurance Policy (collectively, Covered Claims ), then the members of the Company Group may notify RBS of such claim and RBS shall seek coverage for such Covered Claims under such Shared Insurance Policies, control the prosecution and defense of such Covered Claims and forward any insurance proceeds recoverable with respect thereto pursuant to Section 3.02(d) hereof, without any prejudice or limitation to RBS seeking insurance under the Shared Insurance Policies for its own claims. After the Insurance Separation Date, RBS has and shall continue to procure and administer the Shared Insurance Policies, provided that such administration shall not limit, inhibit or preclude the right of the members of the Company Group to insurance coverage thereunder in accordance with this Section 7.01(b), in each case, with respect to Covered Claims. The Company shall promptly notify RBS of any Covered Claims, and RBS agrees to reasonably cooperate with the Company concerning the pursuit by the Company of any such Covered Claim, in each case at the expense of the Company (to the extent such expenses are not covered by the applicable Shared Insurance Policies).
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(c) In the event that Covered Claims relate to the same occurrences for which RBS is seeking coverage under such Shared Insurance Policies and for which the Parties have a shared defense, the Company and RBS shall jointly defend any such claim and waive any conflict of interest necessary to conduct a joint defense, and shall bear any expenses in connection therewith on a pro rata basis in proportion to the assessed value of the claim or claims against such Party (to the extent such expenses are not covered by the applicable Shared Insurance Policies), including self-insured retentions or deductibles. In the event that policy limits under an applicable Shared Insurance Policy are not sufficient to fund all claims of RBS and members of the RBS Group and the Company and members of the Company Group, and any amounts simultaneously due shall be paid to the respective entities in proportion to the assessed value of each respective entitys claim or claims.
Section 7.02. No Restriction on Competition . It is the explicit intent of each of the Parties hereto that the provisions of this Agreement shall not include any non-competition or other similar restrictive arrangements with respect to the range of business activities which may be conducted by the Parties. Accordingly, each of the Parties acknowledges and agrees that, subject to Section 5.05(b)(i), nothing set forth in this Agreement shall be construed to create any explicit or implied restriction or other limitation on (i) the ability of any Party to engage in any business or other activity which competes with the business of any other Party or (ii) the ability of any Party to engage in any specific line of business or engage in any business activity in any specific geographic area.
Section 7.03. No Solicitation of Employees . For and during the 12 month period following the Effective Date, none of RBS, the Company or any member of their respective Groups will, without the prior written consent of the other applicable Party, either directly or indirectly, on their own behalf or in the service or on behalf of others, solicit, aid, induce or encourage any employee at the level of Senior Vice President or higher of any other Partys respective Group to leave his or her employment; provided, however , that nothing in this Section 7.03 shall restrict or preclude the rights of RBS, the Company or any member of their respective Groups from soliciting or hiring (i) any employee who responds to a general solicitation or advertisement that is not specifically targeted or focused on the employees employed by any other Partys respective Group (and nothing shall prohibit such generalized searches for employees through various means, including, but not limited to, the use of advertisements in the media (including trade media) or the engagement of search firms to engage in such searches); provided that the applicable Party has not encouraged or advised such firm to approach any such employee; (ii) any employee whose employment has been terminated by the other Partys respective Group; or (iii) any employee who voluntarily terminated his or her employment more than sixty (60) days prior to any act of solicitation referred to in this Section 7.03.
Section 7.04. Company Capital Reduction . Subject to obtaining any required Governmental Approvals, the Company agrees to consummate the capitalization reduction transaction(s) described in the IPO Registration Statement under the heading Our Relationship with the RBS Group and Certain Other Related Party TransactionsRelationship with the RBS GroupOther.
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Section 7.05. Non-Control Determination . Within thirty (30) days following the first date on which RBS ceases to beneficially own such number of shares of Common Stock representing at least 10% of the voting power of all outstanding shares of Common Stock, RBS shall assess based on the facts and circumstances (including the extent of business relationships among RBS and the Company) whether RBS has a reasonable basis on which to seek a non-control determination with respect to the Company from the Federal Reserve Board and if such reasonable basis exists, RBS shall use commercially reasonable efforts to seek written confirmation from the Federal Reserve Board that RBS is not deemed to control the Company by the Federal Reserve Board.
Section 7.06. Deconsolidation Date Determination. RBS shall provide written confirmation informing the Company that the Deconsolidation Date has occurred. RBS shall provide such written confirmation promptly, but in any case within five (5) Business Days after the Deconsolidation Date.
Section 7.07. Mutual Agreement Procedure Claim . With respect to certain tax matters, each of the Company and RBS agrees to comply with the provisions of Schedule 7.07 hereto.
ARTICLE 8
C ONFIDENTIALITY ; P RESERVATION OF P RIVILEGE
Section 8.01. Confidentiality . (a) Subject to Section 8.02, each of RBS and the Company (each, a Receiving Party ), on behalf of itself and each Person in its respective Group, agree to hold, and to cause its respective directors, officers, employees, agents, accountants, counsel and other advisors and representatives to hold, all Confidential Information received from a Disclosing Party (as defined below) in confidence with at least the same degree of care that applies to its own confidential and proprietary information pursuant to (x) with respect to the Company, the Company Group Policy Framework and (y) with respect to RBS, the RBS Group Policy Framework, in each case as in effect as of the Effective Date. As used in this Article 8, Confidential Information shall include all information with respect to the Company, solely concerning the Company Business (for which the Company shall be the Disclosing Party ) and with respect to RBS, concerning the RBS Business (for which RBS shall be the Disclosing Party) that is accessible to it, in its possession (including Confidential Information in its possession prior to the Effective Date) or furnished by the Disclosing Party or any Person in its respective Group, or accessible to, in the possession of, or furnished to such Receiving Partys respective directors, officers, employees, agents, accountants, counsel and other advisors and representatives at any time pursuant to this Agreement or otherwise (including, for the avoidance of doubt, any Confidential Information provided by the RBS Designee or the RBS Non-Voting Attendee to any member of the RBS Group or any of such members directors, officers, employees, agents, accountants, counsel and other advisors or representatives), except, in each case,
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to the extent that such Confidential Information (i) is or becomes part of the public domain through no breach of this Agreement by the Receiving Party or any of its Group, its respective directors, officers, employees, agents, accountants, counsel and other advisors and representatives, (ii) Confidential Information that was independently developed following the Effective Date by employees or agents of the Receiving Party or any Person in its respective Group, its respective directors, officers, employees, agents, accountants, counsel and other advisors and representatives who have not accessed or otherwise received the applicable Confidential Information; provided that such independent development can be demonstrated by competent, contemporaneous written records of the Receiving Party or any Person in its respective Group, or (iii) becomes available to the Receiving Party or any Person in its respective Group following the Effective Date on a non-confidential basis from a third party who is not bound directly or indirectly by a duty of confidentiality to the Disclosing Party. Notwithstanding the foregoing, this Section 8.01(a) shall not limit the ability of the Receiving Party to disclose information of the Disclosing Party (i) to its directors, officers, employees, agents, accountants, counsel and other advisors or representatives in accordance with this Agreement, (ii) to the extent a Receiving Party discloses such information in any Public Filings or filings with Governmental Authorities pursuant to its reasonable determination that it must make such disclosure or (iii) as required by applicable Law or by any Governmental Authority.
(b) Each Party acknowledges that it and the other members of its Group may have in their possession confidential or proprietary information of third parties that was received under confidentiality or non-disclosure agreements with such third party prior to the Effective Date. Such Party will hold, and will cause the other members of its Group and their respective representatives to hold, in strict confidence the confidential and proprietary information of third parties to which they or any other member of their respective Groups has access, in accordance with the terms of any agreements entered into prior to the Effective Date between one or more members of such Partys Group and such third parties.
(c) Notwithstanding anything to the contrary in this Article 8, (i) to the extent that an Ancillary Agreement or other Contract pursuant to which a Party hereto or a Person in its respective Group is bound or its confidential information is subject provides that certain information shall be maintained confidential on a basis that is more protective of such information or for a longer period of time than provided for herein, then the applicable provisions contained in such Ancillary Agreement or other Contract shall control with respect thereto and (ii) a Party and the Persons in its respective Group shall have no right to use any information of the Disclosing Party unless otherwise provided for in this Agreement, an Ancillary Agreement or Contract between the Parties or a Person in its respective Group.
Section 8.02. Protective Arrangements . In the event that Confidential Information is required to be kept confidential pursuant to Section 8.01 and the Receiving Party or any Person in its Group either determines on the advice of its counsel that it is required to disclose any Confidential Information pursuant to applicable Law (including
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the rules and regulations of the Commission or any national securities exchange) or receives any request or demand from any Governmental Authority to disclose or provide Confidential Information of the Disclosing Party (or any Person in the Disclosing Partys Group) that is subject to the confidentiality provisions hereof, such Party shall notify the other Party prior to disclosing or providing such Confidential Information and shall cooperate at the expense of such other Party in seeking any reasonable protective arrangements (including by seeking confidential treatment of such Confidential Information) requested by such other Party. Subject to the foregoing, the Person that received such a request or determined that it is required to disclose Confidential Information may thereafter disclose or provide Confidential Information to the extent required by such Law (including the rules and regulations of the Commission or any national securities exchange) (as so advised by counsel) or requested or required by such Governmental Authority; provided, however , that such Person provides the other Party, to the extent legally permissible, upon request with a copy of the Confidential Information so disclosed.
Section 8.03. Preservation of Legal Privileges . (a) RBS and the Company recognize that the members of their respective Groups possess and will possess information and advice that has been previously developed but is legally protected from disclosure under legal privileges, such as the attorney-client privilege or work product exemption and other concepts of legal protection ( Privilege ). Neither Party will knowingly waive or compromise any Privilege associated with such information and advice without the prior written consent of the other Party. In the event that Privileged information is required to be disclosed to any arbitrator or mediator in connection with a dispute between the Parties, such disclosure shall not be deemed a waiver of Privilege with respect to such information, and any party receiving it in connection with a proceeding shall be informed of its nature and shall be required to safeguard and protect it.
(b) If the Disclosing Party required to deliver information pursuant to this Agreement believes in good faith (from internal or external counsel), that the delivery of such information would cause the loss of any Privileges (or create a risk of such loss), then both Parties will work in good faith to determine an alternate means of delivering the requested information, or the substance thereof, that does not result in the loss of such Privilege. If needed to preserve a Privilege, the Company and RBS agree to enter into a common interest agreement, in a form to be agreed to by the Parties, in advance of, and as a condition to, such delivery. Notwithstanding the foregoing, if no alternate means can be agreed by the Parties and external counsel to the Disclosing Party informs the Receiving Party in writing that a common interest cannot be established, or with sufficient confidence be asserted, to preserve the Privilege with respect to the information in question, even if a common interest agreement were to be entered into, or that for any other reason the information cannot be delivered without loss of the Privilege (such counsel to explain the reasons for its conclusion briefly but in reasonable detail so that the Receiving Party can review the legal analysis with its own counsel), then the Disclosing Party is excused from providing such information but only to the extent and for the time necessary to preserve the Privileged character thereof.
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(c) Upon receipt by either Party of any subpoena, discovery or other request that may call for the production or disclosure of information that is the subject of a Privilege, or if a Party obtains knowledge that any current or former employee of a Party has received any subpoena, discovery or other request that may call for the production or disclosure of such information, such Party shall provide the other Party a reasonable opportunity to review the information and to assert any rights it may have under this Section 8.03 or otherwise to prevent the production or disclosure of such information. Absent receipt of written consent from the other Party to the production or disclosure of information that may be covered by a Privilege, each Party agrees that it will not produce or disclose any information that may be covered by a Privilege unless a court of competent jurisdiction has entered a final, nonappealable order finding that the information is not entitled to protection under any applicable Privilege.
(d) The Parties agreement to exchange information contained herein are made in reliance on RBSs and the Companys respective agreements, as set forth in Section 8.01, Section 8.02 and this Section 8.03, to maintain the confidentiality of such information and to take the steps provided herein for the preservation of all Privileges that may belong to or be asserted by RBS or the Company, as the case may be. As between the Parties, the access to information being granted pursuant to Article 6 hereof, the agreement to provide witnesses and individuals pursuant to Section 9.10 hereof and the disclosure to RBS and the Company of Privileged information relating to the Company Business or RBS Business (if any) pursuant to this Agreement shall not be asserted by RBS or the Company to constitute, or otherwise deemed, a waiver of any Privilege that has been or may be asserted under this Section 8.03 or otherwise. Nothing in this Agreement shall operate to reduce, minimize or condition the rights granted to RBS and the Company in, or the obligations imposed upon the Parties by, this Section 8.03.
ARTICLE 9
M UTUAL R ELEASES ; I NDEMNIFICATION ; C OOPERATION
Section 9.01. Release of Pre-Closing Claims . (a) Except as provided in Section 9.01(c) and Section 9.04, effective as of the Effective Date, the Company does hereby, for itself and for each member of the Company Group as of the Effective Date and their respective successors and assigns and all Persons who at any time prior to the Effective Date, have been directors, officers, agents or employees of any member of the Company Group (in each case, in their respective capacities as such), release and forever discharge RBS and each member of the RBS Group, and all Persons who at any time prior to the Effective Date have been stockholders, directors, officers, managers, members, agents or employees of any Person in the RBS Group (in each case, in their respective capacities as such), and their respective heirs, executors, administrators, successors and assigns, from any and all Liabilities whatsoever between or among the Company or any Person in the Company Group, on the one hand, and RBS or any Person in the RBS Group, on the other hand, whether at law or in equity (including any rights of contribution or recovery), whether arising under any Contract, by operation of Law or otherwise, existing or arising from any acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed in each case on or before the Effective Date.
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(b) Except as provided in Section 9.01(c) and Section 9.03, effective as of the Effective Date, RBS does hereby, for itself and for each member of the RBS Group as of the Effective Date and their respective successors and assigns and all Persons who at any time prior to the Effective Date, have been directors, officers, agents or employees of any member of the RBS Group (in each case, in their respective capacities as such), release and forever discharge the Company and each member of the Company Group, and all Persons who at any time prior to the Effective Date have been stockholders, directors, officers, managers, members, agents or employees of any Person in the Company Group (in each case, in their respective capacities as such), and their respective heirs, executors, administrators successors and assigns, from any and all Liabilities whatsoever between or among the Company or any Person in the Company Group, on the one hand, and RBS or any Person in the RBS Group, on the other hand, whether at law or in equity (including any rights of contribution or recovery), whether arising under any Contract, by operation of Law or otherwise, existing or arising from any acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed in each case on or before the Effective Date; provided , however , that nothing contained in this Section 9.01(b) shall be construed to include the release by RBS of any rights it may have had in connection with Third Party Shares.
(c) Nothing contained in Section 9.01(a) or (b) shall (x) impair any right of any Person to enforce any Surviving Contract in accordance with its terms or (y) release any Person from:
(i) any Liability provided in or resulting from any Surviving Contract;
(ii) any Liability assumed or retained by, or transferred, assigned or allocated to the Group of which such Person is a member in accordance with, or any other Liability of any Person in any Group under, this Agreement or any Ancillary Agreement;
(iii) any Liability provided in or resulting from any Contract or understanding that is entered into after the Effective Date between a member of the RBS Group, on the one hand, and a member of the Company Group, on the other hand;
(iv) any Liability that the Parties may have with respect to claim for indemnification, recovery or contribution brought pursuant to this Agreement or any Ancillary Agreement, which Liability shall be governed by the provisions of this Article 9 or, if applicable, the appropriate provisions of the Ancillary Agreements; or
(v) any Liability the release of which would result in the release of any Person other than a Person released pursuant to this Section 9.01.
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In addition, nothing contained in Section 9.01(a) shall release RBS from indemnifying any director, officer or employee of the Company or any of its Subsidiaries who was a director, officer or employee of RBS or any of its Affiliates on or prior to the Effective Date, to the extent such director, officer or employee is or becomes a named defendant in any Action with respect to which he or she was entitled to such indemnification pursuant to obligations existing prior to the Effective Date, it being understood that if the underlying obligation giving rise to such Action is a liability of the Company, the Company shall indemnify RBS for such Liability (including RBSs costs to indemnify the director, officer or employee) in accordance with the provisions set forth in this Article 9.
(d) The Company shall not make, and shall not permit any Person in the Company Group to make, any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution, recovery or any indemnification, against RBS or any Person in the RBS Group, or any other Person released pursuant to Section 9.01(a), with respect to any Liabilities released pursuant to Section 9.01(a). RBS shall not make, and shall not permit any Person in the RBS Group to make, any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution, recovery or any indemnification against the Company or any Person in the Company Group, or any other Person released pursuant to Section 9.01(b), with respect to any Liabilities released pursuant to Section 9.01(b).
(e) It is the intent of each of RBS and the Company, by virtue of the provisions of this Section 9.01, to provide for a full and complete release and discharge of all Liabilities existing or arising from all acts and events occurring or failing to occur or alleged to have occurred or to have failed to occur and all conditions existing or alleged to have existed in each case on or before the Effective Date, between or among the Company or any Person in the Company Group, on the one hand, and RBS or any Person in the RBS Group, on the other hand (including any contractual agreements or arrangements existing or alleged to exist between or among any such Persons on or before the Effective Date), except as expressly set forth in Section 9.01(c). At any time, at the request of the other Party, each Party shall cause each Person in its respective Group and to the extent practicable each other Person to execute and deliver releases reflecting the provisions hereof.
(f) If any current or former director, officer, agent or employee of either RBS or the Company initiates an Action with respect to claims released by this Section 9.01, the Party for whom such Person served as a director, officer, agent or employee at the time the Action arose shall indemnify the other Party against such Action in accordance with the provisions set forth in this Article 9.
Section 9.02. Pending, Threatened and Unasserted Claims . The Company shall assume liability for all claims, including pending, threatened and unasserted claims, relating to actions or omissions relating to the Company Business and RBS shall assume liability for all pending, threatened and unasserted claims relating to actions or omissions relating to the RBS Business. In the event of any third-party claims that name both Parties as defendants, each Party will cooperate with the other Party to defend against such claims.
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Section 9.03. Indemnification by the Company . Except as provided in Sections 9.05 and 9.09, the Company shall indemnify, defend and hold harmless each member of the RBS Group and each of their Affiliates and each member of the RBS Groups and their respective Affiliates directors, officers, employees and agents, and each of the heirs, executors, successors and assigns of any of the foregoing (collectively, the RBS Indemnitees ), from and against any and all Losses of the RBS Indemnitees relating to, arising out of or resulting from (without duplication and including any such Losses arising by way of setoff, counterclaim or defense or enforcement of any lien):
(a) any untrue statement or alleged untrue statement of a material fact contained in any Disclosure Document of any member of the Company Group or any omission or alleged omission to state a material fact in any such Disclosure Document required to be stated therein or necessary to make the statements therein not misleading, except insofar as any such Losses are caused by any untrue statement or alleged untrue statement of a material fact in such Disclosure Document or any omission or alleged omission to state a material fact in such Disclosure Document required to be stated therein or necessary to make the statements therein not misleading based upon information relating to RBS furnished to the Company in writing by RBS expressly for use therein;
(b) the Company Business, including the failure of the Company or any other member of the Company Group to pay, perform or otherwise promptly discharge any Liability relating to, arising out of or resulting from the Company Business in accordance with its terms, whether prior to or after the Effective Date or the date hereof; and
(c) any breach by the Company or any Person in the Company Group of this Agreement or any Ancillary Agreement, unless such Ancillary Agreement expressly provides for separate indemnification therein, in which case, any such indemnification claims may be made thereunder (without duplication and including any such Losses arising by way of setoff, counterclaim or defense or enforcement of any lien).
Section 9.04. Indemnification by RBS . Except as provided in Sections 9.05 and 9.09, RBS shall indemnify, defend and hold harmless each member of the Company Group and each of their Affiliates and each member of the Company Groups and their respective Affiliates directors, officers, employees and agents, and each of the heirs, executors, successors and assigns of any of the foregoing (collectively, the Company Indemnitees ), from and against any and all Losses of the Company Indemnitees relating to, arising out of or resulting from (without duplication and including any such Losses arising by way of setoff, counterclaim or defense or enforcement of any lien):
(a) any untrue statement or alleged untrue statement of a material fact contained in any Disclosure Document of any member of the Company Group or any omission or alleged omission to state a material fact in any such Disclosure Document
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required to be stated therein or necessary to make the statements therein not misleading that is based upon information relating to RBS furnished to the Company in writing by RBS expressly for use in such Disclosure Document;
(b) the RBS Business, including the failure of RBS or any other member of the RBS Group to pay, perform or otherwise promptly discharge any Liability relating to, arising out of or resulting from the RBS Business in accordance with its terms, whether prior to or after the Effective Date or the date hereof; and
(c) any breach by RBS or any Person in the RBS Group of this Agreement or any Ancillary Agreement, unless such Ancillary Agreement expressly provides for separate indemnification therein, in which case, any such indemnification claims may be made thereunder (without duplication and including any such Losses arising by way of setoff, counterclaim or defense or enforcement of any lien).
Section 9.05. Indemnification Obligations Net of Insurance Proceeds and Other Amounts . (a) The Parties intend that any Loss subject to indemnification or reimbursement pursuant to this Article 9 will be net of Insurance Proceeds that actually reduce the amount of the Loss. Accordingly, the amount which any Party (an Indemnifying Party ) is required to pay to any Person entitled to indemnification hereunder (an Indemnitee ) will be reduced by any Insurance Proceeds theretofore actually recovered by or on behalf of the Indemnitee in respect of the related Loss. If an Indemnitee receives a payment (an Indemnity Payment ) required by this Agreement from an Indemnifying Party in respect of any Loss and subsequently receives Insurance Proceeds, then the Indemnitee will pay to the Indemnifying Party an amount equal to the excess of the Indemnity Payment received over the amount of the Indemnity Payment that would have been due if the Insurance Proceeds had been received, realized or recovered before the Indemnity Payment was made.
(b) An insurer that would otherwise be obligated to pay any claim shall not be relieved of the responsibility with respect thereto or, solely by virtue of the indemnification provisions hereof, have any subrogation rights with respect thereto, it being expressly understood and agreed that no insurer or any other third party shall be entitled to a wind-fall (i.e., a benefit such insurer or other third party would not be entitled to receive in the absence of the indemnification provisions) by virtue of the indemnification provisions hereof. Nothing contained in this Agreement or any Ancillary Agreement shall obligate any Person in any Group to seek to collect or recover any Insurance Proceeds.
(c) Any Indemnity Payment made by the Company shall be (i) increased as necessary so that after making all payments in respect to taxes imposed on or attributable to such Indemnity Payment, each RBS Indemnitee receives a net amount equal to the sum it would have received had no such taxes been imposed and (ii) reduced to take account of any net Tax benefit actually realized by an RBS Indemnitee arising from the incurrence or payment of the Loss to which the Indemnity Payment relates. Any Indemnity Payment made by RBS shall be (i) increased as necessary so that after making
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all payments in respect to taxes imposed on or attributable to such Indemnity Payment, each Company Indemnitee receives a net amount equal to the sum it would have received had no such taxes been imposed and (ii) reduced to take account of any net Tax benefit actually realized by a Company Indemnitee arising from the incurrence or payment of the Loss to which the Indemnity Payment relates.
(d) If an indemnification claim is covered by the indemnification provisions of an Ancillary Agreement, the claim shall be made under the Ancillary Agreement to the extent applicable and the provisions thereof shall govern such claim. In no event shall any Party be entitled to double recovery from the indemnification provisions of this Agreement and any Ancillary Agreement.
Section 9.06. Procedures for Indemnification of Third Party Claims . (a) If an Indemnitee shall receive notice or otherwise learn of the assertion by a Person (including any Governmental Authority) who is not a Person in the RBS Group or the Company Group of any claim or of the commencement by any such Person of any Action with respect to which an Indemnifying Party may be obligated to provide indemnification to such Indemnitee pursuant to Section 9.02, Section 9.03 or Section 9.04, or any other Section of this Agreement (collectively, a Third Party Claim ), such Indemnitee shall give such Indemnifying Party written notice thereof as promptly as practicable (and in any event within thirty (30) days) after becoming aware of such Third Party Claim. Any such notice shall describe the Third Party Claim in reasonable detail. Notwithstanding the foregoing, the failure of any Indemnitee or other Person to give notice as provided in this Section 9.06(a) shall not relieve the related Indemnifying Party of its obligations under this Article 9, except to the extent, and only to the extent, that such Indemnifying Party is actually prejudiced by such failure to give notice.
(b) An Indemnifying Party may elect (but shall not be required) to defend, at such Indemnifying Partys own expense and by such Indemnifying Partys own counsel (which counsel shall be reasonably satisfactory to the Indemnitee), any Third Party Claim if such Indemnifying Party acknowledges that it would have an indemnity obligation for the Liability resulting from such Third Party Claim as provided for under this Article 9 within forty-five (45) days after the receipt of notice from an Indemnitee in accordance with Section 9.06(a); provided that the Indemnifying Party shall not be entitled to defend and shall pay the reasonable fees and expenses of one separate counsel (in addition to local counsel or counsel with specialized expertise) for all Indemnitees if the claim for indemnification relates to or arises in connection with any criminal action, indictment or allegation; and provided , further , that if an Indemnifying Party elects to defend a Third Party Claim pursuant to this Section 9.06(b), such defense shall be carried out in consultation with the applicable Indemnitees. Within forty-five (45) days after the receipt of notice from an Indemnitee in accordance with Section 9.06(a) (or sooner, if the nature of such Third Party Claim so requires), the Indemnifying Party shall notify the Indemnitee of its election whether the Indemnifying Party will assume responsibility for defending such Third Party Claim, which election shall specify any reservations or exceptions to its defense. After notice from an Indemnifying Party to an Indemnitee of its election to assume the defense of a Third Party Claim, such Indemnitee shall have the
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right to employ separate counsel and to participate in (but not control) the defense, compromise, or settlement thereof, but the fees and expenses of such counsel shall be the expense of such Indemnitee; provided, however , that (i) if the Indemnifying Party has elected to assume the defense of the Third Party Claim but has specified, and continues to assert, any reservations or exceptions in such notice or (ii) if the Third Party Claim involves injunctive or equitable relief, then, in any such case, the reasonable fees and expenses of one separate counsel (in addition to local counsel or counsel with specialized expertise) for all Indemnitees shall be borne by the Indemnifying Party.
(c) If an Indemnifying Party elects not to assume responsibility for defending a Third Party Claim, or fails to notify an Indemnitee of its election as provided in Section 9.06(b), and for any period during which an Indemnifying Party has not assumed the defense of a Third Party Claim (other than during any period in which the Indemnitee shall have failed to give notice of the Third Party Claim in accordance with Section 9.06(a)), such Indemnitee may defend such Third Party Claim at the cost and expense of the Indemnifying Party. Any legal fees and expenses incurred by the Indemnitee in connection with defending such claim shall be paid by the Indemnifying Party at the then applicable regular rates charged by counsel, without regard to any flat fee or special fee arrangement otherwise in effect between such counsel and the Indemnitee.
(d) Unless the Indemnifying Party has failed to assume the defense of the Third Party Claim in accordance with the terms of this Agreement, no Indemnitee may settle or compromise any Third Party Claim without the consent of the Indemnifying Party. If an Indemnifying Party has failed to assume the defense of the Third Party Claim within the time period specified in clause (b) above, it shall not be a defense to any obligation to pay any amount in respect of such Third Party Claim that the Indemnifying Party was not consulted in the defense thereof, that such Indemnifying Partys views or opinions as to the conduct of such defense were not accepted or adopted, that such Indemnifying Party does not approve of the quality or manner of the defense thereof or that such Third Party Claim was incurred by reason of a settlement rather than by a judgment or other determination of liability.
(e) In the case of a Third Party Claim, no Indemnifying Party shall consent to entry of any judgment or enter into any settlement of the Third Party Claim without the consent of the Indemnitee if the effect thereof is (i) to permit any injunction, declaratory judgment, other order or other non-monetary relief to be entered, directly or indirectly, against any Indemnitee or (ii) to ascribe any fault on any Indemnitee in connection with such defense.
(f) Notwithstanding the foregoing, the Indemnifying Party shall not, without the prior written consent of the Indemnitee, settle or compromise any Third Party Claim or consent to the entry of any judgment which does not include as an unconditional term thereof the delivery by the claimant or plaintiff to the Indemnitee of a written release from all Liability in respect of such Third Party Claim.
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Section 9.07. Additional Matters . (a) Any claim on account of a Loss which does not result from a Third Party Claim shall be asserted by written notice given by the Indemnitee to the related Indemnifying Party. Such Indemnifying Party shall have a period of thirty (30) days after the receipt of such notice within which to respond thereto. If such Indemnifying Party does not respond within such 30-day period, such Indemnifying Party shall be deemed to have refused to accept responsibility to make payment. If such Indemnifying Party does not respond within such 30-day period or rejects such claim in whole or in part, such Indemnitee shall be free to pursue such remedies as may be available to such Indemnitee as contemplated by this Agreement and the Ancillary Agreements.
(b) In the event of payment by or on behalf of any Indemnifying Party to any Indemnitee in connection with any Third Party Claim, such Indemnifying Party shall be subrogated to and shall stand in the place of such Indemnitee as to any events or circumstances in respect of which such Indemnitee may have any right, defense or claim relating to such Third Party Claim against any claimant or plaintiff asserting such Third Party Claim or against any other Person. Such Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and expense of such Indemnifying Party, in prosecuting any subrogated right, defense or claim.
(c) In the event of an Action in which the Indemnifying Party is not a named defendant, if either the Indemnitee or Indemnifying Party shall so request, the Parties shall endeavor to substitute the Indemnifying Party for the named defendant or otherwise hold the Indemnifying Party as party thereto, if at all practicable. If such substitution or addition cannot be achieved for any reason or is not requested, the named defendant shall allow the Indemnifying Party to manage the Action as set forth in this Section, and the Indemnifying Party shall fully indemnify the named defendant against all costs of defending the Action (including court costs, sanctions imposed by a court, attorneys fees, experts fees and all other external expenses), the costs of any judgment or settlement, and the cost of any interest or penalties relating to any judgment or settlement with respect to such Third Party Claim.
Section 9.08. Remedies Cumulative . The remedies provided in this Article 9 shall be cumulative and, subject to the provisions of Article 8, shall not preclude assertion by any Indemnitee of any other rights or the seeking of any and all other remedies against any Indemnifying Party.
Section 9.09. Special Damages . NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT OR ANY ANCILLARY AGREEMENT TO THE CONTRARY, IN NO EVENT WILL EITHER PARTY OR ANY OF ITS GROUP MEMBERS BE LIABLE FOR ANY SPECIAL, INCIDENTAL, INDIRECT, COLLATERAL, CONSEQUENTIAL OR PUNITIVE DAMAGES OR LOST PROFITS SUFFERED BY AN INDEMNITEE, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, IN CONNECTION WITH ANY DAMAGES ARISING HEREUNDER OR THEREUNDER (INCLUDING ANY LOSS IN THE VALUE OF COMMON STOCK BENEFICIALLY OWNED BY AN INDEMNITEE); PROVIDED, HOWEVER ,
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THAT TO THE EXTENT AN INDEMNITEE IS REQUIRED TO PAY ANY SPECIAL, INCIDENTAL, INDIRECT, COLLATERAL, CONSEQUENTIAL OR PUNITIVE DAMAGES OR LOST PROFITS (INCLUDING IN RESPECT OF ANY LOSS IN THE VALUE OF COMMON STOCK, INCLUDING THIRD PARTY SHARES) TO A PERSON WHO IS NOT A MEMBER OF THE INDEMNITEES GROUP IN CONNECTION WITH A THIRD PARTY CLAIM, SUCH DAMAGES WILL CONSTITUTE DIRECT DAMAGES AND NOT BE SUBJECT TO THE LIMITATION SET FORTH IN THIS SECTION 9 .09.
Section 9.10. Production of Witnesses; Records; Cooperation . (a) After the Effective Date, except in the case of any Action involving or relating to a conflict or dispute between any member of the RBS Group, on the one hand, and any member of the Company Group, on the other hand, each Party hereto will use its commercially reasonable efforts to make available to each other Party, upon written request, the then current directors, officers, employees, other personnel and agents of the Person in its respective Group as witnesses and any books, records or other documents within its control or which it otherwise has the ability to make available, to the extent that any such Person (giving consideration to business demands of such directors, officers, employees, other personnel and agents) or books, records or other documents may reasonably be required in connection with any Action in which indemnification is or may reasonably be expected to be sought that the requesting Party may from time to time be involved. The requesting Party shall bear all costs and expenses in connection therewith.
(b) If an Indemnifying Party or Indemnitee chooses to defend or to seek to compromise or settle any Third Party Claim, the other Party shall make available to such Indemnifying Party or Indemnitee, as applicable, upon written request then current directors, officers, employees, other personnel and agents of the Persons in its respective Group as witnesses and any information within its control or possession, to the extent that any such Person (giving consideration to business demands of such directors, officers, employees, other personnel and agents) or books, records or other documents may reasonably be required in connection with such defense, settlement or compromise, or such prosecution, evaluation or pursuit, as the case may be, and shall otherwise reasonably cooperate in such defense, settlement or compromise, or such prosecution, evaluation or pursuit, as the case may be.
(c) Without limiting the foregoing, the Parties shall cooperate and consult to the extent reasonably necessary with respect to any Actions in which indemnification is or may reasonably be expected to be sought.
(d) The obligation of the Parties to provide witnesses pursuant to this Section 9.10 is intended to be interpreted in a manner so as to facilitate cooperation and shall include the obligation to provide as witnesses employees and other officers without regard to whether the witness or the employer of the witness could assert a possible business conflict (subject to the exception set forth in the first sentence of Section 9.10(a)).
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(e) In connection with any matter contemplated by this Section 9.10 the Parties will enter into a mutually acceptable joint defense agreement so as to maintain to the extent practicable any applicable attorney-client privilege or work product immunity of any Person in any Group.
Section 9.11. Company Warranty in respect of Pre-Closing Claims . As of the Effective Date the Company does hereby, for itself and for each member of the Company Group and their respective successors and assigns and all Persons who at any time prior to the Effective Date have been directors, officers, agents or employees of any member of the Company Group (in each case, in their respective capacities as such) (collectively, the Company Warrantors ), warrant and represent that none of the Company Warrantors has sold, transferred, assigned or otherwise disposed of any interest any of them have, had or may have had in relation to those claims released in Section 9.01(a).
Section 9.12. RBS Warranty in respect of Pre-Closing Claims . As of the Effective Date RBS does hereby, for itself and for each member of the RBS Group and their respective successors and assigns and all Persons who at any time prior to the Effective Date have been directors, officers, agents or employees of any member of the RBS Group (in each case, in their respective capacities as such) (collectively, the RBS Warrantors ), warrant and represent that none of the RBS Warrantors has sold, transferred, assigned or otherwise disposed of any interest any of them have, had or may have had in relation to those claims released in Section 9.01(b).
ARTICLE 10
D ISPUTE R ESOLUTION
Section 10.01. Disputes . Except as otherwise specifically provided in any Ancillary Agreement, the procedures for discussion, negotiation and mediation set forth in this Article 10 shall apply to all disputes, controversies or claims (whether arising in contract, tort or otherwise) between or among any Person in the RBS Group and the Company Group that may arise out of or relate to, or arise under or in connection with this Agreement, or the transactions contemplated hereby or thereby (including all actions taken in furtherance of the transactions contemplated hereby on or prior to the Effective Date).
Section 10.02. Escalation; Mediation . (a) It is the intent of the Parties to use their respective commercially reasonable efforts to resolve expeditiously any dispute, controversy or claim between or among them with respect to the matters covered by this Agreement or any Ancillary Agreement that may arise from time to time on a mutually acceptable negotiated basis. In furtherance of the foregoing, any Party involved in a dispute, controversy or claim with respect to such matters (except any matters covered by the Trademark License Agreement and the Transitional Services Agreement) may deliver a notice (an Escalation Notice ) demanding an in person meeting involving representatives of the Parties at a senior level of management of the Parties (or if the Parties agree, of the appropriate strategic business unit or division within such entity). A copy of any such Escalation Notice shall be given to the General Counsel, or like officer
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or official, of each Party involved in the dispute, controversy or claim (which copy shall state that it is an Escalation Notice pursuant to this Agreement). Any agenda, location or procedures for such discussions or negotiations between the Parties may be established by the Parties from time to time; provided, however , that the Parties shall use their commercially reasonable efforts to meet within thirty (30) days of the Escalation Notice.
(b) If the Parties are not able to resolve the dispute, controversy or claim through the escalation process referred to above, then the matter shall be referred to mediation. The Parties shall retain a mediator to aid the Parties in their discussions and negotiations by informally providing advice to the Parties. Any opinion expressed by the mediator shall be strictly advisory and shall not be binding on the Parties, nor shall any opinion expressed by the mediator be admissible in any other proceeding. The mediator may be chosen from a list of mediators previously selected by the Parties or by other agreement of the Parties. Costs of the mediation shall be borne equally by the Parties involved in the matter, except that each Party shall be responsible for its own expenses. Mediation shall be a prerequisite to the commencement of any Action by either Party.
Section 10.03. Court Actions . (a) In the event that any Party, after complying with the provisions set forth in Section 10.02 above, desires to commence an Action, such Party, subject to Section 13.17, may submit the dispute, controversy or claim (or such series of related disputes, controversies or claims) to any court of competent jurisdiction as set forth in Section 13.17.
(b) Unless otherwise agreed in writing, the Parties will continue to provide service and honor all other commitments under this Agreement during the course of dispute resolution pursuant to the provisions of this Article 10, except to the extent such commitments are the subject of such dispute, controversy or claim.
ARTICLE 11
F URTHER A SSURANCES
Section 11.01. Further Assurances . (a) In addition to the actions specifically provided for elsewhere in this Agreement, including, without limitation, the actions set forth in Section 6.02, 6.03 and 6.09, each of the Parties hereto will cooperate with each other and shall use its (and will cause their respective Subsidiaries and Affiliates to use) commercially reasonable efforts, prior to, on and after the Effective Date, to take, or cause to be taken, all actions, and to do, or cause to be done, all things, reasonably necessary, proper or advisable under applicable Laws, regulations and agreements to consummate and make effective the transactions contemplated by this Agreement and the Ancillary Agreements.
(b) Without limiting the foregoing, prior to, on and after the Effective Date, each Party shall cooperate with the other Party, and without any further consideration, at the expense of such Party, to execute and deliver, or use its commercially reasonable efforts to cause to be executed and delivered, all instruments, including instruments of conveyance, assignment and transfer, and to make all filings with, and to obtain all
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consents, approvals or authorizations of, any Governmental Authority or any other Person under any permit, license, agreement, indenture, order, decree, financial assurance (including letter of credit) or other instrument (including any Consents, Notices or Governmental Approvals), and to take all such other actions as such Party may reasonably be requested to take by such other Party hereto from time to time, consistent with the terms of this Agreement, in order to effectuate the provisions and purposes of this Agreement and the Ancillary Agreements and the other transactions contemplated hereby and thereby.
(c) On or prior to the Effective Date, RBS and the Company in their respective capacities as direct and indirect stockholders of their respective Subsidiaries, shall each ratify any actions which are reasonably necessary or desirable to be taken by RBS, the Company or any other Subsidiary of the Company or RBS, as the case may be, to effectuate the transactions contemplated by this Agreement.
ARTICLE 12
T ERMINATION
Section 12.01. Termination . Except as expressly set forth in Section 12.02, this Agreement shall terminate and be of no further force or effect on the Final Withdrawal Date.
Section 12.02. Effect of Termination; Survival . In the event of any termination of this Agreement, no Party (or any of its directors, officers, members or managers) shall have any Liability or further obligation to any other Party; provided that the terms, provisions and agreements contained in Article 3, Section 6.11, Article 8, Article 9, Article 10 and Sections 11.01(a) and (b) shall survive indefinitely and remain operative and in full force and effect, including (in respect of Article 9) regardless of (i) any investigation made by or on behalf of any Indemnitee; and (ii) the knowledge by the Indemnitee of Liabilities for which it might be entitled to indemnification or contribution hereunder; and provided , further , that the terms, provisions and agreements contained in Schedule 1.01(b) hereto shall survive to the extent contemplated therein. For the avoidance of doubt, the rights and obligations of each of RBS and the Company (including their respective Indemnitees) under this Agreement shall survive the merger or consolidation of any Party, the sale or other transfer by any Party of any assets or businesses or the assignment by it of any Liabilities, or the change of form, change of control or corporate reorganization of any Party.
ARTICLE 13
M ISCELLANEOUS
Section 13.01. Counterparts; Entire Agreement; Conflicting Agreements . (a) This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the Parties and delivered to the other Party. Execution of this Agreement or any other documents pursuant to this Agreement by facsimile or other electronic copy of a signature shall be deemed to be, and shall have the same effect as, executed by an original signature.
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(b) This Agreement, the Ancillary Agreements, the exhibits, the schedules and appendices hereto and thereto contain the entire agreement between the Parties with respect to the subject matter hereof, supersede all previous agreements, negotiations, discussions, writings, understandings, commitments and conversations with respect to such subject matter and there are no agreements or understandings between the Parties with respect to such subject matter other than those set forth or referred to herein or therein.
(c) In the event of any inconsistency between this Agreement and any Schedule hereto, the Schedule shall prevail. Subject to Section 9.05(d), in the event and to the extent that there shall be a conflict between the provisions of this Agreement and the provisions of any Ancillary Agreement, the Ancillary Agreement shall control with respect to the subject matter thereof, and this Agreement shall control with respect to all other matters.
Section 13.02. No Construction Against Drafter . The Parties acknowledge that this Agreement and all the terms and conditions contained herein have been fully reviewed and negotiated by the Parties. Having acknowledged the foregoing, the Parties agree that any principle of construction or rule of law that provides that, in the event of any inconsistency or ambiguity, an agreement shall be construed against the drafter of the agreement shall have no application to the terms and conditions of this Agreement.
Section 13.03. Governing Law . This Agreement shall be governed by and construed and interpreted in accordance with the Laws of the State of New York, without regard to the conflict of laws principles thereof that would result in the application of any Law other than the Laws of the State of New York.
Section 13.04. Transferability; Assignability . This Agreement shall be binding upon and inure to the benefit of the Parties hereto and their respective successors and permitted assigns; provided, however , that no Party hereto may assign its respective rights or delegate its respective obligations under this Agreement without the express prior written consent of the other Party hereto.
Section 13.05. Third Party Beneficiaries . Except for the indemnification rights under this Agreement of any RBS Indemnitee or Company Indemnitee in their respective capacities as such (a) the provisions of this Agreement are solely for the benefit of the Parties and are not intended to confer upon any Person (including employees of the Parties hereto) except the Parties any rights or remedies hereunder, and (b) there are no third party beneficiaries of this Agreement and this Agreement shall not provide any third person (including employees of the Parties hereto) with any remedy, claim, liability, reimbursement, claim of action or other right in excess of those existing without reference to this Agreement.
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Section 13.06. Notices . Except as otherwise provided in Section 5.07, all notices or other communications under this Agreement shall be in writing and shall be deemed to be duly given when (a) delivered in person or (b) deposited in the United States mail or private express mail, postage prepaid, addressed as follows:
If to RBS, to:
The Royal Bank of Scotland Group plc
Business House G, First Floor
RBS Gogarburn
175 Glasgow Road
Edinburgh EH12 1HQ
Scotland
Attention: Group General Counsel
with a copy to:
General Counsel, Corporate / M&A
chris.campbell@rbs.com
rushad.abadan@rbs.com
If to the Company to:
Citizens Financial Group, Inc.
One Citizens Plaza
Providence, RI 02903
Attention: John J. Fawcett, Chief Financial Officer
and
Citizens Financial Group, Inc.
28 State Street, 38th Floor
Boston, MA 02109
Attention: Stephen T. Gannon, General Counsel and Chief Legal Officer
with a copy to:
Citizens Financial Group, Inc.
28 State Street, 12th Floor, MS 1225
Boston, MA 02109
Attention: David A. Bright, Senior Vice President and Senior Counsel
Any Party may, by notice to the other Party, change the address to which such notices are to be given.
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Section 13.07. Severability . If any provision of this Agreement or the application thereof to any Person or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof or the application of such provision to Persons or circumstances or in jurisdictions other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any Party. Upon such determination, the Parties shall negotiate in good faith in an effort to agree upon such a suitable and equitable provision to effect the original intent of the Parties.
Section 13.08. Force Majeure . No Party shall be deemed in default of this Agreement to the extent that any delay or failure in the performance of its obligations under this Agreement results from any cause beyond its reasonable control and without its fault or negligence, such as acts of God, acts of civil or military authority, embargoes, epidemics, war, riots, insurrections, fires, explosions, earthquakes, floods, unusually severe weather conditions, labor problems or unavailability of parts, or, in the case of computer systems, any failure in electrical or air conditioning equipment. In the event of any such excused delay, the time for performance shall be extended for a period equal to the time lost by reason of the delay; provided that if any Party experiences such a delay or failure, it shall immediately provide a written notice to the other Party of such delay or failure, including a reasonably detailed description of the cause.
Section 13.09. Late Payments . Except as expressly provided to the contrary in this Agreement or in any Ancillary Agreement, any amount not paid when due pursuant to this Agreement (and any amounts billed or otherwise invoiced or demanded and properly payable that are not paid within thirty (30) days of such bill, invoice or other demand) shall accrue interest at a rate per annum equal to the Prime Rate plus 2.5%.
Section 13.10. Expenses . Except as otherwise specified in this Agreement or the Ancillary Agreements, and except as set forth on Schedule 13 .10 or as otherwise agreed in writing between RBS and the Company, RBS and the Company shall each be responsible for its own fees, costs and expenses paid or incurred in connection with the IPO.
Section 13.11. Headings . The article, section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.
Section 13.12. Waivers of Default . Waiver by any Party of any default by the other Party of any provision of this Agreement shall not be deemed a waiver by the waiving Party of any subsequent or other default, nor shall it prejudice the rights of the other Party.
Section 13.13. Remedies . The Parties hereby expressly recognize and acknowledge that immediate, extensive and irreparable damage would result, no adequate
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remedy at law would exist and damages would be difficult to determine in the event that any provision of this Agreement is not performed in accordance with its specific terms or otherwise breached. Therefore, in addition to, and not in limitation of, any other remedy available to any Party, except as otherwise expressly provided herein, an aggrieved Party under this Agreement would be entitled to specific performance of the terms hereof and immediate injunctive relief, without the necessity of proving the inadequacy of money damages as a remedy. Neither Party shall be required to obtain or furnish any bond or similar instrument in connection with or as a condition to obtaining or seeking any such remedy. For the avoidance of doubt, nothing in this Agreement shall diminish the availability of specific performance of the obligations under this Agreement or any other injunctive relief. Such remedies, and any and all other remedies provided for in this Agreement, shall be cumulative in nature and not exclusive and shall be in addition to any other remedies whatsoever which any Party may otherwise have. Each of the Parties hereby acknowledges and agrees that it may be difficult to prove damages with reasonable certainty, that it may be difficult to procure suitable substitute performance, and that injunctive relief and/or specific performance will not cause an undue hardship to the Parties. Each Party hereby further agrees that in the event of any action by the other Party for specific performance or injunctive relief, it will not assert that a remedy at law or other remedy would be adequate or that specific performance or injunctive relief in respect of such breach or violation should not be available on the grounds that money damages are adequate or any other grounds
Section 13.14. Amendments . No provisions of this Agreement shall be deemed waived, amended, supplemented or modified by any Party, unless such waiver, amendment, supplement or modification is in writing and signed by the authorized representative of the Party against whom it is sought to enforce such waiver, amendment, supplement or modification.
Section 13.15. Interpretation . Words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other genders as the context requires. The terms hereof, herein and herewith and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole (including all of the schedules, exhibits and appendices hereto) and not to any particular provision of this Agreement. Article, Section, Exhibit, Schedule and Appendix references are to the Articles, Sections, Exhibits, Schedules and Appendices to this Agreement unless otherwise specified. The word including and words of similar import when used in this Agreement shall mean including, without limitation, unless the context otherwise requires or unless otherwise specified.
Section 13.16. Waiver of Jury Trial . EACH OF THE PARTIES HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY COURT PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF AND PERMITTED UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH OF THE PARTIES HEREBY (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR
54
ATTORNEY OF THE OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 13 .16.
Section 13.17. Submission to Jurisdiction; Waivers . With respect to any Action relating to or arising out of this Agreement, subject to the provisions of Article 10, each Party to this Agreement irrevocably (a) consents and submits to the exclusive jurisdiction of the courts of the State of New York and any court of the United States located in the Borough of Manhattan in New York City; (b) waives any objection which such Party may have at any time to the laying of venue of any Action brought in any such court, waives any claim that such Action has been brought in an inconvenient forum and further waives the right to object, with respect to such Action, that such court does not have jurisdiction over such Party; and (c) consents to the service of process at the address set forth for notices in Section 13.06 herein; provided, however , that such manner of service of process shall not preclude the service of process in any other manner permitted under applicable Law.
55
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representatives as of the date set forth above.
THE ROYAL BANK OF SCOTLAND GROUP PLC | ||
By: |
|
|
Name: | ||
Title: | ||
CITIZENS FINANCIAL GROUP, INC. | ||
By: |
|
|
Name: | ||
Title: |
Exhibit 10.2
Dated , 2014
THE ROYAL BANK OF SCOTLAND GROUP PLC
and
CITIZENS FINANCIAL GROUP, INC.
TRANSITIONAL SERVICES AGREEMENT
TABLE OF CONTENTS
P AGE | ||||||||
1 |
Definition and Rules of Construction |
2 | ||||||
1.1 |
Definitions |
2 | ||||||
1.2 |
Rules of Construction |
9 | ||||||
2 |
Performance of Services |
11 | ||||||
2.1 |
Provision of Services and Relief |
11 | ||||||
2.2 |
Incidental and Omitted Services |
13 | ||||||
2.3 |
Standard of Service |
15 | ||||||
2.4 |
Recipient Dependencies |
16 | ||||||
2.5 |
Service Reporting |
17 | ||||||
3 |
Third Party Suppliers |
18 | ||||||
3.1 |
Termination, Expiry or Renewal of Third Party Agreements |
18 | ||||||
3.2 |
Changes in Third Party Supplier Costs |
19 | ||||||
3.3 |
Relationship with Third Party Suppliers |
20 | ||||||
3.4 |
Liability for Third Party Suppliers |
20 | ||||||
4 |
Price and Payment |
21 | ||||||
4.1 |
Charges |
21 | ||||||
4.2 |
Invoicing Procedures and Payment Due |
22 | ||||||
4.3 |
Payments Gross |
23 | ||||||
4.4 |
Interest |
23 | ||||||
4.5 |
Value Added Tax and Sales or Use Tax |
23 | ||||||
5 |
Representations, Warranties and Mutual Obligations |
24 | ||||||
5.1 |
Representations and Warranties |
24 | ||||||
5.2 |
General Obligations |
25 | ||||||
6 |
Term and Termination |
26 | ||||||
6.1 |
TSA Term |
26 | ||||||
6.2 |
Service Term |
26 | ||||||
6.3 |
Service Term Extension |
26 | ||||||
6.4 |
Termination on Notice |
27 | ||||||
6.5 |
Termination for Insolvency |
27 | ||||||
6.6 |
Termination for Regulatory Reasons |
27 | ||||||
6.7 |
Termination for Breach |
28 | ||||||
6.8 |
Termination Charges |
28 | ||||||
6.9 |
Delivery of Data on Termination or Expiry |
28 | ||||||
6.10 |
Survival of Rights on Termination or Expiry |
29 | ||||||
7 |
Migration |
29 | ||||||
7.1 |
Migration and the Migration Plans |
29 | ||||||
7.2 |
Failure to Timely Migrate |
29 | ||||||
8 |
Limitation of Liability and Indemnification |
29 | ||||||
8.1 |
Exclusions from Liability |
29 | ||||||
8.2 |
Cap on Damages and Exclusions |
30 | ||||||
8.3 |
Indemnification |
31 | ||||||
9 |
Governance |
32 |
i
9.1 |
TSA Committee |
32 | ||||||
10 |
Changes and Change Control |
32 | ||||||
10.1 |
Changes |
32 | ||||||
10.2 |
Mandatory Change |
33 | ||||||
10.3 |
Discretionary Changes |
33 | ||||||
10.4 |
Emergency Change |
34 | ||||||
11 |
Dispute Resolution |
34 | ||||||
11.1 |
Dispute Resolution Process |
34 | ||||||
12 |
Intellectual Property Rights |
35 | ||||||
12.1 |
Provider Ownership and License |
35 | ||||||
12.2 |
Recipient Ownership and License |
35 | ||||||
13 |
Data Protection, Confidential Information and Record-keeping |
36 | ||||||
13.1 |
Data Protection |
36 | ||||||
13.2 |
Confidential Information |
37 | ||||||
13.3 |
Record-keeping |
39 | ||||||
14 |
Force Majeure |
40 | ||||||
14.1 |
Force Majeure Events |
40 | ||||||
14.2 |
No Liability for Force Majeure |
40 | ||||||
14.3 |
Delay Owing to Force Majeure |
40 | ||||||
15 |
Employee Provisions |
40 | ||||||
15.1 |
No Obligation to Transfer Employees |
40 | ||||||
15.2 |
Pre-employment Screening |
41 | ||||||
16 |
Communications with Competent Authorities |
42 | ||||||
17 |
Audit |
43 | ||||||
17.1 |
Regulatory Audit Rights |
43 | ||||||
17.2 |
General Audit Rights |
43 | ||||||
18 |
Sanctions |
44 | ||||||
18.1 |
Compliance with Sanctions Laws and Regulations |
44 | ||||||
19 |
Information Security |
45 | ||||||
19.1 |
Information Security |
45 | ||||||
20 |
Other Provisions |
46 | ||||||
20.1 |
Whole Agreement |
46 | ||||||
20.2 |
No Construction Against Drafter |
47 | ||||||
20.3 |
Publicity and Public Announcements |
47 | ||||||
20.4 |
Further Assurances |
47 | ||||||
20.5 |
Assignment |
47 | ||||||
20.6 |
Third Party Rights |
47 | ||||||
20.7 |
Amendment and Waiver |
48 | ||||||
20.8 |
Notices |
48 | ||||||
20.9 |
Severability |
49 | ||||||
20.10 |
Counterparts |
49 | ||||||
20.11 |
Independent Contractor |
49 | ||||||
20.12 |
Governing Law and Submission to Jurisdiction |
49 | ||||||
20.13 |
Anti-Bribery Provisions |
50 |
ii
Schedule 1 Service Schedules | 1-1 | |||||||
Schedule 2 Forms of Invoice | 2-1 | |||||||
Schedule 3 Migration Principles | 3-1 | |||||||
Schedule 4 TSA Committee Terms of Reference | 4-1 | |||||||
Schedule 5 Policies | 5-1 |
iii
TRANSITIONAL SERVICES AGREEMENT
THIS TRANSITIONAL SERVICES AGREEMENT ( TSA ), dated as of [ ], 2014, is by and among THE ROYAL BANK OF SCOTLAND GROUP PLC ( RBSG ), a public limited company organized under the laws of Scotland (Company Number SC045551); and CITIZENS FINANCIAL GROUP, INC . ( CFG ), a Delaware corporation with its principal place of business in Providence, Rhode Island. Capitalized terms used herein and not otherwise defined shall have the respective meanings assigned to them in Section 1 hereof.
