ITEM 1A. RISK FACTORS
We are subject to a number of risks potentially impacting our business, financial condition, results of operations and cash flows. As we are 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 risk, liquidity risk, operational risk, model risk, technology, regulatory and legal risk and strategic and reputational risk. We discuss our principal risk management processes and, in appropriate places, related historical performance in the “Risk Governance” section in Item 7.
You should carefully consider the following risk factors that may affect our business, financial condition and results of operations. Other factors that could affect our business, financial condition and results of operation are discussed in the “Forward-Looking Statements” section above. However, there may be additional risks that are not presently material or known, and factors besides those discussed below, or in this or other reports that we file or furnish with the SEC, that could also adversely affect us.
Risks Related to Our Business
The COVID-19 pandemic and associated lockdowns have adversely affected us, and may continue to adversely affect, and created, and may exacerbate or create new, significant risks and uncertainties for our business, and the ultimate impact of the pandemic on us will depend on future developments, which are highly uncertain and cannot be predicted.
The COVID-19 pandemic and associated lockdowns have negatively affected the global and U.S. economies, increased unemployment levels, disrupted supply chains and businesses in many industries, lowered equity market valuations, decreased liquidity in fixed income markets, and created significant volatility and disruption in financial markets. This has resulted, and could continue to result, in higher and more volatile provisions for credit losses, and is also expected to result in increased charge-offs, particularly as more
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customers experience credit deterioration and as customers need to draw on their committed credit lines to help finance their businesses and activities. The pandemic’s negative economic impact and its effect on customer needs and behaviors could adversely affect our liquidity and also continue to adversely affect our capital profile. Moreover, governmental actions in response to the pandemic are meaningfully influencing the interest-rate environment, which has, and is likely to continue to, reduce our net interest margin. The pandemic may also have adverse effects on our noninterest income. The effects of the pandemic have resulted, and may continue to result, in lower service charges and fees and card fees, and has also caused, and may continue to cause, volatility in other noninterest income, in particular capital markets fees and foreign exchange and interest rate products revenue.
In addition, our reliance on work-from-home capabilities and the potential inability to maintain critical staff in our operational facilities present risks associated with our local infrastructure, restrictive stay-at-home orders across jurisdictions, illness, quarantines and the sustainability of a work-from-home environment, as well as heightened cybersecurity, information security and operational risks. Many of our service providers have been, and may further be, affected by similar factors that increase their risk of business disruptions or that may otherwise affect their ability to perform under the terms of any agreements with us or provide essential services. Any disruption to our ability to deliver financial products or services to, or interact with, our clients and customers could result in losses or increased operational costs, regulatory fines, penalties or other sanctions, or harm to our reputation. We also face an increased risk of litigation and governmental and regulatory scrutiny as a result of the effects of the pandemic on market and economic conditions and the actions of governmental authorities in response to those conditions.
The federal banking regulators have issued interagency guidance to clarify supervisory expectations regarding loan modifications due to COVID-19-related non-payment and the regulatory capital transition for the current expected credit loss accounting standard. Further, the Federal Reserve has implemented a broad array of actions to limit the negative impacts of the COVID-19 pandemic and associated lockdowns on the economy and U.S. businesses. In addition, the U.S. Congress has passed a number of economic stimulus packages, including the $2 trillion CARES Act, the Families First Coronavirus Response Act, the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020, and the Consolidated Appropriations Act, 2021. In response to the pandemic, we have (i) assisted our retail and small business customers through loan forbearances and modifications, (ii) extended loans under the PPP, and (iii) committed funding for community support with a particular emphasis on small businesses and non-profit partners. These government programs are complex and our participation may lead to governmental and regulatory scrutiny, negative publicity and damage to our reputation.
In April 2020, we announced that we would temporarily suspend our stock repurchase program through December 31, 2020 to support the efforts of the Federal Reserve and other banks to moderate the impact of the pandemic by making additional capital and liquidity available to our customers, including corporates, small businesses and individuals. Further, the Federal Reserve took actions to preserve capital at banks by imposing certain limitations on firms that participate in CCAR for the third and fourth quarters of 2020, including mandatory suspension of share repurchases, and limiting common stock dividends to existing rates and the average quarterly net income for the prior four quarters. In December 2020, the Federal Reserve modified its limitations on capital distributions for the first quarter of 2021 such that firms that participate in CCAR, like us, may resume share repurchases provided that the aggregate of share repurchases and common stock dividends for the first quarter of 2021 do not exceed average quarterly net income for the trailing four quarters. The Federal Reserve can extend or modify its current capital distribution limitations in future quarters. The pandemic may cause us to limit future capital distributions.
The extent to which the pandemic and associated lockdowns adversely affect our business, financial condition and results of operations, as well as our liquidity and regulatory capital ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the widespread availability, use and effectiveness of vaccines, the effectiveness of our work-from-home arrangements and staffing levels in operational facilities, actions taken by governmental authorities and other third parties in response to the pandemic and associated lockdowns and the direct and indirect impact of the pandemic and associated lockdowns on us, our clients and customers, our service providers and other market participants. As the pandemic and associated lockdowns adversely affect us, it may also have the effect of heightening many of the other risks described herein.
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We may not be able to successfully execute our business strategy.
Our business strategy is designed to maximize the full potential of our business and drive sustainable growth and enhanced profitability, and our success rests on our ability to maintain a high-performing, customer-centric organization; develop differentiated value propositions to acquire, deepen, and retain core customer segments; build excellent capabilities designed to help us stand out from our competitors; operate with financial discipline and a mindset of continuous improvement to self-fund investments; prudently grow and optimize our balance sheet; modernize our technology and operational models to improve delivery, organizational agility and speed to market; and embed risk management within our culture and our operations. Our future success and the value of our stock will depend, in part, on our ability to effectively implement our business strategy. There are risks and uncertainties, many of which are not within our control, associated with each element of our strategy. If we are not able to successfully execute our business strategy, we may never achieve our financial performance goals and any shortfall may be material. See the “Business Strategy” section in Item 1 for further information.
Supervisory requirements and expectations on us as a financial holding company and a bank holding company and any regulator-imposed limits on our activities could adversely affect our ability to implement our strategic plan, expand our business, continue to improve our financial performance and make capital distributions to our stockholders.
Our operations are subject to extensive regulation, supervision and examination by the federal banking agencies (the FRB, the OCC and the FDIC), as well as the CFPB. As part of the supervisory and examination process, if we are unsuccessful in meeting the supervisory requirements and expectations that apply to us, regulatory agencies may from time to time take supervisory actions against us that may not be publicly disclosed. Such actions may include restrictions on our activities or the activities of our subsidiaries, informal (nonpublic) or formal (public) supervisory actions or public enforcement actions, including the payment of civil money penalties, which could increase our costs and 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, financial condition or results of operations. See the “Regulation and Supervision” section in Item 1 for further information.
Changes in interest rates may have an adverse effect on our profitability.
Net interest income historically has been, and we anticipate that it 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. Changes in interest rates can have a material effect on many areas of our business, including net interest income, deposit costs, loan volume and delinquency, and the value of our mortgage servicing rights. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Open Market Committee. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect our ability to originate loans and obtain deposits and the fair value of our financial assets and liabilities. If the interest rates on our interest-bearing liabilities increase at a faster pace than the interest rates on our interest earning assets, our net interest income may decline and, with it, a decline in our earnings may occur. Our net interest income and our earnings would be similarly affected if the interest rates on our interest earning assets declined at a faster pace than the interest rates on our interest-bearing liabilities.
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 FRB, 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 the “Risk Governance” section in Item 7, changes in interest rates still may have an adverse effect on our profitability.
If our ongoing assumptions regarding borrower or depositor behavior 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.
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Changes in the method pursuant to which the LIBOR and other benchmark rates are calculated and their planned discontinuance could adversely impact our business operations and financial results.
Many of our lending products, securities, derivatives, and other financial transactions utilize a benchmark rate, such as LIBOR, to determine the applicable interest rate or payment amount. In 2017, the Chief Executive of the U.K. Financial Conduct Authority (“FCA”) announced that the FCA intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. Since then, the financial industry has been working towards the transition away from LIBOR to alternative reference rates. On November 30, 2020, the ICE Benchmark Administration (“IBA”), the authorized administrator of LIBOR regulated by the U.K. FCA, announced a proposal that, if adopted, would result in the cessation of one-week and two-month U.S. dollar LIBOR as previously anticipated at the end of 2021, while extending the publication of the other tenors of U.S. dollar LIBOR until June 30, 2023. While this proposal has received support from both U.K. and U.S. regulators, the U.S. regulators are encouraging banks to stop entering into new U.S. dollar LIBOR contracts as soon as practicable and not later than December 31, 2021. The combination of the IBA proposal and the U.S. official sector guidance would continue to facilitate the transition away from LIBOR for new originations by the end of 2021 while enabling more legacy contracts to mature before the final LIBOR cessation date of June 30, 2023.
The discontinuation of a benchmark rate, changes in a benchmark rate, or changes in market perceptions of the acceptability of a benchmark rate, including LIBOR, could, among other things, adversely affect the value of and return on certain of our financial instruments or products, result in changes to our risk exposures, or require renegotiation of previous transactions. In addition, any such discontinuation or changes, whether actual or anticipated, could result in market volatility, adverse tax or accounting effects, increased compliance, legal and operational costs, and risks associated with customer disclosures and contract negotiations. The transition to using a new rate could also expose us to risks associated with disputes with customers and other market participants in connection with interpreting and implementing LIBOR fallback provisions.
In 2018, we formed a LIBOR Transition Program designed to guide the organization through the planned discontinuation of LIBOR. Various regulators, industry bodies and other market participants in the U.S. and other countries are engaged in initiatives to develop, introduce and encourage the use of alternative rates to replace certain benchmarks. Despite progress made to date by regulators and industry participants, such as us, to prepare for the anticipated discontinuation of LIBOR, significant uncertainties still remain. Such uncertainties relate to, for example, whether replacement benchmark rates may become accepted alternatives to LIBOR for different types of transactions and financial instruments, how the terms of any transaction or financial instrument may be adjusted to account for differences between LIBOR and any alternative rate selected, how any replacement would be implemented across the industry, and the effect any changes in industry views or movement to alternative benchmarks would have on the markets for LIBOR-linked financial instruments.
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 cornerstone of our strategic plan involves the hiring 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. 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, including as a result of an untimely death or illness of key personnel, or replace a sufficient number of appropriately skilled and key 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.
