The financial services industry in general and in our branch footprint is highly competitive. Our branch footprint is in the New England, Mid-Atlantic and Midwest regions, though certain lines of business serve broader, national markets. Within those markets we face competition from community banks, super-regional and national financial institutions, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies and money market funds. Some of our larger competitors may make available to their customers a broader array of product, pricing and structure alternatives while some smaller competitors may have more liberal lending policies and processes. Competition among providers of financial products and services continues to increase, with consumers having the opportunity to select from a growing variety of traditional and nontraditional alternatives. The ability of non-banking financial institutions to provide services previously limited to commercial banks has also intensified competition.

In Commercial Banking, there is intense competition for quality loan originations from traditional banking institutions, particularly large regional banks, as well as commercial finance companies, leasing companies and other non-bank lenders, and institutional investors including collateralized loan obligation (“CLO”)CLO managers, hedge funds and private equity firms. Some larger competitors, including certain national banks that have a significant presence in our market area, may offer a broader array of products and, due to their asset size, may sometimes be in a position to hold more exposure on their own balance sheet. We compete on a number of factors including, among others, customer service, quality of execution, range of products offered, price and reputation.

In the highly competitive banking industry in which we operate, trademarks, service marks, trade names and logos are important to the success of our business. We own and license a variety of trademarks, service marks, trade names, logos and pending registrations and are spending significant resources to develop our stand-alone brands. In connection with our initial public offering, we entered into a trademark license agreement, pursuant to which we were granted a limited license to use certainthe RBS trademarks (including the daisywheel logo)trademark for an initial term of five years and, at our option, up to 10ten years. We have changed the legal names of any of our subsidiaries that included “RBS” and have continued operational and legal work to rebrand CFG and our banking subsidiaries. We expect the process of changing all marketing materials, operational materials, signage, systems, and legal entities containing “RBS” to our new brand name will take approximately 14 months and cost approximately $14 million, excluding any incremental advertising and customer communication expenses. We expect to then shift the majority of our advertising and marketing budget to our new brand progressively as the different legal entities complete their individual brand name changes. We expect the shift in advertising and marketing investment to be completed no later than July 31, 2015.

We have recently made and continue to make significant investments in our information technology systems for our banking, and lending and cash management activities. We believe thisInvestment is a necessary investment in order to offer new products and improve our overall customer experiences,experience, as well as to provide scale for future growth and acquisitions. The technology investments include replacing systems that support our branch tellers, commercial loans, automobile loans and treasury solutions. Additional investments that are in process include creating an enterprise data warehouse to capture and manage data to better understand our customers, identify our capital requirements and support regulatory reporting and a new mortgage system for our home lending solutions business.

As described in more detail below, the Dodd-Frank Wall Street Reform and Consumer Protection Act whichof 2010 (the “Dodd-Frank Act”) and its implementing regulations significantly restructured the financial regulatory regime in the United States.States and enhanced supervision and prudential standards for large bank holding companies. The Dodd-Frank Act represents a significant overhaul of many aspects of the regulation of the financial services industry, addressing, among other things, systemic risk, capital adequacy, deposit insurance assessments, consumer financial protection, regulation of derivatives and securities markets, restrictions on an insured bank’s transactions with its affiliates, lending limits and mortgage-lending practices. Various provisionsimplications of the Dodd-Frank Act discussedfor our businesses depend to a large extent on the manner in greater detail below, require the issuance of manywhich its implementing regulations which willcontinue to be established and interpreted by the primary U.S. financial regulatory agencies - the FRB, the FDIC, the OCC, the SEC and the Commodity Futures Trading Commission (“CFTC”). Certain aspects of the Dodd-Frank Act remain subject to further rulemaking, take effect over several years, makingvarious transition periods, or contain other elements that make it difficult to precisely anticipate their full impact. Recent political developments, including the overall impact to us, our subsidiaries or the financial industry more generally. Although the overall impact cannot be predicted with any degree of certainty, the Dodd-Frank Act will affect us across a wide range of areas.

We are taking a more stringent approach to supervising and regulating financial institutions and financial products and services over which they exercise their respective supervisory authorities. We, our two banking subsidiaries and our products and services are all subject to greater supervisory scrutiny and enhanced supervisory requirements and expectations and face significant challenges in meeting them. We expect to continue to face greater supervisory scrutiny and enhanced supervisory requirements for the foreseeable future.

Our principal bank subsidiary, CBNA, is a national banking association. As such, it is subject to regulation, examination and supervision by the OCC as its primary federal regulator and by the FDIC as the insurer of its deposits.

CBPA is a Pennsylvania-chartered savings bank. Accordingly, it is subject to supervision by the Department of Banking of the Commonwealth of Pennsylvania (the “PA Banking Department”), as its chartering agency, and regulation, supervision and examination by the FDIC as the primary federal regulator of state-chartered savings banks and as the insurer of its deposits.

A principal objective of the U.S. bank regulatory system is to protect depositors by ensuring the financial safetyThe federal and soundness of banks. To that end, thestate banking regulators have broad regulatory, examinationare given authority to approve or disapprove mergers, acquisitions, consolidations, the establishment of branches and enforcement authority. Thesimilar corporate actions. These banking regulators regularly examine our operations, and CFG and our banking subsidiaries are subject to periodic reporting requirements.