RECITALS
WHEREAS, RBSG is the indirect owner of all the issued and outstanding common stock of CFG immediately prior to the date hereof;
WHEREAS, shares of CFG are being sold to the public pursuant to the IPO and CFG will cease to be a wholly owned indirect subsidiary of RBSG upon the closing of the IPO;
WHEREAS, after the closing of the IPO, RBSG will remain the majority shareholder of CFG, subject to future sales to the public (and ultimately the contemplated complete disposition on or before December 31, 2016) by RBSG;
WHEREAS, immediately prior to the date hereof, each Provider specified in a Service Schedule was providing services ( Existing Services ) to the respective Recipient under such Service Schedule which were the same as, or substantially similar to, the Services to be provided thereunder to such Recipient;
WHEREAS, as of the date hereof and pursuant to the terms of (and except as otherwise provided in) the Separation Agreement, all master agreements, statements of work, service schedules and similar agreements, instruments, documents, arrangements, commitments or understandings relating to the Existing Services are terminated;
WHEREAS, Services will be provided to each Recipient to facilitate its ongoing operations during a transitional period following the IPO during which the applicable Provider will also provide assistance to such Recipient relating to Migration as contemplated by this TSA;
WHEREAS, each Provider has agreed to procure and provide the Services to the applicable Recipient, and each Party has agreed to receive and pay for the Services it or its Affiliates receives pursuant to the Service Schedules, subject to the terms of this TSA; and
1
NOW, THEREFORE, in consideration of the rights and duties set forth herein, and for other good and valuable consideration, the adequacy and sufficiency of which are hereby acknowledged, RBSG and CFG hereby agree as follows:
1 | Definition and Rules of Construction |
1.1 | Definitions |
For the purposes of this TSA, the following terms shall have the following meanings:
Adverse Policy Change has the meaning given in Section 2.3.4;
Affiliate means, in relation to any company, such companys holding companies and direct or indirect subsidiaries and the direct or indirect subsidiaries of such holding companies from time to time; however, for purposes of this TSA, the Parties shall not be considered Affiliates of each other. For the avoidance of doubt, in respect of RBSG, Affiliates shall not include CFG or its direct or indirect subsidiaries; and, in respect of CFG, Affiliates shall not include RBSG or its direct or indirect subsidiaries and Affiliates shall be construed accordingly;
Anti-Bribery and Corruption Policy means each policy that a Party shall put in place to comply with its own anti-bribery and corruption policy and obligations, and with Anti-Corruption Laws;
Anti-Corruption Laws means any anti-bribery or anti-corruption-related provisions in criminal and anti-competition laws and/or anti-bribery or anti-corruption laws of the jurisdiction in which, for the Provider, the Provider provides the Services and, for the Recipient, the Recipient receives the Services, together with any amending, consolidating or successor legislation or case law which has effect from time to time in the relevant jurisdiction;
ARD has the meaning given in Section 15.1.1;
Business Day means a day which is not a Saturday, Sunday or public holiday in London, New York or Boston;
CC Laws means all laws relating to the handling of customer complaints that are applicable to the Services;
CFG means Citizens Financial Group, Inc.;
CFG Policies means the policies and procedures of CFG listed in Schedule 5B (as may be amended from time to time in accordance with Sections 2.3.3 and 2.3.4);
CFG Recipient means any of CFG and its Affiliates that is a Recipient under any of the Service Schedules;
Change means any modification, addition or amendment to any Service (including any change to any part of any Service Schedule) including any Mandatory Change or Discretionary Change;
Change Control Procedure means the procedure set out in Section 10.1.1;
Change Control Request has the meaning given in Section 10.1.1(ii);
Charges means the charges imposed on a Recipient in exchange for receiving Services in the relevant Service Schedules;
2
Competent Authority means any local, state, national, supranational, governmental or nongovernmental authority, statutory undertaking, agency or public or regulatory body (including the Prudential Regulation Authority, the Financial Conduct Authority, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau) which has jurisdiction over RBSG (and/or its Affiliates) and/or CFG (and/or its Affiliates);
Confidential Information has the meaning given in Section 13.2.1;
Day 2 means, with respect to a Service, the date on which CFG ceases to be treated as a subsidiary of, a group company of, an affiliate of or controlled by RBSG, pursuant to the terms of a Third Party Agreement necessary for the provision of such Service;
Defaulting Party has the meaning given to it in Section 6.7.1;
Disabling Device means any device, method, token, code, program or subprogram that can disable, interfere with or adversely affect all or any part of a Service, a Partys equipment, and/or their operation, or destroy any of a Partys data or other software or hardware, or damage, destroy or interfere with a Partys information technology network or any of a Partys data or other software or hardware, or permit any person to circumvent the normal security of a Partys software, systems or networks;
Discretionary Change means any Change which is not a Mandatory Change or an Emergency;
Dispute has the meaning given in Section 11.1.1;
Emergency has the meaning given in Section 10.4.2;
Excluded Service means a service or element of a service that, prior to the Service Commencement Date, a Party or its Affiliate, as Recipient with respect to such Service or service element, has expressly notified to the other Party or Affiliate in writing as not being required by the notifying Party or Affiliate whether in relation to its business or the business of its Affiliates or specifically in relation to this TSA;
Existing Services means services provided by the Parties or their Affiliates to each other immediately prior to the date hereof;
Existing Third Party Agreement means any Third Party Agreement in force as at the Service Commencement Date, as the same may be amended from time to time, and any extension, replacement or renewal of such agreement;
Fairness Laws means all applicable federal, state and local fair lending, fair housing, Unfair or Deceptive Acts or Practices and Unfair, Deceptive or Abusive Acts or Practices statutes;
FAM means felony and misdemeanor in the context of a county and lower court-level search;
FIM means felony including misdemeanor in the context of a county-level search;
Force Majeure has the meaning given in Section 14.1;
3
Fraud Prevention Policy means anti-fraud measures or policies that a Partys Group shall have in place whenever it possesses, stores, processes or has access to the other Partys Groups Personal Data, as listed in Schedule 5;
GLB Act means the Gramm-Leach-Bliley Act, 15 U.S.C. 6801 et seq.;
Group means, in relation to (i) a Party, that Party and its Affiliates, (ii) a Provider, that Provider and its Affiliates, and (iii) a Recipient, that Recipient and its Affiliates;
Incidental Services has the meaning given in Section 2.2.1;
Indemnitees has the meaning given in Section 8.3.1;
Intellectual Property Rights means (i) copyrights (including copyrights in any software), patents, database rights and rights in trademarks, designs, know-how and confidential information (whether registered or unregistered), (ii) applications for registration, and rights to apply for registration, of any of the foregoing rights and (iii) all other intellectual property rights and equivalent or similar forms of protection existing anywhere in the world;
IPO means the initial public offering of CFGs shares;
IS Requirements means the information security policies that a Partys Group shall have in place whenever it possesses, stores, processes or has access to the other Partys Groups Confidential Information (inclusive of Personal Data), as listed in Schedule 5;
Level 1 Clearance means individuals who will have no unaccompanied access to any Recipient facility, and no access to the Recipients information technology network or the Recipients Confidential Information;
Level 2+ Clearance means individuals who may have unaccompanied access to any Recipient facility, or any access to the Recipients information technology network or the Recipients Confidential Information;
LIBOR means the ICE Benchmark Administration Limited rate for deposits in £ (Sterling) (or its replacement) for a period of one month which appears on the relevant Reuters Screen rounded upwards to four decimal places at 11:00 a.m. (London Time) on the day specified for the determination of an interest rate (or, if such day is not a Business Day, such rate from the immediately preceding Business Day) and, if no such screen rate is available, the replacement rate or service selected by the TSA Committee;
Licensable means, with respect to any Intellectual Property Rights, that the Licensing Party, as applicable, has the power and authority to grant a license, sublicense or covenant as to such Intellectual Property Rights to the Licensed Party as provided for herein without (i) violating the terms of any agreement or other arrangement with any third party, (ii) requiring any consent, approval or waiver from any third party, (iii) materially impairing any of the existing rights in respect of such Intellectual Property Rights of the Licensing Party, (iv) imposing any additional material obligations on the Licensing Party relating to such Intellectual Property Rights, and/or (v) requiring the payment of any compensation to any third party.
4
Licensed Party means (i) the Provider in its capacity as a licensee for the purposes of the licenses granted in Section 12.2 and (ii) the Recipient in its capacity as a licensee for the purposes of the licenses granted in Section 12.1.
Licensing Party means (i) the Provider in its capacity as a licensor for the purposes of the licenses granted in Section 12.1 and (ii) the Recipient in its capacity as a licensor for the purposes of the licenses granted in Section 12.2.
Losses means losses, claims, damages, costs, charges and liabilities (including reasonable legal fees and disbursements) and Loss shall be construed accordingly;
Mandatory Change means a Change which is required as a consequence of any change in Regulation on or subsequent to the date hereof in order for (i) a Recipient to receive Services or to perform Recipient Dependencies and/or (ii) a Provider to provide (or procure the provision of) Services or to perform any of its other obligations under this TSA, in each case in compliance with Regulation;
Migration means the migration of Services in whole or part from the personnel and information technology systems or other facilities of a Provider, its Affiliates or Third Party Suppliers to the personnel and information technology systems or other facilities of a Recipient, and/or its Affiliates and/or Successor Providers, provided, however , that Migration does not require or otherwise give rise to an obligation on the part of a Provider, its Affiliates or Third Party Suppliers to grant any Successor Provider access to the Provider Systems;
Migration Plan shall have the meaning given in paragraph 2 of Schedule 3;
Migration Principles means the principles relating to Migration set out in Schedule 3;
Monthly Charge has the meaning given in Section 8.2.1;
Non-Defaulting Party has the meaning given in Section 6.7.1;
OFAC means the Office of Foreign Assets Control of the United States Department of the Treasury;
Omitted Service has the meaning given in Section 2.2.2;
Party means RBSG or CFG;
Personal Data of a disclosing Party means any data, information and/or records of or pertaining to the disclosing Partys or an Affiliates customers (current, former or prospective) and employees (current, former or prospective) or its customers customers (current, former or prospective) or employees (current, former or prospective), including but not limited to names, addresses, telephone numbers, account numbers, account and transaction information and any other Nonpublic Personal Information as defined in the GLB Act relating to such individuals;
Policies means the policies and procedures listed in Schedule 5 (as may be amended from time to time in accordance with Sections 2.3.3 and 2.3.4), as applicable to RBSG or CFG;
Provider means each provider specified in the Service Schedule for the relevant Service;
5
Provider Data means all Confidential Information provided in relation to the Services to the Recipient, any member of the Recipients Group, or any Successor Provider, by or on behalf of the Provider or any member of the Providers Group or any Third Party Supplier;
Providers Derivative IP has the meaning given in Section 12.1.2(ii);
Providers Existing IP has the meaning given in Section 12.1.2(i);
Providers Intellectual Property means all Intellectual Property Rights owned by the Provider and shall include software in the Providers information technology infrastructure and systems that is owned by the Provider (such as scripts and batch tools) as is needed by the Recipient to receive the Services (in whole or part) or in relation to Migration;
Providers New IP has the meaning given in Section 12.1.2(iii);
Provider Systems means the information technology systems made available to the Recipient and its Affiliates pursuant to this TSA by or on behalf of the Provider, any member of its Group or any Third Party Supplier, which are supported and maintained by or on behalf of the Provider, any member of its Group or any Third Party Supplier;
RBSG means The Royal Bank of Scotland Group plc;
RBSG Policies means the policies and procedures of RBSG listed in Schedule 5A (as may be amended from time to time in accordance with Sections 2.3.3 and 2.3.4), including but not limited to RBSGs Policy Framework, Information Security and policies on records management and retention;
RBSG Recipient means any of RBSG and its Affiliates that is a Recipient under any of the Service Schedules;
Recipient means each Recipient specified in the Service Schedule for the relevant Service;
Recipient CHS has the meaning given in Section 2.1.8;
Recipient Data means all Confidential Information:
(i) | including, without limitation, all Personal Data provided in relation to the Services to a Provider, any member of the Providers Group, or any Third Party Supplier, by or on behalf of the Recipient or any member of the Recipients Group; or |
(ii) | generated by the Provider, any member of the Providers Group, or any Third Party Supplier in the course of providing the Services; |
Recipient Dependencies means the obligations of a Recipient under this TSA including (i) those expressly identified as Recipient Dependencies in the Service Schedules and any other obligations of the Recipient otherwise set out in the description of the Services in the Service Schedules and (ii) any Recipient Dependencies added in accordance with Sections 2.2.2 and 2.2.3;
Recipients Derivative IP has the meaning given in Section 12.2.2(ii);
Recipients Existing IP has the meaning given in Section 12.2.2(i);
6
Recipients Intellectual Property means all Intellectual Property Rights owned by the Recipient and shall include software in the Recipients information technology infrastructure and systems that is owned by the Recipient (such as scripts and batch tools) as is needed by the Provider to provide the Services (in whole or part) or in relation to Migration;
Recipients New IP has the meaning given in Section 12.2.2(iii);
Regulation means any applicable law, regulation, regulatory constraint, obligation or rule (including any binding code of conduct and binding statement of principle incorporated and contained in such rules) applicable to the existence or operation of this TSA, the Recipient, the Provider, any Affiliate of the Provider, any Affiliate of the Recipient or the provision or receipt of the Services, the performance of any Recipient Dependency or the performance of either Partys other obligations under this TSA from time to time;
Report means a Service Organization Control (SOC) 1 Type II Report (or substantially similar report in the event the SOC 1 Type II Report is no longer the industry standard) issued by an accounting firm which will cover, at a minimum, the policies, procedures and controls required by this TSA and the relevant Service Schedule;
Revised Migration Date means, for the relevant Service, the date that results from adding to that Services Scheduled End Date the period equal to the period of delay to the completion of Migration to the extent directly attributable to the material fault of the Provider for such Service, provided, however , that in no event shall any Revised Migration Date extend beyond December 31, 2016. For the avoidance of doubt, regardless of the length of the period of delay or whether Migration of a Service is complete as of December 31, 2016, a Revised Migration Date shall not be any date after December 31, 2016;
Sales or Use Tax means any sales or use tax or any similar tax imposed at the point of sale or on the use/consumption of goods and services;
Scheduled End Date means December 31, 2016 or, if an earlier date for cessation of services is specified in a Service Schedule with respect to a Service, then such sooner date as is specified for such Service. For the avoidance of doubt, a Scheduled End Date shall not be any date after December 31, 2016;
Senior Nominees means the senior individuals nominated by each Party;
Separation Agreement means the Separation and Shareholder Agreement between RBSG and CFG dated on or about the date of this TSA;
Service Commencement Date means the date hereof;
Service Level means the level of performance set out in Section 2.3.1;
Service Provider CHP means a Providers complaints handling policy for the relevant Service;
Service Records means complete and accurate records of, and supporting documentation for, all Services provided pursuant to this TSA;
7
Service Schedule means any of the Service Schedules in Schedule 1 of this TSA, each of which describes the terms and obligations of a Provider and a Recipient in relation to a particular Service;
Service Term means the period of provision of a Service which period shall start on the Service Commencement Date and expire (unless terminated earlier in accordance with this TSA) in accordance with the provisions of Section 6.2;
Services means:
(i) | the services (or any element of the services) specified in the Service Schedules; |
(ii) | any Incidental Services provided pursuant to Section 2.2.1; and |
(iii) | any Omitted Services added to the Service Schedules pursuant to Section 2.2.2; and |
in each case as more specifically described in the Service Schedule for that Service and Service means any one of the Services;
Staff has the meaning given in Section 15.1.3;
Successor Provider means the entity or entities (which may include a Recipient or any member of its Group) succeeding a Provider in the provision or operation of services the same as or substantially similar to all or part of the Services;
Tax includes all forms of taxation and social security contributions and all statutory, governmental, state, provincial, local governmental or municipal impositions, duties, contributions, levies and withholdings of any nature whatsoever, in each case whether imposed in the United Kingdom, the United States or elsewhere in the world, whenever imposed and whether chargeable directly or primarily or solely against or attributable directly or primarily or solely to the Recipient or any other person, together with all penalties, charges and interest relating to any of the foregoing;
Tax Authority means any body or organization in any jurisdiction having authority over a Party in relation to Tax;
Third Party Agreements means any agreements entered into between a Provider (or any member of its Group) and any third party for the provision of a service, goods, lease or license relating to, or necessary for, the provision of the Services or performance of any of the Providers other obligations under this TSA whether entered into before or after the date of this TSA;
Third Party Consent means any permission, consent, license, agreement, authorization or right to use required, from a third party (whether under a Third Party Agreement or otherwise):
(i) | by the Provider, to the extent necessary to allow the provision of the Services or performance of the Providers other obligations under this TSA by the Provider to or for the benefit of the Recipient or receipt of the Services by the Recipient; or |
(ii) | by the Recipient, to the extent necessary for the Recipient to receive the benefit of the Services provided by the Provider under this TSA; |
8
Third Party Supplier means any third party providing a service, goods, lease or license under a Third Party Agreement;
TSA means this transitional services agreement;
TSA Committee shall have the meaning set out in Section 9.1.1; and
VAT means United Kingdom value added tax imposed in compliance with EC Council Directive 2006/112 or any other tax of a similar nature, whether imposed in a member state of the European Union in substitution for, or levied in addition to, such tax, or imposed elsewhere. Any reference in this TSA to any Party shall, at any time when such Party is treated as a member of a group for VAT purposes, include (where appropriate and unless the context otherwise requires) a reference to the representative member of such group at such time (the term representative member to have the same meaning as in the Value Added Tax Act 1994).
1.2 | Rules of Construction |
Unless the context otherwise requires or except as otherwise expressly provided the following rules of construction shall apply to this TSA.
1.2.1 | Singular, Plural, Gender |
References to one gender include all genders and references to the singular include the plural and vice versa.
1.2.2 | References to Persons and Companies |
References to:
(i) | a person shall include any company, partnership, trust, joint venture, firm, association, unincorporated association, organization, or any government, state or local body or authority (whether or not having separate legal personality); and |
(ii) | a company shall include any company, corporation or any body corporate, wherever incorporated. |
1.2.3 | Schedules, Sections, Appendices, Paragraphs |
References to this TSA shall include any Schedules to it and references to Sections and Schedules are to Sections of, and Schedules to, this TSA. References to paragraphs and appendices are to paragraphs and appendices of the Schedules. All Schedules are an integral part of this TSA.
9
1.2.4 | Headings |
The article, Section and paragraph headings contained in this TSA are for reference purposes only and shall not affect in any way the meaning or interpretation of this TSA.
1.2.5 | Includes, in writing |
The words includes and including shall mean include without limitation and including without limitation, respectively. The words in writing means any communication made by letter (but not, for avoidance of doubt, electronic mail) and written shall be interpreted accordingly.
1.2.6 | Agreed |
References to agreed mean, in relation to any document, that document in the form agreed and, for the purposes of identification, signed or initialed by or on behalf of each Party by a duly authorized representative, with such alterations as the Parties agree in writing.
1.2.7 | Information |
References to books, records or other information mean books, records or other information in any form, including paper, electronically stored data, magnetic media, film and microfilm.
1.2.8 | References to Law |
References to a statute or statutory provision include:
(i) | that statute or provision as modified or amended from time to time, whether before or after the date of this TSA; and |
(ii) | any subordinate legislation or regulation made from time to time under that statute or statutory provision, including (where applicable) that statute or statutory provision as modified or amended. |
1.2.9 | Precedence |
If there is any conflict, apparent conflict or ambiguity in or between any of the sections of this TSA set out below, the sections will be applied in the following order of precedence with the sections higher in the order of precedence prevailing over the Parties:
(i) | the Sections of this TSA; |
(ii) | the Schedules to this TSA; and |
(iii) | any other document referred to in this TSA. |
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1.2.10 | Costs |
Any reference to costs shall mean costs (including internal costs arising in respect of personnel and other related costs) and expenses (including charges, fees and other amounts payable to third parties).
2 | Performance of Services |
2.1 | Provision of Services and Relief |
2.1.1 | Each Provider specified in a Service Schedule shall provide the Services to the relevant Recipient specified in that Service Schedule for the relevant Service Term in accordance with the terms of this TSA. CFG shall timely pay for all Services provided to a CFG Recipient (regardless of whether it is the Recipient, its Affiliate or any of their respective third party service providers who receive the Services) and RBSG shall timely pay for all Services provided to an RBSG Recipient (regardless of whether it is the Recipient, its Affiliate or any of their respective third party service providers who receive the Services), in each case in accordance with the terms of this TSA. |
2.1.2 | A Provider shall provide the Services only to the Recipient specified in the relevant Service Schedule. If a Recipient wishes to add or substitute an Affiliate as a Recipient, such addition or substitution must be agreed in accordance with the Change Control Procedure. The applicable Provider shall not unreasonably withhold or delay its consent to add such requested Affiliate as a Recipient. |
2.1.3 | If the Provider wishes to provide Services to the Recipient via any additional Affiliate or substitute an Affiliate as Provider, such addition or substitution must be agreed in accordance with the Change Control Procedure. The applicable Recipient shall not unreasonably withhold or delay its consent to add such requested Affiliate as a Provider. |
2.1.4 | Without prejudice to the Mandatory Change provisions set out in Section 10 .2, a Provider shall not be in breach of this TSA to the extent that it is unable to provide any of the Services or perform any of its other obligations under this TSA, in each case to the extent that to do so would result in a breach of Regulation, so long as, if and to the extent commercially practicable, such Provider has promptly notified the applicable Recipient of such prohibition, has consulted with the applicable Recipient to explain why the Provider reasonably believes such prohibition applies, and has worked together with the Recipient in good faith to either arrange for modification of the relevant Service(s) at issue or a transition of such Service(s) to a Successor Provider. For the avoidance of doubt, the transition of any Service(s) to a Successor Provider pursuant to this Section 2 .1.4 terminates the applicable Service(s) and related Service Schedule(s) under this TSA and does not create a Third Party Agreement for which the Provider is responsible for the remainder of the Service Term(s) with respect to the affected Service(s). |
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2.1.5 | Subject to the requirements set forth below, a Provider may subcontract the provision of any or all of the Services or any of the Providers other obligations under this TSA. Except in relation to an Existing Third Party Agreement: |
(i) | in selecting the subcontractor in question, the Provider shall have followed its applicable Policies on vendor procurement and approval; |
(ii) | the Provider will notify the Recipient in advance of entering into any subcontract at a meeting of the TSA Committee; |
(iii) | the Provider shall ensure any Third Party Consent that is required for the Recipient to receive the Services (and to sublicense to the extent necessary to receive the full benefit of the Services) is obtained and maintained for the duration of the applicable Service Term; |
(iv) | the Provider shall not be entitled to increase the Charges to reflect any increase in the costs incurred by the Provider under that subcontract, compared to the costs previously incurred by the Provider, other than to the extent it would have been permitted to do so, had it not entered into the subcontract; and |
(v) | the Provider shall furnish the Recipient with information about the subcontractor in question which is reasonable for diligence purposes, and the Recipient approves of the use of the subcontractor via the Change Control Procedure, with such approval not to be unreasonably withheld or delayed. |
2.1.6 | Each Party shall be primarily liable under this TSA for any default in the performance of obligations under this TSA by any Provider in such Partys Group, as well as any such default by any subcontractor of such Provider. |
2.1.7 | In the event that the Provider is to participate in any credit or other business decision with respect to the Recipients customers or potential customers under a Service Schedule, then prior to commencing any Services under such Service Schedule, the Provider shall distribute to each of its personnel who may have such interaction or make such a decision the following Fairness Statement: |
FAIRNESS STATEMENT
The fair and equal treatment of [SERVICE RECIPIENTS] customers, without regard to race, sex, sexual orientation, color, national origin, religion, age, marital status, disability, or any other prohibited basis, is an integral part of [SERVICE RECIPIENTS] fundamental mission of providing quality financial services to existing and prospective customers. Denying any segment of society equal access to basic economic opportunities is morally repugnant and has no place in our society. Only through all of our efforts can we ensure that every bank customer and credit applicant receives fair and equal treatment and that we have helped each member of the communities that [RECIPIENT] serves reach his or her full potential.
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The Provider shall be responsible for ensuring that it and its personnel have reviewed and understand the above Fairness Statement as well as its and their obligations thereunder, and shall comply therewith as well as, subject to the Change Control Procedure with respect to any changes in Regulation occurring after the date hereof, with Fairness Laws. In the event that the Provider detects any incident or activity which constitutes or results in a violation of Fairness Laws with respect to any matter relating to this TSA, the Provider will immediately notify the Recipient.
2.1.8 | In the event that the Provider interacts directly with the Recipients customers or potential customers in the course of providing Services hereunder, then the Provider agrees that, subject to the Change Control Procedure with respect to any changes in Regulation subsequent to the date hereof: |
(i) | the Services will be performed in accordance with any and all laws relating to the handling of customer complaints that are applicable to the Services ( CC Laws ), |
(ii) | the Provider shall not take, or omit to take, any act that could reasonably be expected to lead to the Recipient being in breach of any CC Law, and |
(iii) | it shall have in place and comply with its own complaints handling policy (the Service Provider CHP ) to ensure that the Provider complies with all CC Laws. |
The Provider further agrees that the Services shall be performed in accordance with the Recipients complaint handling standard (as in effect on the date hereof and listed in Schedule 5, the Recipient CHS ); provided that for the purposes of this Section 2.1.8, the Provider shall be deemed to be in compliance with the Recipient CHS if the applicable Service Schedule contains agreed terms relating to complaint monitoring, investigations, escalation procedures, expected timescales and Service Level and Provider complies with such requirements. The Provider shall immediately notify the Recipient in writing of any suspected or known breach of the Service Provider CHP or any CC Law.
2.2 | Incidental and Omitted Services |
2.2.1 | From the Service Commencement Date: |
(i) | each Provider shall provide, with no change to the Charges, in addition to the Services, any other services, functions and responsibilities which are reasonably necessary for or incidental to, or which otherwise constitute an integral part of, the provision of the Services provided by such Provider, provided that no such service, function or responsibility that was not provided during the six months (or, if applicable, such shorter period) prior to the Service Commencement Date shall be required to be provided pursuant to this provision; and |
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(ii) | each Recipient shall provide, with no change to the Charges, in addition to the applicable Recipient Dependencies set out in the Service Schedules, any information, cooperation and assistance and undertake any other responsibilities which are reasonably necessary for or incidental to, or which otherwise constitute an integral part of, the performance of the Recipient Dependencies or the receipt of the Services set out in the Service Schedules, provided that no such information, cooperation and assistance or any other responsibility that was not provided during the six months (or, if applicable, such shorter period) prior to the Service Commencement Date shall be required to be provided pursuant to this provision, |
these being Incidental Services .
2.2.2 | Without limiting Section 2 .2.1, if, during the six months immediately following the Service Commencement Date, either Party identifies any Service or any element of a Service (including any Recipient Dependency) that: |
(i) | was provided by or on behalf of a Provider to a Recipient or any of its Affiliates (or, in the case of a Recipient Dependency, was a dependency in respect of such provision) during the six months (or, if applicable, such shorter period) prior to the Service Commencement Date; |
(ii) | is not included in the Services set out in the Service Schedules or is not appropriately documented within the relevant Service Schedule; and |
(iii) | is not an Excluded Service |
(an Omitted Service ), such Omitted Service shall, upon the relevant Partys request, be deemed to form part of the Services and the Parties shall amend or create the relevant Service Schedule accordingly, including by adding (i)(a) an additional Charge to reflect the additional cost and appropriate margin, if any, to the Provider of the Omitted Services, to the extent that such cost and margin were not taken into account when calculating (and accordingly were not a constituent part of) the Charges for the Services excluding the Omitted Service, and (b) any Recipient Dependency that such Omitted Service is dependent upon; or (ii) any Recipient Dependency that was omitted from an existing Service Schedule. The Parties shall act reasonably and in good faith in agreeing whether and to what extent an additional Charge is payable pursuant to this Section 2.2.2. Disagreement on the Charge for an Omitted Service shall be resolved in accordance with Section 11.
2.2.3 | If at any time more than six months after the Service Commencement Date an Omitted Service is identified, such Omitted Service may be added to the relevant Service Schedule only via the Change Control Procedure. |
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2.3 | Standard of Service |
2.3.1 | Each Provider shall provide each of the Services: |
(i) | in the same manner and with the same skill and care as they were provided to the applicable Recipient during the six-month period (or, if applicable, such shorter period) prior to the Service Commencement Date; |
(ii) | if so specified for a Service, in accordance with any specified Service Level within a Service Schedule for the relevant Service; and |
(iii) | if no Service Level is specified within a Service Schedule for the relevant Service, with the same priority and with the same level of service as they were provided to the applicable Recipient during the six-month period (or, if applicable, such shorter period) prior to the Service Commencement Date. |
2.3.2 | Subject to the Change Control Procedure with respect to any change in Regulation coming into effect after the date hereof, the Provider shall provide and procure the provision of the Services in compliance with the Regulation applicable to the Provider. |
2.3.3 | Subject to the Change Control Procedure with respect to any change in Regulation coming into effect after the date hereof, the Provider shall provide and procure the provision of the Services in accordance with the Policies applicable to the Provider. |
2.3.4 | Without prejudice to Section 2.3.3, each Party shall ensure that, as part of the meetings of the TSA Committee, it notifies the other Party of any changes it has made to the Policies (and, to the extent reasonably practicable, of any proposed changes to the Policies). Notwithstanding the foregoing, if and to the extent that any proposed change to the Policies would materially increase the risk or reduce the operational controls available to the Provider or the Recipient in connection with the provision or receipt of the Services or materially increase the cost or reduce the benefit to the Recipient in receiving the Services or the Provider in providing the Services (an Adverse Policy Change ), the relevant Party shall undertake an impact assessment in advance of the change being implemented and involve the other Party in that impact assessment. In respect of any Adverse Policy Change the Parties shall, acting reasonably and in good faith, develop, agree and implement a remedial plan with the objective of mitigating any material increase in risk or reduction in operational controls available to the Provider or the Recipient in connection with the provision or receipt of the Services or material increase in the cost or reduction in the benefit to the Recipient or Provider in receiving or providing the Services. Any obligations set out in the Service Schedules which require compliance with policies shall be construed as referring to the Policies. |
2.3.5 | If and to the extent a Provider is aware of any material failure, or any circumstances that, in the Providers reasonable opinion, would be reasonably likely to result in a material failure, to provide any material part of the Services in accordance with Section 2 .3.1, 2.3.2 or 2 .3.3, then, without prejudice to the Recipients other rights and remedies, the Provider shall as soon as reasonably practicable: |
(i) | inform the Recipient (and the TSA Committee) of such failure or potential failure (and, if known, what the Provider considers to be the cause of the problem); |
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(ii) | advise the Recipient of the remedial efforts being undertaken with respect to that failure or to prevent that potential failure; and |
(iii) | subject to any duty of confidentiality owed by the Provider, provide the Recipient with further information in relation to the failure or potential failure if and to the extent that information has been produced by, or is otherwise in the possession or control of, the Provider or any of its Affiliates for its own purposes and the Recipient reasonably requires that information at the time in order to manage communications with its customers, employees, investors, suppliers and any Competent Authority. |
2.4 | Recipient Dependencies |
2.4.1 | Each Service Schedule shall specify any Recipient Dependencies for the relevant Service, which are, above and beyond a Recipients general obligations under Section 2 .2.1(ii) with respect to such Services, specific obligations to be performed by the Recipient under that Service Schedule in order for the Provider under that Service Schedule to be able to provide the relevant Service to the Recipient. |
2.4.2 | If and to the extent a Recipient is aware of any material failure, or any circumstances that, in the Recipients reasonable opinion, would be reasonably likely to result in a material failure, to perform any material part of the Recipient Dependencies that are set out in a Service Schedule in accordance with this TSA, then, without prejudice to the applicable Providers other rights and remedies, the Recipient shall, as soon as reasonably practicable: |
(i) | inform the Provider of such failure or potential failure and, if known, what the Recipient considers to be the cause of the problem; and |
(ii) | undertake appropriate remedial efforts and promptly advise the Provider of the remedial efforts being undertaken with respect to that failure or to prevent that potential failure. |
2.4.3 | Without prejudice to any right or remedy of a Provider under this TSA in respect of any other obligations of the Recipient (including in relation to any Recipient Dependency or any Incidental Service performed by a Recipient which is not set out in a Service Schedule), if and to the extent the Recipient fails to perform a Recipient Dependency that is set out in a Service Schedule, Section 2 .4.4 sets out the Providers sole and exclusive remedy in respect of the failure by the Recipient to meet that Recipient Dependency other than with respect to: |
(i) | any such failure which causes unauthorized or unlawful access by a third party to the Providers computing systems or loss or corruption of the Providers data; or |
(ii) | any obligation of the Recipient to pay any amount (including any Charges) to the Provider under this TSA. |
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2.4.4 | Each Party recognizes that each Provider is reliant and dependent on the performance of the Recipient Dependencies in order to provide the Services and to perform its other obligations under this TSA. A Provider shall not be in breach of this TSA to the extent that its failure to provide the Services or perform its other obligations under this TSA is a result of a breach by the Recipient of a Recipient Dependency ( provided that such relief shall not prejudice any rights or remedies of the Recipient in respect of any prior breach by the Provider, to the extent that such prior breach caused the Recipients breach of the relevant Recipient Dependency and was not itself caused by a breach by the Recipient of a Recipient Dependency). Any disputes relating to the Providers relief from a breach by the Recipient of a Recipient Dependency shall be resolved in accordance with Section 11 . Nothing in this Section 2 .4.4 shall exclude or limit the liability of the Provider in relation to any failure to provide the Services or perform its other obligations under this TSA to the extent that such failure is not the result of a breach by the Recipient of a Recipient Dependency. |
2.4.5 | A Recipient shall not be in breach of this TSA to the extent that its failure to perform a Recipient Dependency is a result of a breach by the applicable Provider of an obligation of the Provider ( provided that such relief shall not prejudice any rights or remedies of the Provider in respect of any prior breach by the Recipient, to the extent that such prior breach caused the Providers breach of the relevant obligation and was not itself caused by a breach of the Providers obligations under this TSA). Nothing in this Section 2.4.5 shall exclude or limit the liability of the Recipient in relation to any failure to perform a Recipient Dependency to the extent that such failure is not the result of a breach by the Provider of its obligations under this TSA. |
2.5 | Service Reporting |
2.5.1 | From the Service Commencement Date and thereafter until the Scheduled End Date, each Provider shall, with respect to each Service for which the Service Schedule requires a certain Service Level: |
(i) | record the actual service level achieved for such Service in each calendar month against the relevant Service Level; and |
(ii) | on a quarterly basis (or such alternate frequency if so specified in the relevant Service Schedule) report its performance in respect of the applicable Service Level. |
2.5.2 | At the TSA Committee, the Parties will review each Providers performance against the Service Levels for the previous reporting period. In the event that a Provider has failed to meet any Service Level, that Provider shall present an appropriate action plan detailing steps to remedy the situation. |
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3 | Third Party Suppliers |
3.1 | Termination, Expiry or Renewal of Third Party Agreements |
3.1.1 | If, during a Service Term: |
(i) | a Third Party Agreement is terminated by a Provider (or any member of its Group) or by the Third Party Supplier (for any reason other than Force Majeure (for which Section 14 .2 shall apply) or for insolvency of the Third Party Supplier (for which Section 3.1.7 shall apply)); |
(ii) | a Third Party Agreement expires or is terminated other than as provided in Section 3 .1.1(i); or |
(iii) | a Third Party Agreement otherwise ceases to be available to a Provider for the provisions of Services to a Recipient (for example, by virtue of application of a change of control or similar provision), |
and that Third Party Agreement is required for the provision or receipt of any Service or the performance of any obligation of the Provider or the applicable Recipient, then subject to the provisions of Section 3.1, the Provider shall use commercially reasonable efforts to implement such arrangements as are necessary to ensure continuity of the relevant Service on the same terms of the relevant Service Schedule and this TSA, unless otherwise agreed by the Parties in advance through the TSA Committee.
3.1.2 | Each Provider shall, acting reasonably and in good faith, involve the applicable Recipient to the extent within its reasonable control in any negotiations with any Third Party Supplier in relation to any material change to, or extension, renewal or replacement of, a Third Party Agreement and migration to an alternative Third Party Supplier if and to the extent such change, extension, renewal or replacement would be reasonably likely to materially impact the relevant Service or the Charges for such Service provided under a relevant Service Schedule and this TSA, in each case in respect of the period from the date hereof until the end of the Service Term (and in such event shall to the extent within its reasonable control permit the Recipient to negotiate with the relevant Third Party Supplier in respect of any increase in the Providers costs of implementing such change, extension, renewal, replacement or migration unless the Provider agrees to bear such increased costs and not change the Charges for the Service). |
3.1.3 | The Recipient shall not unreasonably withhold or delay its approval of the costs referred to in Section 3.1.2. Any disputes as to the Recipients payment of such costs shall be resolved by the TSA Committee. |
3.1.4 | Each Party shall use commercially reasonable efforts to mitigate to the extent within its reasonable control any costs required to be incurred in respect of the negotiation and implementation of any change to, or extension, renewal or replacement of, a Third Party Agreement and migration to an alternative Third Party Supplier. |
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3.1.5 | Each Provider shall ensure that, to the extent reasonably practicable, as part of the meetings of the TSA Committee, it gives the Recipient reasonable advance notice of any Third Party Agreements which are expected to be breached or due to expire, terminate or be renewed. |
3.1.6 | Notwithstanding the provisions of Section 3 .1.1, prior to any termination or expiry or renewal of a Third Party Agreement, the Parties shall consult with each other to determine whether, upon termination or expiry of the relevant Third Party Agreement, the applicable Recipient wishes to establish independent arrangements for the Service to which such Third Party Agreement relates. The applicable Provider shall, to the extent reasonably practicable, give the Recipient reasonable advance notice of that termination, expiry or renewal. If the Recipient elects to terminate the affected Service and migrate to a Successor Provider, then the Parties shall agree the changes (if any) that need to be made to the relevant Service Schedules and related Charges. |
3.1.7 | In the event of the insolvency of a Third Party Supplier required for the provision or receipt of a Service or the performance of any obligation of the Provider or the applicable Recipient for such Service, the Provider may discontinue (which, for the avoidance of doubt, shall include electing not to replace) such Service without the discontinuance being a breach or causing any liability of the Provider to the relevant Recipient. |
3.1.8 | For the avoidance of doubt, the provisions of Section 3 .1.1 through Section 3.1.7, inclusive, shall not affect the rights of a Provider to terminate a Service, or for a Service to terminate, pursuant to Section 6 hereof. |
3.2 | Changes in Third Party Supplier Costs |
3.2.1 | Except as provided in Section 3 .1, in the event that a Third Party Supplier increases or decreases its fees in relation to a Service during a Service Term: |
(i) | the affected Provider shall promptly notify the TSA Committee of the change in fees, with such notice to include supporting documentation as might reasonably be expected to explain the change in fees to the affected Recipient; and |
(ii) | the Charges for the relevant Service shall be adjusted accordingly. |
3.2.2 | In the event that a Third Party Supplier increases or decreases its fees (including but not limited to a change in fees owing to a material change in volume or usage by the Recipient) in relation to a Service (or portion of a Service) for which, pursuant to the applicable Service Schedule, the Third Party Supplier directly invoices the Recipient, the applicable Recipient shall promptly inform the TSA Committee of such change in fees. |
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3.3 | Relationship with Third Party Suppliers |
3.3.1 | So far as it relates to the provision of a Service or the performance of a Providers other obligations under this TSA, the Provider shall manage exclusively its relationship with Third Party Suppliers and the applicable Recipient shall not discuss with any Third Party Supplier the provision of the Services or the performance of the Providers other obligations under this TSA, except: |
(i) | to the extent required to do so by a court, competent judicial authority and/or a Competent Authority; |
(ii) | as agreed by the TSA Committee; |
(iii) | as may be necessary to pay invoices for a Service for which, pursuant to the applicable Service Schedule, a Third Party Supplier directly invoices the Recipient or to make a query about such an invoice; |
(iv) | as may otherwise be expressly permitted by a Service Schedule or otherwise by this TSA (including the Migration Principles); or |
(v) | if in the Providers opinion and only to the extent reasonably necessary in order for the Recipient to be able to receive the Services under the applicable Service Schedule, |
provided in each case that the applicable Recipient has notified the Provider in advance (if and to the extent permitted to do so under Regulation) through the TSA Committee.
3.4 | Liability for Third Party Suppliers |
3.4.1 | If a Provider breaches this TSA as a result of the acts or omissions of a Third Party Supplier, the Providers liability is subject to the Section 8 .2 limitations and caps on liability. |
3.4.2 | Notwithstanding the limitations in Section 3.4.1, any amounts recovered by a Provider from a Third Party Supplier which are in relation to Losses incurred as a result of the acts or omissions of the Third Party Supplier shall be divided among the Provider and Recipient in proportion to their Losses, provided , however , that any amounts paid over to the Recipient shall not exceed the amount of the Recipients Losses. For the avoidance of any doubt: |
(i) | any amounts paid over to a Recipient pursuant to this Section 3.4.2 are independent of and not to be part of any limitations or caps on the liability of the Parties as set forth in Section 8 .2; and |
(ii) | if a Providers commercially reasonable efforts to recover such amounts from a Third Party Supplier are unsuccessful, such a failure to recover any amounts is not a breach and is not a liability of the Provider. |
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3.4.3 | Without prejudice to the Parties rights and obligations in relation to mitigation of losses at law or in equity, each Provider and Recipient shall use commercially reasonable efforts to mitigate the quantum of Losses and/or any other adverse consequences incurred or suffered by the Recipient and members of the Recipients Group as a result of the breach of a Third Party Agreement by a Third Party Supplier (to the extent a Party is aware of such breach). |
4 | Price and Payment |
4.1 | Charges |
4.1.1 | In relation to a Service for which, pursuant to the applicable Service Schedule, the Provider issues an invoice, each Party shall pay on behalf of the Recipients in its Group to the applicable Provider the Charges as set forth in the relevant Service Schedule in respect of the provision of the relevant Services and the performance of other obligations of the Provider under this TSA, provided that a relevant invoice has been rendered in accordance with Section 4 .2. |
4.1.2 | In relation to a Service (or portion of a Service) for which, pursuant to the applicable Service Schedule, a Third Party Supplier directly invoices the Recipient, each Party shall ensure that the Recipients in its Group make timely payments directly to the applicable Third Party Supplier. |
4.1.3 | Without prejudice to the rights and remedies of either Party, if a Recipient is unable to undertake an activity on the date allocated to it in the Migration Plan owing to the material fault of the other Party and as a consequence the date of completion of Migration of a Service is after the Scheduled End Date then: |
(i) | the Parties shall submit the matter to the TSA Committee and, acting reasonably and in good faith, work together to reschedule such activity in a manner that minimizes any delay to completion of Migration and agree to an adjustment of Charges as is appropriate to reflect the extent and materiality of the fault; |
(ii) | the Recipient shall continue to pay Charges (subject to any adjustments made pursuant to Section 4.1.3(i)) until the Revised Migration Date; and |
(iii) | the Scheduled End Date in the relevant Service Schedule shall be construed as a reference to the Revised Migration Date. |
4.1.4 | Unless otherwise expressly stated in or contemplated by this TSA, the Charges are the only amounts payable by the Recipient in respect of the Services. |
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4.2 | Invoicing Procedures and Payment Due |
4.2.1 | The Charges for any Service shall be invoiced by RBSG or CFG as the Provider of that Service in accordance with this Section 4.2 and each invoice shall be substantially in the form of the template attached in Schedule 2 applicable to the relevant Provider. Invoices shall be sent to the address for invoices specified in the Service Schedule to which the relevant invoice relates. |
4.2.2 | The Charges with respect to any month shall be invoiced by the Provider: |
(i) | if CFG or an Affiliate of CFG is the Provider, within 30 days following the end of the month after which the relevant Services are provided or obligations are performed, or in respect of which the Charges are otherwise due or the relevant costs incurred by the Provider. To the extent applicable, a true-up of Charges for a Service shall be invoiced as indicated in the Service Schedule to which the true-up relates; |
(ii) | if an Affiliate of RBSG within the United States is the Provider, within 30 days following the end of the month after which the relevant Services are provided or obligations are performed, or in respect of which the Charges are otherwise due or the relevant costs incurred by the Provider. To the extent applicable, a true-up of Charges for a Service shall be invoiced as indicated in the Service Schedule to which the true-up relates; or |
(iii) | if RBSG or an Affiliate of RBSG outside the United States is the Provider, within 30 days following the end of the quarter after which the relevant Services are provided or obligations are performed, or in respect of which the Charges are otherwise due or the relevant costs incurred by the Provider. To the extent applicable, a true-up of Charges for a Service shall be invoiced on an annual basis in the month of February. |
Payment on all invoices shall be due to the applicable Party within 30 days of receipt of the relevant invoice.
4.2.3 | If any part of the Charges is subject to a bona fide dispute, then that part of the Charges subject to dispute shall be referred to the TSA Committee and any part of the Charges that is not subject to dispute is to be paid pursuant to this Section 4 . |
4.2.4 | Any amount due under this TSA for which a time for payment is not otherwise specified shall be due and payable within 30 days of the receipt of a valid invoice for such amount. |
4.2.5 | Payments due in respect of a Service pursuant to this TSA shall be made to the account specified in the relevant Service Schedule or such other account as the Provider may notify the Recipient from time to time. |
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4.3 | Payments Gross |
All sums payable by a Party under this TSA, including any payment pursuant to an indemnity, compensation or reimbursement provision, shall be invoiced and paid in U.S. dollars, British pounds sterling or Euros, free and clear of any deductions, withholdings, set-offs or counterclaims, save only as may be required by law. If any deductions or withholdings are required by law (including with respect to any payment made pursuant to this Section 4.3), the Party making the payment shall be obliged to pay to the other Party 50% of the amount deducted or withheld with respect to the payment. The Parties shall claim from the appropriate Tax Authority any exemption, rate reduction, refund, credit or similar benefit (including pursuant to any relevant tax treaty) to which they are entitled in respect of any deduction or withholding in respect of which a payment has been made pursuant to this Section 4.3 and, for such purposes shall, within any applicable time limits, submit any claims, notices, returns or applications and send a copy thereof to the payer. If the recipient of a payment to which this Section 4.3 applies receives a credit for or refund of any Tax payable or actually realizes a similar benefit by reason of any deduction or withholding for or on account of Tax, then it shall reimburse to the other Party an amount equal to 50% of such credit, refund or benefit. The Parties shall cooperate and use commercially reasonable efforts to mitigate any deduction or withholding determined to be required by law.
4.4 | Interest |
If any Party defaults in the payment when due of any sum payable under this TSA (howsoever determined), the liability of that Party shall be increased to include interest on such sum from the date when such payment is due until the date of actual payment at a rate per annum of 250 basis points above LIBOR.
4.5 | Value Added Tax and Sales or Use Tax |
All amounts payable under this TSA shall be deemed to be exclusive of any applicable VAT, Sales or Use Tax. If any amount falling due under this TSA (from whatever cause) is subject to VAT, Sales or Use Tax, then the applicable Recipient shall bear the cost of such taxes in the manner described below.
In the case of VAT, if any amount falling due under this TSA constitutes the consideration for a taxable supply of goods and/or services for VAT purposes, the applicable Recipient shall, where the Provider is the person liable to account for the applicable VAT to the relevant Tax Authority, pay VAT in addition to and at the same time as the amount so falling due, against delivery of a valid VAT invoice. Where the applicable Recipient is the person liable to account for the applicable VAT to the relevant Tax Authority, such Recipient shall pay such VAT directly to the Tax Authority.
In the case of Sales or Use Tax, if any amount falling due under this TSA is subject to Sales or Use Tax, the applicable Recipient shall, where the Provider is the person liable to account for the applicable Sales or Use Tax to the relevant Tax Authority, pay amounts equal to such Sales or Use Tax in addition to and at the same time as the amounts so falling due, against delivery of an invoice itemizing the computed tax. Where the applicable Recipient is the person liable to account for the applicable Sales or Use Tax to the relevant Tax Authority, such Recipient shall pay such Sales or Use Tax directly to the Tax Authority.
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Where under the terms of this TSA one Party is liable to indemnify or reimburse the other Party in respect of any costs, such payment shall, to the extent required by the preceding sentences of this Section 4.5, be increased to include any applicable Sales or Use Tax or VAT, but in the case of VAT shall exclude the amount of any recoverable input tax of the other Party (or the representative member of any group of which that Party is a member for VAT purposes in respect of such costs), and that other Party shall use commercially reasonable efforts (and shall procure that any such relevant representative member shall use commercially reasonable efforts) to recover such amount of VAT as may be practicable.
The Parties agree to cooperate and to use commercially reasonable efforts to reduce or mitigate liability for, or to obtain available refunds of, any applicable Sales or Use Tax or VAT.
5 | Representations, Warranties and Mutual Obligations |
5.1 | Representations and Warranties |
5.1.1 | Each Party represents and warrants to the other that as at the date hereof: |
(i) | it is duly constituted, organized and validly existing under the laws of the jurisdiction of its incorporation; |
(ii) | it has the legal right and full power and authority to execute and deliver, and it and its Affiliates, as applicable, have the legal right and full power and authority to exercise its and their rights and perform its and their obligations under, this TSA, the Service Schedules and any documents which are to be executed by it or any of them pursuant to this TSA; |
(iii) | its and its Affiliates contemplated provision or receipt, as applicable, of Services in the Service Schedules does not conflict with any other contract to which it is a Party; |
(iv) | this TSA and the contemplated provision of the Services by it or any Affiliate pursuant to the Service Schedules is compliant in all material respects with all Regulation applicable to it and them, including, for the avoidance of any doubt and to the extent applicable, Regulation W of the Board of Governors of the Federal Reserve System; |
(v) | this TSA and the contemplated receipt of the Services by it or any Affiliate pursuant to the Service Schedules is compliant in all material respects with all Regulation applicable to it and them, including, for the avoidance of any doubt and to the extent applicable, Regulation W of the Board of Governors of the Federal Reserve System; |
(vi) | it is satisfied that all Charges for the Services provided hereunder were negotiated and determined on an arms-length basis; |
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(vii) | its and its Affiliates contemplated provision or receipt, as applicable, of Services in the Service Schedules is compliant in all material respects with the Policies applicable to it and them; |
(viii) | the manner, priority and level of service (including any applicable Service Levels), skill and care as provided by each Provider of services to it or its Affiliates in respect of the Existing Services during the six-month period (or, if applicable, such shorter period) prior to the date hereof is adequate and sufficient for its needs; |
(ix) | its provision or receipt, as applicable of Existing Services by it and its Affiliates during the six-month period (or, if applicable, such shorter period) prior to the date hereof was compliant with all Regulation applicable to it and them; |
(x) | its and its Affiliates possession, storage, processing or access to the other Partys and its Affiliates Personal Data during the six-month period (or, if applicable, such shorter period) prior to the date hereof was compliant in all material respects with the applicable Fraud Prevention Policy; |
(xi) | its and its Affiliates possession, storage, processing or access to the other Partys and its Affiliates Confidential Information during the six-month period (or, if applicable, such shorter period) prior to the date hereof was compliant in all material respects with the applicable Fraud Prevention Policy; |
(xii) | its and its Affiliates provision or receipt, as applicable, of Existing Services during the six-month period (or, if applicable, such shorter period) prior to the date hereof was compliant in all material respects with the Policies applicable to it and them; and |
(xiii) | its and its Affiliates provision or receipt, as applicable, of Existing Services during the six-month period (or, if applicable, such shorter period) prior to the date hereof complied with the requirements, including any specified Service Level, for the corresponding Services as set forth in the Service Schedules hereto. |
5.2 | General Obligations |
5.2.1 | Each Party shall and shall cause its Affiliates to: |
(i) | subject to the Change Control Procedure with respect to any change in Regulation after the Service Commencement Date, comply with Regulation in connection with the performance of its obligations under this TSA including (in the case of a Provider) its provision of the Services and (in the case of a Recipient) its receipt of the Services; |
(ii) | perform its obligations under this TSA, including (in the case of a Provider) its provision of the Services and (in the case of a Recipient) its receipt of the Services; |
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(iii) | provide on a timely basis such information and data as the other Party may reasonably require for the purposes of the provision of the Services; and |
(iv) | participate in discussions regarding the provision or receipt of the Services (as applicable) to the extent reasonably required by the other Party in order to enable the Services to be properly provided or received. |
5.2.2 | Without prejudice to the Mandatory Change provisions set out in Section 10.2, each Party shall promptly notify the other upon becoming aware of any proposed changes to a Regulation or new Regulation which will or are likely to impact the provision or receipt of the Services. |
5.2.3 | If a Party or any of its Affiliates or, to its knowledge, any Third Party Supplier is subject to any investigation by any Competent Authority and such investigation is relevant to the performance of the obligations under this TSA, then, to the extent permitted by Regulation and the Competent Authority, the Party shall as soon as reasonably practicable notify the other Party of such investigation (such notice to contain reasonable detail relating to the reason for the investigation and why it is relevant to the provision or receipt of the Services). The Parties agree to cooperate to the extent reasonable in the event of any such investigation. |
6 | Term and Termination |
6.1 | TSA Term |
This TSA shall come into effect on the date of its execution and, subject to earlier termination in accordance with its terms, automatically terminate without the need for further action by either Party on the earlier of (i) the date of expiry of the last Service Term and (ii) the Scheduled End Date (both being subject to any extensions pursuant to Section 4.1.3).
6.2 | Service Term |
Subject to Sections 6.3 to 6.7 (inclusive) each Service Term shall automatically expire without the need for further action by either Party on the date specified in the applicable Service Schedule or, if none is specified, the Scheduled End Date (subject to any extensions pursuant to Section 4.1.3).
6.3 | Service Term Extension |
6.3.1 | If the Recipient wishes to continue to receive a Service after the expiry of the relevant Service Term (or any period previously specified by the Recipient in accordance with this Section) owing to the material fault of the Provider pursuant to Section 4.1.3, it must give, together with an explanation as to why such extension is attributable to the material fault of the Provider, notice to specify the period for which the Recipient wishes to continue to receive the Service; provided , however , that such extension period shall not extend beyond December 31, 2016. |
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6.3.2 | Promptly upon receipt of such notice, the relevant Provider shall indicate if it: |
(i) | agrees, in which case the Service Term shall be extended until the Revised Migration Date; or |
(ii) | disagrees, as to either the degree of fault attributed to it or the period for which the relevant Service should be extended, in which case such dispute shall be resolved pursuant to Section 11 . |
6.4 | Termination on Notice |
6.4.1 | Notwithstanding any other provision of this TSA, the Recipient may terminate any of the Services, or any separable part of the Services, by providing the Provider with mailed notice of such termination, such notice to be: |
(i) | at least the period of notice specified in the relevant Service Schedule for the termination of that Service; or |
(ii) | if no such notice period is specified, at least three months notice. |
6.4.2 | The Recipient is not responsible or liable for any Provider costs incurred as a result of an early termination notice made in compliance herewith; provided, however, that a Recipient shall reimburse the Provider for any costs incurred by the Provider as a result of a Service being terminated early by the Recipient where such Service is provided pursuant to a Third Party Agreement which was renewed, extended or replaced after the Service Commencement Date. |
6.4.3 | If a Service Schedule expressly permits the Provider to terminate the relevant Service upon notice, then, notwithstanding any other provisions of this TSA, such Provider may terminate the relevant Service pursuant to the applicable termination procedures, and such Provider is not responsible or liable for any Recipient costs incurred as a result of an early termination in compliance herewith. |
6.5 | Termination for Insolvency |
Each Party may terminate this TSA immediately by notice to the other Party if the other Party becomes unable to pay its debts, enters into liquidation, a receiver or administrative receiver is appointed over all or any of its assets, it ceases trading or is dissolved, or any procedure equivalent to any of the preceding matters occurs in any other jurisdiction with respect to that other Party.
6.6 | Termination for Regulatory Reasons |
6.6.1 | Each Party shall have a right to terminate this TSA if directed in writing by a Competent Authority. A Party may exercise such right upon 90 days prior notice, or such shorter timeframe as required by a Competent Authority or to comply with Regulation. |
6.6.2 | In the event of a termination of this TSA pursuant to this Section 6 .6, the Parties acknowledge and agree that Migration of the Services may not be fully implemented as of such termination and, to the extent required by a Competent Authority, neither Party will have any obligation to assist in the Migration of the Services after such termination. |
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6.7 | Termination for Breach |
6.7.1 | Subject to Section 6 .7.2, each Party (the Non-Defaulting Party ) may terminate a Service immediately by notice to the other Party (the Defaulting Party ) if the Defaulting Party or any Affiliate commits a material breach of its obligations with respect to that Service under this TSA and the applicable Service Schedule and (where the breach is capable of being remedied) that breach has not been remedied within 30 days after receipt of a written request to do so from the Non-Defaulting Party. |
6.7.2 | In the event that a Party elects to terminate a Service pursuant to Section 6 .7.1, the TSA shall be deemed to continue in full force and effect in accordance with its terms, except with respect to such terminated Service. |
6.7.3 | Unless otherwise specified, any breach in respect of any individual Service Schedule shall not constitute a breach of this TSA or a breach of any other Service Schedule, and unless otherwise agreed in writing, the Parties will continue to provide Services and honor all other commitments under this TSA during the course of dispute resolution pursuant to Section 11, except to the extent such commitments are the subject of such dispute, controversy or claim. |
6.8 | Termination Charges |
In the event of termination or expiry of a Service pursuant to this TSA or the termination or expiry of all or part of this TSA, the Recipient shall pay the Provider the applicable termination charges, if any, for that Service as set forth in the relevant Service Schedule.
6.9 | Delivery of Data on Termination or Expiry |
6.9.1 | Except if and to the extent otherwise agreed in the relevant Service Schedule or Migration Plan, and subject always to Regulation, in the event of the termination or expiry of a Service pursuant to this TSA: |
(i) | to the extent that: |
(a) | any Recipient Data is in the possession or reasonable control of the Provider or its Affiliates, the Provider shall provide to the Recipient such Recipient Data in its then-current format; and |
(b) | any Provider Data is in the possession or reasonable control of the Recipient or its Affiliates, the Recipient shall provide to the Provider such Provider Data in its then-current format; |
(ii) |
once the Provider has provided the Recipient Data in accordance with Section 6 .9.1(i)(a), the Provider will (to the extent reasonably practicable) delete or destroy its copy or copies of such data, unless required to maintain |
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a copy by Regulation or the requirements of any Competent Authority or to the extent such Recipient Data also relates to the Providers Groups business; and |
(iii) | once the Recipient has provided the Provider Data in accordance with Section 6 .9.1(i)(b) the Recipient will (to the extent reasonably practicable) delete or destroy its copy or copies of such data, unless required to maintain a copy by Regulation or the requirements of any Competent Authority or to the extent such Provider Data also relates to the Recipients Groups business. |
6.9.2 | Each Party will bear its own costs in complying with its obligations under this Section 6 .9. |
6.9.3 | Any Recipient Data retained by Provider and any Provider Data retained by Recipient pursuant to Section 6.9.1 shall be subject to the Data Protection requirements set forth in Section 13 and the Confidentiality requirements set forth in Section 13 for as long as such data is retained. |
6.10 | Survival of Rights on Termination or Expiry |
Termination or expiry of this TSA shall not affect any rights or obligations which may have accrued prior to termination or expiry. The obligations of each Party set out in any Section intended to survive such termination or expiry, including this Section 6.10 and Section 4, Section 8, Section 12, Section 13, Section 16, Section 17 and Section 20 shall continue in full force and effect notwithstanding termination or expiry of this TSA.
7 | Migration |
7.1 | Migration and the Migration Plans |
7.1.1 | The Parties shall act reasonably and in good faith in accordance with the Migration Principles as set forth in Schedule 3 and perform their respective obligations in relation to Migration (including those obligations agreed as part of a Migration Plan). |
7.2 | Failure to Timely Migrate |
7.2.1 | Failure to timely complete Migration of a Service is not a breach of this TSA. |
8 | Limitation of Liability and Indemnification |
8.1 | Exclusions from Liability |
Notwithstanding anything herein to the contrary, no Party shall be liable for any special, indirect, incidental, consequential or punitive damages of any kind whatsoever in any way due to, resulting from or arising in connection with any of the Services or the performance of or failure to perform Providers or Recipients obligations under this TSA, as applicable, including to the extent that such liability is:
(i) | for or in respect of any loss of profit, loss of revenue, loss of goodwill or indirect or consequential losses, punitive, special or consequential damages; or |
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(ii) | for the value of any lost or corrupted data; or |
(iii) | for the costs of reconstituting, restoring or rectifying lost or corrupted data (in each case, other than to the extent arising from a breach of Section 19 .1), |
in each case of whatever nature regardless of whether such damages are foreseeable or whether the Provider or Recipient, as applicable, or any of its Affiliates has been advised of the possibility of such damages.