Limitations on the manner in which regulated financial institutions, such as us, can compensate their officers and employees, including those contained in pending rule proposals implementing requirements of Section 956 of the Dodd-Frank Act, may make it more difficult for such institutions to compete for talent with financial institutions and other companies not subject to these or similar limitations. If we are unable to compete effectively, our business, financial condition and results of operations could be adversely affected, perhaps materially.
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Our ability to meet our obligations, and the cost of funds to do so, depend on our ability to access identified sources of liquidity at a reasonable cost.
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, secured FHLB advances), 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 increasing competitive pressures for retail or corporate customer deposits, changes in interest rates and returns on other investment classes, or a loss of confidence by customers in us or in the banking sector generally which could result in a significant outflow of deposits within a short period of time. To the extent there is heightened competition among U.S. banks for retail customer deposits, this competition may increase the cost of procuring new deposits and/or retaining existing 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.
Maintaining a diverse and appropriate funding strategy for our assets consistent with our wider strategic risk appetite and 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, 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, in order to reduce our funding commitments.
A reduction in our credit ratings, which are based on a number of factors, 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 conditions affecting the financial services industry generally. Any downgrade in our ratings would likely increase our borrowing costs, could limit our access to capital markets, and otherwise adversely affect our business. For example, a ratings downgrade could adversely affect our ability to sell or market certain of our securities, including long-term debt, engage in certain longer-term derivatives transactions and retain our customers, particularly corporate customers who may require a minimum rating threshold in order to place funds with us. 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.
Our financial performance may be adversely affected by deterioration 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. 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.
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Our framework for managing risks may not be effective in mitigating risk and loss.
Our risk management framework is made up of various processes and strategies to manage our risk exposure. The framework to manage risk, including the framework’s 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 certain actions 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 the “Risk Governance” and “Market Risk” sections in Item 7. 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.
Changes in our accounting policies or in accounting standards could materially affect how we report our financial results and condition.
From time to time, the FASB and SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be operationally complex to implement and can materially impact how we record and report our financial condition and results of operations. For example, in June 2016, the FASB issued Accounting Standards Update 2016-13, Measurement of Credit Losses on Financial Instruments (“CECL”), that substantially changed the accounting for credit losses on loans and other financial assets held by banks, financial institutions and other organizations. Upon adoption of CECL on January 1, 2020, we recognize credit losses on these assets equal to management’s estimate of credit losses over the full remaining expected life. We consider all relevant information when estimating expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts. As evidenced in the first half of 2020 due to the impact of COVID-19, the standard introduces heightened volatility in provision for credit losses, given uncertainty in the accuracy of macroeconomic forecasts over longer time horizons, variances in the rate and composition of loan growth, and changes in overall loan portfolio size and mix. As a result, it is possible that our ongoing reported earnings and lending activity could be negatively impacted. For more information regarding CECL, see Note 1 in Item 8.
Our financial and accounting estimates and risk management framework rely on analytical forecasting and models.
The processes we use to estimate our inherent loan losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depends upon the use of analytical and forecasting models. 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. 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
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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 adversely affected 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 Credit Losses to increase.
The preparation of audited 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 ACL. The ACL is a reserve established through a provision for credit losses charged to expense and represents our estimate of expected credit losses within the existing loan and lease portfolio and unfunded lending commitments. The level of the ACL is based on periodic evaluation of the loan and lease portfolios and unfunded lending commitments that are not unconditionally cancellable considering a number of relevant underlying factors, including key assumptions and evaluation of quantitative and qualitative information.
The determination of the appropriate level of the ACL 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 ACL. In addition, bank regulatory agencies periodically review our ACL and may require an increase in the ACL 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 ACL—that is, if the ACL is inadequate—we will need to recognize additional provision for credit losses. Should such additional provision expense become necessary, it would result in a decrease in net income and capital and may have a material adverse effect on us. For more information regarding our use of estimates in preparation of financial statements, see Note 1 in Item 8 and the “Critical Accounting Estimates” section in Item 7.
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; improper conduct or 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 against us or our vendors, 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 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 change as a result of changes in customer behavior, 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 address customer needs by using 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
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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 and any regulator-imposed limits on our activities could adversely affect our ability to implement our strategic plan, expand our business, continue to improve our financial performance and make capital distributions to our stockholders.”
We are subject to a variety of cybersecurity risks that, if realized, could adversely affect how we conduct our business.
Information security risks for large financial institutions such as us have increased significantly in recent years in part because of the proliferation of new technologies, such as Internet and mobile banking to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, nation-states, activists and other external parties. Third parties with whom we or our customers do business also present operational and information security risks to us, including security breaches or failures of their own systems. The possibility of employee error, failure to follow security procedures, or malfeasance also presents these risks, particularly given the recent trend towards remote work arrangements. Our operations rely on the secure processing, transmission and storage of confidential information in our computer systems and networks. In addition, to access our products and services, our customers may use personal computers, smartphones, tablets, and other mobile devices that are beyond our control environment. Although we believe that we have appropriate information security procedures and controls, our technologies, systems, networks and our customers’ devices may be the target of cyber-attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, theft, sale or loss or destruction of the confidential, and/or proprietary information of CFG, our customers, our vendors, our counterparties, or our employees. We are under continuous threat of loss or network degradation due to cyber-attacks, such as computer viruses, malicious or destructive code, phishing attacks, ransomware, and Distributed Denial of Service (“DDoS”) attacks. This is especially true 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 extract funds directly from customers’ or our accounts using fraudulent schemes that may include Internet-based funds transfers. We have been subject to a number of e-fraud incidents historically. We have also been subject to attempts to steal sensitive customer data, such as account numbers and social security numbers, through unauthorized access to our computer systems including computer hacking. Such attacks are less frequent but could present significant reputational, legal and regulatory costs to us if successful. We have implemented certain technology protections such as Customer Profiling and Set-Up Authentication to be in compliance with the FFIEC Authentication in Internet Banking Environment (“AIBE”) guidelines.
As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our layers of defense or to investigate and remediate any information security vulnerabilities. System enhancements and updates may also create risks associated with implementing new systems and integrating them with existing ones. Due to the complexity and interconnectedness of information technology systems, the process of enhancing our layers of defense can itself create a risk of systems disruptions and security issues. In addition, addressing certain information security vulnerabilities, such as hardware-based vulnerabilities, may affect the performance of our information technology systems. The ability of our hardware and software providers to deliver patches and updates to mitigate vulnerabilities in a timely manner can introduce additional risks, particularly when a vulnerability is being actively exploited by threat actors. Cyber-attacks against the patches themselves have also proven to be a significant risk that companies will have to address going forward.
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Despite our efforts to prevent a cyber-attack, a successful cyber-attack could persist for an extended period of time before being detected, and, following detection, it could take considerable time for us to obtain full and reliable information about the cybersecurity incident and the extent, amount and type of information compromised. During the course of an investigation, we may not necessarily know the full effects of the incident or how to remediate it, and actions and decisions that are taken or made in an effort to mitigate risk may further increase the costs and other negative consequences of the incident.
The techniques used by cyber criminals change frequently, may not be recognized until launched and can be initiated from a variety of sources, including terrorist organizations and hostile foreign governments. These actors may attempt to fraudulently induce employees, customers or other users of our systems to disclose sensitive information in order to gain access to data or our systems. In the event that a cyber-attack is successful, our business, financial condition or results of operations may be adversely affected. For a discussion of the guidance that federal banking regulators have released regarding cybersecurity and cyber risk management standards, see the “Regulation and Supervision” section of Item 1.
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, including due to hacking or other similar attempts to breach information technology security protocols, 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 require us to devote substantial resources (including management time and attention) to recovery and response efforts, 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. Although we maintain insurance coverage for information security events, we may incur losses as a result of such events that are not insured against or not fully covered by our insurance.
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) unaffiliated third parties operate data communications networks on which certain components and services relating to our online banking system rely, (ii) third parties host or maintain many of our applications, including our Commercial Loan System, which is hosted and maintained by Automated Financial Systems, Inc., and our Mobile Digital Banking Application, which is hosted and maintained by Amazon Web Services, Inc., (iii) Fidelity National Information Services, Inc. maintains our core deposits system, (iv) Infosys Limited provides us with a wide range of information technology support services, including service desk, end user, servicer, and private cloud support, and (v) IBM Corporation provides us with mainframe support services. 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, which performance could be disrupted or otherwise adversely affected due to failures or other information security events originating at the third parties or at the third parties’ suppliers or vendors (so-called “fourth party risk”). We may not be able to effectively monitor or mitigate fourth-party risk, in particular as it relates to the use of common suppliers or vendors by the third parties that perform functions and services for us. 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 time frames. 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.
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
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products or services that do not perform as expected or customers’ expectations for the product are not satisfied.
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 Rhode Island and our recovery data center in North Carolina unusable. Although we enhanced our disaster recovery capabilities in 2016 through the completion of the new, out-of-region backup data center in North Carolina, there can be no assurance that our current disaster recovery plans and capabilities will adequately protect us from serious disaster.
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 could require us to charge off a higher percentage of loans and increase the 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 has made a significant recovery, an interruption or reversal of this recovery would adversely affect the financial services industry and banking sector.
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 non-banking financial institutions that are not subject to the same regulatory restrictions as banks and bank holding companies, securities firms and insurance companies, and competitors that may have greater financial resources.
With respect to non-banking financial institutions, technology and other changes have lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks. For example, consumers can maintain funds that would have historically been held as bank deposits in brokerage accounts or mutual funds. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. Some of our non-bank competitors are not subject to the same extensive regulations we are and, therefore, may have greater flexibility in competing for business. 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.
The conditions of other financial institutions or of the financial services industry could adversely affect our operations and financial conditions.
Financial services institutions are typically 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
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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 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 FRB. In addition, CBNA is subject to comprehensive regulation, supervision and examination by the OCC. Our regulators supervise us through regular examinations and other means that allow the regulators to gauge management’s 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 actions 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. Financial holding companies are allowed to engage in certain financial activities in which a bank holding company is not otherwise permitted to engage. However, to maintain financial holding company status, a bank holding company (and all of its depository institution subsidiaries) must be “well capitalized” and “well managed.” If a bank holding company ceases to meet these capital and management requirements, there are many penalties it would be faced with, including the FRB may impose limitations or conditions on the conduct of its activities, and it 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 FRB. If a company does not return to compliance within 180 days, which period may be extended, the FRB may require divestiture of that company’s depository institutions. To the extent we do not meet the requirements to be a financial holding company in the future, there could be a material adverse effect on our business, financial condition and results of operations.