In addition, CBNA and CBPA are subject to regulation, supervision and examination by the CFPB.CFPB with respect to consumer protection laws and regulations. The CFPB has broad authority to, among other things, regulate the offering and provision of consumer financial products by depository institutions with more than $10 billion in total assets. The CFPB may promulgate rules under a variety of consumer financial protection statutes, including the Truth in Lending Act, the Electronic Funds Transfer Act and the Real Estate Settlement Procedures Act.

The Dodd-Frank Act establishedrepresents a significant overhaul of many aspects of the Financial Stability Oversight Council, which has oversight authority for monitoringregulation of the financial services industry, addressing, among other things, systemic risk, capital adequacy, deposit insurance assessments, consumer financial protection, regulation of derivatives and securities markets, restrictions on an insured bank’s transactions with its affiliates, lending limits and mortgage-lending practices. Moreover, as a general matter, the federal banking regulators (the FRB, the OCC and the FDIC) as well as the CFPB have taken a more stringent approach to supervising and regulating systemic risk,financial institutions and can recommendfinancial products and services over which they exercise their respective supervisory authorities, including with respect to enforcement matters. Our two banking subsidiaries and our products and services have been subject to greater supervisory scrutiny and enhanced supervisory requirements and expectations in recent years.

Sections 165 and 166 of the Dodd-Frank Act direct the FRB to establish enhanced prudential standards reporting and disclosureearly remediation requirements applicable to large financial institutions with total consolidated assets of $50 billion or more. The FRB has adopted final rules implementing three aspects of Sections 165 and 166 - liquidity requirements, stress testing of capital, and overall risk management requirements. The final rules’ liquidity requirements are described below under “—Liquidity Standards” and their stress testing requirements are described below under “—Capital Planning and Stress Testing Requirements”.

Section 165 of the Dodd-Frank Act also requires bank holding companies with total consolidated assets of $50 billion or more to submit resolution plans to the Federal Reserve BoardFRB and FDIC providing for systemically importantthe company’s strategy for rapid and orderly resolution in the event of its material financial distress or failure. In September 2011, these agencies issued a joint final resolution plan rule implementing this requirement. The FDIC issued a separate such rule applicable to insured depository institutions of $50 billion or more in total assets, such as CBNA. We submitted our most recent resolution plan to the FRB and FDIC in December 2016; CBNA submitted its most recent resolution plan to the FDIC in December 2015. If the FRB and the FDIC determine that these plans are not credible and we do not cure the deficiencies, the FRB and the FDIC may impose more stringent capital, leverage or liquidity requirements or restrictions on our growth, activities or operations.

The FRB has not yet adopted final rules implementing two key requirements of Section 165 and 166 - single counterparty credit limits (“SCCL”) and early remediation requirements. In March 2016 the FRB issued a re-proposal of its SCCL rules, initially published for comment in 2014. As re-proposed, we and our controlled entities would be prohibited from having an aggregate net credit exposure to any counterparty (as broadly defined in the proposed rule to include certain related entities to the entity that is the direct obligor) exceeding 25% of our tier 1 capital. The SCCL rules, when finalized, may affect our ability to enter into transactions, including as hedges for other exposures, with other financial institutions.

The Gramm-Leach-BlileyBank Holding Company Act of 1999 (“GLBA”) permits a qualifyinggenerally restricts bank holding company to become a financial holding company. Financial holding companies may engagefrom engaging in a broader range ofbusiness activities other than those permitted for a bank holding company, which are limited to (i) banking, managing or controlling banks, (ii) furnishing services to or performing services for subsidiaries and (iii) activities that the Federal Reserve BoardFRB has determined to be so closely related to banking as to be a proper incident thereto. GLBA broadensFor so long as they continue to meet the scope of permissible activitieseligibility requirements for financial holding company status, financial holding companies to include,may engage in a broader range of activities, including, among other things, securities underwriting and dealing, insurance underwriting and brokerage, merchant banking and other activities that are declareddetermined by the Federal Reserve Board,FRB, in cooperation with the Treasury Department, to be “financial in nature or incidental thereto” or that the Federal Reserve Board declaresFRB determines unilaterally to be “complementary” to financial activities. In addition, a financial holding company may conduct permissible new financial activities or acquire permissible non-bank financial companies with after-the-fact notice to the Federal Reserve Board.FRB.

WeAs noted above, we have elected and qualified forto be treated as a financial holding company status under amendments to the Bank Holding Company Act as effected by GLBA. To maintain financial holding company status, a financial holding company and all of its bankinginsured depository institution subsidiaries must remain well capitalized and well managed (as described below under “Federal Deposit Insurance Act”), and maintain a Community Reinvestment Act (“CRA”)CRA rating of at least “Satisfactory.” If a financial holding company ceases to meet these requirements, the Federal Reserve Board’sFRB’s regulations provide that wethe financial holding company must enter into an agreement with the Federal Reserve BoardFRB to comply with all applicable capital and management requirements. Until the financial holding company returns to compliance, the Federal Reserve BoardFRB may impose limitations or conditions on the conduct of its activities, and the company may not commence any of the broader financial activities permissible for financial holding companies or acquire a company engaged in such financial activities without prior approval of the Federal Reserve Board.FRB. In addition, the failure to meet such requirements could result in other material restrictions on the activities of the financial holding company, and may also adversely affect the financial holding company'scompany’s ability to enter into certain transactions, including acquisition transactions, or obtain necessary approvals in connection therewith.therewith, and may result in the bank holding company losing financial holding company status. Any restrictions imposed on our activities by the Federal Reserve BoardFRB may not necessarily be made known to the public. If the company does not return to compliance within 180 days, the Federal Reserve BoardFRB may require divestiture of the financial holding company’s depository institutions. Failure to satisfy the financial holding company requirements could also resultto divest its subsidiary depository institutions or to discontinue or divest investments in loss ofcompanies engaged in activities permissible only for a bank holding company electing to be treated as a financial holding company status.company. Bank holding companies and banks must also be both well capitalized and well managed in order to acquire banks located outside their home state.