8.2 | Cap on Damages and Exclusions |
8.2.1 | Except in the case of death or personal injury, willful misconduct, fraud or fraudulent misrepresentation, criminal liability, intentional tort, intentional breach of a Service Schedule or of this TSA, or Charges that have been paid or come due in connection with the Services, each of the RBSG Groups and the CFG Groups aggregate liability to members of the other Group in respect of any individual Service shall be limited to an amount equal to 12 times the Monthly Charge for such Service, where Monthly Charge means the amount of Charges paid for the first full calendar month (which shall include any amounts invoiced directly to a Recipient by a Third Party Supplier in that month) of the relevant Service giving rise to the claim. If the Charges for a Service are a lump sum or an amount that is otherwise not charged on a monthly basis then the Monthly Charge for such Service shall be the total amount of Charges for that Service divided by the number of months during which the Service has been provided. |
8.2.2 | Except in the case of death or personal injury, willful misconduct, fraud or fraudulent misrepresentation, criminal liability, intentional tort, intentional breach of a Service Schedule or of this TSA, or Charges that have been paid or come due in connection with the Services, each such Groups aggregate liability to the members of the other Group in connection with this TSA in respect of any given calendar year shall be limited to the amounts set forth below: |
Calendar year of the relevant Service(s) | ||||||||||||
2014 | 2015 | 2016 | ||||||||||
RBS Group maximum aggregate liability to members of CFG Group |
$ | 12.7 million | $ | 13.8 million | $ | 2.5 million | ||||||
CFG Group maximum aggregate liability to members of RBS Group |
$ | 15.8 million | $ | 20.3 million | $ | 4.2 million |
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For the avoidance of doubt, subject to the exceptions noted above in this Section 8 .2.2, the sum total of all amounts paid by a Group in respect of any given calendar year pursuant to Section 8 .2.1, together with any other liability under this TSA, shall not exceed the amount set forth above for that calendar year.
8.2.3 | The limits on, and exclusions of, liability set out in this Section 8 shall not apply in respect of: |
(i) | any liability for death or personal injury; |
(ii) | any liability for willful misconduct; |
(iii) | any liability for fraud or fraudulent misrepresentation; |
(iv) | any criminal liability; |
(v) | any liability for intentional tort; |
(vi) | intentional breach of a Service Schedule or of this TSA; |
(vii) | any other liability that cannot be lawfully excluded; and |
(viii) | the obligation of any Party to pay Charges with respect to Services that have been provided. |
8.3 | Indemnification |
8.3.1 | Subject to the exclusions from liability in Section 8 .1, RBSG and CFG agree to indemnify and hold harmless each other and each of their respective (and their respective Affiliates) Affiliates, and each of their and their respective Affiliates directors, officers, employees and agents, and each of the heirs, executors, successors and assigns of any of the foregoing (collectively, the Indemnitees ), from and against any and all Losses of the Indemnitees relating to, arising out of or resulting from any of the following by such indemnifying Party or by any person in such indemnifying Partys Group: |
(i) | breach of its obligations under this TSA; |
(ii) | breach of its representations and warranties under this TSA; |
(iii) | violations of Regulation in connection with this TSA; or |
(iv) | infringement, misappropriation or violation of Intellectual Property Rights of a third party in connection with the provision or receipt of Services under this TSA; |
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provided that:
(i) | the aggregate liability pursuant to this Section 8.3 shall not exceed the cap on damages in Section 8.2 (subject to the exclusions from the cap set forth therein); and |
(ii) | a Provider shall have no liability under this Section 8 .3 with respect to any infringement, misappropriation or violation of Intellectual Property Rights of a third party to the extent that such claim is based upon or related to: |
(a) | Services that have been modified by the Recipient; |
(b) | use of the Services in conjunction or combination with any software, data or other materials not provided by the Provider of the Services; or |
(c) | use of the Services in a manner or for any purpose other than as directed by the Provider or as expressly permitted by this TSA. |
9 | Governance |
9.1 | TSA Committee |
9.1.1 | The Parties will establish a TSA Management and Change Control Committee (the TSA Committee ) to monitor overall performance and trends in performance of all Services in accordance with this TSA. The terms of reference of the TSA Committee shall be as set forth in Schedule 4. |
10 | Changes and Change Control |
10.1 | Changes |
10.1.1 | Subject to Sections 10 .2 to 10 .4 (inclusive), in the event that a Party wishes to make any Change it shall be managed by way of the Change Control Procedure as set forth in this Section 10.1.1. |
(i) | At each meeting of the TSA Committee (or, with respect to any proposed action of the TSA Committee in the absence of a meeting, by notice to each TSA Committee member) each Party shall, acting reasonably and in good faith, provide the other with an indicative forecast of any Changes it proposes making to the Services. |
(ii) | Upon realization of the need for a Change, either Party shall provide prompt notice to the other Party of a Change request ( Change Control Request ) in writing, specifying in as much detail as is reasonably practicable the nature of the proposed Change. Within four weeks of receipt of a Change Control Request, the Party that received such notice shall provide a response indicating whether it can make the proposed Change, its estimated costs of making the proposed Change and an estimated schedule for implementing the proposed Change. |
(iii) | The timing of implementation of any Change will be determined by the TSA Committee. |
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10.2 | Mandatory Change |
10.2.1 | Where a Change Control Request is in respect of a Mandatory Change, the Parties shall, as soon as reasonably practicable thereafter, meet to discuss and agree the terms on which, and the time frame in which, each Party shall implement that Mandatory Change (which shall be within the time frame required to comply with the relevant Regulation, except where it would not be reasonable for each Party to implement such Mandatory Change within such time frame, in which case each Party shall implement such Mandatory Change as soon as reasonably practicable thereafter). The Parties shall work together in good faith to mitigate the consequences of any delay in implementing the Mandatory Change beyond the date required to comply with the Regulation. |
10.2.2 | To the extent that a Mandatory Change requested by a Party increases the cost to the other Party of providing or receiving the Services (including, for the avoidance of doubt, the costs and appropriate margin of implementing the Mandatory Change and incremental running costs and appropriate margin incurred by the other Party arising as a result of that Mandatory Change), then the increased cost and margin to the other Party will be added to the Charges paid by the Party for the relevant Service. |
10.3 | Discretionary Changes |
10.3.1 | Where a Change Control Request submitted by a Party is in respect of a Discretionary Change, the Parties shall, as soon as reasonably practicable thereafter, meet to discuss the terms of the Discretionary Change. |
10.3.2 | To the extent that a Discretionary Change requested by a Party increases the cost to the other Party or any of its Affiliates in providing or receiving the relevant Service (including, for the avoidance of doubt, the costs and appropriate margin of implementing the Discretionary Change and incremental running costs and appropriate margin arising as a result of that Discretionary Change), then: |
(i) | if the Party that requested the Discretionary Change or any Affiliate is the Recipient of the applicable Service, the increased cost and margin to the Provider of the Service will be added to the Charges paid by the Party for the relevant Service; or |
(ii) | if the Party that requested the Discretionary Change or any Affiliate is the Provider of the applicable Service, the increased cost to the Recipient of the Service will be deducted from the Charges paid by the Recipient for the relevant Service. |
10.3.3 | For the avoidance of doubt, the Party being requested to implement a Discretionary Change may refuse to implement any Discretionary Change. |
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10.4 | Emergency Change |
10.4.1 | If a Change is required to respond to an Emergency, the affected Party shall use commercially reasonable efforts to notify the other Party and obtain the other Partys prior consent for the Change but if the notifying Party is the Provider and the Provider is not able to notify the Recipient and obtain consent, the Provider shall be entitled, without limiting any rights and remedies of the Recipient in respect of any breach of this TSA (as if such Change had not been made), to nevertheless make the minimum necessary temporary Change as necessary to respond to the Emergency in accordance with the terms of any applicable disaster recovery plans. As soon as practicable following the implementation of any temporary Change, the Provider shall notify the Recipient of the temporary Change and the nature of the Emergency and shall then retroactively comply with the terms of the Change Control Procedure. |
10.4.2 | Emergency means a Change that is required to ensure (i) continued provision of, or the continued operation and integrity of, the Services; or (ii) the continued operation and integrity of the Provider Systems, in each case the implementation of which cannot wait (including for reasons of stability and performance) for authorization through the Change Control Procedure. |
11 | Dispute Resolution |
11.1 | Dispute Resolution Process |
11.1.1 | The Parties shall in the first instance attempt to resolve any dispute in relation to any aspect of, or failure to agree any matter arising in relation to, this TSA or any document agreed or contemplated as being agreed pursuant to this TSA (a Dispute ) informally through discussion as follows: |
(i) | the TSA Committee will meet to resolve the Dispute, and if the TSA Committee cannot resolve the Dispute unanimously within 10 Business Days of the Dispute being referred to them, then; |
(ii) | the Dispute shall promptly be referred by the TSA Committee to a nominated senior individual of each Party (the Senior Nominees ), and if the Senior Nominees cannot resolve the Dispute unanimously within 10 Business Days of the Dispute being referred to them (unless a longer period is mutually agreed), then; |
(iii) | the dispute resolution process shall be deemed to have been exhausted in respect of the Dispute, and each Party shall be free to pursue its rights at law in respect of such Dispute without further reference to the dispute procedure under this Section 11.1. |
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This Section 11.1 does not limit the right of either Party to: (i) exercise any self-help remedies provided for herein; or (ii) file an action in a court of law, before, during, or after the dispute resolution process to obtain a provisional or interim remedy, and/or any ancillary, additional or supplementary remedy, provided that any such action shall be heard and determined exclusively in any court of competent jurisdiction sitting in New York County, New York.
11.1.2 | The Parties will discuss in good faith, at either Partys request, measures to shorten the time contemplated by this Section 11 to complete the Dispute resolution process. |
12 | Intellectual Property Rights |
12.1 | Provider Ownership and License |
12.1.1 | Each Provider hereby grants to the applicable Recipient a non-exclusive, worldwide, royalty-free, fully paid-up license during the Service Term to use all Intellectual Property Rights (other than trademarks and domain names) Licensable by the Provider and utilized by the Provider in the provision of the Services solely to the extent necessary to receive and use the Services or complete Migration (and with a right to sublicense to customers of the Recipient to the extent necessary to enable such customers to benefit from the provision of the Services). |
12.1.2 | Each Recipient hereby acknowledges and agrees that, as between the Recipient and the applicable Provider: |
(i) | the Providers Intellectual Property existing as of the date hereof ( Providers Existing IP ) will remain the sole and exclusive property of the Provider; |
(ii) | the Provider shall own all Intellectual Property Rights subsisting in any and all adaptations of, modifications and enhancements to and works derived from Providers Existing IP that are created, developed, conceived or reduced to practice by or on behalf of the Provider or the Recipient during the Service Term ( Providers Derivative IP ); and |
(iii) | the Provider shall own all Intellectual Property Rights, other than Recipients Derivative IP and Recipients New IP (as defined below), that are created, developed, conceived or reduced to practice by or on behalf of the Provider during the Service Term ( Providers New IP ). |
12.1.3 | Each Recipient hereby irrevocably assigns and agrees to assign to the applicable Provider all right, title and interest in and to Providers Derivative IP and Providers New IP. |
12.2 | Recipient Ownership and License |
12.2.1 | Each Recipient hereby grants the applicable Provider a non-exclusive, worldwide, royalty-free, fully paid-up license during the Service Term to use all Intellectual Property Rights (other than trademarks and domain names) Licensable by the Recipient solely to the extent necessary to provide the Services. |
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12.2.2 | Without prejudice to Section 12.1, each Provider hereby acknowledges and agrees that, as between the Provider and the applicable Recipient: |
(i) | the Recipients Intellectual Property existing as of the date hereof ( Recipients Existing IP ) will remain the sole and exclusive property of the Recipient; and |
(ii) | the Recipient shall own all Intellectual Property Rights subsisting in any and all adaptations of, modifications and enhancements to and works derived from Recipients Existing IP that are created, developed, conceived or reduced to practice by or on behalf of the Provider or the Recipient during the Service Term ( Recipients Derivative IP ); and |
(iii) | the Recipient shall own all Intellectual Property Rights, other than Providers Derivative IP, that are, at the Recipients expense, created, developed, conceived or reduced to practice by or on behalf of the Provider specifically at the written direction of, and solely for, the Recipient during the Service Term ( Recipients New IP ). Notwithstanding the foregoing, the applicable Recipient shall hereby grant such Provider a perpetual, irrevocable, non-exclusive, worldwide, royalty-free, fully paid-up and unrestricted license to use and reproduce software included in Recipients New IP, including any and all object code, source code, information and/or documentation related thereto. |
12.2.3 | Each Provider hereby irrevocably assigns and agrees to assign to the applicable Recipient all right, title and interest in and to Recipients Derivative IP and Recipients New IP. |
13 | Data Protection, Confidential Information and Record-keeping |
13.1 | Data Protection |
13.1.1 |
Each Party acknowledges and agrees that, solely to permit it or its Affiliates to perform its obligations pursuant to this TSA and the Service Schedules, the other Partys Group may provide it with Confidential Information, including Personal Data. Each Party further acknowledges and agrees that it and its Affiliates shall have the right to use the other Partys Groups Confidential Information, including Personal Data, solely to fulfill and perform its obligations under this TSA and otherwise comply with Regulation. Regulation in respect of Personal Data may include U.S. federal data privacy laws and regulations such as the GLB Act, the Federal Privacy of Consumer Financial Information Regulation (12 CFR Part 30), as amended from time to time, issued pursuant to Section 504 of the GLB Act, and the Health and Insurance Portability and Accountability Act of 1996 (42 U.S.C. § 1320d), U.S. state data privacy laws such as the Massachusetts Data Protection Act (201 CMR 17) and, if applicable, international data privacy laws such as The Data Protection Act 1998 and Directive |
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95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and the free movement of such data. Each Party may provide guidelines to help the other Party comply with such Regulation, but each Party using its own legal advisors will remain fully responsible, subject to the Change Control Procedure in respect of any change in Regulation after the date hereof, for interpreting and complying with such Regulation with respect to its own business. A Party shall have no right to use, reuse or disclose any Personal Data to any person or entity for any reason not specifically permitted under this TSA or a Service Schedule. |
13.1.2 | Each Party confirms that, when it or its Affiliate is processing data, it or the Affiliate shall: |
(i) | only process Personal Data in accordance with the other Partys instructions; and |
(ii) | take appropriate technical and organizational measures to protect Personal Data against accidental or unlawful destruction or accidental loss, alteration, unauthorized disclosure or access and against all other unlawful forms of processing. |
13.1.3 | The Parties shall respectively comply with all Regulation, subject to the Change Control Procedure in respect of any change in Regulation after the date hereof, in respect of Confidential Information, including Personal Data, including securing such consents, registrations and notifications as may be required to enable the Provider and any Third Party Suppliers to provide the Services and to enable the Recipient to receive the Services. |
(i) | If requested by RBSG, CFG will enter into an agreement with RBSG on the terms of the Commission Decision of February 15, 2010 on standard contractual clauses for the transfer of Personal Data to processors established in third countries (2010/87/EC) or the Commission Decision of 27 December 2004 on an alternative set of standard contractual clauses for the transfer of Personal Data to third countries (2004/915/EC), as appropriate. |
13.2 | Confidential Information |
13.2.1 |
The Parties hereby covenant and agree to keep confidential all Confidential Information relating to the other Partys Group. Without limiting the generality of the foregoing, each Partys Group shall cause its employees and agents to exercise the same level of care with respect to Confidential Information relating to the other Partys Group as it would with respect to proprietary information, materials and processes relating to itself. Confidential Information shall mean all information, materials and processes relating to a Partys Group or its employees, third party vendors, counterparties or customers obtained by the other Partys Group at any time (whether prior to or after the date hereof) in any format whatsoever (whether orally, visually, in writing, electronically or in any other form) arising out of the rendering or receipt of Services hereunder (or preparations for the same or for the termination thereof) and |
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shall include, but not be limited to, economic and business information or data, business plans, software and information relating to personnel, products, financial performance and projections, processes, strategies and systems but shall not include information which: |
(i) | is or becomes generally available to the public other than by release in violation of the provisions of this Section 13; |
(ii) | is or becomes available on a non-confidential basis to a Party from a source other than the other Party to this TSA, provided that the Party in question reasonably believes that such source is not or was not bound by an obligation to the other Party to hold such information confidential; and |
(iii) | is acquired or developed independently by a Party without use or reference to otherwise Confidential Information of the other Party. |
Except with the prior written consent of the other Party, each Party will use the other Partys Groups Confidential Information only in connection with the performance of its obligations hereunder and each Party shall use commercially reasonable efforts to restrict access to the other Partys Groups Confidential Information to those employees of such Partys Group requiring access for the purpose of providing or receiving Services hereunder.
13.2.2 | The provisions of Section 13.2.1 shall not prohibit a Partys disclosure or use of the other Partys Groups Confidential Information if and to the extent such Confidential Information is made available to or used by the professional advisers or Third Party Suppliers of each Party for the provision or receipt of the Services; provided , however , that in each case such professional advisors or Third Party Suppliers are subject to written confidentiality obligations in a form approved by the other Party (such approval not to be unreasonably withheld or delayed). |
13.2.3 | Each Party shall notify the other Party immediately of any suspected or known fraud relevant to its activities under this TSA or any Service Schedule, or of any unauthorized access, possession, use, or knowledge, or attempt thereof, of the other Partys Groups Confidential Information, or of the occurrence of any other incident relating to the Services that could cause financial, customer or reputational loss to another Party, and agrees to cooperate with the other Party to investigate the occurrence and mitigate the impact of such an event. Each Party shall promptly provide the other Party with full details of any such event and use all available efforts to prevent a recurrence of any such event. |
13.2.4 |
Notwithstanding any provision of this Section 13 to the contrary, a receiving Partys Group may disclose such portion of the Confidential Information relating to the disclosing Partys Group to the extent, but only to the extent, the receiving Party reasonably believes that such disclosure is required under Regulation or the rules of a Competent Authority, or under a subpoena or other legal process; provided that if practicable and permissible under Regulation or rules, the receiving Party shall first |
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notify the disclosing Party of such requirement and allow such Party a reasonable opportunity to seek a protective order or other appropriate remedy to prevent such disclosure and cooperate with the disclosing Party in any lawful effort by the disclosing Party to contest the legal validity of such requirement and prevent such disclosure. |
13.2.5 | The Parties agree that monetary damages will not be an adequate remedy if this Section 13 regarding Data Protection and Confidential Information is breached, and therefore, a disclosing Party shall, in addition to any other legal or equitable remedies, be entitled to seek injunctive relief against any breach or threatened breach of this Section 13 by the receiving Party with respect to the disclosing Partys Groups Confidential Information. |
13.3 | Record-keeping |
13.3.1 | The Provider shall maintain complete and accurate records of, and supporting documentation for, all Services provided pursuant to this TSA ( Service Records ). Until the later of: |
(i) | seven years after the termination of this TSA or in the case of invoices eight years after their issuance; |
(ii) | all pending matters relating to this TSA (e.g., disputes) between the Parties are closed; |
(iii) | all pending audits relating to this TSA are closed, provided, however , that notice of any such audit was received within seven years after the termination of this TSA; |
(iv) | the information is no longer required to meet the Providers records retention policy as disclosed by the Provider to the Recipient and as such policy may be adjusted from time to time; or |
(v) | any periods as required by Regulation have expired, |
the Provider shall maintain and provide access upon request to the Service Records.
13.3.2 | The Providers records management program shall be reasonably consistent with such industry frameworks as ISO 15489 or DoD5015.2 as in effect on the date hereof. Before the Provider destroys or otherwise disposes of any Service Records, the Recipient shall have the right to request that the Provider return such Service Records by giving notice at least sixty days prior to the applicable record retention expiration date, and the Provider shall deliver such information to the Recipient. |
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14 | Force Majeure |
14.1 | Force Majeure Events |
For purposes of this TSA, Force Majeure means an event beyond the reasonable control of either Party, which by its nature was not foreseen by such Party, or, if it was foreseen, was not reasonably avoidable, and includes without limitation, acts of God, storms, floods, riots, fires, sabotage, civil commotion or civil unrest, interference by civil or military authorities, threat, declaration, continuation, escalation or acts of war (declared or undeclared) or acts of terrorism, any unauthorized, unlawful access by a third party to either Partys computing systems other than as a result of such Partys fault, failure or shortage of energy sources, strike, walkout, lockout or other labor trouble or shortage, delays by unaffiliated suppliers, and acts, omissions or delays in acting by any Competent Authority.
14.2 | No Liability for Force Majeure |
Without limiting the generality of Section 8.3, neither Party shall be under any liability for failure to fulfill any obligation under this TSA or a Service Schedule, so long as and to the extent to which the fulfillment of such obligation is prevented, frustrated, hindered or delayed as a consequence of circumstances of Force Majeure; provided that (i) such Party shall have used commercially reasonable efforts to minimize to the extent practicable the effect of Force Majeure on its obligations hereunder and (ii) nothing in this Section 14.2 shall be construed to require the settlement of any strike, walkout, lockout or other labor dispute on terms which, in the reasonable judgment of the affected Party, are contrary to its interests. It is understood that the settlement of a strike, walkout, lockout or other labor dispute will be entirely within the discretion of the affected Party. The Party affected by the Force Majeure event shall notify the other Party of that fact as soon as practicable.
14.3 | Delay Owing to Force Majeure |
In the event of any such delay as a consequence of circumstances of Force Majeure, the Recipient of any affected Service may elect to either:
(i) | submit a Change Control Request to extend the time for performance of the affected Service for a period equal to the time lost by reason of the delay, provided , however, that such extension period shall not extend beyond December 31, 2016; or |
(ii) | terminate this TSA in relation to those Services which are affected by the Force Majeure event. |
15 | Employee Provisions |
15.1 | No Obligation to Transfer Employees |
15.1.1 | The Parties agree that the Acquired Rights Directive (Council Directive 77/187/EEC as amended by Council Directive 98/50 EEC and consolidated in Council Directive 2001/23/EEC) as amended ( ARD ) or any enactment of the ARD in any national law or any analogous national law will not apply on the commencement of the Services. |
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15.1.2 | The Parties believe that on the cessation or partial cessation of the Services or any part of the Services on the termination, expiry or variation of this TSA, no transfer of the contracts of employment between a Provider or any Third Party Supplier (or any subcontractor thereof) and any of its/their employees to the applicable Recipient or a Successor Provider shall take place by reason of the ARD or any enactment of the ARD in any national law or any analogous national law. |
15.1.3 | Without prejudice to Section 15 .1.1, if requested to do so by a Recipient at any time before the termination, expiry or variation of the Services, the applicable Provider will (or will procure that) all persons working on the Services ( Staff ), whether employed/engaged by the Provider, by any Third Party Supplier or any subcontractor thereof, will be redeployed or otherwise removed from the Services before the cessation of those Services so that those Staff cease to be engaged within the Services and are not affected by any transfer pursuant to the ARD or any enactment of the ARD in any national law or any analogous national law that may otherwise occur on the cessation of those Services. |
15.2 | Pre-employment Screening |
15.2.1 | Subject to Regulation, the Provider shall require any individual it employs or engages in connection with the performance of its obligations under this TSA to have satisfied the screening procedures in Sections 15 .2.2 and 15 .2.3 prior to such individual performing any Services hereunder. |
15.2.2 | The screening procedures set forth in Section 15 .2.3 below shall apply to individuals who will be performing Services from within the United States. For individuals who will be performing Services from outside the United States: |
(i) | when RBSG or its Affiliates are the Provider, they shall comply with the RBSG Policy applicable to the relevant jurisdiction; and |
(ii) | when CFG or its Affiliates are the Provider, they shall comply with the CFG Policy applicable to the relevant jurisdiction. |
15.2.3 | For individuals who will have no unaccompanied access to any Recipient facility, and no access to the Recipients information technology network or the Recipients Confidential Information ( Level 1 Clearance ), the Provider shall have conducted commercially reasonable recruitment and security vetting procedures in relation to each such individual, including, at a minimum, by verifying such individuals identity and legal right to work in the United States based on documentation satisfying Form I-9 of the U.S. Department of Homeland Security. For individuals who may have unaccompanied access to any Recipient facility, or any access to the Recipients information technology network or the Recipients Confidential Information ( Level 2+ Clearance ), the Provider shall also have performed a background investigation on each such individual which, at a minimum, consists of the following: |
(i) | verification of current residence; |
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(ii) | verification of the previous two years of employment history; |
(iii) | verification of any specific academic, trade or professional qualifications or records that are required for the individual to perform his or her role; and |
(iv) | criminal records checks, including at a minimum a FIM county-level search and a FAM county and lower-court-level search; |
provided that in the event that an individual experiences a break in service with the Provider subsequent to the foregoing investigation having been conducted, a new background investigation meeting the requirements set forth herein will be required.
15.2.4 | In the event that: |
(i) | the Provider is unable to comply fully with the pre-employment requirements above with respect to an individual; |
(ii) | the Provider is unable to verify the information described in clauses (i) through (iii) of Section 15 .2.3; |
(iii) | the criminal records checks referred to in clause (iv) of Section 15 .2.3 determine that the individual in question has (A) a conviction or program entry for a covered offense as described in Section 19 of the Federal Deposit Insurance Act, or (B) two or more convictions for crimes involving violent behavior in the previous five years; or |
(iv) | any pre-engagement screening activity returns information that otherwise indicates in the Providers reasonable judgment that such individual should not be engaged to provide Services under this TSA, |
then the Provider shall not engage the individual in relation to this TSA or any Service Schedule.
16 | Communications with Competent Authorities |
If either Party receives any material correspondence from any Competent Authority that relates to the Services, it will provide a copy of that correspondence to the other Party unless it is prevented from doing so by Regulation or such Competent Authority. The Parties shall consult with each other over such correspondence and shall only respond to the Competent Authority if:
16.1.1 | the terms of the response have been approved by the other Party (such consent not to be unreasonably withheld or delayed); or |
16.1.2 | Regulation requires a response to the Competent Authority without the other Partys consent. |
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17 | Audit |
17.1 | Regulatory Audit Rights |
17.1.1 | The Provider shall (and shall use all commercially reasonable efforts to ensure its Third Party Suppliers providing material Services or a material element of the Services shall) promptly permit: |
(i) | the Recipient or its auditors (to the extent the Recipient and its auditors are directed by a Competent Authority); and |
(ii) | any Competent Authority (or its designated representatives), |
access to the Providers and Third Party Suppliers facilities and premises, equipment, books and records (electronic or otherwise), operational systems, employees, contractors, and subcontractors to the extent required by the Competent Authority to perform an audit.
17.1.2 | Subject to any restriction under Regulation or the direction of any Competent Authority, the Provider shall ensure it is (and shall use all commercially reasonable efforts to ensure its Third Party Suppliers providing material Services or a material element of the Services are) open and cooperative with the Recipient and its auditors and any Competent Authority (and its designated representatives) in performing its obligations under this Section 17.1 and shall provide such information, assistance, records and materials, access to persons engaged in the provision of the Services and explanations as required by the Recipient or its auditors (to the extent the Recipient and its auditors are directed by a Competent Authority) or the Competent Authority (including attending any meetings requested by the Recipient and/or the Competent Authority (or its designated representatives) and providing copies of any internal audit reports which are relevant to the Services). The Recipient shall provide as much notice of the audit as is reasonably practicable. Subject to Section 17 .1.3, each Party shall bear its own costs in respect of such audits. |
17.1.3 | If and to the extent the Provider does not have the rights under its relevant Third Party Agreement to ensure its Third Party Supplier grants the rights described in Sections 17 .1.1 and 17 .1.2, any costs in procuring such rights shall be borne by the Recipient; provided that such costs were approved by the Recipient in writing before they were incurred. If the Recipient declines, or otherwise fails, to approve such costs, the Provider shall not be required to obtain the grant of the relevant rights by that Third Party Supplier. |
17.2 | General Audit Rights |
17.2.1 | With respect to each Service Schedule: |
(i) |
The Provider shall, from time to time, but in any event no more than twice in any 12-month period (subject to the exception in Section 17.2.1(iii)), during regular business hours and upon reasonable notice, permit the Recipient or |
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its representatives to perform audits of the Providers (and to the extent commercially reasonable, its Third Party Suppliers) facilities, equipment, books and records (electronic or otherwise), operational systems, employees, contractors, subcontractors, and such other audits as may be necessary to ensure the Providers and its Third Party Suppliers compliance with the terms and conditions of this TSA and the relevant Service Schedules, as well as Regulation, and to ensure the Providers financial and operational viability, including but not limited to the Providers internal controls, pre-engagement employee screening, information and other security, business resumption, continuity, recovery, Service Level compliance, and contingency plans. |
(ii) | Upon request, the Provider shall provide to the Recipient at the Recipients expense an audit conducted by a reputable and experienced accounting firm in accordance with the Statement on Standards for Attestation Engagements (SSAE) No. 16, Reporting on Controls at a Service Organization, developed by the American Institute of Certified Public Accountants (AICPA), and have such accounting firm issue a Service Organization Control (SOC) 1 Type II Report (or substantially similar report in the event the SOC 1 Type II Report is no longer the industry standard) which will cover, at a minimum, the policies, procedures and controls required by this TSA and the relevant Service Schedule (the Report ). |
(iii) | If an audit conducted pursuant to Section 17 .2.1(i) reveals any non-compliance or other deficiencies, or the Report described in Section 17.2.1(ii) in its final and issued version contains a qualified opinion, in either case relating to risks to the Providers systems and facilities which could result in the unauthorized destruction, loss, alteration, disclosure of or access to the Recipients Confidential Information, then a senior technology executive of the Provider shall promptly meet with a representative of the Recipient to discuss the matter, and the Provider shall promptly take action to remedy the non-compliance or deficiencies and/or resolve the matters addressed by the qualification(s) so that any deficiencies that caused the qualified opinion to be issued are remedied to the Recipients reasonable satisfaction (including with respect to the timeline of the remediation). Notwithstanding the limitation on the number of audits in Section 17 .2.1(i), a Provider shall permit the Recipient to perform an audit solely to the extent necessary to confirm that any non-compliance or deficiencies identified in an audit conducted pursuant to Section 17 .2.1(i) or in the Report described in Section 17 .2.1(ii) have been remedied. |
18 | Sanctions |
18.1 | Compliance with Sanctions Laws and Regulations |
18.1.1 |
The Parties acknowledge that the Parties and their respective Groups are subject to the international sanction laws and regulations issued from time to time by HM |
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Treasury, the European Union, the United States of America (including, but not limited to, all applicable regulations of the Office of Foreign Assets Control ( OFAC ), the Bank Secrecy Act and the USA Patriot Act (including such regulations that may require the Provider to implement a Customer Identification Program or Know Your Customer Program to confirm that no beneficiary or client of the Provider appears on any lists issued by OFAC, including the Specially Designated Nationals list, and determine whether transactions by or with such beneficiary or client may constitute suspicious activity, such as identity theft, fraud, money laundering, terrorist financing or other threats to national security)), and the United Nations. |
18.1.2 | Neither Party shall be obliged to make any payment under, or otherwise to implement any part of the Services, if in the reasonable opinion of the relevant Party to do so is illegal or there is involvement by any person (natural, corporate or governmental) listed in the HM Treasury, the European Union, the United States of America, the United Nations or local sanctions lists, or there is any involvement by any person located in, incorporated under the laws of, or owned or controlled by, or acting on behalf of, a person located in or organized under the laws of a country or territory that is the target of comprehensive sanctions. |
19 | Information Security |
19.1 | Information Security |
19.1.1 | A Partys Group may not store, copy, disclose or use the other Partys Groups Data for any purpose other than to the extent necessary to provide or receive, as applicable, the Services and to comply with Regulation. |
19.1.2 | Neither Partys Group shall attempt to obtain access to, use or interfere with any information technology systems or data used or processed by the other Partys Group except to the extent required to do so to provide or receive the Services (as applicable), or except to the extent expressly permitted to do so by this TSA. |
19.1.3 | Each Partys Group shall maintain reasonable security measures to protect both Partys Groups information technology systems, from third parties, and in particular from disruption by any back door, time bomb, Trojan Horse, worm, drop dead device, virus or other software routine intended or designed to (i) permit access or use of information technology systems by a third person other than as authorized by the Recipient or the Provider or (ii) disable, damage or erase, or disrupt or impair the normal operation of the Recipients or Providers information technology systems. |
19.1.4 | Each Partys Group shall use reasonably up-to-date security measures to prevent unauthorized access to and unauthorized use of the information technology systems owned by the other Party (or, with respect to a Recipient, any member of the Recipients Group and, with respect to a Provider, any member of the Providers Group) and the other Partys data (including, with respect to a Recipient, the Recipient Data) by third parties (including Third Party Suppliers). |
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19.1.5 | A Party shall not introduce any Disabling Device into any information technology environment or any system used by the other Partys Group in connection with the Services. Without limiting a Partys other obligations under this TSA, the Parties agree that, in the event any Disabling Device is found in the systems used to provide the Services, (i) if such Disabling Device originated in any software, deliverable or other resource provided under this TSA or any Service Schedule, the Party that introduced the Disabling Device shall remove such Disabling Device at its sole expense and, subject to the caps on damages set forth in Section 8 .2 hereof, indemnify the affected Party for all Losses incurred as a result of such Disabling Device, and (ii) in any case (wherever such Disabling Device originated), the Party that introduced the Disabling Device shall exercise commercially reasonable efforts at no additional charge to eliminate, and reduce the effects of, the Disabling Device and, if the Disabling Device causes a loss of operational efficiency or loss of data, to mitigate such losses and restore such data using generally accepted data restoration techniques. |
19.1.6 | In addition to its other obligations set forth in this TSA, |
(i) | whenever a Partys Group possesses, stores, processes or has access to the other Partys Groups Personal Data, it shall comply with the applicable Fraud Prevention Policy; and |
(ii) | whenever a Partys Group possesses, stores, processes or has access to the other Partys Groups Confidential Information (inclusive of Personal Data), it shall comply with the applicable IS Requirements. |
If requested, a Party will explain to the disclosing Party how it complies with the Fraud Prevention Policy and the IS Requirements, and shall demonstrate its compliance upon request as set forth in Section 17.2.
19.1.7 | Each Party shall make the other aware as soon as reasonably practical of any information security breach which may materially adversely impact the Services or the other Partys Groups business. |
20 | Other Provisions |
20.1 | Whole Agreement |
20.1.1 | This TSA constitutes the entire agreement between the Parties with respect to the subject matter hereof at the date hereof and supersedes all prior agreements and understandings, both oral or written, between the Parties in relation to the subject matter hereof. |
20.1.2 | In this Section 20 .1, this TSA includes all documents entered into pursuant to it and/or this TSA. |
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20.2 | No Construction Against Drafter |
The Parties acknowledge that this TSA and all the terms and conditions contained herein have been fully reviewed and negotiated by the Parties. Having acknowledged the foregoing, the Parties agree that any principle of construction or rule of law that provides that, in the event of any inconsistency or ambiguity, an agreement shall be construed against the drafter of the agreement shall have no application to the terms and conditions of the TSA.
20.3 | Publicity and Public Announcements |
A Party must not make any public announcement relating to this TSA without the prior written approval of the other Party (such approval not to be unreasonably withheld, conditioned or delayed). This shall not affect any announcement required by Regulation, any Competent Authority or the rules of any stock exchange on which the shares of a Party are listed, but the Party with an obligation to make an announcement shall notify the other Party and take into account their reasonable representations so far as is reasonably practicable before complying with such obligation.
20.4 | Further Assurances |
Each Party shall, and shall cause its Affiliates to, from time to time execute such documents, perform such acts and things as any Party may reasonably require to give full effect to the provisions of this TSA and the transactions contemplated herein.
20.5 | Assignment |
The provisions of this TSA shall be binding upon and inure to the benefit of the Parties hereto and their respective successors and assigns. No Party may assign, delegate or otherwise transfer any of its rights or obligations under this TSA without the prior written consent of the other Party hereto.
20.6 | Third Party Rights |
Each Party to this TSA acknowledges and agrees that each of Citizens Bank, N.A. and Citizens Bank of Pennsylvania (each a Bank Beneficiary ) are express third party beneficiaries of this TSA, and that in the event of CFGs default and failure to obtain for any Bank Beneficiary any services needed by such Bank Beneficiary under this TSA, such Bank Beneficiary shall be entitled to directly enforce and enjoy all rights and privileges of CFG set forth in this TSA (including, without limitation, the right to obtain services under this TSA directly and not through CFG) notwithstanding that they are not Parties to this TSA and irrespective of any actions taken or not taken by CFG; provided, however, that each Bank Beneficiary will be able to obtain services under this TSA directly only to the extent such Bank Beneficiary is in compliance with and assumes all of CFGs obligations under this TSA, including any obligation such Bank Beneficiary may have to provide Services under this TSA. Subject to the foregoing, and except for the indemnification rights as set forth in Section 8 .3, (i) the provisions of this TSA are solely for the benefit of the Parties and are not intended to confer upon any Person (including employees of the Parties hereto) except the Parties and the express third party beneficiaries set forth above any rights or remedies hereunder, and (ii) there are no third party beneficiaries of this TSA other than the express third party beneficiaries set forth above and this TSA shall not provide any third person (including
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employees of the Parties hereto), other than the express third party beneficiaries set forth above, with any remedy, claim, liability, reimbursement, claim of action or other right in excess of those existing without reference to this TSA.
20.7 | Amendment and Waiver |
20.7.1 | Any provision of this TSA (including the Service Schedules hereto) may be amended or waived if, but only if, such amendment or waiver is in writing and is signed, in the case of an amendment, by each Party to this TSA, or in the case of a waiver, by the Party against whom the waiver is to be effective. |
20.7.2 | No failure or delay by any Party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by Regulation. |
20.8 | Notices |
All notices, requests and other communications to any Party hereunder shall be in writing (electronic mail ( e-mail ) transmission may be used, provided that a receipt of such e-mail is requested and received), and shall be given:
(i) | if to RBSG to: |
The Royal Bank of Scotland Group plc
Business House G, First Floor
RBS Gogarburn
PO Box 1000
Edinburgh EH12 1HQ
Scotland
Attention: Group General Counsel
With a copy to:
General Counsel, Corporate / M&A
chris.campbell@rbs.com
rushad.abadan@rbs.com
(ii) | if to CFG to: |
Citizens Financial Group, Inc.
One Citizens Plaza
Providence, RI 02903
United States
Attention: John Fawcett, Chief Financial Officer
With a copy to:
Citizens Financial Group, Inc.
28 State Street, 12 th Floor, MS 1225
Boston, MA 02109
United States
Attention: Stephen T. Gannon, General Counsel
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or such other address or e-mail address as such Party may hereafter specify for the purpose by notice to the other Parties hereto. All such notices, requests and other communications shall be deemed received on the date of receipt by the recipient thereof if received prior to 5:00 p.m. in the place of receipt and such day is a Business Day in the place of receipt. Otherwise, any such notice, request or communication shall be deemed not to have been received until the next succeeding Business Day in the place of receipt.
20.9 | Severability |
If any provision of this TSA or the application thereof to any Party or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof or the application of such provision to any of the Parties or circumstances or in jurisdictions other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any Party. Upon such determination, the Parties shall negotiate in good faith in an effort to agree upon such a suitable and equitable provision to effect the original intent of the Parties.
20.10 | Counterparts |
This TSA may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the Parties and delivered to the other Party. Execution of this TSA or any other documents pursuant to this TSA by facsimile or other electronic copy of a signature shall be deemed to be, and shall have the same effect as if executed by an original signature.
20.11 | Independent Contractor |
Nothing in this TSA shall constitute or be deemed to constitute a partnership or joint venture between the Parties hereto or constitute or be deemed to constitute any Party the agent or employee of the other Party for any purpose whatsoever and neither Party shall have authority or power to bind the other or to contract in the name of, or create a liability against, the other in any way or for any purpose. The Parties hereto acknowledge and agree that when acting as a Provider, the other Party is an independent contractor in the performance of each and every part of this TSA and nothing herein shall be construed to be inconsistent with this status. Subject to the terms and conditions of this TSA, the Provider shall have the authority to select the means, methods and manner by which any Service is performed.
20.12 | Governing Law and Submission to Jurisdiction |
20.12.1 | This TSA shall be governed by and construed and interpreted in accordance with the laws of the State of New York, without regard to the conflict of laws principles thereof that would result in the application of any law other than the laws of the State of New York. |
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20.12.2 | EACH OF THE PARTIES HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY COURT PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF AND PERMITTED UNDER OR IN CONNECTION WITH THIS TSA OR THE SERVICES CONTEMPLATED BY THIS TSA. EACH OF THE PARTIES HEREBY (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS TSA AND THE SERVICES CONTEMPLATED BY THIS TSA, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 20 .12.2. |
20.12.3 | With respect to any Action relating to or arising out of this TSA, subject to the provisions of Section 11, each Party to this TSA irrevocably (a) consents and submits to the exclusive jurisdiction of the courts of the State of New York and any court of the United States located in the Borough of Manhattan in New York City; (b) waives any objection which such Party may have at any time to the laying of venue of any Action brought in any such court, waives any claim that such Action has been brought in an inconvenient forum and further waives the right to object, with respect to such Action, that such court does not have jurisdiction over such party; and (c) consents to the service of process at the address set forth for notices in Section 20.7 herein; provided, however, that such manner of service of process shall not preclude the service of process in any other manner permitted under Regulation. |
20.13 | Anti-Bribery Provisions |
20.13.1 | Each Party agrees that it shall comply with, and that the Services will be performed in accordance with, the Anti-Corruption Laws, subject to the Change Control Procedure in respect of any change in Anti-Corruption Laws after the date hereof, and that it shall not cause, by act or omission, any other Party to be in breach of any Anti-Corruption Laws. |
20.13.2 | Each Party shall have in place and comply with its own anti-bribery and corruption policy to ensure that it complies with the Anti-Corruption Laws (each such policy, an Anti-Bribery and Corruption Policy ). If requested, a Party shall provide to the other Party a copy of its Anti-Bribery and Corruption Policy and, if required, the providing Party will explain to the receiving Party how the features set out in its Anti-Bribery and Corruption Policy correspond to the receiving Partys Anti-Bribery and Corruption Policy. Subject to the Change Control Procedure, the providing Party shall promptly implement any amendments to its Anti-Bribery and Corruption Policy which the receiving Party, acting reasonably, considers necessary following its review of the providing Partys Anti-Bribery and Corruption Policy to ensure that the providing Party complies with the Anti-Corruption Laws. |
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20.13.3 | Each Party shall review its Anti-Bribery and Corruption Policy on a regular basis and shall promptly implement and notify the other Party of any amendments to its Anti-Bribery and Corruption Policy which it considers necessary for continued compliance with the Anti-Corruption Laws. |
20.13.4 | Each Party shall cooperate with the other Party and promptly provide any information or confirmation which the other Party requires from time to time in connection with the obligations set forth in this Section 20 .13. Each Party acknowledges that the other Party will place reliance upon the information provided. |
20.13.5 | Each Party shall immediately notify the other Party in writing of any suspected or known breach of its Anti-Bribery and Corruption Policy or any of the Anti-Corruption Laws. |
20.13.6 | Each Party shall have the right to suspend and/or terminate any Service Schedule for material breach immediately, or on such other time specified by the terminating Party, upon written notice to the Provider under such Service Schedule if: (i) the Provider, or any person employed by it or acting on its behalf (whether with or without the knowledge of such Service Provider) fails to comply with any of the Anti-Corruption Laws or is in material breach of the Providers Anti-Bribery and Corruption Policy; or (ii) a Party has a reasonable suspicion that an occurrence as specified in clause (i) of this Section 20 .13.6 has occurred. |
20.13.7 | Regardless of any other provision in this TSA, no Party shall be obliged to do, nor obliged to omit to do, any act which would, in its reasonable opinion, put it in breach of any Anti-Corruption Laws. |
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IN WITNESS WHEREOF, this TSA has been duly executed.
SIGNED for and on behalf of THE ROYAL BANK OF SCOTLAND GROUP PLC by its Authorised Attorney: |
} |
|||
SIGNED for and on behalf of CITIZENS FINANCIAL GROUP, INC. by: |
} |
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Exhibit 10.3
TRADE MARK LICENCE AGREEMENT
between
THE ROYAL BANK OF SCOTLAND GROUP PLC
and
CITIZENS FINANCIAL GROUP INC.
INDEX
CLAUSE | PAGE | |||||
1. |
Definitions and Interpretation |
2 | ||||
2. |
Licence Term |
6 | ||||
3. |
Grant of Licence |
7 | ||||
4. |
Title and Goodwill |
12 | ||||
5. |
Restrictions on Use |
13 | ||||
6. |
Composite Trade Marks |
14 | ||||
7. |
Quality Control |
15 | ||||
8. |
Infringement |
17 | ||||
9. |
Warranties, Indemnity and Liability |
19 | ||||
10. |
Termination |
22 | ||||
11. |
Consequences of Expiry of Agreement or Termination |
24 | ||||
12. |
Licence Fees |
27 | ||||
13. |
Irrevocable Authority |
28 | ||||
14. |
Notice |
29 | ||||
15. |
Amendment |
30 | ||||
16. |
Entire Agreement |
30 | ||||
17. |
Severability |
31 | ||||
18. |
No Partnership, Joint Venture or Agency |
31 | ||||
19. |
Assignment |
31 | ||||
20. |
Waiver |
32 | ||||
21. |
Contracts (Rights of Third Parties) Act 1999 |
32 | ||||
22. |
Counterparts |
32 | ||||
23. |
Governing Law and Jurisdiction |
32 | ||||
SCHEDULES | PAGE | |||||
Schedule 1 |
Daisy Design |
1-1 | ||||
Schedule 2 |
Existing Composite Trade Marks |
2-1 | ||||
Schedule 3 |
New Composite Trade Marks |
3-1 | ||||
Schedule 3A |
New Consumer Banking Business Line Composite Trade Marks |
3-2 | ||||
Schedule 3B |
New Commercial Banking Business Line Composite Trade Marks |
3-4 | ||||
Schedule 4 |
Licensees Trade Marks |
4-1 | ||||
Schedule 5 |
Limited Instances of Permitted Use of RBS Mark in Relation to Retail Banking Services |
5-1 | ||||
Schedule 6 |
Domain Names Containing the RBS Mark Controlled by the Licensor |
6-1 |
THIS TRADE MARK LICENCE AGREEMENT made the day of 2014 (the Agreement )
BETWEEN:
(1) | THE ROYAL BANK OF SCOTLAND GROUP PLC , a company incorporated in Scotland with company number SC045551 and having its registered office at 36 St. Andrew Square, Edinburgh EH2 2YB, Scotland (the Licensor ) |
and
(2) | CITIZENS FINANCIAL GROUP, INC., a Delaware corporation, with a principal place of business at One Citizens Plaza, Providence, Rhode Island 02903-1339 (the Licensee ) |
WHEREAS:
A. | The Licensor is the owner of the Licensors Trade Marks. |
B. | The Licensor has previously granted the Licensee one or more licences in respect of Licensors Trade Marks, including pursuant to those previous licence agreements of 19 September 2005, 1 November 2006 and 18 May 2012 (the Previous Licence Agreements ). |
C. | The Licensee wishes to obtain from the Licensor for itself, the Licensee Group Companies and the Permitted Sub-licensees, and the Licensor has agreed to grant to the Licensee and the Licensee Group Companies, a limited licence to use the Licensors Trade Marks, on or in relation to the Services in the Territory, such licence to include the right of the Licensee to grant sub-licences to the Permitted Sub-licensees, all on the terms and conditions set out in this Agreement. |
D. | The Licensor and the Licensee intend that this Agreement will supersede the Previous Licence Agreements and the Previous Licence Agreements shall terminate as of the Commencement Date and shall have no further effect following the Commencement Date. |
NOW, THEREFORE , for good and valuable consideration (the receipt and sufficiency of which is hereby acknowledged by the Licensor and the Licensee) and in consideration of the mutual undertakings set out in this Agreement, and intending to be legally bound hereby, the Licensor and the Licensee agree as follows:
1. | DEFINITIONS AND INTERPRETATION |
1.1. | In this Agreement (including the recitals), the following words and expressions shall have the meanings set out below: |
Acquired Bank shall have the meaning set out in Clause 3.4.1;
Acquired Branch shall have the meaning set out in Clause 3.4.2;
Acquiring Party shall have the meaning set out in Clause 3.4.1;
Capital Stock means, with respect to any person or entity, any and all shares, interests, participations, rights in or other equivalents (however designated) of such persons or entitys voting stock, and any rights, warrants or options exercisable or exchangeable for or convertible into such voting stock;
CBNA means Citizens Bank, N.A.;
CBPA means Citizens Bank of Pennsylvania;
Change of Control means (i) the consummation of any transaction as a result of which any person or entity, other than the Licensor, any of its affiliates or any Initial Transferee, acquires directly or indirectly more than fifty (50) per cent of the outstanding Capital Stock of the Licensee, including through a merger or consolidation or purchase of the Capital Stock of the Licensee or (ii) the sale, lease, conveyance, disposition, in one or a series of related transactions other than a merger or consolidation, of all or substantially all of the assets of the Licensee taken as a whole to any person or entity other than the Licensor, or an affiliate of the Licensor;
Claim shall have the meaning set out in Clause 9.4.
Commencement Date means the date first appearing at the beginning of this Agreement;
Composite Trade Marks means the Existing Composite Trade Marks, New Composite Trade Marks, New Commercial Banking Business Line Composite Trade Marks and New Consumer Banking Business Line Trade Marks, collectively;
Daisy Design means the design set out in Schedule 1;
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Extended Term shall have the meaning set out in Clause 2.2;
Existing Composite Trade Marks means (i) the marks set out in Schedule 2, the use of each of which shall be limited to any shade of green, black and/or white and variations thereof (including green or black outline of white lettering and the Daisy Design), save that the Daisy Design and RBS name shall always be used in Pantone 281 blue (or its equivalent under an industry recognised colour standard) where those two marks appear together in the Composite Trade Marks and (ii) any domain name which is either (a) controlled, and used in connection with the Services, by the Licensee as of the Commencement Date that contains the acronym RBS or (b) otherwise set out in Schedule 6;
Initial Term shall have the meaning set out in Clause 2.1;
Initial Transferee means any person or entity to whom the Licensor or any of its affiliates transfers at least fifty (50) per cent of the outstanding Capital Stock of the Licensee owned directly or indirectly by the Licensor on the Commencement Date;
Licence Fees shall have the meaning set out in Clause 12.1;
Licensee Group Company means, subject to Clause 3.4.1, in relation to the Licensee, any company which, at the relevant time, is a wholly-owned Subsidiary of the Licensee;
Licensees Trade Marks means the marks set out in Schedule 4 and any trade mark and service mark applications and registrations for such marks in the name of the Licensee;
Licensors Trade Marks means (i) the Daisy Design (whether registered or unregistered), (ii) the acronym RBS (whether registered or unregistered), and (iii) any United States trade mark and service mark applications and registrations in the name of the Licensor for the foregoing;
Manner of Use Requirements shall have the meaning set out in Clause 7.4;
New Commercial Banking Business Line Composite Trade Marks means the marks set out in Schedule 3B, as such Schedule may be amended from time-to time pursuant to Clause 5.2, the use of each of which shall be limited to any shade of green, grey, black and/or white and variations thereof, (including green, grey or black outline of white lettering and the Daisy Design);
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New Composite Trade Marks means the marks set out in Schedule 3;
New Consumer Banking Business Line Composite Trade Marks means the marks set out in Schedule 3A, as such Schedule may be amended from time-to-time pursuant to Clause 5.2, the use of each of which shall be limited to any shade of green, grey, black and/or white and variations thereof, (including green, grey or black outline of white lettering and the Daisy Design);
Permitted Sub-licensees means only: (i) The Phillies and Phillies Ballpark L. P. and (ii) Major League Baseball (MLB), pursuant to the Permitted Sub-licence Agreement;
Permitted Sub-licence Agreement means the Naming Rights, Sponsorship and Advertising Agreement dated 17 June 2003 between CBPA and the Licensee on the one hand and The Phillies and Phillies Ballpark L.P. on the other;
Previous Licence Agreements shall have the meaning set out in Recital B;
Quality Standard shall have the meaning set out in Clause 7.3;
Registration Rights Agreement means the Registration Rights Agreement, dated on or around the Commencement Date, by and between the Licensor and the Licensee;
Schedule means a schedule annexed to and forming part of this Agreement as may be updated from time to time in accordance with this Agreement;
Separation Agreement means the Separation and Shareholder Agreement, dated on or around the Commencement Date, by and between the Licensor and the Licensee;
Services means retail and commercial banking services in the Territory and their marketing, promotion and sale;
Subsidiary means, with respect to any person or entity, any entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at any time directly or indirectly owned by such person or entity;
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Tax includes all forms of taxation and social security contributions and all statutory, governmental, state, provincial, local governmental or municipal impositions, duties, contributions, levies and withholdings of any nature whatsoever, in each case whether imposed in the United Kingdom, the United States or elsewhere in the world, whenever imposed and whether chargeable directly or primarily or solely against or attributable directly or primarily or solely to the parties, together with all penalties, charges and interest relating to any of the foregoing;
Tax Authority means any body or organization in any jurisdiction having authority over a party in relation to Tax;
Territory means those states and territories (including unincorporated territories) comprising the United States of America;
Transitional Services Agreement means the Transitional Services Agreement, dated on or around the Commencement Date, by and between the Licensor and the Licensee; and
VAT means United Kingdom value added tax imposed in compliance with EC Council Directive 2006/112 or any other tax of a similar nature, whether imposed in a member state of the European Union in substitution for, or levied in addition to, such tax, or imposed elsewhere. Any reference in this Agreement to any party shall, at any time when such party is treated as a member of a group for VAT purposes, include (where appropriate and unless the context otherwise requires) a reference to the representative member of such group at such time (the term representative member to have the same meaning as in the Value Added Tax Act 1994).