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 institution’s activities and lead it to raise capital or subject it to other requirements. Directives issued to enforce such actions may be confidential and thus, in some instances, we are not permitted to publicly disclose these actions. In addition, as part of our regular examination process, our regulators may advise us 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 continues to be subject to significant and evolving regulatory requirements that could have a material adverse effect on our business and earnings.
We are heavily regulated by multiple banking, consumer protection, securities and other regulatory authorities at the federal and state levels. This regulatory oversight is primarily established to protect depositors, the FDIC’s Deposit Insurance Fund, consumers of financial products, and the financial system as a
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whole, not our security holders. Changes to statutes, regulations, rules or policies, including the interpretation, implementation or enforcement of statutes, regulations, rules or policies, could affect us in substantial and unpredictable ways, including by, for example, subjecting us to additional costs, 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, including non-banks, to offer competing financial services and products. In recent years, we, together with the rest of the financial services industry, have faced particularly intense scrutiny, with many new regulatory initiatives and vigorous oversight and enforcement on the part of numerous regulatory and governmental authorities. Legislatures and regulators have pursued a broad array of initiatives intended to promote the safety and soundness of financial institutions, financial market stability, the transparency and liquidity of financial markets, and consumer and investor protection. Certain regulators and law enforcement authorities have also recently required admissions of wrongdoing and, in some cases, criminal pleas as part of the resolutions of matters brought by them against financial institutions. Any such resolution of a matter involving us could lead to increased exposure to civil litigation, could adversely affect our reputation, could result in penalties or limitations on our ability to do business or engage in certain activities and could have other negative effects. In addition, a single event or issue may give rise to numerous and overlapping investigations and proceedings, including by multiple federal and state regulators and other governmental authorities.
We are also subject to laws and regulations relating to the privacy of the information of our customers, employees, counterparties and others, and any failure to comply with these laws and regulations could expose us to liability and/or reputational damage. As new privacy-related laws and regulations are implemented, the time and resources needed for us to comply with those laws and regulations, as well as our potential liability for non-compliance and our reporting obligations in the case of data breaches, may significantly increase.
While there have been significant revisions to the laws and regulations applicable to us that have been finalized in recent months, there are other rules to implement changes that have yet to be proposed or enacted by our regulators. The final timing, scope and impact of these changes to the regulatory framework applicable to financial institutions remains uncertain. For more information on the regulations to which we are subject and recent initiatives to reform financial institution regulation, see the “Regulation and Supervision” section in Item 1.
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. See “Regulation and Supervision” in Item 1 and the “Capital and Regulatory Requirements” and “Liquidity” sections in Item 7, for further discussion of the regulations to which we are subject.
The Parent Company could be required to act as a “source of strength” to CBNA, which would have a material adverse effect on our business, financial condition and results of operations.
FRB 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 FRB 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:
•The Parent Company may be compelled to contribute capital to CBNA, including by engaging in a public offering to raise such capital. Furthermore, any extensions of credit from the Parent Company to CBNA that are included in CBNA’s capital would be subordinate in right of payment to depositors and certain other indebtedness of CBNA.
•In the event of a bank holding company’s 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 the event of impairment of the capital stock of CBNA, the Parent Company, as CBNA’s stockholder, could be required to pay such deficiency.
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The Parent Company depends on CBNA for substantially all of its revenue, and restrictions on dividends and other distributions by CBNA could affect its liquidity and ability to fulfill our obligations.
As a bank holding company, the Parent Company is a separate and distinct legal entity from CBNA, our banking subsidiary. The Parent Company typically receives substantially all of our revenue from dividends from CBNA. 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 CBNA may pay to the Parent Company. Also, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. In the event CBNA is unable to pay dividends to the Parent Company, it may not be able to service debt, pay obligations or pay dividends on its common stock. The inability to receive dividends from CBNA could have a material adverse effect on our business, financial condition and results of operations. See the “Supervision and Regulation” section in Item 1 and the “Capital and Regulatory Matters” section in Item 7.
From time-to-time, we may become or are subject to regulatory actions that may have a material impact on our business.
We may become or 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, compliance 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.
In regulatory actions, such as those referred to above, it is inherently difficult to determine whether any loss is probable or whether it is possible to reasonably 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 investigation. The Parent Company may be required to make significant restitution payments to CBNA customers arising from certain compliance issues and also may be required to pay civil money penalties in connection with certain of these issues. This uncertainty makes it difficult to estimate probable losses, which, in turn, can lead to substantial disparities between the reserves we may establish for such proceedings and the eventual settlements, fines, or penalties. 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 alleged 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. 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 may be involved, see Note 18 in Item 8.
Compliance with anti-money laundering and anti-terrorism financing rules involves 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
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consequences, including sanctions, fines and reputational consequences, which could have a material adverse effect on our business, financial condition or results of operations.
Risks Related to our Common Stock
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. 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 repurchase shares or pay cash dividends on our common stock.
Holders of our common stock are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments. Although we have historically declared cash dividends on our common stock, we are not required to do so and may reduce or eliminate our common stock dividend in the future. This could adversely affect the market price of our common stock. Also, as a bank holding company, our ability to repurchase shares and declare and pay dividends is dependent on certain federal regulatory considerations, including the rules of the FRB regarding capital adequacy and dividends. Additionally, we are required to submit periodic capital plans to the FRB for review, or otherwise obtain FRB authorization, before we can take certain capital actions, including repurchasing shares, declaring and paying dividends, or repurchasing or redeeming capital securities. If our capital plan or any amendment to our capital plan is objected to for any reason, our ability to repurchase shares and declare and pay dividends on our capital stock may be limited. Further, if we are unable to satisfy the capital requirements applicable to us for any reason, we may be limited in our ability to repurchase shares and declare and pay dividends on our capital stock. See the “Regulation and Supervision” section in Item 1, for further discussion of the regulations to which we are subject.
“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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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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We lease eight operations centers in Boston, Medford, and Westwood, Massachusetts; Pittsburgh, Pennsylvania; Warwick, Rhode Island; Franklin, Tennessee; Irving, Texas and Glen Allen, Virginia. We own two principal operations centers in Johnston and East Providence, Rhode Island. At December 31, 2020, our subsidiaries owned and operated a total of 38 facilities and leased an additional 1,172 facilities. We believe our current facilities are adequate to meet our needs. See Note 6 and Note 8 in Item 8 for more information regarding our premises and equipment, and leases, respectively.
ITEM 3. LEGAL PROCEEDINGS
Information required by this item is presented in Note 18 in Item 8 and is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the New York Stock Exchange under the symbol “CFG.” As of February 1, 2021, our common stock was owned by seven holders of record (including Cede & Co.) and approximately 209,000 beneficial shareholders whose shares were held in “street name” through a broker or bank. Information relating to compensation plans under which our equity securities are authorized for issuance is presented in Item 12.
The following graph compares the cumulative total stockholder returns for our performance during the five-year period ended December 31, 2020 relative to the performance of the Standard & Poor’s 500® index, a commonly referenced U.S. equity benchmark consisting of leading companies from diverse economic sectors; the KBW Nasdaq Bank Index (“BKX”), composed of 24 leading national money center and regional banks and thrifts; and a group of other banks that constitute our peer regional banks (i.e., Comerica, Fifth Third, KeyCorp, M&T, PNC, Regions, Truist, Huntington and U.S. Bancorp). The graph assumes a $100 investment at the closing price on December 31, 2015 in each of CFG common stock, the S&P 500 index, the BKX and the peer market-capitalization weighted average and assumes all dividends were reinvested on the date paid. The points on the graph represent the fiscal quarter-end amounts based on the last trading day in each subsequent fiscal quarter.
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This graph shall not be deemed “soliciting material” or be filed with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Citizens Financial Group, Inc. under the Securities Act of 1933, as amended, or the Exchange Act.
Issuer Purchase of Equity Securities
We did not purchase any of the Company’s equity securities during the quarter ended December 31, 2020.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with Item 7 and our audited Consolidated Financial Statements and Notes in Item 8. Our historical results are not necessarily indicative of the results expected for any future period.
For the Year Ended December 31,
OPERATING DATA:
OTHER OPERATING DATA:
(1) On December 22, 2017, Tax Legislation was passed reducing the corporate tax rate from 35% to 21% effective January 1, 2018.
(2) See the “Introduction — Key Performance Metrics Used by Management and Non-GAAP Financial Measures” section in Item 7 for definitions of our key performance metrics.
(3) “Operating leverage” represents the period-over-period percent change in total revenue, less the period-over-period percent change in noninterest expense. For the purpose of the 2016 calculation, 2015 total revenue was $4.8 billion and noninterest expense was $3.3 billion.
(4) Net interest margin is presented on an FTE basis using the federal statutory tax rate.
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As of December 31,
BALANCE SHEET DATA:
OTHER BALANCE SHEET DATA:
Asset Quality Ratios:
Capital Ratios:(4)
(1) Allowance for loan and leases losses, allowance for credit losses, and related ratios, at December 31, 2020 reflect the impact of the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
(2) In the first quarter of 2020, we reclassified federal funds purchased and securities sold under agreement to repurchase and other short-term borrowed funds to
short-term borrowed funds. Prior periods have been adjusted to conform with the current period presentation.
(3) For more information on the computation of non-GAAP financial measures, see “-Introduction - Non-GAAP Financial Measures” and “-Non-GAAP Financial Measures and Reconciliations.”
(4) The capital ratios and associated components are prepared using the U.S. Basel III Standardized approach and became fully phased-in on January 1, 2019. The December 31, 2017 capital ratios reflect the retrospective adoption of FASB ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Page
Introduction 40
Financial Performance 40
Net Interest Income 43
Noninterest Income 46
Noninterest Expense 47
Provision for Credit Losses 48
Income Tax Expense 48
Business Operating Segments 49
Analysis of Financial Condition 51
Securities 51
Loans and Leases 52
Allowance for Credit Losses and Nonaccruing Loans and Leases 54
Deposits 61
Borrowed Funds 62
Quarterly Results of Operations 64
Capital and Regulatory Matters 66
Liquidity 71
Contractual Obligations 74
Off-Balance Sheet Arrangements 74
Critical Accounting Estimates 74
Risk Governance 78
Market Risk 80
Non-GAAP Financial Measures and Reconciliations 88
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INTRODUCTION
Citizens Financial Group, Inc. is one of the nation’s oldest and largest financial institutions with $183.3 billion in assets as of December 31, 2020. Our mission is to help customers, colleagues and communities each reach their potential by listening to them and understanding their needs in order to offer tailored advice, ideas and solutions. Headquartered in Providence, Rhode Island, we offer a broad range of retail and commercial banking products and services to individuals, small businesses, middle-market companies, large corporations and institutions. In Consumer Banking, we provide an integrated experience that includes mobile and online banking, a 24/7 customer contact center as well as the convenience of approximately 2,700 ATMs and 1,000 branches in 11 states in the New England, Mid-Atlantic, and Midwest regions. Consumer Banking products and services include a full range of banking, lending, savings, wealth management and small business offerings. In Commercial Banking, we offer corporate, institutional and not-for-profit clients a full range of wholesale banking products and services including lending and deposits, capital markets, treasury services, foreign exchange and interest rate products, and asset finance. More information is available at www.citizensbank.com.