In March 2014,Currently under the OCC communicated its determination that CBNA isBank Holding Company Act, we may not currently both well capitalized and well managed, as those terms are definedbe able to engage in applicable regulations, based on certain minimum capital ratios and supervisory ratings,categories of new activities or acquire shares or control of other companies other than in connection with internal reorganizations.

A financial subsidiary of a national bank is permitted to engage in a broader range of activities, similar to those of a financial holding company, than those permissible for a national bank itself. CBNA has two financial subsidiaries, Citizens Securities, Inc. (doing business as CCO Investment Services Corp.), a registered broker-dealer, and RBS Citizens Insurance Agency, Inc., a dormant entity, although it continuesentity. On March 13, 2014, the OCC determined that CBNA no longer met the conditions to collect commissions on certain outstanding insurance policies.own a financial subsidiary - namely that CBNA hasmust be both well capitalized and well managed. CBNA entered into an agreement with the OCC pursuant to which it must developdeveloped and submitted to the OCC a remediation plan which must be approved by the OCC, setting forth the specific actions it will take to bring itself back into compliance with the conditions to own a financial subsidiarysubsidiary. CBNA has completed its undertakings under the plan, which have been validated by our internal audit team and the schedule for achieving that objective. Until CBNA addresses the deficienciessubmitted to the OCC’s satisfaction,OCC for review and approval. However, until the plan has been approved by the OCC, CBNA will be subject to restrictions on its ability to acquire control or buildhold an interest in any new financial subsidiary and to commence new activities in any existing financial subsidiary without the prior approvalconsent of the OCC. If CBNA fails to remediate the deficiencies, it may have to divest itself of its financial

Our bank subsidiaries and comply with any additional limitations or conditions on its conduct as the OCC may impose. CBNA has developed a plan to address the deficiencies and has implemented a comprehensive enterprise-wide program, through which many deficiencies, we believe, have been addressed.

We are also required to make improvements to our overall compliance and operational risk management programs and practices in order to comply with enhanced supervisory requirements and expectations and to address weaknesses in retail credit risk management, liquidity risk management, model risk management, outsourcing and vendor risk management and related oversight and monitoring practices and tools. Our

Prior to January 1, 2015, the risk-based capital standards applicable to us and our banking subsidiaries' consumer compliance programbank subsidiaries (the “general risk-based capital rules”) were based on the 1988 Capital Accord, known as Basel I, of the Basel Committee. In July 2013, the federal bank regulators approved final capital rules implementing the Basel III framework as well as certain provisions of the Dodd-Frank Act. The Basel III-based U.S. final rules substantially revised the risk-based capital requirements applicable to bank holding companies and controlstheir depository institution subsidiaries, including the Parent Company, CBNA and CBPA, as compared to the general risk-based capital rules. The U.S. Basel III final rules became effective for the Parent Company, CBNA and CBPA on January 1, 2015 (subject to a phase-in period for certain provisions).

The U.S. Basel III final rules also require improvement, particularlyintroduced a new capital conservation buffer (“CCB”), composed entirely of CET1 capital, on top of three minimum risk-weighted asset ratios. Under existing rules, the CCB when fully phased-in on January 1, 2019 will be 2.5%. Banking institutions with a ratio of CET1 capital, tier 1 capital or Total capital to risk-weighted assets below the effective minimum once the CCB is taken into account (that is, 7.0%, 8.5% and 10.5% for the three ratios, respectively, once the CCB is fully-phased in) will be subject to constraints on capital distributions, including dividends and share repurchases, and certain discretionary executive compensation based on the amount of the shortfall. The implementation of the CCB began on January 1, 2016 at the 0.625% level and will increase by 0.625% on each subsequent January 1, until the buffer reaches its fully

With respect to deposit reconciliationCBNA and CBPA, the U.S. Basel III final rules also revise the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act, as discussed below in “Federal Deposit Insurance Act.”

Bank holding companies with $50 billion or more in total consolidated assets are required to develop and maintain a capital plan, and to submit the capital plan to the FRB for review under its CCAR process. CCAR is designed to evaluate the capital adequacy, capital adequacy process and planned capital distributions, such as dividend payments and common stock repurchases, of a bank holding company subject to CCAR. As part of CCAR, the FRB evaluates whether a bank holding company has sufficient capital to continue operations under various hypothetical scenarios of economic and financial market stress (both bank holding company- and FRB- developed, including an “adverse” and “severely adverse” stress scenario developed by the Federal Reserve). The FRB will also evaluate whether the bank holding company has robust, forward-looking capital planning processes fair lendingthat account for its unique risks.