1.2. | In this Agreement, unless the context otherwise requires: |
1.2.1 | the index and clause headings are for convenience only and shall not affect the construction or interpretation of this Agreement; |
1.2.2 | references to the recitals, clauses and Schedules are references to the recitals, clauses and Schedules of this Agreement and references in any clause or Schedule to a paragraph are, unless otherwise stated, references to a paragraph in that clause or Schedule; |
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1.2.3 | unless the context otherwise requires the singular shall include the plural and vice versa , references to any gender shall include references to the other genders and references to persons shall include natural persons, corporations, companies, firms, partnerships, bodies corporate, associations, organisations, foundations and trusts (in each case whether or not having separate legal personality); |
1.2.4 | any phrase introduced by the terms include or including do not limit the sense of the words preceding such terms and shall be deemed to be followed by the words, without limitation; and |
1.2.5 | references to any English legal term for any right, action, remedy, method of judicial proceeding, legal document, legal status, court, official or any legal concept or thing shall in respect of any jurisdiction other than England be deemed to include that which most nearly approximates in that jurisdiction to the English law term. |
1.2.6 | Unless otherwise specified to the contrary, all of the obligations, undertakings or covenants of the Licensee under this Agreement shall apply to the Licensee in relation to itself and all other Licensee Group Companies and Permitted Sub-licensees (subject to the terms of the Permitted Sub-licence Agreement) and the Licensee shall, accordingly, ensure that the Licensee Group Companies and the Permitted Sub-licensees (subject to the terms of the Permitted Sub-licence Agreement) comply at all times with the terms of this Agreement. |
1.3. | The Schedules and recitals form part of this Agreement and shall have effect as if set out in full in the body of this Agreement and any reference to this Agreement includes the Schedules and recitals. |
2. | LICENCE TERM |
2.1. | This Agreement shall come into force on the Commencement Date and, except if terminated in accordance with Clause 3.1 or Clause 10, shall continue in full force and effect for a period of five (5) years from the Commencement Date (the Initial Term ). |
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2.2. | If the Licensee wishes to extend the Initial Term, the Licensee shall, at least six (6) months prior to expiry of the Initial Term, notify the Licensor in writing both that such an extension is required and the period of such extension (not to exceed five (5) years) and, except to the extent this Agreement is terminated in accordance with Clause 3.1 or Clause 10, subject to payment of the Licence Fees as set forth in Clause 12.1.2, this Agreement shall be automatically extended for such period, and such extension shall automatically come into force on the date of expiry of the Initial Term and shall continue in full force and effect for a maximum period of up to five (5) years from the date of expiry of the Initial Term, or until such time as terminated in accordance with Clause 3.1 or Clause 10 (the Extended Term ) (it being understood that, in the event this Agreement is terminated in part pursuant to Clause 3.1, any extension pursuant to this Clause 2.2 shall only apply to those parts of this Agreement that have not otherwise been terminated pursuant to Clause 3.1). |
2.3. | The Previous Licence Agreements shall terminate as of the Commencement Date. |
3. | GRANT OF LICENCE |
3.1. |
Subject to the terms and conditions of this Agreement, and in consideration of the payment by the Licensee of the Licence Fees, the Licensor hereby grants to the Licensee and the Licensee Group Companies, and the Licensee, on behalf of itself and the Licensee Group Companies, hereby accepts from the Licensor, a non-transferable, non-sub-licensable (except as set forth in Clause 3.3) sole licence to use the Licensors Trade Marks but only in relation to the Composite Trade Marks (except as set forth in Clause 3.2) in relation to the Services in the Territory; provided that (x) except as otherwise set forth in Clause 3.2.7 or Clause 3.8, and notwithstanding any other provision of this Agreement, not later than thirty (30) days after the Licensor shall have ceased to hold at least fifty (50) per cent of the Licensees outstanding Capital Stock (but in no event earlier than 1 October 2015), this Agreement shall, subject to Clause 11.3, terminate with respect to the Licensees and the Licensee Group Companies right to use the Licensors RBS mark as part of the Existing Composite Trade Marks and in the instances set forth on Schedule 5, and upon such termination, the Licensee shall, and shall ensure that each Licensee Group Company shall, immediately discontinue the use of the acronym RBS as part of the Existing Composite Trade Marks and in the instances set forth on Schedule 5; (y) except in the limited instances set forth on Schedule 5, the Licensee shall not, and shall ensure that each Licensee Group |
7
Company shall not, at any time during its use of the Licensors RBS mark as part of the Existing Composite Trade Marks, use it in connection with the operation of the Licensees retail banking business or the marketing, promotion or sale of retail banking services; and (z) if the Licensee seeks to rebrand any product or Service which, as of the commencement of the relevant rebranding initiative for such product or Service, is branded using the Composite Trade Marks, and such rebranding provides for the cessation of use of the Composite Trade Marks with respect to such product or Service, then this Agreement shall, subject to Clause 11.4, without the need for notice and effective as of the date of completion (but in no event more than sixty (60) days after the commencement) of the relevant rebranding initiative, terminate with respect to the Licensees right to use the Composite Trade Marks in relation to such product or Service. The Licensee shall develop a project plan with respect to each rebranding initiative described in sub-clause (z) above and shall provide a copy of such project plan to the Licensor with reasonable notice prior to the commencement of the rebranding initiative. The dates of commencement and completion of such rebranding initiative shall be determined in accordance with the relevant project plan (it being understood that any such rebranding initiative shall not be deemed to have commenced to the extent the Licensee engages in customary testing or pre-launch activities (not to exceed ninety (90) days) in a test market to determine the viability and/or logistics associated with the full-scale public rollout of any such rebranding initiative). |
3.2. | Nothing in this Agreement shall or is intended to permit the Licensee, the Licensee Group Companies or the Permitted Sub-licensees to use the Licensors Trade Marks (i) except as a component of a Composite Trade Mark, or (ii) for any purposes other than those set out in Clause 3.1 without the prior written consent of the Licensor, provided however, that subject to the terms of this Agreement, the Licensee and the Licensee Group Companies shall be permitted to continue to use: |
3.2.1 | the Daisy Design by itself on the interior and exterior of the properties owned or leased by the Licensee or any Licensee Group Company; |
3.2.2 | the Daisy Design by itself as a design element in plastic debit or credit cards issued by the Licensee or any Licensee Group Company; |
3.2.3 | the Daisy Design by itself as an environmental element in traditional and in-store branches and administrative offices of the Licensee or any Licensee Group Company as a wall super graphic, window vinyl pattern, media wall mark or podium; |
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3.2.4 | the Daisy Design by itself as a design element in incidental promotional items and employee accessories ( e.g. , pens, ties, pins, cuff links and golf shirts) that use the Daisy Design produced by the Licensee or any Licensee Group Company for their own use, but solely to the extent and only in the manner used as of 1 June 2014; |
3.2.5 | the Daisy Design by itself as a design element in printed materials and collateral ( e.g . internal Microsoft PowerPoint templates, memorandum templates etc) in existence as of 1 June 2014; |
3.2.6 | the Daisy Design by itself in online applications used by the Licensee or any Licensee Group Company (including its mobile application having the Daisy Design as the icon, the App Store icon on the iTunes site, the icon for a technology application known as Relay Initiative, which provides for an electronic message to be sent to loan applicants upon submission of a loan application, and all checking and savings pages on citizensbank.com and charterone.com) as of 1 June 2014; and |
3.2.7 | the Daisy Design and the Licensors RBS mark, each either by itself or together as a combined trade mark, as design elements in internal, non-customer facing technology applications, but solely to the extent and only in the manner used on such applications by the Licensee or any Licensee Group Company as of 1 June 2014; provided that the Licensee and any such Licensee Group Company shall cease any and all such uses by 1 October 2017. |
3.3. |
The Licensee and the Licensee Group Companies shall have no right to sub-licence the Licensors Trade Marks or the Composite Trade Marks without the prior written consent of the Licensor, which consent shall be given or withheld at the Licensors sole and absolute discretion. Notwithstanding the foregoing, the Licensee shall, subject to the terms of this Agreement, have the right to grant sub-licences under the licence granted to the Licensee pursuant to Clause 3.1 to the Permitted Sub-licensees, pursuant to the Permitted Sub-licence Agreement, without the prior written consent of the Licensor. Neither Licensee nor any Permitted Sub-licensee may amend, modify or otherwise |
9
change the Permitted Sub-licence Agreement without the prior written consent of the Licensor to the extent such amendment, modification or other change relates to or otherwise affects the Licensors Trade Marks or the Composite Trade Marks in any respect. The Licensee shall remain responsible and fully liable at all times to the Licensor for any acts, omissions or default on the part of the Permitted Sub-licensees, and any action, omission or default by any Permitted Sub-licensee that would constitute a breach of this Agreement if it were an action, omission or default by the Licensee, shall constitute a breach of this Agreement by the Licensee. For the avoidance of doubt, no Permitted Sub-licensee shall, at any time, have any greater right to use the Licensors Trade Marks than the Licensee, each Permitted Sub-licensees right to use the Licensors Trade Marks shall be consistent with the terms of the Permitted Sub-licence Agreement and shall automatically terminate upon and to the extent of any expiration or termination of this Agreement. |
3.4. | If: |
3.4.1 | at any time during the Initial Term, the Licensee or any Licensee Group Company (an Acquiring Party ) acquires another depository institution, where such acquired institution becomes a Licensee Group Company (the Acquired Bank ), the licence granted in Clause 3.1 shall extend, at the discretion of the Licensee, to such Acquired Bank, however the licence granted in Clause 3.1 shall not extend to any depositary institution acquired after the Initial Term; and |
3.4.2 | at any time during the Initial Term or the Extended Term, an Acquiring Party acquires one or more bank branches (each an Acquired Branch ), the licence granted in Clause 3.1 shall extend, at the discretion of the Licensee, to such Acquired Branch. |
3.5. | The Licensee acknowledges and confirms that the Licensor reserves the right to use or licence the Licensors Trade Marks in the Territory in any manner at the Licensors sole discretion; provided that the Licensor shall not sub-licence the Daisy Design in the Territory to any third party in relation to the Services except for (i) transitional purposes in connection with a sale or disposition of a business or (ii) the Licensors own purposes (including to a vendor providing services to Licensor or any of its affiliates or in connection with any joint venture or other strategic partnership or alliance). |
10
3.6. | The Licensor may, at the Licensors sole and absolute discretion, add to, delete or vary any of the Licensors Trade Marks (it being understood that the Licensee and the Licensee Group Companies shall not be required to add, delete or vary any of the Licensors Trade Marks from the manner in which the Licensee or the Licensee Group Companies are using any of the Licensors Trade Marks as of 1 June 2014 as part of the Composite Trade Marks or as otherwise permitted hereunder). |
3.7. | The Licensee shall not be in breach of the terms of Clause 3.1 solely by reason of using the Composite Trade Marks (or the Daisy Design by itself to the extent permitted under Clause 3.2) on an Internet website that is accessible from outside the Territory, so long as the website is targeted at persons inside the Territory. |
3.8. | The parties acknowledge and agree that with respect to any plastic debit or credit card issued by the Licensee or any Licensee Group Company as of 1 October 2015 which uses the Licensors RBS mark as a design element on any such debit or credit card, whether in combination with the Daisy Design and/or the Existing Composite Trade Marks, the Licensee or the Licensee Group Company, as applicable, shall not be required to recall and/or reissue such debit or credit cards immediately after 1 October 2015; provided that (i) to the extent any such debit or credit card needs to be reissued by the Licensee or any Licensee Group Company in the ordinary course after the Commencement Date, whether due to expiration or replacement of such debit or credit card for any reason, any reissue of such debit or credit card shall have all uses of, and references to, the Licensors RBS mark removed and (ii) in any event, any and all of the Licensees and the Licensee Group Companies plastic debit and credit cards which use the Licensors RBS mark as a design element shall be recalled and reissued by the Licensee and/or the Licensee Group Companies, as applicable, no later than 1 October 2017 so that all uses of, and references to, the Licensors RBS mark are removed and no longer used in connection therewith. For the avoidance of doubt, the Licensee and the Licensee Group Companies shall only be permitted to use the Licensors RBS mark with respect to any plastic debit or credit card, as contemplated in this Clause 3.8, solely to the extent and only in the manner such RBS mark was used on such debit or credit card as of 1 June 2014. |
3.9. | For the avoidance of doubt, and notwithstanding anything herein to the contrary, each Licensee Group Company shall be licensed hereunder only for so long as such Licensee Group Company is and remains a wholly-owned Subsidiary of the Licensee. |
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4. | TITLE AND GOODWILL |
4.1. | The Licensee acknowledges the Licensors exclusive ownership of the Licensors Trade Marks. This Agreement does not give the Licensee, the Licensee Group Companies or the Permitted Sub-licensees any interest in the Licensors Trade Marks, except the right to use the Licensors Trade Marks in accordance with the terms of this Agreement. |
4.2. | Any use of the Licensors Trade Marks in so far as they form part of the Composite Trade Marks, or as otherwise permitted hereunder or under the Permitted Sub-licence Agreement, by the Licensee, any Licensee Group Company or any Permitted Sub-licensee shall inure to the sole benefit of the Licensor. Without prejudice to the foregoing, all goodwill arising on or derived from the use of the Licensors Trade Marks in so far as they form part of the Composite Trade Marks, or as otherwise permitted hereunder or under the Permitted Sub-licence Agreement, by the Licensee, any Licensee Group Company or any Permitted Sub-licensee pursuant to this Agreement shall accrue to the benefit of the Licensor. The Licensor may, at any time as reasonably required, call for a confirmatory assignment of that goodwill and the Licensee shall immediately execute, and shall ensure that the Licensee Group Companies and Permitted Sub-licensees immediately execute, such assignment. Any use of the Licensees Trade Marks in so far as they form part of the Composite Trade Marks by the Licensee, any Licensee Group Company or Permitted Sub-licensee shall inure to the sole benefit of the Licensee. Without prejudice to the foregoing, all goodwill arising on or derived from the use of the Licensees Trade Marks in so far as they form part of the Composite Trade Marks by the Licensee, any Licensee Group Company or Permitted Sub-licensee pursuant to this Agreement shall accrue to the benefit of the Licensee. |
4.3. | Wherever practicable (but in relation to the use by the Permitted Sub-Licensee, subject to the terms of the Permitted Sub-licence Agreement) the Licensee shall indicate that the Licensors Trade Marks are the property of the Licensor by the use of the following style of trade mark notice (or its equivalent), or such other notice as may be approved in advance by the Licensor, on or in relation to all Services in relation to which the Licensors Trade Marks, in so far as they form part of the Composite Trade Marks or as otherwise permitted hereunder or under the Permitted Sub-licence Agreement, are used: The Daisy Design and RBS marks are trade marks of The Royal Bank of Scotland Group plc used under licence by Citizens Financial Group Inc. |
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5. | RESTRICTIONS ON USE |
5.1. | The Licensee shall, and shall ensure that the Licensee Group Companies and Permitted Sub-licensees shall, neither do nor suffer to be done any act or thing which is in any way inconsistent with the Licensors ownership of the Licensors Trade Marks or the Licensors ownership of the Licensors Trade Marks in the Composite Trade Marks or in those marks on Schedule 5 or which could impair any application for or registration of any of the Licensors Trade Marks or the Composite Trade Marks. |
5.2. |
The Licensee shall not, and shall ensure that the Licensee Group Companies, and the Permitted Sub-licensees shall not, adopt, register or use any word, name (including company or trading name), mark, symbol, internet domain name, other designation or trade style which, in the Licensors opinion, is likely to cause confusion with or dilute any of the Licensors Trade Marks, and shall not make any unlicensed use of trade marks which, in the Licensors opinion, are confusingly similar to the Licensors Trade Marks. For the avoidance of doubt, the Licensee shall only, and shall ensure that the Licensee Group Companies shall only, use the Licensors Trade Marks as they appear in Schedule 2, Schedule 3, Schedule 3A, Schedule 3B, Schedule 5 and Schedule 6 and, where applicable, subject always to the colour limitations specified in the definitions of Existing Composite Trade Marks, New Commercial Banking Business Line Composite Trade Marks and New Consumer Banking Business Line Composite Trade Marks set out in Clause 1.1 above. Any other use of the Licensors Trade Marks with or in a different colour, shall constitute a new mark and shall require the Licensors express written consent prior to any use thereof. The Licensee has confirmed to the Licensor that (a) it initially intends to use the New Consumer Banking Business Line Composite Trade Marks in connection with its consumer banking businesses and (b) it initially intends to use the New Commercial Banking Business Line Composite Trade Marks in connection with its commercial banking businesses. Subject to the foregoing, the parties agree that in the event that the Licensee encounters any unforeseen legal obstacle or litigation risk in relation to its use of the New Composite Trade Mark [Daisy Design] + CITIZENS ONE (or any other New Composite Trade Mark substituted therefor as provided below), the Licensee shall be permitted to use one of the other New Composite Trade Marks in substitution for the New Composite Trade Mark which is subject to such obstacle or legal risk and upon written notification to the Licensor, Schedule 3A and Schedule 3B shall be deemed automatically revised to reflect such substitution. Notwithstanding anything herein to the contrary, the Licensee and the Licensee Group Companies shall be limited |
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at any given time to the use of a single New Composite Trade Mark (including as part of the associated New Consumer Banking Business Line Composite Trade Marks and New Commercial Banking Business Line Composite Trade Marks set out in Schedule 3A and Schedule 3B, respectively). |
6. | COMPOSITE TRADE MARKS |
6.1. | The Licensor and Licensee have previously registered and applied to register various versions of the Existing Composite Trade Marks in the Territory, as detailed in Schedule 2. For the avoidance of doubt, the Licensor continues, and shall continue, to retain exclusive ownership of the Licensors Trade Marks in so far as they comprise the applied for and/or registered Composite Trade Marks and the Licensee continues, and shall continue, to retain exclusive ownership of the Licensees Trade Marks in so far as they comprise the applied for and/or registered Composite Trade Marks. The parties agree that the registration of the Composite Trade Marks is purely a protective measure and for administrative ease and shall not provide the Licensor and/or Licensee with any legal rights over either partys respective component trade marks. The Licensee agrees that it shall take immediate steps to ensure that the Licensor is registered as a joint registrant and proprietor in relation to the Composite Trade Marks (to the extent this has not already been done by the Licensee in relation to each of the Composite Trade Marks). |
6.2. | The Licensee shall not apply to register as a trade mark, service mark or domain name any further versions of the Existing Composite Trade Marks in the Territory without the prior written consent of the Licensor, such consent not to be unreasonably withheld, provided however that Licensee is entitled to register in the name of Licensee and Licensor jointly any New Composite Trade Marks under which it proposes to do business pursuant to Clause 5.2 subject to the Licensee giving the Licensor prior written notice to this effect. Similarly, the Licensor shall not apply to register as a trade mark or service mark any further versions of the Composite Trade Marks in the Territory without the prior written consent of the Licensee, such consent not to be unreasonably withheld. As regards the Existing Composite Trade Marks, as detailed in Schedule 2, and any New Composite Trade Marks that are registered pursuant to Clause 5.2, the Licensee shall have sole responsibility for the ongoing prosecution and maintenance of these, including the payment of any related fees, until the expiry and/or termination of this Agreement, but shall keep the Licensor regularly informed in this regard. With regard to the domain names in Schedule 6, the Licensor shall have sole responsibility for renewing those domain names, including the payment of any related fees, for at least so long as the Licensee is licensed to use them in accordance with Clause 3.1. |
6.3. | If the Licensee ceases the use of any Composite Trade Mark for which a registration is in effect in the Territory, or for which an application for registration is pending in the Territory, such Composite Trade Mark shall be simply allowed to lapse on renewal or at the next official action if in the application stage. |
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7. | QUALITY CONTROL |
7.1. | The Licensee shall use, and shall ensure that the Licensee Group Companies and the Permitted Sub-licensees use, the Licensors Trade Marks as part of the Composite Trade Marks (or otherwise to the extent specified in Clause 3.2 or permitted under the Permitted Sub-licence Agreement) only in a manner and form: (i) designed to maintain the goodwill and reputation for high quality associated with the Licensors Trade Marks; (ii) consistent with the use of the Licensors Trade Marks by the Licensee, the Licensee Group Companies and the Permitted Sub-licensees prior to 1 June 2014; (iii) that protects the Licensors ownership of the Licensors Trade Marks; and (iv) that complies with all applicable laws, rules and regulations. |
7.2. | The Licensee shall ensure that its and the Licensee Group Companies Services, and advertising and marketing of such Services, featuring any of the Licensors Trade Marks as part of the Composite Trade Marks or other use as contemplated in Clause 3.2, and the Permitted Sub-licensees use in accordance with the terms of the Permitted Sub-licence Agreement, shall in no way reduce or diminish the reputation, image or prestige of the Licensor or the Licensors Trade Marks. |
7.3. | Subject to Clause 7.5, the Licensee shall ensure that all Services which feature any of the Licensors Trade Marks as part of the Composite Trade Marks or other use as contemplated in Clause 3.2 or permitted under the Permitted Sub-licence Agreement shall be at least equal in quality to goods and services provided by the Licensee immediately prior to 1 June 2014 (the Quality Standard ). |
7.4. |
Subject to Clause 7.5, the Licensee shall use, and shall ensure that the Licensee Group Companies and the Permitted Sub-licensees use, the Licensors Trade Marks as part of the Composite Trade Marks (or otherwise to the extent specified in Clause 3.2 or permitted under the Permitted Sub-licence Agreement) only in the form stipulated by |
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Licensor and shall conform to and observe, and shall ensure that the Licensee Group Companies and the Permitted Sub-licensees conform to and observe, such standards as the Licensor from time to time prescribes, including standards related to the quality, design, identity, size, position, appearance, marking and colour of the Licensors Trade Marks, and the manner, disposition and use of the Licensors Trade Marks and accompanying designations (the Manner of Use Requirements ). For the avoidance of doubt, the parties acknowledge and agree that (i) the use of the Existing Composite Trade Marks by the Licensee and the Licensee Group Companies immediately prior to 1 June 2014 was compliant with the Licensors current Quality Standard and Manner of Use Requirements and (ii) notwithstanding the above, no Manner of Use Requirements applicable to any Composite Trade Mark shall require the Licensee or the Licensee Group Companies to deviate from the manner in which Licensors Trade Marks are depicted in the Existing Composite Trade Marks immediately prior to 1 June 2014. |
7.5. | The Licensor shall have the right, in its reasonable discretion, to alter or amend the Quality Standard and/or the Manner of Use Requirements at any time during the Initial Term and the Extended Term, and shall give advance written notice of any such changes to the Licensee. The Licensee agrees to promptly adjust its use, and shall ensure that the Licensee Group Companies and the Permitted Sub-licensees promptly adjust their use, to abide by any such amended Quality Standard and/or Manner of Use Requirements; provided that no such alteration or amendment to the Quality Standard and/or the Manner of Use Requirements by the Licensor applicable to any Composite Trade Mark shall require the Licensee or the Licensee Group Companies to deviate from the manner in which the Licensors Trade Marks are depicted in the Existing Composite Trade Marks immediately prior to 1 June 2014. |
7.6. |
The Licensee shall permit, and shall ensure that the Licensee Group Companies and the Permitted Sub-licensees (subject to the terms of the Permitted Sub-licence Agreement) permit, the Licensor and/or its authorised representative at all reasonable times to enter the premises of the Licensee or the applicable Licensee Group Company or Permitted Sub-licensee for the purpose of observing the creation, promotion and provision of Services which feature any of the Licensors Trade Marks as part of the Composite Trade Marks. Upon the Licensors reasonable request but not more often than twice per year, the Licensee shall, and shall ensure that the Licensee Group Companies and the Permitted Sub-licensees shall, submit samples or provide other evidence (including the inspection of premises) for the Licensors review, of the Services bearing the Licensors |
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Trade Marks as part of the Composite Trade Marks, and products, items or premises bearing the Licensors Trade Marks as set out in Clause 3.2, or pursuant to the Permitted Sub-licence Agreement. Should the Licensor notify the Licensee that any Services which feature any of the Licensors Trade Marks as part of the Composite Trade Marks or other use as contemplated in Clause 3.2 or pursuant to the Permitted Sub-licence Agreement fails to comply with the Quality Standard or the Manner of Use Requirements in effect at that time, the Licensee shall promptly correct, and shall ensure that any applicable Licensee Group Companies or Permitted Sub-licensees (subject to the terms of the Permitted Sub-licence Agreement) promptly correct, such defects in accordance with such notification from the Licensor, and in any event within forty five (45) days of such notice. |
7.7. | As part of the Licensees obligations under quality control, it shall provide the Licensor with a written statement at each anniversary of the Commencement Date of its steps and the steps of the Licensee Group Companies and the Permitted Sub-licensees to adopt branding that does not incorporate the Licensors Trade Marks. |
7.8. | The Licensor acknowledges and agrees that the use of the Existing Composite Trade Marks by the Permitted Sub-licensees as of the Commencement Date is, to the extent such use is compliant with the terms of the Permitted Sub-Licence Agreement as of the Commencement Date, compliant with the terms of this Agreement as of the Commencement Date. |
8. | INFRINGEMENT |
8.1. | The Licensee shall notify the Licensor promptly (including in respect of any of Licensors Trade Marks that form part of the Composite Trade Marks or of those marks on Schedule 5) of: |
8.1.1 | any actual or suspected infringement of any of the Licensors Trade Marks; |
8.1.2 | any third party claims that any of the Licensors Trade Marks are invalid or conflict with the rights of any other party; and |
8.1.3 | any claims that any of the Licensors Trade Marks or the use thereof infringes the rights of any other party, |
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that come to its attention and shall not act in such a way that will prejudice any claim or admit any liability in respect of the same.
8.2. | Subject to Clause 8.5, the Licensor shall have the right, but not the obligation, in its sole and absolute discretion to prosecute or defend, at its own expense, all suits involving the Licensors Trade Marks, and to take any action that it deems desirable or necessary for the protection of the Licensors Trade Marks (irrespective of whether the Licensors Trade Marks form part of the Composite Trade Marks or of those marks on Schedule 5). At the Licensors discretion, it may do so in its name, in the name of the Licensee, or in the name of both the Licensor and the Licensee, and the Licensee shall claim no rights against the Licensor as a result of any such action. |
8.3. | If the Licensor decides to take affirmative action against or in response to any actual or suspected infringement of the Licensors Trade Marks, any actual or threatened claim that the Licensors Trade Marks or the use thereof infringes the rights of any third party or any actions or proceedings (including registrations, cancellation and opposition proceedings or claims of invalidity) brought before the United States Patent and Trademark Office or any foreign equivalent relating to the Licensors Trade Marks, the Licensee shall, if requested by Licensor and at Licensors expense, lend its name to such proceedings and otherwise assist the Licensor in taking all steps reasonably required by the Licensor in respect of such action, including without limit, in respect of quantification of any damages claim based on the damages suffered by the Licensee as a result of the said infringement or claim. Except as expressly set out in Clause 8.5, recovery of costs or damages resulting from any such action or proceeding shall be distributed between the parties at the Licensors sole discretion and after reimbursement to the Licensor of any costs and expenses incurred by it in relation to such action. |
8.4. | Subject to Clause 8.5, the Licensee shall have no right to take any affirmative action against or in response to any actual or suspected infringement of the Licensors Trade Marks, any actual or threatened claim that any of the Licensors Trade Marks or the use thereof infringes the rights of any third party or any actions or proceedings (including registrations, cancellation and opposition proceedings or claims of invalidity) brought before the United States Patent and Trademark Office or any foreign equivalent relating to the Licensors Trade Marks without the prior written consent of the Licensor. Except as expressly set out in this Clause 8, any rights of the Licensee to take such action (whether statutory or otherwise) shall be expressly disapplied to the maximum extent permitted by law. |
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8.5. | Each party may take affirmative action in its own name against or in response to any actual or suspected infringement of the Composite Trade Marks or of those marks on Schedule 5, any actual or threatened claim that any of the Composite Trade Marks or any of those marks on Schedule 5, or the use thereof infringes the rights of any third party or any actions or proceedings (including registrations, cancellation and opposition proceedings or claims of invalidity) brought before the United States Patent and Trademark Office or any foreign equivalent relating to the Composite Trade Marks or to those marks on Schedule 5 (it being understood that nothing herein is intended to give either party the right to take affirmative action in its own name where the actual, suspected or threatened infringement relates only to an individual component of the Composite Trade Marks or of those marks on Schedule 5 which individual component, as a standalone mark, is exclusively owned by the other party). Where the parties mutually agree to take such an action, it shall be pursued jointly in the joint names of the parties. When such action is pursued subject to joint agreement, the parties shall work together to protect and enforce their collective rights in the applicable Composite Trade Mark or in the applicable mark on Schedule 5. In no event (regardless of whether or not the action is pursued jointly) shall either party, without the prior consent of the other, admit liability or make any offer, promise, compromise, settlement, or communication with the third party in respect of any such action. Recovery of costs or damages resulting from any such joint action shall be distributed equitably between the parties after the reimbursement to each party for its costs and expenses incurred in taking such action. All costs of any infringement proceedings or actions or proceedings brought before the United States Patent and Trademark Office or any foreign equivalent relating to the Composite Trade Marks or to those marks on Schedule 5, whether instigated by the Licensee itself or in partnership with the Licensor, shall be borne by the Licensee. |
9. | WARRANTIES, INDEMNITY AND LIABILITY |
9.1. | The Licensor hereby represents and warrants to the Licensee that the Licensor owns all right, title and interest in and to the Licensors Trade Marks. |
9.2. |
EACH PARTY ACKNOWLEDGES THAT, IN ENTERING INTO THIS AGREEMENT, IT DOES NOT DO SO IN RELIANCE ON ANY REPRESENTATION, WARRANTY OR |
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OTHER PROVISION EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT AND ANY CONDITIONS, WARRANTIES, REPRESENTATIONS, UNDERSTANDINGS OR OTHER TERMS, WHETHER EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, INCLUDING ANY REPRESENTATIONS OR WARRANTIES OF NON-INFRINGEMENT, ARE EXCLUDED FROM THIS AGREEMENT TO THE FULLEST EXTENT PERMITTED BY LAW. |
9.3. | The Licensee shall indemnify and defend the Licensor and each of the Licensors affiliates from and against all suits, actions, claims, liabilities, damages, loss, costs and expenses whether actual or alleged, including reasonable legal fees, court costs and other legal expenses, arising out of, in connection with, or relating to, (i) any breach by the Licensee of its representations, warranties or covenants under this Agreement, (ii) any use of the Licensors Trade Marks, the Licensees Trade Marks or the Composite Trade Marks by the Licensee or anyone acting under authority of the Licensee (including any Licensee Group Company or Permitted Sub-licensee), and (iii) the Licensees failure or the failure of any Licensee Group Company or Permitted Sub-licensee to comply with all applicable laws and regulations relating to the sale, promotion or advertising of the Services or the purpose of the relevant sub-licence. |
9.4. | Where the Licensor is seeking to rely upon one of the indemnities set out in Clause 9.3, in respect of any such suit, action or claim (whether actual or alleged) (a Claim ), the Licensor shall: |
9.4.1 | as soon as reasonably practicable give to the Licensee written notice of the Claim specifying in reasonable detail the nature of the Claim, and all details of the Claim from time to time in the knowledge or possession of the Licensor; |
9.4.2 | with respect to any third party Claims, not, without the prior written consent of the Licensee, admit liability or make any offer, promise, compromise, settlement, or communication with the third party in respect of the Claim; |
9.4.3 | use all reasonable endeavours to mitigate any loss arising out of such Claim by any third party; and |
9.4.4 |
with respect to any third party Claims, render all reasonable assistance to the Licensee in connection with the defence of any such Claim against the |
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Licensor (at the Licensees expense) and/or, at the request of the Licensee, (and against the Licensee providing to the reasonable satisfaction of the Licensor security for all costs, charges and expenses) surrender to the Licensee or its insurers on its request the conduct in the Licensors name of the defence, settlement and/or counterclaim of the Claim ( provided that the Licensor shall be kept informed as to the conduct of such defence, settlement and/or counterclaim) and nothing in this Agreement shall prohibit the Licensor from issuing any press release in connection with any adverse publicity resulting from any such Claim (but provided that such statement shall not contain any admission of liability). |
9.5. | Notwithstanding anything in this Agreement to the contrary, the Licensor hereby expressly disclaims all liability for any and all: |
9.5.1 | special, punitive, incidental, indirect or consequential loss or damage; or |
9.5.2 | loss of profit, turnover, business, revenue, contracts, goodwill, reputation, anticipated savings or management time (whether direct or indirect); or |
9.5.3 | claims brought against the Licensee, any Licensee Group Company or the Permitted Sub-Licensees by any other party, which may arise out of or in connection with this Agreement or the performance or purported performance of or delay or failure in the performance of its obligations under this Agreement and the Licensee hereby waives and releases any claims it might otherwise have to be compensated in connection with this Agreement for such loss or damage. |
9.6. | NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, THE TOTAL AGGREGATE LIABILITY OF THE LICENSOR UNDER THIS AGREEMENT OR OTHERWISE (WHETHER OR NOT CAUSED BY THE NEGLIGENCE OF THE LICENSOR, ITS EMPLOYEES, CONSULTANTS, AGENTS OR SUB-CONTRACTORS) ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT SHALL NOT EXCEED THE LESSER OF (I) THE SUMS RECEIVED BY THE LICENSOR FROM THE LICENSEE UNDER THIS AGREEMENT IN THE IMMEDIATELY PRECEDING TWELVE (12) MONTH PERIOD FROM WHICH THE CLAIM AROSE, AND (II) FIVE HUNDRED THOUSAND US DOLLARS ($500,000). |
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9.7. | Nothing in this Agreement shall affect either partys liability to the other for death or personal injury resulting from its own or that of its employees, agents, consultants or sub-contractors negligence or for breach of any obligations implied by Section 12 of the Sale of Goods Act 1979, Schedule 1 of the Sale and Supply of Goods Act 1994 or under Part 1 of the Consumer Protection Act 1987 which liability shall not be limited. |
10. | TERMINATION |
10.1. | The Licensor may terminate this Agreement at any time on giving written notice to the Licensee if: |
10.1.1 | the Licensee commits any material or persistent breach of any of the provisions of this Agreement (including as contemplated in Clause 3.3) and, in the case of a breach which is capable of remedy fails to remedy the same within thirty (30) days after receipt of a written notice giving full particulars of the breach and requiring it to be remedied; or |
10.1.2 | the Licensee commits any material or persistent breach of any of the provisions of the Separation Agreement or the Registration Rights Agreement (it being understood that, with respect to any termination by the Licensor pursuant to this Clause 10.1.2, the phase-out period set out in Clause 11.1.2 shall commence immediately upon the provision of such termination notice to the Licensee); or |
10.1.3 | an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of any of the Licensee, CBNA or CBPA or any of their respective debts, or of a substantial part of any of their respective assets, under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for any of the Licensee, CBNA or CBPA or for a substantial part of any of their respective assets, and, in any such case, such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; or |
22
10.1.4 | any of the Licensee, CBNA or CBPA shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for any of the Licensee, CBNA or CBPA or for a substantial part of any of their respective assets, (iii) file an answer admitting the material allegations of a petition filed against any of them in any such proceeding, (iv) make a general assignment for the benefit of creditors or (v) take any action for the purpose of effecting any of the foregoing; |
10.1.5 | the Licensee is the subject of a notice to strike off the register of companies or corporations in the United States or such other country where the Licensee is registered as a company; or |
10.1.6 | anything analogous to any of the foregoing under the laws of any jurisdiction outside England occurs in relation to the Licensee; or |
10.1.7 | the Licensee ceases, or threatens to cease, to carry on business; or |
10.1.8 | the Licensee undergoes a Change of Control; or |
10.1.9 | the Licensee fails to pay to the Licensor the Licence Fees in accordance with Clause 12.1; or |
10.1.10 | the Licensee or any Licensee Group Company disputes or contests, directly or indirectly, the validity of any of the Licensors Trade Marks or the Composite Trade Marks, or any of Licensors rights therein, or counsels, procedures or assists anyone else to do the same; or |
10.1.11 | the Licensor, in its reasonable discretion, considers that the Licensee, any Licensee Group Company or any Permitted Sub-Licensee caused, directly or indirectly, any circumstances which could adversely affect the validity, ownership (including any assignment of or granting of an encumbrance or security interest in the Composite Trade Marks) or integrity of any of the Licensors Trade Marks or the Composite Trade Marks in any respect. |
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10.2. | At any time during the Initial Term and the Extended Term, the Licensee shall also be entitled to terminate this Agreement by written notice to the Licensor upon the later of: (x) the Licensee ceasing to use all of the Composite Trade Marks and the Daisy Design (to the extent contemplated by Clause 3.2); and (y) the cessation of use of all of the Licensors Trade Marks by the Permitted Sub-licensees. |
11. | CONSEQUENCES OF EXPIRY OF AGREEMENT OR TERMINATION |
11.1. | Forthwith upon expiry or termination of this Agreement in whole or in part: |
11.1.1 | The Licensee shall discontinue, and shall ensure that the Licensee Group Companies and the Permitted Sub-licensees discontinue, all further use of the Licensors Trade Marks (including the Composite Trade Marks) to the extent of such termination, as relevant. |
11.1.2 | The Licensee shall remove, and shall ensure that the Licensee Group Companies and the Permitted Sub-licensees remove, any existing uses of the Licensors Trade Marks (including the Composite Trade Marks) from the Services and any domain names, websites, company names, products, promotional items, premises and any other such existing uses. In the case of: (x) the expiration of this Agreement in the ordinary course at the end of the Initial Term or the Extended Term, this shall be done by the end of the Initial Term or the Extended Term, and (y) termination of this Agreement (in whole or in part) prior to the expiry of the Initial Term or the Extended Term, this shall be done as soon as practical and to the extent of such termination and, in any event, not later than six (6) months after such termination (without limiting the Licensees obligation to pay any Licence Fees pursuant to Clause 12.1 during such period). |
11.1.3 | The Licensee shall not thereafter promote, sell or offer, and shall ensure that all Licensee Group Companies and Permitted Sub-licensees do not promote, sell or offer any Services under or by reference to any mark identical to, confusingly similar to, or incorporating any of, the Licensors Trade Marks. |
11.1.4 | Any existing trade mark registrations and/or applications for the Composite Trade Marks shall be simply allowed to lapse on renewal (if a registration) and at the next official action (if in application stage). |
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11.2. | Termination of this Agreement for whatever reason shall not affect the accrued rights of either party arising out of this Agreement as at the date of termination and, in particular but without limitation to, the right to recover damages from the other. |
11.3. | Forthwith upon a partial termination of this Agreement pursuant to Clause 3.1(x), except as provided therein: |
11.3.1 | The Licensee shall discontinue, and shall ensure that all Licensee Group Companies discontinue, all further use of any Existing Composite Trade Marks that incorporate the RBS mark and all further use of the instances set forth on Schedule 5. |
11.3.2 | The Licensee shall remove, and shall ensure that all Licensee Group Companies remove, any existing uses of any Existing Composite Trade Marks that incorporate the RBS mark and any existing uses of the instances set forth on Schedule 5 from the Services and any domain names, websites, company names and any other such existing uses. This shall be done as soon as practical and, in any event, not later than six (6) months after the partial termination of this Agreement in respect of Licensees right to use the RBS mark. |
11.3.3 | The Licensee shall not thereafter promote, sell or offer any Services under or by reference to any mark identical to, confusingly similar to, or incorporating the RBS mark, and the Licensee shall ensure that no Licensee Group Company shall engage in any of the foregoing. |
11.3.4 | Any existing trade mark and domain name registrations and/or applications for the Existing Composite Trade Marks and for those marks on Schedule 5, in each case, that incorporate the RBS mark shall be simply allowed to lapse on renewal (if a registration) and at the next official action (if in application stage). |
11.4. | Forthwith upon a partial termination of this Agreement pursuant to Clause 3.1(z): |
11.4.1 | The Licensee shall discontinue, and shall ensure that all Licensee Group Companies and Permitted Sub-licensees discontinue, all further use of the Licensors Trade Marks (including the Composite Trade Marks) in relation to the applicable product or Services. |
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11.4.2 | The Licensee shall remove, and shall ensure that all Licensee Group Companies and Permitted Sub-licensees remove, any existing uses of the Licensors Trade Marks (including the Composite Trade Marks) from the applicable product or Services or in relation to any uses as contemplated in the Permitted Sub-licence Agreement. This shall be done as soon as practical and, in any event, no more than sixty (60) days after the commencement of the relevant rebranding initiative as specified in Clause 3.1(z). |
11.4.3 | The Licensee shall not thereafter promote, sell or offer the applicable product or Services in the Territory under or by reference to any mark identical to, confusingly similar to, or incorporating any of, the Licensors Trade Marks, and the Licensee shall ensure that no Licensee Group Company or Permitted Sub-licensees shall engage in any of the foregoing. |
11.5. | For the avoidance of doubt, subject to Clause 12.1, a partial termination of this Agreement pursuant to Clause 3.1(x) or Clause 3.1(z) shall not affect Licensees obligation to pay any Licence Fees pursuant to Clause 12.1. |
11.6. | Termination or expiry of this Agreement shall, in all cases, be without prejudice to Clauses 1 (Definitions and Interpretation), the first sentence of 5.2 (Restrictions on Use), 9 (Warranties, Indemnity and Liability), 11 (Consequences of Termination), 13 (Power of Attorney), 16 (Entire Agreement), 17 (Severability), 18 (No Partnership, Joint Venture or Agency), 19 (Assignment), 20 (Waiver), 21 (Contracts (Rights of Third Parties) Act 1999), 22 (Counterparts) and 23 (Governing Law and Jurisdiction), all of which shall survive termination or expiry for whatever reason and continue in full force and effect. |
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12. | LICENCE FEES |
12.1. | From the Commencement Date to the expiry of the Initial Term or Extended Term, as applicable, the Licensee shall pay the Licensor the following licence fees in accordance with this Clause 12.1 (the Licence Fees ). |
12.1.1 | For each applicable period of the Initial Term and the Extended Term, as applicable, the Licensee will pay the Licensor the following: |
Year |
Licence Fees |
|
During the Initial Term | One US Dollar ($1) | |
First year of the Extended Term | Five hundred thousand US Dollars ($500,000) | |
Second year of the Extended Term | Five hundred thousand US Dollars ($500,000) | |
Third year of the Extended Term | Five hundred thousand US Dollars ($500,000) | |
Fourth year of the Extended Term | Four million US Dollars ($4,000,000) | |
Fifth year of the Extended Term | Five million US Dollars ($5,000,000) |
12.1.2 | The applicable Licence Fee for the Initial Term is to be paid by the Licensee to the Licensor in advance of the Commencement Date. All other Licence Fees during the Extended Term must be paid by the Licensee to the Licensor annually in advance and at least seven (7) business days prior to the commencement of the first, second, third, fourth and/or fifth year of the Extended Term, as applicable. |
12.2. | Without limiting the Licensees obligation to pay any accrued but unpaid Licence Fees to Licensor, the Licensees obligation to pay Licence Fees to Licensor pursuant to Clause 12.1 shall cease once (i) the Licensee has fully and finally ceased all use of the Composite Trade Marks (and the Licensors Trade Marks to the extent contemplated by Clause 3.2) throughout the Territory, (ii) all of the Licensee Group Companies and Permitted Sub-licensees have fully and finally ceased to use the Licensors Trade Marks and the Composite Trade Marks; and (iii) the Licensee has provided the Licensor with a written declaration signed by an officer of the Licensee certifying the foregoing. |
12.3. |
All sums payable by a party under this Agreement shall be paid free and clear of any deductions, withholdings, set-offs or counterclaims, save only as may be required by law. If any deductions or withholdings are required by law, the party making the payment |
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shall be obliged to pay to the other party such sum as will after such deduction or withholding has been made leave the other party with a sum equal to the sum it would have been left with if no such requirement to make a deduction or withholding had been required. The parties shall claim from the appropriate Tax Authority any exemption, rate reduction, refund, credit or similar benefit (including pursuant to any relevant tax treaty) to which they are entitled in respect of any deduction or withholding in respect of which a payment has been made pursuant to this Clause 12.3 and, for such purposes shall, within any applicable time limits, submit any claims, notices, returns or applications and send a copy thereof to the payer. If the recipient of a payment to which this Clause 12.3 receives a credit for or refund of any Tax payable or similar benefit by reason of any deduction or withholding for or on account of Tax, then it shall reimburse to the other party such part of such additional amounts paid to it pursuant to this Clause 12.3 as the recipient of the payment certifies to the other party will leave it (after such reimbursement) in no better and no worse position than it would have been if the other party had not been required to make such deduction or withholding. |
12.4. | All amounts payable under this Agreement shall be deemed to be exclusive of any applicable VAT. If any amount falling due under this Agreement (from whatever cause) constitutes the consideration for a taxable supply of goods and/or services for VAT purposes, then the person(s) to whom the goods or services are supplied shall, where the provider is the person liable to account for the applicable VAT to the relevant Tax Authority, pay VAT in addition to and at the same time as the amount so falling due, against delivery of a valid VAT invoice. Where under the terms of this Agreement one party is liable to indemnify or reimburse another party in respect of any costs, the payment shall exclude the amount of any recoverable input tax of the other party (or the representative member of any group of which that party is a member for VAT purposes in respect of such costs), and that other party shall use its reasonable endeavours (and shall procure that any such relevant representative member shall use its reasonable endeavours) to recover such amount of VAT as may be practicable. |
13. | IRREVOCABLE AUTHORITY |
13.1. |
The Licensee hereby irrevocably authorises the Licensor to promptly execute and deliver and sign on behalf of the Licensee, any documents, forms, instruments and (to the extent permitted by any relevant jurisdiction) deeds, or to do any such thing and generally to use the Licensees name as may be reasonably necessary for the purpose |
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of giving to the Licensor the full benefit of this Agreement in relation to the Licensors Trade Marks. The Licensor and the Licensee hereby undertake to each other to cooperate with their respective reasonable requests to promptly execute and deliver any documents, forms, instruments and (to the extent permitted by any relevant jurisdiction) deeds, or to do any such thing as may be reasonably necessary for the purpose of giving to the other the full benefit of this Agreement in relation to the Composite Trade Marks. |
14. | NOTICE |
14.1. | Any notice or other communication given under this Agreement shall be in writing and shall be served by (i) delivering it personally, (ii) sending it by registered airmail or a reputable overnight courier service, or (iii) sending it by email, in each case to the address and for the attention of the relevant party set out in Clause 14.2 (or as otherwise notified by that party in writing). Any such notice shall be deemed to have been received: (w) if delivered personally, at the time of delivery; (x) in the case of registered airmail, five (5) days from the date of posting; (y) in the case of overnight courier, forty eight (48) hours from the date of delivery to the courier; and (z) in the case of email, at the time of transmission if subsequently confirmed by return email. |
14.2. | The addresses and fax numbers of the parties for the purposes of Clause 14 are: |
14.2.1 | The Royal Bank of Scotland Group plc |
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14.2.2 | Citizens Financial Group Inc |
Address: | Citizens Financial Group Inc | |
28 State Street | ||
Boston, MA 02109 | ||
USA | ||
For the attention of: | Stephen T. Gannon, Esq., General Counsel |
14.3. | In proving such service it shall be sufficient to prove that the envelope containing such notice was addressed to the address of the relevant party set out in Clause 14.2 (or as otherwise notified by that party under this Agreement) and delivered either to that address, into the custody of the postal authorities as a registered airmail letter or into the custody of a reputable courier for overnight delivery, or that the notice was transmitted by email to the email address of the relevant party set out in Clause 14.2 (or as otherwise notified by that party of the relevant party). |
15. | AMENDMENT |
15.1. | This Agreement may not be amended except by an instrument in writing executed by duly authorised representatives of both parties. |
16. | ENTIRE AGREEMENT |
16.1. | The parties acknowledge that this Agreement together with the Schedules constitutes the entire agreement between the parties in respect of the matters contemplated herein, and supersedes and replaces all prior agreements, representations and understandings and discussions between them, including the Previous Licence Agreements, which are hereby terminated. The parties confirm that they have not entered into this Agreement on the basis of any representation that is not expressly included in or incorporated into this Agreement. |
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16.2. | Without limiting the generality of the foregoing, neither party shall have any remedy in respect of any untrue statement made to it upon which it may have relied in entering into this Agreement, and a partys only remedy is for breach of contract. Notwithstanding the foregoing, nothing in this Agreement purports to exclude liability for any fraudulent misrepresentation, statement or act. |
17. | SEVERABILITY |
17.1. | If any provision of this Agreement is determined to be illegal and unenforceable by any court of law or any competent governmental or other authority, the remaining provisions shall be severable and enforceable in accordance with their terms so long as this Agreement without such terms or provisions does not fail of its essential purpose or purposes. The parties shall negotiate in good faith to replace any such illegal or unenforceable provision or provisions with suitable provisions which shall maintain the economic purposes and intentions of this Agreement. |
18. | NO PARTNERSHIP, JOINT VENTURE OR AGENCY |
18.1. | Nothing contained in this Agreement shall be deemed to constitute or imply any partnership, joint venture, agency, fiduciary relationship or other relationship between the parties other than the contractual relationship expressly provided for in this Agreement. |
19. | ASSIGNMENT |
19.1. | This Agreement is personal to the Licensee. The Licensee shall not assign, transfer, charge, deal, sub-contract, sub-licence (except as set forth in Clause 3.3) or in any other manner make over to any third party the benefit and/or the burden of this Agreement, or purport to do any of the same, without the prior written consent of the Licensor. |
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20. | WAIVER |
20.1. | A failure or delay of either party to enforce any of the provisions of this Agreement shall not operate as a waiver of such provision and shall not preclude or prejudice such party from later enforcing the same or any other provisions of this Agreement. |
21. | CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999 |
21.1. | Nothing in this Agreement or any other document referred to in this Agreement shall create any rights or confer any benefit on any third party under the Contracts (Rights of Third Parties) Act 1999 (the 1999 Act). For the avoidance of doubt, the Licensor and the Licensee are entitled to vary, amend, rescind or terminate any of the provisions of this Agreement (in accordance with its terms) without notifying or seeking the consent of any third party and the rights of the 1999 Act are hereby excluded. |
22. | COUNTERPARTS |
22.1. | This Agreement may be executed in any number of counterparts each of which when executed and delivered shall be deemed to be an original and all of which counterparts when taken together shall be deemed to constitute one and the same instrument. |
23. | GOVERNING LAW AND JURISDICTION |
23.1. | The construction, validity and performance of this Agreement shall be governed in all respects by the laws of England and Wales and all disputes arising in any way out of or affecting this Agreement shall be subject to the non-exclusive jurisdiction of the English Courts to which the parties agree to submit, save in respect of those issues relating to the validity or enforcement of any of the Licensors Trade Marks or the Composite Trade Marks which shall be governed by the law of the country of registration (if any) of those rights. |
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AS WITNESS the hands of the parties hereto or their duly authorised representatives on the date first above written:
For and on behalf of | ||
THE ROYAL BANK OF SCOTLAND GROUP PLC | ||
By | ||
|
Authorised Attorney | |
|
Full Name | |
|
Position | |
For and on behalf of | ||
CITIZENS FINANCIAL GROUP INC. | ||
By | ||
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Authorised Signatory | |
|
Full Name | |
|
Position |
[Signature Page]
Exhibit 10.4
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT, dated as of [ ], 2014 (this Agreement ), is by and between Citizens Financial Group, Inc., a Delaware corporation (the Company ), and The Royal Bank of Scotland Group plc, a public limited company organized under the laws of Scotland (Company Number SC045551) ( RBSG ).
W I T N E S S E T H:
WHEREAS, the Company is currently contemplating an underwritten initial public offering ( IPO ) of shares of its Common Stock (as defined below); and
WHEREAS, the Company desires to grant registration rights to RBSG on the terms and conditions set out in this Agreement;
NOW, THEREFORE, in consideration of the covenants and agreements contained herein, the parties hereto agree as follows:
ARTICLE 1
D EFINITIONS
Section 1.01. Defined Terms . As used in this Agreement, the following terms shall have the following meanings:
Action means any demand, action, suit, countersuit, arbitration, inquiry, proceeding or investigation by or before any Governmental Authority or any federal, state, local, foreign or international arbitration or mediation tribunal.
Affiliate of any Person means a Person that controls, is controlled by, or is under common control with such Person; provided , however , that, for purposes of this Agreement, the Company and its Subsidiaries shall not be considered to be Affiliates of RBSG and its Subsidiaries (other than the Company and its Subsidiaries), and RBSG and its Subsidiaries (other than the Company and its Subsidiaries) shall not be considered to be Affiliates of the Company or its Subsidiaries. As used herein, control means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such entity, whether through ownership of voting securities or other interests, by contract or otherwise.
Agreement has the meaning set forth in the preamble to this Agreement.
Business Day means any day other than a Saturday, Sunday or a day on which banking institutions are authorized or obligated by law to be closed in New York, New York or London, United Kingdom.
Common Stock shall mean the shares of common stock, $0.01 par value per share, of the Company.
Company Notice has the meaning set forth in Section 2.01(a).
Company Takedown Notice has the meaning set forth in Section 2.01(f).
Demand Registration has the meaning set forth in Section 2.01(a).
Exchange Act means the Securities Exchange Act of 1934, as amended.
Governmental Authority means any nation or government, any state, municipality or other political subdivision thereof, and any entity, body, agency, commission, department, board, bureau, court, tribunal or other instrumentality, whether federal, state, local, domestic, foreign or multinational, exercising executive, legislative, judicial, regulatory, administrative or other similar functions of, or pertaining to, government and any executive official thereof.
Holder shall mean RBSG or any of its Subsidiaries, so long as such Person holds any Registrable Securities, and any Person owning Registrable Securities who is a permitted transferee of rights under Section 3.03.
Initiating Holder has the meaning set forth in Section 2.01(a).
IPO has the meaning set forth in the recitals to this Agreement.
Loss or Losses has the meaning set forth in Section 2.08(a).
Person means an individual, a general or limited partnership, a corporation, a trust, a joint venture, an unincorporated organization, a limited liability entity, any other entity and any Governmental Authority,
Piggyback Registration has the meaning set forth in Section 2.02(a).
Prospectus means the prospectus included in any Registration Statement, all amendments and supplements to such prospectus, including post-effective amendments, and all other material incorporated by reference in such prospectus.
RBSG has the meaning set forth in the preamble to this Agreement and shall include its successors, by merger, acquisition, reorganization or otherwise.
Registrable Securities means any Shares and any securities issued or issuable directly or indirectly with respect to, in exchange for, upon the conversion of or in replacement of the Shares, whether by way of a dividend or distribution or stock split or in connection with a combination of shares, recapitalization, merger, consolidation, exchange or other reorganization; provided that any such Shares shall cease to be Registrable Securities if (i) they have been registered and sold pursuant to an effective Registration Statement, (ii) they have been transferred by a Holder in a transaction in which the Holders rights under this Agreement are not, or cannot be, assigned, (iii) they may be sold pursuant to Rule 144 under the Securities Act without limitation thereunder on volume or manner of sale, or (iv) they have ceased to be outstanding.
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Registration means a registration with the SEC of the offer and sale to the public of Common Stock under a Registration Statement. The terms Register, Registered and Registering shall have a correlative meaning.
Registration Expenses shall mean all expenses incident to the Companys performance of or compliance with this Agreement, including all (i) registration, qualification and filing fees; (ii) expenses incurred in connection with the preparation, printing and filing under the Securities Act of the Registration Statement, any Prospectus and any issuer free writing prospectus and the distribution thereof; (iii) the fees and expenses of the Companys counsel and independent accountants; (iv) the fees and expenses incurred in connection with the registration or qualification and determination of eligibility for investment of the Shares under the state or foreign securities or blue sky laws and the preparation, printing and distribution of a World Sky Memorandum (including the related fees and expenses of counsel); (v) the costs and charges of any transfer agent and any registrar; (vii) all expenses and application fees incurred in connection with any filing with, and clearance of an offering by, Financial Industry Regulatory Authority, Inc.; (vii) expenses incurred in connection with any road show presentation to potential investors; (viii) printing expenses, messenger, telephone and delivery expenses; (ix) internal expenses of the Company (including all salaries and expenses of employees of the Company performing legal or accounting duties); and (x) fees and expenses of listing any Registrable Securities on any securities exchange on which shares of Common Stock are then listed; but excluding any Selling Expenses.
Registration Period has the meaning set forth in Section 2.01(c).
Registration Rights shall mean the rights of the Holders to cause the Company to Register Registrable Securities pursuant to this Agreement.
Registration Statement means any registration statement of the Company filed with, or to be filed with, the SEC under the rules and regulations promulgated under the Securities Act, including the related Prospectus, amendments and supplements to such registration statement, including post-effective amendments, and all exhibits and all material incorporated by reference in such registration statement.
SEC has the meaning set forth in the recitals to this Agreement.
Securities Act means the U.S. Securities Act of 1933, as amended.
Selling Expenses means all underwriting discounts, selling commissions and transfer taxes applicable to the sale of Registrable Securities hereunder.
Shares means all shares of Common Stock that are beneficially owned by RBSG or any of its Subsidiaries or any permitted transferee of rights under Section 3.03 from time to time, whether or not held immediately following the IPO.
Shelf Registration means a Registration Statement of the Company for an offering to be made on a delayed or continuous basis of Common Stock pursuant to Rule 415 under the Securities Act (or similar provisions then in effect).
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Subsidiary means, when used with respect to any Person, (a) a corporation in which such Person or one or more Subsidiaries of such Person, directly or indirectly, owns capital stock having a majority of the total voting power in the election of directors of all outstanding shares of all classes and series of capital stock of such corporation entitled generally to vote in such election; and (b) any other Person (other than a corporation) in which such Person or one or more Subsidiaries of such Person, directly or indirectly, has (i) a majority ownership interest or (ii) the power to elect or direct the election of a majority of the members of the governing body of such first-named Person.
Takedown Notice has the meaning set forth in Section 2.01(f).
Underwritten Offering means a Registration in which securities of the Company are sold to an underwriter or underwriters on a firm commitment basis for reoffering to the public.
Section 1.02. General Interpretive Principles . Whenever used in this Agreement, except as otherwise expressly provided or unless the context otherwise requires, any noun or pronoun shall be deemed to include the plural as well as the singular and to cover all genders. Whenever the words include , includes or including are used in this Agreement, they shall be deemed to be followed by the words without limitation . Unless otherwise specified, the terms hereof , herein , hereunder and similar terms refer to this Agreement as a whole (including the exhibits hereto), and references herein to Articles and Sections refer to Articles and Sections of this Agreement. Except as otherwise indicated, all periods of time referred to herein shall include all Saturdays, Sundays and holidays; provided , however , that if the date to perform the act or give any notice with respect to this Agreement shall fall on a day other than a Business Day, such act or notice may be performed or given timely if performed or given on the next succeeding Business Day. References to a Person are also to its permitted successors and assigns. The parties have participated jointly in the negotiation and drafting of this Agreement and, in the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as jointly drafted by the parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provision of this Agreement.
ARTICLE 2
R EGISTRATION R IGHTS
Section 2.01. Registration .
(a) Request . Any Holder(s) of Registrable Securities (collectively, the Initiating Holder ) shall have the right to request that the Company file a Registration Statement with the SEC on the appropriate registration form for all or part of the Registrable Securities held by such Holder once such Registrable Securities are no longer subject to the underwriter lock-up applicable to the IPO (which may be due to the expiration or waiver of such lock-up with respect to such Registrable Securities) by delivering a written request to the Company specifying the kind and number of shares of Registrable Securities such Holder wishes to Register and the intended method of
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distribution thereof (a Demand Registration ). The Company shall (i) within 10 Business Days of the receipt of such request, give written notice of such Demand Registration to all Holders of Registrable Securities (the Company Notice ), (ii) use its reasonable best efforts to file a Registration Statement in respect of such Demand Registration within 45 days of receipt of the request, and (iii) use its reasonable best efforts to cause such Registration Statement to become effective as soon as reasonably practicable thereafter. The Company shall include in such Registration all Registrable Securities that the Holders request to be included within the 10 Business Days following their receipt of the Company Notice.
(b) Limitations of Demand Registrations . There shall be no limitation on the number of Demand Registrations pursuant to Section 2.01(a); provided , however , that the Holders may not require the Company to effect more than six Demand Registrations in a 12-month period. In the event that any Person shall have received rights to Demand Registrations pursuant to Section 3.03, and such Person shall have made a Demand Registration request, such request shall be treated as having been made by the Holder(s). The Registrable Securities requested to be Registered pursuant to Section 2.01(a) must represent (i) an aggregate offering price of Registrable Securities that is reasonably be expected to equal at least $150,000,000 or (ii) all of the remaining Registrable Securities owned by the requesting Holder and its Affiliates.
(c) Effective Registration . The Company shall be deemed to have effected a Registration for purposes of Section 2.01(b) if the Registration Statement is declared effective by the SEC or becomes effective upon filing with the SEC, and remains effective until the earlier of (i) the date when all Registrable Securities thereunder have been sold and (ii) 40 days from the effective date of the Registration Statement (the Registration Period ). No Registration shall be deemed to have been effective if the conditions to closing specified in the underwriting agreement, if any, entered into in connection with such Registration are not satisfied by reason of the Company. If, during the Registration Period, such Registration is interfered with by any stop order, injunction or other order or requirement of the SEC or other Governmental Authority, the Registration Period shall be extended on a day-for-day basis for any period the Holder is unable to complete an offering as a result of such stop order, injunction or other order or requirement of the SEC or other Governmental Authority.
(d) Underwritten Offering . If the Initiating Holder so indicates at the time of its request pursuant to Section 2.01(a), such offering of Registrable Securities shall be in the form of an Underwritten Offering and the Company shall include such information in the Company Notice. In the event that the Initiating Holder intends to distribute the Registrable Securities by means of an Underwritten Offering, no Holder may include Registrable Securities in such Registration unless such Holder, subject to the limitations set forth in Section 2.06, (i) agrees to sell its Registrable Securities on the basis provided in the applicable underwriting arrangements; (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements and (iii) cooperates with the Companys reasonable requests in connection with such Registration (it being understood that the Companys failure to perform its obligations hereunder, which failure is caused by such Holders failure to cooperate, will not constitute a breach by the Company of this Agreement).
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(e) Priority of Securities in an Underwritten Offering . If the managing underwriter or underwriters of a proposed Underwritten Offering, including an Underwritten Offering from a Shelf Registration, pursuant to this Section 2.01 informs the Company and the Holders with Registrable Securities in the proposed Underwritten Offering in writing that, in its or their opinion, the number of securities requested to be included in such Underwritten Offering exceeds the number that can be sold in such Underwritten Offering without being likely to have a significant adverse effect on the price, timing or distribution of the securities offered or the market for the securities offered, then the number of securities to be included in such Underwritten Offering shall be reduced in the following order of priority: first , there shall be excluded from the Underwritten Offering any securities to be sold for the account of any selling securityholder other than the Holders; second , there shall be excluded from the Underwritten Offering any securities to be sold for the account of the Company; third , there shall be excluded from the Underwritten Offering any securities to be sold for the account of Holders other than RBSG and its Subsidiaries that have been requested to be included therein pro rata based on the number of Registrable Securities owned by each such Holder; and finally , the number of Registrable Securities of RBSG and its Subsidiaries shall be reduced, in each case to the extent necessary to reduce the total number of securities to be included in such offering to the number recommended by the managing underwriter or underwriters.