The following MD&A is intended to assist readers in their analysis of the accompanying Consolidated Financial Statements and supplemental financial information. It should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements in Item 8, as well as other information contained in this document.
Non-GAAP Financial Measures
This document contains non-GAAP financial measures denoted as “Underlying” results. Underlying results for any given reporting period exclude certain items that may occur in that period which management does not consider indicative of our on-going financial performance. We believe these non-GAAP financial measures provide useful information to investors because they are used by management to evaluate our operating performance and make day-to-day operating decisions. In addition, we believe our Underlying results in any given reporting period reflect our on-going financial performance and increase comparability of period-to-period results, and, accordingly, are useful to consider in addition to our GAAP financial results.
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 such companies. We caution investors not to place undue reliance on such non-GAAP financial measures, but to consider them with the most directly comparable GAAP measures. Non-GAAP financial measures have limitations as analytical tools, and should not be considered in isolation or as a substitute for our results reported under GAAP.
Non-GAAP measures are denoted throughout our MD&A by the use of the term Non-GAAP or Underlying and where there is a reference to Non-GAAP or Underlying results in that paragraph, all measures that follow that reference are on the same basis when applicable. For more information on the computation of non-GAAP financial measures, see “—Non-GAAP Financial Measures and Reconciliations.”
FINANCIAL PERFORMANCE
Key Highlights
Net income of $1.1 billiondecreased 41% from 2019, with earnings per diluted common share of $2.22, down 42% from $3.81 per diluted common share for 2019. ROTCE of 6.9% declined from 12.6% in 2019. Declining results continue to be driven by the COVID-19 pandemic and its associated impact on our ACL which, coupled with our adoption of CECL on January 1, 2020, resulted in a $923 million reserve build during 2020.
In 2020, results reflected a $83 million after-tax reduction, or $0.19 per diluted common share, from notable items, largely tied to TOP 6 transformational and revenue and efficiency initiatives. In 2019, we recorded $17 million after-tax, or $0.03 per diluted common share, of notable items tied to Acquisition integration costs, costs related to strategic initiatives and income tax benefits associated with an operational restructure and legacy tax matters.
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Table 1: Notable Items
(in millions) Noninterest expense Income tax expense Net Income
Less: Notable items
Total integration costs 10 (2) (8)
(1) Other notable items include noninterest expense of $115 million related to our TOP 6 transformational and revenue and efficiency initiatives and an income tax benefit of $11 million related to an operational restructure and legacy tax matters.
(in millions) Noninterest expense Income tax expense Net Income
Less: Notable items
Total integration costs 18 (4) (14)
Other notable items(1) 50 (47) (3)
Total notable items 68 (51) (17)
1) Other notable items include noninterest expense of $50 million related to our TOP programs and other efficiency initiatives and an income tax benefit of $34 million related to an operational restructure and legacy tax matters.
•Net income available to common stockholders of $950 million decreased $768 million, or 45%, compared to $1.7 billion in 2019.
◦On an Underlying basis, which excludes notable items, 2020 net income available to common stockholders of $1.0 billion compared with $1.7 billion in 2019.
◦On an Underlying basis, EPS of $2.41 per share compared to $3.84 in 2019.
•Total revenue of $6.9 billion increased $414 million, or 6%, from 2019, as a 24% increase in noninterest income, given record results across mortgage, capital markets and wealth, was partially offset by a 1% decrease in net interest income given lower rates.
◦Net interest income of $4.6 billion reflected 8% growth in average interest-earning assets offset by the impact of the lower rate and challenging yield-curve environment.
◦Net interest margin of 2.88% decreased 26 basis points from 3.14% in 2019, reflecting the impact of lower interest rates, partially offset by lower funding costs and improved funding mix, as well as continued mix shift towards higher yielding assets.
–Net interest margin on a fully taxable-equivalent basis of 2.89% decreased by 27 basis points, compared to 3.16% in 2019.
–Average loans and leases of $124.5 billion increased $6.6 billion, or 6%, from $117.9 billion in 2019, reflecting a $5.5 billion increase in commercial loans and leases primarily driven by $3.2 billion of PPP loans as well as a $1.1 billion increase in retail loans.
–Period-end loan growth of $4.0 billion, or 3%, from 2019, reflected 6% growth in total commercial driven by PPP loans.
–Average deposits of $138.7 billion increased $15.4 billion, or 13%, from $123.3 billion in 2019, as a result of government stimulus benefiting consumers and small businesses as well as commercial clients building liquidity given COVID-19 disruption.
–Period-end deposit growth of $21.9 billion, or 17%, from 2019, reflecting growth in demand deposits, money market accounts, savings and checking with interest, partially offset by a decrease in term deposits.
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◦Noninterest income of $2.3 billion increased $442 million, or 24%, from 2019, driven by mortgage banking and capital markets fees, partially offset by lower service charges and fees, card fees, foreign exchange and interest rate products revenue, securities gains and other income.
•Noninterest expense of $4.0 billionincreased $144 million, or 4%, from $3.8 billion in 2019, driven by higher salaries and employee benefits reflecting strong mortgage production; outside services tied to growth initiatives; and equipment and software expense given continued investments in technology; partially offset by lower other operating expense given lower travel, pension and advertising expenses.
◦On an Underlying basis, noninterest expense increased 2% from 2019.
•The efficiency ratio of 57.8% compared to 59.3% in 2019, and ROTCE of 6.9% compared to 12.6%.
◦On an Underlying basis, the efficiency ratio of 56.0% compared to 58.2% in 2019 and ROTCE of 7.5%compared to12.8%, given the implementation of CECL and reserve increases tied to COVID-19 impacts.
•Provision for credit losses of $1.6 billion increased $1.2 billion from $393 million in 2019, reflecting our adoption of CECL and its reliance on forecasts of expected future losses, combined with the approximate $923 million impact from COVID-19 and associated lockdowns and a sudden rise in unemployment and drop in GDP.
•Tangible book value per common of $32.72 increased 2% from 2019. Fully diluted average common shares outstanding decreased 23.1 million shares, or 5% over the same period.
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RESULTS OF OPERATIONS — 2020 compared with 2019
Net Interest Income
Net interest income is our largest source of revenue and is the difference between the interest earned on interest-earning assets (generally loans, leases and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (generally deposits and borrowed funds). The level of net interest income is primarily a function of the difference between the effective yield on our average interest-earning assets and the effective cost of our interest-bearing liabilities. These factors are influenced by 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 FRB and market interest rates. For further discussion, refer to “—Market Risk — Non-Trading Risk,” and “—Risk Governance.”
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Table 2: Major Components of Net Interest Income
Year Ended December 31,
Assets
Non-taxable investment securities 4 — 2.60 5 — 2.60 (1) —
Allowance for loan and lease losses (2,218) (1,244) (974)
Liabilities and Stockholders’ Equity
Interest rate spread 2.66 % 2.73 % (7)
(1) Interest income and rates on loans include loan fees. Additionally, $1.0 billion and $728 million of average nonaccrual loans were included in the average loan balances used to determine the average yield on loans for December 2020 and 2019, respectively.
(2) Net interest income and net interest margin is presented on a fully taxable-equivalent (“FTE”) basis using the federal statutory tax rate of 21%. The FTE impact is predominantly attributable to commercial and industrial loans for the periods presented.
Net interest income of $4.6 billion decreased $28 million, reflecting 8% average interest-earning asset growth, including the addition of PPP loans, and improvements in funding mix and deposit pricing that were more than offset by a 26 basis point decrease in net interest margin given the lower rate and challenging yield curve environment.
Net interest margin on an FTE basis of 2.89% decreased 27 basis points compared to 3.16% in 2019, primarily reflecting the impact of lower interest rates and elevated cash balances given strong deposit flows (elevated cash balances drove 8 basis points of the decline), partially offset by improved funding mix and deposit
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pricing. Average interest-earning asset yields of 3.35% decreased 84 basis points from 4.19% in 2019, while average interest-bearing liability costs of 0.69% decreased 77 basis points from 1.46% in 2019, reflecting strong pricing discipline.
Average interest-earning assets of $159.3 billion increased $12.5 billion, or 8%, from 2019, driven by a $5.5 billion increase in average commercial loans, a $4.4 billion increase in total investment securities and interest-bearing cash and due from banks and deposits in banks, a $1.5 billion increase in average total loans held for sale and a $1.1 billion increase in average retail loans. Commercial growth was driven by commercial and industrial (primarily PPP loans) and commercial real estate. Retail growth was driven by education and other retail, partially offset by home equity.
Average deposits of $138.7 billion increased $15.4 billion from 2019, as a result of government stimulus benefiting consumers and small businesses and clients building liquidity given COVID-19 disruption. Increases in demand deposits, money market accounts, savings, and checking with interest, were partially offset by a decrease in term deposits. Total interest-bearing deposit costs of $509 million decreased $646 million, or 56%, from $1.2 billion in 2019, primarily due to a lower rate environment and strong pricing discipline.
Average total borrowed funds of $11.2 billion decreased $2.5 billion from 2019 as strong deposit flows allowed for significantly lower levels of borrowings, with FHLB advances near zero at period-end and a reduction in senior and subordinated debt. Total borrowed funds costs of $262 million decreased $158 million from 2019. The total borrowed funds cost of 2.33% decreased 73 basis points from 3.06% in 2019 due to the impact of COVID-19 on the rate environment.
Table 3: Changes in Net Interest Income Due to Average Volume and Average Rate
Year Ended December 31,
(in millions) Average Volume(1) Average Rate(1) Net Change
Interest Income
Interest-bearing cash and due from banks and deposits in banks $90 ($109) ($19)
Taxable investment securities (7) (116) (123)
Total investment securities (7) (116) (123)
Residential mortgages (5) (64) (69)
Loans held for sale, at fair value 41 (29) 12
Other loans held for sale 19 1 20
Interest Expense
Total interest-bearing deposits 2 (648) (646)
Short-term borrowed funds (5) (3) (8)
Long-term borrowed funds (56) (94) (150)
Total borrowed funds (61) (97) (158)
(1) Volume and rate changes have been allocated on a consistent basis using the respective percentage changes in average balances and average rates.