The capital plan must cover a “planning horizon” of at least nine quarters (beginning with the quarter preceding the submission of the plan, or January 1, 2017 for the capital plans required to be filed on or before April 5, 2017). Bank holding companies are also subject to an ongoing requirement to revise and mortgage servicing.resubmit their capital plans upon the occurrence of certain events specified by rule, or when required by the FRB. In addition to other limitations, our ability to make any capital distributions (including dividends and share repurchases) is contingent on the FRB’s non-objection to our capital plan under quantitative tests requiring that we demonstrate that we will continue to meet all minimum capital requirements applicable to us over the nine-quarter planning horizon under all applicable scenarios. For capital plans in CCAR submissions before the April 5, 2017 submission, the FRB was able to object to the capital plan of any bank holding company subject to CCAR under quantitative tests as well as qualitative tests (such as concerns with the assumptions, analysis or methodologies of the capital plan).

Currently,The FRB recently amended its capital plan rule to eliminate its ability to object to the capital plan of a “large and noncomplex” bank holding company (that is, one that has less than $250 billion in total consolidated assets, less than $75 billion in nonbank assets, and that is not classified as a global systemically important bank holding company under the Bank Holding Company Act, weFRB’s capital rules) on qualitative grounds. However, the FRB will incorporate an assessment of the qualitative aspects of the firm’s capital planning process into regular, ongoing supervisory activities and through targeted, horizontal assessments of particular aspects of capital planning.

The FRB’s capital planning and stress testing rules generally limit our ability to make quarterly capital distributions-that is, dividends and share repurchases-if the amount of our actual cumulative quarterly capital issuances of instruments that qualify as regulatory capital are less than we had indicated in our submitted capital plan as to which we receive a non-objection from the FRB. Due to the importance and intensity of the stress tests and the CCAR process, we have dedicated significant resources to comply with internal reorganizations.stress testing and capital planning requirements and expect to continue to do so in the future.

The Federal Deposit Insurance Act (“FDIA”) requiresHistorically, the Federal Reserve Board,FRB evaluated our liquidity as part of the supervisory process, without required formulaic measures. Liquidity risk management and supervision have become increasingly important since the 2008 financial crisis. In September 2014, the FRB, OCC and FDIC issued a final rule to prescribe operationalimplement the Basel III-based U.S. LCR, which is a quantitative liquidity metric designed to ensure that a covered bank or bank holding company maintains an adequate level of unencumbered high-quality liquid assets to cover expected net cash outflows over a 30-day time horizon under an acute liquidity stress scenario. The LCR rule, as adopted, applies in its most comprehensive form only to advanced approaches bank holding companies (that is, those with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposures) and managerial standards for all insured depository institutions subsidiaries of such bank holding companies and, in a modified form, to bank holding companies having $50 billion or more in total consolidated assets but less than the thresholds for the advanced approaches. The U.S. LCR differs in certain respects from the Basel Committee’s version of the LCR, including CBNAa narrower definition of high-quality liquid assets, different prescribed cash inflow and CBPA.outflow assumptions for certain types of instruments and transactions, and a shorter phase-in schedule that began on January 1, 2015. As of January 1, 2017, the rule has been fully phased in. The agencies have adopted regulations and interagency guidelines which set forthmodified LCR requires us to maintain a ratio of high-quality liquid assets to 70% of net cash outflows (compared to 100% in the safety and soundness standards usedcomprehensive LCR for advanced approaches bank holding companies). At December 31, 2016, our LCR on the modified basis was above the minimum requirement.

As a modified LCR company, we are required to identify and address problems at insured depository institutions before capital becomes impaired.calculate our LCR on a monthly basis. If an agency determines that a bankcovered company fails to satisfy anymeet the minimum required LCR, it must promptly notify its primary federal banking regulator and may be required to take remedial actions. In December 2016, the FRB issued a final rule that requires bank holding companies to disclose publicly, on a quarterly basis, quantitative and qualitative information about certain components of our LCR beginning for modified LCR bank holding companies on October 1, 2018.

The Basel III framework also included a second liquidity standard, it maythe NSFR, which is designed to promote more medium- and long-term funding of the assets and activities of banks over a one-year time horizon. In May 2016, the federal banking regulators issued a proposed rule that would implement the NSFR for large U.S. banking organizations. Under the proposed rule, the most stringent requirements would apply to advanced approaches bank holding companies, and would require such organizations to maintain a minimum NSFR of 1.0 on an ongoing basis, calculated by dividing the organization’s available stable funding (“ASF”) by its required stable funding (“RSF”). Bank holding companies with more than $50 billion but that are not advanced approaches bank holding companies would be subject to submita modified NSFR requirement which would require such bank holding companies to maintain a minimum NSFR of 0.7 on an acceptable planongoing basis. Under the proposed rule, a banking organization’s ASF would be calculated by applying specified standard weightings to achieve compliance, consistent with deadlines forits equity and liabilities based on their expected stability over a one-year time horizon and its RSF would be calculated by applying specified standardized weightings to its assets, derivative exposures and commitments based on their liquidity characteristics over the submission and reviewsame one-year time horizon. If implemented as proposed, the NSFR rule would take effect on January 1, 2018. We continue to evaluate the potential effects of such safety and soundness compliance plans.this proposal on our operations.