(f) Shelf Registration . At any time after the date hereof when the Company is eligible to Register the applicable Registrable Securities on Form S-3 (or a successor form) and the Holder may request Demand Registrations, the requesting Holders may request the Company to effect a Demand Registration as a Shelf Registration. There shall be no limitations on the number of Underwritten Offerings pursuant to a Shelf Registration; provided , however , that the Holders may not require the Company to effect more than six Underwritten Offerings in a 12-month period. Any Holder of Registrable Securities included on a Shelf Registration shall have the right to request that the Company cooperate in a shelf takedown at any time, including an Underwritten Offering, by delivering a written request thereof to the Company specifying the kind and number of shares of Registrable Securities such Holder wishes to include in the shelf takedown ( Takedown Notice ). The Company shall (i) within 5 Business Days of the receipt of a Takedown Notice for an Underwritten Offering, give written notice of such Takedown Notice to all Holders of Registrable Securities included on such Shelf Registration (the Company Takedown Notice ), and (ii) shall take all actions reasonably requested by such Holder, including the filing of a Prospectus supplement and the other actions described in Section 2.04, in accordance with the intended method of distribution set forth in the Takedown Notice as expeditiously as practicable. If the takedown is an Underwritten Offering, the Company shall include in such Underwritten Offering all Registrable Securities that that the Holders request to be included within the 5 days following their receipt of the Company Takedown Notice. If the takedown is an Underwritten Offering, the Registrable Securities requested to be included in a shelf takedown must represent (i) an aggregate offering price of Registrable Securities that is reasonably be expected to equal at least $50,000,000 or (ii) all of the remaining Registrable Securities owned by the requesting Holder and its Affiliates.
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(g) SEC Form . Except as set forth in the next sentence, the Company shall use its reasonable best efforts to cause Demand Registrations to be Registered on Form S-3 (or any successor form), and if the Company is not then eligible under the Securities Act to use Form S-3, Demand Registrations shall be Registered on Form S-1 (or any successor form). The Company shall use its reasonable best efforts to become eligible to use Form S-3 and, after becoming eligible to use Form S-3, shall use its reasonable best efforts to remain so eligible. All Demand Registrations shall comply with applicable requirements of the Securities Act and, together with each Prospectus included, filed or otherwise furnished by the Company in connection therewith, shall not contain any untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading.
Section 2.02. Piggyback Registrations .
(a) Participation . If the Company proposes to file a Registration Statement under the Securities Act with respect to any offering of Common Stock for its own account and/or for the account of any other Persons (other than a Registration (i) under Section 2.01 hereof, (ii) pursuant to a Registration Statement on Form S-8 (or other registration solely relating to an offering or sale to employees or directors of the Company pursuant to any employee stock plan or other employee benefit arrangement) or Form S-4 or similar form that relates to a transaction subject to Rule 145 under the Securities Act, (iii) pursuant to any form that does not include substantially the same information as would be required to be included in a Registration Statement covering the sale of Registrable Securities, (iv) in connection with any dividend reinvestment or similar plan or (v) for the sole purpose of offering securities to another entity or its security holders in connection with the acquisition of assets or securities of such entity or any similar transaction), then, as soon as practicable (but in no event less than 15 days prior to the proposed date of filing such Registration Statement), the Company shall give written notice of such proposed filing to each Holder, and such notice shall offer such Holders the opportunity to Register under such Registration Statement such number of Registrable Securities as each such Holder may request in writing (a Piggyback Registration ). Subject to Section 2.02(a) and Section 2.02(c), the Company shall include in such Registration Statement all such Registrable Securities that are requested to be included therein within 12 days after the receipt of any such notice; provided , however , that if, at any time after giving written notice of its intention to Register any securities pursuant to this Section 2.01(a) and prior to the effective date of the Registration Statement filed in connection with such Registration, the Company shall determine for any reason not to Register or to delay Registration of such securities, the Company may, at its election, give written notice of such determination to each such Holder and, thereupon, (i) in the case of a determination not to Register, shall be relieved of its obligation to Register any Registrable Securities in connection with such Registration and shall have no liability to any Holder in connection with such termination, without prejudice, however, to the rights of any Holder to request that such Registration be effected as a Demand Registration under Section 2.01, and (ii) in the case of a
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determination to delay Registration, shall be permitted to delay Registering any Registrable Securities for the same period as the delay in Registering such other shares of Common Stock. No Registration effected under this Section 2.02 shall relieve the Company of its obligation to effect any Demand Registration under Section 2.01. If the offering pursuant to a Registration Statement pursuant to this Section 2.02 is to be an Underwritten Offering, then each Holder making a request for a Piggyback Registration pursuant to this Section 2.02(a) shall, and the Company shall use reasonable best efforts to coordinate arrangements with the underwriters so that each such Holder may, participate in such Underwritten Offering. If the offering pursuant to such Registration Statement is to be on any other basis, then each Holder making a request for a Piggyback Registration pursuant to this Section 2.02(a) shall, and the Company shall use reasonable best efforts to coordinate arrangements so that each such Holder may, participate in such offering on such basis. If the Company files a Shelf Registration for its own account and/or for the account of any other Persons, the Company agrees that it shall use its reasonable best efforts to include in such Registration Statement such disclosures as may be required by Rule 430B under the Securities Act in order to ensure that the Holders may be added to such Shelf Registration at a later time through the filing of a Prospectus supplement rather than a post-effective amendment.
(b) Right to Withdraw . Each Holder shall have the right to withdraw such Holders request for inclusion of its Registrable Securities in any Underwritten Offering pursuant to this Section 2.02 at any time prior to the execution of an underwriting agreement with respect thereto by giving written notice to the Company of such Holders request to withdraw and, subject to the preceding clause, each Holder shall be permitted to withdraw all or part of such Holders Registrable Securities from a Piggyback Registration at any time prior to the effective date thereof.
(c) Priority of Piggyback Registration . If the managing underwriter or underwriters of any proposed Underwritten Offering of a class of Registrable Securities included in a Piggyback Registration informs the Company and the Holders in writing that, in its or their opinion, the number of securities of such class which such Holder and any other Persons intend to include in such Underwritten Offering exceeds the number which can be sold in such Underwritten Offering without being likely to have a significant adverse effect on the price, timing or distribution of the securities offered or the market for the securities offered, then the securities to be included in such Underwritten Offering shall be reduced in the following order of priority: first , there shall be excluded from the Underwritten Offering any securities to be sold for the account of any selling securityholder other than the Holders; second , there shall be excluded from the Underwritten Offering any securities to be sold for the account of the Company; third , there shall be excluded from the Underwritten Offering any securities to be sold for the account of Holders other than RBSG and its Subsidiaries that have been requested to be included therein pro rata based on the number of Registrable Securities owned by each such Holder; and finally , the number of Registrable Securities of RBSG and its Subsidiaries shall be reduced, in each case to the extent necessary to reduce the total number of securities to be included in such offering to the number recommended by the managing underwriter or underwriters.
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Section 2.03. Selection of Underwriter(s) . In any Underwritten Offering pursuant to Section 2.01 or Section 2.02 in which a Holder is participating, RBSG, in the event RBSG is participating, or the Holders of a majority of the outstanding Registrable Securities being included in the Underwritten Offering (the Majority Holders ), in the event RBSG is not participating, shall select the underwriter(s). RBSG or the Majority Holders shall consult with the Company in the selection of such underwriters by RBSG or such Majority Holders, provided that RBSG or such Majority Holders, as applicable, shall be under no obligation to the Company as a result of or in connection with such consultation.
Section 2.04. Registration Procedures .
(a) In connection with the Registration and/or sale of Registrable Securities pursuant to this Agreement, through an Underwritten Offering or otherwise, the Company shall use reasonable best efforts to effect or cause the Registration and the sale of such Registrable Securities in accordance with the intended methods of disposition thereof and:
(i) prepare and file the required Registration Statement, including all exhibits and financial statements required under the Securities Act to be filed therewith, and before filing with the SEC a Registration Statement or Prospectus, or any amendments or supplements thereto, (A) furnish to the underwriters, if any, and to the Holders participating in such Registration, copies of all documents prepared to be filed, which documents will be subject to the review of such underwriters and such participating Holders and their respective counsel, and (B) consider in good faith any comments of the underwriters and Holders and their respective counsel on such documents;
(ii) prepare and file with the SEC such amendments and supplements to such Registration Statement and the Prospectus used in connection therewith as may be necessary to keep such Registration Statement effective in accordance with the terms of this Agreement and to comply with the provisions of the Securities Act with respect to the disposition of all of the Shares Registered thereon;
(iii) in the case of a Shelf Registration, prepare and file with the SEC such amendments and supplements to such Registration Statement and the Prospectus used in connection therewith as may be necessary to keep such Registration Statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all Shares subject thereto for a period ending on the 3 rd anniversary after the effective date of such Registration Statement;
(iv) notify the participating Holders and the managing underwriter or underwriters, if any, and (if requested) confirm such advice in writing and provide copies of the relevant documents, as soon as reasonably practicable after notice thereof is received by the Company (A) when the applicable Registration
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Statement or any amendment thereto has been filed or becomes effective, or when the applicable Prospectus or any amendment or supplement to such Prospectus has been filed, (B) of any written comments by the SEC or any request by the SEC or any other Governmental Authority for amendments or supplements to such Registration Statement or such Prospectus or for additional information, (C) of the issuance by the SEC of any stop order suspending the effectiveness of such Registration Statement or any order preventing or suspending the use of any preliminary or final Prospectus or the initiation or threatening of any proceedings for such purposes, (D) if, at any time, the representations and warranties of the Company in any applicable underwriting agreement cease to be true and correct in all material respects, and (E) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for offering or sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose;
(v) promptly notify each selling Holder and the managing underwriter or underwriters, if any, when the Company becomes aware of the occurrence of any event as a result of which the applicable Registration Statement or the Prospectus included in such Registration Statement (as then in effect) contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein (in the case of such Prospectus and any preliminary Prospectus, in light of the circumstances under which they were made) not misleading or, if for any other reason it shall be necessary during such time period to amend or supplement such Registration Statement or Prospectus in order to comply with the Securities Act and, in either case as promptly as reasonably practicable thereafter, prepare and file with the SEC, and furnish without charge to the selling Holder and the managing underwriter or underwriters, if any, an amendment or supplement to such Registration Statement or Prospectus which will correct such statement or omission or effect such compliance;
(vi) use its reasonable best efforts to prevent or obtain the withdrawal of any stop order or other order suspending the use of any preliminary or final Prospectus;
(vii) promptly incorporate in a Prospectus supplement or post-effective amendment such information as the managing underwriters, if any, and the Holders may reasonably request to be included therein in order to permit the intended method of distribution of the Registrable Securities; and make all required filings of such Prospectus supplement or post-effective amendment as soon as reasonably practicable after being notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment;
(viii) furnish to each selling Holder and each underwriter, if any, without charge, as many conformed copies as such Holder or underwriter may reasonably request of the applicable Registration Statement and any amendment or post-effective amendment thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits (including those incorporated by reference);
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(ix) deliver to each selling Holder and each underwriter, if any, without charge, as many copies of the applicable Prospectus (including each preliminary Prospectus) and any amendment or supplement thereto as such Holder or underwriter may reasonably request (it being understood that the Company consents to the use of such Prospectus or any amendment or supplement thereto by each selling Holder and the underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by such Prospectus or any amendment or supplement thereto) and such other documents as such selling Holder or underwriter may reasonably request in order to facilitate the disposition of the Registrable Securities by such Holder or underwriter;
(x) on or prior to the date on which the applicable Registration Statement is declared effective or becomes effective, use its reasonable best efforts to register or qualify, and cooperate with each selling Holder, the managing underwriter or underwriters, if any, and their respective counsel, in connection with the registration or qualification of such Registrable Securities for offer and sale under the securities or World Sky laws of each state and other jurisdiction of the United States as any selling Holder or managing underwriter or underwriters, if any, or their respective counsel reasonably request in writing and do any and all other acts or things reasonably necessary or advisable to keep such registration or qualification in effect for so long as such Registration Statement remains in effect and so as to permit the continuance of sales and dealings in such jurisdictions of the United States for so long as may be necessary to complete the distribution of the Registrable Securities covered by the Registration Statement; provided that the Company will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to taxation or general service of process in any such jurisdiction where it is not then so subject;
(xi) in connection with any sale of Registrable Securities that will result in such securities no longer being Registrable Securities, cooperate with each selling Holder and the managing underwriter or underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive Securities Act legends; and to register such Registrable Securities in such denominations and such names as such selling Holder or the underwriter(s), if any, may request at least two Business Days prior to such sale of Registrable Securities; provided that the Company may satisfy its obligations hereunder without issuing physical stock certificates through the use of The Depository Trust Companys Direct Registration System;
(xii) cooperate and assist in any filings required to be made with the Financial Industry Regulatory Authority and each securities exchange, if any, on which any of the Companys securities are then listed or quoted and on each inter-dealer
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quotation system on which any of the Companys securities are then quoted, and in the performance of any due diligence investigation by any underwriter (including any qualified independent underwriter) that is required to be retained in accordance with the rules and regulations of each such exchange, and use its reasonable best efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof or the underwriter or underwriters, if any, to consummate the disposition of such Registrable Securities;
(xiii) not later than the effective date of the applicable Registration Statement, provide a CUSIP number for all Registrable Securities and provide the applicable transfer agent with printed certificates for the Registrable Securities which are in a form eligible for deposit with The Depository Trust Company; provided that the Company may satisfy its obligations hereunder without issuing physical stock certificates through the use of The Depository Trust Companys Direct Registration System;
(xiv) in the case of an Underwritten Offering, obtain for delivery to and addressed to RBSG, if RBSG is participating, and the underwriter or underwriters, an opinion from the Companys outside counsel in customary form and content for the type of Underwritten Offering, dated the date of the closing under the underwriting agreement;
(xv) in the case of an Underwritten Offering, obtain for delivery to and addressed to the underwriter or underwriters and, to the extent agreed by the Companys independent certified public accountants, each selling Holder, a comfort letter from the Companys independent certified public accountants in customary form and content for the type of Underwritten Offering, dated the date of execution of the underwriting agreement and brought down to the closing under the underwriting agreement;
(xvi) use its reasonable best efforts to comply with all applicable rules and regulations of the SEC and make generally available to its security holders, as soon as reasonably practicable, but no later than 90 days after the end of the 12-month period beginning with the first day of the Companys first quarter commencing after the effective date of the applicable Registration Statement, an earnings statement satisfying the provisions of Section 11(a) of the Securities Act and the rules and regulations promulgated thereunder and covering the period of at least 12 months, but not more than 18 months, beginning with the first month after the effective date of the Registration Statement;
(xvii) provide and cause to be maintained a transfer agent and registrar for all Registrable Securities covered by the applicable Registration Statement from and after a date not later than the effective date of such Registration Statement;
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(xviii) cause all Registrable Securities covered by the applicable Registration Statement to be listed on each securities exchange on which any of the Companys securities are then listed or quoted and on each inter-dealer quotation system on which any of the Companys securities are then quoted;
(xix) provide (A) each Holder participating in the Registration, (B) the underwriters (which term, for purposes of this Agreement, shall include a Person deemed to be an underwriter within the meaning of Section 2(11) of the Securities Act), if any, of the Registrable Securities to be Registered, (C) the sale or placement agent therefor, if any, (D) counsel for such underwriters or agent, and (E) any attorney, accountant or other agent or representative retained by such Holder or any such underwriter, as selected by such Holder, the opportunity to participate in the preparation of such Registration Statement, each Prospectus included therein or filed with the SEC, and each amendment or supplement thereto, and to require the insertion therein of material, furnished to the Company in writing, which in the reasonable judgment of such Holder(s) and their counsel should be included; and for a reasonable period prior to the filing of such Registration Statement, make available upon reasonable notice at reasonable times and for reasonable periods for inspection by the parties referred to in (A) through (E) above, all pertinent financial and other records, pertinent corporate documents and properties of the Company that are available to the Company, and cause all of the Companys officers, directors and employees and the independent public accountants who have certified its financial statements to make themselves available at reasonable times and for reasonable periods, to discuss the business of the Company and to supply all information available to the Company reasonably requested by any such Person in connection with such Registration Statement as shall be necessary to enable them to exercise their due diligence responsibility, subject to the foregoing, provided that any such Person gaining access to information or personnel pursuant to this Section 2.4(a)(xix) shall agree to use reasonable efforts to protect the confidentiality of any information regarding the Company which the Company determines in good faith to be confidential, and of which determination such Person is notified, unless (A) the release of such information is required by law or regulation or is requested or required by deposition, interrogatory, requests for information or documents by a governmental entity, subpoena or similar process, (B) such information is or becomes publicly known without a breach of this Agreement, (C) such information is or becomes available to such Person on a non-confidential basis from a source other than the Company or (D) such information is independently developed by such Person;
(xx) to cause the executive officers of the Company to participate in the customary road show presentations that may be reasonably requested by the managing underwriter or underwriters in any Underwritten Offering and otherwise to facilitate, cooperate with, and participate in each proposed offering contemplated herein and customary selling efforts related thereto; and
(xxi) take all other customary steps reasonably necessary to effect the Registration, offering and sale of the Registrable Securities.
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(b) As a condition precedent to any Registration hereunder, the Company may require each Holder as to which any Registration is being effected to furnish to the Company such information regarding the distribution of such securities and such other information relating to such Holder, its ownership of Registrable Securities and other matters as the Company may from time to time reasonably request in writing. Each such Holder agrees to furnish such information to the Company and to cooperate with the Company as reasonably necessary to enable the Company to comply with the provisions of this Agreement.
(c) RBSG agrees, and any other Holder agrees by acquisition of such Registrable Securities, that, upon receipt of any written notice from the Company of the occurrence of any event of the kind described in Section 2.04(a)(v), such Holder will forthwith discontinue disposition of Registrable Securities pursuant to such Registration Statement until such Holders receipt of the copies of the supplemented or amended Prospectus contemplated by Section 2.04(a)(v), or until such Holder is advised in writing by the Company that the use of the Prospectus may be resumed, and if so directed by the Company, such Holder will deliver to the Company (at the Companys expense) all copies, other than permanent file copies then in such Holders possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the period during which the applicable Registration Statement for a Demand Registration is required to be maintained effective shall be extended by the number of days during the period from and including the date of the giving of such notice to and including the date when each seller of Registrable Securities covered by such Registration Statement either receives the copies of the supplemented or amended Prospectus contemplated by Section 2.04(a)(v) or is advised in writing by the Company that the use of the Prospectus may be resumed.
Section 2.05. Holdback Agreements . Each of the Company and the Holders agrees, upon notice from the managing underwriter or underwriters in connection with any Registration for an Underwritten Offering of the Companys securities (other than pursuant to a registration statement on Form S-4 or any similar or successor form or pursuant to a registration solely relating to an offering and sale to employees or directors of the Company pursuant to any employee stock plan or other employee benefit plan arrangement), not to effect (other than pursuant to such Registration) any public sale or distribution of Registrable Securities, including, but not limited to, any sale pursuant to Rule 144, or make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of, any Registrable Securities, any other equity securities of the Company or any securities convertible into or exchangeable or exercisable for any equity securities of the Company without the prior written consent of the managing underwriters during such period as reasonably requested by the managing underwriters (but in no event longer than the seven days before and the 90 days after the pricing of such Underwritten Offering); provided , that such restrictions shall not apply in any circumstance to (i) Registrable Securities acquired by a Holder in the public market subsequent to the IPO, (ii) distributions-in-kind to a Holders limited or other partners,
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members, shareholders or other equity holders, (iii) Registrable Securities with regard to which RBSG has beneficial ownership pursuant to an investment advisory arrangement under which RBSG provides investment advisory services to a non-related third party in connection with such Registrable Securities and does not derive a benefit from such Registrable Securities other than customary advisory or similar fees. Notwithstanding the foregoing, no holdback agreements of the type contemplated by this Section 2.05 shall be required of Holders unless each of the Companys directors and executive officers agrees to be bound by a substantially identical holdback agreement for at least the same period of time.
Section 2.06. Underwriting Agreement in Underwritten Offerings . If requested by the managing underwriters for any Underwritten Offering, the Company and the participating Holders shall enter into an underwriting agreement in customary form with such underwriters for such offering; provided , however , that no Holder shall be required to make any representations or warranties to the Company or the underwriters (other than representations and warranties regarding (i) such Holders ownership of Registrable Securities to be transferred free and clear of all liens, claims and encumbrances created by such Holder, (ii) such Holders power and authority to effect such transfer, (iii) such matters pertaining to such Holders compliance with securities laws as reasonably may be requested and (iv) such Holders intended method of distribution) or to undertake any indemnification obligations to the Company with respect thereto, except as otherwise provided in Section 2.08 hereof.
Section 2.07. Registration Expenses Paid By Company . In the case of any Registration of Registrable Securities required pursuant to this Agreement (including any Registration that is delayed or withdrawn) or proposed Underwritten Offering pursuant to this Agreement, the Company shall pay all Registration Expenses regardless of whether the Registration Statement becomes effective or the Underwritten Offering is completed. The Company shall have no obligation to pay any Selling Expenses.
Section 2.08. Indemnification.
(a) Indemnification by the Company . The Company agrees to indemnify and hold harmless, to the full extent permitted by law, each Holder and such Holders officers, directors, employees, advisors, Affiliates and agents and each Person who controls (within the meaning of the Securities Act or the Exchange Act) such Holder from and against any and all losses, claims, damages, liabilities (or actions in respect thereof, whether or not such indemnified party is a party thereto) and expenses, joint or several (including reasonable costs of investigation and legal expenses) (each, a Loss and collectively Losses ) arising out of or based upon (i) any untrue or alleged untrue statement of a material fact contained in any Registration Statement under which the sale of such Registrable Securities was Registered under the Securities Act (including any final or preliminary Prospectus contained therein or any amendment thereof or supplement thereto or any documents incorporated by reference therein), or any such statement made in any free writing prospectus (as defined in Rule 405 under the Securities Act) that the Company has filed or is required to file pursuant to Rule 433(d) of the Securities Act, or (ii) any omission or alleged omission to state therein a material
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fact required to be stated therein or necessary to make the statements therein (in the case of a Prospectus, preliminary Prospectus or free writing prospectus, in light of the circumstances under which they were made) not misleading; provided , however , that the Company shall not be liable to any particular indemnified party in any such case to the extent that any such Loss arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any such Registration Statement in reliance upon and in conformity with written information furnished to the Company by such indemnified party expressly for use in the preparation thereof. This indemnity shall be in addition to any liability the Company may otherwise have. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Holder or any indemnified party and shall survive the transfer of such securities by such Holder.
(b) Indemnification by the Selling Holder . Each selling Holder agrees (severally and not jointly) to indemnify and hold harmless, to the full extent permitted by law, the Company and the Companys directors, officers, employees, advisors, Affiliates and agents and each Person who controls the Company (within the meaning of the Securities Act and the Exchange Act) from and against any Losses arising out of or based upon (i) any untrue or alleged untrue statement of a material fact contained in any Registration Statement under which the sale of such Registrable Securities was Registered under the Securities Act (including any final or preliminary Prospectus contained therein or any amendment thereof or supplement thereto or any documents incorporated by reference therein), or any such statement made in any free writing prospectus that the Company has filed or is required to file pursuant to Rule 433(d) of the Securities Act, or (ii) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of a Prospectus, preliminary Prospectus or free writing prospectus, in light of the circumstances under which they were made) not misleading to the extent, but, in each case (i) or (ii), only to the extent, that such untrue statement or omission is contained in any information furnished in writing by such selling Holder to the Company expressly for inclusion in such Registration Statement, Prospectus, preliminary Prospectus or free writing prospectus. In no event shall the liability of any selling Holder hereunder be greater in amount than the dollar amount of the net proceeds received by such Holder under the sale of the Registrable Securities giving rise to such indemnification obligation. This indemnity shall be in addition to any liability the selling Holder may otherwise have. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any indemnified party.
(c) Conduct of Indemnification Proceedings . Any Person entitled to indemnification hereunder will (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification ( provided that any delay or failure to so notify the indemnifying party shall relieve the indemnifying party of its obligations hereunder to the extent that it is materially prejudiced by reason of such delay or failure) and (ii) permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party; provided , however , that any Person entitled to indemnification hereunder shall have the right to select and employ separate counsel and to participate in the defense of such claim, but the fees and expenses
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of such counsel shall be at the expense of such Person unless (a) the indemnifying party has agreed in writing to pay such fees or expenses, (b) the indemnifying party shall have failed to assume the defense of such claim within a reasonable time after receipt of notice of such claim from the Person entitled to indemnification hereunder or fails to employ counsel reasonably satisfactory to such Person or to pursue the defense of such claim in a reasonably vigorous manner, (c) the named parties to any proceeding include both such indemnified and the indemnifying party and the indemnified party has reasonably concluded (based on written advice of counsel) that there may be legal defenses available to it or other indemnified parties that are different from or in addition to those available to the indemnifying party, or (d) in the reasonable judgment of any such Person, based upon written advice of its counsel, a conflict of interest may exist between such Person and the indemnifying party with respect to such claims (in which case, if the Person notifies the indemnifying party in writing that such Person elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such claim on behalf of such Person). If such defense is not assumed by the indemnifying party, the indemnifying party will not be subject to any liability for any settlement made without its consent, but such consent may not be unreasonably withheld, conditioned or delayed. If the indemnifying party assumes the defense, the indemnifying party shall not have the right to settle such action without the consent of the indemnified party, which consent may not be unreasonably withheld, conditioned or delayed. No indemnifying party shall consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of an unconditional release from all liability in respect to such claim or litigation. It is understood that the indemnifying party or parties shall not, in connection with any proceeding or related proceedings in the same jurisdiction, arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm (in addition to any appropriate local counsel) at any one time from all such indemnified party or parties unless (x) the employment of more than one counsel has been authorized in writing by the indemnifying party or parties, (y) an indemnified party has reasonably concluded (based on written advice of counsel) that there may be legal defenses available to it that are different from or in addition to those available to the other indemnified parties or (z) a conflict or potential conflict exists or in the reasonable judgment of such Person may exist (based on advice of counsel to an indemnified party) between such indemnified party or parties and the other indemnified parties, in each of which cases the indemnifying party shall be obligated to pay the reasonable fees and expenses of such additional counsel.
(d) Contribution . If for any reason the indemnification provided for in Section 2.08(a) or Section 2.08(b) is unavailable to an indemnified party or insufficient to hold it harmless as contemplated by Section 2.08(a) or Section 2.08(b), then the indemnifying party shall, in lieu of indemnifying such indemnified party thereunder, contribute to the amount paid or payable by the indemnified party as a result of such Loss in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and the indemnified party on the other hand in connection with the statements or omissions which resulted in such Loss as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things,
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whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or the indemnified party and the parties relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. Notwithstanding anything in this Section 2.08(d) to the contrary, no indemnifying party (other than the Company) shall be required pursuant to this Section 2.08(d) to contribute any amount in excess of the amount by which the net proceeds received by such indemnifying party from the sale of Registrable Securities in the offering to which the Losses of the indemnified parties relate (before deducting expenses, if any) exceeds the amount of any damages which such indemnifying party has otherwise been required to pay by reason of such untrue statement or omission. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 2.08(d) were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in this Section 2.08(d). No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. The amount paid or payable by an indemnified party hereunder shall be deemed to include, for purposes of this Section 2.08(d), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating, preparing to defend or defending against or appearing as a third party witness in respect of, or otherwise incurred in connection with, any such loss, claim, damage, expense, liability, action, investigation or proceeding. If indemnification is available under this Section 2.08, the indemnifying parties shall indemnify each indemnified party to the full extent provided in Section 2.08(a) and Section 2.08(b) hereof without regard to the relative fault of said indemnifying parties or indemnified party.
Section 2.09. Reporting Requirements; Rule 144 . The Company shall use its reasonable best efforts to be and remain in compliance with the periodic filing requirements imposed under the SECs rules and regulations, including the Exchange Act, and thereafter shall timely file such information, documents and reports as the SEC may require or prescribe under Section 13 or 15(d) (whichever is applicable) of the Exchange Act. If the Company is not required to file such reports during such period, it will, upon the request of any Holder, make publicly available such necessary information for so long as necessary to permit sales pursuant to Rule 144 or Regulation S under the Securities Act, and it will take such further action as any Holder may reasonably request, all to the extent required from time to time to enable such Holder to sell Registrable Securities without Registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 or Regulation S under the Securities Act, as such Rules may be amended from time to time, or (b) any rule or regulation hereafter adopted by the SEC. From and after the date hereof through the date upon which no Holder owns any Registrable Securities, the Company shall forthwith upon request furnish any Holder (i) a written statement by the Company as to whether it has complied with such requirements and, if not, the specifics thereof, (ii) a copy of the most recent annual or quarterly report of the Company, and (iii) such other reports and documents filed by the Company with the SEC as such Holder may reasonably request in availing itself of an exemption for the sale of Registrable Securities without registration under the Securities Act.
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ARTICLE 3
M ISCELLANEOUS
Section 3.01. Term . This Agreement shall terminate upon the earlier of (i) such time as there are no Registrable Securities and (ii) the Final Withdrawal Date (as defined in the Separation Agreement), except for the provisions of Section 2.07 and Section 2.08 and all of this Article 3, which shall survive any such termination.
Section 3.02. Notices . All notices or other communications under this Agreement shall be in writing and shall be deemed to be duly given when (a) delivered in person or (b) deposited in the United States mail or private express mail, postage prepaid, addressed as follows:
If to RBSG, to:
The Royal Bank of Scotland Group plc
Business House G, First Floor
RBS Gogarburn
PO Box 1000
Edinburgh EH12 1HQ
Scotland
Attention: Group General Counsel
with a copy to:
General Counsel, Corporate / M&A
chris.campbell@rbs.com
rushad.abadan@rbs.com
If to the Company to:
Citizens Financial Group, Inc.
One Citizens Plaza
Providence, RI 02903
Attention: John J. Fawcett, Chief Financial Officer
with a copy to:
Citizens Financial Group, Inc.
28 State Street, 12th Floor, MS 1225
Boston, MA 02109
Attention: David A. Bright, Senior Vice President and Senior Counsel
Any party may, by notice to the other party, change the address to which such notices are to be given.
Section 3.03. Successors, Assigns and Transferees . This Agreement and all provisions hereof shall be binding upon and inure to the benefit of the parties hereto and
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their respective successors and permitted assigns. The Company may assign this Agreement at any time in connection with a sale or acquisition of the Company, whether by merger, consolidation, sale of all or substantially all of the Companys assets, or similar transaction, without the consent of the Holders; provided that the successor or acquiring Person agrees in writing to assume all of the Companys rights and obligations under this Agreement. A Holder may assign its rights and obligations under this Agreement to any transferee that acquires at least 5% of the outstanding shares of Common Stock and executes an agreement to be bound hereby in the form attached hereto as Exhibit A , an executed counterpart of which shall be furnished to the Company. Notwithstanding the foregoing, if such transfer is subject to covenants, agreements or other undertakings restricting transferability thereof, the Registration Rights shall not be transferred in connection with such transfer unless such transferee complies with all such covenants, agreements and other undertakings.
Section 3.04. GOVERNING LAW; NO JURY TRIAL .
(a) This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of New York, without regard to the conflict of laws principles thereof that would result in the application of any law other than the laws of the State of New York. EACH OF THE PARTIES HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY COURT PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF AND PERMITTED UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH OF THE PARTIES HEREBY (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, AS APPLICABLE.
(b) With respect to any Action relating to or arising out of this Agreement, each party to this Agreement irrevocably (i) consents and submits to the exclusive jurisdiction of the courts of the State of New York and any court of the United States located in the Borough of Manhattan in New York City; (ii) waives any objection which such party may have at any time to the laying of venue of any Action brought in any such court, waives any claim that such Action has been brought in an inconvenient forum and further waives the right to object, with respect to such Action, that such court does not have jurisdiction over such party; and (iii) consents to the service of process at the address set forth for notices in Section 3.02 herein; provided , however , that such manner of service of process shall not preclude the service of process in any other manner permitted under applicable law.
Section 3.05. Specific Performance . In the event of any actual or threatened default in, or breach of, any of the terms, conditions and provisions of this Agreement, the party or parties who are or are to be thereby aggrieved shall have the right to seek
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specific performance and injunctive or other equitable relief of its rights under this Agreement, in addition to any and all other rights and remedies at law or in equity, and all such rights and remedies shall be cumulative.
Section 3.06. Headings . The article, section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.
Section 3.07. Severability . If any provision of this Agreement or the application thereof to any Person or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof or the application of such provision to Persons or circumstances or in jurisdictions other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination, the parties shall negotiate in good faith in an effort to agree upon such a suitable and equitable provision to effect the original intent of the parties.
Section 3.08. Amendment; Waiver .
(a) This Agreement may not be amended or modified and waivers and consents to departures from the provisions hereof may not be given, except by an instrument or instruments in writing making specific reference to this Agreement and signed by the Company and RBSG or, if neither RBSG or any of its Affiliates is a Holder, the Holders of a majority of the Registrable Securities.
(b) Waiver by any party of any default by the other party of any provision of this Agreement shall not be deemed a waiver by the waiving party of any subsequent or other default, nor shall it prejudice the rights of the other party.
Section 3.09. Further Assurances . Each of the parties hereto shall execute and deliver all additional documents, agreements and instruments and shall do any and all acts and things reasonably requested by the other party hereto in connection with the performance of its obligations undertaken in this Agreement.
Section 3.10. Counterparts . This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party. Execution of this Agreement or any other documents pursuant to this Agreement by facsimile or other electronic copy of a signature shall be deemed to be, and shall have the same effect as, executed by an original signature.
[ The remainder of page intentionally left blank. Signature page follows. ]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first written above.
CITIZENS FINANCIAL GROUP, INC. | ||
By: |
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Name: | ||
Title: |
THE ROYAL BANK OF SCOTLAND GROUP PLC | ||
By: |
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Name: | ||
Title: |
EXHIBIT A
THIS INSTRUMENT forms part of the Registration Rights Agreement (the Agreement ), dated as of , 2014, by and among Citizens Financial Group, Inc., a Delaware corporation, and The Royal Bank of Scotland Group plc, a public limited company organized under the laws of Scotland ( RBSG ). The undersigned hereby acknowledges having received a copy of the Agreement and having read the Agreement in its entirety, and for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound, hereby agrees that the terms and conditions of the Agreement binding upon and inuring to the benefit of RBSG shall be binding upon and inure to the benefit of the undersigned and its successors and permitted assigns as if it were an original party to the Agreement.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this day of , 20 .
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Name: | ||
Title: |
Exhibit 10.5
FORM OF INDEMNIFICATION AGREEMENT
(Delaware corporation)
This Indemnification Agreement (this Agreement ), made and entered into as of the day of , 2014, by and between Citizens Financial Group, Inc., a Delaware corporation (the Company ) and ( Indemnitee ).
W I T N E S S E T H:
WHEREAS, highly competent persons have become more reluctant to serve publicly-held corporations as directors or in other capacities unless they are provided with adequate protection through insurance or adequate indemnification against risks of claims and actions against them arising out of their service to and activities on behalf of the corporation.
WHEREAS, the Board of Directors of the Company (the Board ) has determined that, in order to attract and retain qualified individuals, the Company will attempt to maintain on an ongoing basis, at its sole expense, liability insurance to protect persons serving the Company and its subsidiaries from certain liabilities. Although the furnishing of such insurance has been a customary and widespread practice among United States-based corporations and other business enterprises, the Company believes that, given current market conditions and trends, such insurance may be available to it in the future only at higher premiums and with more exclusions. At the same time, directors, officers, and other persons in service to corporations or business enterprises are being increasingly subjected to expensive and time-consuming litigation relating to, among other things, matters that traditionally would have been brought only against the Company or business enterprise itself.
WHEREAS, the Amended and Restated Certificate of Incorporation (the Certificate of Incorporation ) of the Company provides that the Company shall indemnify and advance expenses to all directors and officers of the Company in the manner set forth therein and to the fullest extent permitted by applicable law, and the Companys Certificate of Incorporation provides for limitation of liability for directors and officers. In addition, Indemnitee may be entitled to indemnification pursuant to the General Corporation Law of the State of Delaware ( DGCL ) . The Certificate of Incorporation and the DGCL expressly provide that the indemnification provisions set forth therein are not exclusive, and thereby contemplate that contracts may be entered into between the Company and members of the board of directors, officers and other persons with respect to indemnification.
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WHEREAS, the uncertainties relating to such insurance and to indemnification have increased the difficulty of attracting and retaining such persons.
WHEREAS, the Board has determined that the increased difficulty in attracting and retaining such persons is detrimental to the best interests of the Companys stockholders and that the Company should act to assure such persons that there will be increased certainty of such protection in the future.
WHEREAS, it is reasonable, prudent and necessary for the Company contractually to obligate itself to indemnify, and to advance expenses on behalf of, such persons to the fullest extent permitted by applicable law so that they will serve or continue to serve the Company free from undue concern that they will not be so indemnified.
WHEREAS, this Agreement is a supplement to and in furtherance of the Certificate of Incorporation, the Companys Amended and Restated Bylaws and any resolutions adopted pursuant thereto and shall not be deemed a substitute therefor, nor to diminish or abrogate any rights of Indemnitee thereunder.
WHEREAS, Indemnitee does not regard the protection available under the Companys Certificate of Incorporation and insurance as adequate in the present circumstances, and may not be willing to serve as an officer or director of the Company without adequate protection, and the Company desires Indemnitee to serve in such capacity. Indemnitee is willing to serve, continue to serve and to take on additional service for or on behalf of the Company on the condition that he be so indemnified.
NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows:
ARTICLE 1
C ERTAIN D EFINITIONS
(a) As used in this Agreement:
Change of Control means any one of the following circumstances occurring after the date hereof: (i) there shall have occurred an event required to be reported with respect to the Company in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item or any similar schedule or form) under the Exchange Act, regardless of whether the Company is then subject to such reporting requirement; (ii) any person or group (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) shall have become, without prior approval of the Companys Board by approval of at least a majority of the Continuing Directors, the beneficial owner (as defined in Rule 13d-3 under the
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Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Companys then outstanding voting securities (provided that, for purposes of this clause (ii), the term person shall exclude (x) the Company, (y) any trustee or other fiduciary holding securities under an employee benefit plan of the Company, and (z) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company); (iii) there occurs a merger or consolidation of the Company with any other entity, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 51% of the combined voting power of the voting securities of the surviving entity outstanding immediately after such merger or consolidation and with the power to elect at least a majority of the board of directors or other governing body of such surviving entity; (iv) all or substantially all the assets of the Company are sold or disposed of in a transaction or series of related transactions; (v) the approval by the stockholders of the Company of a complete liquidation of the Company; or (vi) the Continuing Directors cease for any reason to constitute at least a majority of the members of the Board.
Continuing Director means (i) each director on the Board on the date hereof or (ii) any new director whose election or nomination for election by the Companys stockholders was approved by a vote of at least a majority of the directors then still in office who were directors on the date hereof or whose election or nomination was so approved.
Corporate Status means the status of a person who is or was a director, officer, trustee, general partner, managing member, fiduciary, board of directors committee member, employee or agent of the Company or of any other Enterprise.
Disinterested Director means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee.
Enterprise means the Company and any other corporation, limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise of which Indemnitee is or was serving at the request of the Company as a director, officer, trustee, general partner, managing member, fiduciary, board of directors committee member, employee or agent.
ERISA means the Employee Retirement Income Security Act of 1974, as amended.
Exchange Act means the Securities Exchange Act of 1934, as amended.
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Expenses means all direct and indirect costs (including attorneys fees, retainers, court costs, transcripts, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses) reasonably incurred in connection with (i) prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, or otherwise participating in, a Proceeding or (ii) establishing or enforcing a right to indemnification under this Agreement, the Companys Certificate of Incorporation, applicable law or otherwise. Expenses also shall include Expenses incurred in connection with any appeal resulting from any Proceeding, including the premium, security for, and other costs relating to any cost bond, supersede as bond, or other appeal bond or its equivalent. For the avoidance of doubt, Expenses, however, shall not include any Liabilities.
Independent Counsel means a law firm, or a member of a law firm, that is experienced in matters of corporate law and neither currently is, nor in the three years previous to its selection or appointment has been, retained to represent (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning Indemnitee under this Agreement or of other indemnitees under similar indemnification agreements) or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term Independent Counsel shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitees rights under this Agreement.
Liabilities means any losses or liabilities, including any judgments, fines, ERISA excise taxes and penalties, penalties and amounts paid in settlement, arising out of or in connection with any Proceeding (including all interest, assessments and other charges paid or payable in connection with or in respect of any such judgments, fines, ERISA excise taxes and penalties, penalties or amounts paid in settlement).
Proceeding means any threatened, pending or completed action, derivative action, suit, claim, counterclaim, cross claim, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether civil (including intentional and unintentional tort claims), criminal, administrative or investigative, including any appeal therefrom, and whether instituted by or on behalf of the Company or any other party, in which Indemnitee was, is or will be involved as a party, potential party, non-party witness or otherwise by reason of any Corporate Status of Indemnitee, or by reason of any action taken (or failure to act) by him or her or of any action (or failure to act) on his or her part while serving in any Corporate Status.
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(b) For the purposes of this Agreement:
References to Company shall include, in addition to the resulting or surviving corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents, so that if Indemnitee is or was a director, officer, employee, or agent of such constituent corporation or is or was serving at the request of such constituent corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, then Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued.
Reference to other enterprise shall include employee benefit plans; references to fines shall include any excise tax assessed with respect to any employee benefit plan; references to serving at the request of the Company shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner not opposed to the best interests of the Company as referred to in this Agreement.
Reference to including shall mean including, without limitation, regardless of whether the words without limitation actually appear, references to the words herein, hereof and hereunder and other words of similar import shall refer to this Agreement as a whole and not to any particular paragraph, subparagraph, section, subsection or other subdivision.
ARTICLE 2
S ERVICES B Y I NDEMNITEE
Section 2.01 . Services By Indemnitee. Indemnitee hereby agrees to serve or continue to serve, at the will of the Company (in the case of an officer), as a director or officer of the Company, for so long as Indemnitee is duly elected or appointed or until Indemnitee tenders his or her resignation or is removed. This Agreement shall not constitute an employment agreement, supersede any employment agreement to which Indemnitee is a party or create any right of Indemnitee to continue employment or appointment.
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ARTICLE 3
I NDEMNIFICATION
Section 3.01 . General. (a) The Company hereby agrees to and shall indemnify Indemnitee and hold Indemnitee harmless from and against any and all Expenses and Liabilities, in either case, actually and reasonably incurred by Indemnitee or on Indemnitees behalf by reason of Indemnitees Corporate Status, to the fullest extent permitted by applicable law. The Companys indemnification obligations set forth in this Section 3.01 shall apply (i) in respect of Indemnitees past, present and future service in any Corporate Status and (ii) regardless of whether Indemnitee is serving in any Corporate Status at the time any such Expense or Liability is incurred.
For purposes of this Agreement, the meaning of the phrase to the fullest extent permitted by applicable law shall include, but not be limited to:
(i) to the fullest extent permitted by any provision of the DGCL, or the corresponding provision of any successor statute, and
(ii) to the fullest extent authorized or permitted by any amendments to or replacements of the DGCL adopted after the date of this Agreement that increase the extent to which a corporation may indemnify its officers and directors.
(b) Witness Expenses . Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his or her Corporate Status, a witness in any Proceeding to which Indemnitee is not a party, he shall be indemnified against all Expenses actually and reasonably incurred by Indemnitee or on his or her behalf in connection therewith.
(c) Expenses as a Party Where Wholly or Partly Successful . Notwithstanding any other provisions of this Agreement, to the fullest extent permitted by applicable law, to the extent that Indemnitee is a party to (or a participant in) and is successful, on the merits or otherwise, in any Proceeding or in defense of any claim, issue or matter therein, in whole or in part, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or her in connection therewith. If Indemnitee is not wholly successful in such Proceeding, but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall, to the fullest extent permitted by applicable law, indemnify Indemnitee against all Expenses actually and reasonably incurred by Indemnitee or on his or her behalf in connection with each successfully resolved claim, issue or matter. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.
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Section 3.02 . Exclusions. Notwithstanding any provision of this Agreement and unless Indemnitee ultimately is successful on the merits with respect to any such claim, the Company shall not be obligated under this Agreement to make any indemnity in connection with any claim made against Indemnitee:
(a) for (i) an accounting of profits made from the purchase and sale (or sale and purchase) by Indemnitee of securities of the Company within the meaning of Section 16(b) of the Exchange Act or similar provisions of state statutory law or common law or (ii) any reimbursement of the Company by Indemnitee of any bonus or other incentive-based or equity-based compensation or of any profits realized by Indemnitee from the sale of securities of the Company, as required in each case under the Exchange Act (including any such reimbursements that arise from an accounting restatement of the Company pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act ), or the payment to the Company of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 306 of the Sarbanes-Oxley Act); or
(b) except as otherwise provided in Section 6.01(e), prior to a Change of Control, in connection with any Proceeding (or any part of any Proceeding) initiated by Indemnitee (other than any cross claim or counterclaim asserted by the Indemnitee), including any Proceeding (or any part of any Proceeding) initiated by Indemnitee against the Company or its directors, officers, employees or other indemnitees, unless (i) the Board authorized the Proceeding (or any part of any Proceeding) prior to its initiation or (ii) the Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the Company under applicable law.
ARTICLE 4
A DVANCEMENT O F E XPENSES ; D EFENSE OF C LAIMS
Section 4.01 . Advances. Notwithstanding any provision of this Agreement to the contrary, the Company shall advance any Expenses actually and reasonably incurred by Indemnitee in connection with any Proceeding within thirty (30) days after the receipt by the Company of each statement requesting such advance from time to time, whether prior to or after final disposition of any Proceeding. Advances shall be unsecured and interest free. Advances shall be made without regard to Indemnitees ability to repay such amounts and without regard to Indemnitees ultimate entitlement to indemnification under the other provisions of this Agreement. Advances shall include any and all reasonable Expenses incurred pursuing an action to enforce this right of advancement, including Expenses incurred preparing and forwarding statements to the Company to support the advances claimed.
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Section 4.02 . Repayment of Advances or Other Expenses. Indemnitee agrees that Indemnitee shall reimburse the Company for all Expenses advanced by the Company pursuant to Section 4.01, in the event and only to the extent that it shall be determined by final judgment or other final adjudication under the provisions of any applicable law (as to which all rights of appeal therefrom have been exhausted or lapsed) that Indemnitee is not entitled to be indemnified by the Company for such Expenses.
Section 4.03 . Defense of Claims. The Company shall be entitled to assume the defense of any Proceeding with counsel consented to by Indemnitee (such consent not to be unreasonably withheld) upon the delivery by the Company to Indemnitee of written notice of the Companys election to do so. After delivery of such notice, consent to such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees or expenses of counsel subsequently incurred by Indemnitee with respect to such Proceeding; provided that (i) Indemnitee shall have the right to employ separate counsel in respect of any Proceeding at Indemnitees expense and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized in writing by the Company or (B) Indemnitee shall have reasonably concluded upon the advice of counsel that there is a conflict of interest between the Company and Indemnitee in the conduct of the defense of such Proceeding, then in each such case the fees and expenses of Indemnitees counsel shall be at the Companys expense. The Company shall not settle any action, claim or Proceeding (in whole or in part) which would impose any Expense, judgment, fine, penalty or limitation on Indemnitee without Indemnitees prior written consent, such consent not to be unreasonably withheld. Indemnitee shall not settle any action, claim or Proceeding (in whole or in part) which would impose any Expense, judgment, fine, penalty or limitation on the Company without the Companys prior written consent, such consent not to be unreasonably withheld.
ARTICLE 5
P ROCEDURES F OR N OTIFICATION OF AND D ETERMINATION OF E NTITLEMENT T O I NDEMNIFICATION
Section 5.01 . Notification; Request For Indemnification. (a) As soon as reasonably practicable after receipt by Indemnitee of written notice that he is a party to or a participant (as a witness or otherwise) in any Proceeding or of any other matter in respect of which Indemnitee intends to seek indemnification or advancement of Expenses hereunder, Indemnitee shall provide to the Company written notice thereof, including the nature of and the facts underlying the Proceeding. The omission by Indemnitee to so notify the Company will not relieve the Company from any liability which it may have to Indemnitee hereunder or otherwise unless and to the extent that (i) none of the Company and its subsidiaries are party to or aware of such Proceeding and (ii) the Company is materially prejudiced by such failure.
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(b) To obtain indemnification under this Agreement, Indemnitee shall deliver to the Company a written request for indemnification, including therewith such information as is reasonably available to Indemnitee and reasonably necessary to determine Indemnitees entitlement to indemnification hereunder. Such request(s) may be delivered from time to time and at such time(s) as Indemnitee deems appropriate in his or her sole discretion. Indemnitees entitlement to indemnification shall be determined according to Section 5.02 of this Agreement and applicable law.
Section 5.02 . Determination of Entitlement. (a) Where there has been a written request by Indemnitee for indemnification pursuant to Section 5.01(b), then as soon as is reasonably practicable (but in any event not later than 60 days) after final disposition of the relevant Proceeding, a determination, if required by applicable law, with respect to Indemnitees entitlement thereto shall be made in the specific case: (i) if a Change of Control shall not have occurred, (A) by a majority vote of the Disinterested Directors, even though less than a quorum of the Board, (B) by a committee of Disinterested Directors designated by a majority vote of the Disinterested Directors, even though less than a quorum of the Board, (C) if there are no such Disinterested Directors or, if such Disinterested Directors so direct, by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to Indemnitee; or (ii) if a Change of Control shall have occurred, by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to Indemnitee. If it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten (10) days after such determination. Indemnitee shall reasonably cooperate with the person, persons or entity making such determination with respect to Indemnitees entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs or expenses (including attorneys fees and disbursements) actually and reasonably incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitees entitlement to indemnification).
(b) If entitlement to indemnification is to be determined by Independent Counsel pursuant to Section 5.02(a)(ii), such Independent Counsel shall be selected by Indemnitee, and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected. If entitlement to indemnification is to be determined by Independent Counsel pursuant to Section 5.02(a)(i)(C) (or if Indemnitee requests that such selection be made by the Board), such Independent Counsel shall be selected by the Company in which case the Company shall give written notice to Indemnitee advising him or her of the identity of the Independent Counsel so selected. In either event, Indemnitee
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or the Company, as the case may be, may, within 10 days after such written notice of selection shall have been received, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of Independent Counsel as defined in Section 1 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If such written objection is so made and substantiated, the Independent Counsel so selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court of competent jurisdiction has determined that such objection is without merit. If, within 20 days after the later of submission by Indemnitee of a written request for indemnification pursuant to Section 5.01(b) hereof and the final disposition of the Proceeding, no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition a court of competent jurisdiction for resolution of any objection which shall have been made by the Company or Indemnitee to the others selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 5.02(a) hereof. Upon the due commencement of any judicial proceeding or arbitration pursuant to Section 6.01(a) of this Agreement, the Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing).
(c) The Company agrees to pay the reasonable fees and expenses of any Independent Counsel serving under this Agreement.
Section 5.03 . Presumptions and Burdens of Proof; Effect of Certain Proceedings. (a) In making any determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall, to the fullest extent not prohibited by law, presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 5.01(b) of this Agreement, and the Company shall, to the fullest extent not prohibited by law, have the burden of proof to overcome that presumption in connection with the making by any person, persons or entity of any determination contrary to that presumption. Neither the failure of any person, persons or entity to have made a determination prior to the commencement of any action pursuant to this Agreement that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by any person, persons or entity that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct.
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(b) If the person, persons or entity empowered or selected under Section 5.02 of this Agreement to determine whether Indemnitee is entitled to indemnification shall not have made a determination within the sixty (60) day period referred to in Section 5.02(a), the requisite determination of entitlement to indemnification shall, to the fullest extent not prohibited by law, be deemed to have been made and Indemnitee shall be entitled to such indemnification, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitees statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law; provided , however, that such 60-day period may be extended for a reasonable time, not to exceed an additional thirty (30) days, if the person, persons or entity making the determination with respect to entitlement to indemnification in good faith requires such additional time for the obtaining or evaluating of documentation and/or information relating thereto.
(c) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his or her conduct was unlawful.
(d) For purposes of any determination of good faith, Indemnitee shall be deemed to have acted in good faith if Indemnitees action is in good faith reliance on the records or books of account of any Enterprise, including financial statements, or on information supplied to Indemnitee by the officers of such Enterprise in the course of their duties, or on the advice of legal counsel for such Enterprise or on information or records given or reports made to such Enterprise by an independent certified public accountant or by an appraiser or other expert selected by such Enterprise. The provisions of this Section 5.03(d) shall not be deemed to be exclusive or to limit in any way the other circumstances in which Indemnitee may be deemed or found to have met the applicable standard of conduct set forth in this Agreement.
(e) The knowledge and/or actions, or failure to act, of any other director, trustee, partner, managing member, fiduciary, officer, agent or employee of any Enterprise shall not be imputed to Indemnitee for purposes of determining any right to indemnification under this Agreement.
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ARTICLE 6
R EMEDIES OF I NDEMNITEE
Section 6.01. Adjudication or Arbitration . (a) In the event of any dispute between Indemnitee and the Company hereunder as to entitlement to indemnification or advancement of Expenses (including where (i) a determination is made pursuant to Section 5.02 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 4.01 of this Agreement, (iii) payment of indemnification pursuant to Section 3.01 of this Agreement is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification, (iv) no determination as to entitlement to indemnification is timely made pursuant to Section 5.02 of this Agreement and no payment of indemnification is made within ten (10) days after entitlement is deemed to have been determined pursuant to Section 5.03(b)) or (v) a contribution payment is not made in a timely manner pursuant to Section 8.04 of this Agreement, then Indemnitee shall be entitled to an adjudication by a court of his or her entitlement to such indemnification, contribution or advancement. Alternatively, in such case, Indemnitee, at his or her option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. The Company shall not oppose Indemnitees right to seek any such adjudication or award in arbitration.
(b) In the event that a determination shall have been made pursuant to Section 5.02(a) of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 6.01 shall be conducted in all respects as a de novo trial, or arbitration, on the merits, and Indemnitee shall not be prejudiced by reason of that adverse determination. In any judicial proceeding or arbitration commenced pursuant to this Section 6.01 the Company shall have the burden of proving Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be, and the Company may not refer to or introduce into evidence any determination pursuant to Section 5.02(a) of this Agreement adverse to Indemnitee for any purpose. If Indemnitee commences a judicial proceeding or arbitration pursuant to this Section 6.01, Indemnitee shall not be required to reimburse the Company for any advances pursuant to Section 4.02 until a final determination is made with respect to Indemnitees entitlement to indemnification (as to which all rights of appeal have been exhausted or lapsed).
(c) If a determination shall have been made pursuant to Section 5.02(a) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 6.01, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitees statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law.
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(d) The Company shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 6.01 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement.
(e) The Company shall indemnify Indemnitee to the fullest extent permitted by law against all Expenses and, if requested by Indemnitee, shall (within thirty (30) days after the Companys receipt of such written request) advance such Expenses to Indemnitee, which are reasonably incurred by Indemnitee in connection with any judicial proceeding or arbitration brought by Indemnitee for (i) indemnification or advances of Expenses by the Company (or otherwise for the enforcement, interpretation or defense of his or her rights) under this Agreement or any other agreement, including any other indemnification, contribution or advancement agreement, or any provision of the Companys Certificate of Incorporation or By-laws now or hereafter in effect or (ii) recovery or advances under any directors and officers liability insurance policy maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, contribution, advancement or insurance recovery, as the case may be.
ARTICLE 7
D IRECTORS AND O FFICERS L IABILITY I NSURANCE
Section 7.01 . D&O Liability Insurance. The Company shall obtain and maintain a policy or policies of insurance ( D&O Liability Insurance ) with reputable insurance companies providing liability insurance for directors and officers of the Company in their capacities as such (and for any capacity in which any director or officer of the Company serves any other Enterprise at the request of the Company), in respect of acts or omissions occurring while serving in such capacity, on terms with respect to coverage and amount (including with respect to the payment of Expenses) no less favorable than those of such policy in effect on the date hereof.
Section 7.02 . Evidence of Coverage. Upon request by Indemnitee, the Company shall provide copies of all policies of D&O Liability Insurance obtained and maintained in accordance with Section 7.01 of this Agreement. The Company shall promptly notify Indemnitee of any changes in such insurance coverage.
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ARTICLE 8
M ISCELLANEOUS
Section 8.01 . Nonexclusivity of Rights. The rights of indemnification, contribution and advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled to under applicable law, the Companys Certificate of Incorporation, the Companys Amended and Restated Bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy.
Section 8.02 . Insurance and Subrogation. (a) Indemnitee shall be covered by the Companys D&O Liability Insurance in accordance with its or their terms to the maximum extent of the coverage available for any director or officer under such policy or policies. If, at the time the Company receives notice of a claim hereunder, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of such Proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such Proceeding in accordance with the terms of such policies. The failure or refusal of any such insurer to pay any such amount shall not affect or impair the obligations of the Company under this Agreement.
(b) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company effectively to bring suit to enforce such rights.
(c) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable (or for which advancement is provided) hereunder if and to the extent that Indemnitee has actually received such payment under any insurance policy or other indemnity provision.
Section 8.03 The Companys obligation to indemnify or advance Expenses hereunder to Indemnitee who is or was serving at the request of the Company as a director, officer, trustee, partner, managing member, fiduciary, board of directors committee member, employee or agent of any other Enterprise shall be reduced by any amount Indemnitee has actually received as indemnification or advancement of Expenses from such Enterprise.
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Section 8.04 . Contribution. To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee for any reason whatsoever, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amount incurred by Indemnitee, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in settlement and/or for Expenses, in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the circumstances of such Proceeding in order to reflect (i) the relative benefits received by the Company and Indemnitee as a result of the event(s) and/or transaction(s) giving rise to such Proceeding; and/or (ii) the relative fault of the Company (and its directors, officers, employees and agents) and Indemnitee in connection with such event(s) and/or transaction(s).
Section 8.05 . Amendment. This Agreement may not be modified or amended except by a written instrument executed by or on behalf of each of the parties hereto. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit, restrict or reduce any right of Indemnitee under this Agreement in respect of any act or omission, or any event occurring, prior to such amendment, alteration or repeal. To the extent that a change in applicable law, whether by statute or judicial decision, (i) permits greater indemnification, contribution or advancement of Expenses than would be afforded currently under the Companys Certificate of Incorporation and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change or (ii) limits rights with respect to indemnification, contribution or advancement of Expenses, it is the intent of the parties hereto that the rights with respect to indemnification, contribution or advancement of Expenses in effect prior to such change shall remain in full force and effect to the extent permitted by applicable law.
Section 8.06 . Waivers. The observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) by the party entitled to enforce such term only by a writing signed by the party against which such waiver is to be asserted. Unless otherwise expressly provided herein, no delay on the part of any party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party hereto of any right, power or privilege hereunder operate as a waiver of any other right, power or privilege hereunder nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder.
Section 8.07 . Entire Agreement. This Agreement and the documents referred to herein constitute the entire agreement between the parties hereto with respect to the matters covered hereby, and any other prior or contemporaneous oral or written understandings or agreements with respect to the matters covered hereby are superseded by this Agreement, provided that this Agreement is a supplement to and in furtherance of the Certificate of Incorporation and By-laws of the Company and applicable law, and shall not be deemed a substitute therefor, nor to diminish or abrogate any rights of Indemnitee thereunder.
15
Section 8.08 . Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law; (b) such provision or provisions shall be deemed reformed to the extent necessary to conform to applicable law and to give the maximum effect to the intent of the parties hereto; and (c) to the fullest extent possible, the provisions of this Agreement (including each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby.
Section 8.09 . Notices. All notices, requests, demands and other communications under this Agreement shall be in writing (which may be by facsimile transmission). All such notices, requests and other communications shall be deemed received on the date of receipt by the recipient thereof if received prior to 5:00 p.m. in the place of receipt and such day is a business day in the place of receipt. Otherwise, any such notice, request or communication shall be deemed not to have been received until the next succeeding business day in the place of receipt. The address for notice to a party is as shown on the signature page of this Agreement, or such other address as any party shall have given by written notice to the other party as provided above.
Section 8.10 . Binding Effect. (a) The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce Indemnitee to serve as a director or officer of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving as a director or officer of the Company.
(b) This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company, spouses, heirs, and executors, administrators, personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all or substantially all, or a substantial part of the business or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the manner and to the same extent that the Company would be required to perform if no such succession had taken place.
16
(c) The indemnification, contribution and advancement of Expenses provided by, or granted pursuant to this Agreement shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors, administrators, legatees and assigns of such a person.
Section 8.11 . Governing Law. This Agreement and the legal relations among the parties shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules.
Section 8.12 . Consent To Jurisdiction. Except with respect to any arbitration commenced by Indemnitee pursuant to Section 6.01(a) of this Agreement, the Company and Indemnitee hereby irrevocably and unconditionally (i) agree that any action or proceeding arising out of or in connection with this Agreement shall be brought only in the Chancery Court of the State of Delaware (the Delaware Court ), and not in any other state or federal court in the United States of America or any court in any other country, (ii) consent to submit to the exclusive jurisdiction of the Delaware Court for purposes of any action or proceeding arising out of or in connection with this Agreement, (iii) waive any objection to the laying of venue of any such action or proceeding in the Delaware Court, and (iv) waive, and agree not to plead or to make, any claim that any such action or proceeding brought in the Delaware Court has been brought in an improper or inconvenient forum.
Section 8.13 . Headings. The Article and Section headings in this Agreement are for convenience of reference only, and shall not be deemed to alter or affect the meaning or interpretation of any provisions hereof.
Section 8.14 . Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement.
Section 8.15 . Use of Certain Terms. As used in this Agreement, the words herein, hereof, and hereunder and other words of similar import refer to this Agreement as a whole and not to any particular paragraph, subparagraph, section, subsection, or other subdivision. Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa.
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered to be effective as of the date first above written.
CITIZENS FINANCIAL GROUP, INC. | ||
By: |
|
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Name: | ||
Title: | ||
Address: | ||
Facsimile: | ||
Attention: | ||
With a copy to: | ||
Address: | ||
Facsimile: | ||
Attention: |
INDEMNITEE |
|
Address: |
Facsimile: |
With a copy to: |
Address: |
Facsimile: |
Attention: |
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EXHIBIT 10.37
SUPPLEMENTAL RETIREMENT AGREEMENT
THIS SUPPLEMENTAL RETIREMENT AGREEMENT dated as of the 31 st day of October, 1995 (but effective as of the Effective Date) by and between CHARTER ONE FINANCIAL, INC., its successors and assigns (the Company) and CHARLES J. KOCH (the Executive).
WITNESSETH:
WHEREAS, the Executive is a member of the senior management team of the Company whose duties will become more demanding and whose responsibilities will be expanded by virtue of the combination between the Company and FirstFed Michigan Corporation (FirstFed) and their respective savings bank subsidiaries;
WHEREAS, the Executive has heretofore performed his duties in an exemplary and efficient manner, resulting in the substantial growth, success and profitability of the Company and its subsidiaries;
WHEREAS, the Company wishes to provide the Executive with supplemental retirement benefits commensurate with his executive duties on behalf of the Company and its subsidiaries, as well as comparable to the non-qualified retirement benefits of like kind provided to similarly situated executives with comparable responsibilities, duties and functions; and
WHEREAS, the Company believes that the supplemental retirement benefits to be provided to the Executive pursuant to this Agreement will induce continued service by the Executive with the Company, which continued service is deemed essential for the future growth and success of the Company and its subsidiaries after its combination with FirstFed.
NOW, THEREFORE, in consideration of the premises and intending to be legally bound hereby, the Company and the Executive hereby agree as follows:
1. | Definitions . |
In this Agreement, the following words and phrases shall have the following meanings:
(a) Accrued Benefit Percentage shall mean .25% for each of the first 60 calendar quarters that the Executive has heretofore been or is hereinafter employed by the Company any of its subsidiaries (or any predecessors or successors thereto by merger or purchase) plus .875% for each calendar quarter of employment thereafter, calculated through the last day of the calendar quarter in which the Executive (i) experiences a Separation from Service or (ii) attains Normal Retirement Age, whichever shall first occur. There shall be no duplication of the Accrued Benefit Percentage for service with more than one employer.
(b) Administrator shall mean the person or committee appointed by the Board of Directors of the Company to administer this Agreement.
(c) Average Compensation shall mean the amount determined as of the Benefit Commencement Date by dividing by 36 the total monetary compensation earned by the Executive from the Company and its subsidiaries (or any predecessors or successors thereto by merger or purchase), including but not limited to salary, bonuses and incentive compensation (but excluding specifically stock based compensation, including but not limited to restructured stock, stock options and stock appreciation rights) during the 3 annual periods (whether or not consecutive) that results in the largest total. An annual period shall consist of any 12 month consecutive period.
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(d) Benefit Commencement Date shall mean the last day of the calendar month following the earliest of (i) Normal Retirement Age, (ii) the date the Executive attains (or but for his death would have attained) age 65 if prior thereto he experiences a Separation from Service for Cause, (iii) the date of the Executives Separation from Service without Cause provided the Executive is then age 58 or older, (iv) the date the Executive attains (or but for his death would have attained) the age of 58 years if he experiences a Separation from Service without Cause prior to his attaining age 58 or (v) 6 months after the date of death of the Executive if he dies while employed by the Company.
(e) Cause shall mean a Separation from Service that arises from a Termination for Cause (as such term is defined in the written employment agreement (the Employment Agreement) between the Company and the Executive of even date herewith).
(f) Effective Date shall mean the date that FirstFed is merged into the Company.
(g) Monthly Benefit shall mean the Average Compensation multiplied by the Accrued Benefit Percentage; provided, however, in no event will the Monthly Benefit exceed $33,333.00.
(h) Normal Retirement Age shall mean the date the Executive attains or but for his death would have attained age 65.
(i) Separation from Service shall mean the date of cessation of the employment relationship between the Executive and the Company and its subsidiaries (including any successor in interest, if applicable).
(j) Spouse shall mean the person to whom the executive is married immediately prior to his death.
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2. | Payment of Benefits . |
(a) During the Life of the Executive .
If the Executive is living on the Benefit Commencement Date, the Company shall pay to him the Monthly Benefit on each of the Benefit Commencement Date and on the last day of each calendar month thereafter during his lifetime.
(b) Following the Death of the Executive .
(i) If the Executive is not living on the Benefit Commencement Date but the Spouse is then living, the Company shall pay to the Spouse 50% of the Monthly Benefit on each of the Benefit Commencement Date and the last day of each calendar month thereafter during the lifetime of the Spouse, or
(ii) If the Executive dies after the Benefit Commencement Date and is survived by the Spouse, the Company shall pay to the Spouse 50% of the Monthly Benefit on each of the last day of the calendar month next following the death of the Executive and the last day of each calendar month thereafter during the lifetime of the Spouse, and
(iii) After the death of both the Executive and the Spouse, no amounts will be payable under this Agreement other than previously due amounts which were not paid and any amount payable for the calendar month that death occurred.
3. | Miscellaneous . |
(a) Withholding . To the extent amounts payable under this Agreement are determined by the Administrator, in good faith, to be subject to federal, state or local income tax, the Company may withhold from each such payment an amount necessary to meet the employers obligation to withhold amounts under the applicable federal, state or local law.
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(b) General Assets and Funding . The amounts payable under this Agreement are payable from the general assets of the Company and no special fund or arrangement is intended to be established hereby nor shall the Company be required to earmark, place in trust or otherwise segregate assets with respect to this Agreement or any benefits hereunder. The Administrator reserves the right to determine how the Company will fund its obligation undertaken by this Agreement. Should the Administrator elect to fund this Agreement, in whole or in part, through the medium of life insurance or annuities, or both, the Company shall be the owner and beneficiary of the policy. The Company reserves the absolute right, in its sole discretion, to terminate such life insurance or annuities, as well as any other funding program, at any time, in whole or in part. Such termination shall in no way affect the Companys obligation to pay the Executive and Spouse as provided in this Agreement. At no time shall the Executive or Spouse be deemed to have any right, title, or interest in or to any specific asset or assets of the Company, including but not by way of restriction, any insurance or annuity contract and contracts or the proceeds therefrom.
(c) Governing Law . This Agreement shall be construed under the laws of the State of Ohio, without regard to its principles of conflict of laws.
(d) Future Employment . This Agreement shall not be construed as providing the Executive the right to be continued in the employ of the Company or its subsidiaries; and the terms and conditions of his employment are the subject of the Employment Agreement which shall control the employment relationship.
(e) No Pledge or Attachment . No benefit which is or may become payable under this Agreement shall be subject to any anticipation, alienation, sale, transfer, pledge, encumbrance or hypothecation or subject to any attachment, levy or similar process and any attempt to effect any such action shall be null and void.
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(f) Amendment of Agreement . This Agreement may be amended, in whole or in part, only upon the mutual written agreement of the Company and the Executive.
(g) Binding Effect . This Agreement and the obligations of the Company herein shall be binding upon the successors and assigns of the Company. The Spouse shall be deemed a beneficiary of this Agreement.
(h) Participation in Plans . Nothing contained in this Agreement shall be construed to alter, abridge, or in any manner affect the rights and privileges of the Executive to participate in and be covered by any pension, profit sharing, group insurance, bonus, incentive, or other employee plans which the Company or its subsidiaries may now or hereafter have.
(i) No Rights Prior to Effective Date . This Agreement shall become effective on the Effective Date if the Executive is employed by the Company on such date. Until the Effective Date or earlier termination of this Agreement as provided herein, this Agreement shall remain executory in nature. In the event the Executive experiences a Separation from Service prior to the Effective Date or that certain Agreement and Plan of Merger dated May 30, 1995 between the Company and FirstFed is terminated, in either such event, this Agreement shall thereupon cease, determine and terminate.
(j) Termination of Salary Continuation Agreement . If this Agreement becomes effective on the Effective Date, then that certain Salary Continuation Agreement between the Executive and First Federal Savings Bank (now known as Charter One Bank, F.S.B. by name change) dated as of January 1,1987 shall thereupon terminate and be replaced by this Agreement.
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The parties have caused this Agreement to be executed and delivered as of the date first above written.
CHARTER ONE FINANCIAL, INC. | ||
By: |
/s/ John D. Koch |
|
John D. Koch | ||
Executive Vice President | ||
EXECUTIVE | ||
/s/ Charles J. Koch |
||
Charles J. Koch |
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AMENDMENT 1 TO SUPPLEMENTAL RETIREMENT
AGREEMENT
This Amendment 1 to Supplemental Retirement Agreement dated as of this 3 RD day of May, 1996, by and between Charter One Financial, Inc., its successors and assigns (the Company) and Charles John Koch (the Executive) for the purpose of modifying and amending that certain Supplemental Retirement Agreement between the parties dated as of October 31,1995 (the SRA).
WITNESSETH
In consideration of the Company entering into a Split-Dollar Agreement (the Death Benefit Agreement) with the Executive on even date herewith, the parties have agreed to modify and amend the SRA in the following manner:
1. | Notwithstanding anything contained in Section l(d)(v) of the SRA or otherwise in the SRA, in the event of the death of the Executive while employed by the Company or any of its affiliates under circumstances in which a beneficiary of the Executive or his/her estate is entitled to death proceeds (a) in accordance with the Death Benefit Agreement (including any amendments or modifications hereinafter made thereto with the written consent of the Executive) or (b) under any other written agreement between the Company and the Executive that replaces the Death Benefit Agreement, then in that event, neither the Executive nor his/her spouse will be entitled to any benefits under the SRA. |
2. | Except as modified and amended herein, the SRA shall remain in full force and effect. |
The parties have caused this Amendment to be executed and delivered as of the date first above herein written.
CHARTER ONE FINANCIAL, INC. | ||
By: |
/s/ ROBERT J. VANA |
|
Authorized Officer | ||
EXECUTIVE | ||
/s/ CHARLES J. KOCH |
||
CHARLES J. KOCH |
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AMENDMENT 2 TO SUPPLEMENTAL RETIREMENT AGREEMENT
This Amendment 2 to Supplemental Retirement Agreement (this Amendment) dated as of this day of July, 2002 (but effective March 20, 2001), by and between Charter One Financial, Inc., its successors and assigns (the Company) and Charles J. Koch (the Executive) for the purpose of modifying and amending that certain Supplemental Retirement Agreement between the parties dated as of October 31,1995, as amended pursuant to Amendment 1 thereto dated as of May 3,1996 (the SRA).
WITNESSETH:
The board of directors of the Company has decided to increase the maximum monthly benefit under the SRA in light of changes in condition since the date of the SRA including, but not limited to, the substantial growth of the Company, the Executives contribution to such growth, and the inadequacy, as of the effective date of this Amendment, of the maximum monthly benefit currently provided in the SRA. In addition, the Company and the Executive have, on even date herewith, entered into a Fully Restated Split Dollar Agreement (the Death Benefit Agreement) which necessitates a change to the SRA.
NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:
1. Notwithstanding anything contained in Section l(d)(v) of the SRA or otherwise in the SRA, in the event of the death of the Executive under circumstances in which a beneficiary of the Executive or his estate is entitled to death proceeds (a) under any life insurance policy or policies maintained pursuant to the Death Benefit Agreement (including any amendments or modifications) or (b) under any other written agreement between the Company and the Executive that replaces the Death Benefit Agreement, then in that event, neither the Executive nor his/her spouse will be entitled to any benefits under the SRA.
2. Section 1(g) of the SRA is hereby amended and fully restated as follows:
(g) Monthly Benefit shall mean the Average Compensation multiplied by the Accrued Benefit Percentage; provided, however, in no event will the Monthly Benefit exceed $45,000.00.
3. Except as modified and amended herein, the SRA shall remain in full force and effect.
The parties have caused this Amendment to be executed and delivered as of the date first above herein written.
CHARTER ONE FINANCIAL, INC. | ||
By:
|
/s/ ROBERT J. VANA |
|
Authorized Officer | ||
EXECUTIVE | ||
/s/ CHARLES J. KOCH |
||
CHARLES J. KOCH |
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[CHARLES J. KOCH]
AMENDMENT 3 TO SUPPLEMENTAL RETIREMENT AGREEMENT
This Amendment 3 to Supplemental Retirement Agreement (this Amendment) dated as of this day of December, 2003 by and between Charter One Financial, Inc., its successors and assigns (the Company) and Charles J. Koch (the Executive) for the purpose of modifying and amending that certain Supplemental Retirement Agreement between the parties dated as of October 31, 1995, as amended pursuant to Amendments 1 and 2 thereto dated as of May 3,1996, and July , 2002, respectively (the SRA).
WITNESSETH:
To induce the Executive to continue his employment with the Company, the board of directors of the Company has decided to increase the monthly benefit under the SRA based upon his continued employment commitment to the Company. This Amendment provides an enhanced supplemental retirement benefit to the Executive by increasing the Accrued Benefit Percentage under Section l(a)(ii) of the SRA and by increasing the dollar cap of the Monthly Benefit from $45,000 to up to $73,125 under Section 1(g) of the SRA (collectively, the Enhanced SRA Benefit). The Company is providing the Enhanced SRA Benefit to the Executive as part and parcel of the 2004 Senior Executive Retention Plan of the Company which also includes a deferred compensation benefit to be provided by the Company to the Executive pursuant to the Companys 2004 Senior Executive Deferred Compensation Plan (the 2004 Senior Executive DCP) and the Executives associated 2004 Senior Executive Deferred Compensation Plan Agreement (the Executives DCP Plan Agreement).
NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:
1. Section 1(a) of the SRA is hereby amended and fully restated as follows:
(a) Accrued Benefit Percentage shall mean the aggregate of (i) .25% for each of the first 60 calendar quarters that the Executive has heretofore been or is hereinafter employed by the Company, any of its subsidiaries (or any predecessors or successors thereto by merger or purchase) plus .875% for each calendar quarter of employment thereafter, calculated through the last day of the calendar quarter in which the Executive (A) experiences a Separation from Service or (B) attains Normal Retirement Age, whichever shall first occur; plus (ii) subject to the forfeiture provisions of Section 3(k) below, 25% if the Executive is employed by the Company or any of its subsidiaries (or any successors thereto by merger or purchase) on December 31, 2008 or experiences a Separation from Service For Good Reason or Without Cause prior to January 1, 2009; provided however, in no event shall the Accrued Benefit Percentage exceed 70%. There shall be duplication of the Accrued Benefit Percentage for service with more than one employer.
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2. Section 1 (b) of the SRA is hereby amended and fully restated as follows:
Benefit Commencement Date shall mean the last day of the calendar month following the earliest of (i) Normal Retirement Age, (ii) the date the Executive attains (or but for his death would have attained) age 65 if prior thereto he experiences a Separation from Service for Cause, (iii) the date of the Executives Separation from Service for any reason other than Cause provided the Executive is then age 58 or older, (iv) the date the Executive attains (or but for his death would have attained) the age of 58 years if he experiences a Separation from Service for any reason other than Cause prior to his attaining age 58 or (v) 6 months after the date of death of the Executive if he dies while employed by the Company or any of its subsidiaries (or any successors thereto by merger or purchase).
3. Section 1(c) of the SRA is hereby amended and fully restated as follows:
(c) Cause shall mean a Separation from Service by action of the Company or any of its subsidiaries (or any successor by merger or purchase) (i) due to the Executives dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (excluding violations which do not have an adverse effect on the Company or Charter One Bank, N.A. (or any successors thereto by merger or purchase)), or material breach of any provision of his written employment agreement with the Company which results in a Termination for Cause under such employment agreement; or (ii) after the Executive is subject to a final cease-and-desist order or is suspended or temporarily or permanently prohibited from participation in the conduct of the affairs of the Company or any of its subsidiaries (or any successors by merger or purchase) by a governmental or regulatory authority.
4. Section 1 (g) of the SRA is hereby amended and fully restated as follows:
(g) Monthly Benefit shall mean the Average Compensation multiplied by the Accrued Benefit Percentage. Notwithstanding the foregoing, (i) the Monthly Benefit shall not exceed $45,000 if the Executive (A) experiences a Separation from Service prior to January 1, 2009 for any reason other than For Good Reason or Without Cause, or (B) forfeits the Enhanced SRA under Section 3(k) below; or (ii) the Monthly Benefit shall not exceed $73,125 if the Executive (x) experiences a Separation from Service For Good Reason or Without Cause prior to January 1, 2009 or a Separation from Service after December 31,2008 and (y) has not forfeited the Enhanced SRA under Section 3(k) below.
5. The SRA is hereby further amended by the addition of the following new Sections l(k) and (m):
(k) For Good Reason shall mean a Separation from Service by action of the Executive due to a material diminution of or interference with his duties, responsibilities or benefits which constitutes an Involuntary Termination (as defined in the Executives written employment agreement with the Company) by action of the Executive.
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(l) Without Cause shall mean a Separation from Service by action of the Company or any of its subsidiaries (or any successors thereto by merger or purchase), but specifically excluding a Separation from Service for Cause or on account of the disability of the Executive.
6. The SRA is hereby further amended by the addition of the following new Section 3(k),:
(k) Forfeiture of the Enhanced Benefit . If the Executive forfeits his Vested Account Balance (as such term is defined in the 2004 Senior Executive DCP) pursuant to the terms of Section 6.2 or 6.3 of the 2004 Senior Executive DCP, then in any such event, the Executive shall likewise forfeit the Enhanced SRA Benefit and any rights of the Executive to the Enhanced SRA Benefit shall cease and terminate (i.e. the Executive shall not be entitled to the benefit provided in Section l(a)(ii) or a Monthly Benefit in excess of $45,000). The 2004 Senior Executive DCP and the Executives DCP Plan Agreement are hereby incorporated herein by reference. If the Executive commences receiving the Enhanced SRA Benefit and subsequently forfeits the Enhanced SRA Benefit as provided above, then the Executive shall be obligated to return to the Company the cumulative amount of the Enhanced SRA Benefit previously paid to the Executive.
7. Except as modified and amended herein, the SRA shall remain in full force and effect.
The parties have caused this Amendment to be executed and delivered as of the date first above herein written.
CHARTER ONE FINANCIAL, INC. | ||
By: |
|
|
Authorized Officer | ||
EXECUTIVE | ||
|
||
CHARLES J. KOCH |
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Exhibit 10.38
Dated , 2014
RBS BUSINESS SERVICES PRIVATE LTD
and
CITIZENS BANK, N.A.
AMENDED AND RESTATED MASTER SERVICES AGREEMENT
AMENDED AND RESTATED MASTER SERVICES AGREEMENT
THIS AMENDED AND RESTATED MASTER SERVICES AGREEMENT ( MSA ), dated as of [ ], 2014, is by and between RBS BUSINESS SERVICES PRIVATE LTD , a company incorporated under the laws of India, whose registered office is at Empire Complex, 414 Senapati Bapat Marg, Lower Parel, Mumbai 400 013 India, formerly known as ABN AMRO CENTRAL ENTERPRISE SERVICES PRIVATE LIMITED ( PROVIDER ) and whose processing centres are located at Mumbai, Chennai, Gurgaon and New Delhi; and CITIZENS BANK, N.A a United States national bank with its principal place of business at 1 Citizens Plaza, Providence, Rhode Island 02903, formerly known as RBS Citizens, N.A.. ( Recipient ), Capitalized terms used herein and not otherwise defined shall have the respective meanings assigned to them in Section 1 hereof.
RECITALS
WHEREAS, The Royal Bank of Scotland Group plc ( RBSG ) is the indirect owner of all the issued and outstanding common stock of Citizens Financial Group, Inc. ( CFG ) immediately prior to the date hereof;
WHEREAS, shares of CFG are being sold to the public pursuant to the IPO and CFG will cease to be a wholly owned indirect subsidiary of RBSG upon the closing of the IPO;
WHEREAS, after the closing of the IPO, RBSG will remain the majority shareholder of CFG, subject to future sales to the public (and ultimately the contemplated complete disposition by on or before December 31, 2016) by RBSG;
WHEREAS, the Provider is an Affiliate of RBSG and the Recipient is an Affiliate of CFG;
WHEREAS the Provider and the Recipient entered into a Master Services Agreement effective 21 July 2008, amended by a First Amendment Agreement dated 14 July 2009 (together, the Original MSA ) for the provision of Services and the parties entered into service agreement schedules ( Service Schedules ) to give effect to the Original MSA and document the Services provided;
WHEREAS, the Parties have agreed with effect from the date hereof to amend and restate the Original MSA on the terms and conditions set out in this MSA;
WHEREAS, the Services will continue to be provided to the Recipient to facilitate its ongoing operations during a transitional period following the IPO;
WHEREAS, the Provider has agreed to continue to procure and provide the Services as specified in the Service Schedules to the Recipient, and the Recipient has agreed to receive and pay for the Services received pursuant to the Service Schedules, subject to the terms of this MSA; and
NOW, THEREFORE, in consideration of the rights and duties set forth herein, and for other good and valuable consideration, the adequacy and sufficiency of which are hereby acknowledged, the Provider and the Recipient hereby agree as follows:
2
1 | Definition and Rules of Construction |
1.1 | Definitions |
For the purposes of this MSA, the following terms shall have the following meanings:
Adverse Policy Change has the meaning given in Section 2.3.4;
Affiliate means, in relation to any Party, its holding companies and direct and indirect subsidiaries and the direct and indirect subsidiaries of such holding companies from time to time; however, for purposes of this MSA the Parties shall not be considered Affiliates of each other. For the avoidance of doubt, in respect of the Provider, Affiliates shall not include the Recipient or its subsidiaries; and, in respect of the Recipient, Affiliates shall not include the Provider or its other subsidiaries and Affiliates shall be construed accordingly;
Anti-Bribery and Corruption Policy means each policy that a Party shall put in place to comply with its own anti-bribery and corruption policy and obligations, and with Anti-Corruption Laws;
Anti-Corruption Laws means any anti-bribery or anti-corruption related provisions in criminal and anti-competition laws and/or anti-bribery or anti-corruption laws of the jurisdiction in which, for the Provider, the Provider provides the Services and, for the Recipient, the Recipient receives the Services, together with any amending, consolidating or successor legislation or case law which has effect from time to time in the relevant jurisdiction;
ARD has the meaning given in Section 15.1.1;
Business Day means a day which is not a Saturday, Sunday or a public holiday in New York or Boston;
CFG means Citizens Financial Group, Inc.;
Change means any modification, addition or amendment to any Service (including any change to any part of any Service Schedule) including any Mandatory Change or Discretionary Change;
Change Control Procedure means the procedure set out in Section 10.1.1;
Change Control Request has the meaning given in Section 10.1.1(i);
Charges means collectively the fees payable under each Service Schedule for the provision of Services;
Competent Authority means any local, state, national, supranational, governmental or nongovernmental authority, statutory undertaking, agency or public or regulatory body (including the Prudential Regulation Authority, the Financial Conduct Authority, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau) which has jurisdiction over the Provider (and/or its Affiliates) and/or the Recipient (and/or its Affiliates);
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Confidential Information has the meaning given in Section 13.2.1;
Criticality 1 Incident means an incident, disaster or other disruption for which the Service Level time period in which the affected Service must have been restored is specified to be within four hours;
Defaulting Party has the meaning given to it in Section 6.7.1;
Disabling Device means any device, method, token, code, program or subprogram that can disable, interfere with or adversely affect all or any part of a Service, a Partys equipment, and/or their operation, or destroy any of a Partys data or other software or hardware, or damage, destroy or interfere with a Partys information technology network or any of a Partys data or other software or hardware, or permit any person to circumvent the normal security of a Partys software, systems or networks;
Discretionary Change means any Change which is not a Mandatory Change or an Emergency;
Dispute has the meaning given in Section 11.1.1;
Emergency has the meaning given in Section 10.4.2;
Existing Third Party Agreement means any Third Party Agreement in force as at the date hereof, as the same may be amended from time to time and any extension, replacement or renewal of such agreement;
Force Majeure has the meaning given in Section 14.1;
Fraud Prevention Policy means anti-fraud measures or policies that the Provider shall have in place whenever it possesses, stores, processes or has access to the Recipients Personal Data, as listed in Schedule 2;
GLB Act means the Gramm-Leach-Bliley Act, 15 U.S.C. 6801 et seq;
Group means, in relation to a Party, that Party and its Affiliates;
Indemnitees has the meaning given in Section 8.3.1;
Intellectual Property Rights means (i) copyrights (including copyrights in any software), patents, database rights and rights in trademarks, designs, know-how and confidential information (whether registered or unregistered), (ii) applications for registration, and rights to apply for registration, of any of the foregoing rights and (iii) all other intellectual property rights and equivalent or similar forms of protection existing anywhere in the world;
IPO means the initial public offering of CFGs shares;
IS Requirements means the information security policies that the Provider shall have in place whenever it possesses, stores, processes or has access to the Recipients Confidential Information (inclusive of Personal Data) as listed in Schedule 2;
Losses means losses, claims, damages, costs, charges and liabilities (including reasonable legal fees and disbursements) and Loss shall be construed accordingly;
Mandatory Change means a Change which is required as a consequence of any change in Regulation on or subsequent to the date hereof in order for (i) the Recipient to receive
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Services or to perform Recipient Dependencies and/or (ii) the Provider to provide (or procure the provision of), Services or to perform any of its other obligations under this MSA, in each case in compliance with Regulation;
Migration means the migration of Services in whole or part from the personnel and information technology systems or other facilities of the Provider, its Affiliates or Third Party Suppliers to the personnel and information technology systems or other facilities of the Recipient, and/or its Affiliates and/or Successor Providers, provided, however , that Migration does not require or otherwise give rise to an obligation on the part of a Provider, its Affiliates or Third Party Suppliers to grant any Successor Provider access to the Provider Systems;
Monthly Charge has the meaning given in Section 8.2.1;
MSA means this amended and restated master services agreement;
Non-Defaulting Party has the meaning given in Section 6.7.1;
OFAC means the Office of Foreign Assets Control of the United States Department of the Treasury;
Original MSA means the Master Services Agreement effective 21 July 2008 entered into by the Parties as amended by the First Amendment Agreement dated 14 July 2009;
Party means the Provider or Recipient;
Personal Data of a disclosing Party means any data, information and/or records of or pertaining to the disclosing Partys or an Affiliates customers (current, former or prospective) and employees (current, former or prospective) or its customers customers (current, former or prospective) or employees (current, former or prospective), including but not limited to names, addresses, telephone numbers, account numbers, account and transaction information and any other Nonpublic Personal Information as defined in the GLB Act, relating to such individuals;
Policies means the policies and procedures listed in Schedule 2 (as may be amended from time to time in accordance with Sections 2.3.3 and 2.3.4), as applicable to the Provider;
Provider Data means all Confidential Information provided in relation to the Services to the Recipient, any Affiliate of the Recipient, or any Successor Provider, by or on behalf of the Provider or any Affiliate of the Provider or any Third Party Supplier;
Provider Systems means the information technology systems made available to the Recipient pursuant to this MSA by or on behalf of the Provider, any Affiliate of the Provider or any Third Party Supplier, which are supported and maintained by or on behalf of the Provider, any Affiliate of the Provider or any Third Party Supplier;
RBSG means The Royal Bank of Scotland Group plc;
Recipient Data means all Confidential Information:
(i) | including, without limitation, all Personal Data provided in relation to the Services to the Provider, any Affiliate of the Provider or any Third Party Supplier, by or on behalf of the Recipient or any Affiliate of the Recipient; or |
(ii) | generated by the Provider, any Affiliate of the Provider, or any Third Party Supplier in the course of providing the Services, |
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Recipient Dependencies means the obligations of the Recipient under this MSA including those expressly identified as Recipient Dependencies in the Service Schedules and any other obligations of the Recipient otherwise set out in the description of the Services in the Service Schedules;
Regulation means any applicable law, regulation, regulatory constraint, obligation or rule (including any binding code of conduct and binding statement of principle incorporated and contained in such rules) applicable to the existence or operation of this MSA, the Recipient, the Provider, any Affiliate of the Provider, any Affiliate of the Recipient or the provision or receipt of the Services, the performance of any Recipient Dependency or the performance of either Partys other obligations under this MSA from time to time;
Scheduled MSA End Date means the earlier of (i) December 31, 2016, and (ii) the first date on which RBSG ceases to beneficially own such number of shares of CFG common stock representing at least 26% of the voting power of all outstanding shares of CFG common stock;
Senior Nominees means the senior individuals nominated by each Party;
Service Level means the level of performance set out in the Service Schedules;
Service Records means complete and accurate records of, and supporting documentation for, all Services provided pursuant to this MSA;
Service Schedule means any of the Service Schedules in Schedule 1 of this MSA, each of which describes the terms and obligations of the Provider and the Recipient in relation to a particular Service, and any extension or renewal schedule, as agreed by the Parties, which has the effect of extending or amending the Service Schedule Expiry Date in respect of a Service set out in the Service Schedules in Schedule 1;
Service Schedule Expiry Date means the date of cessation of a Service as specified in a Service Schedule with respect to a Service;
Service Term means the period of provision of a Service which period commenced on the effective date as set out in the relevant Service Schedule and which shall expire (unless terminated earlier in accordance with this MSA) in accordance with the provisions of Section 6.3;
Services means the services (or any element of the services) specified in the Service Schedules for that Service and Service means any one of the Services;
Staff has the meaning given in Section 15.1.3;
Successor Provider means the entity or entities (which may include the Recipient or any member of its Group) succeeding the Provider in the provision or operation of services the same as or substantially similar to all or part of the Services;
Tax means all taxes, charges, imposts, levies and duties of any kind payable to any governmental, fiscal or taxing authority in the United States, India, United Kingdom or elsewhere in the world. The definition of tax includes any penalties, additions, fines or associated interest. The words taxes and taxation and similar expressions shall be interpreted in accordance with this definition;
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Third Party Agreements means any agreements entered into between the Provider (or any of its Affiliates) and any third party for the provision of a service, goods, lease or license relating to, or necessary for, the provision of the Services or performance of any of the Providers other obligations under this MSA whether entered into before or after the date of this MSA;
Third Party Consent means any permission, consent, license, agreement, authorization or right to use required, from a third party (whether under a Third Party Agreement or otherwise):
(i) | by the Provider, to the extent necessary to allow the provision of the Services or performance of the Providers other obligations under this MSA by the Provider to or for the benefit of the Recipient or receipt of the Services by the Recipient; or |
(ii) | by the Recipient, to the extent necessary for the Recipient to receive the benefit of the Services provided by the Provider under this MSA; |
Third Party Supplier means any third party providing a service, goods, lease or license under a Third Party Agreement;
1.2 | Rules of Construction |
Unless the context otherwise requires or except as otherwise expressly provided the following rules of construction shall apply to this MSA.
1.2.1 | Singular, Plural, Gender |
References to one gender include all genders and references to the singular include the plural and vice versa.
1.2.2 | References to Persons and Companies |
References to:
(i) | a person shall include any company, partnership, trust, joint venture, firm, association, unincorporated association, organization, or any government, state or local body or authority (whether or not having separate legal personality); and |
(ii) | a company shall include any company, corporation or any body corporate, wherever incorporated. |
1.2.3 | Schedules, Sections, Appendices, Paragraphs |
References to this MSA shall include any Schedules to it and references to Sections and Schedules are to Sections of, and Schedules to, this MSA. References to paragraphs and appendices are to paragraphs and appendices of the Schedules. All Schedules are an integral part of this MSA.
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1.2.4 | Headings |
The article, Section and paragraph headings contained in this MSA are for reference purposes only and shall not affect in any way the meaning or interpretation of this MSA.
1.2.5 | Includes, in writing |
The words includes and including shall mean include without limitation and including without limitation, respectively. The words in writing means any communication made by letter (but not, for avoidance of doubt, electronic mail) and written shall be interpreted accordingly.
1.2.6 | Agreed |
References to agreed mean, in relation to any document, that document in the form agreed and, for the purposes of identification, signed or initialed by or on behalf of each Party by a duly authorized representative, with such alterations as the Parties agree in writing.
1.2.7 | Information |
References to books, records or other information mean books, records or other information in any form including paper, electronically stored data, magnetic media, film and microfilm.
1.2.8 | References to Law |
References to a statute or statutory provision include:
(i) | that statute or provision as modified or amended from time to time, whether before or after the date of this MSA; and |
(ii) | any subordinate legislation or regulation made from time to time under that statute or statutory provision, including (where applicable) that statute or statutory provision as modified or amended. |
1.2.9 | Precedence |
If there is any conflict, apparent conflict or ambiguity in or between any of sections of this MSA set out below, the sections will be applied in the following order of precedence with the sections higher in the order of precedence prevailing over the Parties:
(i) | the Sections of this MSA; |
(ii) | the Schedules to this MSA; and |
(iii) | any other document referred to in this MSA. |
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1.2.10 | Interpretation |
References to:
(i) | Service Agreement or SA in a Service Schedule shall be construed to mean a Service Schedule; and |
(ii) | Section 8 in a Service Schedule shall be construed to mean Section 4 of this MSA. |
1.2.11 | Costs |
Any reference to costs shall mean costs (including internal costs arising in respect of personnel and other related costs) and expenses (including charges, fees and other amounts payable to third parties).
2 | Performance of Services |
2.1 | Provision of Services and Relief |
2.1.1 | The Parties agree that with effect from the date hereof, the Original MSA shall be (and shall be deemed and construed to have been) amended and restated and to be in the form of this MSA. The Parties agree that all Services Schedules entered into between the Provider and the Recipient prior to the date hereof shall, from the date hereof, incorporate and shall be bound by the terms and conditions of this MSA. |
2.1.2 | The Provider shall provide the Services to the Recipient for the relevant Service Term in accordance with the terms of this MSA. The Recipient shall timely pay the Provider for all Services provided in accordance with the terms of this MSA. |
2.1.3 | Without prejudice to the Mandatory Change provisions set out in Section 10.2, the Provider shall not be in breach of this MSA to the extent that it is unable to provide any of the Services or perform any of its other obligations under this MSA, in each case to the extent that to do so would result in a breach of Regulation so long as, if and to the extent commercially practicable, the Provider has promptly notified the Recipient of such prohibition, has consulted with the Recipient to explain why the Provider reasonably believes such prohibition applies, and has worked together with the Recipient in good faith to either arrange for modification of the relevant Services(s) at issue or a transition of such Service(s) to a Successor Provider. For the avoidance of doubt, the transition of any Service(s) to a Successor Provider pursuant to this Section 2.1.3 terminates the applicable Service(s) and related Service Schedule(s) under this MSA and does not create a Third Party Agreement for which the Provider is responsible for the remainder of the Service Term(s) with respect to the affected Service(s). |
2.1.4 | Subject to the requirements set forth below, the Provider may subcontract the provision of any or all of the Services or any of the Providers other obligations under this MSA. Except in relation to an Existing Third Party Agreement: |
(i) | in selecting the subcontractor in question, the Provider shall have followed its applicable Policies on vendor procurement and approval; |
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(ii) | the Provider will notify the Recipient in advance of entering into any subcontract; |
(iii) | the Provider shall ensure any Third Party Consent that is required for the Recipient to receive the Services (and to sublicense to the extent necessary to receive the full benefit of the Services) is obtained and maintained for the duration of the applicable Service Term; |
(iv) | the Provider shall be entitled to increase the Charges to reflect any increase in the costs incurred by the Provider under that subcontract, compared to the costs previously incurred by the Provider; and |
(v) | the Provider shall furnish the Recipient with information about the subcontractor in question which is reasonable for diligence purposes, and the Recipient approves of the use of the subcontractor via the Change Control Procedure, with such approval not be unreasonably withheld or delayed. |
2.1.5 | The Provider shall be primarily liable under this MSA for any default in the performance of obligations under this MSA by any subcontractor of the Provider. |
2.2 | [Not Used] |
2.3 | Standard of Service |
2.3.1 | The Provider shall provide the Services in accordance with any specified Service Level within a Service Schedule for the relevant Service. |
2.3.2 | Subject to the Change Control Procedure with respect to any change in Regulation coming into effect after the date hereof, the Provider shall provide and procure the provision of the Services in compliance with the Regulation applicable to the Provider. |
2.3.3 | Subject to the Change Control Procedure with respect to any change in Regulation coming into effect after the date hereof, the Provider shall provide and procure the provision of the Services in accordance with the Policies applicable to the Provider. |
2.3.4 | Without prejudice to Section 2.3.3, if and to the extent that any proposed change to the Policies would materially increase the risk or reduce the operational controls available to the Provider or the Recipient in connection with the provision or receipt of the Services or materially increase the cost or reduce the benefit to the Recipient in receiving the Services or the Provider in providing the Services (an Adverse Policy Change ), the Provider shall undertake an impact assessment in advance of the change being implemented and involve the Recipient in that impact assessment. In respect of any Adverse Policy Change the Parties shall, acting reasonably and in good faith, develop, agree and implement a remedial plan with the objective of mitigating any material increase in risk or reduction in operational controls available to the Provider or the Recipient in connection with the provision or receipt of the Services or material increase in the cost or reduction in the benefit to the Recipient or Provider in receiving or providing the Services. Any obligations set out in the Service Schedules which require compliance with policies shall be construed as referring to the Policies. |
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2.3.5 | If and to the extent the Provider is aware of any material failure, or any circumstances that, in the Providers reasonable opinion, would be reasonably likely to result in a material failure, to provide any material part of the Services in accordance with Section 2.3.1, 2.3.2 or 2.3.3, then, without prejudice to the Recipients other rights and remedies, the Provider shall as soon as reasonably practicable: |
(i) | inform the Recipient of such failure or potential failure (and, if known, what the Provider considers to be the cause of the problem); |
(ii) | advise the Recipient of the remedial efforts being undertaken with respect to that failure or to prevent that potential failure; and |
(iii) | subject to any duty of confidentiality owed by the Provider, provide the Recipient with further information in relation to the failure or potential failure if and to the extent that information has been produced by, or is otherwise in the possession or control of, the Provider or any of its Affiliates for its own purposes and the Recipient reasonably requires that information at the time in order to manage communications with its customers, employees, investors, suppliers and any Competent Authority. |
2.4 | Recipient Dependencies |
2.4.1 | Each Service Schedule shall specify any Recipient Dependencies for the relevant Service, specific obligations to be performed by the Recipient under that Service Schedule in order for the Provider under that Service Schedule to be able to provide the relevant Service to the Recipient. |
2.4.2 | If and to the extent the Recipient is aware of any material failure, or any circumstances that, in the Recipients reasonable opinion, would be reasonably likely to result in a material failure, to perform any material part of the Recipient Dependencies that are set out in a Service Schedule in accordance with this MSA, then, without prejudice to the Providers other rights and remedies, the Recipient shall, as soon as reasonably practicable: |
(i) | inform the Provider of such failure or potential failure and, if known, what the Recipient considers to be the cause of the problem; and |
(ii) | undertake appropriate remedial efforts and promptly advise the Provider of the remedial efforts being undertaken with respect to that failure or to prevent that potential failure. |
2.4.3 |
Without prejudice to any right or remedy of the Provider under this MSA in respect of any other obligations of the Recipient (including in relation to any Recipient Dependency or any Incidental Service performed by a Recipient which is not set out in a Service Schedule), if and to the extent the Recipient fails to perform a Recipient Dependency |
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that is set out in a Service Schedule, Section 2.4.4 sets out the Providers sole and exclusive remedy in respect of the failure by the Recipient to meet that Recipient Dependency other than with respect to: |
(i) | any such failure which causes unauthorized or unlawful access by a third party to the Providers computing systems or loss or corruption of the Providers data; or |
(ii) | any obligation of the Recipient to pay any amount (including any Charges) to the Provider under this MSA. |
2.4.4 | Each Party recognizes that the Provider is reliant and dependent on the performance of the Recipient Dependencies in order to provide the Services and to perform its other obligations under this MSA. The Provider shall not be in breach of this MSA to the extent that its failure to provide the Services or perform its other obligations under this MSA is a result of a breach by the Recipient of a Recipient Dependency ( provided that such relief shall not prejudice any rights or remedies of the Recipient in respect of any prior breach by the Provider, to the extent that such prior breach caused the Recipients breach of the relevant Recipient Dependency and was not itself caused by a breach by the Recipient of a Recipient Dependency). Any disputes relating to the Providers relief from a breach by the Recipient of a Recipient Dependency shall be resolved in accordance with Section 11. Nothing in this Section 2.4.4 shall exclude or limit the liability of the Provider in relation to any failure to provide the Services or perform its other obligations under this MSA to the extent that such failure is not the result of a breach by the Recipient of a Recipient Dependency. |
2.4.5 | The Recipient shall not be in breach of this MSA to the extent that its failure to perform a Recipient Dependency is a result of a breach by the applicable Provider of an obligation of the Provider ( provided that such relief shall not prejudice any rights or remedies of the Provider in respect of any prior breach by the Recipient, to the extent that such prior breach caused the Providers breach of the relevant obligation and was not itself caused by a breach of the Providers obligations under this MSA). Nothing in this Section 2.4.5 shall exclude or limit the liability of the Recipient in relation to any failure to perform a Recipient Dependency to the extent that such failure is not the result of a breach by the Provider of its obligations under this MSA. |
2.5 | Service Reporting |
2.5.1 | From the date hereof and thereafter until the earlier of the Scheduled MSA End Date or applicable Service Schedule Expiry Date, the Provider shall, with respect to each Service for which the Service Schedule requires a certain Service Level, provide to the Recipient, as part of its monthly performance reports a set of hard copy and soft copy reports to verify the Providers performance and compliance with the Service Levels and record the occurrence of any Criticality 1 Incidents. |
2.5.2 | The Parties will review the Providers performance against the Service Levels for the previous reporting period. |
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3 | Third Party Suppliers |
3.1 | Termination, Expiry or Renewal of Third Party Agreements |
3.1.1 | If, during a Service Term: |
(i) | a Third Party Agreement is terminated by the Provider (or any member of its Group) or by the Third Party Supplier (for any reason other than Force Majeure (for which Section 14.2 shall apply) or for insolvency of the Third Party Supplier (for which Section 3.1.3 shall apply)); or |
(ii) | a Third Party Agreement expires or is terminated other than as provided in Section 3.1.1(i), or; |
(iii) | a Third Party Agreement otherwise ceases to be available to a Provider for the provisions of Services to a Recipient (for example, by virtue of application of a change of control or similar provision), |
and that Third Party Agreement is required for the provision or receipt of any Service or the performance of any obligation of the Provider or the Recipient, then subject to the provisions of Section 3.1, the Provider shall use commercially reasonable efforts to implement such arrangements as are necessary to ensure continuity of the relevant Service on the same terms of the relevant Service Schedule and this MSA, unless otherwise agreed by the Parties in advance.
3.1.2 | Each Party shall use commercially reasonable efforts to mitigate to the extent within its reasonable control any costs required to be incurred in respect of the negotiation and implementation of any change to, or extension, renewal or replacement of a Third Party Agreement and migration to an alternative Third Party Supplier. |
3.1.3 | In the event of the insolvency of a Third Party Supplier required for the provision or receipt of a Service or the performance of any obligation of the Provider or the applicable Recipient for such Service, the Provider may discontinue (which, for the avoidance of doubt, shall include electing not to replace) such Service without the discontinuance being a breach or causing any liability of the Provider to the relevant Recipient. |
3.1.4 | For the avoidance of doubt, the provisions of Section 3.1.1 through Section 3.1.3, inclusive, shall not affect the rights of a Provider to terminate a Service, or for a Service to terminate, pursuant to the terms of the applicable Service Schedule. |
3.2 | Changes in Third Party Supplier Costs |
3.2.1 | In the event that a Third Party Supplier increases or decreases its fees in relation to a Service during a Service Term: |
(i) | the Provider shall promptly notify the Recipient of the change in fees with such notice to include supporting documentation as might reasonably be expected to explain the change in fees to the Recipient; and |
(ii) | the Charges for the relevant Service shall be adjusted accordingly. |
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3.3 | Relationship with Third Party Suppliers |
3.3.1 | So far as it relates to the provision of a Service or the performance of the Providers other obligations under this MSA, the Provider shall manage exclusively its relationship with Third Party Suppliers and the applicable Recipient shall not discuss with any Third Party Supplier the provision of the Services or the performance of the Providers other obligations under this MSA, except: |
(i) | to the extent required to do so by a court, competent judicial authority and/or a Competent Authority; |
(ii) | as agreed by the Parties; or |
(iii) | if in the Providers opinion and only to the extent reasonably necessary in order for the Recipient to be able to receive the Services under the applicable Service Schedule, |
provided in each case that it has notified the Provider in advance (if and to the extent permitted to do so under Regulation).
3.4 | Liability for Third Party Suppliers |
3.4.1 | If the Provider breaches this MSA as a result of the acts or omissions of a Third Party Supplier, the Providers liability is subject to the Section 8.2 limitations and caps on liability. |
3.4.2 | Notwithstanding the limitations in Section 3.4.1, any amounts recovered by the Provider from a Third Party Supplier which are in relation to Losses incurred as a result of the acts or omissions of the Third Party Supplier shall be divided among the Provider and Recipient in proportion to their Losses, provided , however , that any amounts paid over to the Recipient shall not exceed the amount of the Recipients Losses. For the avoidance of any doubt: |
(i) | any amounts paid over to the Recipient pursuant to this Section 3.4.2 are independent of and not to be part of any limitations or caps on the liability of the Parties as set forth in Section 8.2; and |
(ii) | if the Providers commercially reasonable efforts to recover such amounts from a Third Party Supplier are unsuccessful, such a failure to recover any amounts is not a breach and is not a liability of the Provider. |
3.4.3 | Without prejudice to the Parties rights and obligations in relation to mitigation of losses at law or in equity, each Provider and Recipient shall use commercially reasonable efforts to mitigate the quantum of Losses and/or any other adverse consequences incurred or suffered by the Recipient as a result of the breach of a Third Party Agreement by a Third Party Supplier (to the extent a Party is aware of such breach). |
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4 | Price and Payment |
4.1 | Charges |
4.1.1 | In consideration for the provision of the Services, Recipient agrees to pay to Provider upon the terms and subject to the conditions of this MSA, the Charges in accordance with the then prevailing tax guidelines as to arms length remuneration currently considered to be at cost plus such regulatory transfer pricing mark-up on cost as may be recommended by advisors from time to time. |
4.2 | Costs |
4.2.1 | The costs referred to in Section 4.1 shall mean all direct, managed and indirect costs associated with and attributable to the provision of the Services by Provider. These costs shall be inclusive of, but not limited to, all expenses in so far as they relate to the Services supplied by Provider for salaries, advisory, facilities and equipment plus the expenses to the extent reasonably allocatable to the Services provided by Provider. The appropriate charges for depreciable assets such as facilities and equipment shall be determined in accordance with generally accepted accounting rules. |
4.3 | Taxes |
4.3.1 | The Charges payable under each Service Schedule are exclusive of any Taxes, which would be applicable from time to time as per statutory requirements and shall be for the account of Recipient. |
4.3.2 | Each party shall be responsible for Taxes based on its own net income, employment taxes of its own employees and Taxes on any property it owns or leases. |
4.3.3 | All payments made by the Recipient to the Provider will be made without deduction or withholding for or on account of any present or future Taxes, including but not limited to value added tax, turnover tax and withholding taxes, unless Recipient is required by law to deduct or withhold such taxes or duties. |
4.3.4 | In such event, the Recipient will pay such additional amounts as may be necessary in order that the net amounts receivable by Provider after such deduction or withholding shall be equal to the amount which would have been receivable in the absence of such deduction or withholding. |
4.4 | Payment Terms |
4.4.1 | The Services provided are classed as either Business Process Outsourcing (BPO) or Knowledge Process Outsourcing (KPO) which attracts a mark up in accordance with rate prevailing when the invoice is issued, based on benchmarking studies recommended by external advisors. The prevailing rates are detailed on the invoices at the time of issue. |
4.4.2 | The invoice currency will be USD. |
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4.4.3 | Provider will send the invoice in hard-copy format and use the address for invoicing as set out in the Service Schedule. |
4.4.4 | The invoice will contain the description as set out in the relevant Service Schedule, failing which the description, Professional Services Charges rendered by RBS Business Services Private Ltd, or other words as agreed by both parties. |
4.4.5 | The Provider shall invoice the Recipient monthly. |
4.4.6 | The invoices are payable through physical remittance of funds within 30 days of receipt of the relevant invoice. |
4.4.7 | If any part of the Charges is subject to a bona fide dispute then that part of the Charges subject to dispute shall be dealt with in accordance with Section 11 and any part of the Charges that is not subject to dispute is to be paid pursuant to this Section 4. |
5 | Representations, Warranties and Mutual Obligations |
5.1 | Representations and Warranties |
5.1.1 | Each Party represents and warrants to the other that as at the date hereof: |
(i) | it is duly constituted, organized and validly existing under the laws of the jurisdiction of its incorporation; |
(ii) | it has the legal right and full power and authority to execute and deliver, and it have the legal right and full power and authority to exercise its rights and perform its obligations under, this MSA, the Service Schedules and any documents which are to be executed by it or any of them pursuant to this MSA; |
(iii) | its contemplated provision or receipt, as applicable, of Services in the Service Schedules does not conflict with any other contract to which it is a Party; and |
(iv) | it is satisfied that all Charges for the Services provided hereunder were negotiated and determined on an arms-length basis. |
5.1.2 | The Provider represents and warrants to the Recipient that as at the date hereof: |
(i) | this MSA and the provision of the Services pursuant to the Service Schedule is compliant in all material respects with all Regulation applicable to it; and |
(ii) | its provision of Services in the Service Schedule is compliant in all material respects with the Policies. |
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5.1.3 | The Recipient represents and warrants to the Provider that as at the date hereof this MSA and the receipt of the Services by it pursuant to the Service Schedule is compliant in all material respects with all Regulation applicable to it, including, for the avoidance of any doubt and to the extent applicable, Regulation W of the Board of Governors of the Federal Reserve System. |
5.2 | General Obligations |
5.2.1 | Each Party shall: |
(i) | subject to the Change Control Procedure with respect to any change in Regulation after the date hereof, comply with Regulation in connection with the performance of its obligations under this MSA including (in the case of the Provider) its provision of the Services and (in the case of the Recipient) its receipt of the Services; |
(ii) | perform its obligations under this MSA including (in the case of the Provider) its provision of the Services and (in the case of the Recipient) its receipt of the Services; |
(iii) | provide on a timely basis such information and data as the other Party may reasonably require for the purposes of the provision of the Services; and |
(iv) | participate in discussions regarding the provision or receipt of the Services (as applicable) to the extent reasonably required by the other Party in order to enable the Services to be properly provided or received. |
5.2.2 | Without prejudice to the Mandatory Change provisions set out in Section 10.2, each Party shall promptly notify the other upon becoming aware of any proposed changes to a Regulation or new Regulation which will or are likely to impact the provision or receipt of the Services. |
5.2.3 | If a Party or any of its Affiliates or, to its knowledge, any Third Party Supplier is subject to any investigation by any Competent Authority and such investigation is relevant to the performance of the obligations under this MSA, then, to the extent permitted by Regulation and the Competent Authority, the Party shall as soon as reasonably practicable notify the other Party of such investigation (such notice to contain reasonable detail relating to the reason for the investigation and why it is relevant to the provision or receipt of the Services). The Parties agree to cooperate to the extent reasonable in the event of any such investigation. |
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6 | Term and Termination |
6.1 | Original MSA |
The Parties acknowledge and agree that the Original MSA was effective from 21 July 2008. On and from the date of execution of this MSA, the Original MSA shall be amended and restated in the form of this MSA.
6.2 | MSA Term |
Subject to earlier termination in accordance with its terms, this MSA shall automatically terminate without the need for further action by either Party on the earlier of: (i) the date of expiry of the last Service Term; and (ii) the Scheduled MSA End Date, (both being subject to an extension pursuant to Section 6.3.2).
6.3 | Service Term |
6.3.1 | Subject to Section 6.3.2 each Service Term shall automatically expire without the need for further action by either Party on the earlier of: (i) the applicable Service Schedule Expiry Date; and (ii) the Scheduled MSA End Date. |
6.3.2 | If the Recipient wishes to continue to receive a Service after the expiry of the relevant Service Schedule Expiry Date and/or Scheduled MSA End Date then the Recipient must give notice to the Provider specifying the period for which the Recipient wishes to continue to receive the Service, provided however, that such extension shall not extend beyond December 31, 2016. Upon such notice the Service Term shall be extended up to the relevant date. |
6.4 | Termination on Notice |
6.4.1 | Notwithstanding any other provision of this MSA, the Recipient may terminate any of the Services, or any separable part of the Services, by providing the Provider with at least six months prior mailed notice of such termination. |
6.4.2 | The Recipient is not responsible or liable for any Provider costs incurred as a result of an early termination notice made in compliance herewith, provided, however, that a Recipient shall reimburse the Provider for any costs incurred by the Provider as a result of a Service being terminated early by the Recipient where such Service is provided pursuant to a Third Party Agreement which was renewed, extended or replaced after the date hereof. |
6.5 | Termination for Insolvency |
Each Party may terminate this MSA immediately by written notice to the other Party if the other Party becomes unable to pay its debts, enters into liquidation, a receiver or administrative receiver is appointed over all or any of its assets, it ceases trading or is dissolved, or any procedure equivalent to any of the preceding matters occurs in any other jurisdiction with respect to that other Party.
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6.6 | Termination for Regulatory Reasons |
6.6.1 | Each Party shall have a right to terminate this MSA if directed in writing by a Competent Authority. A Party may exercise such right upon 90 days prior notice, or such shorter timeframe as required by a Competent Authority or to comply with Regulation. |
6.6.2 | In the event of a termination of this MSA pursuant to this Section 6.6, the Parties acknowledge and agree that Migration of the Services may not be fully implemented as of such termination and, to the extent required by a Competent Authority, neither Party will have any obligation to assist in the Migration of the Services after such termination. |
6.7 | Termination for Breach |
6.7.1 | Subject to Section 6.7.2, each Party (the Non-Defaulting Party ) may terminate a Service immediately by written notice to the other Party (the Defaulting Party ) if the Defaulting Party commits a material breach of its obligations with respect to that Service under this MSA and the applicable Service Schedule and (where the breach is capable of being remedied) that breach has not been remedied within 30 days after receipt of a written request to do so from the Non-Defaulting Party. |
6.7.2 | In the event that a Party elects to terminate a Service pursuant to Section 6.7.1, the MSA shall be deemed to continue in full force and effect in accordance with its terms, except with respect to such terminated Service. |
6.7.3 | Unless otherwise specified, any breach in respect of any individual Service Schedule shall not constitute a breach of this MSA or a breach of any other Service Schedule, and unless otherwise agreed in writing, the Parties will continue to provide Services and honor all other commitments under this MSA during the course of dispute resolution pursuant to Section 11, except to the extent such commitments are the subject of such dispute, controversy or claim. |
6.8 | Delivery of Data on Termination or Expiry |
6.8.1 | Except if and to the extent otherwise agreed in the relevant Service Schedule and subject always to Regulation, in the event of the termination or expiry of a Service pursuant to this MSA: |
(i) | to the extent that: |
(a) | any Recipient Data is in the possession or reasonable control of the Provider or its Affiliates, the Provider shall provide to the Recipient such Recipient Data in its then-current format; and |
(b) | any Provider Data is in the possession or reasonable control of the Recipient or its Affiliates, the Recipient shall provide to the Provider such Provider Data in its then-current format; |
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(ii) | once the Provider has provided the Recipient Data in accordance with Section 6.8.1.(i)(a), the Provider will (to the extent reasonably practicable) delete or destroy its copy or copies of such data, unless required to maintain a copy by Regulation or the requirements of any Competent Authority or to the extent such Recipient Data also relates to the Providers Groups business; and |
(iii) | once the Recipient has provided the Provider Data in accordance with Section 6.8.1.(i)(b) the Recipient will (to the extent reasonably practicable) delete or destroy its copy or copies of such data, unless required to maintain a copy by Regulation or the requirements of any Competent Authority or to the extent such Provider Data also relates to the Recipients Groups business. |
6.8.2 | Unless otherwise agreed by the Parties, the Provider shall charge Recipient in respect of the costs incurred by the Provider in respect of complying with its obligations under this Section 6.8. |
6.8.3 | Any Recipient Data retained by Provider and any Provider Data retained by Recipient pursuant to Section 6.8.1 shall be subject to the Data Protection requirements set forth in Section 13 and the Confidentiality requirements set forth in Section 13 for as long as such data is retained. |
6.9 | Survival of Rights on Termination or Expiry |
Termination or expiry of this MSA shall not affect any rights or obligations which may have accrued prior to termination or expiry. The obligations of each Party set out in any Section intended to survive such termination or expiry, including this Section 6.9 and Section 4, Section 8, Section 12, Section 13, Section 16, Section 17 and and Section 20 shall continue in full force and effect notwithstanding termination or expiry of this MSA.
7 | Migration |
7.1 | Migration |
No later than the third month of the six month notice period specified in Section 6.4, the Provider will:
7.1.1 | submit a plan reasonably acceptable to the Recipient, specifying how the Provider will assist in the orderly handover of the terminated Services; |
7.1.2 | regularly update the plan to ensure that it reflects changes in the Services or terminated Services, and the methods of delivering the terminated Services; and |
7.1.3 | revise the plan from time to time in accordance with Recipients reasonable directions. |
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7.2 | Migration Plan |
The Provider will as soon as reasonably practicable:
7.2.1 | implement the plan referred to in Section 7.1; and |
7.2.2 | provide the Recipient with all information, documentation, Recipient software, Recipient Data, Recipient equipment and hardware and any work or records which are material to Recipients business. The Provider will also provide all other assistance reasonably required by the Recipient. |
7.3 | Migration Costs |
The Recipient shall be responsible for any costs incurred by the Provider in relation to the migration services described in Sections 7.1 and 7.2.
8 | Limitation of Liability and Indemnification |
8.1 | Exclusions from Liability |
Notwithstanding anything herein to the contrary, no Party shall be liable for any special, indirect, incidental, consequential or punitive damages of any kind whatsoever in any way due to, resulting from or arising in connection with any of the Services or the performance of or failure to perform Providers or Recipients obligations under this MSA, as applicable, including to the extent that such liability is:
(i) | for or in respect of any loss of profit, loss of revenue, loss of goodwill or indirect or consequential losses, punitive, special or consequential damages; or |
(ii) | for the value of any lost or corrupted data; or |
(iii) | for the costs of reconstituting, restoring or rectifying lost or corrupted data (in each case, other than to the extent arising from a breach of Section 19.1), |
in each case of whatever nature regardless of whether such damages are foreseeable or whether the Provider or Recipient, as applicable, or any of its Affiliates has been advised of the possibility of such damages.
8.2 | Cap on Damages and Exclusions |
8.2.1 | Except in the case of death or personal injury, fraud or fraudulent misrepresentation, or Charges that have come due in connection with the Services, the Providers and the Recipients aggregate liability to the other in respect of any individual Service shall be limited to an amount equal to 12 x the Monthly Charge for such Service, where Monthly Charge means the amount of Charges paid for the first full calendar month (which shall include any amounts invoiced directly to the Recipient by a Third Party Supplier in that month) of the relevant Service giving rise to the claim. |
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8.2.2 | Except in the case of death or personal injury, fraud or fraudulent misrepresentation, or Charges that have been paid or come due in connection with the Services, each Partys total aggregate liability to the other in connection with this MSA shall be limited to an amount equal to the total Charges for all Services paid and payable to Provider pursuant to this MSA during the 12 months prior to the first date an event giving rise to the liability occurred. |
8.2.3 | The limits on, and exclusions of, liability set out in this Section 8 shall not apply in respect of: |
(i) | any liability for death or personal injury; |
(ii) | any liability for fraud or fraudulent misrepresentation; |
(iii) | any other liability that cannot be lawfully excluded; and |
(iv) | the obligation of Recipient to pay Charges with respect to Services that have been provided. |
8.3 | Indemnification |
8.3.1 | Subject to the exclusions from liability in Section 8.1, the Provider and the Recipient agree to indemnify and hold harmless each other, and each of their directors, officers, employees and agents, and each of the heirs, executors, successors and assigns of any of the foregoing (collectively the Indemnitees ), from and against any and all losses of the Indemnitees relating to, arising out of or resulting from any breach by a Party, of this MSA or any of the Service Schedules hereunder, to the extent caused by, resulting from or arising out of or in connection with the other Partys infringement, misappropriation or violation of Intellectual Property Rights of a third party in connection with the provision or receipt of Services under this MSA; |
provided that.
(i) | the aggregate liability pursuant to this Section 8.3 shall not exceed the cap on damages in Section 8.2 (subject to the exclusions from the cap set forth therein); and |
(ii) | the Provider shall have no liability under this Section 8.3 with respect to any infringement, misappropriation or violation of Intellectual Property Rights of a third party to the extent that such claim is based upon or related to: |
(a) | Services that have been modified by the Recipient; |
(b) | use of the Services in conjunction or combination with any software, data or other materials not provided by the Provider of the Services; or |
(c) | use of the Services in a manner or for any purpose other than as directed by the Provider or as expressly permitted by this MSA. |
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9 | Governance |
9.1 | Each party will appoint representatives with suitable qualifications, experience and authority to participate in the meetings and committees, and otherwise fulfil their respective functions. |
9.2 | The Provider and the Recipient will each manage and supervise the relationship set out in this MSA, through a body containing representatives of both the Provider and the Recipient as constituted from time to time. |
10 | Changes and Change Control |
10.1 | Changes |
10.1.1 | Subject to Sections 10.2 to 10.4 (inclusive), in the event that a Party wishes to make any Change it shall be managed by way of the Change Control Procedure as set forth in this Section 10.1.1. |
(i) | Upon realization of the need for a Change, either Party shall provide prompt notice to the other Party of a Change request ( Change Control Request ) in writing specifying in as much detail as is reasonably practicable the nature of the proposed Change. Within four weeks of receipt of a Change Control Request, the Party that received such notice shall provide a response indicating whether it can make the proposed Change, its estimated costs of making the proposed Change and an estimated schedule for implementing the proposed Change. |
(ii) | The timing of implementation of any Change will be determined by the Parties. |
10.2 | Mandatory Change |
10.2.1 | Where a Change Control Request is in respect of a Mandatory Change, the Parties shall, as soon as reasonably practicable thereafter, meet to discuss and agree the terms on which, and the time frame in which, each Party shall implement that Mandatory Change (which shall be within the time frame required to comply with the relevant Regulation, except where it would not be reasonable for each Party to implement such Mandatory Change within such time frame, in which case each Party shall implement such Mandatory Change as soon as reasonably practicable thereafter). The Parties shall work together in good faith to mitigate the consequences of any delay in implementing the Mandatory Change beyond the date required to comply with the Regulation. |
10.2.2 | To the extent that a Mandatory Change requested by a Party increases the cost to the Provider (including, for the avoidance of doubt, the costs and appropriate margin of implementing the Mandatory Change and incremental running costs and appropriate margin incurred by the Provider arising as a result of that Mandatory Change), then the increased cost and margin to the Provider will be added to the Charges paid by the Recipient for the relevant Service. |
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10.3 | Discretionary Changes |
10.3.1 | Where a Change Control Request submitted by a Party is in respect of a Discretionary Change, the Parties shall, as soon as reasonably practicable thereafter, meet to discuss the terms of the Discretionary Change, including the payment of costs incurred by the Provider associated with the proposed Discretionary Change. For the avoidance of doubt, the Party being requested to implement a Discretionary Change may refuse to implement any Discretionary Change. |
10.4 | Emergency Change |
10.4.1 | If a Change is required to respond to an Emergency, the affected Party shall use commercially reasonable efforts to notify the other Party and obtain the other Partys prior consent for the Change but, if the notifying party is the Provider and the Provider is not able to notify the Recipient and obtain consent, the Provider shall be entitled, without limiting any rights and remedies of the Recipient in respect of any breach of this MSA (as if such Change had not been made), to nevertheless make the minimum necessary temporary Change as necessary to respond to the Emergency in accordance with the terms of any applicable disaster recovery plans. As soon as practicable following the implementation of any temporary Change, the Provider shall notify the Recipient of the temporary Change and the nature of the Emergency and shall then retroactively comply with the terms of the Change Control Procedure. |
10.4.2 | Emergency means a Change that is required to ensure: (i) continued provision of, or the continued operation and integrity of the Services; or (ii) the continued operation and integrity of the Provider Systems, in each case the implementation of which cannot wait (including for reasons of stability and performance) for authorization through the Change Control Procedure. |
11 | Dispute Resolution |
11.1 | Dispute Resolution Process |
11.1.1 | The Parties shall in the first instance attempt to resolve any dispute in relation to any aspect of, or failure to agree any matter arising in relation to, this MSA or any document agreed or contemplated as being agreed pursuant to this MSA (a Dispute ) informally through discussion as follows: |
(i) | the representatives will discuss to resolve the Dispute, and if the representatives cannot resolve the Dispute within 10 Business Days of the Dispute being referred to them, then; |
(ii) | the Dispute shall promptly be referred by the representatives to a nominated senior individual of each Party (the Senior Nominees ), and if the Senior Nominees cannot resolve the Dispute within 10 Business Days of the Dispute being referred to them (unless a longer period is mutually agreed), then; |
(iii) | the dispute resolution process shall be deemed to have been exhausted in respect of the Dispute, and each Party shall be free to pursue its rights at law in respect of such Dispute without further reference to the dispute procedure under this Section 11.1. |
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This Section 11.1 does not limit the right of either Party to: (i) exercise any self-help remedies provided for herein; or (ii) file an action in a court of law, before, during, or after the dispute resolution process to obtain a provisional or interim remedy, and/or any ancillary, additional or supplementary remedy, provided that any such action shall be heard and determined exclusively in any court of competent jurisdiction sitting in England.
11.1.2 | The Parties will discuss in good faith, at either Partys request, measures to shorten the time contemplated by this Section 11 to complete the Dispute resolution process. |
12 | Intellectual Property Rights |
12.1 | Ownership |
12.1.1 | The Provider and the Recipient (or their respective licensors) will retain all right, title and interest in or to their respective Intellectual Property Rights. |
12.2 | License |
12.2.1 | Each party grants the other party a royalty-free, non-transferable, non-exclusive licence to use the Intellectual Property Rights solely for the purpose of providing or receiving the Services. |
12.2.2 | Both parties undertake to: |
(i) | comply with the other partys reasonable directions (whether oral or written) relating to the manner of the use of the other Partys Intellectual Property Rights; |
(ii) | only modify the other partys Intellectual Property Rights with the prior written consent of that other party and then only in the manner and to the extent authorised by that other Party; and |
(iii) | treat all information relating to the other Partys Intellectual Property Rights as confidential in accordance with the terms of Section 13. |
12.2.3 | Neither Party shall: |
(i) | sub-license, assign, transfer, charge or otherwise deal in or encumber the other Partys Intellectual Property Rights or use the other Partys Intellectual Property Rights on behalf of a third party; or |
(ii) | remove or alter any copyright or proprietary notice on any materials in which the other Partys Intellectual Property Rights are embodied. |
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13 | Data Protection, Confidential Information and Record-keeping |
13.1 | Data Protection |
13.1.1 | Each Party acknowledges and agrees that, solely to permit it to perform its obligations pursuant to this MSA and the Service Schedules, the other Party may provide it with Confidential Information, including Personal Data. Each Party further acknowledges and agrees that it shall have the right to use the other Partys Confidential Information, including Personal Data, solely to fulfill and perform its obligations under this MSA and otherwise comply with Regulations that apply to that Party. Regulation in respect of Personal Data may include U.S. federal data privacy laws and regulations such as the GLB Act, the Federal Privacy of Consumer Financial Information Regulation (12 CFR Part 30), as amended from time to time, issued pursuant to Section 504 of the GLB Act, and the Health and Insurance Portability and Accountability Act of 1996 (42 U.S.C. § 1320d), U.S. state data privacy laws such as the Massachusetts Data Protection Act (201 CMR 17) and, if applicable, international data privacy laws such as The Data Protection Act 1998 and Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and the free movement of such data. To the extent that the Recipient requires the Provider to comply with any Regulation in respect of Personal Data which does not apply to the Provider at law, then the Recipient shall (i) instruct the Provider of the same under Clause 13.1.2(i) and (ii) provide all reasonable assistance and information to the Provider in order to allow the Provider to comply with the same. Each Party may provide guidelines to help the other Party comply with such Regulation, but each Party using its own legal advisors will remain fully responsible, subject to the Change Control Procedure in respect of any change in Regulation after the date hereof, for interpreting and complying with such Regulation with respect to its own business. A Party shall have no right to use, reuse or disclose any Personal Data to any person or entity for any reason not specifically permitted under this MSA or a Service Schedule. |
13.1.2 | Each Party confirms that, when it is processing data, it shall: |
(i) | only process Personal Data in accordance with the other Partys instructions; and |
(ii) | take appropriate technical and organizational measures to protect Personal Data against accidental or unlawful destruction or accidental loss, alteration, unauthorized disclosure or access and against all other unlawful forms of processing. |
13.1.3 | The Parties shall respectively comply with all Regulation, subject to the Change Control Procedure in respect of any change in Regulation after the date hereof, in respect of Confidential Information, including Personal Data, including securing such consents, registrations and notifications as may be required to enable the Provider and any Third Party Suppliers to provide the Services and to enable the Recipient to receive the Services. |
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13.2 | Confidential Information |
13.2.1 | The Parties hereby covenant and agree to keep confidential all Confidential Information relating to the other Party. Without limiting the generality of the foregoing, each Party shall cause its employees and agents to exercise the same level of care with respect to Confidential Information relating to the other Party as it would with respect to proprietary information, materials and processes relating to itself. Confidential Information shall mean all information, materials and processes relating to a Party, its Affiliates, its employees, third party vendors, counterparties or customers obtained by the other Party at any time (whether prior to or after the date hereof) in any format whatsoever (whether orally, visually, in writing, electronically or in any other form) arising out of the rendering or receipt of Services hereunder (or preparations for the same or for the termination thereof) and shall include, but not be limited to, economic and business information or data, business plans, software and information relating to personnel, products, financial performance and projections, processes, strategies and systems but shall not include information which: |
(i) | was already in possession of the other Party prior to the date hereof and for which no confidentiality obligation or other restriction on use previously existed; |
(ii) | is or becomes generally available to the public other than by release in violation of the provisions of this Section 13; |
(iii) | is or becomes available on a non-confidential basis to a Party from a source other than the other Party to this MSA, provided that the Party in question reasonably believes that such source is not or was not bound by an obligation to the other Party to hold such information confidential; and |
(iv) | is acquired or developed independently by a Party without use or reference to otherwise Confidential Information of the other Party. |
Except with the prior written consent of the other Party, each Party will use the other Partys Confidential Information only in connection with the performance of its obligations hereunder and each Party shall use commercially reasonable efforts to restrict access to the other Partys Confidential Information to those employees of such Party requiring access for the purpose of providing or receiving Services hereunder.
13.2.2 | The provisions of Section 13.2.1 shall not prohibit a Partys disclosure or use of the other Partys Confidential Information if and to the extent such Confidential Information is made available to or used by the professional advisers or Third Party Suppliers of each Party for the provision or receipt of the Services, provided , however that in each case such professional advisors or Third Party Suppliers are subject to written confidentiality obligations in a form approved by the other Party (such approval not to be unreasonably withheld or delayed). |
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13.2.3 | Each Party shall notify the other Party immediately of any suspected or known fraud relevant to its activities under this MSA or any Service Schedule, or of any unauthorized access, possession, use, or knowledge, or attempt thereof, of the other partys Confidential Information, or of the occurrence of any other incident relating to the Services that could cause financial, customer or reputational loss to another Party, and agrees to cooperate with the other Party to investigate the occurrence and mitigate the impact of such an event. Each Party shall promptly provide the other Party with full details of any such event and use all available efforts to prevent a recurrence of any such event. |
13.2.4 | Notwithstanding any provision of this Section 13 to the contrary, a receiving Party may disclose such portion of the Confidential Information relating to the disclosing Party to the extent, but only to the extent, the receiving Party reasonably believes that such disclosure is required Regulation or the rules of a Competent Authority or under a subpoena or other legal process; provided that if practicable and permissible under Regulation, or rules, the receiving Party shall first notify the disclosing Party of such requirement and allow such Party a reasonable opportunity to seek a protective order or other appropriate remedy to prevent such disclosure and cooperate with the disclosing Party in any lawful effort by the disclosing Party to contest the legal validity of such requirement and prevent such disclosure. |
13.2.5 | The Parties agree that monetary damages will not be an adequate remedy if this Section 13 regarding Data Protection and Confidential Information is breached and therefore, a disclosing Party shall, in addition to any other legal or equitable remedies, be entitled to seek injunctive relief against any breach or threatened breach of this Section 13 by the receiving Party with respect to the disclosing Partys Confidential Information. |
13.3 | Record-keeping |
13.3.1 | The Provider will at all times operate a consistent and generally accepted system of accounting in relation to, and maintain complete and accurate records of, and adequate supporting documents for the Service Records. |
13.3.2 | The Provider will maintain the Service Records: |
(i) | in a manner and to a level of detail sufficient to justify the calculation of the Charges and to satisfy the requirements of the Regulation; and |
(ii) | for the period required by the Regulation, and for a minimum of seven years after the Service Records are created. |
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14 | Force Majeure |
14.1 | Force Majeure Events |
For purposes of this MSA, Force Majeure means an event beyond the reasonable control of either Party, which by its nature was not foreseen by such Party, or, if it was foreseen, was not reasonably avoidable, and includes without limitation, acts of God, storms, floods, riots, fires, sabotage, civil commotion or civil unrest, interference by civil or military authorities, threat, declaration, continuation, escalation or acts of war (declared or undeclared) or acts of terrorism, any unauthorized, unlawful access by a third party to either Partys computing systems other than as a result of such Partys, failure or shortage of energy sources, strike, walkout, lockout or other labor trouble or shortage, delays by unaffiliated suppliers, and acts, omissions or delays in acting by any Competent Authority.
14.2 | No Liability for Force Majeure |
Without limiting the generality of Section 8.3, neither Party shall be under any liability for failure to fulfill any obligation under this MSA or a Service Schedule, so long as and to the extent to which the fulfillment of such obligation is prevented, frustrated, hindered, or delayed as a consequence of circumstances of Force Majeure; provided that (i) such Party shall have used commercially reasonable efforts to minimize to the extent practicable the effect of Force Majeure on its obligations hereunder and (ii) nothing in this Section 14.2 shall be construed to require the settlement of any strike, walkout, lockout or other labor dispute on terms which, in the reasonable judgment of the affected Party, are contrary to its interests. It is understood that the settlement of a strike, walkout, lockout or other labor dispute will be entirely within the discretion of the affected Party. The Party affected by the Force Majeure event shall notify the other Party of that fact as soon as practicable.
14.3 | Delay Owing to Force Majeure |
In the event of any such delay as a consequence of circumstances of Force Majeure, the Recipient of any affected Service may elect to either:
(i) | submit a Change Control Request to extend the time for performance of the affected Service for a period equal to the time lost by reason of the delay, provided however , that such extension shall not extend beyond the Scheduled MSA End Date; or |
(ii) | terminate this MSA in relation to those Services which are affected by the Force Majeure event. |
15 | Employee Provisions |
15.1 | No Obligation to Transfer Employees |
15.1.1 | The Parties acknowledge and agree that the Acquired Rights Directive (Council Directive 77/187/EEC as amended by Council Directive 98/50 EEC and consolidated in Council Directive 2001/23/EEC) as amended ( ARD ) or any enactment of the ARD in any national law or any analogous national law did not apply on the commencement of the Services. |
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15.1.2 | The Parties believe that on the cessation or partial cessation of the Services or any part of the Services on the termination, expiry or variation of this MSA, no transfer of the contracts of employment between a Provider or any Third Party Supplier (or any subcontractor thereof) and any of its/their employees to the Recipient or Successor Provider shall take place by reason of the ARD or any enactment of the ARD in any national law or any analogous national law. |
15.1.3 | Without prejudice to Section 15.1.1, if requested to do so by the Recipient at any time before the termination, expiry or variation of the Services, the Provider will (or will procure that) all persons working on the Services ( Staff ), whether employed/engaged by the Provider, by any Third Party Supplier or any subcontractor thereof, will be redeployed or otherwise removed from the Services before the cessation of those Services so that those Staff cease to be engaged within the Services and are not affected by any transfer pursuant to the ARD or any enactment of the ARD in any national law or any analogous national law that may otherwise occur on the cessation of those Services. |
15.2 | Pre-employment Screening |
15.2.1 | Subject to Regulation, the Provider shall require any individual it employs or engages in connection with the performance of its obligations under this MSA to have satisfied the screening procedures set out in the RBSG Policy for India, prior to such individual performing any Services hereunder: |
15.2.2 | In the event that: |
(i) | the Provider is unable to comply fully with the pre-employment requirements above with respect to an individual; |
(ii) | any pre-engagement screening activity returns information that otherwise indicates in the Providers reasonable judgment that such individual should not be engaged to provide Services under this MSA, |
then the Provider shall not engage the individual in relation to this MSA or any Service Schedule.
16 | Communications with Competent Authorities |
If either Party receives any material correspondence from any Competent Authority that relates to the Services, it will provide a copy of that correspondence to the other Party unless it is prevented from doing so by Regulation or such Competent Authority. The Parties shall consult with each other over such correspondence and shall only respond to the Competent Authority if:
16.1.1 | the terms of the response have been approved by the other Party (such consent not to be unreasonably withheld or delayed); or |
16.1.2 | Regulation requires a response to the Competent Authority without the other Partys consent. |
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17 | Audit |
17.1 | Regulatory Audit Rights |
17.1.1 | The Provider shall (and shall use all commercially reasonable efforts to ensure its Third Party Suppliers providing material Services or a material element of the Services shall) promptly permit: |
(i) | the Recipient or its auditors (to the extent the Recipient and its auditors are directed by a Competent Authority); and |
(ii) | any Competent Authority (or its designated representatives), |
access to the Providers and Third Party Suppliers facilities and premises, equipment, books and records (electronic or otherwise), operational systems, employees, contractors, and subcontractors to the extent required by the Competent Authority to perform an audit.
17.1.2 | Subject to any restriction under Regulation or the direction of any Competent Authority, the Provider shall ensure it is (and shall use all commercially reasonable efforts to ensure its Third Party Suppliers providing material Services or a material element of the Services are) open and cooperative with the Recipient and its auditors and any Competent Authority (and its designated representatives) in performing its obligations under this Section 17.1 and shall provide such information, assistance, records and materials, access to persons engaged in the provision of the Services and explanations as required by the Recipient or its auditors (to the extent the Recipient and its auditors are directed by a Competent Authority) or the Competent Authority (including attending any meetings requested by the Recipient and/or the Competent Authority (or its designated representatives) and providing copies of any internal audit reports which are relevant to the Services). The Recipient shall provide as much notice of the audit as is reasonably practicable. Unless otherwise agreed by the Parties, the Provider shall charge Recipient in respect of the costs incurred by the Provider in respect of such audits. |
17.1.3 | If and to the extent the Provider does not have the rights under its relevant Third Party Agreement to ensure its Third Party Supplier grants the rights described in Sections 17.1.1 and 17.1.2, any costs in procuring such rights shall be borne by the Recipient, provided that such costs were approved by the Recipient in writing before they were incurred. If the Recipient declines, or otherwise fails, to approve such costs, the Provider shall not be required to obtain the grant of the relevant rights by that Third Party Supplier. |
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17.2 | General Audit Rights |
17.2.1 | With respect to each Service Schedule: |
(i) | The Provider shall, from time to time, but in any event no more than twice in any 12-month period (subject to the exception in Section 17.2.1(ii)), during regular business hours and upon reasonable notice, permit the Recipient or its representatives to perform audits of the Providers (and to the extent commercially reasonable, its Third Party Suppliers) facilities, equipment, books and records (electronic or otherwise), operational systems, employees, contractors, subcontractors, and such other audits as may be necessary to ensure the Providers and its Third Party Suppliers compliance with the terms and conditions of this MSA and the relevant Service Schedules, as well as Regulation and to ensure the Providers financial and operational viability, including but not limited to the Providers internal controls, pre-engagement employee screening, information and other security, business resumption, continuity, recovery, Service Level compliance, and contingency plans. |
(ii) | If an audit conducted pursuant to Section 17.2.1 (i) reveals any non-compliance or other deficiencies relating to risks to the Providers systems and facilities which could result in the unauthorized destruction, loss, alteration, disclosure of or access to the Recipients Confidential Information, then a senior technology executive of the Provider shall promptly meet with a representative of the Recipient to discuss the matter, and the Provider shall promptly take action to remedy the non-compliance or deficiencies and/or resolve the matters addressed by the qualification(s) so that any deficiencies that caused the qualified opinion to be issued are remedied to the Recipients reasonable satisfaction (including with respect to the timeline of the remediation). Notwithstanding the limitation on the number of audits in Section 17.2.1(i), the Provider shall permit the Recipient to perform an audit solely to the extent necessary to confirm that any non-compliance or deficiencies identified in an audit conducted pursuant to Section 17.2.1(i) have been remedied. |
18 | Sanctions |
18.1 | Compliance with Sanctions Laws and Regulations |
18.1.1 | The Parties acknowledge that the Parties and their respective Affiliates are subject to the international sanction laws and regulations issued from time to time by HM Treasury, the European Union, the United States of America (including, but not limited to, all applicable regulations of the Office of Foreign Assets Control ( OFAC ), the Bank Secrecy Act and the USA Patriot Act (including such regulations that may require the Provider to implement a Customer Identification Program or Know Your Customer Program to confirm that no beneficiary or client of the Provider appears on any lists issued by OFAC, including the Specially Designated Nationals list, and determine whether transactions by or with such beneficiary or client may constitute suspicious activity, such as identity theft, fraud, money laundering, terrorist financing or other threats to national security)), and the United Nations. |
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18.1.2 | Neither Party shall be obliged to make any payment under, or otherwise to implement any part of the Services, if in the reasonable opinion of the relevant Party to do so is illegal or there is involvement by any person (natural, corporate or governmental) listed in the HM Treasury, the European Union, the United States of America, the United Nations or local sanctions lists, or there is any involvement by any person located in, incorporated under the laws of, or owned or controlled by, or acting on behalf or, a person located in or organized under the laws of a country or territory that is the target of comprehensive sanctions. |
19 | Information Security |
19.1 | Information Security |
19.1.1 | A Party may not store, copy, disclose, or use the other Partys Data for any purpose other than to the extent necessary to provide or receive, as applicable, the Services and to comply with Regulation. |
19.1.2 | Neither Party shall attempt to obtain access to, use or interfere with any information technology systems or data used or processed by the other Party except to the extent required to do so to provide or receive the Services (as applicable), or except to the extent expressly permitted to do so by this MSA. |
19.1.3 | Each Party shall maintain reasonable security measures to protect both Parties information technology systems, from third parties, and in particular from disruption by any back door, time bomb, Trojan Horse, worm, drop dead device, virus or other software routine intended or designed to (i) permit access or use of information technology systems by a third person other than as authorized by the Recipient or the Provider, or (ii) disable, damage or erase or disrupt or impair the normal operation of the Recipients or Providers information technology systems. |
19.1.4 | Each Party shall use reasonably up-to-date security measures to prevent unauthorized access to and unauthorized use of the information technology systems owned by the other Party (or, with respect to a Recipient, any member of the Recipients Group and, with respect to a Provider, any member of the Providers Group) and the other Partys data (including, with respect to a Recipient, the Recipient Data) by third parties (including Third Party Suppliers). |
19.1.5 |
A Party shall not introduce any Disabling Device into any information technology environment or any system used by the other Party in connection with the Services. Without limiting a Partys other obligations under this MSA, the Parties agree that, in the event any Disabling Device is found in the systems used to provide the Services, (i) if such Disabling Device originated in any software, deliverable or other resource provided under this MSA or any Service Schedule, the Party that introduced the Disabling Device shall, without prejudice to any other rights and remedies it may have, remove such Disabling Device at its sole expense and (ii) in any case (wherever such Disabling |
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Device originated), the Party that introduced the Disabling Device shall exercise commercially reasonable efforts at no additional charge to eliminate, and reduce the effects of, the Disabling Device and, if the Disabling Device causes a loss of operational efficiency or loss of data, to mitigate such losses and restore such data using generally accepted data restoration techniques. |
19.1.6 | In addition to its other obligations set forth in this MSA, |
(i) | whenever the Provider possesses, stores, processes or has access to the Recipients Personal Data, it shall comply with the applicable Fraud Prevention Policy; and |
(ii) | whenever the Provider possesses, stores, processes or has access to the Recipients Confidential Information (inclusive of Personal Data), it shall comply with the applicable IS Requirements. |
If requested, the Provider will explain to the Recipient how it complies with the Fraud Prevention Policy and the IS Requirements, and shall demonstrate its compliance upon request as set forth in Section 17.2.
19.1.7 | Each Party shall make the other aware as soon as reasonably practical of any information security breach which may materially adversely impact the Services or the other Partys business. |
20 | Other Provisions |
20.1 | Whole Agreement |
20.1.1 | This MSA constitutes the entire agreement between the Parties with respect to the subject matter hereof at the date hereof and supersedes all prior agreements and understandings, both oral or written, between the Parties in relation to the subject matter hereof. |
20.1.2 | In this Section 20.1, this MSA includes all documents entered into pursuant to it and/or this MSA. |
20.2 | No Construction Against Drafter |
The Parties acknowledge that this MSA and all the terms and conditions contained herein have been fully reviewed and negotiated by the Parties. Having acknowledged the foregoing, the Parties agree that any principle of construction or rule of law that provides that, in the event of any inconsistency or ambiguity, an agreement shall be construed against the drafter of the agreement shall have no application to the terms and conditions of the MSA.
20.3 | Publicity and Public Announcements |
A Party must not make any public announcement relating to this MSA without the prior written approval of the other Party (such approval not to be unreasonably withheld, conditioned or delayed). This shall not affect any announcement required by Regulation, any Competent
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Authority or the rules of any stock exchange on which the shares of a Party are listed, but the Party with an obligation to make an announcement shall notify the other Party and take into account their reasonable representations so far as is reasonably practicable before complying with such obligation.
20.4 | Further Assurances |
Each Party shall, from time to time execute such documents, perform such acts and things as any Party may reasonably require to give full effect to the provisions of this MSA and the transactions contemplated therein.
20.5 | Assignment |
20.5.1 | The provisions of this MSA shall be binding upon and inure to the benefit of the Parties hereto and their respective successors and assigns. Subject to Section 20.5.2, no Party may assign, delegate or otherwise transfer any of its rights or obligations under this MSA without the prior written consent of the other Party hereto. |
20.5.2 | The Provider may assign or in any way transfer or dispose of all or any of its rights under or derived from this MSA, or any part of them, to an Affiliate of the Provider. |
20.6 | Third Party Rights |
Except where such rights are expressly granted by this Agreement, a person who is not a party to this MSA shall have no rights under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Agreement. This Clause does not affect any right or remedy of any person which exists or is available otherwise pursuant to that Act.
20.7 | Amendment and Waiver |
20.7.1 | Any provision of this MSA (including the Service Schedules hereto) may be amended or waived if, but only if, such amendment or waiver is in writing and is signed, in the case of an amendment, by each Party to this MSA, or in the case of a waiver, by the Party against whom the waiver is to be effective. |
20.7.2 | No failure or delay by any Party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by Regulation. |
20.8 | Notices |
20.8.1 | All notices, requests and other communications to any Party hereunder shall be in writing, (electronic mail ( e-mail ) transmission may be used, provided that a receipt of such e-mail is requested and received), and shall be given: |
(i) | if to the Provider to: |
RBS Business Services Private Ltd
414, Empire Complex, Senapati Bapat Marg, Lower Parel,
35
Mumbai - 400 013,
India.
Attention: Pankaj Phatarphod,
Managing Director
Email: pankaj.phatarphod@rbs.com
(ii) | if to the Recipient to: |
Citizens Bank, N.A.
1 Citizens Drive
East Providence, RI 02915
USA
Attention: Jeff LeBlanc
Head of Consumer Operations, Senior Vice President
Email: Jeff.leblanc@citizensbank.com
Citizens Bank, N.A.
443 Jefferson Blvd
Warwick, RI 02886
USA
Attention: Heather Bentley
Head of Consumer Specialty Operations, Senior Vice President
Email: Heather.j.bentley@citizensbank.com
Citizens Bank, N.A.
100 Sockanosset Cross Rd
Cranston, RI 02920
USA
Attention: Jo Wyper
Head of Commercial Operations, Senior Vice President
Email: Joanne.c.wyper@citizensbank.com
or such other address or e-mail address as such Party may hereafter specify for the purpose by notice to the other Parties hereto. All such notices, requests and other communications shall be deemed received on the date of receipt by the recipient thereof if received prior to 5:00 p.m. in the place of receipt and such day is a Business Day in the place of receipt. Otherwise, any such notice, request or communication shall be deemed not to have been received until the next succeeding Business Day in the place of receipt.
20.9 | Severability |
20.9.1 | If any provision of this MSA or the application thereof to any Party or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof or the application of such provision to any of the Parties or circumstances or in jurisdictions other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any Party. Upon such determination, the Parties shall negotiate in good faith in an effort to agree upon such a suitable and equitable provision to effect the original intent of the Parties. |
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20.10 | Counterparts |
20.10.1 | This MSA may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the Parties and delivered to the other Party. Execution of this MSA or any other documents pursuant to this MSA by facsimile or other electronic copy of a signature shall be deemed to be, and shall have the same effect as, executed by an original signature. |
20.11 | Independent Contractor |
20.11.1 | Nothing in this MSA shall constitute or be deemed to constitute a partnership or joint venture between the Parties hereto or constitute or be deemed to constitute any Party the agent or employee of the other Party for any purpose whatsoever and neither Party shall have authority or power to bind the other or to contract in the name of, or create a liability against, the other in any way or for any purpose. The Parties hereto acknowledge and agree that when acting as a Provider, the other Party is an independent contractor in the performance of each and every part of this MSA and nothing herein shall be construed to be inconsistent with this status. Subject to the terms and conditions of this MSA, the Provider shall have the authority to select the means, methods and manner by which any Service is performed. |
20.12 | Governing Law and Submission to Jurisdiction |
20.12.1 | This MSA and the relationship between the parties will be governed by, and interpreted in accordance with English law. |
20.12.2 | Each of the parties agree that the courts of England are to have exclusive jurisdiction relating to court proceedings to settle any dispute (including claims for set-off and counterclaims) which may arise in connection with the creation, validity, effect, interpretation or performance of, or the legal relationships established by, this MSA or otherwise arising in connection with this MSA and for the purposes irrevocably submit to the jurisdiction of the English courts. |
20.13 | Anti-Bribery Provisions |
20.13.1 | Each Party agrees that it shall comply with, and that the Services will be performed in accordance with, the Anti-Corruption Laws, subject to the Change Control Procedure in respect of any change in Anti-Corruption Laws after the date hereof, and that it shall not cause, by act or omission, any other Party to be in breach of any Anti-Corruption Laws. |
20.13.2 | Each Party shall have in place and comply with its own anti-bribery and corruption policy to ensure that it complies with the Anti-Corruption Laws (each such policy, an Anti-Bribery and Corruption Policy ). If requested, a Party shall provide to the other Party a copy of its Anti-Bribery and Corruption Policy and, if required, the providing Party will explain to the receiving Party how the features set out in its Anti-Bribery and Corruption Policy correspond to the receiving Partys Anti-Bribery and Corruption Policy. Subject to the Change Control Procedure, the providing Party shall promptly implement any amendments to its Anti-Bribery and Corruption Policy which the receiving Party, acting reasonably, considers necessary following its review of the providing Partys Anti-Bribery and Corruption Policy to ensure that the providing Party complies with the Anti-Corruption Laws. |
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20.13.3 | Each Party shall review its Anti-Bribery and Corruption Policy on a regular basis and shall promptly implement and notify the other Party of any amendments to its Anti-Bribery and Corruption Policy which it considers necessary for continued compliance with the Anti-Corruption Laws. |
20.13.4 | Each Party shall cooperate with the other Party and promptly provide any information or confirmation which the other Party requires from time to time in connection with the obligations set forth in this Section 20.13. Each Party acknowledges that the other Party will place reliance upon the information provided. |
20.13.5 | Each Party shall immediately notify the other Party in writing of any suspected or known breach of its Anti-Bribery and Corruption Policy or any of the Anti-Corruption Laws. |
20.13.6 | Each Party shall have the right to suspend and/or terminate any Service Schedule for material breach immediately, or on such other time specified by the terminating Party, upon written notice to the Provider under such Service Schedule if: (i) the Provider, or any person employed by it or acting on its behalf (whether with or without the knowledge of such Service Provider) fails to comply with any of the Anti-Corruption Laws or is in material breach of the Providers Anti-Bribery and Corruption Policy; or (ii) a Party has a reasonable suspicion that an occurrence as specified in clause (i) of this Section 20.13.6 has occurred. |
20.13.7 | Regardless of any other provision in this MSA, no Party shall be obliged to do, nor obliged to omit to do, any act which would, in its reasonable opinion, put it in breach of any Anti-Corruption Laws. |
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IN WITNESS WHEREOF, this MSA has been duly executed.
SIGNED for and on behalf of RBS BUSINESS SERVICES PRIVATE LTD by: |
} | |
SIGNED for and on behalf of RBS BUSINESS SERVICES PRIVATE LTD by: |
} | |
SIGNED for and on behalf of CITIZENS BANK, N.A. by: |
} | |
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Exhibit 10.39
Dated , 2014
RBS GLOBAL TRADE SERVICE CENTRE PRIVATE LIMITED and
CITIZENS BANK, N.A.
TRANSITIONAL SERVICES AGREEMENT
TRANSITIONAL SERVICES AGREEMENT
THIS TRANSITIONAL SERVICES AGREEMENT ( TSA ), dated as of [ ], 2014, is by and between RBS GLOBAL TRADE SERVICE CENTRE PRIVATE LIMITED, a company incorporated under the laws of India, whose registered office is at Empire Complex, 414 Senapati Bapat Marg, Lower Parel, Mumbai 400 013 India and whose processing centres are located at Mumbai, Chennai and Gurgaon ( PROVIDER ) ; and CITIZENS BANK, N.A a United States national bank with its principal place of business at 1 Citizens Plaza, Providence, Rhode Island 02903, formerly known as RBS Citizens, N.A.. ( Recipient ), Capitalized terms used herein and not otherwise defined shall have the respective meanings assigned to them in Section 1 hereof.
RECITALS
WHEREAS, The Royal Bank of Scotland Group plc ( RBSG ) is the indirect owner of all the issued and outstanding common stock of Citizens Financial Group, Inc. ( CFG ) immediately prior to the date hereof;
WHEREAS, shares of CFG are being sold to the public pursuant to the IPO and CFG will cease to be a wholly owned indirect subsidiary of RBSG upon the closing of the IPO;
WHEREAS, after the closing of the IPO, RBSG will remain the majority shareholder of CFG, subject to future sales to the public (and ultimately the contemplated complete disposition by on or before December 31, 2016) by RBSG;
WHEREAS, the Provider is an Affiliate of RBSG and the Recipient is an Affiliate of CFG;
WHEREAS immediately prior to the date hereof, the Provider was providing services to the Recipient which were the same as Services to be provided thereunder pursuant to the terms of a Services Agreement between the Provider and the Recipient effective 1 May, 2014, ( Original SA ) which incorporated by reference a master services agreement between The Royal Bank of Scotland N.V. (formerly known as ABN AMRO Bank N.V.) and the Recipient effective 10 June, 2008 ( Original MSA );
WHEREAS, as of the date hereof and pursuant to the terms of (and except as otherwise provided in) a Separation Agreement, all master agreements, statements of work, service schedules and similar agreements, including the Original MSA and Original SA are terminated;
WHEREAS, the Provider has agreed to procure and provide the Services as specified in the Service Schedule to the Recipient, and the Recipient has agreed to receive and pay for the Services received pursuant to the Service Schedule, subject to the terms of this TSA to facilitate the Recipients ongoing operations during a transitional period following the IPO; and
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NOW, THEREFORE, in consideration of the rights and duties set forth herein, and for other good and valuable consideration, the adequacy and sufficiency of which are hereby acknowledged, the Provider and the Recipient hereby agree as follows:
1 | Definition and Rules of Construction |
1.1 | Definitions |
For the purposes of this TSA, the following terms shall have the following meanings:
Adverse Policy Change has the meaning given in Section 2.3.4;
Affiliate means, in relation to any Party, its holding companies and direct and indirect subsidiaries and the direct and indirect subsidiaries of such holding companies from time to time; however, for purposes of this TSA the Parties shall not be considered Affiliates of each other. For the avoidance of doubt, in respect of the Provider, Affiliates shall not include the Recipient or its subsidiaries; and, in respect of the Recipient, Affiliates shall not include the Provider or its other subsidiaries and Affiliates shall be construed accordingly;
Anti-Bribery and Corruption Policy means each policy that a Party shall put in place to comply with its own anti-bribery and corruption policy and obligations, and with Anti-Corruption Laws;
Anti-Corruption Laws means any anti-bribery or anti-corruption related provisions in criminal and anti-competition laws and/or anti-bribery or anti-corruption laws of the jurisdiction in which, for the Provider, the Provider provides the Services and, for the Recipient, the Recipient receives the Services, together with any amending, consolidating or successor legislation or case law which has effect from time to time in the relevant jurisdiction;
ARD has the meaning given in Section 15.1.1;
Business Day means a day which is not a Saturday, Sunday or a public holiday in New York or Boston;
CFG means Citizens Financial Group, Inc.;
Change means any modification, addition or amendment to any Service (including any change to any part of any Service Schedule) including any Mandatory Change or Discretionary Change;
Change Control Procedure means the procedure set out in Section 10.1.1;
Change Control Request has the meaning given in Section 10.1.1(i);
Charges means collectively the fees payable under each Service Schedule for the provision of Services;
Competent Authority means any local, state, national, supranational, governmental or nongovernmental authority, statutory undertaking, agency or public or regulatory body (including the Prudential Regulation Authority, the Financial Conduct Authority, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau) which has jurisdiction over the Provider (and/or its Affiliates) and/or the Recipient (and/or its Affiliates);
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Confidential Information has the meaning given in Section 13.2.1;
Defaulting Party has the meaning given to it in Section 6.7.1;
Disabling Device means any device, method, token, code, program or sub-program that can disable, interfere with or adversely affect all or any part of a Service, a Partys equipment, and/or their operation, or destroy any of a Partys data or other software or hardware, or damage, destroy or interfere with a Partys information technology network or any of a Partys data or other software or hardware, or permit any person to circumvent the normal security of a Partys software, systems or networks;
Discretionary Change means any Change which is not a Mandatory Change or an Emergency;
Dispute has the meaning given in Section 11.1.1;
Emergency has the meaning given in Section 10.4.2;
Existing Third Party Agreement means any Third Party Agreement in force as at the date hereof, as the same may be amended from time to time and any extension, replacement or renewal of such agreement;
Force Majeure has the meaning given in Section 14.1;
Fraud Prevention Policy means anti-fraud measures or policies that the Provider shall have in place whenever it possesses, stores, processes or has access to the Recipients Personal Data, as listed in Schedule 2;
GLB Act means the Gramm-Leach-Bliley Act, 15 U.S.C. 6801 et seq;
Group means, in relation to a Party, that Party and its Affiliates;
Indemnitees has the meaning given in Section 8.3.1;
Intellectual Property Rights means (i) copyrights (including copyrights in any software), patents, database rights and rights in trademarks, designs, know-how and confidential information (whether registered or unregistered), (ii) applications for registration, and rights to apply for registration, of any of the foregoing rights and (iii) all other intellectual property rights and equivalent or similar forms of protection existing anywhere in the world;
IPO means the initial public offering of CFGs shares;
IS Requirements means the information security policies that the Provider shall have in place whenever it possesses, stores, processes or has access to the Recipients Confidential Information (inclusive of Personal Data) as listed in Schedule 2;
Losses means losses, claims, damages, costs, charges and liabilities (including reasonable legal fees and disbursements) and Loss shall be construed accordingly;
Mandatory Change means a Change which is required as a consequence of any change in Regulation on or subsequent to the date hereof in order for (i) the Recipient to receive Services or to perform Recipient Dependencies and/or (ii) the Provider to provide (or procure the provision of), Services or to perform any of its other obligations under this TSA, in each case in compliance with Regulation;
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Migration means the migration of Services in whole or part from the personnel and information technology systems or other facilities of the Provider, its Affiliates or Third Party Suppliers to the personnel and information technology systems or other facilities of the Recipient, and/or its Affiliates and/or Successor Providers, provided, however , that Migration does not require or otherwise give rise to an obligation on the part of a Provider, its Affiliates or Third Party Suppliers to grant any Successor Provider access to the Provider Systems;
Monthly Charge has the meaning given in Section 8.2.1;
Non-Defaulting Party has the meaning given in Section 6.7.1;
OFAC means the Office of Foreign Assets Control of the United States Department of the Treasury;
Original MSA means the Master Services Agreement effective 10 June, 2008 entered into by The Royal Bank of Scotland N.V. (formerly known as ABN AMRO Bank N.V.) and the Recipient;
Original SA means the Services Agreement effective 1 May, 2014 entered into by the Provider and Recipient;
Party means the Provider or Recipient;
Personal Data of a disclosing Party means any data, information and/or records of or pertaining to the disclosing Partys or an Affiliates customers (current, former or prospective) and employees (current, former or prospective) or its customers customers (current, former or prospective) or employees (current, former or prospective), including but not limited to names, addresses, telephone numbers, account numbers, account and transaction information and any other Nonpublic Personal Information as defined in the GLB Act, relating to such individuals;
Policies means the policies and procedures listed in Schedule 2 (as may be amended from time to time in accordance with Sections 2.3.3 and 2.3.4), as applicable to the Provider;
Provider Data means all Confidential Information provided in relation to the Services to the Recipient, any Affiliate of the Recipient, or any Successor Provider, by or on behalf of the Provider or any Affiliate of the Provider or any Third Party Supplier;
Provider Systems means the information technology systems made available to the Recipient pursuant to this TSA by or on behalf of the Provider, any Affiliate of the Provider or any Third Party Supplier, which are supported and maintained by or on behalf of the Provider, any Affiliate of the Provider or any Third Party Supplier;
RBSG means The Royal Bank of Scotland Group plc;
Recipient Data means all Confidential Information:
(i) | including, without limitation, all Personal Data provided in relation to the Services to the Provider, any Affiliate of the Provider or any Third Party Supplier, by or on behalf of the Recipient or any Affiliate of the Recipient; or |
(ii) | generated by the Provider, any Affiliate of the Provider, or any Third Party Supplier in the course of providing the Services, |
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Recipient Dependencies means the obligations of the Recipient under this TSA including those expressly identified as Recipient Dependencies in the Service Schedule and any other obligations of the Recipient otherwise set out in the description of the Services in the Service Schedule;
Regulation means any applicable law, regulation, regulatory constraint, obligation or rule (including any binding code of conduct and binding statement of principle incorporated and contained in such rules) applicable to the existence or operation of this TSA, the Recipient, the Provider, any Affiliate of the Provider, any Affiliate of the Recipient or the provision or receipt of the Services, the performance of any Recipient Dependency or the performance of either Partys other obligations under this TSA from time to time;
Scheduled TSA End Date means the earlier of (i) December 31, 2016, and (ii) the first date on which RBSG ceases to beneficially own such number of shares of CFG common stock representing at least 26% of the voting power of all outstanding shares of CFG common stock;
Senior Nominees means the senior individuals nominated by each Party;
Separation Agreement means the Separation and Shareholder Agreement between RBSG and CFG dated on or about the date of this TSA;
Service Level means the level of performance set out in the Service Schedule;
Service Records means complete and accurate records of, and supporting documentation for, the Services provided pursuant to this TSA;
Service Schedule means the Service Schedule in Schedule 1 of this TSA, which describes the terms and obligations of the Provider and the Recipient in relation to the Services, and any extension or renewal schedule, as agreed by the Parties, which has the effect of extending or amending the Service Schedule Expiry Date in respect of the Services;
Service Schedule Expiry Date means the date of cessation of the Services specified in the Service Schedule;
Services means the services (or any element of the services) specified in the Service Schedule and Service means any element of the Services;
Staff has the meaning given in Section 15.1.3;
Successor Provider means the entity or entities (which may include the Recipient or any member of its Group) succeeding the Provider in the provision or operation of services the same as or substantially similar to all or part of the Services;
Tax means all taxes, charges, imposts, levies and duties of any kind payable to any governmental, fiscal or taxing authority in the United States, India, United Kingdom or elsewhere in the world. The definition of tax includes any penalties, additions, fines or associated interest. The words taxes and taxation and similar expressions shall be interpreted in accordance with this definition;
Term means the term of this TSA which period shall start on the date hereof and expire (unless terminated earlier in accordance with this TSA) in accordance with the provisions of Sections 6.2 and 6.3;
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Third Party Agreements means any agreements entered into between the Provider (or any of its Affiliates) and any third party for the provision of a service, goods, lease or license relating to, or necessary for, the provision of the Services or performance of any of the Providers other obligations under this TSA whether entered into before or after the date of this TSA;
Third Party Consent means any permission, consent, license, agreement, authorization or right to use required, from a third party (whether under a Third Party Agreement or otherwise):
(i) | by the Provider, to the extent necessary to allow the provision of the Services or performance of the Providers other obligations under this TSA by the Provider to or for the benefit of the Recipient or receipt of the Services by the Recipient; or |
(ii) | by the Recipient, to the extent necessary for the Recipient to receive the benefit of the Services provided by the Provider under this TSA; |
Third Party Supplier means any third party providing a service, goods, lease or license under a Third Party Agreement;
TSA means this transitional services agreement;
1.2 | Rules of Construction |
Unless the context otherwise requires or except as otherwise expressly provided the following rules of construction shall apply to this TSA.
1.2.1 | Singular, Plural, Gender |
References to one gender include all genders and references to the singular include the plural and vice versa.
1.2.2 | References to Persons and Companies |
References to:
(i) | a person shall include any company, partnership, trust, joint venture, firm, association, unincorporated association, organization, or any government, state or local body or authority (whether or not having separate legal personality); and |
(ii) | a company shall include any company, corporation or any body corporate, wherever incorporated. |
1.2.3 | Schedules, Sections, Appendices, Paragraphs |
References to this TSA shall include any Schedules to it and references to Sections and Schedules are to Sections of, and Schedules to, this TSA. References to paragraphs and appendices are to paragraphs and appendices of the Schedules. All Schedules are an integral part of this TSA.
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1.2.4 | Headings |
The article, Section and paragraph headings contained in this TSA are for reference purposes only and shall not affect in any way the meaning or interpretation of this TSA.
1.2.5 | Includes, in writing |
The words includes and including shall mean include without limitation and including without limitation, respectively. The words in writing means any communication made by letter (but not, for avoidance of doubt, electronic mail) and written shall be interpreted accordingly.
1.2.6 | Agreed |
References to agreed mean, in relation to any document, that document in the form agreed and, for the purposes of identification, signed or initialed by or on behalf of each Party by a duly authorized representative, with such alterations as the Parties agree in writing.
1.2.7 | Information |
References to books, records or other information mean books, records or other information in any form including paper, electronically stored data, magnetic media, film and microfilm.
1.2.8 | References to Law |
References to a statute or statutory provision include:
(i) | that statute or provision as modified or amended from time to time, whether before or after the date of this TSA; and |
(ii) | any subordinate legislation or regulation made from time to time under that statute or statutory provision, including (where applicable) that statute or statutory provision as modified or amended. |
1.2.9 | Precedence |
If there is any conflict, apparent conflict or ambiguity in or between any of sections of this TSA set out below, the sections will be applied in the following order of precedence with the sections higher in the order of precedence prevailing over the Parties:
(i) | the Sections of this TSA; |
(ii) | the Schedules to this TSA; and |
(iii) | any other document referred to in this TSA. |
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1.2.10 | Costs |
Any reference to costs shall mean costs (including internal costs arising in respect of personnel and other related costs) and expenses (including charges, fees and other amounts payable to third parties).
2 | Performance of Services |
2.1 | Provision of Services and Relief |
2.1.1 | [Not Used]. |
2.1.2 | The Provider shall provide the Services to the Recipient during the Term in accordance with the terms of this TSA. The Recipient shall timely pay the Provider for all Services provided in accordance with the terms of this TSA. |
2.1.3 | Without prejudice to the Mandatory Change provisions set out in Section 10.2, the Provider shall not be in breach of this TSA to the extent that it is unable to provide any of the Services or perform any of its other obligations under this TSA, in each case to the extent that to do so would result in a breach of Regulation so long as, if and to the extent commercially practicable, the Provider has promptly notified the Recipient of such prohibition, has consulted with the Recipient to explain why the Provider reasonably believes such prohibition applies, and has worked together with the Recipient in good faith to either arrange for modification of the Services at issue or a transition of the Services to a Successor Provider. For the avoidance of doubt, the transition of the Services to a Successor Provider pursuant to this Section 2.1.3 terminates the Services and the Service Schedule under this TSA and does not create a Third Party Agreement for which the Provider is responsible for the remainder of the Term with respect to the Services. |
2.1.4 | Subject to the requirements set forth below, the Provider may subcontract the provision of any or all of the Services or any of the Providers other obligations under this TSA. Except in relation to an Existing Third Party Agreement: |
(i) | in selecting the subcontractor in question, the Provider shall have followed its applicable Policies on vendor procurement and approval; |
(ii) | the Provider will notify the Recipient in advance of entering into any subcontract; |
(iii) | the Provider shall ensure any Third Party Consent that is required for the Recipient to receive the Services (and to sublicense to the extent necessary to receive the full benefit of the Services) is obtained and maintained for the duration of the Term; |
(iv) | the Provider shall be entitled to increase the Charges to reflect any increase in the costs incurred by the Provider under that subcontract, compared to the costs previously incurred by the Provider; and |
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(v) | the Provider shall furnish the Recipient with information about the subcontractor in question which is reasonable for diligence purposes, and the Recipient approves of the use of the subcontractor via the Change Control Procedure, with such approval not be unreasonably withheld or delayed. |
2.1.5 | The Provider shall be primarily liable under this TSA for any default in the performance of obligations under this TSA by any subcontractor of the Provider. |
2.2 | [Not Used] |
2.3 | Standard of Service |
2.3.1 | The Provider shall provide the Services in accordance with the Service Level. |
2.3.2 | Subject to the Change Control Procedure with respect to any change in Regulation coming into effect after the date hereof, the Provider shall provide and procure the provision of the Services in compliance with the Regulation applicable to the Provider. |
2.3.3 | Subject to the Change Control Procedure with respect to any change in Regulation coming into effect after the date hereof, the Provider shall provide and procure the provision of the Services in accordance with the Policies applicable to the Provider. |
2.3.4 | Without prejudice to Section 2.3.3, if and to the extent that any proposed change to the Policies would materially increase the risk or reduce the operational controls available to the Provider or the Recipient in connection with the provision or receipt of the Services or materially increase the cost or reduce the benefit to the Recipient in receiving the Services or the Provider in providing the Services (an Adverse Policy Change ), the Provider shall undertake an impact assessment in advance of the change being implemented and involve the Recipient in that impact assessment. In respect of any Adverse Policy Change the Parties shall, acting reasonably and in good faith, develop, agree and implement a remedial plan with the objective of mitigating any material increase in risk or reduction in operational controls available to the Provider or the Recipient in connection with the provision or receipt of the Services or material increase in the cost or reduction in the benefit to the Recipient or Provider in receiving or providing the Services. Any obligations set out in the Service Schedule which require compliance with policies shall be construed as referring to the Policies. |
2.3.5 | If and to the extent the Provider is aware of any material failure, or any circumstances that, in the Providers reasonable opinion, would be reasonably likely to result in a material failure, to provide any material part of the Services in accordance with Section 2.3.1, 2.3.2 or 2.3.3, then, without prejudice to the Recipients other rights and remedies, the Provider shall as soon as reasonably practicable: |
(i) | inform the Recipient of such failure or potential failure (and, if known, what the Provider considers to be the cause of the problem); |
(ii) | advise the Recipient of the remedial efforts being undertaken with respect to that failure or to prevent that potential failure; and |
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(iii) | subject to any duty of confidentiality owed by the Provider, provide the Recipient with further information in relation to the failure or potential failure if and to the extent that information has been produced by, or is otherwise in the possession or control of, the Provider or any of its Affiliates for its own purposes and the Recipient reasonably requires that information at the time in order to manage communications with its customers, employees, investors, suppliers and any Competent Authority. |
2.4 | Recipient Dependencies |
2.4.1 | The Service Schedule shall specify any Recipient Dependencies for the relevant Service, specific obligations to be performed by the Recipient under the Service Schedule in order for the Provider under the Service Schedule to be able to provide the relevant Service to the Recipient. |
2.4.2 | If and to the extent the Recipient is aware of any material failure, or any circumstances that, in the Recipients reasonable opinion, would be reasonably likely to result in a material failure, to perform any material part of the Recipient Dependencies that are set out in the Service Schedule in accordance with this TSA, then, without prejudice to the Providers other rights and remedies, the Recipient shall, as soon as reasonably practicable: |
(i) | inform the Provider of such failure or potential failure and, if known, what the Recipient considers to be the cause of the problem; and |
(ii) | undertake appropriate remedial efforts and promptly advise the Provider of the remedial efforts being undertaken with respect to that failure or to prevent that potential failure. |
2.4.3 | Without prejudice to any right or remedy of the Provider under this TSA in respect of any other obligations of the Recipient (including in relation to any Recipient Dependency or any Incidental Service performed by a Recipient which is not set out in a Service Schedule), if and to the extent the Recipient fails to perform a Recipient Dependency that is set out in the Service Schedule, Section 2.4.4 sets out the Providers sole and exclusive remedy in respect of the failure by the Recipient to meet that Recipient Dependency other than with respect to: |
(i) | any such failure which causes unauthorized or unlawful access by a third party to the Providers computing systems or loss or corruption of the Providers data; or |
(ii) | any obligation of the Recipient to pay any amount (including any Charges) to the Provider under this TSA. |
2.4.4 |
Each Party recognizes that the Provider is reliant and dependent on the performance of the Recipient Dependencies in order to provide the Services and to perform its other obligations under this TSA. The Provider shall not be in breach of this TSA to the extent that its failure to provide the Services or perform its other obligations under this TSA is a |
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result of a breach by the Recipient of a Recipient Dependency ( provided that such relief shall not prejudice any rights or remedies of the Recipient in respect of any prior breach by the Provider, to the extent that such prior breach caused the Recipients breach of the relevant Recipient Dependency and was not itself caused by a breach by the Recipient of a Recipient Dependency). Any disputes relating to the Providers relief from a breach by the Recipient of a Recipient Dependency shall be resolved in accordance with Section 11. Nothing in this Section 2.4.4 shall exclude or limit the liability of the Provider in relation to any failure to provide the Services or perform its other obligations under this TSA to the extent that such failure is not the result of a breach by the Recipient of a Recipient Dependency. |
2.4.5 | The Recipient shall not be in breach of this TSA to the extent that its failure to perform a Recipient Dependency is a result of a breach by the applicable Provider of an obligation of the Provider ( provided that such relief shall not prejudice any rights or remedies of the Provider in respect of any prior breach by the Recipient, to the extent that such prior breach caused the Providers breach of the relevant obligation and was not itself caused by a breach of the Providers obligations under this TSA). Nothing in this Section 2.4.5 shall exclude or limit the liability of the Recipient in relation to any failure to perform a Recipient Dependency to the extent that such failure is not the result of a breach by the Provider of its obligations under this TSA. |
2.5 | Service Reporting |
2.5.1 | During the Term the Provider shall, with respect to each Service for which the Service Schedule requires a certain Service Level, provide to the Recipient, as part of its monthly performance reports a set of hard copy and soft copy reports to verify the Providers performance and compliance with the Service Levels. |
2.5.2 | The Parties will review the Providers performance against the Service Levels for the previous reporting period. |
3 | Third Party Suppliers |
3.1 | Termination, Expiry or Renewal of Third Party Agreements |
3.1.1 | If, during the Term: |
(i) | a Third Party Agreement is terminated by the Provider (or any member of its Group) or by the Third Party Supplier (for any reason other than Force Majeure (for which Section 14.2 shall apply) or for insolvency of the Third Party Supplier (for which Section 3.1.3 shall apply)); or |
(ii) | a Third Party Agreement expires or is terminated other than as provided in Section 3.1.1(i), or; |
(iii) | a Third Party Agreement otherwise ceases to be available to a Provider for the provisions of Services to a Recipient (for example, by virtue of application of a change of control or similar provision), |
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and that Third Party Agreement is required for the provision or receipt of any Service or the performance of any obligation of the Provider or the Recipient, then subject to the provisions of Section 3.1, the Provider shall use commercially reasonable efforts to implement such arrangements as are necessary to ensure continuity of the relevant Service on the same terms of the Service Schedule and this TSA, unless otherwise agreed by the Parties in advance.
3.1.2 | Each Party shall use commercially reasonable efforts to mitigate to the extent within its reasonable control any costs required to be incurred in respect of the negotiation and implementation of any change to, or extension, renewal or replacement of a Third Party Agreement and migration to an alternative Third Party Supplier. |
3.1.3 | In the event of the insolvency of a Third Party Supplier required for the provision or receipt of a Service or the performance of any obligation of the Provider or the applicable Recipient for such Service, the Provider may discontinue (which, for the avoidance of doubt, shall include electing not to replace) such Service without the discontinuance being a breach or causing any liability of the Provider to the relevant Recipient. |
3.1.4 | For the avoidance of doubt, the provisions of Section 3.1.1 through Section 3.1.3, inclusive, shall not affect the rights of a Provider to terminate the Services, or for the Services to terminate, pursuant to the terms of the Service Schedule. |
3.2 | Changes in Third Party Supplier Costs |
3.2.1 | In the event that a Third Party Supplier increases or decreases its fees in relation to a Service during the Term: |
(i) | the Provider shall promptly notify the Recipient of the change in fees with such notice to include supporting documentation as might reasonably be expected to explain the change in fees to the Recipient; and |
(ii) | the Charges for the Services shall be adjusted accordingly. |
3.3 | Relationship with Third Party Suppliers |
3.3.1 | So far as it relates to the provision of a Service or the performance of the Providers other obligations under this TSA, the Provider shall manage exclusively its relationship with Third Party Suppliers and the applicable Recipient shall not discuss with any Third Party Supplier the provision of the Services or the performance of the Providers other obligations under this TSA, except: |
(i) | to the extent required to do so by a court, competent judicial authority and/or a Competent Authority; |
(ii) | as agreed by the Parties; or |
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(iii) | if in the Providers opinion and only to the extent reasonably necessary in order for the Recipient to be able to receive the Services under the Service Schedule, |
provided in each case that it has notified the Provider in advance (if and to the extent permitted to do so under Regulation).
3.4 | Liability for Third Party Suppliers |
3.4.1 | If the Provider breaches this TSA as a result of the acts or omissions of a Third Party Supplier, the Providers liability is subject to the Section 8.2 limitations and caps on liability. |
3.4.2 | Notwithstanding the limitations in Section 3.4.1, any amounts recovered by the Provider from a Third Party Supplier which are in relation to Losses incurred as a result of the acts or omissions of the Third Party Supplier shall be divided among the Provider and Recipient in proportion to their Losses, provided , however, that any amounts paid over to the Recipient shall not exceed the amount of the Recipients Losses. For the avoidance of any doubt: |
(i) | any amounts paid over to the Recipient pursuant to this Section 3.4.2 are independent of and not to be part of any limitations or caps on the liability of the Parties as set forth in Section 8.2; and |
(ii) | if the Providers commercially reasonable efforts to recover such amounts from a Third Party Supplier are unsuccessful, such a failure to recover any amounts is not a breach and is not a liability of the Provider. |
3.4.3 | Without prejudice to the Parties rights and obligations in relation to mitigation of losses at law or in equity, each Provider and Recipient shall use commercially reasonable efforts to mitigate the quantum of Losses and/or any other adverse consequences incurred or suffered by the Recipient as a result of the breach of a Third Party Agreement by a Third Party Supplier (to the extent a Party is aware of such breach). |
4 | Price and Payment |
4.1 | Charges |
4.1.1 | In consideration for the provision of the Services, Recipient agrees to pay to Provider upon the terms and subject to the conditions of this TSA, the Charges in accordance with the then prevailing tax guidelines as to arms length remuneration currently considered to be at cost plus such regulatory transfer pricing mark-up on cost as may be recommended by advisors from time to time. |
4.2 | Costs |
4.2.1 |
The costs referred to in Section 4.1 shall mean all direct, managed and indirect costs associated with and attributable to the provision of the Services by Provider. These costs shall be inclusive of, but not limited to, all expenses in so far as they relate to the |
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Services supplied by Provider for salaries, advisory, facilities and equipment plus the expenses to the extent reasonably allocatable to the Services provided by Provider. The appropriate charges for depreciable assets such as facilities and equipment shall be determined in accordance with generally accepted accounting rules. |
4.3 | Taxes |
4.3.1 | The Charges payable under the Service Schedule are exclusive of any Taxes, which would be applicable from time to time as per statutory requirements and shall be for the account of Recipient. |
4.3.2 | Each party shall be responsible for Taxes based on its own net income, employment taxes of its own employees and Taxes on any property it owns or leases. |
4.3.3 | All payments made by the Recipient to the Provider will be made without deduction or withholding for or on account of any present or future Taxes, including but not limited to value added tax, turnover tax and withholding taxes, unless Recipient is required by law to deduct or withhold such taxes or duties. |
4.3.4 | In such event, the Recipient will pay such additional amounts as may be necessary in order that the net amounts receivable by Provider after such deduction or withholding shall be equal to the amount which would have been receivable in the absence of such deduction or withholding. |
4.4 | Payment Terms |
4.4.1 | The Services provided are classed as either Business Process Outsourcing (BPO) or Knowledge Process Outsourcing (KPO) which attracts a mark up in accordance with rate prevailing when the invoice is issued, based on benchmarking studies recommended by external advisors. The prevailing rates are detailed on the invoices at the time of issue. |
4.4.2 | The invoice currency will be USD. |
4.4.3 | Provider will send the invoice in hard-copy format and use the address for invoicing as set out in the Service Schedule. |
4.4.4 | The invoice will contain the description as set out in the Service Schedule, failing which the description, Professional Services Charges rendered by RBS Global Trade Service Centre Private Ltd, or other words as agreed by both parties. |
4.4.5 | The Provider shall invoice the Recipient monthly. |
4.4.6 | The invoices are payable through physical remittance of funds within 30 days of receipt of the relevant invoice. |
4.4.7 | If any part of the Charges is subject to a bona fide dispute then that part of the Charges subject to dispute shall be dealt with in accordance with Section 11 and any part of the Charges that is not subject to dispute is to be paid pursuant to this Section 4. |
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5 | Representations, Warranties and Mutual Obligations |
5.1 | Representations and Warranties |
5.1.1 | Each Party represents and warrants to the other that as at the date hereof: |
(i) | it is duly constituted, organized and validly existing under the laws of the jurisdiction of its incorporation; |
(ii) | it has the legal right and full power and authority to execute and deliver, and it have the legal right and full power and authority to exercise its rights and perform its obligations under, this TSA, the Service Schedule and any documents which are to be executed by it or any of them pursuant to this TSA; |
(iii) | its contemplated provision or receipt, as applicable, of Services in the Service Schedule does not conflict with any other contract to which it is a Party; and |
(iv) | it is satisfied that all Charges for the Services provided hereunder were negotiated and determined on an arms-length basis. |
5.1.2 | The Provider represents and warrants to the Recipient that as at the date hereof: |
(i) | this TSA and the contemplated provision of the Services pursuant to the Service Schedule is compliant in all material respects with all Regulation applicable to it; and |
(ii) | its contemplated provision of Services in the Service Schedule is compliant in all material respects with the Policies applicable to it. |
5.1.3 | The Recipient represents and warrants to the Provider that as at the date hereof this TSA and the contemplated receipt of the Services by it pursuant to the Service Schedule is compliant in all material respects with all Regulation applicable to it, including, for the avoidance of any doubt and to the extent applicable, Regulation W of the Board of Governors of the Federal Reserve System. |
5.2 | General Obligations |
5.2.1 | Each Party shall: |
(i) | subject to the Change Control Procedure with respect to any change in Regulation after the date hereof, comply with Regulation in connection with the performance of its obligations under this TSA including (in the case of the Provider) its provision of the Services and (in the case of the Recipient) its receipt of the Services; |
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(ii) | perform its obligations under this TSA including (in the case of the Provider) its provision of the Services and (in the case of the Recipient) its receipt of the Services; |
(iii) | provide on a timely basis such information and data as the other Party may reasonably require for the purposes of the provision of the Services; and |
(iv) | participate in discussions regarding the provision or receipt of the Services (as applicable) to the extent reasonably required by the other Party in order to enable the Services to be properly provided or received. |
5.2.2 | Without prejudice to the Mandatory Change provisions set out in Section 10.2, each Party shall promptly notify the other upon becoming aware of any proposed changes to a Regulation or new Regulation which will or are likely to impact the provision or receipt of the Services. |
5.2.3 | If a Party or any of its Affiliates or, to its knowledge, any Third Party Supplier is subject to any investigation by any Competent Authority and such investigation is relevant to the performance of the obligations under this TSA, then, to the extent permitted by Regulation and the Competent Authority, the Party shall as soon as reasonably practicable notify the other Party of such investigation (such notice to contain reasonable detail relating to the reason for the investigation and why it is relevant to the provision or receipt of the Services). The Parties agree to cooperate to the extent reasonable in the event of any such investigation. |
6 | Term and Termination |
6.1 | Commencement |
This TSA shall come into effect on the date of its execution.
6.2 | Term |
Subject to Section 6.3 and to earlier termination in accordance with its terms, this TSA shall automatically terminate without the need for further action by either Party on the earlier of: (i) the Service Schedule Expiry Date; and (ii) the Scheduled TSA End Date (both being subject to an extension pursuant to Section 6.3).
6.3 | Extension to the Term |
If the Recipient wishes for the Service to continue beyond the Service Schedule Expiry Date and/or Scheduled TSA End Date then the Recipient must give notice to the Provider specifying the period for which the Recipient wishes to continue to receive the Service, provided however, that such extension shall not extend beyond December 31, 2016. Upon such notice the Term shall be extended up to the relevant date.
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6.4 | Termination on Notice |
6.4.1 | Notwithstanding any other provision of this TSA, the Recipient may terminate any of the Services, or any separable part of the Services, by providing the Provider with at least six months prior mailed notice of such termination. |
6.4.2 | The Recipient is not responsible or liable for any Provider costs incurred as a result of an early termination notice made in compliance herewith, provided, however, that a Recipient shall reimburse the Provider for any costs incurred by the Provider as a result of a Service being terminated early by the Recipient where such Service is provided pursuant to a Third Party Agreement which was renewed, extended or replaced after the date hereof. |
6.5 | Termination for Insolvency |
Each Party may terminate this TSA immediately by written notice to the other Party if the other Party becomes unable to pay its debts, enters into liquidation, a receiver or administrative receiver is appointed over all or any of its assets, it ceases trading or is dissolved, or any procedure equivalent to any of the preceding matters occurs in any other jurisdiction with respect to that other Party.
6.6 | Termination for Regulatory Reasons |
6.6.1 | Each Party shall have a right to terminate this TSA if directed in writing by a Competent Authority. A Party may exercise such right upon 90 days prior notice, or such shorter timeframe as required by a Competent Authority or to comply with Regulation. |
6.6.2 | In the event of a termination of this TSA pursuant to this Section 6.6, the Parties acknowledge and agree that Migration of the Services may not be fully implemented as of such termination and, to the extent required by a Competent Authority, neither Party will have any obligation to assist in the Migration of the Services after such termination. |
6.7 | Termination for Breach |
6.7.1 | Subject to Section 6.7.2, each Party (the Non-Defaulting Party ) may terminate a Service immediately by written notice to the other Party (the Defaulting Party ) if the Defaulting Party commits a material breach of its obligations with respect to that Service under this TSA and the Service Schedule and (where the breach is capable of being remedied) that breach has not been remedied within 30 days after receipt of a written request to do so from the Non-Defaulting Party. |
6.7.2 | In the event that a Party elects to terminate a Service pursuant to Section 6.7.1, the TSA shall be deemed to continue in full force and effect in accordance with its terms, except with respect to such terminated Service. |
6.7.3 | Unless otherwise specified, any breach in respect of the Service Schedule shall not constitute a breach of this TSA, and unless otherwise agreed in writing, the Parties will continue to provide Services and honor all other commitments under this TSA during the course of dispute resolution pursuant to Section 11, except to the extent such commitments are the subject of such dispute, controversy or claim. |
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6.8 | Delivery of Data on Termination or Expiry |
6.8.1 | Except if and to the extent otherwise agreed in the Service Schedule and subject always to Regulation, in the event of the termination or expiry of a Service pursuant to this TSA: |
(i) | to the extent that: |
(a) | any Recipient Data is in the possession or reasonable control of the Provider or its Affiliates, the Provider shall provide to the Recipient such Recipient Data in its then-current format; and |
(b) | any Provider Data is in the possession or reasonable control of the Recipient or its Affiliates, the Recipient shall provide to the Provider such Provider Data in its then-current format; |
(ii) | once the Provider has provided the Recipient Data in accordance with Section 6.8.1.(i)(a), the Provider will (to the extent reasonably practicable) delete or destroy its copy or copies of such data, unless required to maintain a copy by Regulation or the requirements of any Competent Authority or to the extent such Recipient Data also relates to the Providers Groups business; and |
(iii) | once the Recipient has provided the Provider Data in accordance with Section 6.8.1.(i)(b) the Recipient will (to the extent reasonably practicable) delete or destroy its copy or copies of such data, unless required to maintain a copy by Regulation or the requirements of any Competent Authority or to the extent such Provider Data also relates to the Recipients Groups business. |
6.8.2 | Unless otherwise agreed by the Parties, the Provider shall charge Recipient in respect of the costs incurred by the Provider in respect of complying with its obligations under this Section 6.8. |
6.8.3 | Any Recipient Data retained by Provider and any Provider Data retained by Recipient pursuant to Section 6.8.1 shall be subject to the Data Protection requirements set forth in Section 13 and the Confidentiality requirements set forth in Section 13 for as long as such data is retained. |
6.9 | Survival of Rights on Termination or Expiry |
Termination or expiry of this TSA shall not affect any rights or obligations which may have accrued prior to termination or expiry. The obligations of each Party set out in any Section intended to survive such termination or expiry, including this Section 6.9 and Section 4, Section 8, Section 12, Section 13, Section 16, Section 17 and Section 20 shall continue in full force and effect notwithstanding termination or expiry of this TSA.
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7 | Migration |
7.1 | Migration |
No later than the third month of the six month notice period specified in Section 6.4, the Provider will:
7.1.1 | submit a plan reasonably acceptable to the Recipient, specifying how the Provider will assist in the orderly handover of the terminated Services; |
7.1.2 | regularly update the plan to ensure that it reflects changes in the Services or terminated Services, and the methods of delivering the terminated Services; and |
7.1.3 | revise the plan from time to time in accordance with Recipients reasonable directions. |
7.2 | Migration Plan |
The Provider will as soon as reasonably practicable:
7.2.1 | implement the plan referred to in Section 7.1; and |
7.2.2 | provide the Recipient with all information, documentation, Recipient software, Recipient Data, Recipient equipment and hardware and any work or records which are material to Recipients business. The Provider will also provide all other assistance reasonably required by the Recipient. |
7.3 | Migration Costs |
The Recipient shall be responsible for any costs incurred by the Provider in relation to the migration services described in Sections 7.1 and 7.2.
8 | Limitation of Liability and Indemnification |
8.1 | Exclusions from Liability |
Notwithstanding anything herein to the contrary, no Party shall be liable for any special, indirect, incidental, consequential or punitive damages of any kind whatsoever in any way due to, resulting from or arising in connection with any of the Services or the performance of or failure to perform Providers or Recipients obligations under this TSA, as applicable, including to the extent that such liability is:
(i) | for or in respect of any loss of profit, loss of revenue, loss of goodwill or indirect or consequential losses, punitive, special or consequential damages; or |
(ii) | for the value of any lost or corrupted data; or |
(iii) | for the costs of reconstituting, restoring or rectifying lost or corrupted data (in each case, other than to the extent arising from a breach of Section 19.1), |
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in each case of whatever nature regardless of whether such damages are foreseeable or whether the Provider or Recipient, as applicable, or any of its Affiliates has been advised of the possibility of such damages.
8.2 | Cap on Damages and Exclusions |
8.2.1 | Except in the case of death or personal injury, fraud or fraudulent misrepresentation, or Charges that have come due in connection with the Services, the Providers and the Recipients aggregate liability to the other in respect of the Service shall be limited to an amount equal to 12 x the Monthly Charge for such Service, where Monthly Charge means the amount of Charges paid for the first full calendar month (which shall include any amounts invoiced directly to the Recipient by a Third Party Supplier in that month) of the relevant Service giving rise to the claim. |
8.2.2 | Except in the case of death or personal injury, fraud or fraudulent misrepresentation, or Charges that have been paid or come due in connection with the Services, each Partys total aggregate liability to the other in connection with this TSA shall be limited to an amount equal to the total Charges for the Services paid and payable to Provider pursuant to this TSA during the 12 months prior to the first date an event giving rise to the liability occurred. |
8.2.3 | The limits on, and exclusions of, liability set out in this Section 8 shall not apply in respect of: |
(i) | any liability for death or personal injury; |
(ii) | any liability for fraud or fraudulent misrepresentation; |
(iii) | any other liability that cannot be lawfully excluded; and |
(iv) | the obligation of Recipient to pay Charges with respect to Services that have been provided. |
8.3 | Indemnification |
8.3.1 | Subject to the exclusions from liability in Section 8.1, the Provider and the Recipient agree to indemnify and hold harmless each other, and each of their directors, officers, employees and agents, and each of the heirs, executors, successors and assigns of any of the foregoing (collectively the Indemnitees ), from and against any and all losses of the Indemnitees relating to, arising out of or resulting from any breach by a Party, of this TSA or the Service Schedule, to the extent caused by, resulting from or arising out of or in connection with the other Partys infringement, misappropriation or violation of Intellectual Property Rights of a third party in connection with the provision or receipt of Services under this TSA; |
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provided that.
(i) | the aggregate liability pursuant to this Section 8.3 shall not exceed the cap on damages in Section 8.2 (subject to the exclusions from the cap set forth therein); and |
(ii) | the Provider shall have no liability under this Section 8.3 with respect to any infringement, misappropriation or violation of Intellectual Property Rights of a third party to the extent that such claim is based upon or related to: |
(a) | Services that have been modified by the Recipient; |
(b) | use of the Services in conjunction or combination with any software, data or other materials not provided by the Provider of the Services; or |
(c) | use of the Services in a manner or for any purpose other than as directed by the Provider or as expressly permitted by this TSA. |
9 | Governance |
9.1 | Each party will appoint representatives with suitable qualifications, experience and authority to participate in the meetings and committees, and otherwise fulfil their respective functions. |
9.2 | The Provider and the Recipient will each manage and supervise the relationship set out in this TSA, through a body containing representatives of both the Provider and the Recipient as constituted from time to time. |
10 | Changes and Change Control |
10.1 | Changes |
10.1.1 | Subject to Sections 10.2 to 10.4 (inclusive), in the event that a Party wishes to make any Change it shall be managed by way of the Change Control Procedure as set forth in this Section 10.1.1. |
(i) | Upon realization of the need for a Change, either Party shall provide prompt notice to the other Party of a Change request ( Change Control Request ) in writing specifying in as much detail as is reasonably practicable the nature of the proposed Change. Within four weeks of receipt of a Change Control Request, the Party that received such notice shall provide a response indicating whether it can make the proposed Change, its estimated costs of making the proposed Change and an estimated schedule for implementing the proposed Change. |
(ii) | The timing of implementation of any Change will be determined by the Parties. |
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10.2 | Mandatory Change |
10.2.1 | Where a Change Control Request is in respect of a Mandatory Change, the Parties shall, as soon as reasonably practicable thereafter, meet to discuss and agree the terms on which, and the time frame in which, each Party shall implement that Mandatory Change (which shall be within the time frame required to comply with the relevant Regulation, except where it would not be reasonable for each Party to implement such Mandatory Change within such time frame, in which case each Party shall implement such Mandatory Change as soon as reasonably practicable thereafter). The Parties shall work together in good faith to mitigate the consequences of any delay in implementing the Mandatory Change beyond the date required to comply with the Regulation. |
10.2.2 | To the extent that a Mandatory Change requested by a Party increases the cost to the Provider (including, for the avoidance of doubt, the costs and appropriate margin of implementing the Mandatory Change and incremental running costs and appropriate margin incurred by the Provider arising as a result of that Mandatory Change), then the increased cost and margin to the Provider will be added to the Charges paid by the Recipient for the relevant Service. |
10.3 | Discretionary Changes |
10.3.1 | Where a Change Control Request submitted by a Party is in respect of a Discretionary Change, the Parties shall, as soon as reasonably practicable thereafter, meet to discuss the terms of the Discretionary Change, including the payment of costs incurred by the Provider associated with the proposed Discretionary Change. For the avoidance of doubt, the Party being requested to implement a Discretionary Change may refuse to implement any Discretionary Change. |
10.4 | Emergency Change |
10.4.1 | If a Change is required to respond to an Emergency, the affected Party shall use commercially reasonable efforts to notify the other Party and obtain the other Partys prior consent for the Change but, if the notifying party is the Provider and the Provider is not able to notify the Recipient and obtain consent, the Provider shall be entitled, without limiting any rights and remedies of the Recipient in respect of any breach of this TSA (as if such Change had not been made), to nevertheless make the minimum necessary temporary Change as necessary to respond to the Emergency in accordance with the terms of any applicable disaster recovery plans. As soon as practicable following the implementation of any temporary Change, the Provider shall notify the Recipient of the temporary Change and the nature of the Emergency and shall then retroactively comply with the terms of the Change Control Procedure. |
10.4.2 | Emergency means a Change that is required to ensure: (i) continued provision of, or the continued operation and integrity of the Services; or (ii) the continued operation and integrity of the Provider Systems, in each case the implementation of which cannot wait (including for reasons of stability and performance) for authorization through the Change Control Procedure. |
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11 | Dispute Resolution |
11.1 | Dispute Resolution Process |
11.1.1 | The Parties shall in the first instance attempt to resolve any dispute in relation to any aspect of, or failure to agree any matter arising in relation to, this TSA or any document agreed or contemplated as being agreed pursuant to this TSA (a Dispute ) informally through discussion as follows: |
(i) | the representatives will discuss to resolve the Dispute, and if the representatives cannot resolve the Dispute within 10 Business Days of the Dispute being referred to them, then; |
(ii) | the Dispute shall promptly be referred by the representatives to a nominated senior individual of each Party (the Senior Nominees ), and if the Senior Nominees cannot resolve the Dispute within 10 Business Days of the Dispute being referred to them (unless a longer period is mutually agreed), then; |
(iii) | the dispute resolution process shall be deemed to have been exhausted in respect of the Dispute, and each Party shall be free to pursue its rights at law in respect of such Dispute without further reference to the dispute procedure under this Section 11.1. |
This Section 11.1 does not limit the right of either Party to: (i) exercise any self-help remedies provided for herein; or (ii) file an action in a court of law, before, during, or after the dispute resolution process to obtain a provisional or interim remedy, and/or any ancillary, additional or supplementary remedy, provided that any such action shall be heard and determined exclusively in any court of competent jurisdiction sitting in England.
11.1.2 | The Parties will discuss in good faith, at either Partys request, measures to shorten the time contemplated by this Section 11 to complete the Dispute resolution process. |
12 | Intellectual Property Rights |
12.1 | Ownership |
12.1.1 | The Provider and the Recipient (or their respective licensors) will retain all right, title and interest in or to their respective Intellectual Property Rights. |
12.2 | License |
12.2.1 | Each party grants the other party a royalty-free, non-transferable, non-exclusive licence to use the Intellectual Property Rights solely for the purpose of providing or receiving the Services. |
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12.2.2 | Both parties undertake to: |
(i) | comply with the other partys reasonable directions (whether oral or written) relating to the manner of the use of the other Partys Intellectual Property Rights; |
(ii) | only modify the other partys Intellectual Property Rights with the prior written consent of that other party and then only in the manner and to the extent authorised by that other Party; and |
(iii) | treat all information relating to the other Partys Intellectual Property Rights as confidential in accordance with the terms of Section 13. |
12.2.3 | Neither Party shall: |
(i) | sub-license, assign, transfer, charge or otherwise deal in or encumber the other Partys Intellectual Property Rights or use the other Partys Intellectual Property Rights on behalf of a third party; or |
(ii) | remove or alter any copyright or proprietary notice on any materials in which the other Partys Intellectual Property Rights are embodied. |
13 | Data Protection, Confidential Information and Record-keeping |
13.1 | Data Protection |
13.1.1 | Each Party acknowledges and agrees that, solely to permit it to perform its obligations pursuant to this TSA and the Service Schedule, the other Party may provide it with Confidential Information, including Personal Data. Each Party further acknowledges and agrees that it shall have the right to use the other Partys Confidential Information, including Personal Data, solely to fulfill and perform its obligations under this TSA and otherwise comply with Regulations that apply to that Party. Regulation in respect of Personal Data may include U.S. federal data privacy laws and regulations such as the GLB Act, the Federal Privacy of Consumer Financial Information Regulation (12 CFR Part 30), as amended from time to time, issued pursuant to Section 504 of the GLB Act, and the Health and Insurance Portability and Accountability Act of 1996 (42 U.S.C. § 1320d), U.S. state data privacy laws such as the Massachusetts Data Protection Act (201 CMR 17) and, if applicable, international data privacy laws such as The Data Protection Act 1998 and Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and the free movement of such data. To the extent that the Recipient requires the Provider to comply with any Regulation in respect of Personal Data which does not apply to the Provider at law, then the Recipient shall (i) instruct the Provider of the same under Clause 13.1.2(i) and (ii) provide all reasonable assistance and information to the Provider in order to allow the Provider to comply with the same. Each Party may provide guidelines to help the other Party comply with such Regulation, but each Party using its own legal advisors will remain fully responsible, subject to the Change Control Procedure in respect of any change in Regulation after the date hereof, for interpreting and complying with such Regulation with respect to its own business. A Party shall have no right to use, reuse or disclose any Personal Data to any person or entity for any reason not specifically permitted under this TSA or the Service Schedule. |
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13.1.2 | Each Party confirms that, when it is processing data, it shall: |
(i) | only process Personal Data in accordance with the other Partys instructions; and |
(ii) | take appropriate technical and organizational measures to protect Personal Data against accidental or unlawful destruction or accidental loss, alteration, unauthorized disclosure or access and against all other unlawful forms of processing. |
13.1.3 | The Parties shall respectively comply with all Regulation, subject to the Change Control Procedure in respect of any change in Regulation after the date hereof, in respect of Confidential Information, including Personal Data, including securing such consents, registrations and notifications as may be required to enable the Provider and any Third Party Suppliers to provide the Services and to enable the Recipient to receive the Services. |
13.2 | Confidential Information |
13.2.1 | The Parties hereby covenant and agree to keep confidential all Confidential Information relating to the other Party. Without limiting the generality of the foregoing, each Party shall cause its employees and agents to exercise the same level of care with respect to Confidential Information relating to the other Party as it would with respect to proprietary information, materials and processes relating to itself. Confidential Information shall mean all information, materials and processes relating to a Party, its Affiliates, its employees, third party vendors, counterparties or customers obtained by the other Party at any time (whether prior to or after the date hereof) in any format whatsoever (whether orally, visually, in writing, electronically or in any other form) arising out of the rendering or receipt of Services hereunder (or preparations for the same or for the termination thereof) and shall include, but not be limited to, economic and business information or data, business plans, software and information relating to personnel, products, financial performance and projections, processes, strategies and systems but shall not include information which: |
(i) | was already in possession of the other Party prior to the date hereof and for which no confidentiality obligation or other restriction on use previously existed; |
(ii) | is or becomes generally available to the public other than by release in violation of the provisions of this Section 13; |
(iii) | is or becomes available on a non-confidential basis to a Party from a source other than the other Party to this TSA, provided that the Party in question reasonably believes that such source is not or was not bound by an obligation to the other Party to hold such information confidential; and |
(iv) | is acquired or developed independently by a Party without use or reference to otherwise Confidential Information of the other Party. |
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Except with the prior written consent of the other Party, each Party will use the other Partys Confidential Information only in connection with the performance of its obligations hereunder and each Party shall use commercially reasonable efforts to restrict access to the other Partys Confidential Information to those employees of such Party requiring access for the purpose of providing or receiving Services hereunder.
13.2.2 | The provisions of Section 13.2.1 shall not prohibit a Partys disclosure or use of the other Partys Confidential Information if and to the extent such Confidential Information is made available to or used by the professional advisers or Third Party Suppliers of each Party for the provision or receipt of the Services, provided , however that in each case such professional advisors or Third Party Suppliers are subject to written confidentiality obligations in a form approved by the other Party (such approval not to be unreasonably withheld or delayed). |
13.2.3 | Each Party shall notify the other Party immediately of any suspected or known fraud relevant to its activities under this TSA or the Service Schedule, or of any unauthorized access, possession, use, or knowledge, or attempt thereof, of the other partys Confidential Information, or of the occurrence of any other incident relating to the Services that could cause financial, customer or reputational loss to another Party, and agrees to cooperate with the other Party to investigate the occurrence and mitigate the impact of such an event. Each Party shall promptly provide the other Party with full details of any such event and use all available efforts to prevent a recurrence of any such event. |
13.2.4 | Notwithstanding any provision of this Section 13 to the contrary, a receiving Party may disclose such portion of the Confidential Information relating to the disclosing Party to the extent, but only to the extent, the receiving Party reasonably believes that such disclosure is required Regulation or the rules of a Competent Authority or under a subpoena or other legal process; provided that if practicable and permissible under Regulation, or rules, the receiving Party shall first notify the disclosing Party of such requirement and allow such Party a reasonable opportunity to seek a protective order or other appropriate remedy to prevent such disclosure and cooperate with the disclosing Party in any lawful effort by the disclosing Party to contest the legal validity of such requirement and prevent such disclosure. |
13.2.5 | The Parties agree that monetary damages will not be an adequate remedy if this Section 13 regarding Data Protection and Confidential Information is breached and therefore, a disclosing Party shall, in addition to any other legal or equitable remedies, be entitled to seek injunctive relief against any breach or threatened breach of this Section 13 by the receiving Party with respect to the disclosing Partys Confidential Information. |
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13.3 | Record-keeping |
13.3.1 | The Provider will at all times operate a consistent and generally accepted system of accounting in relation to, and maintain complete and accurate records of, and adequate supporting documents for the Service Records. |
13.3.2 | The Provider will maintain the Service Records: |
(i) | in a manner and to a level of detail sufficient to justify the calculation of the Charges and to satisfy the requirements of the Regulation; and |
(ii) | for the period required by the Regulation, and for a minimum of seven years after the Service Records are created. |
14 | Force Majeure |
14.1 | Force Majeure Events |
For purposes of this TSA, Force Majeure means an event beyond the reasonable control of either Party, which by its nature was not foreseen by such Party, or, if it was foreseen, was not reasonably avoidable, and includes without limitation, acts of God, storms, floods, riots, fires, sabotage, civil commotion or civil unrest, interference by civil or military authorities, threat, declaration, continuation, escalation or acts of war (declared or undeclared) or acts of terrorism, any unauthorized, unlawful access by a third party to either Partys computing systems other than as a result of such Partys, failure or shortage of energy sources, strike, walkout, lockout or other labor trouble or shortage, delays by unaffiliated suppliers, and acts, omissions or delays in acting by any Competent Authority.
14.2 | No Liability for Force Majeure |
Without limiting the generality of Section 8.3, neither Party shall be under any liability for failure to fulfill any obligation under this TSA or the Service Schedule, so long as and to the extent to which the fulfillment of such obligation is prevented, frustrated, hindered, or delayed as a consequence of circumstances of Force Majeure; provided that (i) such Party shall have used commercially reasonable efforts to minimize to the extent practicable the effect of Force Majeure on its obligations hereunder and (ii) nothing in this Section 14.2 shall be construed to require the settlement of any strike, walkout, lockout or other labor dispute on terms which, in the reasonable judgment of the affected Party, are contrary to its interests. It is understood that the settlement of a strike, walkout, lockout or other labor dispute will be entirely within the discretion of the affected Party. The Party affected by the Force Majeure event shall notify the other Party of that fact as soon as practicable.
14.3 | Delay Owing to Force Majeure |
In the event of any such delay as a consequence of circumstances of Force Majeure, the Recipient of any affected Service may elect to either:
(i) | submit a Change Control Request to extend the time for performance of the affected Service for a period equal to the time lost by reason of the delay, provided however , that such extension shall not extend beyond the Scheduled TSA End Date; or |
(ii) | terminate this TSA in relation to those Services which are affected by the Force Majeure event. |
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15 | Employee Provisions |
15.1 | No Obligation to Transfer Employees |
15.1.1 | The Parties acknowledge and agree that the Acquired Rights Directive (Council Directive 77/187/EEC as amended by Council Directive 98/50 EEC and consolidated in Council Directive 2001/23/EEC) as amended ( ARD ) or any enactment of the ARD in any national law or any analogous national law will not apply on the commencement of the Services. |
15.1.2 | The Parties believe that on the cessation or partial cessation of the Services or any part of the Services on the termination, expiry or variation of this TSA, no transfer of the contracts of employment between a Provider or any Third Party Supplier (or any subcontractor thereof) and any of its/their employees to the Recipient or Successor Provider shall take place by reason of the ARD or any enactment of the ARD in any national law or any analogous national law. |
15.1.3 | Without prejudice to Section 15.1.1, if requested to do so by the Recipient at any time before the termination, expiry or variation of the Services, the Provider will (or will procure that) all persons working on the Services ( Staff ), whether employed/engaged by the Provider, by any Third Party Supplier or any subcontractor thereof, will be redeployed or otherwise removed from the Services before the cessation of those Services so that those Staff cease to be engaged within the Services and are not affected by any transfer pursuant to the ARD or any enactment of the ARD in any national law or any analogous national law that may otherwise occur on the cessation of those Services. |
15.2 | Pre-employment Screening |
15.2.1 | Subject to Regulation, the Provider shall require any individual it employs or engages in connection with the performance of its obligations under this TSA to have satisfied the screening procedures set out in the RBSG Policy for India, prior to such individual performing any Services hereunder: |
15.2.2 | In the event that: |
(i) | the Provider is unable to comply fully with the pre-employment requirements above with respect to an individual; |
(ii) | any pre-engagement screening activity returns information that otherwise indicates in the Providers reasonable judgment that such individual should not be engaged to provide Services under this TSA, |
then the Provider shall not engage the individual in relation to this TSA or the Service Schedule.
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16 | Communications with Competent Authorities |
If either Party receives any material correspondence from any Competent Authority that relates to the Services, it will provide a copy of that correspondence to the other Party unless it is prevented from doing so by Regulation or such Competent Authority. The Parties shall consult with each other over such correspondence and shall only respond to the Competent Authority if:
16.1.1 | the terms of the response have been approved by the other Party (such consent not to be unreasonably withheld or delayed); or |
16.1.2 | Regulation requires a response to the Competent Authority without the other Partys consent. |
17 | Audit |
17.1 | Regulatory Audit Rights |
17.1.1 | The Provider shall (and shall use all commercially reasonable efforts to ensure its Third Party Suppliers providing material Services or a material element of the Services shall) promptly permit: |
(i) | the Recipient or its auditors (to the extent the Recipient and its auditors are directed by a Competent Authority); and |
(ii) | any Competent Authority (or its designated representatives), |
access to the Providers and Third Party Suppliers facilities and premises, equipment, books and records (electronic or otherwise), operational systems, employees, contractors, and subcontractors to the extent required by the Competent Authority to perform an audit.
17.1.2 |
Subject to any restriction under Regulation or the direction of any Competent Authority, the Provider shall ensure it is (and shall use all commercially reasonable efforts to ensure its Third Party Suppliers providing material Services or a material element of the Services are) open and cooperative with the Recipient and its auditors and any Competent Authority (and its designated representatives) in performing its obligations under this Section 17.1 and shall provide such information, assistance, records and materials, access to persons engaged in the provision of the Services and explanations as required by the Recipient or its auditors (to the extent the Recipient and its auditors are directed by a Competent Authority) or the Competent Authority (including attending any meetings requested by the Recipient and/or the Competent Authority (or its designated representatives) and providing copies of any internal audit reports which are relevant to the Services). The Recipient shall provide as much notice of the audit as is |
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reasonably practicable. Unless otherwise agreed by the Parties, the Provider shall charge Recipient in respect of the costs incurred by the Provider in respect of such audits. |
17.1.3 | If and to the extent the Provider does not have the rights under its relevant Third Party Agreement to ensure its Third Party Supplier grants the rights described in Sections 17.1.1 and 17.1.2, any costs in procuring such rights shall be borne by the Recipient, provided that such costs were approved by the Recipient in writing before they were incurred. If the Recipient declines, or otherwise fails, to approve such costs, the Provider shall not be required to obtain the grant of the relevant rights by that Third Party Supplier. |
17.2 | General Audit Rights |
17.2.1 | With respect to the Service Schedule: |
(i) | The Provider shall, from time to time, but in any event no more than twice in any 12-month period (subject to the exception in Section 17.2.1(ii)), during regular business hours and upon reasonable notice, permit the Recipient or its representatives to perform audits of the Providers (and to the extent commercially reasonable, its Third Party Suppliers) facilities, equipment, books and records (electronic or otherwise), operational systems, employees, contractors, subcontractors, and such other audits as may be necessary to ensure the Providers and its Third Party Suppliers compliance with the terms and conditions of this TSA and the Service Schedule, as well as Regulation and to ensure the Providers financial and operational viability, including but not limited to the Providers internal controls, pre-engagement employee screening, information and other security, business resumption, continuity, recovery, Service Level compliance, and contingency plans. |
(ii) | If an audit conducted pursuant to Section 17.2.1 (i) reveals any non-compliance or other deficiencies relating to risks to the Providers systems and facilities which could result in the unauthorized destruction, loss, alteration, disclosure of or access to the Recipients Confidential Information, then a senior technology executive of the Provider shall promptly meet with a representative of the Recipient to discuss the matter, and the Provider shall promptly take action to remedy the non-compliance or deficiencies and/or resolve the matters addressed by the qualification(s) so that any deficiencies that caused the qualified opinion to be issued are remedied to the Recipients reasonable satisfaction (including with respect to the timeline of the remediation). Notwithstanding the limitation on the number of audits in Section 17.2.1(i), the Provider shall permit the Recipient to perform an audit solely to the extent necessary to confirm that any non-compliance or deficiencies identified in an audit conducted pursuant to Section 17.2.1(i) have been remedied. |
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18 | Sanctions |
18.1 | Compliance with Sanctions Laws and Regulations |
18.1.1 | The Parties acknowledge that the Parties and their respective Affiliates are subject to the international sanction laws and regulations issued from time to time by HM Treasury, the European Union, the United States of America (including, but not limited to, all applicable regulations of the Office of Foreign Assets Control ( OFAC ), the Bank Secrecy Act and the USA Patriot Act (including such regulations that may require the Provider to implement a Customer Identification Program or Know Your Customer Program to confirm that no beneficiary or client of the Provider appears on any lists issued by OFAC, including the Specially Designated Nationals list, and determine whether transactions by or with such beneficiary or client may constitute suspicious activity, such as identity theft, fraud, money laundering, terrorist financing or other threats to national security)), and the United Nations. |
18.1.2 | Neither Party shall be obliged to make any payment under, or otherwise to implement any part of the Services, if in the reasonable opinion of the relevant Party to do so is illegal or there is involvement by any person (natural, corporate or governmental) listed in the HM Treasury, the European Union, the United States of America, the United Nations or local sanctions lists, or there is any involvement by any person located in, incorporated under the laws of, or owned or controlled by, or acting on behalf or, a person located in or organized under the laws of a country or territory that is the target of comprehensive sanctions. |
19 | Information Security |
19.1 | Information Security |
19.1.1 | A Party may not store, copy, disclose, or use the other Partys Data for any purpose other than to the extent necessary to provide or receive, as applicable, the Services and to comply with Regulation. |
19.1.2 | Neither Party shall attempt to obtain access to, use or interfere with any information technology systems or data used or processed by the other Party except to the extent required to do so to provide or receive the Services (as applicable), or except to the extent expressly permitted to do so by this TSA. |
19.1.3 | Each Party shall maintain reasonable security measures to protect both Parties information technology systems, from third parties, and in particular from disruption by any back door, time bomb, Trojan Horse, worm, drop dead device, virus or other software routine intended or designed to (i) permit access or use of information technology systems by a third person other than as authorized by the Recipient or the Provider, or (ii) disable, damage or erase or disrupt or impair the normal operation of the Recipients or Providers information technology systems. |
19.1.4 |
Each Party shall use reasonably up-to-date security measures to prevent unauthorized access to and unauthorized use of the information technology systems owned by the |
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other Party (or, with respect to a Recipient, any member of the Recipients Group and, with respect to a Provider, any member of the Providers Group) and the other Partys data (including, with respect to a Recipient, the Recipient Data) by third parties (including Third Party Suppliers). |
19.1.5 | A Party shall not introduce any Disabling Device into any information technology environment or any system used by the other Party in connection with the Services. Without limiting a Partys other obligations under this TSA, the Parties agree that, in the event any Disabling Device is found in the systems used to provide the Services, (i) if such Disabling Device originated in any software, deliverable or other resource provided under this TSA or the Service Schedule, the Party that introduced the Disabling Device shall, without prejudice to any other rights and remedies it may have, remove such Disabling Device at its sole expense and (ii) in any case (wherever such Disabling Device originated), the Party that introduced the Disabling Device shall exercise commercially reasonable efforts at no additional charge to eliminate, and reduce the effects of, the Disabling Device and, if the Disabling Device causes a loss of operational efficiency or loss of data, to mitigate such losses and restore such data using generally accepted data restoration techniques. |
19.1.6 | In addition to its other obligations set forth in this TSA, |
(i) | whenever the Provider possesses, stores, processes or has access to the Recipients Personal Data, it shall comply with the applicable Fraud Prevention Policy; and |
(ii) | whenever the Provider possesses, stores, processes or has access to the Recipients Confidential Information (inclusive of Personal Data), it shall comply with the applicable IS Requirements. |
If requested, the Provider will explain to the Recipient how it complies with the Fraud Prevention Policy and the IS Requirements, and shall demonstrate its compliance upon request as set forth in Section 17.2.
19.1.7 | Each Party shall make the other aware as soon as reasonably practical of any information security breach which may materially adversely impact the Services or the other Partys business. |
20 | Other Provisions |
20.1 | Whole Agreement |
20.1.1 | This TSA constitutes the entire agreement between the Parties with respect to the subject matter hereof at the date hereof and supersedes all prior agreements and understandings, both oral or written, between the Parties in relation to the subject matter hereof. |
20.1.2 | In this Section 20.1, this TSA includes all documents entered into pursuant to it and/or this TSA. |
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20.2 | No Construction Against Drafter |
The Parties acknowledge that this TSA and all the terms and conditions contained herein have been fully reviewed and negotiated by the Parties. Having acknowledged the foregoing, the Parties agree that any principle of construction or rule of law that provides that, in the event of any inconsistency or ambiguity, an agreement shall be construed against the drafter of the agreement shall have no application to the terms and conditions of the TSA.
20.3 | Publicity and Public Announcements |
A Party must not make any public announcement relating to this TSA without the prior written approval of the other Party (such approval not to be unreasonably withheld, conditioned or delayed). This shall not affect any announcement required by Regulation, any Competent Authority or the rules of any stock exchange on which the shares of a Party are listed, but the Party with an obligation to make an announcement shall notify the other Party and take into account their reasonable representations so far as is reasonably practicable before complying with such obligation.
20.4 | Further Assurances |
Each Party shall, from time to time execute such documents, perform such acts and things as any Party may reasonably require to give full effect to the provisions of this TSA and the transactions contemplated therein.
20.5 | Assignment |
20.5.1 | The provisions of this TSA shall be binding upon and inure to the benefit of the Parties hereto and their respective successors and assigns. Subject to Section 20.5.2, no Party may assign, delegate or otherwise transfer any of its rights or obligations under this TSA without the prior written consent of the other Party hereto. |
20.5.2 | The Provider may assign or in any way transfer or dispose of all or any of its rights under or derived from this TSA, or any part of them, to an Affiliate of the Provider. |
20.6 | Third Party Rights |
Except where such rights are expressly granted by this Agreement, a person who is not a party to this TSA shall have no rights under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Agreement. This Clause does not affect any right or remedy of any person which exists or is available otherwise pursuant to that Act.
20.7 | Amendment and Waiver |
20.7.1 | Any provision of this TSA (including the Service Schedule hereto) may be amended or waived if, but only if, such amendment or waiver is in writing and is signed, in the case of an amendment, by each Party to this TSA, or in the case of a waiver, by the Party against whom the waiver is to be effective. |
20.7.2 | No failure or delay by any Party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by Regulation. |
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20.8 | Notices |
20.8.1 | All notices, requests and other communications to any Party hereunder shall be in writing, (electronic mail ( e-mail ) transmission may be used, provided that a receipt of such e-mail is requested and received), and shall be given: |
(i) | if to the Provider to: |
RBS Global Trade Service Centre Private Limited
India Land Tech Park, Tower - A, Plot No. 14, 3rd Main Street; Ambattur
Industrial Estate, Ambattur,
Chennai 600058,
India
Attention: Santanu Bhadra,
Trade Operations - CIB Customer Service & Operations
Email: santanu.bhadra@rbs.com
(ii) | if to the Recipient to: |
Citizens Bank, N.A.
1 Citizens Drive
East Providence, RI 02915
USA
Attention: Jeff LeBlanc
Head of Consumer Operations, Senior Vice President
Email: Jeff.leblanc@citizensbank.com
Citizens Bank, N.A.
443 Jefferson Blvd
Warwick, RI 02886
USA
Attention: Heather Bentley
Head of Consumer Specialty Operations, Senior Vice President
Email: Heather.j.bentley@citizensbank.com
Citizens Bank, N.A.
100 Sockanosset Cross Rd
Cranston, RI 02920
USA
Attention: Jo Wyper
Head of Commercial Operations, Senior Vice President
Email: Joanne.c.wyper@citizensbank.com
or such other address or e-mail address as such Party may hereafter specify for the purpose by notice to the other Parties hereto. All such notices, requests and other communications shall be deemed received on the date of receipt by the recipient thereof if received prior to 5:00 p.m. in the place of receipt and such day is a Business Day in the place of receipt. Otherwise, any such notice, request or communication shall be deemed not to have been received until the next succeeding Business Day in the place of receipt.
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20.9 | Severability |
20.9.1 | If any provision of this TSA or the application thereof to any Party or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof or the application of such provision to any of the Parties or circumstances or in jurisdictions other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any Party. Upon such determination, the Parties shall negotiate in good faith in an effort to agree upon such a suitable and equitable provision to effect the original intent of the Parties. |
20.10 | Counterparts |
20.10.1 | This TSA may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the Parties and delivered to the other Party. Execution of this TSA or any other documents pursuant to this TSA by facsimile or other electronic copy of a signature shall be deemed to be, and shall have the same effect as, executed by an original signature. |
20.11 | Independent Contractor |
20.11.1 | Nothing in this TSA shall constitute or be deemed to constitute a partnership or joint venture between the Parties hereto or constitute or be deemed to constitute any Party the agent or employee of the other Party for any purpose whatsoever and neither Party shall have authority or power to bind the other or to contract in the name of, or create a liability against, the other in any way or for any purpose. The Parties hereto acknowledge and agree that when acting as a Provider, the other Party is an independent contractor in the performance of each and every part of this TSA and nothing herein shall be construed to be inconsistent with this status. Subject to the terms and conditions of this TSA, the Provider shall have the authority to select the means, methods and manner by which any Service is performed. |
20.12 | Governing Law and Submission to Jurisdiction |
20.12.1 | This TSA and the relationship between the parties will be governed by, and interpreted in accordance with English law. |
20.12.2 | Each of the parties agree that the courts of England are to have exclusive jurisdiction relating to court proceedings to settle any dispute (including claims for set-off and counterclaims) which may arise in connection with the creation, validity, effect, interpretation or performance of, or the legal relationships established by, this TSA or otherwise arising in connection with this TSA and for the purposes irrevocably submit to the jurisdiction of the English courts. |
20.13 | Anti-Bribery Provisions |
20.13.1 | Each Party agrees that it shall comply with, and that the Services will be performed in accordance with, the Anti-Corruption Laws, subject to the Change Control Procedure in respect of any change in Anti-Corruption Laws after the date hereof, and that it shall not cause, by act or omission, any other Party to be in breach of any Anti-Corruption Laws. |
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20.13.2 | Each Party shall have in place and comply with its own anti-bribery and corruption policy to ensure that it complies with the Anti-Corruption Laws (each such policy, an Anti-Bribery and Corruption Policy ). If requested, a Party shall provide to the other Party a copy of its Anti-Bribery and Corruption Policy and, if required, the providing Party will explain to the receiving Party how the features set out in its Anti-Bribery and Corruption Policy correspond to the receiving Partys Anti-Bribery and Corruption Policy. Subject to the Change Control Procedure, the providing Party shall promptly implement any amendments to its Anti-Bribery and Corruption Policy which the receiving Party, acting reasonably, considers necessary following its review of the providing Partys Anti-Bribery and Corruption Policy to ensure that the providing Party complies with the Anti-Corruption Laws. |
20.13.3 | Each Party shall review its Anti-Bribery and Corruption Policy on a regular basis and shall promptly implement and notify the other Party of any amendments to its Anti-Bribery and Corruption Policy which it considers necessary for continued compliance with the Anti-Corruption Laws. |
20.13.4 | Each Party shall cooperate with the other Party and promptly provide any information or confirmation which the other Party requires from time to time in connection with the obligations set forth in this Section 20.13. Each Party acknowledges that the other Party will place reliance upon the information provided. |
20.13.5 | Each Party shall immediately notify the other Party in writing of any suspected or known breach of its Anti-Bribery and Corruption Policy or any of the Anti-Corruption Laws. |
20.13.6 | Each Party shall have the right to suspend and/or terminate the Service Schedule for material breach immediately, or on such other time specified by the terminating Party, upon written notice to the Provider under the Service Schedule if: (i) the Provider, or any person employed by it or acting on its behalf (whether with or without the knowledge of such Service Provider) fails to comply with any of the Anti-Corruption Laws or is in material breach of the Providers Anti-Bribery and Corruption Policy; or (ii) a Party has a reasonable suspicion that an occurrence as specified in clause (i) of this Section 20.13.6 has occurred. |
20.13.7 | Regardless of any other provision in this TSA, no Party shall be obliged to do, nor obliged to omit to do, any act which would, in its reasonable opinion, put it in breach of any Anti-Corruption Laws. |
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IN WITNESS WHEREOF, this TSA has been duly executed.
SIGNED for and on behalf of RBS GLOBAL TRADE SERVICE CENTRE PRIVATE LIMITED by: |
} | |||
SIGNED for and on behalf of RBS GLOBAL TRADE SERVICE CENTRE PRIVATE LIMITED by: |
} | |||
SIGNED for and on behalf of CITIZENS BANK, N.A. by: | } |
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Exhibit 21.1
List of Subsidiaries
Name of Subsidiary |
Jurisdiction of Organization |
|
1001 Services, Inc. |
MI | |
1215 Financial Center Associates, Ltd. |
OH | |
5801 Southfield Service Drive Corp. |
DE | |
Albany Community Development, LLC |
DE | |
CFG Appraisal Inc. |
OH | |
CFG Investment Corp. |
RI | |
CFG Service Corp. |
DE | |
Charter One Securities, Inc. |
OH | |
Citizens Automobile Finance, Corp. |
DE | |
Citizens Bank, National Association |
United States | |
Citizens Bank of Pennsylvania |
PA | |
Citizens Capital, Inc. |
MA | |
Citizens Charitable Foundation |
RI | |
Citizens Community Development Corporation |
RI | |
Citizens CT Investment Corp. IV |
RI | |
Citizens Mortgage Corp. |
RI | |
Citizens NH Investment Corp. IV |
RI | |
Citizens Plaza, Inc. |
RI | |
Citizens RI Investment Corp. IV |
RI | |
Citizens Securities, Inc. |
RI | |
Citizens Ventures, Incorporated |
MA | |
Connecticut Financial Realty Corporation |
CT | |
Connecticut Realty Investors, Inc. |
CT | |
Court Street Holding, Inc. |
MA | |
CSB Investment Corp. |
RI | |
First Fed of Michigan International NV |
Netherlands Antilles | |
First NH Mortgage Corp. |
NH | |
GreatBanc Service Corp. |
RI | |
ICX Corporation |
OH | |
JSA Financial Corporation |
MA | |
Lexington Savings Corp. |
MA | |
MA Investment Corporation IV |
RI | |
Mass Investment Corp. |
RI | |
Minuteman Investments Corporation |
MA | |
Montgomery Service Corporation |
PA | |
Mountbatten Realty Corp. |
DE | |
New England Acceptance Corporation |
NH | |
NY Investment Corp. IV |
RI | |
PA Investment Corp. I |
RI |
Name of Subsidiary |
Jurisdiction of Organization |
|
PA Investment Corp. II |
RI | |
RBS Asset Finance, Inc. |
NY | |
RBS Citizens Community Development Corporation |
NY | |
RBS Citizens Insurance Agency, Inc. |
OH | |
RI | ||
RI Realty Trust, Inc. |
MA | |
Servco, Inc. |
OH | |
St. Paul Financial Development Corp. |
IL | |
Thistle Group Holding Co. |
PA | |
VT Investment Corp. IV |
VT | |
Warwick Residential Mortgage Corp. |
RI | |
West Register Citizens Corp. |
DE | |
Windsor Realty Corp. |
DE | |
Woburn National Realty Trust |
MA |
2
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the use in this Amendment No. 3 to Registration Statement No. 333-195900 of our report dated March 12, 2014 (except for notes 24, 26, and 27, as to which the date is May 12, 2014, and except for notes 25 and 29, as to which the date is September 8, 2014) relating to the consolidated financial statements of Citizens Financial Group, Inc. appearing in the Prospectus, which is part of this Registration Statement, and to the reference to us under the heading Experts in such Prospectus.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
September 8, 2014