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Noninterest Income
Table 4: Noninterest Income
Year Ended December 31,
Trust and investment services fees 203 202 1 —
Letter of credit and loan fees 140 135 5 4
Foreign exchange and interest rate products 120 155 (35) (23)
Securities gains, net 4 19 (15) (79)
(1) Includes bank-owned life insurance income and other income for all periods presented, and net impairment losses recognized in earnings on available for sale debt securities for the 2019 period.
Noninterest income of $2.3 billion increased $442 million, or 24%, from 2019, reflecting increased mortgage banking fees due to higher origination volumes and gain on sale margins, and capital markets fees. These results were partially offset by lower service charges and fees and card fees as well as lower foreign exchange and interest rate products revenue, reflecting challenging market conditions. Results also reflected decreased securities gains and other income given lower leasing income and lower gains related to asset dispositions, partially offset by gain on sale of education loans.
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Noninterest Expense
Table 5: Noninterest Expense
Year Ended December 31,
Noninterest expense of $4.0 billion in 2020 increased $144 million, or 4%, compared to 2019, reflecting higher salaries and employee benefits, reflecting strong mortgage production, outside services, tied to growth initiatives, and an increase in equipment and software expense, given continued investments in technology. These results were partially offset by lower other operating expense given a decline in travel, pension, and advertising expenses. Underlying noninterest expense increased $87 million, or 2%, due to the reasons listed above.
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Provision for Credit Losses
The provision for credit losses is the result of a detailed analysis performed to estimate our ACL. The total provision for credit losses includes the provision for loan and lease losses and the provision for unfunded commitments. Refer to “—Analysis of Financial Condition — Allowance for Credit Losses and Nonaccruing Loans and Leases” for more information.
Provision for credit losses of $1.6 billion included a $923 million reserve build primarily associated with the impact of the COVID-19 pandemic and associated lockdowns on our loan portfolio, which resulted in a sudden rise in unemployment and drop in GDP. Net charge-offs of $693 million increased $263 million from 2019, which reflected charge-offs in our commercial portfolio concentrated in certain sub-categories, including retail real estate, metals and mining, energy and related, and casual dining, as well as the impact of continued seasoning in retail growth portfolios, and loan growth.
Income Tax Expense
Income tax expense of $241 million decreased $219 million from $460 million in 2019. The 2020 effective tax rate of 18.5% decreased from 20.4% in 2019, driven by the increased benefit of tax-advantaged investments on lower pre-tax income. An Underlying effective tax rate of 19.9% in 2020 compared to 22.0% in 2019.
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Business Operating Segments
We have two business operating segments: Consumer Banking and Commercial Banking. Segment results are derived by specifically attributing managed assets, liabilities, capital and related revenues, provision for credit losses, which, at the segment level, is equal to net charge-offs, and other expenses. The residual difference between the consolidated provision for credit losses and the business operating segments’ net charge-offs is reflected in Other.
Non-segment operations are classified as Other, which includes corporate functions, the Treasury function, the securities portfolio, wholesale funding activities, intangible assets not directly allocated to a business operating segment, community development, non-core assets, and other unallocated assets, liabilities, capital, revenues, provision for credit losses, expenses and income tax expense. In addition, Other includes goodwill not directly allocated to a business operating segment and any associated goodwill impairment charges. For impairment testing purposes, we allocate all goodwill to our Consumer Banking and/or Commercial Banking reporting units.
Our capital levels are evaluated and managed centrally; however, capital is allocated on a risk-adjusted basis to the business operating segments to support evaluation of business performance. Because funding and asset liability management is a central function, funds transfer-pricing (“FTP”) methodologies are utilized to allocate a cost of funds used, or credit for the funds provided, to all business operating 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 FTP process, is included in Other. We periodically evaluate and refine our methodologies used to measure financial performance of our business operating segments.
Noninterest income and expense are directly attributed to each business operating segment, including fees, service charges, salaries and benefits, and other direct revenues and costs and are respectively accounted for in a manner similar to our Consolidated Financial Statements. Occupancy costs are allocated based on utilization of facilities by each business operating segment. Noninterest expenses incurred by centrally managed operations or business operating segments that directly support another business operating segment’s operations are charged to the applicable business operating segment based on its utilization of those services.
Income tax expense is assessed to each business operating 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 operating segments is a dynamic process. Accordingly, financial results may be revised periodically as management systems are enhanced, methods of evaluating performance or product lines are updated, or our organizational structure changes.
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The following table presents certain financial data of our business operating segments. Total business operating segment financial results differ from total consolidated net income. These differences are reflected in Other non-segment operations. See Note 25 in Item 8 for further information.
Table 6: Selected Financial Data for Business Operating Segments
(dollars in millions) Consumer Banking Commercial Banking
Average Balances:
(1) Includes LHFS.
(2) The majority of PPP loans are reflected in Consumer Banking in accordance with how they are managed.
Consumer Banking
Net interest income increased $129 million, or 4%, from 2019, driven by the benefit of a $4.8 billion increase in average loans led by education, other retail and the impact of the PPP loan program, partially offset by lower deposit margins driven by the low rate environment. Noninterest income increased $499 million, or 43%, from 2019, driven by mortgage banking fees (reflecting strong origination volumes and gain on sale margins) and other income (gain on sale of education loans), partially offset by lower service charges and fees (higher deposit balances and lower transaction volumes) and card fees (lower transaction volumes). Noninterest expense increased $113 million, or 4%, from 2019, reflecting higher salaries and employee benefits costs tied to higher mortgage origination volumes and PPP loans. Net charge-offs of $288 million decreased $37 million, or 11%, reflecting the impact of loan forbearance programs.
Commercial Banking
Net interest income of $1.6 billion decreased $177 million, or 12%, from 2019, primarily due to the low rate environment, partially offset by higher loan and lower-costing deposit volume. Noninterest income of $595 million decreased $12 million, or 2%, from $607 million in 2019, as higher capital markets fees were offset by a decrease in other income and foreign exchange and interest rate products. Noninterest expense of $860 million increased$2 million, from $858 million in 2019, driven by higher salaries and employee benefits, partially offset by lower travel costs. Net charge-offs of $398 millionincreased $301 million from 2019, driven by the impact of COVID-19 and associated lockdowns, primarily in the retail real estate, metals and mining, energy and related, and casual dining industries.
RESULTS OF OPERATIONS — 2019 compared with 2018
For a description of our results of operations for 2019, see the “Results of Operations — 2019 compared with 2018” section of Item 7 in our 2019 Form 10-K.
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ANALYSIS OF FINANCIAL CONDITION
Securities
Table 7: Amortized Cost and Fair Value of AFS and HTM Securities
State and political subdivisions 3 3 5 5 5 5
Mortgage-backed securities, at fair value:
Mortgage-backed securities, at cost:
Other/non-agency — — — — 740 748
Asset-backed securities, at cost $893 $893 $— $— $— $—
Our securities portfolio is managed to maintain prudent levels of liquidity, credit quality and market risk while achieving appropriate returns that align with our overall portfolio management strategy. The portfolio includes high quality, highly liquid investments reflecting our ongoing commitment to appropriate contingent liquidity levels and pledging capacity. U.S. government-guaranteed notes and GSE-issued mortgage-backed securities represent 95% of the fair value of our debt securities portfolio holdings. Holdings backed by mortgages dominate our portfolio and facilitate our ability to pledge those securities to the FHLB for collateral purposes.
The fair value of the AFS debt securities portfolio of $22.9 billion at December 31, 2020 increased $2.3 billion from $20.6 billion at December 31, 2019 largely reflecting an increase of $1.8 billion related to reinvestment timing and a $482 million increase in value from lower long-term rates. The fair value of the HTM debt securities portfolio decreased $115 million largely reflecting portfolio runoff, partially offset by the reclass of certain ABS. In September 2020, we purchased $813 million of asset-backed securities, which were recorded as AFS; however, in October 2020, management transferred these securities to HTM after concluding to hold these securities through maturity. For further information, see Note 1 in Item 8.
As of December 31, 2020, the portfolio’s average effective duration was 2.7 years compared with 3.7 years as of December 31, 2019, as lower long-term rates drove an increase in both actual and projected securities prepayment speeds. We manage our securities portfolio duration and convexity risk through asset selection and securities structure, and maintain duration levels within our risk appetite in the context of the broader interest rate risk in the banking book framework and limits.
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Distribution of Maturities(1)
Amortized cost:
U.S. Treasury and other $11 $— $— $— $11
State and political subdivisions — — — 3 3
Mortgage-backed securities:
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities — — — 2,342 2,342
Asset-backed securities — — 893 — 893
Total debt securities held to maturity — — 893 2,342 3,235
(1) Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without incurring penalties.
(2) As of December 31, 2020, no investment exceeded 10% of Stockholders’ Equity.
(3) Yields on tax-exempt securities are not computed on a tax-equivalent basis.
(4) Yields exclude the impact of hedging activity.
Loans and Leases
Table 9: Composition of Loans and Leases, Excluding LHFS
(1) The commercial loan class has been renamed commercial and industrial, and the commercial loans and leases loan segment has been renamed commercial.
(2) The December 31, 2020 commercial and industrial balance included PPP loans fully guaranteed by the SBA.
(3) Beginning in the first quarter of 2020, home equity loans, home equity lines of credit, home equity loans serviced by others and home equity lines of credit serviced by others are included in home equity. Prior periods have been adjusted to conform with the current period presentation.
(4) Beginning in the first quarter of 2020, credit card and other retail are included in other retail. Prior periods have been adjusted to conform with the current period presentation.
Total loans and leases increased $4.0 billion, or 3%, from $119.1 billion as of December 31, 2019, largely driven by commercial PPP loans to small business customers. Growth in retail loans, driven by education, was muted in part by the sale of education loans in September and December 2020 amounting to $1.1 billion, inclusive of accrued interest, capitalized interest and fees, and a decline in home equity and other retail. For further information, see Note 10 in Item 8.
PPP loans to small business customers totaled approximately $4.7 billion for the quarters ended June 30, 2020 and September 30, 2020, and $4.2 billion as of December 31, 2020. Average PPP loans totaled approximately $3.4 billion, $4.7 billion and $4.5 billion for the quarters ended June 30, 2020, September 30, 2020, and December 31, 2020, respectively. There were no outstanding PPP loans as of and during the quarter ended March 31, 2020.