UnderFinally, per the liquidity rules included in the FRB’s enhanced prudential standards adopted pursuant to Section 616165 of the Dodd-Frank Act which codifies(referred to above under “—Financial Regulatory Reform”) we are required to maintain a buffer of highly liquid assets based on projected funding needs for 30 days. The liquidity buffer is in addition to the Federal Reserve Board’s long-standing “source of strength” doctrine, any bank holding company that controls an insured depository institution must serve as a source of financialfederal banking regulators’ LCR rule and managerial strength for its depository institution subsidiary. The statute defines “source of financial strength” as the ability to provide financial assistance in the event of the financial distress at the insured depository institution. The Federal Reserve Board may require a bank holding company to provide such support at times when it may not have the financial resources to do so or when doing so is not otherwise in the interests of CFG or its shareholders or creditors.

Bank holding companies with $50 billion or more in total consolidated assets are required to develop and maintain a capital plan, and to submit the capital plan to the FRB for review under its CCAR process. CCAR is designed to evaluate the capital adequacy, capital adequacy process and planned capital distributions, such as dividend payments and common stock repurchases, of accumulated net earnings and only if (i) any required transfera bank holding company subject to surplus has been made prior to declaration of the dividend and (ii) payment of the dividend will not reduce surplus.

The capital plan must approve any planned distributioncover a “planning horizon” of capital in connectionat least nine quarters (beginning with the CCAR process. The Federal Reserve Board will either objectquarter preceding the submission of the plan, or January 1, 2017 for the capital plans required to be filed on or before April 5, 2017). Bank holding companies are also subject to an ongoing requirement to revise and resubmit their capital plans upon the occurrence of certain events specified by rule, or when required by the FRB. In addition to other limitations, our ability to make any capital distributions (including dividends and share repurchases) is contingent on the FRB’s non-objection to our capital plan under quantitative tests requiring that we demonstrate that we will continue to meet all minimum capital requirements applicable to us over the nine-quarter planning horizon under all applicable scenarios. For capital plans in wholeCCAR submissions before the April 5, 2017 submission, the FRB was able to object to the capital plan of any bank holding company subject to CCAR under quantitative tests as well as qualitative tests (such as concerns with the assumptions, analysis or methodologies of the capital plan).

The FRB recently amended its capital plan rule to eliminate its ability to object to the capital plan of a “large and noncomplex” bank holding company (that is, one that has less than $250 billion in part, or providetotal consolidated assets, less than $75 billion in nonbank assets, and that is not classified as a noticeglobal systemically important bank holding company under the FRB’s capital rules) on qualitative grounds. However, the FRB will incorporate an assessment of the qualitative aspects of the firm’s capital planning process into regular, ongoing supervisory activities and through targeted, horizontal assessments of particular aspects of capital planning.

The FRB’s capital planning and stress testing rules to, among other things, generally limit a bank holding company’sour ability to make quarterly capital distributions — thatdistributions-that is, dividends and share repurchases — commencing April 1, 2015 ifrepurchases-if the amount of the bank’sour actual cumulative quarterly capital issuances of instruments that qualify as regulatory capital are less than the bankwe had indicated in itsour submitted capital plan as to which it receivedwe receive a non−objectionnon-objection from the Federal Reserve Board, subjectFRB. Due to certain qualificationsthe importance and exceptions.

The Federal Reserve Board evaluatesHistorically, the FRB evaluated our liquidity as part of the supervisory process.process, without required formulaic measures. Liquidity risk management and supervision have become increasingly important since the 2008 financial crisis. In September 2014, the Federal Reserve Board,FRB, OCC and FDIC issued a final rule to implement the Basel III Liquidity Coverage Ratio (“LCR”). TheIII-based U.S. LCR, which is a quantitative liquidity metric designed by the Basel Committee to ensure that banks have sufficienta covered bank or bank holding company maintains an adequate level of unencumbered high-quality liquid assets to cover expected net cash outflows over a 30-day time horizon under an acute liquidity stress period.scenario. The Basel Committee contemplates that major jurisdictions will begin to phase in the LCR requirement on January 1, 2015. The final U.S. LCR rule, as adopted, applies a modified version of the LCRin its most comprehensive form only to largeadvanced approaches bank holding companies (that is, those with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposures) and depository institutions subsidiaries of such as us.bank holding companies and, in a modified form, to bank holding companies having $50 billion or more in total consolidated assets but less than the thresholds for the advanced approaches. The modified version of theU.S. LCR differs in certain respects from the Basel Committee’s version of the LCR, including a narrower definition of high-quality liquid assets, different prescribed cash inflow and outflow assumptions for certain types of instruments and transactions, and a shorter phase-in schedule that beginsbegan on January 1, 20152015. As of January 1, 2017, the rule has been fully phased in. The modified LCR requires us to maintain a ratio of high-quality liquid assets to 70% of net cash outflows (compared to 100% in the comprehensive LCR for advanced approaches bank holding companies). At December 31, 2016, our LCR on the modified basis was above the minimum requirement.

As a modified LCR company, we are required to calculate our LCR on a monthly basis. If a covered company fails to meet the minimum required LCR, it must promptly notify its primary federal banking regulator and endsmay be required to take remedial actions. In December 2016, the FRB issued a final rule that requires bank holding companies to disclose publicly, on a quarterly basis, quantitative and qualitative information about certain components of our LCR beginning for modified LCR bank holding companies on October 1, 2018.

The Basel III framework also included a second liquidity standard, the NSFR, which is designed to promote more medium- and long-term funding of the assets and activities of banks over a one-year time horizon. In May 2016, the federal banking regulators issued a proposed rule that would implement the NSFR for large U.S. banking organizations. Under the proposed rule, the most stringent requirements would apply to advanced approaches bank holding companies, and would require such organizations to maintain a minimum NSFR of 1.0 on an ongoing basis, calculated by dividing the organization’s available stable funding (“ASF”) by its required stable funding (“RSF”). Bank holding companies with more than $50 billion but that are not advanced approaches bank holding companies would be subject to a modified NSFR requirement which would require such bank holding companies to maintain a minimum NSFR of 0.7 on an ongoing basis. Under the proposed rule, a banking organization’s ASF would be calculated by applying specified standard weightings to its equity and liabilities based on their expected stability over a one-year time horizon and its RSF would be calculated by applying specified standardized weightings to its assets, derivative exposures and commitments based on their liquidity characteristics over the same one-year time horizon. If implemented as proposed, the NSFR rule would take effect on January 1, 2017.2018. We continue to evaluate the potential effects of this proposal on our operations.

The Basel Committee also has finalized its Net Stable Funding Ratio (“NSFR”), a quantitative liquidity metric designed to promote the resilience of a bank’s liquidity risk profile over a longer period than the LCR. The NSFR establishes a minimum acceptable amount of stable funding based onFinally, per the liquidity characteristics of an institution’s assets and activities over a one-year horizon. The NSFR has been developed to provide a sustainable maturity structure of assets and liabilities. The final rule will be implemented as a minimum standard by January 1, 2018. Federal banking regulators have not yet proposed rules to implement the NSFRincluded in the United States.

As a result of and in addition to new legislation aimed at regulatory reform, such as the Dodd-Frank Act, and the increased capital and liquidity requirements introduced by the U.S. implementation of the Basel III framework (the capital components and the LCR as one of the two key liquidity components which have become effective), the federal banking agencies (the Federal Reserve Board,FRB, the OCC and the FDIC), as well as the CFPB, generally are taking a more stringent approach to supervising and regulating financial institutions and financial products and services over which they exercise their respective supervisory authorities. We, our two banking subsidiaries and our products and services are all subject to greater supervisory scrutiny and enhanced supervisory requirements and expectations and face significant challenges in meeting them.expectations. We expect to continue to face greater supervisory scrutiny and enhanced supervisory requirements in the foreseeable future.

Our two banking subsidiaries are currently subject to consent orders issued by the OCC and the FDIC in connection with their findings of deceptive marketing and implementation of some of our checking account and funds transfer products and services. Among other things, the consent orders require us to remedy deficiencies and develop stronger compliance controls, policies and procedures. We have made progress and continue to make progress in addressing these requirements, but the consent orders remain in place and we are unable to predict when they may be terminated. CBNA is also making improvements to its compliance management systems, fair lending compliance, risk management, deposit reconciliation practices and overdraft fees in order to address deficiencies in those areas. CBPA is making improvements to address deficiencies in its deposit reconciliation practices, overdraft fees, identity theft add-on products, third-party payment processor activities, oversight of third-party service providers, compliance program, policies, procedures and training, consumer complaints process and anti-money laundering controls. These efforts require us to make investments in additional resources and systems and also require a significant commitment of managerial time and attention.

While we need to make substantial improvements tohave made significant progress in enhancing our compliance and risk management and other processes, systems and controls. We expect to continue to dedicate significant resources and managerial time and attention and to make significant investments in enhanced compliance, risk management and other processes, systems and controls. We also expect to make restitution payments to our banking subsidiaries’ customers, which could be significant, arising from certain of the consumer compliance deficiencies described above and may be required to pay civil money penalties in connection with certain of these deficiencies. We have established reserves in respect of these future payments, but the amounts that we are ultimately obligated to pay could be in excess of our reserves.

Net interest income historically has been, and in the near-to-medium term 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. Our net interest income was $3.3 billion for the year ended December 31, 2014 and $3.1 billion for the year ended December 31, 2013. Changes in interest rates can have a material effect on many areas of our business, including the following:

We cannot control or predict with certainty changes in interest rates. Global, national, regional and local economic conditions, competitive pressures and the policies of regulatory authorities, including monetary policies of the Federal Reserve Board,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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Governance” in Part II, Item 7, included elsewhere in this report, changes in interest rates still may have an adverse effect on our profitability.

If our ongoing assumptions regarding borrower behavior are wrong or overall economic conditions are significantly different than we anticipate, then our risk mitigation may be insufficient to protect against interest rate risk and our net income would be adversely affected.

A key cornerstone of our strategic plan involves the hiring of a large number of highly skilled and qualified personnel. Accordingly, our ability to implement our strategic plan and our future success depends on our ability to attract, retain and motivate highly skilled and qualified personnel, including our senior management and other key employees and directors, competitivelycompetitive with our peers. The marketplace for skilled personnel is becoming more competitive, which means the cost of hiring, incentivizing and retaining skilled personnel may continue to increase. The failure to attract or retain, 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.