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As of December 31, 2020, under our COVID-19-related forbearance programs, that are guided by the CARES Act as well as banking regulator interagency guidance, we have deferred payments on:
•Approximately $1.4 billion, or 2.3%, of our retail portfolio, for which the weighted average FICO score is 711
◦94% of customers that exited forbearance are current on payments
◦Although not required, approximately 42% of our residential mortgage borrowers have made payment while in active forbearance, and the weighted average loan-to-value of the $700 million in residential mortgage loans in active forbearance is 62%.
•Approximately $343 million, or 0.6%, of our commercial portfolio, including approximately $53 million, or 1.0%, of our small business portfolio.
The vast majority of these deferrals are not classified as TDRs.
Loan and Lease Concentrations
At December 31, 2020, we did not identify any concentration of loans and leases exceeding 10% of total loans and leases that were not otherwise disclosed as a category of loans and leases. For further information on how we manage concentration exposures, see Note 5 in Item 8.
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Allowance for Credit Losses and Nonaccruing Loans and Leases
The ACL, which consists of an ALLL and a reserve for unfunded lending commitments, is created through charges to the provision for credit losses in order to provide appropriate reserves to absorb future estimated credit losses in accordance with GAAP. For further information on our processes to determine our ACL, see “—Critical Accounting Estimates — Allowance for Credit Losses,” and Note 5 in Item 8.
Summary of Loan and Lease Loss Experience
Table 11: Summary of Changes in ALLL and Reserve for Unfunded Commitments
As of and for the Year Ended December 31,
Allowance for Loan and Lease Losses — Beginning:
Qualitative — — — — 86
Qualitative — — — — 81
Cumulative effect of change in accounting principle:
Commercial and industrial ($197) $— $— $— $—
Commercial real estate (57) — — — —
Leases 78 — — — —
Total commercial (176) — — — —
Residential mortgages 95 — — — —
Home equity 74 — — — —
Automobile 82 — — — —
Education 298 — — — —
Other retail 80 — — — —
Total retail loans 629 — — — —
Cumulative effect of change in accounting principle $453 $— $— $— $—
Allowance for Loan and Lease Losses — Beginning, Adjusted:
Qualitative — — — — 86
Qualitative — — — — 81
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Table 11: Summary of Changes in ALLL and Reserve for Unfunded Commitments
As of and for the Year Ended December 31,
Gross Charge-offs:
Commercial and industrial ($247) ($87) ($48) ($62) ($56)
Residential mortgages (7) (8) (8) (11) (21)
Gross Recoveries:
Commercial real estate 1 — 4 3 12
Residential mortgages 6 9 5 6 9
Net (Charge-offs)/Recoveries:
Commercial and industrial ($236) ($63) ($33) ($25) ($35)
Commercial real estate (111) (39) — (10) (2)
Residential mortgages (1) 1 (3) (5) (12)
Provision for Loan and Lease Losses:
Qualitative — — — — (21)
Residential mortgages 12 (2) (5) (6) 8
Qualitative — — — — 27
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Table 11: Summary of Changes in ALLL and Reserve for Unfunded Commitments
As of and for the Year Ended December 31,
Total Allowance for Loan and Lease Losses — Ending:
Qualitative — — — — 65
Qualitative — — — — 108
Reserve for Unfunded Lending Commitments — Beginning $44 $91 $88 $72 $58
Cumulative effect of change in accounting principle (2) — — — —
Provision for unfunded lending commitments 185 (47) 3 16 14
Reserve for unfunded lending commitments — Ending $227 $44 $91 $88 $72
Table 12: Allocation of the ALLL
December 31,
Qualitative — N/A — N/A — N/A — N/A 65 N/A
Qualitative — N/A — N/A — N/A — N/A 108 N/A
The ALLL represented 1.98% of total loans and leases and 240% of NPLs as of December 31, 2020 compared with 1.05% and 178%, respectively, as of December 31, 2019.
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Risk Elements
December 31,
Nonaccrual loans and leases
Loans and leases that are accruing and 90 days or more delinquent
Commercial and industrial $20 $2 $1 $5 $2
Commercial real estate — — — 3 —
Leases 1 — — — —
(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.
NPLs of $1.0 billion as of December 31, 2020 increased $316 million from December 31, 2019, driven by a $103 million increase in retail reflecting growth in mortgage NPLs, and a $213 million increase in commercial NPLs reflecting a deterioration in certain industry sectors from the impacts of COVID-19 and associated lockdowns. NCOs of $693 million increased $263 million, or 61%, from $430 million in 2019 reflecting charge-offs in our commercial portfolio related to retail real estate, metals and mining, energy and related, and casual dining, while retail NCOs were down compared to 2019 due in large part to U.S. Government stimulus programs and forbearance. NCOs as a percentage of total average loans of 0.56% increased 20 basis points compared to 0.36% in 2019.
We continue to assess the impact of the COVID-19 pandemic and associated lockdowns and have instituted a variety of measures to identify and monitor areas of potential risk, including direct outreach to commercial clients and close monitoring of retail credit metrics.
Potential Problem Loans and Leases
At December 31, 2020, we did not identify any potential problem loans or leases within the portfolio that were not already disclosed in “—Risk Elements” and “—Commercial Loan Asset Quality.” Potential problem loans or leases consist of loans and leases where information about a borrower’s possible credit problems cause management to have serious doubts as to the ability of a borrower to comply with the present repayment terms.
Commercial Loan Asset Quality
Our commercial portfolio consists of traditional commercial and industrial, and commercial real estate loans. The portfolio is largely comprised of customers in our footprint and adjacent states in which we have a physical presence where our local delivery model provides for strong client connectivity. We also lend nationally to companies that fall within targeted client, industry, and geographic expansion strategies.
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Commercial NPLs increased $213 million to $458 million as of December 31, 2020 from $245 million as of December 31, 2019. As of December 31, 2020, total commercial NPLs were 0.8% of the commercial portfolio and increased from 0.4% at December 31, 2019. Total 2020 commercial portfolio net charge-offs of $425 million increased from $116 million in 2019. For the year ended December 31, 2020, the commercial portfolio annualized net charge-off ratio of 0.67% increased from 0.20% for the year ended December 31, 2019, reflecting charge-offs in the retail real estate, metals and mining, energy and related, and casual dining industry sectors.
The increases in commercial NPLs and NCOs were driven largely by a deterioration in certain industry sectors, including retail real estate, casual dining, and energy and related, resulting from the impacts of COVID-19 and associated lockdowns.
For commercial, we utilize regulatory classification ratings to monitor credit quality. For more information on regulatory classification ratings, see Note 5 in Item 8. The recorded investment in commercial based on regulatory classification ratings is presented below:
Table 14: Commercial Loans and Leases by Regulatory Classification
Criticized
(in millions) Pass Special Mention Substandard Doubtful Total
(1) Pass includes PPP loans.
Criticized
(in millions) Pass Special Mention Substandard Doubtful Total
Total commercial criticized balances of $4.6 billion as of December 31, 2020 increased $1.6 billion compared with December 31, 2019. Commercial criticized as a percent of total commercial of 7.6% at December 31, 2020 increased from 5.3% at December 31, 2019.
Commercial and industrial criticized balances of $3.3 billion, or 7.5% of the total commercial and industrial loan portfolio as of December 31, 2020, increased from $2.5 billion, or 6.1%, as of December 31, 2019. The increase was due to the migration to criticized loans for hospitality, energy and related, and casual dining. Commercial and industrial criticized loans represented 71% of total criticized loans as of December 31, 2020 compared to 83% as of December 31, 2019.
Commercial real estate criticized balances of $1.3 billion, or 8.8% of the commercial real estate portfolio, increased from $353 million, or 2.6%, as of December 31, 2019. The increase was due to the migration to criticized loans for a few larger borrowers in the hospitality and retail industry sectors. Commercial real estate accounted for 28% of total criticized loans as of December 31, 2020 compared to 12% as of December 31, 2019.
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Table 15: Commercial Loans and Leases by Industry Sector
(dollars in millions) Balance % of Total Loans Balance % of Total Loans
Health, pharma, and social assistance 3,243 3 3,496 3
Professional, scientific, and technical services 2,804 2 2,986 3
Arts, entertainment, and recreation 1,382 1 1,229 1
Administrative and waste management services 1,320 1 1,454 1
Real estate and rental and leasing 732 — 659 —
Accommodation and food services 749 1 606 1
Finance and insurance 498 — 418 —
(1) Deferred fees and costs are reported in All other
(2) Excludes PPP loans for the year-ended December 31, 2020.
Retail Loan Asset Quality
For retail loans, we utilize credit scores provided by FICO which are generally refreshed on a quarterly basis and the loan’s payment and delinquency status to monitor credit quality. Management believes FICO credit scores are considered the strongest indicator of credit losses over the contractual life of the loan as the scores are based on current and historical national industry-wide consumer level credit performance data, and assist management in predicting the borrower’s future payment performance. The largest portion of the retail portfolio is represented by borrowers located in the New England, Mid-Atlantic and Midwest regions, although we have continued to lend selectively in areas outside the footprint primarily in the auto finance and education lending.
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Table 16: Aging of Retail Loans as a Percentage of Loan Class
Days Past Due Days Past Due
For more information on the aging of accruing and nonaccruing retail loans, see Note 5 in Item 8.
Table 17: Retail Asset Quality Metrics
Average refreshed FICO for total portfolio 771 764
CLTV ratio for secured real estate(1) 60 % 59 %
Nonaccrual retail loans as a percentage of total retail 0.90 % 0.74 %
(1) The real estate secured portfolio CLTV is calculated as the mortgage and second lien loan balance divided by the most recently available value of the property.
Year Ended December 31,
(dollars in millions) 2020 2019 Change Percent
Annualized net charge-off rate 0.44 % 0.52 % (8) bps
Retail asset quality remained relatively stable with December 31, 2019. The net charge-off rate of 0.44% for the year ended December 31, 2020 reflected a decrease of 8 basis points from the year ended December 31, 2019, driven by the forbearance and stimulus activity stemming from the COVID-19 pandemic and associated lockdowns.
Troubled Debt Restructurings
TDR is the classification given to a loan that has been restructured in a manner that grants a concession to a borrower 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 borrower’s 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 our lending policy. Depending on the specific facts and circumstances of the customer, restructuring can involve loans moving to nonaccrual, remaining on nonaccrual, or remaining on accrual status.
In the first quarter of 2020, we adopted the CARES Act and interagency guidance issued by the bank regulatory agencies which provide that COVID-19-related modifications to retail and commercial loans that met certain eligibility criteria are exempt from classification as a TDR. Loans with payment deferrals and forbearance plans entered into as a result of the COVID-19 pandemic and associated lockdowns were generally not considered TDRs.
As of December 31, 2020, $718 million of retail loans were classified as TDRs, compared with $667 million as of December 31, 2019. As of December 31, 2020, $171 million of retail TDRs were in nonaccrual status with 38% current with payments, compared to $143 million in nonaccrual status with 38% current on payments at December 31, 2019. TDRs generally return to accrual status once repayment capacity and appropriate payment history can be established. TDRs are individually evaluated for impairment and loans, once classified as TDRs, remain classified as TDRs until paid off, sold or refinanced at market terms. For additional information regarding TDRs, see “—Critical Accounting Estimates — Allowance for Credit Losses” and Note 5 in Item 8.
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Table 18: Accruing and Nonaccruing Retail Troubled Debt Restructurings
As a % of Accruing Retail TDRs
As a % of Accruing Retail TDRs
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 those loans had been current in accordance with their original contractual terms, and had been outstanding throughout the year, or since origination if held for only part of the year. The table also presents the interest income related to these loans that was actually recognized for the year.
Table 19: Interest Income Foregone
(in millions) For the Year Ended December 31, 2020
Gross amount of interest income that would have been recorded (1) $126
Interest income actually recognized 17
Total interest income foregone $109
(1) Based on the contractual rate that was being charged at the time the loan was restructured or placed on nonaccrual status.
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 non-local currency. As of December 31, 2020, 2019 and 2018, 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.
Deposits
Table 20: Composition of Deposits
December 31,
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Total deposits as of December 31, 2020, increased $21.9 billion, or 17%, to $147.2 billion compared to $125.3 billion, driven by growth in demand deposits, money market accounts, savings, and checking with interest, partially offset by a decrease in term deposits and demand deposits. Citizens Access®, our national digital platform, attracted $5.9 billion of deposits through December 31, 2020, up from $5.8 billion as of December 31, 2019.
Table 21: Average Balances of and Average Interest Rates Paid for Deposits
For the Year Ended December 31,
(1) The aggregate amount of deposits by foreign depositors in domestic offices was $839 million, $1.7 billion and $1.2 billion as of December 31, 2020, 2019 and 2018, respectively.
Borrowed Funds
Table 22: Summary of Short-Term Borrowed Funds
December 31,
Securities sold under agreements to repurchase $231 $265 ($34) (13 %)
Other short-term borrowed funds 12 9 3 33
Total short-term borrowed funds $243 $274 ($31) (11 %)
Our advances, lines of credit, and letters of credit from the FHLB are collateralized by pledged mortgages and 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 $3.2 billion and $9.8 billion at December 31, 2020 and 2019, respectively. Our remaining available FHLB borrowing capacity was $13.9 billion and $7.2 billion at December 31, 2020 and 2019, respectively. We can also borrow from the FRB discount window to meet short-term liquidity requirements. Collateral, including certain loans, is pledged to support this borrowing capacity. At December 31, 2020, our unused secured borrowing capacity was approximately $64.6 billion, which included unencumbered securities, FHLB borrowing capacity, and FRB discount window capacity.
Table 23: Key Data Related to Short-Term Borrowed Funds
As of and for the Year Ended December 31,
Weighted-average interest rate at year-end: (1)
Other short-term borrowed funds 0.02 3.85 2.73
Maximum amount outstanding at any month-end during the year:
Average amount outstanding during the year:
Other short-term borrowed funds 34 66 467
Weighted-average interest rate during the year: (1)
Other short-term borrowed funds 0.76 2.50 2.10
(1) Rates exclude certain hedging costs.
(2) Balances are net of certain short-term receivables associated with reverse repurchase agreements, as applicable.
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Table 24: Summary of Long-Term Borrowed Funds
December 31,
Parent Company:
2.500% fixed-rate senior unsecured notes, due February 2030 297 —
3.250% fixed-rate senior unsecured notes, due April 2030 745 —
2.638% fixed-rate subordinated debt, due September 2032(1) 543 —
CBNA’s Global Note Program:
2.447% floating-rate senior unsecured notes, due March 2020(2) — 300
2.487% floating-rate senior unsecured notes, due May 2020(2) — 250
Additional Borrowings by CBNA and Other Subsidiaries:
(1) Reflects the September 2020 completion of (i) $621 million in private exchange offers for five series of outstanding subordinated notes whereby participants received a combination of the our newly issued 2.638% fixed-rate subordinated notes due 2032 and an additional cash payment and (ii) $11 million in related cash tender offers whereby validly tendered and accepted subordinated notes were purchased by us and subsequently cancelled.
(2) Rate disclosed reflects the floating rate as of December 31, 2020, or final rate as applicable.
Long-term borrowed funds of $8.3 billion as of December 31, 2020 decreased $5.7 billion from December 31, 2019, as strong deposit flows allowed for significantly lower levels of borrowings. The decline in borrowed funds reflected a decrease of $5.0 billion in FHLB borrowings, and a decrease of $729 million in subordinated debt and unsecured notes.
The Parent Company’s long-term borrowed funds as of December 31, 2020 and 2019 included principal balances of $3.5 billion and $2.5 billion, respectively, and unamortized deferred issuance costs and/or discounts of ($90) million and ($8) million, respectively. CBNA and other subsidiaries’ long-term borrowed funds as of December 31, 2020 and 2019 included principal balances of $4.8 billion and $11.5 billion, respectively, with unamortized deferred issuance costs and/or discounts of ($11) million and ($13) million, respectively, and hedging basis adjustments of $112 million and $50 million, respectively. See Note 13 in Item 8 for further information about our hedging of certain long-term borrowed funds.
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QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited quarterly Consolidated Statements of Operations data and Consolidated Balance Sheet data as of and for the four quarters of 2020 and 2019, respectively. We have prepared the Consolidated Statements of Operations data and Balance Sheet data on the same basis as our Consolidated Financial Statements in Item 8 and, in the opinion of management, each Consolidated 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 our Consolidated Financial Statements and Notes in Item 8.
Table 25: Quarterly Results of Operations
For the Three Months Ended
Operating Data:
Other Operating Data:
Share Data:
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As of
Balance Sheet Data:
Asset Quality Ratios:
Capital ratios:(15)
(1) Fourth quarter 2020 noninterest expense included $42 million of pre-tax notable items consisting of $2 million of integration costs associated with Acquisitions and $40 million in other notable items related to TOP programs and other efficiency initiatives.
(2) Fourth quarter 2020 income tax expense included $18 million of benefits associated with other notable items ($7 million largely tied to an operational restructure and $11 million in TOP programs and other efficiency initiatives).
(3) Fourth quarter 2020 net income included $24 million of after-tax notable items consisting of $2 million in integration costs associated with Acquisitions and $22 million in other notable items (including a $7 million benefit largely tied to an operational restructure more than offset by $29 million in after-tax TOP programs and other efficiency initiatives).
(4) Third quarter 2020 noninterest expense included $31 million of pre-tax notable items consisting of $2 million of integration costs associated with Acquisitions and $29 million in other notable items related to TOP programs and other efficiency initiatives. Income tax expense included $7 million of benefits associated with notable items related to TOP programs and other efficiency initiatives. Net income included $24 million of after-tax notable items consisting of $2 million of total integration costs associated with Acquisitions and $22 million in other notable items related to TOP programs and other efficiency initiatives.
(5) Second quarter 2020 noninterest expense included $19 million of pre-tax notable items consisting of $2 million of integration costs associated with Acquisitions and $17 million in other notable items related to TOP programs and other efficiency initiatives. Income tax expense included $9 million of benefits associated with notable items ($1 million for integration costs associated with Acquisitions and $8 million in other notable items, consisting of $4 million related to legacy tax matters and $4 million in TOP programs and other efficiency initiatives). Net income included $10 million of after-tax notable items consisting of $1 million of total integration costs associated with Acquisitions and $9 million in other notable items (including $4 million related to legacy tax matters more than offset by $13 million after-tax in TOP programs and other efficiency initiatives.
(6) First quarter 2020 noninterest expense included $33 million of pre-tax notable items consisting of $4 million of integration costs associated with Acquisitions and $29 million in other notable items related to TOP programs and other efficiency initiatives. Income tax expense included $8 million of benefits associated with notable items ($1 million for integration costs associated with Acquisitions and $7 million in TOP programs and other efficiency initiatives). Net income included $25 million of after-tax notable items consisting of $3 million after-tax of total integration costs associated with Acquisitions and $22 million after-tax in other notable items related to TOP programs and other efficiency initiatives.
(7) Fourth quarter 2019 noninterest expense included $37 million of pre-tax notable items consisting of $35 million in other notable items ($35 million in TOP programs and other efficiency initiatives) and $2 million of integration costs associated with acquisitions. Income tax expense included $33 million of benefits associated with other notable items ($24 million largely tied to legacy tax matters and $9 million in TOP programs and other efficiency initiatives). Net income included $4 million of after-tax notable items consisting of $2 million in total integration costs associated with acquisitions and $2 million in other notable items (including $24 million largely tied to legacy tax matters offset by $26 million in after-tax TOP programs and other efficiency initiatives).
(8) Third quarter 2019 noninterest expense included $19 million of pre-tax notable items consisting of $15 million in other notable items ($15 million in TOP programs and other efficiency initiatives) and $4 million of integration costs associated with acquisitions. Income tax expense included $15 million of benefits associated with notable items ($14 million in other notable items, consisting of $10 million related to an operational restructure and $4 million in TOP programs and other efficiency initiatives, and $1 million for integration costs associated with acquisitions). Net income included $4 million of after-tax notable items consisting of $3 million of total integration costs associated with acquisitions and $1 million in other notable items (including $10 million related to an operational restructure offset by $11 million in after-tax TOP programs and other efficiency initiatives).
(9) Second quarter 2019 noninterest expense included $7 million of pre-tax notable items for total integration costs associated with acquisitions. Income tax expense and net income included $2 million and $5 million, respectively, related to these notable items.
(10) First quarter 2019 noninterest expense included $5 million of pre-tax notable items for total integration costs associated with acquisitions. Income tax expense and net income included $1 million and $4 million, respectively, related to these notable items.
(11) Ratios for the periods above are presented on an annualized basis.
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(12) Net interest margin is presented on a FTE basis using the federal statutory tax rate of 21%.
(13) Excludes LHFS of $4.0 billion, $3.7 billion, $5.0 billion, $3.3 billion, $3.3 billion, $2.0 billion, $2.2 billion, and $1.3 billion as of December 31, 2020, September 30, 2020, June 30, 2020, March 31, 2020, December 31, 2019, September 30, 2019, June 30, 2019 and March 31, 2019, respectively.
(14) In the first quarter of 2020, we reclassified federal funds purchased and securities sold under agreement to repurchase and other short-term borrowed funds to short-term borrowed funds. Prior periods have been adjusted to conform with the current period presentation.
(15) The capital ratios and associated components are prepared using the U.S. Basel III Standardized transitional approach.
CAPITAL AND REGULATORY MATTERS
As a bank holding company and a financial holding company, we are subject to regulation and supervision by the FRB. Our banking subsidiary, CBNA, is a national banking association whose primary federal regulator is the OCC. Our regulation and supervision continues to evolve as the legal and regulatory frameworks governing our operations continue to change. For more information, see the “Regulation and Supervision” section in Item 1.
Tailoring of Prudential Requirements
In October 2019, the FRB and the other banking regulators finalized rules that tailor the application of the enhanced prudential standards to bank holding companies and depository institutions to implement the EGRRCPA amendments to the Dodd-Frank Act (“Tailoring Rules”). Under the Tailoring Rules, Category IV firms, such as us, are subject to biennial supervisory stress-testing and are exempt from company-run stress testing and related disclosure requirements. Category IV firms are also no longer required to submit resolution plans. The FRB continues to supervise Category IV firms on an ongoing basis, including evaluation of the capital adequacy and capital planning processes during off-cycle years. We remain subject to the requirement to develop, maintain and submit an annual capital plan for review and approval by our board of directors (or one of its committees), as well as FR Y-14 reporting requirements. On April 6, 2020, we submitted our 2020 Capital Plan to the FRB under the FRB’s 2020 CCAR process. For more information, see the “Tailoring of Prudential Requirements” section in Item 1.
On March 4, 2020, the FRB finalized a stress capital buffer (“SCB”) requirement that integrates regulatory capital requirements with the results of the FRB’s supervisory stress tests by replacing the static CCB of 2.5% with a dynamic SCB requirement. The new SCB requirement is based on the projected losses under the supervisory severely adverse scenario of each firm subject to CCAR plus four quarters of planned common stock dividends, subject to a floor of 2.5%. Under the SCB framework, the FRB will no longer object to capital plans on quantitative grounds and each firm will be required to maintain capital ratios above the sum of its minimum requirements and the SCB requirements to avoid restrictions on capital distributions and discretionary bonus payments. For Category IV firms, like us, the FRB has stated that the SCB will be re-calibrated with each biennial supervisory stress test and updated annually to reflect our planned common stock dividends and common share buy-backs. On October 1, 2020, our SCB of 3.4% became effective and will apply to our capital actions through September 30, 2021.
On September 30, 2020, the FRB issued a proposed rule to make conforming changes to its Capital Plan Rule, stress capital buffer requirements, and capital planning requirements to be consistent with the Tailoring Rules framework. Under the proposal, Category IV firms, like us, would have the ability to elect to participate in the supervisory stress test and receive an updated SCB requirement in a year in which they are not subject to the supervisory stress test. For purposes of calculating the SCB in 2021, the proposed rule would require us to notify the FRB of our intention to participate in the 2021 supervisory stress test by April 5, 2021.
In light of the heightened uncertainty related to the COVID-19 pandemic and associated lockdowns, the FRB took certain actions to preserve capital at banks. Among those actions, the FRB imposed certain limitations on firms for the third and fourth quarters of 2020, including mandatory suspension of share repurchases, and limiting common stock dividends to existing rates and the average quarterly net income for the prior four quarters. Further, the FRB required that CCAR firms, like us, conduct an additional round of stress tests and resubmit updated capital plans to reflect changes in the macroeconomic environment due to the COVID-19 pandemic. Consistent with the FRB’s mandate, we resubmitted our capital plan on November 2, 2020. The results of our resubmission, received on December 18, 2020, exceeded all capital requirements under the FRB’s severe stress scenarios and we reiterated key aspects of our 2020 Capital Plan, which include maintaining quarterly common dividends of $0.39 per common share through the SCB window period ending third quarter 2021. In December 2020, the FRB modified its limitations on capital distributions for the first quarter of 2021 such that firms that participate in CCAR, like us, may resume share repurchases provided that the aggregate of share repurchases and common stock dividends for the first quarter of 2021 do not exceed average quarterly net income for the trailing four quarters. The FRB can extend or modify its current capital distribution limitations in future quarters. In January 2021, our board of directors authorized us to repurchase up to $750 million of our common stock beginning in the first quarter of 2021. The timing and amount of future dividends and share
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repurchases will depend on various factors, including our capital position, financial performance, risk-weighted assets, capital impacts of strategic initiatives, market conditions and regulatory considerations. All future capital distributions are subject to consideration and approval by the board of directors prior to execution.
Regulations relating to capital planning, regulatory reporting, and stress capital buffer requirements applicable to firms like us are presently subject to rulemaking and potential further guidance and interpretation by the applicable federal regulators. We will continue to evaluate the impact of these and any other prudential regulatory changes, including their potential resultant changes in our regulatory and compliance costs and expenses.
Capital Framework
Under the current U.S. Basel III capital framework, we and our banking subsidiary must meet the following specific minimum requirements: CET1 capital ratio of 4.5%, tier 1 capital ratio of 6.0%, total capital ratio of 8.0%, and tier 1 leverage ratio of 4.0%. As a bank holding company, our SCB of 3.4% is imposed on top of the three minimum risk-based capital ratios listed above and a CCB of 2.5% is imposed on top of the three minimum risk-based capital ratios listed above for our banking subsidiary.
Effective for us on April 1, 2020, the CET1 deduction threshold for MSRs, certain deferred tax assets and significant investments in the capital of unconsolidated institutions is 25%. As of December 31, 2020, we did not meet the threshold for these additional capital deductions. MSRs or deferred tax assets not deducted from CET1 capital are assigned a 250% risk weight and significant investments in the capital of unconsolidated financial institutions not deducted from CET1 capital are assigned an exposure category risk weight.
In reaction to the COVID-19 pandemic, the FRB and the other federal banking regulators adopted a final rule relative to regulatory capital treatment of ACL under CECL. This rule allowed electing banking organizations to delay the estimated impact of CECL on regulatory capital for a two-year period ending January 1, 2022, followed by a three-year transition period ending January 1, 2025 to phase-in the aggregate amount of the capital benefit provided during the initial two-year delay. As of December 31, 2020, $568 million of the capital benefit has been accumulated for application to the three-year transition period.
Table 26: Regulatory Capital Ratios Under the U.S. Basel III Standardized Rules
Required Minimum plus Required Buffer for Non-Leverage Ratios(1)(2)
(in millions, except ratio data) Amount Ratio
Quarterly adjusted average assets 175,370
Quarterly adjusted average assets 158,782
(1) Required “Minimum Capital ratio” for 2020 and 2019 are: Common equity tier 1 capital of 4.5%; Tier 1 capital of 6.0%; Total capital of 8.0%; and Tier 1 leverage of 4.0%.
(2) “Minimum Capital ratio” includes stress capital buffer of 3.4% for 2020 and capital conservation buffer of 2.5% for 2019; N/A to Tier 1 leverage.
At December 31, 2020, our CET1 capital, tier 1 capital and total capital ratios were 10.0%, 11.3% and 13.4%, respectively, as compared with 10.0%, 11.1% and 13.0%, respectively, as of December 31, 2019. The CET1 capital ratio remained stable as $3.9 billion of risk-weighted asset (“RWA”) growth and the impact of the capital actions described in “—Capital Transactions” below were primarily offset by net income for the year ended December 31, 2020 and 25% of the increase in AACL subsequent to CECL adoption. The tier 1 capital ratio increased due to the changes in CET1 capital and the issuance of Series F preferred stock described in “—Capital Transactions” below. The total capital ratio increased due to the changes in CET1 and tier 1 capital and the net change in AACL attributable to CECL adoption, the modified transition amount and excess ACL, partially offset by
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the subordinated debt exchange offers described in “—Regulatory Capital Ratios and Capital Composition” below and an increase in non-qualifying subordinated debt. At December 31, 2020, our CET1 capital, tier 1 capital and total capital ratios were approximately 210 basis points, 190 basis points and 200 basis points, respectively, above their regulatory minimums plus our stress capital buffer. All ratios remained well above the U.S. Basel III minima.
Regulatory Capital Ratios and Capital Composition
CET1 capital under U.S. Basel III Standardized rules totaled $14.6 billion at December 31, 2020, and increased $303 million from $14.3 billion at December 31, 2019, largely driven by net income for the year ended December 31, 2020 and 25% of the increase in AACL subsequent to CECL adoption, partially offset by dividends and common share repurchases. Tier 1 capital at December 31, 2020 totaled $16.6 billion, reflecting a $698 million increase from $15.9 billion at December 31, 2019, driven by the changes in CET1 capital and the issuance of Series F preferred stock. At December 31, 2020, we had $2.0 billion of non-cumulative perpetual preferred stock issued and outstanding, an increase of $395 million from $1.6 billion at December 31, 2019, given the second quarter 2020 issuance of 400,000 shares of Series F Preferred Stock that qualified as additional tier 1 capital. Total capital of $19.6 billion at December 31, 2020, increased $1.1 billion from December 31, 2019, driven by the changes in CET1 and tier 1 capital and the net change in AACL, partially offset by a decrease in qualifying subordinated debt.
RWA totaled $146.8 billion at December 31, 2020, based on U.S. Basel III Standardized rules, up $3.9 billion from December 31, 2019. This increase was driven by higher derivative valuations, increases in education loans, commercial real estate loans, MSR RWA, resulting from the finalization of the simplification rules which increased risk weight from 100% to 250%, and increases in residential mortgages, loans held for sale and commercial past due loans. These RWA increases were partially offset by decreases in high volatility commercial real estate, commercial loans, home equity loans and consumer personal loans.
As of December 31, 2020, the tier 1 leverage ratio was 9.4% decreasing from 10.0% at December 31, 2019 driven by the $16.6 billion increase in quarterly adjusted average assets, partially offset by higher tier one capital. The increase in quarterly adjusted average assets was primarily driven by the COVID-19 pandemic and associated lockdowns, resulting in increased cash level of $9.3 billion and an increase in total loans of $4.6 billion. The increased cash is a result of higher deposits caused by government stimulus and commercial clients building liquidity. The increase in total loans is primarily the result of an increase in commercial and industrial loans from PPP.
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Table 27: Capital Composition Under the U.S. Basel III Capital Framework
Exclusions:(1)
Modified CECL transitional amount 568 —
Debt and equity securities (380) (1)
Derivatives 11 (3)
Unamortized net periodic benefit costs 429 415
Deductions:
Deferred tax liability associated with goodwill 379 374
Other intangible assets (58) (68)