Governmental scrutiny with respect to matters relating to compensation and other business practices inIn May 2016, the financial services industry has increased dramatically in the past several years and has resulted in more aggressive and intense regulatory supervision and the application and enforcement of more stringent standards. For example, in June 2010, the Federal Reserve Board andFRB, other federal banking regulatorsagencies and the Securities and Exchange Commission jointly issued comprehensive final guidancepublished re-proposed rules (originally proposed in April 2011) designed to ensure thatimplement provisions of the Dodd-Frank Act prohibiting incentive compensation policies do not undermine the safety and soundness of banking organizations by encouraging employees to take imprudent risks. The recent financial crisis and the current political and public sentiment regardingarrangements that would encourage inappropriate risk taking at covered financial institutions, has resultedwhich includes a bank or bank holding company with $1 billion or more of assets. Although the re-proposed rules include more stringent requirements, particularly for larger institutions, it cannot be determined at this time whether or when a final rule will be adopted. Compliance with such a final rule may substantially affect the manner in a significant amount of adverse press coverage, as well as adverse statements or charges by regulatorswhich we structure compensation for our executives and elected officials. Future legislation or regulation or government viewsother employees. Depending on compensation may result in us altering compensation practices in ways that could adversely affect our ability to attractthe nature and retain talented employees.

Liquidity risk is the risk that we will not be able to meet our obligations, including funding commitments, as they come due. This risk is inherent in our operations and can be heightened by a number of factors, including an over-reliance on a particular source of funding (including, for example, short-term and overnight funding)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 a loss of confidence by customers in us or in the banking sector generally, increasing competitive pressures for retail or corporate customer deposits, changes in interest rates and returns on other investment classes, which could result in a significant outflow of deposits

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, reflected in reductions in unsecured deposits supplied by these counterparties), which may cause funding from these sources to no longer be available. Under these circumstances, we may need to seek funds from alternative sources, potentially at higher costs than has previously been the case, or may be required to consider disposals of other assets not previously identified for disposal, in order to reduce our funding commitments.

Credit ratings affect the cost and other terms upon which we are able to obtain funding. Rating agencies regularly evaluate us, and their ratings are based on a number of factors, including our financial strength. Other factors considered by rating agencies include the financial strength of, and other factors relating to, RBS and RBS Group, as well as 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 in the capital markets certain of our securities, including long-term debt, engage in certain longer-term and derivatives transactions and retain our customers, particularly corporate customers who needmay 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.

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.

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 a strategic initiativecertain 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk GovernanceGovernance” and “— Market Risk” in Part II, Item 7, included elsewhere in this report. 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.

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. For example, we experienced certain technical issues relating to our market risk measurement processes when we began incorporating trade level detail for foreign exchange contracts in 2013. Despite rigorous pilot testing of our processes, during the initial phase of implementation our processes failed to incorporate certain positions we maintained to offset client exposure, which led to an immaterial overstatement of foreign exchange currency rate risk positions during 2013 compared to our position at year end. We have adjusted our processes and have experienced no further issues. In addition, if existing or potential customers believe our risk management is inadequate, they could take their business elsewhere. This could harm our reputation as well as our revenues and profits. Finally, information we provide to our regulators based on poorly designed or implemented models could also be inaccurate or misleading. Some of the decisions that our regulators make, including those related to capital distributions to our stockholders, could be affected adversely due to their perception that the quality of the models used to generate the relevant information is insufficient.

The preparation of audited consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”)GAAP requires management to make significant estimates that affect the financial statements. Our most critical accounting estimate is the allowance for loan and lease losses.ALLL. The allowance for loan and lease lossesALLL is a reserve established through a provision for loan and lease losses charged to expense and represents our estimate of incurred but unrealized losses within the existing portfolio of loans. The allowanceALLL is necessary to reserve for estimated loan and lease losses and risks inherent in the loan portfolio. The level of the allowanceALLL reflects our ongoing evaluation of industry concentrations, specific credit risks, loan and lease loss experience, current loan portfolio quality, present economic, political and regulatory conditions and incurred losses inherent in the current loan portfolio.

The determination of the appropriate level of the allowance for loan and lease lossesALLL 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

As of December 31, 2016, we had $6.9 billion of goodwill. A significant decline in our expected future cash flows, a need for higher reserves. In particular, a severe decrease in housing prices or spike in unemployment would cause higher losses and a larger allowance for loan and lease losses, particularlysignificant adverse change in the residential real estate secured portfolios. Withinbusiness climate, substantially slower economic growth or a significant and sustained decline in the residential real estate portfolios, we have HELOCs forprice of our common stock, any or all of which could be materially impacted by many of the end of draw is happening overrisk factors discussed herein, may

Our operations depend on our ability to process a very large number of transactions efficiently and accurately while complying with applicable laws and regulations. Operational risk and losses can result from internal and external fraud; errors by employees or third parties; failure to document transactions properly or to obtain proper authorization; failure to comply with applicable regulatory requirements and conduct of business rules; equipment failures, including those caused by natural disasters or by electrical, telecommunications or other essential utility outages; business continuity and data security system failures, including those caused by computer viruses, cyber-attacks or unforeseen problems encountered while implementing major new computer systems or upgrades to existing systems; or the inadequacy or failure of systems and controls, including those of our suppliers or counterparties. Although we have implemented risk controls and loss mitigation actions, and substantial resources are devoted to developing efficient procedures, identifying and rectifying weaknesses in existing procedures and training staff, it is not possible to be certain that such actions have been or will be 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 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 useaddress 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 or retain new business may be impaired, and our business, financial condition or results of operations may be adversely affected.

In addition, changes in the legal and regulatory framework under which we operate require us to update our information systems to ensure compliance. Our need to review and evaluate the impact of ongoing rule proposals, final rules and implementation guidance from regulators further complicates the development and implementation of new information systems for our business. Also, recent regulatory guidance has focused on the need for financial institutions to perform increased due diligence and ongoing monitoring of third-party vendor relationships, thus increasing the scope of management involvement and decreasing the efficiency otherwise resulting from our relationships with third-party technology providers. Given the significant number of ongoing regulatory reform initiatives, it is possible that we incur higher than expected information technology costs in order to comply with current and impending regulations. See “—Supervisory requirements and expectations on us as a financial holding company and a bank holding company, our need to make improvements and devote resources to various aspects of our controls, processes, policies and procedures, and any regulator-imposed limits on our activities, could limit our ability to implement our strategic plan, expand our business, improve our financial performance and make capital distributions to our stockholders.”

Recently, there has been a series of distributed denial of service attacks on financial services companies, including us. Distributed denial of service attacks are designed to saturate the targeted online network with excessive amounts of network traffic, resulting in slow response times, or in some cases, causing the site to be temporarily unavailable. Generally, these attacks are conducted to interrupt or suspend a company’s access to Internet service. The attacks can adversely affect the performance of a company’s website and in some instances prevent customers from accessing a company’s website. We are implementinghave implemented certain technology protections such as Customer Profiling and Step-Up Authentication to be in compliance with the Federal Financial Institutions Examination Council (“FFIEC”)FFIEC Authentication in Internet Banking Environment (“AIBE”) guidelines. However, potentialAs cyber threats that include hackingcontinue 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 other attempts to breachremediate any information technology security controls are rapidly evolving and wevulnerabilities. The techniques used by cyber criminals change frequently, may not be ablerecognized until launched and can be initiated from a variety of sources, including terrorist organizations and hostile foreign governments. These actors may attempt to anticipatefraudulently induce employees, customers or prevent all such attacks.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 “Regulation and Supervision” in Part I, Item 1 — Business, included in this report.

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 damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability.

We rely on third parties for the performance of a significant portion of our information technology functions and the provision of information technology and business process services. For example, (i) certain components and services relating to our online banking system rely on data communications networks operated by unaffiliated third parties, (ii) many of our applications are hosted or maintained by third parties, including our Commercial Loan System, which is hosted and maintained by Automated Financial Systems, Inc., and (iii) our core deposits system is maintained by Fidelity Information Services, Inc. Also, in 2015, we entered into an agreement with IBM Corporation for the provision of a wide range of information technology support services, including end user, data center, network, mainframe, storage and database 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. If we experience a disruption in the provision of any functions or services performed by third parties, we may have difficulty in finding alternate providers on terms favorable to us and in reasonable timeframes. If these services are not performed in a satisfactory manner, we would not be able to serve our customers well. In either situation, our business could incur significant costs and be adversely affected.

Our success and results depend, in part, on our reputation and the strength of our brands. We are vulnerable to adverse market perception as we operate in an industry where integrity, customer trust and confidence are paramount. We are exposed to the risk that litigation, employee misconduct, operational failures, the outcome of regulatory or other investigations or actions, press speculation and negative publicity, among other factors, could damage our brands or reputation. Our brands and reputation could also be harmed if we sell products or services that do not perform as expected or customers’ expectations for the product are not satisfied.

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 MassachusettsNorth Carolina unusable. The distance between the data center locations (approximately 45 miles) provides diversity in resources, but not sufficient diversity in the event of a catastrophe as described above. Although we are building a new, out-of-region backup data center in North Carolina, scheduled for completion in 2015, we do not currently have a backup data center outside New England.enhanced our

Our net deferred tax assets (“DTAs”)DTAs are subject to an evaluation of whether it is more likely than not that they will be realized for financial statement purposes. In making this determination, we consider all positive and negative evidence available, including the impact of recent operating results, as well as potential carry-back of tax to prior years’ taxable income, reversals of existing taxable temporary differences, tax planning strategies and projected earnings within the statutory tax loss carryover period. We have determined that the DTAs are more likely than not to be realized at December 31, 20142016 (except for $157$107 million related to state DTAsnet operating losses and state tax credits for which a valuation allowance was established). If we were to conclude that a significant portion of the DTAs were not more likely than not to be realized, the required valuation allowance could adversely affect our financial condition and results of operations.

At December 31, 2014,2016, we maintained an investment of approximately $399 million$1.0 billion in entities for which we receive allocations of tax credits, which we utilize to offset our taxable income. We accrued $26 million and $14recognized $70 million in credits for the yearsyear ended December 31, 2014 and December 31, 2013, respectively.2016. As of December 31, 2014,2016, all tax credits have been utilized to offset taxable income. Substantially all of these tax credits are related to development projects that are subject to ongoing compliance requirements over certain periods of time to fully realize their value. If these projects are not operated in full compliance with the required terms, the tax credits could be subject to recapture or restructuring. Further, we may not be able to utilize any future tax credits. If we are unable to utilize our tax credits or, if our tax credits are subject to recapture or restructuring, it could have a material adverse effect on our business, financial condition and results of operations.

Our business is affected by national economic conditions, as well as perceptions of those conditions and future economic prospects. Changes in such economic conditions are not predictable and cannot be controlled. Adverse economic conditions that could affect us include: