UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ü] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2015
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number:
1-6523
Exact name of registrant as specified in its charter:
Bank of America Corporation
State or other jurisdiction of incorporation or organization:
Delaware
IRS Employer Identification No.:
56-0906609
Address of principal executive offices:
Bank of America Corporate Center
100 N. Tryon Street
Charlotte, North Carolina 28255
Registrant's telephone number, including area code:
(704) 386-5681
Former name, former address and former fiscal year, if changed since last report:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ü No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ü No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (check one).
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Large accelerated filer ü | | Accelerated filer | | Non-accelerated filer (do not check if a smaller reporting company) | | Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes No ü
On October 29, 2015, there were 10,412,479,671 shares of Bank of America Corporation Common Stock outstanding.
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Bank of America Corporation | |
September 30, 2015 | |
Form 10-Q | |
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This report on Form 10-Q, the documents that it incorporates by reference and the documents into which it may be incorporated by reference may contain, and from time to time Bank of America Corporation (collectively with its subsidiaries, the Corporation) and its management may make certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often use words such as "anticipates," "targets," "expects," "hopes," "estimates," "intends," "plans," "goal," "believes," "continue," "suggests" and other similar expressions or future or conditional verbs such as "will," "may," "might," "should," "would" and "could." The forward-looking statements made represent the Corporation's current expectations, plans or forecasts of its future results and revenues, and future business and economic conditions more generally, and other future matters. These statements are not guarantees of future results or performance and involve certain known and unknown risks, uncertainties and assumptions that are difficult to predict and are often beyond the Corporation's control. Actual outcomes and results may differ materially from those expressed in, or implied by, any of these forward-looking statements.
You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties more fully discussed elsewhere in this report, and under Item 1A. Risk Factors of the Corporation's 2014 Annual Report on Form 10-K and in any of the Corporation's subsequent Securities and Exchange Commission filings: the Corporation's ability to resolve representations and warranties repurchase and related claims, including claims brought by investors or trustees seeking to distinguish certain aspects of the ACE decision or to assert other claims seeking to avoid the impact of the ACE decision; the possibility that the Corporation could face related servicing, securities, fraud, indemnity, contribution or other claims from one or more counterparties, including trustees, purchasers of loans, underwriters, issuers, other parties involved in securitizations, monolines or private-label and other investors; the possibility that future representations and warranties losses may occur in excess of the Corporation's recorded liability and estimated range of possible loss for its representations and warranties exposures; the possibility that the Corporation may not collect mortgage insurance claims; potential claims, damages, penalties, fines and reputational damage resulting from pending or future litigation and regulatory proceedings, including the possibility that amounts may be in excess of the Corporation's recorded liability and estimated range of possible losses for litigation exposures; the possibility that the European Commission will impose remedial measures in relation to its investigation of the Corporation's competitive practices; the possible outcome of LIBOR, other reference rate and foreign exchange inquiries and investigations; uncertainties about the financial stability and growth rates of non-U.S. jurisdictions, the risk that those jurisdictions may face difficulties servicing their sovereign debt, and related stresses on financial markets, currencies and trade, and the Corporation's exposures to such risks, including direct, indirect and operational; the impact of U.S. and global interest rates, currency exchange rates and economic conditions; the possibility that future credit losses may be higher than currently expected, due to changes in economic assumptions, customer behavior and other uncertainties; the impact on the Corporation's business, financial condition and results of operations of a potential higher interest rate environment; adverse changes to the Corporation's credit ratings from the major credit rating agencies; estimates of the fair value of certain of the Corporation's assets and liabilities; uncertainty regarding the content, timing and impact of regulatory capital and liquidity requirements, including the adoption of total loss-absorbing capacity requirements; the potential for payment protection insurance exposure to increase as a result of Financial Conduct Authority actions; the possible impact of Federal Reserve actions on the Corporation's capital plans; the impact of implementation and compliance with new and evolving U.S. and international regulations, including, but not limited to, recovery and resolution planning requirements, FDIC assessments, the Volcker Rule and derivatives regulations; impacts of the October 6, 2015 European Court of Justice judgment invalidating the Safe Harbor Data Transfer Framework; the impact of recent proposed U.K. tax law changes, including a reduction to the U.K. corporate tax rate, and the creation of a bank surcharge tax, which together, if enacted, will result in a tax charge upon enactment and higher tax expense going forward, as well as a reduction in the bank levy; a failure in or breach of the Corporation's operational or security systems or infrastructure, or those of third parties, including as a result of cyber attacks and other similar matters.
Forward-looking statements speak only as of the date they are made, and the Corporation undertakes no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.
Notes to the Consolidated Financial Statements referred to in the Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) are incorporated by reference into the MD&A. Certain prior-period amounts have been reclassified to conform to current period presentation. Throughout the MD&A, the Corporation uses certain acronyms and abbreviations which are defined in the Glossary.
The Corporation's Annual Report on Form 10-K for the year ended December 31, 2014 as supplemented by a Current Report on Form 8-K filed on April 29, 2015 to reflect reclassified business segment information is referred to herein as the 2014 Annual Report on Form 10-K. These unaudited Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements of the Corporation's 2014 Annual Report on Form 10-K.
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Executive Summary |
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Business Overview |
The Corporation is a Delaware corporation, a bank holding company (BHC) and a financial holding company. When used in this report, "the Corporation" may refer to Bank of America Corporation individually, Bank of America Corporation and its subsidiaries, or certain of Bank of America Corporation's subsidiaries or affiliates. Our principal executive offices are located in Charlotte, North Carolina. Through our banking and various nonbank subsidiaries throughout the U.S. and in international markets, we provide a diversified range of banking and nonbank financial services and products through five business segments: Consumer Banking, Global Wealth & Investment Management (GWIM), Global Banking, Global Markets and Legacy Assets & Servicing (LAS), with the remaining operations recorded in All Other. Effective January 1, 2015, we aligned the segments with how we are managing the businesses in 2015. For more information on this realignment, see Note 18 – Business Segment Information to the Consolidated Financial Statements. Prior periods have been reclassified to conform to the current period presentation. We operate our banking activities primarily under the Bank of America, National Association (Bank of America, N.A. or BANA) charter. At September 30, 2015, the Corporation had approximately $2.2 trillion in assets and approximately 215,200 full-time equivalent employees.
As of September 30, 2015, we operated in all 50 states, the District of Columbia, the U.S. Virgin Islands, Puerto Rico and more than 35 countries. Our retail banking footprint covers approximately 80 percent of the U.S. population, and we serve approximately 47 million consumer and small business relationships with approximately 4,700 financial centers, 16,100 ATMs, nationwide call centers, and leading online and mobile banking platforms (www.bankofamerica.com). We offer industry-leading support to approximately three million small business owners. Our wealth management businesses, with client balances of $2.4 trillion, provide tailored solutions to meet client needs through a full set of investment management, brokerage, banking, trust and retirement products. We are a global leader in corporate and investment banking and trading across a broad range of asset classes serving corporations, governments, institutions and individuals around the world.
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Third-Quarter 2015 Economic and Business Environment |
In the U.S., the economy grew at a moderate pace in the third quarter of 2015, following uneven but accelerating growth in the first half of the year. Capital spending picked up following several weak quarters, while nonresidential construction continued to expand though restrained by oil price declines. In addition, retail spending increased driven by continued strengthening in vehicle sales, solid employment gains and lower energy costs. Residential construction also continued to improve during the third quarter, reflecting low mortgage rates and rising consumer confidence. U.S. Dollar appreciation resumed during the third quarter, adding to consumer purchasing power while restraining export gains. After widening in the first quarter, the U.S. trade gap narrowed slightly in the second quarter before widening again in the third quarter.
Unemployment continued to decline in the third quarter of 2015. Payroll gains slowed in the second half of the quarter, and there was little evidence of an increase in wage gains. Energy costs fell, offsetting the second quarter’s modest rebound. However, inflation was stable, though the core measure remains well below the Board of Governors of the Federal Reserve System’s (Federal Reserve) longer-term annual target of two percent.
While the Federal Reserve has continued to indicate that it would likely be appropriate to raise the target range for the federal funds rate, rates remained unchanged during the third quarter, with the Federal Reserve citing restraint on economic activity and downward pressure on inflation stemming from recent global economic and financial developments. Longer-term U.S. Treasury yields moved moderately lower during the quarter as equities weakened.
Internationally, the eurozone and Japanese economies continued to be supported by accommodative monetary policies, weaker currencies and low energy costs. Challenges remain in Greece, although recent elections indicated a restoration of some measure of political stability. Meanwhile, rising emigration from the war-torn Middle East posed a new challenge to the eurozone. Despite Asia’s economic slowdown, growth continued in Japan. Russia and Brazil remained in recession, while economic growth in China slowed, though Chinese equities stabilized and policy easing provided some support to the Chinese economy. Emerging markets in Asia and Latin America were pressured by softer demand from China, as well as low commodity prices.
Settlement with Bank of New York Mellon
On April 22, 2015, the New York County Supreme Court entered final judgment approving the settlement with the Bank of New York Mellon (BNY Mellon). In October 2015, BNY Mellon obtained certain state tax opinions and an Internal Revenue Service (IRS) private letter ruling confirming that the settlement will not impact the real estate mortgage investment conduit tax status of the trusts. The final conditions of the settlement have thus been satisfied, requiring the Corporation to make the settlement payment of $8.5 billion (excluding legal fees) on or before February 9, 2016. The settlement payment and legal fees were previously fully reserved. BNY Mellon is required to determine the share of the settlement payment that will be allocated to each of the trusts covered by the settlement and then to distribute those amounts.
For more information on servicing matters associated with the settlement with the BNY Mellon, see Off-Balance Sheet Arrangements and Contractual Obligations – Mortgage-related Settlements – Servicing Matters on page 54 of the MD&A of the Corporation's 2014 Annual Report on Form 10-K.
Capital Management
During the nine months ended September 30, 2015, we repurchased approximately $1.6 billion of common stock in connection with our 2015 Comprehensive Capital Analysis and Review (CCAR) capital plan, which included a request to repurchase $4.0 billion of common stock over five quarters beginning in the second quarter of 2015, and to maintain the quarterly common stock dividend at the current rate of $0.05 per share.
Based on the conditional non-objection we received from the Federal Reserve on our 2015 CCAR submission, we were required to resubmit our CCAR capital plan by September 30, 2015 and address certain weaknesses the Federal Reserve identified in our capital planning process. We have established plans and taken actions which we believe address the identified weaknesses, and we resubmitted our CCAR capital plan on September 30, 2015. The Federal Reserve has 75 days to review our resubmitted CCAR capital plan and our capital planning revisions. Following that review, the Federal Reserve may determine that the capital plan is not adequate or the identified weaknesses are not being satisfactorily addressed, and may restrict our future capital actions.
As an Advanced approaches institution under Basel 3, we were required to complete a qualification period (parallel run) to demonstrate compliance with the Basel 3 Advanced approaches capital framework to the satisfaction of U.S. banking regulators. On September 3, 2015, we received approval from the Federal Reserve and the Office of the Comptroller of the Currency to exit parallel run and begin using the Basel 3 Advanced approaches capital framework to determine risk-based capital requirements beginning October 1, 2015. Beginning in the fourth quarter of 2015, we will be required to report regulatory risk-based capital ratios and risk-weighted assets under both the Standardized and Advanced approaches. The approach that yields the lower ratio is to be used to assess capital adequacy including under the Prompt Corrective Action (PCA) framework. For additional information, see Capital Management on page 56.
Table 1 provides selected consolidated financial data for the three and nine months ended September 30, 2015 and 2014, and at September 30, 2015 and December 31, 2014.
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Table 1 | | | | |
Selected Financial Data | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in millions, except per share information) | 2015 | | 2014 | | 2015 | | 2014 |
Income statement | | | | | | | |
Revenue, net of interest expense (FTE basis) (1) | $ | 20,913 |
| | $ | 21,434 |
| | $ | 64,679 |
| | $ | 66,161 |
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Net income (loss) | 4,508 |
| | (232 | ) | | 13,185 |
| | 1,783 |
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Diluted earnings (loss) per common share (2) | 0.37 |
| | (0.04 | ) | | 1.09 |
| | 0.10 |
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Dividends paid per common share | 0.05 |
| | 0.05 |
| | 0.15 |
| | 0.07 |
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Performance ratios | | | | | |
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Return on average assets | 0.82 | % | | n/m |
| | 0.82 | % | | 0.11 | % |
Return on average tangible common shareholders' equity (1) | 10.11 |
| | n/m |
| | 10.29 |
| | 0.94 |
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Efficiency ratio (FTE basis) (1) | 66.03 |
| | 93.97 | % | | 66.98 |
| | 92.08 |
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Asset quality | | | | | |
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Allowance for loan and lease losses at period end | | | | | $ | 12,657 |
| | $ | 15,106 |
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Allowance for loan and lease losses as a percentage of total loans and leases outstanding at period end (3) | | | | | 1.44 | % | | 1.71 | % |
Nonperforming loans, leases and foreclosed properties at period end (3) | | | | | $ | 10,336 |
| | $ | 14,232 |
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Net charge-offs (4) | $ | 932 |
| | $ | 1,043 |
| | 3,194 |
| | 3,504 |
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Annualized net charge-offs as a percentage of average loans and leases outstanding (3, 4) | 0.42 | % | | 0.46 | % | | 0.49 | % | | 0.52 | % |
Annualized net charge-offs as a percentage of average loans and leases outstanding, excluding the purchased credit-impaired loan portfolio (3) | 0.43 |
| | 0.48 |
| | 0.50 |
| | 0.53 |
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Annualized net charge-offs and purchased credit-impaired write-offs as a percentage of average loans and leases outstanding (3) | 0.49 |
| | 0.57 |
| | 0.60 |
| | 0.64 |
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Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs (4) | 3.42 |
| | 3.65 |
| | 2.96 |
| | 3.22 |
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Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the purchased credit-impaired loan portfolio | 3.18 |
| | 3.27 |
| | 2.76 |
| | 2.88 |
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Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs and purchased credit-impaired write-offs | 2.95 |
| | 2.95 |
| | 2.41 |
| | 2.63 |
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Balance sheet | | | | | | | |
Total loans and leases | | | | | $ | 887,689 |
| | $ | 881,391 |
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Total assets | | | | | 2,153,006 |
| | 2,104,534 |
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Total deposits | | | | | 1,162,009 |
| | 1,118,936 |
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Total common shareholders' equity | | | | | 233,632 |
| | 224,162 |
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Total shareholders' equity | | | | | 255,905 |
| | 243,471 |
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Capital ratios under Basel 3 Standardized – Transition | | | | | | | |
Common equity tier 1 capital | | | | | 11.6 | % | | 12.3 | % |
Tier 1 capital | | | | | 12.9 |
| | 13.4 |
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Total capital | | | | | 15.8 |
| | 16.5 |
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Tier 1 leverage | | | | | 8.5 |
| | 8.2 |
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(1) | Fully taxable-equivalent (FTE) basis, return on average tangible common shareholders' equity and the efficiency ratio are non-GAAP financial measures. Other companies may define or calculate these measures differently. For more information on these measures and ratios, and a corresponding reconciliation to GAAP financial measures, see Supplemental Financial Data on page 16. |
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(2) | The diluted earnings (loss) per common share excludes the effect of any equity instruments that are antidilutive to earnings per share. There were no potential common shares that were dilutive in the third quarter of 2014 because of the net loss applicable to common shareholders. |
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(3) | Balances and ratios do not include loans accounted for under the fair value option. For additional exclusions from nonperforming loans, leases and foreclosed properties, see Consumer Portfolio Credit Risk Management – Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity on page 92 and corresponding Table 49, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 101 and corresponding Table 58. |
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(4) | Net charge-offs exclude $148 million and $726 million of write-offs in the purchased credit-impaired loan portfolio for the three and nine months ended September 30, 2015 compared to $246 million and $797 million for the same periods in 2014. These write-offs decreased the purchased credit-impaired valuation allowance included as part of the allowance for loan and lease losses. For more information on purchased credit-impaired write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 87. |
n/m = not meaningful
Net income was $4.5 billion, or $0.37 per diluted share, and $13.2 billion, or $1.09 per diluted share for the three and nine months ended September 30, 2015 compared to a net loss of $232 million, or a loss of $0.04 per share, and net income of $1.8 billion, or $0.10 per share for the same periods in 2014. The results for the three and nine months ended September 30, 2015 compared to the same periods in 2014 were primarily driven by decreases of $5.7 billion and $15.2 billion in litigation expense, as well as declines in nearly all other noninterest expense categories, partially offset by a decline in net interest income on a fully taxable-equivalent (FTE) basis, higher provision for credit losses and lower revenue. Included in net interest income on an FTE basis were negative market-related adjustments on debt securities of $597 million and $412 million for the three and nine months ended September 30, 2015 compared to negative market-related adjustments of $55 million and $503 million for the same periods in 2014.
Total assets increased $48.5 billion from December 31, 2014 to $2.2 trillion at September 30, 2015 primarily due to higher cash and cash equivalents as a result of strong deposit inflows driven by growth in customer and client activity, as well as continued commercial loan growth. During the nine months ended September 30, 2015, we returned $3.1 billion in capital to common shareholders through common stock repurchases and dividends. For more information on the increase in total assets and other significant balance sheet items, see Executive Summary – Balance Sheet Overview on page 11. From a capital management perspective, during the nine months ended September 30, 2015, we maintained our strong capital position with Common equity tier 1 capital of $161.6 billion, risk-weighted assets of $1,392 billion and a Common equity tier 1 capital ratio of 11.6 percent at September 30, 2015 compared to $155.4 billion, $1,262 billion and 12.3 percent at December 31, 2014 as measured under Basel 3 Standardized – Transition. The decline in the Common equity tier 1 capital ratio is primarily due to an increase in risk-weighted assets due to the change in the calculation of risk-weighted assets from the general risk-based approach at December 31, 2014 to the Basel 3 Standardized approach, starting in 2015. On September 3, 2015, we received approval to exit parallel run and begin using the Basel 3 Advanced approaches capital framework to determine risk-based capital requirements in the fourth quarter of 2015. Additionally, the Corporation's supplementary leverage ratio was 6.4 percent and 5.9 percent at September 30, 2015 and December 31, 2014, both above the 5.0 percent required minimum. Our Global Excess Liquidity Sources were $499 billion with time-to-required funding at 42 months at September 30, 2015 compared to $439 billion and 39 months at December 31, 2014. For additional information, see Capital Management on page 56 and Liquidity Risk on page 68.
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Table 2 | | | | | | | |
Summary Income Statement |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in millions) | 2015 | | 2014 | | 2015 | | 2014 |
Net interest income (FTE basis) (1) | $ | 9,742 |
| | $ | 10,444 |
| | $ | 30,128 |
| | $ | 30,956 |
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Noninterest income | 11,171 |
| | 10,990 |
| | 34,551 |
| | 35,205 |
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Total revenue, net of interest expense (FTE basis) (1) | 20,913 |
| | 21,434 |
| | 64,679 |
| | 66,161 |
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Provision for credit losses | 806 |
| | 636 |
| | 2,351 |
| | 2,056 |
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Noninterest expense | 13,807 |
| | 20,142 |
| | 43,320 |
| | 60,921 |
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Income before income taxes (FTE basis) (1) | 6,300 |
| | 656 |
| | 19,008 |
| | 3,184 |
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Income tax expense (FTE basis) (1) | 1,792 |
| | 888 |
| | 5,823 |
| | 1,401 |
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Net income (loss) | 4,508 |
| | (232 | ) | | 13,185 |
| | 1,783 |
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Preferred stock dividends | 441 |
| | 238 |
| | 1,153 |
| | 732 |
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Net income (loss) applicable to common shareholders | $ | 4,067 |
| | $ | (470 | ) | | $ | 12,032 |
| | $ | 1,051 |
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Per common share information | | | | | | | |
Earnings (loss) | $ | 0.39 |
| | $ | (0.04 | ) | | $ | 1.15 |
| | $ | 0.10 |
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Diluted earnings (loss) | 0.37 |
| | (0.04 | ) | | 1.09 |
| | 0.10 |
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Capital ratios under Basel 3 Standardized – Transition (2) | | | | | September 30 2015 | | December 31 2014 |
Common equity tier 1 capital | | | | | 11.6 | % | | 12.3 | % |
Tier 1 capital | | | | | 12.9 |
| | 13.4 |
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Total capital | | | | | 15.8 |
| | 16.5 |
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Tier 1 leverage | | | | | 8.5 |
| | 8.2 |
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(1) | FTE basis is a non-GAAP financial measure. For more information on this measure and for a corresponding reconciliation to GAAP financial measures, see Supplemental Financial Data on page 16. |
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(2) | For more information on capital management and the related capital ratios, see Capital Management on page 56. |
Net Interest Income
Net interest income on an FTE basis decreased $702 million to $9.7 billion, and $828 million to $30.1 billion for the three and nine months ended September 30, 2015 compared to the same periods in 2014. The net interest yield on an FTE basis decreased 19 basis points (bps) to 2.10 percent, and six bps to 2.21 percent for the same periods. The decrease for the three-month period was driven by negative market-related adjustments on debt securities, as well as lower loan yields and consumer loan balances, partially offset by commercial loan growth. Market-related adjustments on debt securities resulted in an expense of $597 million for the three months ended September 30, 2015 compared to an expense of $55 million for the same period in 2014. Negative market-related adjustments on debt securities were due to the acceleration of premium amortization on debt securities as the decline in long-term interest rates shortened the estimated lives of mortgage-related debt securities. Also included in market-related adjustments is hedge ineffectiveness that impacted net interest income.
The decrease for the nine-month period was primarily driven by lower loan yields and consumer loan balances, partially offset by lower long-term debt balances, commercial loan growth and a $91 million improvement in market-related adjustments on debt securities. Market-related adjustments on debt securities resulted in an expense of $412 million for the nine months ended September 30, 2015 compared to an expense of $503 million for the same period in 2014. For additional information, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements of the Corporation's 2014 Annual Report on Form 10-K.
Noninterest Income
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Table 3 | | | | |
Noninterest Income |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in millions) | 2015 | | 2014 | | 2015 | | 2014 |
Card income | $ | 1,510 |
| | $ | 1,500 |
| | $ | 4,381 |
| | $ | 4,334 |
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Service charges | 1,898 |
| | 1,907 |
| | 5,519 |
| | 5,599 |
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Investment and brokerage services | 3,336 |
| | 3,327 |
| | 10,101 |
| | 9,887 |
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Investment banking income | 1,287 |
| | 1,351 |
| | 4,300 |
| | 4,524 |
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Equity investment income (loss) | (31 | ) | | 9 |
| | 84 |
| | 1,150 |
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Trading account profits | 1,616 |
| | 1,899 |
| | 5,510 |
| | 6,198 |
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Mortgage banking income | 407 |
| | 272 |
| | 2,102 |
| | 1,211 |
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Gains on sales of debt securities | 385 |
| | 432 |
| | 821 |
| | 1,191 |
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Other income | 763 |
| | 293 |
| | 1,733 |
| | 1,111 |
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Total noninterest income | $ | 11,171 |
| | $ | 10,990 |
| | $ | 34,551 |
| | $ | 35,205 |
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Noninterest income increased $181 million to $11.2 billion, and decreased $654 million to $34.6 billion for the three and nine months ended September 30, 2015 compared to the same periods in 2014. The following highlights the significant changes.
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• | Investment and brokerage services income remained relatively unchanged for the three-month period and increased $214 million for the nine-month period primarily driven by increased asset management fees due to the impact of long-term assets under management (AUM) flows and higher market levels, partially offset by lower transactional revenue. |
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• | Investment banking income decreased $64 million and $224 million driven by lower debt and equity issuance fees, partially offset by higher advisory fees. |
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• | Equity investment income decreased $40 million and $1.1 billion as the year-ago period included a gain on the sale of a portion of an equity investment and gains from an initial public offering (IPO) of an equity investment in Global Markets. |
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• | Trading account profits decreased $283 million and $688 million driven by declines in credit-related businesses due to lower client activity, partially offset by strong performance in equity derivatives and improvement in rates, currencies and commodities products within fixed-income, currencies and commodities (FICC). For more information on trading account profits, see Global Markets on page 41. |
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• | Mortgage banking income increased $135 million for the three-month period primarily due to improved mortgage servicing rights (MSR) net-of-hedge performance and a lower provision for representations and warranties, partially offset by a decline in servicing fees. Mortgage banking income increased $891 million for the nine-month period primarily due to a benefit in the provision for representations and warranties compared to an expense in the prior-year period, improved MSR net-of-hedge performance and an increase in core production revenue, partially offset by a decline in servicing fees. |
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• | Other income increased $470 million for the three-month period due to higher gains on asset sales and higher net debit valuation adjustment (DVA) gains on structured liabilities in the current year period. Other income increased $622 million for the nine-month period due to the same factors as described in the three-month discussion above, as well as lower U.K. consumer payment protection insurance (PPI) costs. |
Provision for Credit Losses
|
| | | | | | | | | | | | | | | |
Table 4 |
Credit Quality Data |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in millions) | 2015 | | 2014 | | 2015 | | 2014 |
Provision for credit losses | | | | | | | |
Consumer | $ | 542 |
| | $ | 544 |
| | $ | 1,714 |
| | $ | 1,351 |
|
Commercial | 264 |
| | 92 |
| | 637 |
| | 705 |
|
Total provision for credit losses | $ | 806 |
| | $ | 636 |
| | $ | 2,351 |
| | $ | 2,056 |
|
| | | | | | | |
Net charge-offs (1) | $ | 932 |
| | $ | 1,043 |
| | $ | 3,194 |
| | $ | 3,504 |
|
Net charge-off ratio (2) | 0.42 | % | | 0.46 | % | | 0.49 | % | | 0.52 | % |
| |
(1) | Net charge-offs exclude write-offs in the purchased credit-impaired loan portfolio. |
| |
(2) | Net charge-off ratios are calculated as annualized net charge-offs divided by average outstanding loans and leases excluding loans accounted for under the fair value option. |
The provision for credit losses increased $170 million to $806 million, and $295 million to $2.4 billion for the three and nine months ended September 30, 2015 compared to the same periods in 2014. The provision for credit losses was $126 million and $843 million lower than net charge-offs, resulting in a reduction in the allowance for credit losses. The prior-year periods included $400 million of additional costs associated with the consumer relief portion of the settlement with the U.S. Department of Justice (DoJ). Excluding these additional costs, the provision for credit losses in the consumer portfolio increased compared to the same periods in 2014 as we continue to release reserves, but at a slower pace than in the prior-year periods, and also due to a lower level of recoveries on nonperforming loan sales and other recoveries in the nine-month period. The provision for credit losses in the commercial portfolio increased during the three-month period primarily due to loan growth. The decreases in net charge-offs for the three and nine months ended September 30, 2015 were primarily due to credit quality improvement in the consumer portfolio.
We currently expect that, if economic conditions remain unchanged, the provision for credit losses would be generally consistent with present levels through mid-2016. For more information on the provision for credit losses, see Provision for Credit Losses on page 108.
Noninterest Expense
|
| | | | | | | | | | | | | | | |
Table 5 | | | | | | | |
Noninterest Expense |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in millions) | 2015 | | 2014 | | 2015 | | 2014 |
Personnel | $ | 7,829 |
| | $ | 8,039 |
| | $ | 25,333 |
| | $ | 26,094 |
|
Occupancy | 1,028 |
| | 1,070 |
| | 3,082 |
| | 3,264 |
|
Equipment | 499 |
| | 514 |
| | 1,511 |
| | 1,594 |
|
Marketing | 445 |
| | 446 |
| | 1,330 |
| | 1,338 |
|
Professional fees | 673 |
| | 611 |
| | 1,588 |
| | 1,795 |
|
Amortization of intangibles | 207 |
| | 234 |
| | 632 |
| | 708 |
|
Data processing | 731 |
| | 754 |
| | 2,298 |
| | 2,348 |
|
Telecommunications | 210 |
| | 311 |
| | 583 |
| | 1,005 |
|
Other general operating | 2,185 |
| | 8,163 |
| | 6,963 |
| | 22,775 |
|
Total noninterest expense | $ | 13,807 |
| | $ | 20,142 |
| | $ | 43,320 |
| | $ | 60,921 |
|
Noninterest expense decreased $6.3 billion to $13.8 billion, and $17.6 billion to $43.3 billion for the three and nine months ended September 30, 2015 compared to the same periods in 2014. The following highlights the significant changes.
| |
• | Personnel expense decreased $210 million and $761 million as we continue to streamline processes, reduce headcount and achieve cost savings. |
| |
• | Professional fees increased $62 million for the three-month period primarily due to higher consulting fees related to the CCAR resubmission. Professional fees decreased $207 million for the nine-month period due to lower default-related servicing expenses and legal fees. |
| |
• | Telecommunications expense decreased $101 million and $422 million due to efficiencies gained as we have simplified our operating model, including in-sourcing certain functions. |
| |
• | Other general operating expense decreased $6.0 billion and $15.8 billion primarily due to decreases in litigation expense which were primarily related to previously disclosed legacy mortgage-related matters and other litigation charges in the prior-year periods. |
Income Tax Expense
|
| | | | | | | | | | | | | | | |
Table 6 | | | | | | | |
Income Tax Expense | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in millions) | 2015 | | 2014 | | 2015 | | 2014 |
Income before income taxes | $ | 6,069 |
| | $ | 431 |
| | $ | 18,330 |
| | $ | 2,545 |
|
Income tax expense | 1,561 |
| | 663 |
| | 5,145 |
| | 762 |
|
Effective tax rate | 25.7 | % | | 153.8 | % | | 28.1 | % | | 29.9 | % |
The effective tax rates for the three and nine months ended September 30, 2015 were driven by our recurring tax preference benefits and also reflected tax benefits related to certain non-U.S. restructurings. The effective tax rate for the three months ended September 30, 2014 was driven by the impact of accruals estimated to be nondeductible, partially offset by recurring tax preference items, the impact of the resolution of several tax examinations and tax benefits from a non-U.S. restructuring. The effective tax rate for the nine months ended September 30, 2014 was impacted by the recurring preference and other tax benefit items previously mentioned, which more than offset the impact of the non-deductible charges.
On July 8, 2015, the U.K. Chancellor's Budget (the Budget) was released, proposing to reduce the U.K. corporate income tax rate by two percent to 18 percent. The first one percent reduction would be effective on April 1, 2017 and the second on April 1, 2020. The Budget also proposed a tax surcharge on banking institutions of eight percent, to be effective on January 1, 2016, and proposed that existing net operating loss carryforwards may not reduce the additional surcharge income tax liability. On October 26, 2015, these and other proposals were passed by the U.K. House of Commons, and they are expected to be fully enacted via Royal Assent before the end of 2015. Enactment would require us to remeasure our U.K. deferred tax assets, which we estimate would result in a charge of up to $300 million. We expect the effective tax rate to be approximately 30 percent in the fourth quarter, excluding unusual items and specifically the recent U.K. tax proposals, and approximately 30 percent for the full-year 2015, including the impact of the recent U.K. tax proposals, but absent other unusual items.
|
| | | | | | | | | | |
Balance Sheet Overview |
|
Table 7 |
Selected Balance Sheet Data |
(Dollars in millions) | September 30 2015 | | December 31 2014 | | % Change |
Assets | | | | | |
Cash and cash equivalents | $ | 170,426 |
| | $ | 138,589 |
| | 23 | % |
Federal funds sold and securities borrowed or purchased under agreements to resell | 206,681 |
| | 191,823 |
| | 8 |
|
Trading account assets | 180,018 |
| | 191,785 |
| | (6 | ) |
Debt securities | 391,651 |
| | 380,461 |
| | 3 |
|
Loans and leases | 887,689 |
| | 881,391 |
| | 1 |
|
Allowance for loan and lease losses | (12,657 | ) | | (14,419 | ) | | (12 | ) |
All other assets | 329,198 |
| | 334,904 |
| | (2 | ) |
Total assets | $ | 2,153,006 |
| | $ | 2,104,534 |
| | 2 |
|
Liabilities | | | | | |
Deposits | $ | 1,162,009 |
| | $ | 1,118,936 |
| | 4 | % |
Federal funds purchased and securities loaned or sold under agreements to repurchase | 199,238 |
| | 201,277 |
| | (1 | ) |
Trading account liabilities | 74,252 |
| | 74,192 |
| | — |
|
Short-term borrowings | 34,518 |
| | 31,172 |
| | 11 |
|
Long-term debt | 237,288 |
| | 243,139 |
| | (2 | ) |
All other liabilities | 189,796 |
| | 192,347 |
| | (1 | ) |
Total liabilities | 1,897,101 |
| | 1,861,063 |
| | 2 |
|
Shareholders' equity | 255,905 |
| | 243,471 |
| | 5 |
|
Total liabilities and shareholders' equity | $ | 2,153,006 |
| | $ | 2,104,534 |
| | 2 |
|
Assets
At September 30, 2015, total assets were approximately $2.2 trillion, up $48.5 billion from December 31, 2014. The key driver of the increase in assets was increased cash and cash equivalents primarily due to strong deposit inflows driven by growth in customer and client activity. Debt securities increased primarily due to the deployment of deposit inflows. The increase in loans and leases was driven by strong demand for commercial loans, outpacing consumer loan sales and run-off. The increase in securities borrowed or purchased under agreements to resell was driven by sales and trading activities, partially offset by a reduction in trading account assets. The Corporation took certain actions during the nine months ended September 30, 2015 to further optimize liquidity in response to the Basel 3 Liquidity Coverage Ratio (LCR) requirements. Most notably, we exchanged loans supported by long-term standby agreements with Fannie Mae (FNMA) and Freddie Mac (FHLMC) into debt securities guaranteed by FNMA and FHLMC, which further improved liquidity in the asset and liability management (ALM) portfolio.
Liabilities and Shareholders' Equity
At September 30, 2015, total liabilities were approximately $1.9 trillion, up $36.0 billion from December 31, 2014, primarily driven by an increase in deposits, partially offset by a decline in long-term debt.
Shareholders' equity of $255.9 billion at September 30, 2015 increased $12.4 billion from December 31, 2014 driven by earnings, preferred stock issuances and an increase in accumulated other comprehensive income (OCI) due to a positive net change in the fair value of available-for-sale (AFS) debt securities, partially offset by returns of capital to shareholders through share repurchases, as well as common and preferred dividends.
|
| | | | | | | | | | | | | | | | | | | |
Table 8 | | | | |
Selected Quarterly Financial Data | | | | |
| 2015 Quarters | | 2014 Quarters |
(In millions, except per share information) | Third | | Second | | First | | Fourth | | Third |
Income statement | | | | | | | | | |
Net interest income | $ | 9,511 |
| | $ | 10,488 |
| | $ | 9,451 |
| | $ | 9,635 |
| | $ | 10,219 |
|
Noninterest income | 11,171 |
| | 11,629 |
| | 11,751 |
| | 9,090 |
| | 10,990 |
|
Total revenue, net of interest expense | 20,682 |
| | 22,117 |
| | 21,202 |
| | 18,725 |
| | 21,209 |
|
Provision for credit losses | 806 |
| | 780 |
| | 765 |
| | 219 |
| | 636 |
|
Noninterest expense | 13,807 |
| | 13,818 |
| | 15,695 |
| | 14,196 |
| | 20,142 |
|
Income before income taxes | 6,069 |
| | 7,519 |
| | 4,742 |
| | 4,310 |
| | 431 |
|
Income tax expense | 1,561 |
| | 2,199 |
| | 1,385 |
| | 1,260 |
| | 663 |
|
Net income (loss) | 4,508 |
| | 5,320 |
| | 3,357 |
| | 3,050 |
| | (232 | ) |
Net income (loss) applicable to common shareholders | 4,067 |
| | 4,990 |
| | 2,975 |
| | 2,738 |
| | (470 | ) |
Average common shares issued and outstanding | 10,444 |
| | 10,488 |
| | 10,519 |
| | 10,516 |
| | 10,516 |
|
Average diluted common shares issued and outstanding (1) | 11,197 |
| | 11,238 |
| | 11,267 |
| | 11,274 |
| | 10,516 |
|
Performance ratios | | | | | | | | | |
Return on average assets | 0.82 | % | | 0.99 | % | | 0.64 | % | | 0.57 | % | | n/m |
|
Four quarter trailing return on average assets (2) | 0.76 |
| | 0.54 |
| | 0.39 |
| | 0.23 |
| | 0.24 | % |
Return on average common shareholders' equity | 6.97 |
| | 8.75 |
| | 5.35 |
| | 4.84 |
| | n/m |
|
Return on average tangible common shareholders' equity (3) | 10.11 |
| | 12.78 |
| | 7.88 |
| | 7.15 |
| | n/m |
|
Return on average tangible shareholders' equity (3) | 9.84 |
| | 11.93 |
| | 7.85 |
| | 7.08 |
| | n/m |
|
Total ending equity to total ending assets | 11.89 |
| | 11.71 |
| | 11.67 |
| | 11.57 |
| | 11.24 |
|
Total average equity to total average assets | 11.71 |
| | 11.67 |
| | 11.49 |
| | 11.39 |
| | 11.14 |
|
Dividend payout | 12.82 |
| | 10.49 |
| | 17.68 |
| | 19.21 |
| | n/m |
|
Per common share data | | | | | | | | | |
Earnings (loss) | $ | 0.39 |
| | $ | 0.48 |
| | $ | 0.28 |
| | $ | 0.26 |
| | $ | (0.04 | ) |
Diluted earnings (loss) (1) | 0.37 |
| | 0.45 |
| | 0.27 |
| | 0.25 |
| | (0.04 | ) |
Dividends paid | 0.05 |
| | 0.05 |
| | 0.05 |
| | 0.05 |
| | 0.05 |
|
Book value | 22.41 |
| | 21.91 |
| | 21.66 |
| | 21.32 |
| | 20.99 |
|
Tangible book value (3) | 15.50 |
| | 15.02 |
| | 14.79 |
| | 14.43 |
| | 14.09 |
|
Market price per share of common stock | | | | | | | | | |
Closing | $ | 15.58 |
| | $ | 17.02 |
| | $ | 15.39 |
| | $ | 17.89 |
| | $ | 17.05 |
|
High closing | 18.45 |
| | 17.67 |
| | 17.90 |
| | 18.13 |
| | 17.18 |
|
Low closing | 15.26 |
| | 15.41 |
| | 15.15 |
| | 15.76 |
| | 14.98 |
|
Market capitalization | $ | 162,457 |
| | $ | 178,231 |
| | $ | 161,909 |
| | $ | 188,141 |
| | $ | 179,296 |
|
| |
(1) | The diluted earnings (loss) per common share excluded the effect of any equity instruments that are antidilutive to earnings per share. There were no potential common shares that were dilutive in the third quarter of 2014 because of the net loss applicable to common shareholders. |
| |
(2) | Calculated as total net income (loss) for four consecutive quarters divided by annualized average assets for four consecutive quarters. |
| |
(3) | Tangible equity ratios and tangible book value per share of common stock are non-GAAP financial measures. Other companies may define or calculate these measures differently. For more information on these ratios and for corresponding reconciliations to GAAP financial measures, see Supplemental Financial Data on page 16. |
| |
(4) | For more information on the impact of the purchased credit-impaired loan portfolio on asset quality, see Consumer Portfolio Credit Risk Management on page 75. |
| |
(5) | Includes the allowance for loan and lease losses and the reserve for unfunded lending commitments. |
| |
(6) | Balances and ratios do not include loans accounted for under the fair value option. For additional exclusions from nonperforming loans, leases and foreclosed properties, see Consumer Portfolio Credit Risk Management – Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity on page 92 and corresponding Table 49, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 101 and corresponding Table 58. |
| |
(7) | Primarily includes amounts allocated to the U.S. credit card and unsecured consumer lending portfolios in Consumer Banking, purchased credit-impaired loans and the non-U.S. credit card portfolio in All Other. |
| |
(8) | Net charge-offs exclude $148 million, $290 million, $288 million, $13 million and $246 million of write-offs in the purchased credit-impaired loan portfolio in the third, second and first quarters of 2015 and in the fourth and third quarters of 2014, respectively. These write-offs decreased the purchased credit-impaired valuation allowance included as part of the allowance for loan and lease losses. For more information on purchased credit-impaired write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 87. |
n/m = not meaningful
|
| | | | | | | | | | | | | | | | | | | |
Table 8 | | | | |
Selected Quarterly Financial Data (continued) | | | | |
| 2015 Quarters | | 2014 Quarters |
(Dollars in millions) | Third | | Second | | First | | Fourth | | Third |
Average balance sheet | | | | | | | | | |
Total loans and leases | $ | 882,841 |
| | $ | 881,415 |
| | $ | 872,393 |
| | $ | 884,733 |
| | $ | 899,241 |
|
Total assets | 2,168,993 |
| | 2,151,966 |
| | 2,138,574 |
| | 2,137,551 |
| | 2,136,109 |
|
Total deposits | 1,159,231 |
| | 1,146,789 |
| | 1,130,726 |
| | 1,122,514 |
| | 1,127,488 |
|
Long-term debt | 240,520 |
| | 242,230 |
| | 240,127 |
| | 249,221 |
| | 251,772 |
|
Common shareholders' equity | 231,620 |
| | 228,780 |
| | 225,357 |
| | 224,479 |
| | 222,374 |
|
Total shareholders' equity | 253,893 |
| | 251,054 |
| | 245,744 |
| | 243,454 |
| | 238,040 |
|
Asset quality (4) | | | | | | | | | |
Allowance for credit losses (5) | $ | 13,318 |
| | $ | 13,656 |
| | $ | 14,213 |
| | $ | 14,947 |
| | $ | 15,635 |
|
Nonperforming loans, leases and foreclosed properties (6) | 10,336 |
| | 11,565 |
| | 12,101 |
| | 12,629 |
| | 14,232 |
|
Allowance for loan and lease losses as a percentage of total loans and leases outstanding (6) | 1.44 | % | | 1.49 | % | | 1.57 | % | | 1.65 | % | | 1.71 | % |
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (6) | 129 |
| | 122 |
| | 122 |
| | 121 |
| | 112 |
|
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases, excluding the PCI loan portfolio (6) | 120 |
| | 111 |
| | 110 |
| | 107 |
| | 100 |
|
Amounts included in allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases (7) | $ | 4,682 |
| | $ | 5,050 |
| | $ | 5,492 |
| | $ | 5,944 |
| | $ | 6,013 |
|
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases, excluding the allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases (6, 7) | 81 | % | | 75 | % | | 73 | % | | 71 | % | | 67 | % |
Net charge-offs (8) | $ | 932 |
| | $ | 1,068 |
| | $ | 1,194 |
| | $ | 879 |
| | $ | 1,043 |
|
Annualized net charge-offs as a percentage of average loans and leases outstanding (6, 8) | 0.42 | % | | 0.49 | % | | 0.56 | % | | 0.40 | % | | 0.46 | % |
Annualized net charge-offs as a percentage of average loans and leases outstanding, excluding the PCI loan portfolio (6) | 0.43 |
| | 0.50 |
| | 0.57 |
| | 0.41 |
| | 0.48 |
|
Annualized net charge-offs and PCI write-offs as a percentage of average loans and leases outstanding (6) | 0.49 |
| | 0.62 |
| | 0.70 |
| | 0.40 |
| | 0.57 |
|
Nonperforming loans and leases as a percentage of total loans and leases outstanding (6) | 1.11 |
| | 1.22 |
| | 1.29 |
| | 1.37 |
| | 1.53 |
|
Nonperforming loans, leases and foreclosed properties as a percentage of total loans, leases and foreclosed properties (6) | 1.17 |
| | 1.31 |
| | 1.39 |
| | 1.45 |
| | 1.61 |
|
Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs (8) | 3.42 |
| | 3.05 |
| | 2.82 |
| | 4.14 |
| | 3.65 |
|
Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the PCI loan portfolio | 3.18 |
| | 2.79 |
| | 2.55 |
| | 3.66 |
| | 3.27 |
|
Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs and PCI write-offs | 2.95 |
| | 2.40 |
| | 2.28 |
| | 4.08 |
| | 2.95 |
|
Capital ratios at period end |
Risk-based capital under Basel 3 Standardized – Transition: | | | | | | | | | |
Common equity tier 1 capital | 11.6 | % | | 11.2 | % | | 11.1 | % | | 12.3 | % | | 12.0 | % |
Tier 1 capital | 12.9 |
| | 12.5 |
| | 12.3 |
| | 13.4 |
| | 12.8 |
|
Total capital | 15.8 |
| | 15.5 |
| | 15.3 |
| | 16.5 |
| | 15.8 |
|
Tier 1 leverage | 8.5 |
| | 8.5 |
| | 8.4 |
| | 8.2 |
| | 7.9 |
|
| | | | | | | | | |
Tangible equity (3) | 8.8 |
| | 8.6 |
| | 8.6 |
| | 8.4 |
| | 8.1 |
|
Tangible common equity (3) | 7.8 |
| | 7.6 |
| | 7.5 |
| | 7.5 |
| | 7.2 |
|
For footnotes see page 12.
|
| | | | | | | |
Table 9 | | | |
Selected Year-to-Date Financial Data | | | |
| Nine Months Ended September 30 |
(In millions, except per share information) | 2015 | | 2014 |
Income statement | | | |
Net interest income | $ | 29,450 |
| | $ | 30,317 |
|
Noninterest income | 34,551 |
| | 35,205 |
|
Total revenue, net of interest expense | 64,001 |
| | 65,522 |
|
Provision for credit losses | 2,351 |
| | 2,056 |
|
Noninterest expense | 43,320 |
| | 60,921 |
|
Income before income taxes | 18,330 |
| | 2,545 |
|
Income tax expense | 5,145 |
| | 762 |
|
Net income | 13,185 |
| | 1,783 |
|
Net income applicable to common shareholders | 12,032 |
| | 1,051 |
|
Average common shares issued and outstanding | 10,483 |
| | 10,532 |
|
Average diluted common shares issued and outstanding | 11,234 |
| | 10,588 |
|
Performance ratios | | | |
Return on average assets | 0.82 | % | | 0.11 | % |
Return on average common shareholders' equity | 7.04 |
| | 0.63 |
|
Return on average tangible common shareholders' equity (1) | 10.29 |
| | 0.94 |
|
Return on average tangible shareholders' equity (1) | 9.90 |
| | 1.45 |
|
Total ending equity to total ending assets | 11.89 |
| | 11.24 |
|
Total average equity to total average assets | 11.62 |
| | 11.02 |
|
Dividend payout | 13.06 |
| | 70.06 |
|
Per common share data | | | |
Earnings | $ | 1.15 |
| | $ | 0.10 |
|
Diluted earnings | 1.09 |
| | 0.10 |
|
Dividends paid | 0.15 |
| | 0.07 |
|
Book value | 22.41 |
| | 20.99 |
|
Tangible book value (1) | 15.50 |
| | 14.09 |
|
Market price per share of common stock | | | |
Closing | $ | 15.58 |
| | $ | 17.05 |
|
High closing | 18.45 |
| | 17.92 |
|
Low closing | 15.15 |
| | 14.51 |
|
Market capitalization | $ | 162,457 |
| | $ | 179,296 |
|
| |
(1) | Tangible equity ratios and tangible book value per share of common stock are non-GAAP financial measures. Other companies may define or calculate these measures differently. For more information on these ratios and for corresponding reconciliations to GAAP financial measures, see Supplemental Financial Data on page 16. |
| |
(2) | For more information on the impact of the purchased credit-impaired loan portfolio on asset quality, see Consumer Portfolio Credit Risk Management on page 75. |
| |
(3) | Includes the allowance for loan and lease losses and the reserve for unfunded lending commitments. |
| |
(4) | Balances and ratios do not include loans accounted for under the fair value option. For additional exclusions from nonperforming loans, leases and foreclosed properties, see Consumer Portfolio Credit Risk Management – Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity on page 92 and corresponding Table 49, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 101 and corresponding Table 58. |
| |
(5) | Primarily includes amounts allocated to the U.S. credit card and unsecured consumer lending portfolios in Consumer Banking, purchased credit-impaired loans and the non-U.S. credit card portfolio in All Other. |
| |
(6) | Net charge-offs exclude $726 million and $797 million of write-offs in the purchased credit-impaired loan portfolio for the nine months ended September 30, 2015 and 2014. These write-offs decreased the purchased credit-impaired valuation allowance included as part of the allowance for loan and lease losses. For more information on purchased credit-impaired write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 87. |
|
| | | | | | | |
Table 9 | | | |
Selected Year-to-Date Financial Data (continued) | | | |
| Nine Months Ended September 30 |
(Dollars in millions) | 2015 | | 2014 |
Average balance sheet | | | |
Total loans and leases | $ | 878,921 |
| | $ | 910,360 |
|
Total assets | 2,153,289 |
| | 2,148,298 |
|
Total deposits | 1,145,686 |
| | 1,124,777 |
|
Long-term debt | 240,960 |
| | 255,084 |
|
Common shareholders' equity | 228,609 |
| | 222,598 |
|
Total shareholders' equity | 250,260 |
| | 236,806 |
|
Asset quality (2) | | | |
Allowance for credit losses (3) | $ | 13,318 |
| | $ | 15,635 |
|
Nonperforming loans, leases and foreclosed properties (4) | 10,336 |
| | 14,232 |
|
Allowance for loan and lease losses as a percentage of total loans and leases outstanding (4) | 1.44 | % | | 1.71 | % |
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (4) | 129 |
| | 112 |
|
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases, excluding the PCI loan portfolio (4) | 120 |
| | 100 |
|
Amounts included in allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases (5) | $ | 4,682 |
| | $ | 6,013 |
|
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases, excluding the allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases (4, 5) | 81 | % | | 67 | % |
Net charge-offs (6) | $ | 3,194 |
| | $ | 3,504 |
|
Annualized net charge-offs as a percentage of average loans and leases outstanding (4, 6) | 0.49 | % | | 0.52 | % |
Annualized net charge-offs as a percentage of average loans and leases outstanding, excluding the PCI loan portfolio (4) | 0.50 |
| | 0.53 |
|
Annualized net charge-offs and PCI write-offs as a percentage of average loans and leases outstanding (4) | 0.60 |
| | 0.64 |
|
Nonperforming loans and leases as a percentage of total loans and leases outstanding (4) | 1.11 |
| | 1.53 |
|
Nonperforming loans, leases and foreclosed properties as a percentage of total loans, leases and foreclosed properties (4) | 1.17 |
| | 1.61 |
|
Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs (6) | 2.96 |
| | 3.22 |
|
Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the PCI loan portfolio | 2.76 |
| | 2.88 |
|
Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs and PCI write-offs | 2.41 |
| | 2.63 |
|
For footnotes see page 14.
|
|
Supplemental Financial Data |
We view net interest income and related ratios and analyses on an FTE basis, which when presented on a consolidated basis, are non-GAAP financial measures. We believe managing the business with net interest income on an FTE basis provides a more accurate picture of the interest margin for comparative purposes. To derive the FTE basis, net interest income is adjusted to reflect tax-exempt income on an equivalent before-tax basis with a corresponding increase in income tax expense. For purposes of this calculation, we use the federal statutory tax rate of 35 percent. This measure ensures comparability of net interest income arising from taxable and tax-exempt sources.
Certain performance measures including the efficiency ratio and net interest yield utilize net interest income (and thus total revenue) on an FTE basis. The efficiency ratio measures the costs expended to generate a dollar of revenue, and net interest yield measures the bps we earn over the cost of funds.
We also evaluate our business based on certain ratios that utilize tangible equity, a non-GAAP financial measure. Tangible equity represents an adjusted shareholders' equity or common shareholders' equity amount which has been reduced by goodwill and intangible assets (excluding MSRs), net of related deferred tax liabilities. These measures are used to evaluate our use of equity. In addition, profitability, relationship and investment models use both return on average tangible common shareholders' equity and return on average tangible shareholders' equity as key measures to support our overall growth goals. These ratios are as follows:
| |
• | Return on average tangible common shareholders' equity measures our earnings contribution as a percentage of adjusted common shareholders' equity. The tangible common equity ratio represents adjusted ending common shareholders' equity divided by total assets less goodwill and intangible assets (excluding MSRs), net of related deferred tax liabilities. |
| |
• | Return on average tangible shareholders' equity measures our earnings contribution as a percentage of adjusted average total shareholders' equity. The tangible equity ratio represents adjusted ending shareholders' equity divided by total assets less goodwill and intangible assets (excluding MSRs), net of related deferred tax liabilities. |
| |
• | Tangible book value per common share represents adjusted ending common shareholders' equity divided by ending common shares outstanding. |
The aforementioned supplemental data and performance measures are presented in Tables 8 and 9.
We evaluate our business segment results based on measures that utilize average allocated capital. Return on average allocated capital is calculated as net income adjusted for cost of funds and earnings credits and certain expenses related to intangibles, divided by average allocated capital. Allocated capital and the related return both represent non-GAAP financial measures. In addition, for purposes of goodwill impairment testing, the Corporation utilizes allocated equity as a proxy for the carrying value of its reporting units. Allocated equity in the reporting units is comprised of allocated capital plus capital for the portion of goodwill and intangibles specifically assigned to the reporting unit. For additional information, see Business Segment Operations on page 25.
Table 10 presents certain non-GAAP financial measures and performance measurements on an FTE basis.
|
| | | | | | | | | | | | | | | |
Table 10 |
Supplemental Financial Data |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in millions) | 2015 | | 2014 | | 2015 | | 2014 |
Fully taxable-equivalent basis data | | | | | | | |
Net interest income | $ | 9,742 |
| | $ | 10,444 |
| | $ | 30,128 |
| | $ | 30,956 |
|
Total revenue, net of interest expense | 20,913 |
| | 21,434 |
| | 64,679 |
| | 66,161 |
|
Net interest yield | 2.10 | % | | 2.29 | % | | 2.21 | % | | 2.27 | % |
Efficiency ratio | 66.03 |
| | 93.97 |
| | 66.98 |
| | 92.08 |
|
Tables 11, 12 and 13 provide reconciliations of these non-GAAP financial measures to GAAP financial measures. We believe the use of these non-GAAP financial measures provides additional clarity in assessing the results of the Corporation and our segments. Other companies may define or calculate these measures and ratios differently.
|
| | | | | | | | | | | | | | | | | | | | | | | |
Table 11 |
Quarterly and Year-to-Date Supplemental Financial Data and Reconciliations to GAAP Financial Measures |
| Three Months Ended September 30 |
| 2015 | | 2014 |
(Dollars in millions) | As Reported | | Fully taxable-equivalent adjustment | | Fully taxable-equivalent basis | | As Reported | | Fully taxable-equivalent adjustment | | Fully taxable-equivalent basis |
Net interest income | $ | 9,511 |
| | $ | 231 |
| | $ | 9,742 |
| | $ | 10,219 |
| | $ | 225 |
| | $ | 10,444 |
|
Total revenue, net of interest expense | 20,682 |
| | 231 |
| | 20,913 |
| | 21,209 |
| | 225 |
| | 21,434 |
|
Income tax expense | 1,561 |
| | 231 |
| | 1,792 |
| | 663 |
| | 225 |
| | 888 |
|
| | | | | | | | | | | |
| Nine Months Ended September 30 |
| 2015 | | 2014 |
Net interest income | $ | 29,450 |
| | $ | 678 |
| | $ | 30,128 |
| | $ | 30,317 |
| | $ | 639 |
| | $ | 30,956 |
|
Total revenue, net of interest expense | 64,001 |
| | 678 |
| | 64,679 |
| | 65,522 |
| | 639 |
| | 66,161 |
|
Income tax expense | 5,145 |
| | 678 |
| | 5,823 |
| | 762 |
| | 639 |
| | 1,401 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
Table 12 |
Period-end and Average Supplemental Financial Data and Reconciliations to GAAP Financial Measures |
| | | | | Average |
| Period-end | | Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in millions) | September 30 2015 | | December 31 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
Common shareholders' equity | $ | 233,632 |
| | $ | 224,162 |
| | $ | 231,620 |
| | $ | 222,374 |
| | $ | 228,609 |
| | $ | 222,598 |
|
Goodwill | (69,761 | ) | | (69,777 | ) | | (69,774 | ) | | (69,792 | ) | | (69,775 | ) | | (69,818 | ) |
Intangible assets (excluding MSRs) | (3,973 | ) | | (4,612 | ) | | (4,099 | ) | | (4,992 | ) | | (4,307 | ) | | (5,232 | ) |
Related deferred tax liabilities | 1,762 |
| | 1,960 |
| | 1,811 |
| | 2,077 |
| | 1,885 |
| | 2,114 |
|
Tangible common shareholders' equity | $ | 161,660 |
| | $ | 151,733 |
| | $ | 159,558 |
| | $ | 149,667 |
| | $ | 156,412 |
| | $ | 149,662 |
|
| | | | | | | | | | | |
Shareholders' equity | $ | 255,905 |
| | $ | 243,471 |
| | $ | 253,893 |
| | $ | 238,040 |
| | $ | 250,260 |
| | $ | 236,806 |
|
Goodwill | (69,761 | ) | | (69,777 | ) | | (69,774 | ) | | (69,792 | ) | | (69,775 | ) | | (69,818 | ) |
Intangible assets (excluding MSRs) | (3,973 | ) | | (4,612 | ) | | (4,099 | ) | | (4,992 | ) | | (4,307 | ) | | (5,232 | ) |
Related deferred tax liabilities | 1,762 |
| | 1,960 |
| | 1,811 |
| | 2,077 |
| | 1,885 |
| | 2,114 |
|
Tangible shareholders' equity | $ | 183,933 |
| | $ | 171,042 |
| | $ | 181,831 |
| | $ | 165,333 |
| | $ | 178,063 |
| | $ | 163,870 |
|
| | | | | | | | | | | |
Assets | $ | 2,153,006 |
| | $ | 2,104,534 |
| | | | | | | | |
Goodwill | (69,761 | ) | | (69,777 | ) | | | | | | | | |
Intangible assets (excluding MSRs) | (3,973 | ) | | (4,612 | ) | | | | | | | | |
Related deferred tax liabilities | 1,762 |
| | 1,960 |
| | | | | | | | |
Tangible Assets | $ | 2,081,034 |
| | $ | 2,032,105 |
| | | | | | | | |
|
| | | | | | | | | | | | | | | |
Table 13 | | | | | | | |
Segment Supplemental Financial Data Reconciliations to GAAP Financial Measures (1) |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in millions) | 2015 | | 2014 | | 2015 | | 2014 |
| | | | | | | |
Consumer Banking | | | | | | | |
Reported net income | $ | 1,759 |
| | $ | 1,669 |
| | $ | 4,940 |
| | $ | 4,781 |
|
Adjustment related to intangibles (2) | 1 |
| | 1 |
| | 3 |
| | 3 |
|
Adjusted net income | $ | 1,760 |
| | $ | 1,670 |
| | $ | 4,943 |
| | $ | 4,784 |
|
| | | | | | | |
Average allocated equity (3) | $ | 59,312 |
| | $ | 60,385 |
| | $ | 59,330 |
| | $ | 60,401 |
|
Adjustment related to goodwill and a percentage of intangibles | (30,312 | ) | | (30,385 | ) | | (30,330 | ) | | (30,401 | ) |
Average allocated capital | $ | 29,000 |
| | $ | 30,000 |
| | $ | 29,000 |
| | $ | 30,000 |
|
| | | | | | | |
Deposits | | | | | | | |
Reported net income | $ | 695 |
| | $ | 651 |
| | $ | 1,957 |
| | $ | 1,852 |
|
Adjustment related to intangibles (2) | — |
| | — |
| | — |
| | — |
|
Adjusted net income | $ | 695 |
| | $ | 651 |
| | $ | 1,957 |
| | $ | 1,852 |
|
| | | | | | | |
Average allocated equity (3) | $ | 30,421 |
| | $ | 29,427 |
| | $ | 30,422 |
| | $ | 29,426 |
|
Adjustment related to goodwill and a percentage of intangibles | (18,421 | ) | | (18,427 | ) | | (18,422 | ) | | (18,426 | ) |
Average allocated capital | $ | 12,000 |
| | $ | 11,000 |
| | $ | 12,000 |
| | $ | 11,000 |
|
| | | | | | | |
Consumer Lending | | | | | | | |
Reported net income | $ | 1,064 |
| | $ | 1,018 |
| | $ | 2,983 |
| | $ | 2,929 |
|
Adjustment related to intangibles (2) | 1 |
| | 1 |
| | 3 |
| | 3 |
|
Adjusted net income | $ | 1,065 |
| | $ | 1,019 |
| | $ | 2,986 |
| | $ | 2,932 |
|
| | | | | | | |
Average allocated equity (3) | $ | 28,891 |
| | $ | 30,958 |
| | $ | 28,907 |
| | $ | 30,975 |
|
Adjustment related to goodwill and a percentage of intangibles | (11,891 | ) | | (11,958 | ) | | (11,907 | ) | | (11,975 | ) |
Average allocated capital | $ | 17,000 |
| | $ | 19,000 |
| | $ | 17,000 |
| | $ | 19,000 |
|
| | | | | | | |
Global Wealth & Investment Management | | | | | | | |
Reported net income | $ | 656 |
| | $ | 812 |
| | $ | 1,995 |
| | $ | 2,264 |
|
Adjustment related to intangibles (2) | 3 |
| | 3 |
| | 9 |
| | 10 |
|
Adjusted net income | $ | 659 |
| | $ | 815 |
| | $ | 2,004 |
| | $ | 2,274 |
|
| | | | | | | |
Average allocated equity (3) | $ | 22,132 |
| | $ | 22,204 |
| | $ | 22,135 |
| | $ | 22,223 |
|
Adjustment related to goodwill and a percentage of intangibles | (10,132 | ) | | (10,204 | ) | | (10,135 | ) | | (10,223 | ) |
Average allocated capital | $ | 12,000 |
| | $ | 12,000 |
| | $ | 12,000 |
| | $ | 12,000 |
|
| | | | | | | |
Global Banking | | | | | | | |
Reported net income | $ | 1,277 |
| | $ | 1,521 |
| | $ | 3,895 |
| | $ | 4,249 |
|
Adjustment related to intangibles (2) | 1 |
| | — |
| | 1 |
| | 1 |
|
Adjusted net income | $ | 1,278 |
| | $ | 1,521 |
| | $ | 3,896 |
| | $ | 4,250 |
|
| | | | | | | |
Average allocated equity (3) | $ | 58,947 |
| | $ | 57,421 |
| | $ | 58,934 |
| | $ | 57,432 |
|
Adjustment related to goodwill and a percentage of intangibles | (23,947 | ) | | (23,921 | ) | | (23,934 | ) | | (23,932 | ) |
Average allocated capital | $ | 35,000 |
| | $ | 33,500 |
| | $ | 35,000 |
| | $ | 33,500 |
|
| | | | | | | |
Global Markets | | | | | | | |
Reported net income | $ | 1,008 |
| | $ | 371 |
| | $ | 2,944 |
| | $ | 2,780 |
|
Adjustment related to intangibles (2) | 5 |
| | 2 |
| | 9 |
| | 7 |
|
Adjusted net income | $ | 1,013 |
| | $ | 373 |
| | $ | 2,953 |
| | $ | 2,787 |
|
| | | | | | | |
Average allocated equity (3) | $ | 40,351 |
| | $ | 39,401 |
| | $ | 40,405 |
| | $ | 39,394 |
|
Adjustment related to goodwill and a percentage of intangibles | (5,351 | ) | | (5,401 | ) | | (5,405 | ) | | (5,394 | ) |
Average allocated capital | $ | 35,000 |
| | $ | 34,000 |
| | $ | 35,000 |
| | $ | 34,000 |
|
| |
(1) | There are no adjustments to reported net income (loss) or average allocated equity for LAS. |
| |
(2) | Represents cost of funds, earnings credits and certain expenses related to intangibles. |
| |
(3) | Average allocated equity is comprised of average allocated capital plus capital for the portion of goodwill and intangibles specifically assigned to the business segment. For more information on allocated capital, see Business Segment Operations on page 25. |
|
|
Net Interest Income Excluding Trading-related Net Interest Income |
We manage net interest income on an FTE basis and excluding the impact of trading-related activities. As discussed in Global Markets on page 41, we evaluate our sales and trading results and strategies on a total market-based revenue approach by combining net interest income and noninterest income for Global Markets. An analysis of net interest income, average earning assets and net interest yield on earning assets, all of which adjust for the impact of trading-related net interest income from reported net interest income on an FTE basis, is shown below. We believe the use of this non-GAAP presentation in Table 14 provides additional clarity in assessing our results.
|
| | | | | | | | | | | | | | | |
Table 14 | | | | |
Net Interest Income Excluding Trading-related Net Interest Income | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in millions) | 2015 | | 2014 | | 2015 | | 2014 |
Net interest income (FTE basis) | | | | | | | |
As reported | $ | 9,742 |
| | $ | 10,444 |
| | $ | 30,128 |
| | $ | 30,956 |
|
Impact of trading-related net interest income | (1,034 | ) | | (906 | ) | | (2,870 | ) | | (2,672 | ) |
Net interest income excluding trading-related net interest income (FTE basis) (1) | $ | 8,708 |
| | $ | 9,538 |
| | $ | 27,258 |
| | $ | 28,284 |
|
Average earning assets | | | | | | | |
As reported | $ | 1,847,396 |
| | $ | 1,813,482 |
| | $ | 1,822,720 |
| | $ | 1,819,247 |
|
Impact of trading-related earning assets | (421,639 | ) | | (441,661 | ) | | (419,711 | ) | | (449,249 | ) |
Average earning assets excluding trading-related earning assets (1) | $ | 1,425,757 |
| | $ | 1,371,821 |
| | $ | 1,403,009 |
| | $ | 1,369,998 |
|
Net interest yield contribution (FTE basis) (2) | | | | | | | |
As reported | 2.10 | % | | 2.29 | % | | 2.21 | % | | 2.27 | % |
Impact of trading-related activities | 0.33 |
| | 0.48 |
| | 0.39 |
| | 0.48 |
|
Net interest yield on earning assets excluding trading-related activities (FTE basis) (1) | 2.43 | % | | 2.77 | % | | 2.60 | % | | 2.75 | % |
| |
(1) | Represents a non-GAAP financial measure. |
| |
(2) | Calculated on an annualized basis. |
For the three and nine months ended September 30, 2015, net interest income excluding trading-related net interest income decreased $830 million to $8.7 billion, and $1.0 billion to $27.3 billion compared to the same periods in 2014.
The decrease for the three months ended September 30, 2015 was largely driven by a negative change of $542 million in market-related adjustments on debt securities. Also contributing to the decline were lower loan yields and consumer loan balances, partially offset by commercial loan growth. Market-related adjustments on debt securities resulted in an expense of $597 million for the three months ended September 30, 2015 compared to an expense of $55 million for the same period in 2014. For more information on market-related adjustments, see Executive Summary – Financial Highlights on page 7. For more information on the impact of interest rates, see Interest Rate Risk Management for Non-trading Activities on page 118.
The decrease for the nine months ended September 30, 2015 was primarily driven by lower loan yields and consumer loan balances, partially offset by lower long-term debt balances and commercial loan growth. Market-related adjustments on debt securities resulted in an expense of $412 million for the nine months ended September 30, 2015 compared to an expense of $503 million for the same period in 2014.
Average earning assets excluding trading-related earning assets for the three and nine months ended September 30, 2015 increased $53.9 billion to $1,425.8 billion, and $33.0 billion to $1,403.0 billion compared to the same periods in 2014. The increases were primarily in debt securities, cash held at central banks and commercial loans, partially offset by a decline in consumer loans.
For the three and nine months ended September 30, 2015, net interest yield on earning assets excluding trading-related activities decreased 34 bps to 2.43 percent, and 15 bps to 2.60 percent compared to the same periods in 2014 due to the same factors as described above.
|
| | | | | | | | | | | | | | | | | | | | | |
Table 15 |
Quarterly Average Balances and Interest Rates – FTE Basis |
| Third Quarter 2015 | | Second Quarter 2015 |
(Dollars in millions) | Average Balance | | Interest Income/ Expense | | Yield/ Rate | | Average Balance | | Interest Income/ Expense | | Yield/ Rate |
Earning assets | | | | | | | | | | | |
Interest-bearing deposits with the Federal Reserve, non-U.S. central banks and other banks | $ | 145,174 |
| | $ | 96 |
| | 0.26 | % | | $ | 125,762 |
| | $ | 81 |
| | 0.26 | % |
Time deposits placed and other short-term investments | 11,503 |
| | 38 |
| | 1.33 |
| | 8,183 |
| | 34 |
| | 1.64 |
|
Federal funds sold and securities borrowed or purchased under agreements to resell | 210,127 |
| | 275 |
| | 0.52 |
| | 214,326 |
| | 268 |
| | 0.50 |
|
Trading account assets | 140,484 |
| | 1,170 |
| | 3.31 |
| | 137,137 |
| | 1,114 |
| | 3.25 |
|
Debt securities (1) | 394,420 |
| | 1,853 |
| | 1.88 |
| | 386,357 |
| | 3,082 |
| | 3.21 |
|
Loans and leases (2): | | | | | | | | | | | |
Residential mortgage | 193,791 |
| | 1,690 |
| | 3.49 |
| | 207,356 |
| | 1,782 |
| | 3.44 |
|
Home equity | 79,715 |
| | 730 |
| | 3.64 |
| | 82,640 |
| | 769 |
| | 3.73 |
|
U.S. credit card | 88,201 |
| | 2,033 |
| | 9.15 |
| | 87,460 |
| | 1,980 |
| | 9.08 |
|
Non-U.S. credit card | 10,244 |
| | 267 |
| | 10.34 |
| | 10,012 |
| | 264 |
| | 10.56 |
|
Direct/Indirect consumer (3) | 85,975 |
| | 515 |
| | 2.38 |
| | 83,698 |
| | 504 |
| | 2.42 |
|
Other consumer (4) | 1,980 |
| | 15 |
| | 3.01 |
| | 1,885 |
| | 15 |
| | 3.14 |
|
Total consumer | 459,906 |
| | 5,250 |
| | 4.54 |
| | 473,051 |
| | 5,314 |
| | 4.50 |
|
U.S. commercial | 251,908 |
| | 1,743 |
| | 2.75 |
| | 244,540 |
| | 1,705 |
| | 2.80 |
|
Commercial real estate (5) | 53,605 |
| | 384 |
| | 2.84 |
| | 50,478 |
| | 382 |
| | 3.03 |
|
Commercial lease financing | 25,425 |
| | 199 |
| | 3.12 |
| | 24,723 |
| | 180 |
| | 2.92 |
|
Non-U.S. commercial | 91,997 |
| | 514 |
| | 2.22 |
| | 88,623 |
| | 479 |
| | 2.17 |
|
Total commercial | 422,935 |
| | 2,840 |
| | 2.67 |
| | 408,364 |
| | 2,746 |
| | 2.70 |
|
Total loans and leases | 882,841 |
| | 8,090 |
| | 3.64 |
| | 881,415 |
| | 8,060 |
| | 3.67 |
|
Other earning assets | 62,847 |
| | 716 |
| | 4.52 |
| | 62,712 |
| | 721 |
| | 4.60 |
|
Total earning assets (6) | 1,847,396 |
| | 12,238 |
| | 2.64 |
| | 1,815,892 |
| | 13,360 |
| | 2.95 |
|
Cash and due from banks | 27,730 |
| | | | | | 30,751 |
| | | | |
Other assets, less allowance for loan and lease losses | 293,867 |
| | | | | | 305,323 |
| | | | |
Total assets | $ | 2,168,993 |
| | | | | | $ | 2,151,966 |
| | | | |
| |
(1) | Yields on debt securities excluding the impact of market-related adjustments were 2.50 percent, 2.48 percent and 2.54 percent in the third, second and first quarters of 2015, and 2.53 percent and 2.55 percent in the fourth and third quarters of 2014, respectively. Yields on debt securities excluding the impact of market-related adjustments are a non-GAAP financial measure. The Corporation believes the use of this non-GAAP financial measure provides additional clarity in assessing its results. |
| |
(2) | Nonperforming loans are included in the respective average loan balances. Income on these nonperforming loans is generally recognized on a cost recovery basis. PCI loans were recorded at fair value upon acquisition and accrete interest income over the remaining life of the loan. |
| |
(3) | Includes non-U.S. consumer loans of $4.0 billion for each of the quarters of 2015, and $4.2 billion and $4.3 billion in the fourth and third quarters of 2014, respectively. |
| |
(4) | Includes consumer finance loans of $605 million, $632 million and $661 million in the third, second and first quarters of 2015, and $907 million and $1.1 billion in the fourth and third quarters of 2014, respectively; consumer leases of $1.2 billion, $1.1 billion and $1.0 billion in the third, second and first quarters of 2015, and $965 million and $887 million in the fourth and third quarters of 2014, respectively; and consumer overdrafts of $177 million, $131 million and $141 million in the third, second and first quarters of 2015, and $156 million and $161 million in the fourth and third quarters of 2014, respectively. |
| |
(5) | Includes U.S. commercial real estate loans of $49.8 billion, $47.6 billion and $45.6 billion in the third, second and first quarters of 2015, and $45.1 billion and $45.0 billion in the fourth and third quarters of 2014, respectively; and non-U.S. commercial real estate loans of $3.8 billion, $2.8 billion and $2.7 billion in the third, second and first quarters of 2015, and $1.9 billion and $1.0 billion in the fourth and third quarters of 2014, respectively. |
| |
(6) | Interest income includes the impact of interest rate risk management contracts, which decreased interest income on the underlying assets by $8 million, $8 million and $11 million in the third, second and first quarters of 2015, and $10 million and $30 million in the fourth and third quarters of 2014, respectively. Interest expense includes the impact of interest rate risk management contracts, which decreased interest expense on the underlying liabilities by $590 million, $509 million and $582 million in the third, second and first quarters of 2015, and $659 million and $602 million in the fourth and third quarters of 2014, respectively. For additional information, see Interest Rate Risk Management for Non-trading Activities on page 118. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 15 | | | | | | |
Quarterly Average Balances and Interest Rates – FTE Basis (continued) |
| First Quarter 2015 | | Fourth Quarter 2014 | | Third Quarter 2014 |
(Dollars in millions) | Average Balance | | Interest Income/ Expense | | Yield/ Rate | | Average Balance | | Interest Income/ Expense | | Yield/ Rate | | Average Balance | | Interest Income/ Expense | | Yield/ Rate |
Earning assets | | | | | | | | | | | | | | | | | |
Interest-bearing deposits with the Federal Reserve, non-U.S. central banks and other banks | $ | 126,189 |
| | $ | 84 |
| | 0.27 | % | | $ | 109,042 |
| | $ | 74 |
| | 0.27 | % | | $ | 110,876 |
| | $ | 77 |
| | 0.28 | % |
Time deposits placed and other short-term investments | 8,379 |
| | 33 |
| | 1.61 |
| | 9,339 |
| | 41 |
| | 1.73 |
| | 10,457 |
| | 41 |
| | 1.54 |
|
Federal funds sold and securities borrowed or purchased under agreements to resell | 213,931 |
| | 231 |
| | 0.44 |
| | 217,982 |
| | 237 |
| | 0.43 |
| | 223,978 |
| | 239 |
| | 0.42 |
|
Trading account assets | 138,946 |
| | 1,122 |
| | 3.26 |
| | 144,147 |
| | 1,142 |
| | 3.15 |
| | 143,282 |
| | 1,147 |
| | 3.18 |
|
Debt securities (1) | 383,120 |
| | 1,898 |
| | 2.01 |
| | 371,014 |
| | 1,687 |
| | 1.82 |
| | 359,653 |
| | 2,236 |
| | 2.48 |
|
Loans and leases (2): | | | | | | | | | | | | | | | | | |
Residential mortgage | 215,030 |
| | 1,851 |
| | 3.45 |
| | 223,132 |
| | 1,946 |
| | 3.49 |
| | 235,272 |
| | 2,083 |
| | 3.54 |
|
Home equity | 84,915 |
| | 770 |
| | 3.66 |
| | 86,825 |
| | 808 |
| | 3.70 |
| | 88,590 |
| | 836 |
| | 3.76 |
|
U.S. credit card | 88,695 |
| | 2,027 |
| | 9.27 |
| | 89,381 |
| | 2,087 |
| | 9.26 |
| | 88,866 |
| | 2,093 |
| | 9.34 |
|
Non-U.S. credit card | 10,002 |
| | 262 |
| | 10.64 |
| | 10,950 |
| | 280 |
| | 10.14 |
| | 11,784 |
| | 304 |
| | 10.25 |
|
Direct/Indirect consumer (3) | 80,713 |
| | 491 |
| | 2.47 |
| | 83,121 |
| | 522 |
| | 2.49 |
| | 82,669 |
| | 523 |
| | 2.51 |
|
Other consumer (4) | 1,847 |
| | 15 |
| | 3.29 |
| | 2,031 |
| | 85 |
| | 16.75 |
| | 2,110 |
| | 19 |
| | 3.44 |
|
Total consumer | 481,202 |
| | 5,416 |
| | 4.54 |
| | 495,440 |
| | 5,728 |
| | 4.60 |
| | 509,291 |
| | 5,858 |
| | 4.58 |
|
U.S. commercial | 234,907 |
| | 1,645 |
| | 2.84 |
| | 231,215 |
| | 1,648 |
| | 2.83 |
| | 230,891 |
| | 1,660 |
| | 2.86 |
|
Commercial real estate (5) | 48,234 |
| | 347 |
| | 2.92 |
| | 46,996 |
| | 360 |
| | 3.04 |
| | 46,069 |
| | 347 |
| | 2.98 |
|
Commercial lease financing | 24,495 |
| | 216 |
| | 3.53 |
| | 24,238 |
| | 199 |
| | 3.28 |
| | 24,325 |
| | 212 |
| | 3.48 |
|
Non-U.S. commercial | 83,555 |
| | 485 |
| | 2.35 |
| | 86,844 |
| | 527 |
| | 2.41 |
| | 88,665 |
| | 555 |
| | 2.48 |
|
Total commercial | 391,191 |
| | 2,693 |
| | 2.79 |
| | 389,293 |
| | 2,734 |
| | 2.79 |
| | 389,950 |
| | 2,774 |
| | 2.83 |
|
Total loans and leases | 872,393 |
| | 8,109 |
| | 3.75 |
| | 884,733 |
| | 8,462 |
| | 3.80 |
| | 899,241 |
| | 8,632 |
| | 3.82 |
|
Other earning assets | 61,441 |
| | 705 |
| | 4.66 |
| | 65,864 |
| | 739 |
| | 4.46 |
| | 65,995 |
| | 710 |
| | 4.27 |
|
Total earning assets (6) | 1,804,399 |
| | 12,182 |
| | 2.73 |
| | 1,802,121 |
| | 12,382 |
| | 2.73 |
| | 1,813,482 |
| | 13,082 |
| | 2.87 |
|
Cash and due from banks | 27,695 |
| | | | | | 27,590 |
| | | | | | 25,120 |
| | | | |
Other assets, less allowance for loan and lease losses | 306,480 |
| | | | | | 307,840 |
| | | | | | 297,507 |
| | | | |
Total assets | $ | 2,138,574 |
| | | | | | $ | 2,137,551 |
| | |
| | | | $ | 2,136,109 |
| | | | |
For footnotes see page 20.
|
| | | | | | | | | | | | | | | | | | | | | |
Table 15 |
Quarterly Average Balances and Interest Rates – FTE Basis (continued) |
| Third Quarter 2015 | | Second Quarter 2015 |
(Dollars in millions) | Average Balance | | Interest Income/ Expense | | Yield/ Rate | | Average Balance | | Interest Income/ Expense | | Yield/ Rate |
Interest-bearing liabilities | | | | | | | | | | | |
U.S. interest-bearing deposits: | | | | | | | | | | | |
Savings | $ | 46,297 |
| | $ | 2 |
| | 0.02 | % | | $ | 47,381 |
| | $ | 2 |
| | 0.02 | % |
NOW and money market deposit accounts | 545,741 |
| | 67 |
| | 0.05 |
| | 536,201 |
| | 71 |
| | 0.05 |
|
Consumer CDs and IRAs | 53,174 |
| | 38 |
| | 0.29 |
| | 55,832 |
| | 42 |
| | 0.30 |
|
Negotiable CDs, public funds and other deposits | 30,631 |
| | 26 |
| | 0.33 |
| | 29,904 |
| | 22 |
| | 0.30 |
|
Total U.S. interest-bearing deposits | 675,843 |
| | 133 |
| | 0.08 |
| | 669,318 |
| | 137 |
| | 0.08 |
|
Non-U.S. interest-bearing deposits: | | | | | | | | | | | |
Banks located in non-U.S. countries | 4,196 |
| | 7 |
| | 0.71 |
| | 5,162 |
| | 9 |
| | 0.67 |
|
Governments and official institutions | 1,654 |
| | 1 |
| | 0.33 |
| | 1,239 |
| | 1 |
| | 0.38 |
|
Time, savings and other | 53,793 |
| | 73 |
| | 0.53 |
| | 55,030 |
| | 69 |
| | 0.51 |
|
Total non-U.S. interest-bearing deposits | 59,643 |
| | 81 |
| | 0.54 |
| | 61,431 |
| | 79 |
| | 0.52 |
|
Total interest-bearing deposits | 735,486 |
| | 214 |
| | 0.12 |
| | 730,749 |
| | 216 |
| | 0.12 |
|
Federal funds purchased, securities loaned or sold under agreements to repurchase and short-term borrowings | 257,323 |
| | 597 |
| | 0.92 |
| | 252,088 |
| | 686 |
| | 1.09 |
|
Trading account liabilities | 77,443 |
| | 342 |
| | 1.75 |
| | 77,772 |
| | 335 |
| | 1.73 |
|
Long-term debt | 240,520 |
| | 1,343 |
| | 2.22 |
| | 242,230 |
| | 1,407 |
| | 2.33 |
|
Total interest-bearing liabilities (6) | 1,310,772 |
| | 2,496 |
| | 0.76 |
| | 1,302,839 |
| | 2,644 |
| | 0.81 |
|
Noninterest-bearing sources: | | | | | | | | | | | |
Noninterest-bearing deposits | 423,745 |
| | | | | | 416,040 |
| | | | |
Other liabilities | 180,583 |
| | | | | | 182,033 |
| | | | |
Shareholders' equity | 253,893 |
| | | | | | 251,054 |
| | | | |
Total liabilities and shareholders' equity | $ | 2,168,993 |
| | | | | | $ | 2,151,966 |
| | | | |
Net interest spread | | | | | 1.88 | % | | | | | | 2.14 | % |
Impact of noninterest-bearing sources | | | | | 0.22 |
| | | | | | 0.23 |
|
Net interest income/yield on earning assets | | | $ | 9,742 |
| | 2.10 | % | | | | $ | 10,716 |
| | 2.37 | % |
For footnotes see page 20.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 15 | | | | | | |
Quarterly Average Balances and Interest Rates – FTE Basis (continued) |
| First Quarter 2015 | | Fourth Quarter 2014 | | Third Quarter 2014 |
(Dollars in millions) | Average Balance | | Interest Income/ Expense | | Yield/ Rate | | Average Balance | | Interest Income/ Expense | | Yield/ Rate | | Average Balance | | Interest Income/ Expense | | Yield/ Rate |
Interest-bearing liabilities | | | | | | | | | | | | | | | | | |
U.S. interest-bearing deposits: | | | | | | | | | | | | | | | | | |
Savings | $ | 46,224 |
| | $ | 2 |
| | 0.02 | % | | $ | 45,621 |
| | $ | 1 |
| | 0.01 | % | | $ | 46,803 |
| | $ | 1 |
| | 0.01 | % |
NOW and money market deposit accounts | 531,827 |
| | 67 |
| | 0.05 |
| | 515,995 |
| | 76 |
| | 0.06 |
| | 517,043 |
| | 78 |
| | 0.06 |
|
Consumer CDs and IRAs | 58,704 |
| | 45 |
| | 0.31 |
| | 61,880 |
| | 52 |
| | 0.33 |
| | 65,579 |
| | 59 |
| | 0.35 |
|
Negotiable CDs, public funds and other deposits | 28,796 |
| | 22 |
| | 0.31 |
| | 30,950 |
| | 22 |
| | 0.29 |
| | 31,806 |
| | 27 |
| | 0.34 |
|
Total U.S. interest-bearing deposits | 665,551 |
| | 136 |
| | 0.08 |
| | 654,446 |
| | 151 |
| | 0.09 |
| | 661,231 |
| | 165 |
| | 0.10 |
|
Non-U.S. interest-bearing deposits: | | | | | | | | | | | | | | | | | |
Banks located in non-U.S. countries | 4,544 |
| | 8 |
| | 0.74 |
| | 5,415 |
| | 9 |
| | 0.63 |
| | 8,022 |
| | 21 |
| | 1.05 |
|
Governments and official institutions | 1,382 |
| | 1 |
| | 0.21 |
| | 1,647 |
| | 1 |
| | 0.18 |
| | 1,706 |
| | 1 |
| | 0.14 |
|
Time, savings and other | 54,276 |
| | 75 |
| | 0.55 |
| | 57,029 |
| | 76 |
| | 0.53 |
| | 61,331 |
| | 83 |
| | 0.54 |
|
Total non-U.S. interest-bearing deposits | 60,202 |
| | 84 |
| | 0.56 |
| | 64,091 |
| | 86 |
| | 0.53 |
| | 71,059 |
| | 105 |
| | 0.59 |
|
Total interest-bearing deposits | 725,753 |
| | 220 |
| | 0.12 |
| | 718,537 |
| | 237 |
| | 0.13 |
| | 732,290 |
| | 270 |
| | 0.15 |
|
Federal funds purchased, securities loaned or sold under agreements to repurchase and short-term borrowings | 244,134 |
| | 585 |
| | 0.97 |
| | 251,432 |
| | 615 |
| | 0.97 |
| | 255,111 |
| | 590 |
| | 0.92 |
|
Trading account liabilities | 78,787 |
| | 394 |
| | 2.03 |
| | 78,174 |
| | 350 |
| | 1.78 |
| | 84,989 |
| | 392 |
| | 1.83 |
|
Long-term debt | 240,127 |
| | 1,313 |
| | 2.20 |
| | 249,221 |
| | 1,315 |
| | 2.10 |
| | 251,772 |
| | 1,386 |
| | 2.19 |
|
Total interest-bearing liabilities (6) | 1,288,801 |
| | 2,512 |
| | 0.79 |
| | 1,297,364 |
| | 2,517 |
| | 0.77 |
| | 1,324,162 |
| | 2,638 |
| | 0.79 |
|
Noninterest-bearing sources: | | | | | | | | | | | | | | | | | |
Noninterest-bearing deposits | 404,973 |
| | | | | | 403,977 |
| | |
| | | | 395,198 |
| | | | |
Other liabilities | 199,056 |
| | | | | | 192,756 |
| | |
| | | | 178,709 |
| | | | |
Shareholders' equity | 245,744 |
| | | | | | 243,454 |
| | |
| | | | 238,040 |
| | | | |
Total liabilities and shareholders' equity | $ | 2,138,574 |
| | | | | | $ | 2,137,551 |
| | | | | | $ | 2,136,109 |
| | | | |
Net interest spread | | | | | 1.94 | % | | | | | | 1.96 | % | | | | | | 2.08 | % |
Impact of noninterest-bearing sources | | | | | 0.23 |
| | | | | | 0.22 |
| | | | | | 0.21 |
|
Net interest income/yield on earning assets | | | $ | 9,670 |
| | 2.17 | % | | | | $ | 9,865 |
| | 2.18 | % | | | | $ | 10,444 |
| | 2.29 | % |
For footnotes see page 20.
|
| | | | | | | | | | | | | | | | | | | | | |
Table 16 |
Year-to-Date Average Balances and Interest Rates – FTE Basis |
| Nine Months Ended September 30 |
| 2015 | | 2014 |
(Dollars in millions) | Average Balance | | Interest Income/ Expense | | Yield/ Rate | | Average Balance | | Interest Income/ Expense | | Yield/ Rate |
Earning assets | | | | | | | | | | | |
Interest-bearing deposits with the Federal Reserve, non-U.S. central banks and other banks | $ | 132,445 |
| | $ | 261 |
| | 0.26 | % | | $ | 115,670 |
| | $ | 234 |
| | 0.27 | % |
Time deposits placed and other short-term investments | 9,366 |
| | 105 |
| | 1.50 |
| | 11,602 |
| | 129 |
| | 1.49 |
|
Federal funds sold and securities borrowed or purchased under agreements to resell | 212,781 |
| | 774 |
| | 0.49 |
| | 224,001 |
| | 801 |
| | 0.48 |
|
Trading account assets | 138,861 |
| | 3,406 |
| | 3.28 |
| | 146,205 |
| | 3,575 |
| | 3.27 |
|
Debt securities (1) | 388,007 |
| | 6,833 |
| | 2.36 |
| | 345,194 |
| | 6,375 |
| | 2.45 |
|
Loans and leases (2): | | | | | | | | | | | |
Residential mortgage | 205,315 |
| | 5,323 |
| | 3.46 |
| | 242,034 |
| | 6,516 |
| | 3.59 |
|
Home equity | 82,404 |
| | 2,269 |
| | 3.68 |
| | 90,676 |
| | 2,531 |
| | 3.73 |
|
U.S. credit card | 88,117 |
| | 6,040 |
| | 9.17 |
| | 88,820 |
| | 6,227 |
| | 9.37 |
|
Non-U.S. credit card | 10,087 |
| | 793 |
| | 10.51 |
| | 11,700 |
| | 920 |
| | 10.51 |
|
Direct/Indirect consumer (3) | 83,481 |
| | 1,510 |
| | 2.42 |
| | 82,170 |
| | 1,577 |
| | 2.57 |
|
Other consumer (4) | 1,904 |
| | 45 |
| | 3.14 |
| | 2,029 |
| | 54 |
| | 3.56 |
|
Total consumer | 471,308 |
| | 15,980 |
| | 4.53 |
| | 517,429 |
| | 17,825 |
| | 4.60 |
|
U.S. commercial | 243,848 |
| | 5,093 |
| | 2.79 |
| | 229,822 |
| | 4,982 |
| | 2.90 |
|
Commercial real estate (5) | 50,792 |
| | 1,113 |
| | 2.93 |
| | 47,703 |
| | 1,072 |
| | 3.00 |
|
Commercial lease financing | 24,884 |
| | 595 |
| | 3.19 |
| | 24,485 |
| | 639 |
| | 3.48 |
|
Non-U.S. commercial | 88,089 |
| | 1,478 |
| | 2.24 |
| | 90,921 |
| | 1,669 |
| | 2.45 |
|
Total commercial | 407,613 |
| | 8,279 |
| | 2.71 |
| | 392,931 |
| | 8,362 |
| | 2.84 |
|
Total loans and leases | 878,921 |
| | 24,259 |
| | 3.69 |
| | 910,360 |
| | 26,187 |
| | 3.84 |
|
Other earning assets | 62,339 |
| | 2,142 |
| | 4.59 |
| | 66,215 |
| | 2,071 |
| | 4.18 |
|
Total earning assets (6) | 1,822,720 |
| | 37,780 |
| | 2.77 |
| | 1,819,247 |
| | 39,372 |
| | 2.89 |
|
Cash and due from banks | 28,726 |
| | | | | | 26,907 |
| | | | |
Other assets, less allowance for loan and lease losses | 301,843 |
| | | | | | 302,144 |
| | |
| | |
Total assets | $ | 2,153,289 |
| | | | | | $ | 2,148,298 |
| | |
| | |
| |
(1) | Yields on debt securities excluding the impact of market-related adjustments were 2.49 percent and 2.67 percent for the nine months ended September 30, 2015 and 2014. Yields on debt securities excluding the impact of market-related adjustments are a non-GAAP financial measure. The Corporation believes the use of this non-GAAP financial measure provides additional clarity in assessing its results. |
| |
(2) | Nonperforming loans are included in the respective average loan balances. Income on these nonperforming loans is generally recognized on a cost recovery basis. PCI loans were recorded at fair value upon acquisition and accrete interest income over the remaining life of the loan. |
| |
(3) | Includes non-U.S. consumer loans of $4.0 billion and $4.4 billion for the nine months ended September 30, 2015 and 2014. |
| |
(4) | Includes consumer finance loans of $633 million and $1.1 billion, consumer leases of $1.1 billion and $769 million, and consumer overdrafts of $150 million and $146 million for the nine months ended September 30, 2015 and 2014. |
| |
(5) | Includes U.S. commercial real estate loans of $47.7 billion and $46.2 billion, and non-U.S. commercial real estate loans of $3.1 billion and $1.5 billion for the nine months ended September 30, 2015 and 2014. |
| |
(6) | Interest income includes the impact of interest rate risk management contracts, which decreased interest income on the underlying assets by $27 million and $48 million for the nine months ended September 30, 2015 and 2014. Interest expense includes the impact of interest rate risk management contracts, which decreased interest expense on the underlying liabilities by $1.7 billion and $1.8 billion for the nine months ended September 30, 2015 and 2014. For additional information, see Interest Rate Risk Management for Non-trading Activities on page 118. |
|
| | | | | | | | | | | | | | | | | | | | | |
Table 16 |
Year-to-Date Average Balances and Interest Rates – FTE Basis (continued) |
| Nine Months Ended September 30 |
| 2015 | | 2014 |
(Dollars in millions) | Average Balance | | Interest Income/ Expense | | Yield/ Rate | | Average Balance | | Interest Income/ Expense | | Yield/ Rate |
Interest-bearing liabilities | | | | | | | | | | | |
U.S. interest-bearing deposits: | | | | | | | | | | | |
Savings | $ | 46,634 |
| | $ | 6 |
| | 0.02 | % | | $ | 46,489 |
| | $ | 2 |
| | 0.01 | % |
NOW and money market deposit accounts | 537,974 |
| | 205 |
| | 0.05 |
| | 519,870 |
| | 240 |
| | 0.06 |
|
Consumer CDs and IRAs | 55,883 |
| | 125 |
| | 0.30 |
| | 68,455 |
| | 212 |
| | 0.41 |
|
Negotiable CDs, public funds and other deposits | 29,784 |
| | 70 |
| | 0.32 |
| | 31,693 |
| | 85 |
| | 0.36 |
|
Total U.S. interest-bearing deposits | 670,275 |
| | 406 |
| | 0.08 |
| | 666,507 |
| | 539 |
| | 0.11 |
|
Non-U.S. interest-bearing deposits: | | | | | | | | | | | |
Banks located in non-U.S. countries | 4,633 |
| | 24 |
| | 0.70 |
| | 9,866 |
| | 52 |
| | 0.70 |
|
Governments and official institutions | 1,426 |
| | 3 |
| | 0.31 |
| | 1,772 |
| | 2 |
| | 0.13 |
|
Time, savings and other | 54,364 |
| | 217 |
| | 0.53 |
| | 61,974 |
| | 250 |
| | 0.54 |
|
Total non-U.S. interest-bearing deposits | 60,423 |
| | 244 |
| | 0.54 |
| | 73,612 |
| | 304 |
| | 0.55 |
|
Total interest-bearing deposits | 730,698 |
| | 650 |
| | 0.12 |
| | 740,119 |
| | 843 |
| | 0.15 |
|
Federal funds purchased, securities loaned or sold under agreements to repurchase and short-term borrowings | 251,231 |
| | 1,868 |
| | 0.99 |
| | 259,786 |
| | 1,963 |
| | 1.01 |
|
Trading account liabilities | 77,996 |
| | 1,071 |
| | 1.84 |
| | 90,177 |
| | 1,225 |
| | 1.82 |
|
Long-term debt | 240,960 |
| | 4,063 |
| | 2.25 |
| | 255,084 |
| | 4,385 |
| | 2.30 |
|
Total interest-bearing liabilities (6) | 1,300,885 |
| | 7,652 |
| | 0.79 |
| | 1,345,166 |
| | 8,416 |
| | 0.84 |
|
Noninterest-bearing sources: | | | | | | | | | | | |
Noninterest-bearing deposits | 414,988 |
| | | | | | 384,658 |
| | | | |
Other liabilities | 187,156 |
| | | | | | 181,668 |
| | | | |
Shareholders' equity | 250,260 |
| | | | | | 236,806 |
| | | | |
Total liabilities and shareholders' equity | $ | 2,153,289 |
| | | | | | $ | 2,148,298 |
| | | | |
Net interest spread | | | | | 1.98 | % | | | | | | 2.05 | % |
Impact of noninterest-bearing sources | | | | | 0.23 |
| | | | | | 0.22 |
|
Net interest income/yield on earning assets | | | $ | 30,128 |
| | 2.21 | % | | | | $ | 30,956 |
| | 2.27 | % |
For footnotes see page 24.
|
|
Business Segment Operations |
|
Segment Description and Basis of Presentation |
We report our results of operations through the following five business segments: Consumer Banking, Global Wealth & Investment Management (GWIM), Global Banking, Global Markets and Legacy Assets & Servicing (LAS), with the remaining operations recorded in All Other. Effective January 1, 2015, we realigned the segments with how we are managing the businesses in 2015. For more information on the segment realignment, see Note 18 – Business Segment Information to the Consolidated Financial Statements.
We prepare and evaluate segment results using certain non-GAAP financial measures. For additional information, see Supplemental Financial Data on page 16. Table 17 provides selected summary financial data for our business segments and All Other for the three and nine months ended September 30, 2015 compared to the same periods in 2014. For additional detailed information on these results, see the business segment and All Other discussions which follow.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 17 | | | | | | | | | | | | | | | |
Business Segment Results | | | | | | | | | | | | | | | |
| Three Months Ended September 30 |
| Total Revenue (1) | | Provision for Credit Losses | | Noninterest Expense | | Net Income (Loss) |
(Dollars in millions) | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
Consumer Banking | $ | 7,832 |
| | $ | 7,749 |
| | $ | 648 |
| | $ | 668 |
| | $ | 4,434 |
| | $ | 4,462 |
| | $ | 1,759 |
| | $ | 1,669 |
|
Global Wealth & Investment Management | 4,468 |
| | 4,666 |
| | (2 | ) | | (15 | ) | | 3,447 |
| | 3,405 |
| | 656 |
| | 812 |
|
Global Banking | 4,191 |
| | 4,345 |
| | 179 |
| | (64 | ) | | 2,020 |
| | 2,016 |
| | 1,277 |
| | 1,521 |
|
Global Markets | 4,071 |
| | 4,161 |
| | 42 |
| | 45 |
| | 2,683 |
| | 3,357 |
| | 1,008 |
| | 371 |
|
Legacy Assets & Servicing
| 841 |
| | 556 |
| | 6 |
| | 267 |
| | 1,143 |
| | 6,648 |
| | (196 | ) | | (5,114 | ) |
All Other | (490 | ) | | (43 | ) | | (67 | ) | | (265 | ) | | 80 |
| | 254 |
| | 4 |
| | 509 |
|
Total – FTE basis | 20,913 |
| | 21,434 |
| | 806 |
| | 636 |
| | 13,807 |
| | 20,142 |
| | 4,508 |
| | (232 | ) |
FTE adjustment | (231 | ) | | (225 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total Consolidated | $ | 20,682 |
| | $ | 21,209 |
| | $ | 806 |
| | $ | 636 |
| | $ | 13,807 |
| | $ | 20,142 |
| | $ | 4,508 |
| | $ | (232 | ) |
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30 |
| 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
Consumer Banking | $ | 22,826 |
| | $ | 23,049 |
| | $ | 1,870 |
| | $ | 2,027 |
| | $ | 13,141 |
| | $ | 13,446 |
| | $ | 4,940 |
| | $ | 4,781 |
|
Global Wealth & Investment Management | 13,558 |
| | 13,802 |
| | 36 |
| | — |
| | 10,366 |
| | 10,213 |
| | 1,995 |
| | 2,264 |
|
Global Banking | 12,567 |
| | 13,293 |
| | 452 |
| | 353 |
| | 5,952 |
| | 6,200 |
| | 3,895 |
| | 4,249 |
|
Global Markets | 12,961 |
| | 13,801 |
| | 69 |
| | 83 |
| | 8,556 |
| | 9,341 |
| | 2,944 |
| | 2,780 |
|
Legacy Assets & Servicing | 2,844 |
| | 2,042 |
| | 154 |
| | 240 |
| | 3,307 |
| | 19,287 |
| | (390 | ) | | (12,737 | ) |
All Other | (77 | ) | | 174 |
| | (230 | ) | | (647 | ) | | 1,998 |
| | 2,434 |
| | (199 | ) | | 446 |
|
Total – FTE basis | 64,679 |
| | 66,161 |
| | 2,351 |
| | 2,056 |
| | 43,320 |
| | 60,921 |
| | 13,185 |
| | 1,783 |
|
FTE adjustment | (678 | ) | | (639 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total Consolidated | $ | 64,001 |
| | $ | 65,522 |
| | $ | 2,351 |
| | $ | 2,056 |
| | $ | 43,320 |
| | $ | 60,921 |
| | $ | 13,185 |
| | $ | 1,783 |
|
| |
(1) | Total revenue is net of interest expense and is on an FTE basis which for consolidated revenue is a non-GAAP financial measure. For more information on this measure and for a corresponding reconciliation to a GAAP financial measure, see Supplemental Financial Data on page 16. |
The Corporation periodically reviews capital allocated to its businesses and allocates capital annually during the strategic and capital planning processes. We utilize a methodology that considers the effect of regulatory capital requirements in addition to internal risk-based capital models. The Corporation's internal risk-based capital models use a risk-adjusted methodology incorporating each segment's credit, market, interest rate, business and operational risk components. For more information on the nature of these risks, see Managing Risk on page 55. The capital allocated to the business segments is referred to as allocated capital, which represents a non-GAAP financial measure. For purposes of goodwill impairment testing, the Corporation utilizes allocated equity as a proxy for the carrying value of its reporting units. Allocated equity in the reporting units is comprised of allocated capital plus capital for the portion of goodwill and intangibles specifically assigned to the reporting unit.
During the latest annual planning process, we made refinements to the amount of capital allocated to each of our businesses based on multiple considerations that included, but were not limited to, risk-weighted assets measured under Basel 3 Standardized and Advanced approaches, business segment exposures and risk profile, and strategic plans. As a result of this process, in the first quarter of 2015, we adjusted the amount of capital being allocated to our business segments, primarily LAS.
For more information on the basis of presentation for business segments, including the allocation of market-related adjustments to net interest income, and reconciliations to consolidated total revenue, net income and period-end total assets, see Note 18 – Business Segment Information to the Consolidated Financial Statements.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30 | | |
| Deposits | | Consumer Lending | | Total Consumer Banking | | |
(Dollars in millions) | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 | | % Change |
Net interest income (FTE basis) | $ | 2,440 |
| | $ | 2,389 |
| | $ | 2,565 |
| | $ | 2,692 |
| | $ | 5,005 |
| | $ | 5,081 |
| | (1 | )% |
Noninterest income: | | | | | | | | | | | | | |
Card income | 2 |
| | 2 |
| | 1,246 |
| | 1,217 |
| | 1,248 |
| | 1,219 |
| | 2 |
|
Service charges | 1,056 |
| | 1,085 |
| | 1 |
| | — |
| | 1,057 |
| | 1,085 |
| | (3 | ) |
Mortgage banking income | — |
| | — |
| | 207 |
| | 205 |
| | 207 |
| | 205 |
| | 1 |
|
All other income | 131 |
| | 116 |
| | 184 |
| | 43 |
| | 315 |
| | 159 |
| | 98 |
|
Total noninterest income | 1,189 |
| | 1,203 |
| | 1,638 |
| | 1,465 |
| | 2,827 |
| | 2,668 |
| | 6 |
|
Total revenue, net of interest expense (FTE basis) | 3,629 |
| | 3,592 |
| | 4,203 |
| | 4,157 |
| | 7,832 |
| | 7,749 |
| | 1 |
|
| | | | | | | | | | | | | |
Provision for credit losses | 58 |
| | 93 |
| | 590 |
| | 575 |
| | 648 |
| | 668 |
| | (3 | ) |
Noninterest expense | 2,484 |
| | 2,480 |
| | 1,950 |
| | 1,982 |
| | 4,434 |
| | 4,462 |
| | (1 | ) |
Income before income taxes (FTE basis) | 1,087 |
| | 1,019 |
| | 1,663 |
| | 1,600 |
| | 2,750 |
| | 2,619 |
| | 5 |
|
Income tax expense (FTE basis) | 392 |
| | 368 |
| | 599 |
| | 582 |
| | 991 |
| | 950 |
| | 4 |
|
Net income | $ | 695 |
| | $ | 651 |
| | $ | 1,064 |
| | $ | 1,018 |
| | $ | 1,759 |
| | $ | 1,669 |
| | 5 |
|
| | | | | | | | | | | | | |
Net interest yield (FTE basis) | 1.75 | % | | 1.83 | % | | 5.01 | % | | 5.51 | % | | 3.45 | % | | 3.71 | % | | |
Return on average allocated capital | 23 |
| | 23 |
| | 25 |
| | 21 |
| | 24 |
| | 22 |
| | |
Efficiency ratio (FTE basis) | 68.48 |
| | 69.04 |
| | 46.37 |
| | 47.67 |
| | 56.62 |
| | 57.58 |
| | |
| | | | | | | | | | | | | |
Balance Sheet | | | | | | | | | | | | | |
| Three Months Ended September 30 | | |
Average | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 | | % Change |
Total loans and leases | $ | 5,813 |
| | $ | 6,076 |
| | $ | 200,524 |
| | $ | 191,298 |
| | $ | 206,337 |
| | $ | 197,374 |
| | 5 | % |
Total earning assets (1) | 552,639 |
| | 518,038 |
| | 203,013 |
| | 193,970 |
| | 576,226 |
| | 542,776 |
| | 6 |
|
Total assets (1) | 579,690 |
| | 544,537 |
| | 212,084 |
| | 203,541 |
| | 612,348 |
| | 578,846 |
| | 6 |
|
Total deposits | 547,726 |
| | 513,668 |
| | n/m |
| | n/m |
| | 548,895 |
| | 514,549 |
| | 7 |
|
Allocated capital | 12,000 |
| | 11,000 |
| | 17,000 |
| | 19,000 |
| | 29,000 |
| | 30,000 |
| | (3 | ) |
| |
(1) | In segments and businesses where the total of liabilities and equity exceeds assets, we allocate assets from All Other to match the segments' and businesses' liabilities and allocated shareholders' equity. As a result, total earning assets and total assets of the businesses may not equal total Consumer Banking. |
n/m = not meaningful
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Nine Months Ended September 30 | | |
| Deposits | | Consumer Lending | | Total Consumer Banking | | |
(Dollars in millions) | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 | | % Change |
Net interest income (FTE basis) | $ | 7,126 |
| | $ | 7,125 |
| | $ | 7,660 |
| | $ | 8,086 |
| | $ | 14,786 |
| | $ | 15,211 |
| | (3 | )% |
Noninterest income: | | | | | | | | | | | | | |
Card income | 8 |
| | 8 |
| | 3,613 |
| | 3,512 |
| | 3,621 |
| | 3,520 |
| | 3 |
|
Service charges | 3,055 |
| | 3,117 |
| | 1 |
| | 1 |
| | 3,056 |
| | 3,118 |
| | (2 | ) |
Mortgage banking income | — |
| | — |
| | 751 |
| | 620 |
| | 751 |
| | 620 |
| | 21 |
|
All other income | 354 |
| | 295 |
| | 258 |
| | 285 |
| | 612 |
| | 580 |
| | 6 |
|
Total noninterest income | 3,417 |
| | 3,420 |
| | 4,623 |
| | 4,418 |
| | 8,040 |
| | 7,838 |
| | 3 |
|
Total revenue, net of interest expense (FTE basis) | 10,543 |
| | 10,545 |
| | 12,283 |
| | 12,504 |
| | 22,826 |
| | 23,049 |
| | (1 | ) |
| | | | | | | | | | | | | |
Provision for credit losses | 145 |
| | 207 |
| | 1,725 |
| | 1,820 |
| | 1,870 |
| | 2,027 |
| | (8 | ) |
Noninterest expense | 7,303 |
| | 7,406 |
| | 5,838 |
| | 6,040 |
| | 13,141 |
| | 13,446 |
| | (2 | ) |
Income before income taxes (FTE basis) | 3,095 |
| | 2,932 |
| | 4,720 |
| | 4,644 |
| | 7,815 |
| | 7,576 |
| | 3 |
|
Income tax expense (FTE basis) | 1,138 |
| | 1,080 |
| | 1,737 |
| | 1,715 |
| | 2,875 |
| | 2,795 |
| | 3 |
|
Net income | $ | 1,957 |
| | $ | 1,852 |
| | $ | 2,983 |
| | $ | 2,929 |
| | $ | 4,940 |
| | $ | 4,781 |
| | 3 |
|
| | | | | | | | | | | | | |
Net interest yield (FTE basis) | 1.75 | % | | 1.85 | % | | 5.14 | % | | 5.59 | % | | 3.47 | % | | 3.77 | % | | |
Return on average allocated capital | 22 |
| | 23 |
| | 23 |
| | 21 |
| | 23 |
| | 21 |
| | |
Efficiency ratio (FTE basis) | 69.27 |
| | 70.23 |
| | 47.53 |
| | 48.31 |
| | 57.57 |
| | 58.34 |
| | |
| | | | | | | | | | | | | |
Balance Sheet | | | | | | | | | | | | | |
| Nine Months Ended September 30 | | |
Average | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 | | % Change |
Total loans and leases | $ | 5,827 |
| | $ | 6,090 |
| | $ | 196,738 |
| | $ | 190,318 |
| | $ | 202,565 |
| | $ | 196,408 |
| | 3 | % |
Total earning assets (1) | 545,804 |
| | 514,581 |
| | 199,212 |
| | 193,294 |
| | 569,136 |
| | 539,601 |
| | 5 |
|
Total assets (1) | 572,797 |
| | 541,223 |
| | 208,501 |
| | 202,673 |
| | 605,418 |
| | 575,622 |
| | 5 |
|
Total deposits | 540,849 |
| | 510,388 |
| | n/m |
| | n/m |
| | 541,969 |
| | 511,214 |
| | 6 |
|
Allocated capital | 12,000 |
| | 11,000 |
| | 17,000 |
| | 19,000 |
| | 29,000 |
| | 30,000 |
| | (3 | ) |
| | | | | | | | | | | | | |
Period end | September 30 2015 | | December 31 2014 | | September 30 2015 | | December 31 2014 | | September 30 2015 | | December 31 2014 | | % Change |
Total loans and leases | $ | 5,820 |
| | $ | 5,951 |
| | $ | 203,161 |
| | $ | 196,049 |
| | $ | 208,981 |
| | $ | 202,000 |
| | 3 | % |
Total earning assets (1) | 555,258 |
| | 526,872 |
| | 205,415 |
| | 199,097 |
| | 578,702 |
| | 551,945 |
| | 5 |
|
Total assets (1) | 582,195 |
| | 554,170 |
| | 214,928 |
| | 208,729 |
| | 615,152 |
| | 588,875 |
| | 4 |
|
Total deposits | 550,238 |
| | 523,348 |
| | n/m |
| | n/m |
| | 551,539 |
| | 524,413 |
| | 5 |
|
For footnote see page 27.
Consumer Banking, which is comprised of Deposits and Consumer Lending, offers a diversified range of credit, banking and investment products and services to consumers and small businesses. Our customers and clients have access to a franchise network that stretches coast to coast through 33 states and the District of Columbia. The franchise network includes approximately 4,700 financial centers, 16,100 ATMs, nationwide call centers, and online and mobile platforms.
Consumer Banking Results
Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014
Net income for Consumer Banking increased $90 million to $1.8 billion primarily driven by higher noninterest income, lower noninterest expense and lower provision for credit losses, partially offset by lower net interest income. Net interest income decreased $76 million to $5.0 billion as the beneficial impact of an increase in investable assets as a result of higher deposits and higher residential mortgage balances were more than offset by the impact of the allocation of ALM activities, higher funding costs and lower card yields. Noninterest income increased $159 million to $2.8 billion driven by gains on asset sales and higher card income, partially offset by lower service charges.
The provision for credit losses decreased $20 million to $648 million driven by continued improvement in credit quality primarily related to our small business and credit card portfolios. Noninterest expense decreased $28 million to $4.4 billion primarily driven by lower personnel and litigation expenses, partially offset by higher fraud costs in advance of Europay, MasterCard and Visa (EMV) chip implementation.
The return on average allocated capital was 24 percent, up from 22 percent, reflecting higher net income and a decrease in allocated capital. For more information on capital allocated to the business segments, see Business Segment Operations on page 25.
Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014
Net income for Consumer Banking increased $159 million to $4.9 billion primarily driven by lower noninterest expense, higher noninterest income and lower provision for credit losses, partially offset by lower net interest income. Net interest income decreased $425 million to $14.8 billion primarily due to the same factors as described in the three-month discussion above. Noninterest income increased $202 million to $8.0 billion driven by higher mortgage banking income from improved production margins, and higher card income, partially offset by lower service charges.
The provision for credit losses decreased $157 million to $1.9 billion primarily driven by the same factor as described in the three-month discussion above. Noninterest expense decreased $305 million to $13.1 billion primarily driven by the same factors as described in the three-month discussion above.
The return on average allocated capital was 23 percent, up from 21 percent, driven by the same factors as described in the three-month discussion above.
Deposits
Deposits includes the results of consumer deposit activities which consist of a comprehensive range of products provided to consumers and small businesses. Our deposit products include traditional savings accounts, money market savings accounts, CDs and IRAs, noninterest- and interest-bearing checking accounts, as well as investment accounts and products. The revenue is allocated to the deposit products using our funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics. Deposits generates fees such as account service fees, non-sufficient funds fees, overdraft charges and ATM fees, as well as investment and brokerage fees from Merrill Edge accounts. Merrill Edge is an integrated investing and banking service targeted at customers with less than $250,000 in investable assets. Merrill Edge provides investment advice and guidance, client brokerage asset services, a self-directed online investing platform and key banking capabilities including access to the Corporation's network of financial centers and ATMs.
Deposits includes the net impact of migrating customers and their related deposit and brokerage asset balances between Deposits and GWIM as well as other client-managed businesses. For more information on the migration of customer balances to or from GWIM, see GWIM on page 33.
Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014
Net income for Deposits increased $44 million to $695 million driven by higher net interest income and lower provision for credit losses, partially offset by lower noninterest income. Net interest income increased $51 million to $2.4 billion primarily due to the beneficial impact of an increase in investable assets as a result of higher deposits, partially offset by the impact of the allocation of ALM activities. Noninterest income of $1.2 billion remained relatively unchanged.
The provision for credit losses decreased $35 million to $58 million driven by continued improvement in credit quality in the small business portfolio. Noninterest expense of $2.5 billion remained relatively unchanged.
Average deposits increased $34.1 billion to $547.7 billion driven by a continuing customer shift to more liquid products in the low rate environment. Growth in checking, traditional savings and money market savings of $45.2 billion was partially offset by a decline in time deposits of $11.0 billion. As a result of our continued pricing discipline and the shift in the mix of deposits, the rate paid on average deposits declined by one bp to five bps.
Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014
Net income for Deposits increased $105 million to $2.0 billion driven by lower noninterest expense and provision for credit losses. Net interest income of $7.1 billion remained relatively unchanged as the beneficial impact of an increase in investable assets as a result of higher deposits was offset by the impact of the allocation of ALM activities. Noninterest income of $3.4 billion remained relatively unchanged.
The provision for credit losses decreased $62 million to $145 million driven by the same factor as described in the three-month discussion above. Noninterest expense decreased $103 million to $7.3 billion due to lower operating and personnel expenses.
Average deposits increased $30.5 billion to $540.8 billion driven by a continuing customer shift to more liquid products in the low rate environment.
|
| | | | | | | | | | | | | |
Key Statistics – Deposits | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2015 | | 2014 | | 2015 | | 2014 |
Total deposit spreads (excludes noninterest costs) | 1.64 | % | | 1.61 | % | | 1.63 | % | | 1.59 | % |
| | | | | | | |
Period end | | | | | | | |
Client brokerage assets (in millions) | | | | | $ | 117,210 |
| | $ | 108,533 |
|
Online banking active accounts (units in thousands) | | | | | 31,627 |
| | 30,822 |
|
Mobile banking active accounts (units in thousands) | | | | | 18,398 |
| | 16,107 |
|
Financial centers | | | | | 4,741 |
| | 4,947 |
|
ATMs | | | | | 16,062 |
| | 15,671 |
|
Client brokerage assets increased $8.7 billion driven by strong account flows, partially offset by lower market valuations. Mobile banking active accounts increased 2.3 million reflecting continuing changes in our customers' banking preferences. The number of financial centers declined 206, driven by changes in customer preferences to self-service options and as we continue to optimize our consumer banking network and improve our cost-to-serve.
Consumer Lending
Consumer Lending offers products to consumers and small businesses across the U.S. The products offered include credit and debit cards, residential mortgages and home equity loans, and direct and indirect loans such as automotive, marine, aircraft, recreational vehicle and consumer personal loans. In addition to earning net interest spread revenue on its lending activities, Consumer Lending generates interchange revenue from credit and debit card transactions, late fees, cash advance fees, annual credit card fees, mortgage banking fee income and other miscellaneous fees. Consumer Lending products are available to our customers through our retail network, direct telephone, and online and mobile channels.
Consumer Lending includes the net impact of migrating customers and their related loan balances between Consumer Lending and GWIM. For more information on the migration of customer balances to or from GWIM, see GWIM on page 33.
Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014
Net income for Consumer Lending increased $46 million to $1.1 billion primarily due to higher noninterest income and lower noninterest expense, partially offset by lower net interest income and higher provision for credit losses. Net interest income decreased $127 million to $2.6 billion driven by higher funding costs, lower card yields and lower average card loan balances, and the impact of the allocation of ALM activities, partially offset by higher residential mortgage balances. Noninterest income increased $173 million to $1.6 billion due to gains on asset sales and higher card income.
The provision for credit losses increased $15 million to $590 million as continued credit quality improvement in the small business and credit card portfolios was more than offset by increased provision expense within the home loans portfolio. Noninterest expense of $2.0 billion remained relatively unchanged.
Average loans increased $9.2 billion to $200.5 billion primarily driven by increases in residential mortgages and consumer vehicle loans, partially offset by lower home equity loans and continued run-off of non-core portfolios. Beginning with new originations in 2014, we retain certain residential mortgages in Consumer Banking, consistent with where the overall relationship is managed; previously such mortgages were in All Other.
Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014
Net income for Consumer Lending increased $54 million to $3.0 billion due to higher noninterest income, lower noninterest expense and lower provision for credit losses, partially offset by lower net interest income. Net interest income decreased $426 million to $7.7 billion driven by the same factors as described in the three-month discussion above. Noninterest income increased $205 million to $4.6 billion due to higher mortgage banking income from improved production margins, and card income.
The provision for credit losses decreased $95 million to $1.7 billion driven by continued credit quality improvement within the small business and credit card portfolios. Noninterest expense decreased $202 million to $5.8 billion primarily driven by lower personnel expense. Average loans increased $6.4 billion to $196.7 billion primarily driven by the same factors as described in the three-month discussion above.
|
| | | | | | | | | | | | | | | |
Key Statistics – Consumer Lending | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in millions) | 2015 | | 2014 | | 2015 | | 2014 |
Total U.S. credit card (1) | | | | | | | |
Gross interest yield | 9.15 | % | | 9.34 | % | | 9.17 | % | | 9.37 | % |
Risk-adjusted margin | 9.54 |
| | 9.33 |
| | 9.17 |
| | 9.26 |
|
New accounts (in thousands) | 1,257 |
| | 1,202 |
| | 3,713 |
| | 3,357 |
|
Purchase volumes | $ | 56,471 |
| | $ | 53,784 |
| | $ | 162,625 |
| | $ | 156,231 |
|
Debit card purchase volumes | $ | 69,289 |
| | $ | 67,990 |
| | $ | 206,941 |
| | $ | 203,372 |
|
| |
(1) | Total U.S. credit card includes portfolios in Consumer Banking and GWIM. |
During the three months ended September 30, 2015, the total U.S. credit card risk-adjusted margin increased 21 bps compared to the same period in 2014 due to a gain on an asset sale in the current-year period. During the nine months ended September 30, 2015, the total U.S. credit card risk-adjusted margin decreased 9 bps compared to the same period in 2014 due to a decrease in net interest margin and the net impact of gains on asset sales, partially offset by an improvement in credit quality in the U.S. Card portfolio. Total U.S. credit card purchase volumes increased $2.7 billion to $56.5 billion, and $6.4 billion to $162.6 billion, and debit card purchase volumes increased $1.3 billion to $69.3 billion, and $3.6 billion to $206.9 billion, reflecting higher levels of consumer spending.
Mortgage banking income is earned primarily in Consumer Banking and LAS. Mortgage banking income in Consumer Lending consists mainly of core production income, which is comprised primarily of revenue from the fair value gains and losses recognized on our interest rate lock commitments (IRLCs) and loans held-for-sale (LHFS), the related secondary market execution, and costs related to representations and warranties in the sales transactions along with other obligations incurred in the sales of mortgage loans.
The table below summarizes the components of mortgage banking income.
|
| | | | | | | | | | | | | | | |
Mortgage Banking Income | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in millions) | 2015 | | 2014 | | 2015 | | 2014 |
Consumer Lending: | | | | | | | |
Core production revenue | $ | 221 |
| | $ | 239 |
| | $ | 794 |
| | $ | 661 |
|
Representations and warranties provision | 2 |
| | (15 | ) | | 9 |
| | 14 |
|
Other consumer mortgage banking income (1) | (16 | ) | | (19 | ) | | (52 | ) | | (55 | ) |
Total Consumer Lending mortgage banking income | 207 |
| | 205 |
| | 751 |
| | 620 |
|
LAS mortgage banking income (2) | 266 |
| | 152 |
| | 1,409 |
| | 812 |
|
Eliminations (3) | (66 | ) | | (85 | ) | | (58 | ) | | (221 | ) |
Total consolidated mortgage banking income | $ | 407 |
| | $ | 272 |
| | $ | 2,102 |
| | $ | 1,211 |
|
| |
(1) | Primarily relates to intercompany charges for loan servicing activities provided by LAS. |
| |
(2) | Amounts for LAS are included in this Consumer Banking table to show the components of consolidated mortgage banking income. |
| |
(3) | Includes the effect of transfers of certain mortgage loans from Consumer Banking to the ALM portfolio included in All Other and intercompany charges for loan servicing. |
Core production revenue for the three months ended September 30, 2015 decreased $18 million to $221 million compared to the same period in 2014 due to a decrease in production volume to be sold, resulting from a decision to retain certain residential mortgage loans in Consumer Banking. Core production revenue for the nine months ended September 30, 2015 increased $133 million to $794 million compared to the same period in 2014 primarily due to an increase in margins.
|
| | | | | | | | | | | | | | | |
Key Statistics | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in millions) | 2015 | | 2014 | | 2015 | | 2014 |
Loan production (1): | | | | | | | |
Total (2): | | | | | | | |
First mortgage | $ | 13,711 |
| | $ | 11,725 |
| | $ | 43,386 |
| | $ | 31,674 |
|
Home equity | 3,140 |
| | 3,225 |
| | 9,566 |
| | 7,813 |
|
Consumer Banking: | | | | | | | |
First mortgage | $ | 10,027 |
| | $ | 8,861 |
| | $ | 31,146 |
| | $ | 24,024 |
|
Home equity | 2,841 |
| | 2,970 |
| | 8,797 |
| | 7,156 |
|
| |
(1) | The above loan production amounts represent the unpaid principal balance of loans and in the case of home equity, the principal amount of the total line of credit. |
| |
(2) | In addition to loan production in Consumer Banking, there is also first mortgage and home equity loan production in GWIM. |
First mortgage loan originations in Consumer Banking and for the total Corporation increased for the three and nine months ended September 30, 2015 compared to the same periods in 2014 reflecting growth in the overall mortgage market as lower interest rates beginning in late 2014 drove an increase in refinances.
During the three months ended September 30, 2015, 54 percent of the total Corporation first mortgage production volume was for refinance originations and 46 percent was for purchase originations compared to 57 percent and 43 percent for the same period in 2014. Home Affordable Refinance Program (HARP) originations were two percent of all refinance originations compared to five percent for the same period in 2014. Making Home Affordable non-HARP originations were eight percent of all refinance originations compared to 15 percent for the same period in 2014. The remaining 90 percent of refinance originations were conventional refinances compared to 80 percent for the same period in 2014.
During the nine months ended September 30, 2015, 63 percent of the total Corporation first mortgage production volume was for refinance originations and 37 percent was for purchase originations compared to 58 percent and 42 percent for the same period in 2014. HARP originations were three percent of all refinance originations compared to seven percent for the same period in 2014. Making Home Affordable non-HARP originations were nine percent of all refinance originations compared to 18 percent for the same period in 2014. The remaining 88 percent of refinance originations were conventional refinances compared to 75 percent for the same period in 2014.
Home equity production for the total Corporation was $3.1 billion and $9.6 billion for the three and nine months ended September 30, 2015 compared to $3.2 billion and $7.8 billion for the same periods in 2014, with the nine-month increase due to a higher demand in the market based on improving housing trends, and increased market share driven by improved financial center engagement with customers and more competitive pricing.
|
|
Global Wealth & Investment Management |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30 | | | | Nine Months Ended September 30 | | |
(Dollars in millions) | 2015 | | 2014 | | % Change | | 2015 |
| 2014 | | % Change |
Net interest income (FTE basis) | $ | 1,376 |
| | $ | 1,459 |
| | (6 | )% | | $ | 4,086 |
| | $ | 4,430 |
| | (8 | )% |
Noninterest income: | | | | | | | | | | | |
Investment and brokerage services | 2,682 |
| | 2,713 |
| | (1 | ) | | 8,154 |
| | 7,959 |
| | 2 |
|
All other income | 410 |
| | 494 |
| | (17 | ) | | 1,318 |
| | 1,413 |
| | (7 | ) |
Total noninterest income | 3,092 |
| | 3,207 |
| | (4 | ) | | 9,472 |
| | 9,372 |
| | 1 |
|
Total revenue, net of interest expense (FTE basis) | 4,468 |
| | 4,666 |
| | (4 | ) | | 13,558 |
| | 13,802 |
| | (2 | ) |
| | | | | | | | | | | |
Provision for credit losses | (2 | ) | | (15 | ) | | (87 | ) | | 36 |
| | — |
| | n/m |
|
Noninterest expense | 3,447 |
| | 3,405 |
| | 1 |
| | 10,366 |
| | 10,213 |
| | 1 |
|
Income before income taxes (FTE basis) | 1,023 |
| | 1,276 |
| | (20 | ) | | 3,156 |
| | 3,589 |
| | (12 | ) |
Income tax expense (FTE basis) | 367 |
| | 464 |
| | (21 | ) | | 1,161 |
| | 1,325 |
| | (12 | ) |
Net income | $ | 656 |
| | $ | 812 |
| | (19 | ) | | $ | 1,995 |
| | $ | 2,264 |
| | (12 | ) |
| | | | | | | | | | | |
Net interest yield (FTE basis) | 2.12 | % | | 2.33 | % | | | | 2.14 | % | | 2.38 | % | | |
Return on average allocated capital | 22 |
| | 27 |
| | | | 22 |
| | 25 |
| | |
Efficiency ratio (FTE basis) | 77.14 |
| | 72.98 |
| | | | 76.46 |
| | 73.99 |
| | |
| | | | | | | | | | | |
Balance Sheet | | | | | | | | | | | |
| Three Months Ended September 30 | | | | Nine Months Ended September 30 | | |
Average | 2015 | | 2014 | | % Change | | 2015 | | 2014 | | % Change |
Total loans and leases | $ | 133,168 |
| | $ | 121,002 |
| | 10 | % | | $ | 129,881 |
| | $ | 118,505 |
| | 10 | % |
Total earning assets | 257,344 |
| | 248,223 |
| | 4 |
| | 255,498 |
| | 249,102 |
| | 3 |
|
Total assets | 274,192 |
| | 266,324 |
| | 3 |
| | 272,715 |
| | 267,779 |
| | 2 |
|
Total deposits | 243,980 |
| | 239,352 |
| | 2 |
| | 242,507 |
| | 240,716 |
| | 1 |
|
Allocated capital | 12,000 |
| | 12,000 |
| | — |
| | 12,000 |
| | 12,000 |
| | — |
|
| | | | | | | | | | | |
Period end | | | | | | | September 30 2015 | | December 31 2014 | | % Change |
Total loans and leases | | | | | | | $ | 134,630 |
| | $ | 125,431 |
| | 7 | % |
Total earning assets | | | | | | | 262,870 |
| | 256,519 |
| | 2 |
|
Total assets | | | | | | | 279,155 |
| | 274,887 |
| | 2 |
|
Total deposits | | | | | | | 246,172 |
| | 245,391 |
| | — |
|
n/m = not meaningful
GWIM consists of two primary businesses: Merrill Lynch Global Wealth Management (MLGWM) and U.S. Trust, Bank of America Private Wealth Management (U.S. Trust).
MLGWM's advisory business provides a high-touch client experience through a network of financial advisors focused on clients with over $250,000 in total investable assets. MLGWM provides tailored solutions to meet our clients' needs through a full set of investment management, brokerage, banking and retirement products.
U.S. Trust, together with MLGWM's Private Banking & Investments Group, provides comprehensive wealth management solutions targeted to high net worth and ultra high net worth clients, as well as customized solutions to meet clients' wealth structuring, investment management, trust and banking needs, including specialty asset management services.
Client assets managed under advisory and/or discretion of GWIM are AUM and are typically held in diversified portfolios. The majority of client AUM have an investment strategy with a duration of greater than one year and are, therefore, considered long-term AUM. Fees earned on long-term AUM are calculated as a percentage of total AUM. The asset management fees charged to clients are dependent on various factors, but are generally driven by the breadth of the client's relationship and generally range from 50 to 150 bps on their total AUM. The net client long-term AUM flows represent the net change in clients' long-term AUM balances over a specified period of time, excluding market appreciation/depreciation and other adjustments.
Client assets under advisory and discretion of GWIM in which the investment strategy seeks current income, while maintaining liquidity and capital preservation, are considered liquidity AUM. The duration of these strategies is primarily less than one year. The change in AUM balances from the prior-year periods is primarily the net client flows for liquidity AUM.
Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014
Net income for GWIM decreased $156 million to $656 million driven by declines in both net interest income and noninterest income. Net interest income decreased $83 million to $1.4 billion due to the impact of the allocation of ALM activities, partially offset by the impact of loan and deposit growth. Noninterest income, primarily investment and brokerage services income, decreased $115 million to $3.1 billion driven by lower transactional revenue, resulting in part from the ongoing migration of clients from brokerage to managed relationships, as well as lower markets and muted new issue activity, partially offset by increased asset management fees due to the impact of long-term AUM flows. Noninterest expense increased $42 million to $3.4 billion primarily due to higher litigation-related costs and continued investment in client-facing professionals.
Return on average allocated capital was 22 percent, down from 27 percent, due to a decrease in net income. For more information on capital allocated to the business segments, see Business Segment Operations on page 25.
Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014
Net income for GWIM decreased $269 million to $2.0 billion driven by a decrease in revenue and an increase in noninterest expense. Net interest income decreased $344 million to $4.1 billion driven by the same factors as described in the three-month discussion above. Noninterest income, primarily investment and brokerage services income, increased $100 million to $9.5 billion, driven by increased asset management fees due to the impact of long-term AUM flows and higher market levels, partially offset by lower transactional revenue. Noninterest expense increased $153 million to $10.4 billion primarily due to higher revenue-related incentive compensation and investment in client-facing professionals.
Return on average allocated capital was 22 percent, down from 25 percent, due to a decrease in net income.
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| | | | | | | | | | | | | | | |
Key Indicators and Metrics | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in millions, except as noted) | 2015 | | 2014 | | 2015 | | 2014 |
| | | | | | | |
Revenue by Business | | | | | | | |
Merrill Lynch Global Wealth Management | $ | 3,694 |
| | $ | 3,874 |
| | $ | 11,234 |
| | $ | 11,429 |
|
U.S. Trust | 756 |
| | 775 |
| | 2,271 |
| | 2,326 |
|
Other (1) | 18 |
| | 17 |
| | 53 |
| | 47 |
|
Total revenue, net of interest expense (FTE basis) | $ | 4,468 |
| | $ | 4,666 |
| | $ | 13,558 |
| | $ | 13,802 |
|
| | | | | | | |
Client Balances by Business, at period end | | | | | | | |
Merrill Lynch Global Wealth Management | | | | | $ | 1,942,623 |
| | $ | 2,004,391 |
|
U.S. Trust | | | | | 375,751 |
| | 381,054 |
|
Other (1) | | | | | 78,110 |
| | 76,640 |
|
Total client balances | | | | | $ | 2,396,484 |
| | $ | 2,462,085 |
|
| | | | | | | |
Client Balances by Type, at period end | | | | | | | |
Long-term assets under management | | | | | $ | 798,887 |
| | $ | 811,403 |
|
Liquidity assets under management | | | | | 78,106 |
| | 76,603 |
|
Assets under management | | | | | 876,993 |
| | 888,006 |
|
Brokerage assets | | | | | 1,026,355 |
| | 1,073,858 |
|
Assets in custody | | | | | 109,196 |
| | 135,886 |
|
Deposits | | | | | 246,172 |
| | 238,710 |
|
Loans and leases (2) | | | | | 137,768 |
| | 125,625 |
|
Total client balances | | | | | $ | 2,396,484 |
| | $ | 2,462,085 |
|
| | | | | | | |
Assets Under Management Rollforward | | | | | | | |
Assets under management, beginning balance | $ | 930,360 |
| | $ | 878,741 |
| | $ | 902,872 |
| | $ | 821,449 |
|
Net long-term client flows | 4,448 |
| | 11,168 |
| | 27,695 |
| | 40,420 |
|
Net liquidity client flows | (3,210 | ) | | 5,910 |
| | 1,320 |
| | 3,616 |
|
Market valuation/other | (54,605 | ) | | (7,813 | ) | | (54,894 | ) | | 22,521 |
|
Total assets under management, ending balance | $ | 876,993 |
| | $ | 888,006 |
| | $ | 876,993 |
| | $ | 888,006 |
|
| | | | | | | |
Associates, at period end (3) | | | | | | | |
Number of financial advisors | | | | | 16,605 |
| | 15,867 |
|
Total wealth advisors | | | | | 18,037 |
| | 17,039 |
|
Total client-facing professionals | | | | | 20,535 |
| | 19,727 |
|
| | | | | | | |
Merrill Lynch Global Wealth Management Metrics | | | | | | | |
Financial advisor productivity (4) (in thousands) | $ | 1,000 |
| | $ | 1,077 |
| | $ | 1,027 |
| | $ | 1,064 |
|
| | | | | | | |
U.S. Trust Metrics, at period end | | | | | | | |
Client-facing professionals | | | | | 2,178 |
| | 2,135 |
|
| |
(1) | Includes the results of BofA Global Capital Management, the cash management division of Bank of America, and certain administrative items. |
| |
(2) | Includes margin receivables which are classified in customer and other receivables on the Consolidated Balance Sheet. |
| |
(3) | Includes financial advisors in the Consumer Banking segment of 2,042 and 1,868 at September 30, 2015 and 2014. |
| |
(4) | Financial advisor productivity is defined as annualized Merrill Lynch Global Wealth Management total revenue divided by the total number of financial advisors (excluding financial advisors in the Consumer Banking segment). Total revenue excludes the allocation of certain ALM activities. |
Client balances decreased $65.6 billion, or three percent, to $2.4 trillion driven by lower market levels, partially offset by positive long-term AUM flows.
The number of wealth advisors increased six percent, due to continued investment in the advisor development programs, improved competitive recruiting and near historically low advisor attrition levels.
Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014
Revenue from MLGWM of $3.7 billion decreased five percent driven by declines in both net interest income and noninterest income. Net interest income decreased due to the impact of the allocation of ALM activities, partially offset by the impact of loan and deposit growth. Noninterest income decreased driven by lower transactional revenue, partially offset by increased asset management fees due to the impact of long-term AUM flows.
Revenue from U.S. Trust of $756 million decreased two percent primarily driven by the impact of the allocation of ALM activities.
Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014
Revenue from MLGWM of $11.2 billion and U.S. Trust of $2.3 billion were each down two percent due to lower net interest income due to the impact of the allocation of ALM activities, partially offset by higher noninterest income driven by long-term AUM flows and higher market levels.
GWIM results are impacted by the net migration of clients and their corresponding deposit, loan and brokerage balances primarily to or from Consumer Banking, as presented in the table below. Migrations result from the movement of clients between business segments to better align with client needs.
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| | | | | | | | | | | | | | | |
Net Migration Summary | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in millions) | 2015 | | 2014 | | 2015 | | 2014 |
Total deposits, net – to (from) GWIM | $ | 697 |
| | $ | (41 | ) | | $ | 169 |
| | $ | 1,794 |
|
Total loans, net – to (from) GWIM | (15 | ) | | (40 | ) | | (69 | ) | | (58 | ) |
Total brokerage, net – to (from) GWIM | (446 | ) | | (698 | ) | | (1,703 | ) | | (1,408 | ) |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30 | | | | Nine Months Ended September 30 | | |
(Dollars in millions) | 2015 | | 2014 | | % Change | | 2015 |
| 2014 | | % Change |
Net interest income (FTE basis) | $ | 2,345 |
| | $ | 2,450 |
| | (4 | )% | | $ | 6,818 |
| | $ | 7,396 |
| | (8 | )% |
Noninterest income: | | | | | | | | | | | |
Service charges | 746 |
| | 730 |
| | 2 |
| | 2,184 |
| | 2,188 |
| | — |
|
Investment banking fees | 752 |
| | 727 |
| | 3 |
| | 2,381 |
| | 2,383 |
| | — |
|
All other income | 348 |
| | 438 |
| | (21 | ) | | 1,184 |
| | 1,326 |
| | (11 | ) |
Total noninterest income | 1,846 |
| | 1,895 |
| | (3 | ) | | 5,749 |
| | 5,897 |
| | (3 | ) |
Total revenue, net of interest expense (FTE basis) | 4,191 |
| | 4,345 |
| | (4 | ) | | 12,567 |
| | 13,293 |
| | (5 | ) |
| | | | | | | | | | | |
Provision for credit losses | 179 |
| | (64 | ) | | n/m |
| | 452 |
| | 353 |
| | 28 |
|
Noninterest expense | 2,020 |
| | 2,016 |
| | — |
| | 5,952 |
| | 6,200 |
| | (4 | ) |
Income before income taxes (FTE basis) | 1,992 |
| | 2,393 |
| | (17 | ) | | 6,163 |
| | 6,740 |
| | (9 | ) |
Income tax expense (FTE basis) | 715 |
| | 872 |
| | (18 | ) | | 2,268 |
| | 2,491 |
| | (9 | ) |
Net income | $ | 1,277 |
| | $ | 1,521 |
| | (16 | ) | | $ | 3,895 |
| | $ | 4,249 |
| | (8 | ) |
| | | | | | | | | | | |
Net interest yield (FTE basis) | 2.86 | % | | 3.03 | % | | | | 2.85 | % | | 3.13 | % | | |
Return on average allocated capital | 14 |
| | 18 |
| | | | 15 |
| | 17 |
| | |
Efficiency ratio (FTE basis) | 48.17 |
| | 46.39 |
| | | | 47.36 |
| | 46.65 |
| | |
| | | | | | | | | | | |
Balance Sheet | | | | | | | | | | | |
| Three Months Ended September 30 | | | | Nine Months Ended September 30 | | |
Average | 2015 | | 2014 | | % Change | | 2015 | | 2014 | | % Change |
Total loans and leases | $ | 310,043 |
| | $ | 283,264 |
| | 9 | % | | $ | 300,141 |
| | $ | 286,309 |
| | 5 | % |
Total earning assets | 325,740 |
| | 320,931 |
| | 1 |
| | 319,899 |
| | 315,713 |
| | 1 |
|
Total assets | 370,246 |
| | 364,565 |
| | 2 |
| | 364,659 |
| | 361,306 |
| | 1 |
|
Total deposits | 296,321 |
| | 291,927 |
| | 2 |
| | 290,327 |
| | 286,633 |
| | 1 |
|
Allocated capital | 35,000 |
| | 33,500 |
| | 4 |
| | 35,000 |
| | 33,500 |
| | 4 |
|
| | | | | | | | | | | |
Period end | | | | | | | September 30 2015 | | December 31 2014 | | % Change |
Total loans and leases | | | | | | | $ | 315,224 |
| | $ | 288,905 |
| | 9 | % |
Total earning assets | | | | | | | 327,313 |
| | 308,419 |
| | 6 |
|
Total assets | | | | | | | 372,363 |
| | 353,637 |
| | 5 |
|
Total deposits | | | | | | | 297,644 |
| | 279,792 |
| | 6 |
|
n/m = not meaningful
Global Banking, which includes Global Corporate Banking, Global Commercial Banking, Business Banking and Global Investment Banking, provides a wide range of lending-related products and services, integrated working capital management and treasury solutions to clients, and underwriting and advisory services through our network of offices and client relationship teams. Our lending products and services include commercial loans, leases, commitment facilities, trade finance, real estate lending and asset-based lending. Our treasury solutions business includes treasury management, foreign exchange and short-term investing options. We also provide investment banking products to our clients such as debt and equity underwriting and distribution, and merger-related and other advisory services. Underwriting debt and equity issuances, fixed-income and equity research, and certain market-based activities are executed through our global broker-dealer affiliates which are our primary dealers in several countries. Within Global Banking, Global Commercial Banking clients generally include middle-market companies, commercial real estate firms, auto dealerships and not-for-profit companies. Global Corporate Banking clients generally include large global corporations, financial institutions and leasing clients. Business Banking clients include mid-sized U.S.-based businesses requiring customized and integrated financial advice and solutions.
Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014
Net income for Global Banking decreased $244 million to $1.3 billion primarily driven by an increase in the provision for credit losses and lower revenue.
Revenue decreased $154 million to $4.2 billion primarily due to lower net interest income. The decline in net interest income reflects the impact of the allocation of ALM activities and increased liquidity costs as well as loan spread compression, partially offset by loan growth. Noninterest income decreased $49 million to $1.8 billion primarily driven by higher losses on loans accounted for under the fair value option.
The provision for credit losses increased $243 million to $179 million from a provision benefit of $64 million in the prior-year period primarily driven by increases in loan balances combined with reserve releases in the prior-year period. Noninterest expense of $2.0 billion remained relatively unchanged as lower litigation expense was offset by investment in commercial and business bankers.
The return on average allocated capital was 14 percent, down from 18 percent, due to increased capital allocations and lower net income. For more information on capital allocated to the business segments, see Business Segment Operations on page 25.
Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014
Net income for Global Banking decreased $354 million to $3.9 billion primarily driven by lower revenue and higher provision for credit losses, partially offset by lower noninterest expense.
Revenue decreased $726 million to $12.6 billion primarily due to lower net interest income driven by the same factors as described in the three-month discussion above. Noninterest income decreased $148 million to $5.7 billion primarily driven by lower gains within the leasing business and a gain in the prior period on the sale of an equity investment in Global Commercial Banking.
The provision for credit losses increased $99 million to $452 million, driven by the same factors as described in the three-month discussion above. Noninterest expense decreased $248 million to $6.0 billion primarily due to lower litigation expense and technology initiative costs.
The return on average allocated capital was 15 percent, down from 17 percent, driven by the same factors as described in the three-month discussion above.
|
|
Global Corporate, Global Commercial and Business Banking |
Global Corporate, Global Commercial and Business Banking each include Business Lending and Global Transaction Services activities. Business Lending includes various lending-related products and services, and related hedging activities, including commercial loans, leases, commitment facilities, trade finance, real estate lending and asset-based lending. Global Transaction Services includes deposits, treasury management, credit card, foreign exchange and short-term investment products. The table below presents a summary of the results, which exclude certain capital markets activity in Global Banking.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Global Corporate, Global Commercial and Business Banking | | | | | | | | |
| Three Months Ended September 30 |
| Global Corporate Banking | | Global Commercial Banking | | Business Banking | | Total |
(Dollars in millions) | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
Revenue | | | | | | | | | | | | | | | |
Business Lending | $ | 816 |
| | $ | 878 |
| | $ | 984 |
| | $ | 934 |
| | $ | 89 |
| | $ | 91 |
| | $ | 1,889 |
| | $ | 1,903 |
|
Global Transaction Services | 715 |
| | 766 |
| | 673 |
| | 719 |
| | 181 |
| | 179 |
| | 1,569 |
| | 1,664 |
|
Total revenue, net of interest expense | $ | 1,531 |
| | $ | 1,644 |
| | $ | 1,657 |
| | $ | 1,653 |
| | $ | 270 |
| | $ | 270 |
| | $ | 3,458 |
| | $ | 3,567 |
|
| | | | | | | | | | | | | | | |
Balance Sheet | | | | | | | | | | | | | | | |
Average | | | | | | | | | | | | | | | |
Total loans and leases | $ | 142,634 |
| | $ | 127,513 |
| | $ | 150,494 |
| | $ | 139,499 |
| | $ | 16,681 |
| | $ | 16,238 |
| | $ | 309,809 |
| | $ | 283,250 |
|
Total deposits | 138,925 |
| | 144,930 |
| | 122,976 |
| | 117,002 |
| | 34,425 |
| | 29,995 |
| | 296,326 |
| | 291,927 |
|
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30 |
| 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
Revenue | | | | | | | | | | | | | | | |
Business Lending | $ | 2,413 |
| | $ | 2,620 |
| | $ | 2,900 |
| | $ | 2,951 |
| | $ | 263 |
| | $ | 272 |
| | $ | 5,576 |
| | $ | 5,843 |
|
Global Transaction Services | 2,079 |
| | 2,245 |
| | 1,954 |
| | 2,154 |
| | 517 |
| | 532 |
| | 4,550 |
| | 4,931 |
|
Total revenue, net of interest expense | $ | 4,492 |
| | $ | 4,865 |
| | $ | 4,854 |
| | $ | 5,105 |
| | $ | 780 |
| | $ | 804 |
| | $ | 10,126 |
| | $ | 10,774 |
|
| | | | | | | | | | | | | | | |
Balance Sheet | | | | | | | | | | | | | | | |
Average | | | | | | | | | | | | | | | |
Total loans and leases | $ | 136,946 |
| | $ | 129,505 |
| | $ | 146,518 |
| | $ | 140,436 |
| | $ | 16,579 |
| | $ | 16,353 |
| | $ | 300,043 |
| | $ | 286,294 |
|
Total deposits | 137,157 |
| | 141,655 |
| | 120,238 |
| | 115,640 |
| | 32,935 |
| | 29,340 |
| | 290,330 |
| | 286,635 |
|
| | | | | | | | | | | | | | | |
Period end | | | | | | | | | | | | | | | |
Total loans and leases | $ | 144,471 |
| | $ | 129,969 |
| | $ | 153,911 |
| | $ | 138,581 |
| | $ | 16,808 |
| | $ | 16,356 |
| | $ | 315,190 |
| | $ | 284,906 |
|
Total deposits | 140,177 |
| | 135,744 |
| | 122,688 |
| | 115,631 |
| | 34,784 |
| | 30,950 |
| | 297,649 |
| | 282,325 |
|
Business Lending revenue of $1.9 billion remained relatively unchanged for the three months ended September 30, 2015 compared to the same period in 2014 as loan spread compression and lower gains within the leasing business were offset by the benefit of loan growth. Business Lending revenue declined $267 million for the nine months ended September 30, 2015 compared to the same period in 2014 due to the same factors as described in the three-month discussion above as well as a gain in the prior period on the sale of an equity investment in Global Commercial Banking.
Global Transaction Services revenue decreased $95 million and $381 million for the three and nine months ended September 30, 2015 compared to the same periods in 2014 primarily due to lower net interest income as a result of the impact of the allocation of ALM activities and liquidity costs.
Average loans and leases increased nine percent for the three months ended September 30, 2015 compared to the same period in 2014 due to strong origination volumes and increased utilization in the commercial and industrial and commercial real estate portfolios. Average loans and leases increased five percent for the nine months ended September 30, 2015 compared to the same period in 2014 due to strong origination volumes and increased utilization in the commercial and industrial portfolio. Average deposits remained relatively unchanged for the three and nine months ended September 30, 2015 compared to the same periods in 2014.
|
|
Global Investment Banking |
Client teams and product specialists underwrite and distribute debt, equity and loan products, and provide advisory services and tailored risk management solutions. The economics of most investment banking and underwriting activities are shared primarily between Global Banking and Global Markets based on the activities performed by each segment. To provide a complete discussion of our consolidated investment banking fees, the table below presents total Corporation investment banking fees and the portion attributable to Global Banking.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Investment Banking Fees | | | | | | | | | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| Global Banking | | Total Corporation | | Global Banking | | Total Corporation |
(Dollars in millions) | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
Products | | | | | | | | | | | | | | | |
Advisory | $ | 365 |
| | $ | 291 |
| | $ | 391 |
| | $ | 316 |
| | $ | 999 |
| | $ | 782 |
| | $ | 1,095 |
| | $ | 865 |
|
Debt issuance | 325 |
| | 318 |
| | 748 |
| | 784 |
| | 1,031 |
| | 1,153 |
| | 2,416 |
| | 2,701 |
|
Equity issuance | 62 |
| | 118 |
| | 188 |
| | 315 |
| | 351 |
| | 448 |
| | 950 |
| | 1,142 |
|
Gross investment banking fees | 752 |
| | 727 |
| | 1,327 |
| | 1,415 |
| | 2,381 |
| | 2,383 |
| | 4,461 |
| | 4,708 |
|
Self-led deals | (11 | ) | | (26 | ) | | (40 | ) | | (64 | ) | | (50 | ) | | (77 | ) | | (161 | ) | | (184 | ) |
Total investment banking fees | $ | 741 |
| | $ | 701 |
| | $ | 1,287 |
| | $ | 1,351 |
| | $ | 2,331 |
| | $ | 2,306 |
| | $ | 4,300 |
| | $ | 4,524 |
|
Total Corporation investment banking fees of $1.3 billion, excluding self-led deals, included within Global Banking and Global Markets, decreased five percent for the three months ended September 30, 2015 compared to the same period in 2014 as higher advisory fees were more than offset by lower equity underwriting fees. Total Corporation investment banking fees of $4.3 billion, excluding self-led deals, included within Global Banking and Global Markets, decreased five percent for the nine months ended September 30, 2015 compared to the same period in 2014 driven by lower debt and equity issuance fees, partially offset by higher advisory fees. Underwriting fees for debt products declined primarily as a result of lower debt issuance volumes mainly in leveraged finance transactions.
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30 | | | | Nine Months Ended September 30 | | |
(Dollars in millions) | 2015 | | 2014 | | % Change | | 2015 | | 2014 | | % Change |
Net interest income (FTE basis) | $ | 1,135 |
| | $ | 999 |
| | 14 | % | | $ | 3,172 |
| | $ | 2,968 |
| | 7 | % |
Noninterest income: | | | | | | | | | | | |
Investment and brokerage services | 574 |
| | 533 |
| | 8 |
| | 1,703 |
| | 1,654 |
| | 3 |
|
Investment banking fees | 521 |
| | 577 |
| | (10 | ) | | 1,869 |
| | 2,073 |
| | (10 | ) |
Trading account profits | 1,462 |
| | 1,786 |
| | (18 | ) | | 5,282 |
| | 5,921 |
| | (11 | ) |
All other income | 379 |
| | 266 |
| | 42 |
| | 935 |
| | 1,185 |
| | (21 | ) |
Total noninterest income | 2,936 |
| | 3,162 |
| | (7 | ) | | 9,789 |
| | 10,833 |
| | (10 | ) |
Total revenue, net of interest expense (FTE basis) | 4,071 |
| | 4,161 |
| | (2 | ) | | 12,961 |
| | 13,801 |
| | (6 | ) |
| | | | | | | | | | | |
Provision for credit losses | 42 |
| | 45 |
| | (7 | ) | | 69 |
| | 83 |
| | (17 | ) |
Noninterest expense | 2,683 |
| | 3,357 |
| | (20 | ) | | 8,556 |
| | 9,341 |
| | (8 | ) |
Income before income taxes (FTE basis) | 1,346 |
| | 759 |
| | 77 |
| | 4,336 |
| | 4,377 |
| | (1 | ) |
Income tax expense (FTE basis) | 338 |
| | 388 |
| | (13 | ) | | 1,392 |
| | 1,597 |
| | (13 | ) |
Net income | $ | 1,008 |
| | $ | 371 |
| | n/m |
| | $ | 2,944 |
| | $ | 2,780 |
| | 6 |
|
| | | | | | | | | | | |
Return on average allocated capital | 11 | % | | 4 | % | | | | 11 | % | | 11 | % | | |
Efficiency ratio (FTE basis) | 65.91 |
| | 80.70 |
| | | | 66.01 |
| | 67.68 |
| | |
| | | | | | | | | | | |
Balance Sheet | | | | | | | | | | | |
| Three Months Ended September 30 | | | | Nine Months Ended September 30 | | |
Average | 2015 | | 2014 | | % Change | | 2015 | | 2014 | | % Change |
Trading-related assets: | | | | | | | | | | | |
Trading account securities | $ | 196,884 |
| | $ | 201,964 |
| | (3 | )% | | $ | 195,842 |
| | $ | 201,986 |
| | (3 | )% |
Reverse repurchases | 103,422 |
| | 116,853 |
| | (11 | ) | | 109,415 |
| | 115,343 |
| | (5 | ) |
Securities borrowed | 75,786 |
| | 83,369 |
| | (9 | ) | | 78,520 |
| | 86,455 |
| | (9 | ) |
Derivative assets | 55,385 |
| | 44,305 |
| | 25 |
| | 55,490 |
| | 44,103 |
| | 26 |
|
Total trading-related assets (1) | 431,477 |
| | 446,491 |
| | (3 | ) | | 439,267 |
| | 447,887 |
| | (2 | ) |
Total loans and leases | 66,392 |
| | 62,959 |
| | 5 |
| | 61,798 |
| | 63,409 |
| | (3 | ) |
Total earning assets (1) | 439,859 |
| | 457,836 |
| | (4 | ) | | 436,970 |
| | 464,306 |
| | (6 | ) |
Total assets | 597,103 |
| | 599,977 |
| | — |
| | 599,472 |
| | 606,205 |
| | (1 | ) |
Total deposits | 37,050 |
| | 39,345 |
| | (6 | ) | | 38,813 |
| | 40,769 |
| | (5 | ) |
Allocated capital | 35,000 |
| | 34,000 |
| | 3 |
| | 35,000 |
| | 34,000 |
| | 3 |
|
| | | | | | | | | | | |
Period end | | | | | | | September 30 2015 | | December 31 2014 | | % Change |
Total trading-related assets (1) | | | | |
|
| | $ | 407,493 |
| | $ | 418,860 |
| | (3 | )% |
Total loans and leases | | | | |
|
| | 70,159 |
| | 59,388 |
| | 18 |
|
Total earning assets (1) | | | | |
|
| | 421,909 |
| | 421,799 |
| | — |
|
Total assets | | | | |
|
| | 579,776 |
| | 579,594 |
| | — |
|
Total deposits | | | | | | | 36,019 |
| | 40,746 |
| | (12 | ) |
| |
(1) | Trading-related assets include derivative assets, which are considered non-earning assets. |
n/m = not meaningful
Global Markets offers sales and trading services, including research, to institutional clients across fixed-income, credit, currency, commodity and equity businesses. Global Markets product coverage includes securities and derivative products in both the primary and secondary markets. Global Markets provides market-making, financing, securities clearing, settlement and custody services globally to our institutional investor clients in support of their investing and trading activities. We also work with our commercial and corporate clients to provide risk management products using interest rate, equity, credit, currency and commodity derivatives, foreign exchange,
fixed-income and mortgage-related products. As a result of our market-making activities in these products, we may be required to manage risk in a broad range of financial products including government securities, equity and equity-linked securities, high-grade and high-yield corporate debt securities, syndicated loans, mortgage-backed securities (MBS), commodities and asset-backed securities (ABS). The economics of most investment banking and underwriting activities are shared primarily between Global Markets and Global Banking based on the activities performed by each segment. Global Banking originates certain deal-related transactions with our corporate and commercial clients that are executed and distributed by Global Markets. For more information on investment banking fees on a consolidated basis, see page 40.
Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014
Net income for Global Markets increased $637 million to $1.0 billion. Excluding net DVA, net income increased $571 million to $814 million primarily driven by a decline in noninterest expense and lower tax expense, partially offset by lower revenue. Net DVA gains were $313 million compared to gains of $205 million. Sales and trading revenue, excluding net DVA, decreased $124 million primarily driven by lower FICC revenue, partially offset by increased Equities revenue. Noninterest expense decreased $674 million to $2.7 billion largely due to lower litigation expense and to a lesser extent lower revenue-related incentive compensation and support costs. The effective tax rate for the year-ago quarter reflected the impact of non-deductible litigation expense.
Average earning assets decreased $18.0 billion to $439.9 billion largely driven by a decrease in reverse repos, securities borrowed and trading securities primarily due to reduction in client financing activity and continuing balance sheet optimization efforts across Global Markets.
The return on average allocated capital was 11 percent, up from four percent, primarily driven by higher net income. For more information on capital allocated to the business segments, see Business Segment Operations on page 25.
Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014
Net income for Global Markets increased $164 million to $2.9 billion. Excluding net DVA, net income increased $136 million to $2.7 billion primarily driven by the same factors as described in the three-month discussion above, partially offset by lower equity investment gains (not included in sales and trading revenue) as the year-ago period included gains related to the IPO of an equity investment. Net DVA gains were $434 million compared to gains of $386 million. Sales and trading revenue, excluding net DVA, decreased $415 million primarily driven by the same factors as described in the three-month discussion above. Noninterest expense decreased $785 million to $8.6 billion driven by the same factors as described in the three-month discussion above.
Average earning assets decreased $27.3 billion to $437.0 billion primarily driven by the same factors as described in the three-month discussion above. Period-end loans and leases increased $10.8 billion from December 31, 2014 due to growth in mortgage and securitization finance.
The return on average allocated capital was unchanged at 11 percent, reflecting increases in both net income and allocated capital.
|
|
Sales and Trading Revenue |
Sales and trading revenue includes unrealized and realized gains and losses on trading and other assets, net interest income, and fees primarily from commissions on equity securities. Sales and trading revenue is segregated into fixed-income (government debt obligations, investment and non-investment grade corporate debt obligations, commercial mortgage-backed securities, residential mortgage-backed securities (RMBS), collateralized loan obligations (CLOs), interest rate and credit derivative contracts), currencies (interest rate and foreign exchange contracts), commodities (primarily futures, forwards, swaps and options) and equities (equity-linked derivatives and cash equity activity). The table below and related discussion present sales and trading revenue, substantially all of which is in Global Markets, with the remainder in Global Banking. In addition, the table below and related discussion present sales and trading revenue excluding the impact of net DVA, which is a non-GAAP financial measure. We believe the use of this non-GAAP financial measure provides clarity in assessing the underlying performance of these businesses.
|
| | | | | | | | | | | | | | | |
Sales and Trading Revenue (1, 2) | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in millions) | 2015 | | 2014 | | 2015 | | 2014 |
Sales and trading revenue | | | | | | | |
Fixed-income, currencies and commodities | $ | 2,285 |
| | $ | 2,387 |
| | $ | 7,277 |
| | $ | 7,856 |
|
Equities | 1,191 |
| | 1,105 |
| | 3,555 |
| | 3,343 |
|
Total sales and trading revenue | $ | 3,476 |
| | $ | 3,492 |
| | $ | 10,832 |
| | $ | 11,199 |
|
| | | | | | | |
Sales and trading revenue, excluding net DVA (3) | | | | | | | |
Fixed-income, currencies and commodities | $ | 2,007 |
| | $ | 2,254 |
| | $ | 6,912 |
| | $ | 7,587 |
|
Equities | 1,156 |
| | 1,033 |
| | 3,486 |
| | 3,226 |
|
Total sales and trading revenue, excluding net DVA (3) | $ | 3,163 |
| | $ | 3,287 |
| | $ | 10,398 |
| | $ | 10,813 |
|
| |
(1) | Includes FTE adjustments of $43 million and $140 million for the three and nine months ended September 30, 2015 compared to $39 million and $131 million for the same periods in 2014. For more information on sales and trading revenue, see Note 2 – Derivatives to the Consolidated Financial Statements. |
| |
(2) | Includes Global Banking sales and trading revenue of $86 million and $295 million for the three and nine months ended September 30, 2015 compared to $67 million and $221 million for the same periods in 2014. |
| |
(3) | FICC and Equities sales and trading revenue, excluding net DVA, is a non-GAAP financial measure. FICC net DVA gains were $278 million and $365 million for the three and nine months ended September 30, 2015 compared to net DVA gains of $133 million and $269 million for the same periods in 2014. Equities net DVA gains were $35 million and $69 million for the three and nine months ended September 30, 2015 compared to net DVA gains of $72 million and $117 million for the same periods in 2014. |
Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014
FICC revenue, excluding net DVA, decreased $247 million to $2.0 billion primarily driven by declines in credit-related businesses due to lower client activity, partially offset by stronger results in rates products. Equities revenue, excluding net DVA, increased $123 million to $1.2 billion primarily driven by strong performance in derivatives, reflecting favorable market conditions.
Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014
FICC revenue, excluding net DVA, decreased $675 million to $6.9 billion and Equities revenue, excluding net DVA, increased $260 million to $3.5 billion. Both were driven by the same factors as described in the three-month discussion above as well as stronger results in currencies and commodities products within FICC and a benefit in Equities from increased client activity in the Asia-Pacific region.
|
|
Legacy Assets & Servicing |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30 | | | | Nine Months Ended September 30 | | |
(Dollars in millions) | 2015 | | 2014 | | % Change | | 2015 | | 2014 | | % Change |
Net interest income (FTE basis) | $ | 383 |
| | $ | 387 |
| | (1 | )% | | $ | 1,228 |
| | $ | 1,126 |
| | 9 | % |
Noninterest income: | | | | | | | | | | | |
Mortgage banking income | 266 |
| | 152 |
| | 75 |
| | 1,409 |
| | 812 |
| | 74 |
|
All other income | 192 |
| | 17 |
| | n/m |
| | 207 |
| | 104 |
| | 99 |
|
Total noninterest income | 458 |
| | 169 |
| | n/m |
| | 1,616 |
| | 916 |
| | 76 |
|
Total revenue, net of interest expense (FTE basis) | 841 |
| | 556 |
| | 51 |
| | 2,844 |
| | 2,042 |
| | 39 |
|
| | | | | | | | | | | |
Provision for credit losses | 6 |
| | 267 |
| | (98 | ) | | 154 |
| | 240 |
| | (36 | ) |
Noninterest expense | 1,143 |
| | 6,648 |
| | (83 | ) | | 3,307 |
| | 19,287 |
| | (83 | ) |
Loss before income taxes (FTE basis) | (308 | ) | | (6,359 | ) | | (95 | ) | | (617 | ) | | (17,485 | ) | | (96 | ) |
Income tax benefit (FTE basis) | (112 | ) | | (1,245 | ) | | (91 | ) | | (227 | ) | | (4,748 | ) | | (95 | ) |
Net loss | $ | (196 | ) | | $ | (5,114 | ) | | (96 | ) | | $ | (390 | ) | | $ | (12,737 | ) | | (97 | ) |
| | | | | | | | | | | |
Net interest yield (FTE basis) | 3.69 | % | | 3.77 | % | | | | 3.94 | % | | 3.90 | % | | |
| | | | | | | | | | | |
Balance Sheet | | | | | | | | | | | |
| Three Months Ended September 30 | | | | Nine Months Ended September 30 | | |
Average | 2015 | | 2014 | | % Change | | 2015 | | 2014 | | % Change |
Total loans and leases | $ | 29,074 |
| | $ | 35,238 |
| | (17 | )% | | $ | 30,782 |
| | $ | 36,672 |
| | (16 | )% |
Total earning assets | 41,179 |
| | 40,718 |
| | 1 |
| | 41,678 |
| | 38,625 |
| | 8 |
|
Total assets | 50,719 |
| | 53,843 |
| | (6 | ) | | 51,994 |
| | 54,030 |
| | (4 | ) |
Allocated capital | 24,000 |
| | 17,000 |
| | 41 |
| | 24,000 |
| | 17,000 |
| | 41 |
|
| | | | | | | | | | | |
Period end | | | | | | | September 30 2015 | | December 31 2014 | | % Change |
Total loans and leases | | | | | | | $ | 27,982 |
| | $ | 33,055 |
| | (15 | )% |
Total earning assets | | | | | | | 40,187 |
| | 33,923 |
| | 18 |
|
Total assets | | | | | | | 49,080 |
| | 45,958 |
| | 7 |
|
n/m = not meaningful
LAS is responsible for our mortgage servicing activities related to residential first mortgage and home equity loans serviced for others and loans held by the Corporation, including loans that have been designated as the LAS Portfolios. The LAS Portfolios (both owned and serviced), herein referred to as the Legacy Owned and Legacy Serviced Portfolios, respectively (together, the Legacy Portfolios), and as further defined below, include those loans originated prior to January 1, 2011 that would not have been originated under our established underwriting standards as of December 31, 2010. For more information on our Legacy Portfolios, see page 45. In addition, LAS is responsible for managing certain legacy exposures related to mortgage origination, sales and servicing activities (e.g., litigation, representations and warranties). LAS also includes the financial results of the home equity portfolio selected as part of the Legacy Owned Portfolio and the results of MSR activities, including net hedge results.
LAS includes certain revenues and expenses on loans serviced for others, including owned loans serviced for Consumer Banking, GWIM and All Other.
Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014
The net loss for LAS decreased $4.9 billion to $196 million primarily driven by significantly lower litigation expense, which is included in noninterest expense. Also contributing to the decrease in the net loss were higher revenue, lower provision for credit losses and lower noninterest expense, excluding litigation. Revenue increased $285 million primarily due to gains realized from the deconsolidation of certain home equity securitizations as well as higher mortgage banking income. Mortgage banking income increased due to improved MSR net-of-hedge performance and lower representations and warranties provision, partially offset by lower mortgage servicing fees. The provision for credit losses decreased $261 million primarily driven by costs related to the consumer relief portion of the DoJ settlement in the prior-year period. Noninterest expense decreased $5.5 billion primarily due to a $5.1 billion decrease in litigation expense. Excluding litigation, noninterest expense decreased $430 million to $915 million due to lower default-related staffing and other default-related servicing expenses. We believe we are on track to achieve our goal of reducing noninterest expense, excluding litigation expense, to approximately $800 million, per quarter beginning in the fourth quarter of 2015.
The increase in allocated capital for LAS reflects higher Basel 3 Advanced approaches operational risk capital than in 2014. For more information on capital allocated to the business segments, see Business Segment Operations on page 25.
Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014
The net loss for LAS decreased $12.3 billion to $390 million primarily driven by the same factors as described in the three-month discussion above. Total revenue increased $802 million due to higher mortgage banking income reflecting a decrease in representation and warranties provision and higher MSR net-of-hedge performance, partially offset by lower servicing fees due to a smaller portfolio. The provision for credit losses decreased $86 million primarily driven by the same factors as described in the three-month discussion above. Noninterest expense decreased $16.0 billion primarily due to a $14.5 billion decrease in litigation expense. Excluding litigation, noninterest expense decreased $1.5 billion to $2.8 billion due to lower default-related staffing and other default-related servicing expenses.
The increase in allocated capital for LAS was driven by the same factors as described in the three-month discussion above.
Servicing
LAS is responsible for all of our in-house servicing activities related to the residential mortgage and home equity loan portfolios, including owned loans and loans serviced for others (collectively, the mortgage serviced portfolio). A portion of this portfolio has been designated as the Legacy Serviced Portfolio, which represented 26 percent and 27 percent of the total mortgage serviced portfolio, as measured by unpaid principal balance, at September 30, 2015 and 2014. In addition, LAS is responsible for managing vendors who subservice on our behalf.
Servicing activities include collecting cash for principal, interest and escrow payments from borrowers, disbursing customer draws for lines of credit, accounting for and remitting principal and interest payments to investors and escrow payments to third parties, and responding to customer inquiries. Our home retention efforts, including single point of contact resources, are also part of our servicing activities, along with supervision of foreclosures and property dispositions. Prior to foreclosure, LAS evaluates various workout options in an effort to help our customers avoid foreclosure. For more information on our servicing activities, including the impact of foreclosure delays, see Off-Balance Sheet Arrangements and Contractual Obligations – Servicing, Foreclosure and Other Mortgage Matters on page 53 of the MD&A of the Corporation's 2014 Annual Report on Form 10-K.
Legacy Portfolios
The Legacy Portfolios (both owned and serviced) include those loans originated prior to January 1, 2011 that would not have been originated under our established underwriting standards in place as of December 31, 2010. The purchased credit-impaired (PCI) portfolio, as well as certain loans that met a pre-defined delinquency status or probability of default threshold as of January 1, 2011, are also included in the Legacy Portfolios. Since determining the pool of loans to be included in the Legacy Portfolios as of January 1, 2011, the criteria have not changed for these portfolios, but will continue to be evaluated over time.
Legacy Owned Portfolio
The Legacy Owned Portfolio includes those loans that met the criteria as described above and are on the balance sheet of the Corporation. Home equity loans in this portfolio are held on the balance sheet of LAS, and residential mortgage loans in this portfolio are included as part of All Other. The financial results of the on-balance sheet loans are reported in the segment that owns the loans or in All Other. Total loans in the Legacy Owned Portfolio decreased $14.2 billion during the nine months ended September 30, 2015 to $75.7 billion, of which $28.0 billion was held on the LAS balance sheet and the remainder was included in All Other. The decrease was largely due to payoffs and paydowns, as well as loan sales.
Legacy Serviced Portfolio
The Legacy Serviced Portfolio includes loans serviced by LAS in both the Legacy Owned Portfolio and those loans serviced for outside investors that met the criteria as described above. The table below summarizes the balances of the residential mortgage loans included in the Legacy Serviced Portfolio (the Legacy Residential Mortgage Serviced Portfolio) representing 24 percent and 25 percent of the total residential mortgage serviced portfolio of $504 billion and $636 billion, as measured by unpaid principal balance, at September 30, 2015 and 2014. The decline in the Legacy Residential Mortgage Serviced Portfolio was due to paydowns and payoffs, and MSR and loan sales.
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| | | | | | | |
Legacy Residential Mortgage Serviced Portfolio, a subset of the Residential Mortgage Serviced Portfolio (1) |
| September 30 |
(Dollars in billions) | 2015 | | 2014 |
Unpaid principal balance | | | |
Residential mortgage loans | | | |
Total | $ | 121 |
| | $ | 160 |
|
60 days or more past due | 14 |
| | 32 |
|
| | | |
Number of loans serviced (in thousands) | | | |
Residential mortgage loans | | | |
Total | 659 |
| | 853 |
|
60 days or more past due | 81 |
| | 163 |
|
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(1) | Excludes $29 billion and $36 billion of home equity loans and HELOCs at September 30, 2015 and 2014. |
Non-Legacy Portfolio
As previously discussed, LAS is responsible for all of our servicing activities. The table below summarizes the balances of the residential mortgage loans that are not included in the Legacy Serviced Portfolio (the Non-Legacy Residential Mortgage Serviced Portfolio) representing 76 percent and 75 percent of the total residential mortgage serviced portfolio, as measured by unpaid principal balance, at September 30, 2015 and 2014. The decline in the Non-Legacy Residential Mortgage Serviced Portfolio was primarily due to paydowns and payoffs, partially offset by new originations.
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| | | | | | | |
Non-Legacy Residential Mortgage Serviced Portfolio, a subset of the Residential Mortgage Serviced Portfolio (1) |
| September 30 |
(Dollars in billions) | 2015 | | 2014 |
Unpaid principal balance | | | |
Residential mortgage loans | | | |
Total | $ | 383 |
| | $ | 476 |
|
60 days or more past due | 6 |
| | 10 |
|
| | | |
Number of loans serviced (in thousands) | | | |
Residential mortgage loans | | | |
Total | 2,438 |
| | 3,035 |
|
60 days or more past due | 33 |
| | 58 |
|
| |
(1) | Excludes $47 billion and $50 billion of home equity loans and HELOCs at September 30, 2015 and 2014. |
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LAS Mortgage Banking Income |
LAS mortgage banking income includes income earned in connection with servicing activities and MSR valuation adjustments, net of results from risk management activities used to hedge certain market risks of the MSRs. The costs associated with our servicing activities are included in noninterest expense. LAS mortgage banking income also includes the cost of legacy representations and warranties exposures and revenue from the sales of loans that had returned to performing status. The table below summarizes LAS mortgage banking income.
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| | | | | | | | | | | | | | | |
LAS Mortgage Banking Income | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in millions) | 2015 | | 2014 | | 2015 | | 2014 |
Servicing income: | | | | | | | |
Servicing fees | $ | 345 |
| | $ | 471 |
| | $ | 1,167 |
| | $ | 1,496 |
|
Amortization of expected cash flows (1) | (179 | ) | | (201 | ) | | (564 | ) | | (620 | ) |
Fair value changes of MSRs, net of risk management activities used to hedge certain market risks (2) | 83 |
| | (19 | ) | | 526 |
| | 152 |
|
Other servicing-related revenue | — |
| | — |
| | — |
| | 8 |
|
Total net servicing income | 249 |
| | 251 |
| | 1,129 |
| | 1,036 |
|
Representations and warranties (provision) benefit | (77 | ) | | (152 | ) | | 37 |
| | (447 | ) |
Other mortgage banking income (3) | 94 |
| | 53 |
| | 243 |
| | 223 |
|
Total LAS mortgage banking income | $ | 266 |
| | $ | 152 |
| | $ | 1,409 |
| | $ | 812 |
|
| |
(1) | Represents the net change in fair value of the MSR asset due to the recognition of modeled cash flows. |
| |
(2) | Includes gains (losses) on sales of MSRs. |
| |
(3) | Consists primarily of revenue from sales of repurchased loans that had returned to performing status. |
During the three and nine months ended September 30, 2015, LAS mortgage banking income increased $114 million to $266 million, and $597 million to $1.4 billion compared to the same periods in 2014, primarily driven by a benefit in the provision for representations and warranties in the nine-month period, and improved MSR net-of-hedge performance, partially offset by lower servicing fees due to a smaller servicing portfolio. For the three and nine months ended September 30, 2015, servicing fees declined 27 percent and 22 percent to $345 million and $1.2 billion as the size of the servicing portfolio continued to decline driven by loan prepayment activity, which exceeded new originations primarily due to our exit from non-retail channels, as well as strategic sales of MSRs in prior periods. The $37 million benefit in the provision for representations and warranties for the nine months ended September 30, 2015 compared to a provision of $447 million in the same period in 2014 was primarily driven by the impact of the ACE Securities Corp. v. DB Structured Products, Inc. (ACE) decision, as time-barred claims are now treated as resolved. For more information on the ACE decision, see Off-Balance Sheet Arrangements and Contractual Obligations – Representations and Warranties on page 50.
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| | | | | | | | | |
Key Statistics | | | | | |
(Dollars in millions, except as noted) | September 30 2015 | | December 31 2014 |
Mortgage serviced portfolio (in billions) (1, 2) | $ | 580 |
| | | $ | 693 |
| |
Mortgage loans serviced for investors (in billions) (1) | 391 |
| | | 474 |
| |
Mortgage servicing rights: | | | | | |
Balance (3) | 2,699 |
| | | 3,271 |
| |
Capitalized mortgage servicing rights (% of loans serviced for investors) | 69 |
| bps | | 69 |
| bps |
| |
(1) | The servicing portfolio and mortgage loans serviced for investors represent the unpaid principal balance of loans. At September 30, 2015 and December 31, 2014, the balance excludes $17 billion and $16 billion of non-U.S. consumer mortgage loans serviced for investors. |
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(2) | Servicing of residential mortgage loans, HELOCs and home equity loans by LAS. |
| |
(3) | At September 30, 2015 and December 31, 2014, excludes $344 million and $259 million of certain non-U.S. residential mortgage MSR balances that are recorded in Global Markets. |
Mortgage Servicing Rights
At September 30, 2015, the balance of consumer MSRs managed within LAS, which excludes $344 million of certain non-U.S. residential mortgage MSRs recorded in Global Markets was $2.7 billion compared to $3.3 billion at December 31, 2014. The consumer MSR balance managed within LAS decreased $572 million in the nine months ended September 30, 2015 primarily driven by the recognition of modeled cash flows and sales of MSRs, partially offset by new loan originations. For more information on our servicing activities, see Off-Balance Sheet Arrangements and Contractual Obligations – Servicing, Foreclosure and Other Mortgage Matters on page 54. For more information on MSRs, see Note 17 – Mortgage Servicing Rights to the Consolidated Financial Statements.
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| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30 | | | | Nine Months Ended September 30 | | |
(Dollars in millions) | 2015 | | 2014 | | % Change | | 2015 | | 2014 | | % Change |
Net interest income (FTE basis) | $ | (502 | ) | | $ | 68 |
| | n/m |
| | $ | 38 |
| | $ | (175 | ) | | (122 | )% |
Noninterest income: | | | | | | | | | | | |
Card income | 68 |
| | 92 |
| | (26 | )% | | 203 |
| | 266 |
| | (24 | ) |
Equity investment income | (46 | ) | | (26 | ) | | 77 |
| | (34 | ) | | 766 |
| | n/m |
|
Gains on sales of debt securities | 385 |
| | 410 |
| | (6 | ) | | 810 |
| | 1,149 |
| | (30 | ) |
All other loss | (395 | ) | | (587 | ) | | (33 | ) | | (1,094 | ) | | (1,832 | ) | | (40 | ) |
Total noninterest income | 12 |
| | (111 | ) | | (111 | ) | | (115 | ) | | 349 |
| | n/m |
|
Total revenue, net of interest expense (FTE basis) | (490 | ) | | (43 | ) | | n/m |
| | (77 | ) | | 174 |
| | n/m |
|
| | | | | | | | | | | |
Provision for credit losses | (67 | ) | | (265 | ) | | (75 | ) | | (230 | ) | | (647 | ) | | (64 | ) |
Noninterest expense | 80 |
| | 254 |
| | (69 | ) | | 1,998 |
| | 2,434 |
| | (18 | ) |
Income (loss) before income taxes (FTE basis) | (503 | ) | | (32 | ) | | n/m |
| | (1,845 | ) | | (1,613 | ) | | 14 |
|
Income tax expense (benefit) (FTE basis) | (507 | ) | | (541 | ) | | (6 | ) | | (1,646 | ) | | (2,059 | ) | | (20 | ) |
Net income (loss) | $ | 4 |
| | $ | 509 |
| | (99 | ) | | $ | (199 | ) | | $ | 446 |
| | n/m |
|
| | | | | | | | | | | |
Balance Sheet | | | | | | | | | | | |
| Three Months Ended September 30 | | | | Nine Months Ended September 30 | | |
Average | 2015 | | 2014 | | % Change | | 2015 | | 2014 | | % Change |
Loans and leases: | | | | | | | | | | | |
Residential mortgage | $ | 121,179 |
| | $ | 177,183 |
| | (32 | )% | | $ | 137,241 |
| | $ | 186,280 |
| | (26 | )% |
Non-U.S. credit card | 10,244 |
| | 11,784 |
| | (13 | ) | | 10,087 |
| | 11,700 |
| | (14 | ) |
Other | 6,404 |
| | 10,437 |
| | (39 | ) | | 6,426 |
| | 11,077 |
| | (42 | ) |
Total loans and leases | 137,827 |
| | 199,404 |
| | (31 | ) | | 153,754 |
| | 209,057 |
| | (26 | ) |
Total assets (1) | 264,385 |
| | 272,554 |
| | (3 | ) | | 259,031 |
| | 283,356 |
| | (9 | ) |
Total deposits | 22,605 |
| | 29,879 |
| | (24 | ) | | 21,508 |
| | 33,759 |
| | (36 | ) |
| | | | | | | | | | | |
Period end | | | | | | | September 30 2015 | | December 31 2014 | | % Change |
Loans and leases: | | | | | | | | | | | |
Residential mortgage | | | | | | | $ | 114,512 |
| | $ | 155,595 |
| | (26 | )% |
Non-U.S. credit card | | | | | | | 10,066 |
| | 10,465 |
| | (4 | ) |
Other | | | | | | | 6,135 |
| | 6,552 |
| | (6 | ) |
Total loans and leases | | | | | | | 130,713 |
| | 172,612 |
| | (24 | ) |
Total equity investments | | | | | | | 4,378 |
| | 4,886 |
| | (10 | ) |
Total assets (1) | | | | | | | 257,480 |
| | 261,583 |
| | (2 | ) |
Total deposits | | | | | | | 21,771 |
| | 19,242 |
| | 13 |
|
| |
(1) | In segments where the total of liabilities and equity exceeds assets, which are generally deposit-taking segments, we allocate assets from All Other to those segments to match liabilities (i.e., deposits) and allocated shareholders' equity. Such allocated assets were $494.3 billion and $496.3 billion for the three and nine months ended September 30, 2015 compared to $490.6 billion and $480.1 billion for the same periods in 2014, and $493.7 billion and $474.6 billion at September 30, 2015 and December 31, 2014. |
n/m = not meaningful
All Other consists of ALM activities, equity investments, the international consumer card business, liquidating businesses, residual expense allocations and other. ALM activities encompass residential mortgages, debt securities, interest rate and foreign currency risk management activities including the residual net interest income allocation, the impact of certain allocation methodologies and accounting hedge ineffectiveness. The results of certain ALM activities are allocated to our business segments. Beginning with new originations in 2014, we retain certain residential mortgages in Consumer Banking, consistent with where the overall relationship is managed; previously such mortgages were in All Other. Additionally, certain residential mortgage loans that are managed by LAS are held in All Other. For more information on our ALM activities, see Interest Rate Risk Management for Non-trading Activities on page 118 and Note 18 – Business Segment Information to the Consolidated Financial Statements. Equity investments include our merchant services joint venture as well as Global Principal Investments (GPI) which is comprised of a portfolio of equity, real estate and other alternative investments. For more information on our merchant services joint venture, see Note 10 – Commitments and Contingencies to the Consolidated Financial Statements.
Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014
Net income for All Other decreased $505 million to $4 million due to lower net interest income and a decrease in the benefit in the provision for credit losses, partially offset by gains on the sales of consumer real estate loans. Net interest income decreased $570 million compared to the same period in 2014 primarily driven by the negative impact of the market-related adjustments on debt securities due to lower long-term interest rates. Gains on the sales of loans, including nonperforming and other delinquent loans, net of hedges, were $370 million compared to gains of $223 million, and are included in all other loss in the table on page 48. Also included in all other loss were U.K. PPI costs of $303 million compared to $298 million, and negative FTE adjustments of $342 million compared to $301 million to eliminate the FTE treatment of certain tax credits recorded in Global Banking.
The benefit in the provision for credit losses decreased $198 million to a benefit of $67 million compared to the prior-year period primarily due to a slower pace of reserve releases in the current period.
Noninterest expense decreased $174 million to $80 million reflecting a decrease in litigation expense and lower personnel and infrastructure costs, partially offset by higher professional fees related in part to our CCAR resubmission. The income tax benefit was $507 million compared to a benefit of $541 million, as the prior-period tax benefits attributable to the resolution of several tax examinations exceeded the current period tax benefits related to certain non-U.S. restructurings. In addition, both periods include income tax benefit adjustments to eliminate the FTE treatment of certain tax credits recorded in Global Banking.
Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014
Net income for All Other decreased $645 million to a net loss of $199 million due to a decrease in equity investment income, lower gains on sales of debt securities and a decrease in the benefit in the provision for credit losses, partially offset by higher net interest income, gains on sales of consumer real estate loans, lower U.K. PPI costs and a decrease in noninterest expense. Net interest income increased $213 million primarily driven by the impact of market-related adjustments on debt securities. Negative market-related adjustments on debt securities were $412 million compared to $503 million in the prior-year period. Equity investment income decreased $800 million as the prior-year period included a gain on the sale of a portion of an equity investment. Gains on the sales of loans, including nonperforming and other delinquent loans, net of hedges, were $934 million compared to gains of $405 million in the prior-year period. Also included in all other loss were U.K. PPI costs of $319 million compared to $482 million, and negative FTE adjustments of $1.2 billion compared to $962 million to eliminate the FTE treatment of certain tax credits recorded in Global Banking.
The benefit in the provision for credit losses declined $417 million to a benefit of $230 million primarily driven by the same factor as described in the three-month discussion above as well as lower recoveries on nonperforming loan sales.
Noninterest expense decreased $436 million to $2.0 billion primarily driven by the same factors as described in the three-month discussion above. The income tax benefit was $1.6 billion compared to a benefit of $2.1 billion, as the prior-year period included tax benefits attributable to the resolution of several tax examinations. In addition, both periods include income tax benefit adjustments to eliminate the FTE treatment of certain tax credits recorded in Global Banking.
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Off-Balance Sheet Arrangements and Contractual Obligations |
We have contractual obligations to make future payments on debt and lease agreements. Additionally, in the normal course of business, we enter into contractual arrangements whereby we commit to future purchases of products or services from unaffiliated parties. For more information on obligations and commitments, see Note 10 – Commitments and Contingencies to the Consolidated Financial Statements, Off-Balance Sheet Arrangements and Contractual Obligations on page 50 of the MD&A of the Corporation's 2014 Annual Report on Form 10-K, as well as Note 11 – Long-term Debt and Note 12 – Commitments and Contingencies to the Consolidated Financial Statements of the Corporation's 2014 Annual Report on Form 10-K.
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Representations and Warranties |
We securitize first-lien residential mortgage loans generally in the form of RMBS guaranteed by the government-sponsored enterprises (GSEs), which include FHLMC and FNMA, or by the Government National Mortgage Association (GNMA) in the case of Federal Housing Administration (FHA)-insured, U.S. Department of Veterans Affairs (VA)-guaranteed and Rural Housing Service-guaranteed mortgage loans, and sell pools of first-lien residential mortgage loans in the form of whole loans. In addition, in prior years, legacy companies and certain subsidiaries sold pools of first-lien residential mortgage loans and home equity loans as private-label securitizations (in certain of these securitizations, monoline insurers or other financial guarantee providers insured all or some of the securities) or in the form of whole loans. In connection with these transactions, we or certain of our subsidiaries or legacy companies made various representations and warranties. Breaches of these representations and warranties have resulted in and may continue to result in the requirement to repurchase mortgage loans or to otherwise make whole or provide other remedies to the GSEs, U.S. Department of Housing and Urban Development with respect to FHA-insured loans, VA, whole-loan investors, securitization trusts, monoline insurers or other financial guarantors as applicable (collectively, repurchases). In all such cases, subsequent to repurchasing the loan, we would be exposed to any credit loss on the repurchased mortgage loans after accounting for any mortgage insurance (MI) or mortgage guarantee payments that we may receive.
We have vigorously contested any request for repurchase where we have concluded that a valid basis for repurchase does not exist and will continue to do so in the future. However, in an effort to resolve legacy mortgage-related issues, we have reached settlements, certain of which have been for significant amounts, in lieu of a loan-by-loan review process, including with the GSEs, four monoline insurers and BNY Mellon, as trustee for certain securitization trusts.
For more information on accounting for representations and warranties, repurchase claims and exposures, including a summary of the larger bulk settlements, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees and Note 12 – Commitments and Contingencies to the Consolidated Financial Statements of the Corporation's 2014 Annual Report on Form 10-K and Item 1A. Risk Factors of the Corporation's 2014 Annual Report on Form 10-K.
Settlement with the Bank of New York Mellon, as Trustee
On April 22, 2015, the New York County Supreme Court entered final judgment approving the BNY Mellon Settlement. In October 2015, BNY Mellon obtained certain state tax opinions and an IRS private letter ruling confirming that the settlement will not impact the real estate mortgage investment conduit tax status of the trusts. The final conditions of the settlement have thus been satisfied, requiring the Corporation to make the settlement payment of $8.5 billion (excluding legal fees) on or before February 9, 2016. The settlement payment and legal fees were previously fully reserved. BNY Mellon is required to determine the share of the settlement payment that will be allocated to each of the trusts covered by the settlement and then to distribute those amounts. For information on servicing matters associated with the BNY Mellon Settlement, see Off-Balance Sheet Arrangements and Contractual Obligations – Mortgage-related Settlements – Servicing Matters on page 54 of the MD&A of the Corporation's 2014 Annual Report on Form 10-K.
New York Court Decision on Statute of Limitations
On June 11, 2015, the New York Court of Appeals, New York's highest appellate court, issued its opinion on the statute of limitations applicable to representations and warranties claims in ACE Securities Corp. v. DB Structured Products, Inc. (ACE). The Court of Appeals held that, under New York law, a claim for breach of contractual representations and warranties begins to run at the time the representations and warranties are made, and rejected the argument that the six-year statute of limitations does not begin to run until the time repurchase is refused. The Court of Appeals also held that compliance with the contractual notice and cure period was a pre-condition to filing suit, and claims that did not comply with such contractual requirements prior to the expiration of the statute of limitations period were invalid. While no entity affiliated with the Corporation was a party to this litigation, the vast majority of the private-label RMBS trusts into which entities affiliated with the Corporation sold loans and made representations and warranties are governed by New York law. While the Corporation treats claims where the statute of limitations has expired, as determined in accordance with the ACE decision, as time-barred and therefore resolved and no longer outstanding, investors or trustees may seek to distinguish certain aspects of the ACE decision or to
assert other claims seeking to avoid the impact of the ACE decision. For example, a recent ruling by a New York intermediate appellate court allowed a counterparty to pursue litigation on loans in the entire trust even though only some of the loans complied with the condition precedent of timely pre-suit notice and opportunity to cure or repurchase. The potential impact on the Corporation, if any, of judicial limitations on the ACE decision, or claims seeking to distinguish or avoid the ACE decision is unclear at this time. For additional information, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements of the Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015.
Unresolved Repurchase Claims
Unresolved representations and warranties repurchase claims represent the notional amount of repurchase claims made by counterparties, typically the outstanding principal balance or the unpaid principal balance at the time of default. In the case of first-lien mortgages, the claim amount is often significantly greater than the expected loss amount due to the benefit of collateral and, in some cases, MI or mortgage guarantee payments. Claims received from a counterparty remain outstanding until the underlying loan is repurchased, the claim is rescinded by the counterparty, we determine that the applicable statute of limitations has expired, or representations and warranties claims with respect to the applicable trust are settled, and fully and finally released. When a claim is denied and we do not receive a response from the counterparty, the claim remains in the unresolved repurchase claims balance until resolution in one of the ways described above.
At September 30, 2015, we had $18.3 billion of unresolved repurchase claims, net of duplicate claims, compared to $22.8 billion at December 31, 2014. These repurchase claims primarily relate to private-label securitizations and exclude claims in the amount of $7.4 billion at September 30, 2015, net of duplicate claims, where the statute of limitations has expired without litigation being commenced. At December 31, 2014, time-barred claims of $5.2 billion, net of duplicate claims, were included in unresolved repurchase claims. The notional amount of unresolved repurchase claims at both September 30, 2015 and December 31, 2014 includes $3.5 billion of claims, net of duplicate claims, related to loans in specific private-label securitization groups or tranches where we own substantially all of the outstanding securities. For additional information, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements.
The decrease in the notional amount of outstanding unresolved repurchase claims, net of duplicate claims, in the nine months ended September 30, 2015 is primarily due to the impact of the ACE decision. Excluding time-barred claims that were treated as outstanding at December 31, 2014, the remaining outstanding unresolved repurchase claims are driven by: (1) continued submission of claims by private-label securitization trustees, (2) the level of detail, support and analysis accompanying such claims, which impact overall claim quality and, therefore, claims resolution and (3) the lack of an established process to resolve disputes related to these claims. For example, claims submitted without individual file reviews generally lack the level of detail and analysis of individual loans that is necessary to evaluate a claim.
During the three and nine months ended September 30, 2015, we had limited loan-level representations and warranties repurchase claims experience with the monoline insurers due to bulk settlements in prior years and ongoing litigation with a single monoline insurer. For additional information, see Note 12 – Commitments and Contingencies to the Consolidated Financial Statements of the Corporation's 2014 Annual Report on Form 10-K.
As a result of various bulk settlements with the GSEs, we have resolved substantially all outstanding and potential representations and warranties repurchase claims on whole loans sold by legacy Bank of America and Countrywide Financial Corporation (Countrywide) to FNMA and FHLMC through June 30, 2012 and December 31, 2009, respectively. After these settlements, our exposure to representations and warranties liability for loans originated prior to 2009 and sold to the GSEs is limited to loans with an original principal balance of $18.3 billion and loans with certain characteristics excluded from the settlements that we do not believe will be material, such as certain specified violations of the GSEs' charters, fraud and title defects. As of September 30, 2015, of the $18.3 billion, approximately $16.0 billion in principal has been paid and $991 million in principal has defaulted or was severely delinquent. At September 30, 2015, the notional amount of unresolved repurchase claims submitted by the GSEs was $20 million related to these vintages. For more information on the monolines and experience with the GSEs, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements.
In addition to unresolved repurchase claims, we have received notifications from sponsors of third-party securitizations with whom we engaged in whole-loan transactions indicating that we may have indemnity obligations with respect to loans for which we have not received a repurchase request. These outstanding notifications totaled $1.4 billion and $2.0 billion at September 30, 2015 and December 31, 2014.
We also from time to time receive correspondence purporting to raise representations and warranties breach issues from entities that do not have contractual standing or ability to bring such claims. We believe such communications to be procedurally and/or substantively invalid, and generally do not respond.
The presence of repurchase claims on a given trust, receipt of notices of indemnification obligations and receipt of other communications, as discussed above, are all factors that inform our liability for representations and warranties and the corresponding estimated range of possible loss.
Representations and Warranties Liability
The liability for representations and warranties and corporate guarantees is included in accrued expenses and other liabilities on the Consolidated Balance Sheet and the related provision is included in mortgage banking income in the Consolidated Statement of Income. For more information on the representations and warranties liability and the corresponding estimated range of possible loss, see Off-Balance Sheet Arrangements and Contractual Obligations – Estimated Range of Possible Loss on page 54 and Note 7 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements.
At September 30, 2015 and December 31, 2014, the liability for representations and warranties was $11.5 billion and $12.1 billion, which includes $8.6 billion related to the BNY Mellon Settlement. The representations and warranties provision was $75 million for the three months ended September 30, 2015 compared to a provision of $167 million for the same period in 2014. The representations and warranties benefit was $46 million for the nine months ended September 30, 2015 compared to a provision of $433 million for the same period in 2014. The benefit in the provision for representations and warranties for the nine months ended September 30, 2015 compared to a provision in the same period in 2014 was primarily driven by the impact of the ACE decision, as time-barred claims are now treated as resolved.
Our liability for representations and warranties is necessarily dependent on, and limited by, a number of factors including for private-label securitizations the implied repurchase experience based on the BNY Mellon Settlement, as well as certain other assumptions and judgmental factors. Where relevant, we also consider more recent experience, such as claim activity, notification of potential indemnification obligations, our experience with various counterparties, the ACE decision and other recent court decisions related to the statute of limitations and other facts and circumstances, such as bulk settlements, as we believe appropriate. Accordingly, future provisions associated with obligations under representations and warranties may be materially impacted if future experiences are different from historical experience or our understandings, interpretations or assumptions.
Experience with Private-label Securitization and Whole-loan Investors
In prior years, legacy companies and certain subsidiaries sold pools of first-lien residential mortgage loans and home equity loans as private-label securitizations or in the form of whole loans to investors other than the GSEs (although the GSEs are investors in certain private-label securitizations). The majority of the loans sold were included in private-label securitizations, including third-party sponsored transactions. We provided representations and warranties to the whole-loan investors and these investors may retain those rights even when the whole loans were aggregated with other collateral into private-label securitizations sponsored by the whole-loan investors. Such loans originated from 2004 through 2008 had an original principal balance of $970 billion, including $786 billion sold to private-label and whole-loan investors without monoline insurance. Of the $970 billion, $582 billion in principal has been paid, $212 billion in principal has defaulted, $36 billion in principal was severely delinquent, and $140 billion in principal was current or less than 180 days past due at September 30, 2015, as summarized in Table 18.
Loans originated between 2004 and 2008 and sold without monoline insurance had an original total principal balance of $786 billion, which is included in Table 18. Of the $786 billion, $477 billion has been paid in full and $196 billion was defaulted or severely delinquent at September 30, 2015. At least 25 payments have been made on approximately 64 percent of the defaulted and severely delinquent loans.
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Table 18 |
Overview of Non-Agency Securitization and Whole-Loan Balances from 2004 to 2008 |
| Principal Balance | | Defaulted or Severely Delinquent |
(Dollars in billions) | Original Principal Balance | | Outstanding Principal Balance September 30 2015 | | Outstanding Principal Balance 180 Days or More Past Due | | Defaulted Principal Balance | | Defaulted or Severely Delinquent | | Borrower Made Less than 13 Payments | | Borrower Made 13 to 24 Payments | | Borrower Made 25 to 36 Payments | | Borrower Made More than 36 Payments |
By Entity | | | | | | | | | | | | | | | | | |
Bank of America | $ | 100 |
| | $ | 13 |
| | $ | 2 |
| | $ | 8 |
| | $ | 10 |
| | $ | 1 |
| | $ | 2 |
| | $ | 2 |
| | $ | 5 |
|
Countrywide | | | | | | | | | | | | | | | | | |
BNY Mellon Settlement | 409 |
| | 89 |
| | 19 |
| | 88 |
| | 107 |
| | 15 |
| | 26 |
| | 25 |
| | 41 |
|
Other | 307 |
| | 50 |
| | 11 |
| | 67 |
| | 78 |
| | 9 |
| | 18 |
| | 18 |
| | 33 |
|
Total Countrywide | 716 |
| | 139 |
| | 30 |
| | 155 |
| | 185 |
| | 24 |
| | 44 |
| | 43 |
| | 74 |
|
Merrill Lynch | 72 |
| | 12 |
| | 2 |
| | 20 |
| | 22 |
| | 4 |
| | 5 |
| | 4 |
| | 9 |
|
First Franklin | 82 |
| | 12 |
| | 2 |
| | 29 |
| | 31 |
| | 5 |
| | 7 |
| | 5 |
| | 14 |
|
Total (1, 2) | $ | 970 |
| | $ | 176 |
| | $ | 36 |
| | $ | 212 |
| | $ | 248 |
| | $ | 34 |
| | $ | 58 |
| | $ | 54 |
| | $ | 102 |
|
By Product | | | | | | | | | | | | | | | | | |
Prime | $ | 302 |
| | $ | 48 |
| | $ | 5 |
| | $ | 29 |
| | $ | 34 |
| | $ | 2 |
| | $ | 6 |
| | $ | 7 |
| | $ | 19 |
|
Alt-A | 173 |
| | 40 |
| | 8 |
| | 42 |
| | 50 |
| | 7 |
| | 12 |
| | 11 |
| | 20 |
|
Pay option | 150 |
| | 30 |
| | 8 |
| | 46 |
| | 54 |
| | 5 |
| | 13 |
| | 15 |
| | 21 |
|
Subprime | 251 |
| | 46 |
| | 13 |
| | 75 |
| | 88 |
| | 17 |
| | 21 |
| | 16 |
| | 34 |
|
Home equity | 88 |
| | 9 |
| | — |
| | 18 |
| | 18 |
| | 2 |
| | 5 |
| | 4 |
| | 7 |
|
Other | 6 |
| | 3 |
| | 2 |
| | 2 |
| | 4 |
| | 1 |
| | 1 |
| | 1 |
| | 1 |
|
Total | $ | 970 |
| | $ | 176 |
| | $ | 36 |
| | $ | 212 |
| | $ | 248 |
| | $ | 34 |
| | $ | 58 |
| | $ | 54 |
| | $ | 102 |
|
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(1) | Excludes transactions sponsored by Bank of America and Merrill Lynch where no representations or warranties were made. |
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(2) | Includes exposures on third-party sponsored transactions related to legacy entity originations. |
As it relates to private-label securitizations, a contractual liability to repurchase mortgage loans generally arises if there is a breach of representations and warranties that materially and adversely affects the interest of the investor or all the investors in a securitization trust or of the monoline insurer or other financial guarantor (as applicable).
We have received approximately $36.8 billion of representations and warranties repurchase claims (including duplicate claims) related to loans originated between 2004 and 2008, including $27.5 billion from private-label securitization trustees and a financial guarantee provider, $8.5 billion from whole-loan investors and $816 million from one private-label securitization counterparty. New private-label claims are primarily related to repurchase requests received from trustees for private-label securitization transactions not included in the BNY Mellon Settlement. Of the $36.8 billion in claims, we have resolved $17.5 billion of these claims with losses of $2.0 billion. Approximately $3.8 billion of these claims were resolved through repurchase or indemnification, $5.0 billion were rescinded by the investor, $336 million were resolved through settlements and $8.4 billion are not actionable under the applicable statute of limitations and are therefore considered resolved.
At September 30, 2015, for these vintages, the notional amount of unresolved repurchase claims (including duplicate claims) submitted by private-label securitization trustees, whole-loan investors, including third-party securitization sponsors and others was $19.2 billion, before subtracting $2.6 billion of duplicate claims primarily submitted without loan file reviews, resulting in net unresolved repurchase claims of $16.6 billion. We have performed an initial review with respect to substantially all of these claims and although we do not believe a valid basis for repurchase has been established by the claimant, we consider such claims activity in the computation of our liability for representations and warranties. Until we receive a repurchase claim, we generally do not review loan files related to private-label securitizations and believe we are not required by the governing documents to do so, unless particular facts suggest we should review an individual loan file.
Estimated Range of Possible Loss
We currently estimate that the range of possible loss for representations and warranties exposures could be up to $2 billion over existing accruals at September 30, 2015. We treat claims that are time-barred as resolved and do not consider such claims in the estimated range of possible loss. The estimated range of possible loss reflects principally non-GSE exposures. It represents a reasonably possible loss, but does not represent a probable loss, and is based on currently available information, significant judgment and a number of assumptions that are subject to change.
For more information on the methodology used to estimate the representations and warranties liability, the corresponding estimated range of possible loss and the types of losses not considered, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements and Item 1A. Risk Factors of the Corporation's 2014 Annual Report on Form 10-K and, for more information related to the sensitivity of the assumptions used to estimate our liability for representations and warranties, see Complex Accounting Estimates – Representations and Warranties Liability on page 113 of the MD&A of the Corporation's 2014 Annual Report on Form 10-K.
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Servicing, Foreclosure and Other Mortgage Matters |
We service a large portion of the loans we or our subsidiaries have securitized and also service loans on behalf of third-party securitization vehicles and other investors. Our servicing obligations are set forth in servicing agreements with the applicable counterparty. These obligations may include, but are not limited to, loan repurchase requirements in certain circumstances, indemnifications, payment of fees, advances for foreclosure costs that are not reimbursable, or responsibility for losses in excess of partial guarantees for VA loans.
Servicing agreements with the GSEs and GNMA generally provide the GSEs and GNMA with broader rights relative to the servicer than are found in servicing agreements with private investors. For example, the GSEs claim that they have the contractual right to loan repurchase for certain servicing breaches. In addition, the GSEs' first-lien mortgage seller/servicer guides provide timelines to resolve delinquent loans through workout efforts or liquidation, if necessary, and require the imposition of compensatory fees if those deadlines are not satisfied except for reasons beyond the control of the servicer. Servicers for GNMA are required to service in accordance with the applicable government agency requirements which include detailed regulatory requirements for servicing loans and reducing the amount of insurance or guaranty benefits that are paid if the applicable timelines are not satisfied. In addition, many non-agency RMBS and whole-loan servicing agreements state that the servicer may be liable for failure to perform its servicing obligations in keeping with industry standards or for acts or omissions that involve willful malfeasance, bad faith or gross negligence in the performance of, or reckless disregard of, the servicer's duties.
It is not possible to reasonably estimate our liability with respect to certain potential servicing-related claims. While we have recorded certain accruals for servicing-related claims, the amount of potential liability in excess of existing accruals could be material to the Corporation's results of operations or cash flows for any particular reporting period.
Mortgage Electronic Registration Systems, Inc.
For information on Mortgage Electronic Registration Systems, Inc., see Off-Balance Sheet Arrangements and Contractual Obligations – Mortgage Electronic Registration Systems, Inc. on page 54 of the MD&A of the Corporation's 2014 Annual Report on Form 10-K.
Other Mortgage-related Matters
We continue to be subject to additional borrower and non-borrower litigation and governmental and regulatory scrutiny and investigations related to our past and current origination, servicing, transfer of servicing and servicing rights, servicing compliance obligations, and foreclosure activities, and MI and captive reinsurance practices with mortgage insurers, including those claims not covered by the National Mortgage Settlement or the August 20, 2014 settlement with the DoJ. For more information on the DoJ Settlement, see Off-Balance Sheet Arrangements and Contractual Obligations – Department of Justice Settlement on page 53 of the MD&A of the Corporation's 2014 Annual Report on Form 10-K. The ongoing environment of additional regulation, increased regulatory compliance obligations, and enhanced regulatory enforcement, combined with ongoing uncertainty related to the continuing evolution of the regulatory environment, has resulted in increased operational and compliance costs and may limit our ability to continue providing certain products and services. For more information on management's estimate of the aggregate range of possible loss and on regulatory investigations, see Note 10 – Commitments and Contingencies to the Consolidated Financial Statements.
Mortgage-related Settlements – Servicing Matters
The National Mortgage Settlement expired in substantial part in accordance with its terms on October 4, 2015. The independent monitor for the settlement is continuing to conduct his review of our compliance with the uniform servicing standards during the period prior to the expiration of the National Mortgage Settlement. The DoJ and all of the original servicers subject to the National Mortgage Settlement have agreed to extend one section of the National Mortgage Settlement that relates to remediation to service members in order to allow the parties further time to complete such remediation. For more information on servicing matters associated with the BNY Mellon Settlement and the National Mortgage Settlement, see Off-Balance Sheet Arrangements and Contractual Obligations – Mortgage-related Settlements – Servicing Matters on page 54 of the MD&A of the Corporation's 2014 Annual Report on Form 10-K.
Risk is inherent in all our business activities. The seven types of risk faced by the Corporation are strategic, credit, market, liquidity, compliance, operational and reputational risks. Sound risk management is needed to serve our customers and deliver for our shareholders. If not managed well, risks can result in financial loss, regulatory sanctions and penalties, and damage to our reputation, each of which may adversely impact our ability to execute our business strategies. The Corporation takes a comprehensive approach to risk management with a defined Risk Framework and an articulated Risk Appetite Statement which are approved annually by the Corporation's Board of Directors (the Board) and the Board's Enterprise Risk Committee (ERC).
Our Risk Framework is the foundation for comprehensive management of the risks facing the Corporation. The Risk Framework sets forth clear roles, responsibilities and accountability for the management of risk and provides a blueprint for how the Board, through delegation of authority to committees and executive officers, establishes risk appetite and associated limits for our activities.
Our Risk Appetite Statement is intended to ensure that the Corporation maintains an acceptable risk profile by providing a common framework and a comparable set of measures for senior management and the Board to clearly indicate the level of risk the Corporation is willing to accept. Risk appetite is set at least annually in conjunction with the strategic, capital and financial operating plans to align risk appetite with the Corporation's strategy and financial resources. Our line of business strategies and risk appetite are also similarly aligned. For a more detailed discussion of our risk management activities, see the discussion below and pages 55 through 109 of the MD&A of the Corporation's 2014 Annual Report on Form 10-K.
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Strategic Risk Management |
Strategic risk is embedded in every business and is one of the major risk categories along with credit, market, liquidity, compliance, operational and reputational risks. It is the risk that results from incorrect assumptions, inappropriate business plans, ineffective business strategy execution, or failure to respond in a timely manner to changes in the regulatory, macroeconomic and competitive environments, customer preferences, and technology developments in the geographic locations in which we operate.
Our appetite for strategic risk is assessed based on the strategic plan, with strategic risks selectively and carefully considered against the backdrop of the evolving marketplace. Strategic risk is managed in the context of our overall financial condition, risk appetite and stress test results, among other considerations. The chief executive officer and executive management team manage and act on significant strategic actions, such as divestitures, consolidation of legal entities or capital actions subsequent to required review and approval by the Board.
For more information on our strategic risk management activities, see page 58 of the MD&A of the Corporation's 2014 Annual Report on Form 10-K.
The Corporation manages its capital position to maintain sufficient capital to support its business activities and to maintain capital, risk and risk appetite commensurate with one another. Additionally, we seek to maintain safety and soundness at all times, even under adverse scenarios, take advantage of organic growth opportunities, maintain ready access to financial markets, continue to serve as a credit intermediary, remain a source of strength for our subsidiaries, and satisfy current and future regulatory capital requirements. Capital management is integrated into our risk and governance processes, as capital is a key consideration in the development of our strategic plan, risk appetite and risk limits.
We conduct an Internal Capital Adequacy Assessment Process (ICAAP) on a periodic basis. The ICAAP is a forward-looking assessment of our projected capital needs and resources, incorporating earnings, balance sheet and risk forecasts under baseline and adverse economic and market conditions. We utilize periodic stress tests to assess the potential impacts to our balance sheet, earnings, regulatory capital and liquidity under a variety of stress scenarios. We perform qualitative risk assessments to identify and assess material risks not fully captured in our forecasts or stress tests. We assess the potential capital impacts of proposed changes to regulatory capital requirements. Management assesses ICAAP results and provides documented quarterly assessments of the adequacy of our capital guidelines and capital position to the Board or its committees.
The Corporation periodically reviews capital allocated to its businesses and allocates capital annually during the strategic and capital planning processes. For additional information, see Business Segment Operations on page 25.
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CCAR and Capital Planning |
The Federal Reserve requires BHCs to submit a capital plan and requests for capital actions on an annual basis, consistent with the rules governing the Comprehensive Capital Analysis and Review (CCAR) capital plan. The CCAR capital plan is the central element of the Federal Reserve's approach to ensure that large BHCs have adequate capital and robust processes for managing their capital.
In January 2015, we submitted our 2015 CCAR capital plan and related supervisory stress tests. The requested capital actions included a request to repurchase $4.0 billion of common stock over five quarters beginning in the second quarter of 2015, and to maintain the quarterly common stock dividend at the current rate of $0.05 per share. Based on the information in our January 2015 submission, we exceeded all stressed capital ratio minimum requirements in the severely adverse scenario with more than $20 billion in excess capital after all planned capital actions, a significant improvement from the prior-year CCAR quantitative results. On March 11, 2015, the Federal Reserve advised that it did not object to our 2015 capital plan but gave a conditional non-objection under which we were required to resubmit our CCAR capital plan by September 30, 2015 and address certain weaknesses the Federal Reserve identified in our capital planning process. We have established plans and taken actions which we believe address the identified weaknesses, and we resubmitted our CCAR capital plan on September 30, 2015. The Federal Reserve has 75 days to review our resubmitted CCAR capital plan and our capital planning revisions. Following that review, the Federal Reserve may determine that the capital plan is not adequate or the identified weaknesses are not being satisfactorily addressed, and may restrict our future capital actions.
Pending the Federal Reserve's review of the resubmission of our CCAR capital plan, we are permitted to proceed with our stock repurchase program and to maintain our common stock dividend at the current rate. As of September 30, 2015, in connection with our 2015 CCAR capital plans, we have repurchased approximately $1.6 billion of common stock. The timing and amount of additional common stock repurchases and common stock dividends will continue to be consistent with our 2015 CCAR capital plan and will be subject to the Federal Reserve's review of our submission of a revised capital plan as discussed above. In addition, the timing and amount of common stock repurchases will be subject to various factors, including the Corporation's capital position, liquidity, financial performance and alternative uses of capital, stock trading price, and general market conditions, and may be suspended at any time. The common stock repurchases may be effected through open market purchases or privately negotiated transactions, including repurchase plans that satisfy the conditions of Rule 10b5-1 of the Securities Exchange Act of 1934.
As a financial services holding company, we are subject to regulatory capital rules issued by U.S. banking regulators. On January 1, 2014, we became subject to Basel 3, which includes certain transition provisions through January 1, 2019. The Corporation and its primary affiliated banking entity, BANA, are Advanced approaches institutions under Basel 3.
Basel 3 Overview
Basel 3 updated the composition of capital and established a Common equity tier 1 capital ratio. Common equity tier 1 capital primarily includes common stock, retained earnings and accumulated OCI. Basel 3 revised minimum capital ratios and buffer requirements, added a supplementary leverage ratio (SLR), and addressed the adequately capitalized minimum requirements under the PCA framework. Finally, Basel 3 established two methods of calculating risk-weighted assets, the Standardized approach and the Advanced approaches. For additional information, see Capital Management – Standardized Approach and Capital Management – Advanced Approaches on page 59.
As an Advanced approaches institution, under Basel 3, we were required to complete a qualification period (parallel run) to demonstrate compliance with the Basel 3 Advanced approaches to the satisfaction of U.S. banking regulators. We received approval to begin using the Advanced approaches capital framework to determine risk-based capital requirements beginning in the fourth quarter of 2015. As previously disclosed, with the approval to exit parallel run, U.S. banking regulators requested modifications to certain internal analytical models including the wholesale (e.g., commercial) credit models which will increase our risk-weighted assets in the fourth quarter of 2015. All requested modifications to the internal analytical models will be reflected in the risk-based capital ratios in the fourth quarter of 2015. Prior to the requested modification, we estimate that our Common equity tier 1 capital ratio under Basel 3 Advanced approaches on a fully phased-in basis would have been approximately 11.0 percent at September 30, 2015. Having exited parallel run on October 1, 2015, with the requested modifications to these models fully incorporated, the pro-forma Common equity tier 1 capital ratio under the Basel 3 Advanced approaches on a fully phased-in basis would have been an estimated 9.7 percent at September 30, 2015. In the fourth quarter of 2015, we will be required to report regulatory risk-based capital ratios and risk-weighted assets under both the Standardized and Advanced approaches. The approach that yields the lower ratio is to be used to assess capital adequacy including under the PCA framework. Prior to the fourth quarter of 2015, we are required to report our capital adequacy under the Standardized approach only.
Regulatory Capital Composition
Basel 3 requires certain deductions from and adjustments to capital, which are primarily those related to MSRs, deferred tax assets and defined benefit pension assets. Also, any assets that are a direct deduction from the computation of capital are excluded from risk-weighted assets and adjusted average total assets. Basel 3 also provides for the inclusion in capital of net unrealized gains and losses on AFS debt and certain marketable equity securities recorded in accumulated OCI. These changes are impacted by, among other factors, fluctuations in interest rates, earnings performance and corporate actions. Under Basel 3 regulatory capital transition provisions, changes to the composition of regulatory capital are generally recognized in 20 percent annual increments, and will be fully recognized as of January 1, 2018.
Table 19 summarizes how certain regulatory capital deductions and adjustments have been or will be transitioned from 2014 through 2018 for Common equity tier 1 and Tier 1 capital.
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Table 19 |
Summary of Certain Basel 3 Regulatory Capital Transition Provisions |
Beginning on January 1 of each year | 2014 | | 2015 | | 2016 | | 2017 | | 2018 |
Common equity tier 1 capital | | | | | | | | | |
Percent of total amount deducted from Common equity tier 1 capital includes: | 20% | | 40% | | 60% | | 80% | | 100% |
Deferred tax assets arising from net operating loss and tax credit carryforwards; intangibles, other than mortgage servicing rights and goodwill; defined benefit pension fund net assets; net unrealized cumulative gains (losses) related to changes in own credit risk on liabilities, including derivatives, measured at fair value; direct and indirect investments in our own Common equity tier 1 capital instruments; certain amounts exceeding the threshold by 10 percent individually and 15 percent in aggregate |
Percent of total amount used to adjust Common equity tier 1 capital includes (1): | 80% | | 60% | | 40% | | 20% | | 0% |
Net unrealized gains (losses) on AFS debt and certain marketable equity securities recorded in accumulated OCI; employee benefit plan adjustments recorded in accumulated OCI |
Tier 1 capital | | | | | | | | | |
Percent of total amount deducted from Tier 1 capital includes: | 80% | | 60% | | 40% | | 20% | | 0% |
Deferred tax assets arising from net operating loss and tax credit carryforwards; defined benefit pension fund net assets; net unrealized cumulative gains (losses) related to changes in own credit risk on liabilities, including derivatives, measured at fair value |
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(1) | Represents the phase-out percentage of the exclusion by year (e.g., 20 percent of net unrealized gains (losses) on AFS debt and certain marketable equity securities recorded in accumulated OCI was included in 2014). |
Additionally, Basel 3 revised the regulatory capital treatment for Trust Securities, requiring them to be transitioned from Tier 1 capital into Tier 2 capital in 2014 and 2015, until fully excluded from Tier 1 capital in 2016, and transitioned from Tier 2 capital beginning in 2016 with the full exclusion in 2022. As of September 30, 2015, our qualifying Trust Securities were $1.4 billion, approximately 10 bps of the Tier 1 capital ratio.
Minimum Capital Requirements
Minimum capital requirements and related buffers are being phased in from January 1, 2014 through January 1, 2019. Effective January 1, 2015, the PCA framework was also amended to reflect the requirements of Basel 3. The PCA framework establishes categories of capitalization, including "well capitalized," based on regulatory ratio requirements. U.S. banking regulators are required to take certain mandatory actions depending on the category of capitalization, with no mandatory actions required for "well-capitalized" banking organizations, which included BANA at September 30, 2015. Also effective January 1, 2015, Common equity tier 1 capital is included in the measurement of "well capitalized" for depository institutions.
Beginning January 1, 2016, we will be subject to a capital conservation buffer, a countercyclical capital buffer and a G-SIB surcharge which will be phased in over a three-year period ending January 1, 2019. Once fully phased in, the Corporation's risk-based capital ratio requirements will include a capital conservation buffer greater than 2.5 percent, plus any applicable countercyclical capital buffer and G-SIB surcharge in order to avoid certain restrictions on capital distributions and discretionary bonus payments. The buffers and surcharge must be composed solely of Common equity tier 1 capital. The countercyclical capital buffer is currently set at zero. U.S. banking regulators must jointly decide on any increase in the countercyclical buffer, after which time institutions will have up to one year for implementation. Based on the Federal Reserve final rule published in July 2015, under certain assumptions, we estimate that our G-SIB surcharge will increase our risk-based capital ratio requirements by 3.0 percent. For more information on our G-SIB surcharge, see Capital Management – Regulatory Developments on page 65.
Table 20 presents regulatory minimum and "well-capitalized" ratio requirements in accordance with Basel 3 Standardized – Transition as measured at September 30, 2015 and December 31, 2014.
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Table 20 |
Bank of America Corporation Regulatory Capital Ratio Requirements under Basel 3 Standardized – Transition |
| | September 30, 2015 | | December 31, 2014 |
| | Regulatory Minimum (1) | | Well-capitalized (2) | | Regulatory Minimum (1) | | Well-capitalized (2) |
Common equity tier 1 | | 4.5 | % | | n/a |
| | 4.0 | % | | n/a |
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Tier 1 capital | | 6.0 |
| | 6.0 | % | | 5.5 |
| | 6.0 | % |
Total capital | | 8.0 |
| | 10.0 |
| | 8.0 |
| | 10.0 |
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Tier 1 leverage | | 4.0 |
| | n/a |
| | 4.0 |
| | n/a |
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(1) | When presented on a fully phased-in basis, beginning January 1, 2019, the minimum Basel 3 risk-based capital ratio requirements for the Corporation are expected to significantly increase. For additional information, see Table 24. |
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(2) | To be "well capitalized" under current U.S. banking regulatory agency definitions, a bank holding company must maintain these or higher ratios and not be subject to a Federal Reserve order or directive to maintain higher capital levels. |
n/a = not applicable
Standardized Approach
Total risk-weighted assets under the Basel 3 Standardized approach consist of credit risk and market risk measures. Credit risk-weighted assets are measured by applying fixed risk weights to on- and off-balance sheet exposures (excluding securitizations), determined based on the characteristics of the exposure, such as type of obligor, Organization for Economic Cooperation and Development (OECD) country risk code and maturity, among others. Off-balance sheet exposures primarily include financial guarantees, unfunded lending commitments, letters of credit and potential future derivative exposures. Market risk applies to covered positions which include trading assets and liabilities, foreign exchange exposures and commodity exposures. Market risk capital is modeled for general market risk and specific risk for products where specific risk regulatory approval has been granted; in the absence of specific risk model approval, standard specific risk charges apply. For securitization exposures, risk-weighted assets are determined using the Simplified Supervisory Formula Approach (SSFA). Under the Standardized approach, no distinction is made for variations in credit quality for corporate exposures, and the economic benefit of collateral is restricted to a limited list of eligible securities and cash.
Advanced Approaches
In addition to the credit risk and market risk measures, Basel 3 Advanced approaches include measures of operational risk and risks related to the credit valuation adjustment (CVA) for over-the-counter (OTC) derivative exposures. The Advanced approaches rely on internal analytical models to measure risk weights for credit risk exposures and allow the use of models to estimate the exposure at default (EAD) for certain exposure types. Market risk capital measurements are consistent with the Standardized approach, except for securitization exposures. For both trading and non-trading securitization exposures, institutions are permitted to use the Supervisory Formula Approach (SFA) and would use the SSFA if the SFA is unavailable for a particular exposure. Non-securitization credit risk exposures are measured using internal ratings-based models to determine the applicable risk weight by estimating the probability of default, loss given default (LGD) and, in certain instances, EAD. The internal analytical models primarily rely on internal historical default and loss experience. Operational risk is measured using internal analytical models which rely on both internal and external operational loss experience and data. The calculations require management to make estimates, assumptions and interpretations, including with respect to the probability of future events based on historical experience. Actual results could differ from those estimates and assumptions. Under the Federal Reserve's reservation of authority, they may require us to hold an amount of capital greater than otherwise required under the capital rules if they determine that our risk-based capital requirement using our internal analytical models is not commensurate with our credit, market, operational or other risks.
Supplementary Leverage Ratio
Basel 3 also requires Advanced approaches institutions to disclose a SLR. The numerator of the SLR is quarter-end Basel 3 Tier 1 capital. The denominator is total leverage exposure based on the daily average of the sum of on-balance sheet exposures less permitted Tier 1 deductions, as well as the simple average of certain off-balance sheet exposures, as of the end of each month in a quarter. Off-balance sheet exposures primarily include undrawn lending commitments, letters of credit, OTC derivatives and repo-style transactions. Total leverage exposure includes the effective notional principal amount of credit derivatives and similar instruments through which credit protection is sold. The credit conversion factors (CCFs) applied to certain off-balance sheet exposures conform to the graduated CCF utilized under the Basel 3 Standardized approach, but are subject to a minimum 10 percent CCF. Effective January 1, 2018, the Corporation will be required to maintain a minimum SLR of 3.0 percent, plus a supplementary leverage buffer of 2.0 percent, in order
to avoid certain restrictions on capital distributions and discretionary bonuses. Insured depository institution subsidiaries of BHCs, including BANA, will be required to maintain a minimum 6.0 percent SLR to be considered "well capitalized" under the PCA framework.
As of September 30, 2015, the Corporation's estimated SLR on a fully phased-in basis was 6.4 percent, which exceeds the 5.0 percent threshold that represents the minimum plus the supplementary leverage buffer for BHCs. The estimated SLR for BANA on a fully phased-in basis was 7.0 percent, which exceeds the 6.0 percent "well-capitalized" level for insured depository institutions of BHCs.
Capital Composition and Ratios
Table 21 presents Bank of America Corporation's capital ratios and related information in accordance with Basel 3 Standardized – Transition as measured at September 30, 2015 and December 31, 2014. As of September 30, 2015 and December 31, 2014, the Corporation meets the definition of "well capitalized" under current regulatory requirements.
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Table 21 |
Bank of America Corporation Regulatory Capital under Basel 3 Standardized – Transition |
| September 30, 2015 | | December 31, 2014 |
(Dollars in millions) | Ratio | | Amount | | Ratio | | Amount |
Common equity tier 1 capital | 11.6 | % | | $ | 161,649 |
| | 12.3 | % | | $ | 155,361 |
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Tier 1 capital | 12.9 |
| | 178,830 |
| | 13.4 |
| | 168,973 |
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Total capital | 15.8 |
| | 219,901 |
| | 16.5 |
| | 208,670 |
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Tier 1 leverage | 8.5 |
| | 178,830 |
| | 8.2 |
| | 168,973 |
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| | | | | September 30 2015 | | December 31 2014 |
Risk-weighted assets (in billions) (1) | | | | | $ | 1,392 |
| | $ | 1,262 |
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Adjusted quarterly average total assets (in billions) (2) | | | | | 2,092 |
| | 2,060 |
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(1) | On a pro-forma basis, under Basel 3 Standardized – Transition as measured at January 1, 2015, the December 31, 2014 risk-weighted assets would have been $1,392 billion. |
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(2) | Reflects adjusted average total assets for the three months ended September 30, 2015 and December 31, 2014. |
Common equity tier 1 capital under Basel 3 Standardized – Transition was $161.6 billion at September 30, 2015, an increase of $6.3 billion compared to December 31, 2014 driven by earnings, partially offset by dividends, common stock repurchases and the impact of certain transition provisions under Basel 3 Standardized – Transition. For more information on Basel 3 transition provisions, see Table 19. During the nine months ended September 30, 2015, Total capital increased $11.2 billion primarily driven by the same factors that drove the increase in Common equity tier 1 capital as well as issuances of preferred stock and subordinated debt. The Tier 1 leverage ratio increased 35 bps compared to December 31, 2014 primarily driven by an increase in Tier 1 capital. For additional information, see Table 22.
Risk-weighted assets increased $130 billion during the nine months ended September 30, 2015 to $1,392 billion primarily due to the change in the calculation of risk-weighted assets from the general risk-based approach at December 31, 2014 to the Basel 3 Standardized approach. During the nine months ended September 30, 2015, on a pro-forma basis under Basel 3 Standardized – Transition, risk-weighted assets of $1,392 billion remained unchanged compared to December 31, 2014.
At September 30, 2015, an increase or decrease in our Common equity tier 1, Tier 1 or Total capital ratios by one bp would require a change of $139 million in Common equity tier 1, Tier 1 or Total capital. We could also increase our Common equity tier 1, Tier 1 or Total capital ratios by one bp on such date by a reduction in risk-weighted assets of $1.2 billion, $1.1 billion and $880 million, respectively. An increase in our Tier 1 leverage ratio by one bp on such date would require $209 million of additional Tier 1 capital or a reduction of $2.4 billion in adjusted average assets.
Table 22 presents the capital composition as measured under Basel 3 Standardized – Transition at September 30, 2015 and December 31, 2014.
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Table 22 |
Capital Composition under Basel 3 Standardized – Transition |
(Dollars in millions) | September 30 2015 | | December 31 2014 |
Total common shareholders' equity | $ | 233,632 |
| | $ | 224,162 |
|
Goodwill | (69,217 | ) | | (69,234 | ) |
Deferred tax assets arising from net operating loss and tax credit carryforwards | (3,703 | ) | | (2,226 | ) |
Unamortized net periodic benefit costs recorded in accumulated OCI, net-of-tax | 1,964 |
| | 2,680 |
|
Net unrealized (gains) losses on AFS debt and equity securities and net (gains) losses on derivatives recorded in accumulated OCI, net-of-tax | 299 |
| | 573 |
|
Intangibles, other than mortgage servicing rights and goodwill | (1,102 | ) | | (639 | ) |
DVA related to liabilities and derivatives (1) | 152 |
| | 231 |
|
Other | (376 | ) | | (186 | ) |
Common equity tier 1 capital | 161,649 |
| | 155,361 |
|
Qualifying preferred stock, net of issuance cost | 22,273 |
| | 19,308 |
|
Deferred tax assets arising from net operating loss and tax credit carryforwards | (5,554 | ) | | (8,905 | ) |
Trust preferred securities | 1,430 |
| | 2,893 |
|
Defined benefit pension fund assets | (470 | ) | | (599 | ) |
DVA related to liabilities and derivatives under transition | 228 |
| | 925 |
|
Other | (726 | ) | | (10 | ) |
Total Tier 1 capital | 178,830 |
| | 168,973 |
|
Long-term debt qualifying as Tier 2 capital | 20,565 |
| | 17,953 |
|
Qualifying allowance for credit losses | 13,318 |
| | 14,634 |
|
Nonqualifying capital instruments subject to phase out from Tier 2 capital | 4,803 |
| | 3,881 |
|
Minority interest | 2,404 |
| | 3,233 |
|
Other | (19 | ) | | (4 | ) |
Total capital | $ | 219,901 |
| | $ | 208,670 |
|
| |
(1) | Represents loss on structured liabilities and derivatives, net-of-tax, that is excluded from Common equity tier 1, Tier 1 and Total capital for regulatory capital purposes. |
Table 23 presents the components of our risk-weighted assets as measured under Basel 3 Standardized – Transition at September 30, 2015 and December 31, 2014.
|
| | | | | | | |
Table 23 |
Risk-weighted assets under Basel 3 Standardized – Transition |
(Dollars in billions) | September 30 2015 | | December 31 2014 |
Credit risk | $ | 1,297 |
| | $ | 1,169 |
|
Market risk | 95 |
| | 93 |
|
Total risk-weighted assets | $ | 1,392 |
| | $ | 1,262 |
|
Table 24 presents the expected regulatory minimum ratio requirements in accordance with Basel 3 on a fully phased-in basis at January 1, 2019. The regulatory minimum Basel 3 Common equity tier 1, Tier 1 and Total capital ratio requirements for the Corporation will be comprised of the minimum ratio for Common equity tier 1, Tier 1 and Total capital as shown in Table 20, plus a capital conservation buffer greater than 2.5 percent, the G-SIB surcharge of 3.0 percent and any countercyclical buffer, which is currently set at zero. Table 24 assumes a capital conservation buffer of 2.5 percent. For more information on these buffers, see Capital Management – Regulatory Developments on page 65.
|
| | | |
Table 24 | | |
Bank of America Corporation Regulatory Capital Ratio Requirements – Fully Phased-in | | |
| | January 1, 2019 |
| | Regulatory Minimum |
Common equity tier 1 | | 10.0 | % |
Tier 1 capital | | 11.5 |
|
Total capital | | 13.5 |
|
Tier 1 leverage | | 4.0 |
|
Table 25 presents estimates of our Basel 3 regulatory risk-based capital ratios on a fully phased-in basis at September 30, 2015 and December 31, 2014. The Common equity tier 1, Tier 1 and Total capital estimates reflect the full impact of Basel 3 changes to capital composition after the transition period ends on January 1, 2019. These changes include certain deductions from and adjustments to capital, the most significant of which relate to deferred tax assets, and the inclusion of net unrealized gains and losses on AFS debt and certain marketable equity securities recorded in accumulated OCI. These ratios are considered non-GAAP financial measures until the end of the transition period on January 1, 2019 when adopted and required by U.S. banking regulators.
|
| | | | | | | | | | | | | | |
Table 25 |
Bank of America Corporation Regulatory Capital – Fully Phased-in (1, 2) |
|
|
|
|
| September 30, 2015 | | December 31, 2014 |
(Dollars in millions) | Ratio | | Amount | | Ratio | | Amount |
Standardized approach | | | | | | | |
Common equity tier 1 capital | 10.8 | % | | $ | 153,089 |
| | 10.0 | % | | $ | 141,217 |
|
Tier 1 capital | 12.3 |
| | 174,631 |
| | 11.3 |
| | 160,480 |
|
Total capital (3) | 14.9 |
| | 210,817 |
| | 13.9 |
| | 196,115 |
|
Advanced approaches | | | | | | | |
Common equity tier 1 capital | 11.0 |
| | 153,089 |
| | 9.6 |
| | 141,217 |
|
Tier 1 capital | 12.5 |
| | 174,631 |
| | 11.0 |
| | 160,480 |
|
Total capital (3) | 14.5 |
| | 202,062 |
| | 12.7 |
| | 185,986 |
|
Pro-forma Common equity tier 1 capital (4) | 9.7 |
| | 153,089 |
| | — |
| | — |
|
| | | | | | | |
| | | | | September 30 2015 | | December 31 2014 |
Risk-weighted assets – Standardized approach (in billions) | | | | | $ | 1,415 |
| | $ | 1,415 |
|
Risk-weighted assets – Advanced approaches (in billions) | | | | | 1,398 |
| | 1,465 |
|
Pro-forma risk-weighted assets – Advanced approaches (in billions) (4) | | | | | 1,570 |
| | — |
|
| |
(1) | We received approval to begin using the Advanced approaches capital framework to determine risk-based capital requirements beginning in the fourth quarter of 2015. With the approval to exit parallel run, we will be required to report regulatory capital risk-weighted assets and ratios under both the Standardized and Advanced approaches. The approach that yields the lower ratio is to be used to assess capital adequacy. Prior to exiting parallel run, we were required to report regulatory capital risk-weighted assets and ratios under the Standardized approach only. As previously disclosed, with the approval to exit parallel run, U.S. banking regulators requested modifications to certain internal analytical models including the wholesale (e.g., commercial) credit models which will increase our risk-weighted assets in the fourth quarter of 2015. |
| |
(2) | Basel 3 Advanced approaches estimates assume approval by U.S. banking regulators of our internal analytical models. We are working to obtain approval from our regulators of the internal models methodology (IMM). |
| |
(3) | Total capital under the Advanced approaches differs from the Standardized approach due to differences in the amount permitted in Tier 2 capital related to the qualifying allowance for credit losses. |
| |
(4) | Pro-forma Basel 3 Advanced approaches estimates include all requested modifications to the internal analytical models. |
Table 26 presents a reconciliation of regulatory capital in accordance with Basel 3 Standardized – Transition to the Basel 3 Standardized approach fully phased-in estimates and Basel 3 Advanced approaches fully phased-in estimates at September 30, 2015 and December 31, 2014.
|
| | | | | | | |
Table 26 |
Regulatory Capital Reconciliation between Basel 3 Transition to Fully Phased-in (1, 2) |
(Dollars in millions) | September 30 2015 | | December 31 2014 |
Common equity tier 1 capital (transition) | $ | 161,649 |
| | $ | 155,361 |
|
Deferred tax assets arising from net operating loss and tax credit carryforwards phased in during transition | (5,554 | ) | | (8,905 | ) |
Accumulated OCI phased in during transition | (1,018 | ) | | (1,592 | ) |
Intangibles phased in during transition | (1,654 | ) | | (2,556 | ) |
Defined benefit pension fund assets phased in during transition | (470 | ) | | (599 | ) |
DVA related to liabilities and derivatives phased in during transition | 228 |
| | 925 |
|
Other adjustments and deductions phased in during transition | (92 | ) | | (1,417 | ) |
Common equity tier 1 capital (fully phased-in) | 153,089 |
| | 141,217 |
|
Additional Tier 1 capital (transition) | 17,181 |
| | 13,612 |
|
Deferred tax assets arising from net operating loss and tax credit carryforwards phased out during transition | 5,554 |
| | 8,905 |
|
Trust preferred securities phased out during transition | (1,430 | ) | | (2,893 | ) |
Defined benefit pension fund assets phased out during transition | 470 |
| | 599 |
|
DVA related to liabilities and derivatives phased out during transition | (228 | ) | | (925 | ) |
Other transition adjustments to Additional Tier 1 capital | (5 | ) | | (35 | ) |
Additional Tier 1 capital (fully phased-in) | 21,542 |
| | 19,263 |
|
Tier 1 capital (fully phased-in) | 174,631 |
| | 160,480 |
|
Tier 2 capital (transition) | 41,071 |
| | 39,697 |
|
Nonqualifying capital instruments phased out during transition | (4,803 | ) | | (3,881 | ) |
Other transition adjustments to Tier 2 capital | (82 | ) | | (181 | ) |
Tier 2 capital (fully phased-in) | 36,186 |
| | 35,635 |
|
Basel 3 Standardized approach Total capital (fully phased-in) | 210,817 |
| | 196,115 |
|
Change in Tier 2 qualifying allowance for credit losses | (8,755 | ) | | (10,129 | ) |
Basel 3 Advanced approaches Total capital (fully phased-in) | $ | 202,062 |
| | $ | 185,986 |
|
| | | |
Risk-weighted assets – As reported to Basel 3 (fully phased-in) | | | |
As reported risk-weighted assets | $ | 1,391,672 |
| | $ | 1,261,544 |
|
Changes in risk-weighted assets from reported to fully phased-in | 22,989 |
| | 153,722 |
|
Basel 3 Standardized approach risk-weighted assets (fully phased-in) | 1,414,661 |
| | 1,415,266 |
|
Changes in risk-weighted assets for advanced models | (17,157 | ) | | 50,213 |
|
Basel 3 Advanced approaches risk-weighted assets (fully phased-in) | 1,397,504 |
| | $ | 1,465,479 |
|
Changes in risk-weighted assets due to modifications to Internal Analytical Models | 172,697 |
| | — |
|
Pro-forma Basel 3 Advanced approaches risk-weighted assets (fully phased-in) (3) | $ | 1,570,201 |
| | — |
|
| |
(1) | We received approval to begin using the Advanced approaches capital framework to determine risk-based capital requirements beginning in the fourth quarter of 2015. With the approval to exit parallel run, we will be required to report regulatory capital risk-weighted assets and ratios under both the Standardized and Advanced approaches. The approach that yields the lower ratio is to be used to assess capital adequacy. Prior to exiting parallel run, we were required to report regulatory capital risk-weighted assets and ratios under the Standardized approach only. As previously disclosed, with the approval to exit parallel run, U.S. banking regulators requested modifications to certain internal analytical models including the wholesale (e.g., commercial) credit models which will increase our risk-weighted assets in the fourth quarter of 2015. |
| |
(2) | Basel 3 Advanced approaches estimates assume approval by U.S. banking regulators of our internal analytical models. We are working to obtain approval from our regulators of the internal models methodology (IMM). |
| |
(3) | Pro-forma Basel 3 Advanced approaches estimates include all requested modifications to the internal analytical models. |
Bank of America, N.A. Regulatory Capital
Table 27 presents regulatory capital information for BANA in accordance with Basel 3 Standardized – Transition as measured at September 30, 2015 and December 31, 2014.
|
| | | | | | | | | | | | | | | | | | | |
Table 27 |
Bank of America, N.A. Regulatory Capital under Basel 3 Standardized – Transition |
| September 30, 2015 | | December 31, 2014 |
(Dollars in millions) | Ratio | | Amount | | Minimum Required (1) | | Ratio | | Amount | | Minimum Required (1) |
Common equity tier 1 capital | 12.5 | % | | $ | 144,880 |
| | 6.5 | % | | 13.1 | % | | $ | 145,150 |
| | 4.0 | % |
Tier 1 capital | 12.5 |
| | 144,880 |
| | 8.0 |
| | 13.1 |
| | 145,150 |
| | 6.0 |
|
Total capital | 13.8 |
| | 160,331 |
| | 10.0 |
| | 14.6 |
| | 161,623 |
| | 10.0 |
|
Tier 1 leverage | 9.3 |
| | 144,880 |
| | 5.0 |
| | 9.6 |
| | 145,150 |
| | 5.0 |
|
| |
(1) | Percent required to meet guidelines to be considered "well capitalized" under the Prompt Corrective Action framework, except for the December 31, 2014 Common equity tier 1 capital which reflects capital adequacy minimum requirements as an Advanced approaches bank under Basel 3 during a transition period that ended in 2014. |
BANA's Common equity tier 1 capital ratio under Basel 3 Standardized – Transition was 12.5 percent at September 30, 2015, a decrease of 66 bps from December 31, 2014, primarily driven by dividends to the parent company and the change in the calculation of risk-weighted assets from the general risk-based approach at December 31, 2014 to the Basel 3 Standardized approach, partially offset by earnings. The Total capital ratio decreased 82 bps to 13.8 percent at September 30, 2015 compared to December 31, 2014 and the Tier 1 leverage ratio decreased 29 bps to 9.3 percent. The decrease in the Total capital ratio was driven by the same factors as the Common equity tier 1 capital ratio. The decrease in the Tier 1 leverage ratio was primarily driven by an increase in adjusted quarterly average total assets.
Regulatory Developments
Global Systemically Important Bank Surcharge
We have been designated as a global systemically important bank (G-SIB) and as such, are subject to a risk-based capital surcharge (G-SIB surcharge) that must be satisfied with Common equity tier 1 capital. The surcharge assessment methodology published by the Basel Committee on Banking Supervision (Basel Committee) relies on an indicator-based measurement approach (e.g., size, complexity, cross-jurisdictional activity, inter-connectedness and substitutability/financial institution infrastructure) to determine a score relative to the global banking industry. Institutions with the highest scores are designated as G-SIBs and are assigned to one of four loss absorbency buckets from 1.0 percent to 2.5 percent, in 0.5 percent increments based on each institution's relative score and supervisory judgment. A fifth loss absorbency bucket of 3.5 percent serves to discourage banks from becoming more systemically important.
In July 2015, the Federal Reserve finalized a regulation that will implement G-SIB surcharge requirements for the largest U.S. BHCs. Under the final rule, assignment to loss absorbency buckets will be determined by the higher score as calculated according to two methods. Method 1 is consistent with the Basel Committee's methodology, whereas Method 2 replaces the substitutability/financial institution infrastructure indicator with a measure of short-term wholesale funding and then determines the overall score by applying a fixed multiplier for each of the other systemic indicators. Under the final U.S. rules, the G-SIB surcharge will be phased in beginning on January 1, 2016, becoming fully effective on January 1, 2019. We estimate that our G-SIB surcharge will increase our risk-based capital ratio requirements by 3.0 percent under Method 2 and 1.5 percent under Method 1.
For more information on regulatory capital, see Note 16 – Regulatory Requirements and Restrictions to the Consolidated Financial Statements of the Corporation's 2014 Annual Report on Form 10-K.
Minimum Total Loss-Absorbing Capacity
In November 2014, the FSB proposed standards for the total loss-absorbing capacity (TLAC) that G-SIBs would be required to maintain in order to facilitate an orderly resolution in the event of failure. The proposal would require G-SIBs to hold sufficient amounts of qualifying regulatory capital and debt instruments to help ensure recapitalization and continuity of critical functions upon a resolution without imposing losses on taxpayers or threatening financial stability. Under the proposal, a G-SIB would be required to maintain minimum TLAC of 16.0 percent to 20.0 percent of risk-weighted assets, excluding regulatory Common equity tier 1 capital buffers, at least twice the minimum Basel 3 Tier 1 leverage ratio and at least 33 percent of the minimum TLAC requirement in the form of eligible long-term debt. The FSB intends to submit a final revised proposal recommendation to the Group of Twenty (G-20) in November 2015.
On October 30, 2015, the Federal Reserve voted to issue a notice of proposed rulemaking which establishes external TLAC requirements for U.S. BHCs designated as G-SIBs. Under the proposal by the Federal Reserve, U.S. G-SIBs would be required to maintain a minimum external TLAC of 16 percent of risk-weighted assets, excluding regulatory buffers, in 2019, increasing to the greater of 18 percent of risk-weighted assets, excluding regulatory buffers, and 9.5 percent of the denominator of the SLR in 2022. In addition, U.S. G-SIBs must meet the external TLAC requirement with minimum eligible long-term debt equal to the greater of 6 percent of risk-weighted assets plus the G-SIB surcharge, and 4.5 percent of the denominator of the SLR. We continue to monitor and evaluate developments and impacts related to this proposal.
Revisions to Approaches for Measuring Risk-weighted Assets
The Basel Committee has several open proposals to revise key methodologies for measuring risk-weighted assets. The proposals include a fundamental review of the trading book, which would update market risk measurement, and revisions to the CVA risk framework. The proposed revisions affect both modeled and standardized approaches for measuring market risk and CVA risk. The Basel Committee has also proposed revisions to the standardized approach for credit risk and the standardized approaches for operational risk. A revised standardized model for counterparty credit risk has previously been finalized. These revisions would be coupled with a proposed capital floor framework to limit the extent to which banks can reduce risk-weighted asset levels through the use of internal models. The Basel Committee expects to finalize the outstanding proposals by the end of 2016. Once the proposals are finalized, U.S. banking regulators may update the U.S. Basel 3 rules to incorporate the Basel Committee revisions.
Broker-dealer Regulatory Capital and Securities Regulation
The Corporation's principal U.S. broker-dealer subsidiaries are Merrill Lynch, Pierce, Fenner & Smith (MLPF&S) and Merrill Lynch Professional Clearing Corp (MLPCC). MLPCC is a fully-guaranteed subsidiary of MLPF&S and provides clearing and settlement services. Both entities are subject to the net capital requirements of SEC Rule 15c3-1. Both entities are also registered as futures commission merchants and are subject to the Commodity Futures Trading Commission Regulation 1.17.
MLPF&S has elected to compute the minimum capital requirement in accordance with the Alternative Net Capital Requirement as permitted by SEC Rule 15c3-1. At September 30, 2015, MLPF&S's regulatory net capital as defined by Rule 15c3-1 was $10.1 billion and exceeded the minimum requirement of $1.4 billion by $8.7 billion. MLPCC's net capital of $3.2 billion exceeded the minimum requirement of $365 million by $2.8 billion.
In accordance with the Alternative Net Capital Requirements, MLPF&S is required to maintain tentative net capital in excess of $1.0 billion, net capital in excess of $500 million and notify the SEC in the event its tentative net capital is less than $5.0 billion. At September 30, 2015, MLPF&S had tentative net capital and net capital in excess of the minimum and notification requirements.
Merrill Lynch International (MLI), a U.K. investment firm, is regulated by the Prudential Regulation Authority and the Financial Conduct Authority, and is subject to certain regulatory capital requirements. At September 30, 2015, MLI's capital resources were $34.3 billion which exceeded the minimum requirement of $16.8 billion.
|
|
Common and Preferred Stock Dividends |
For a summary of our declared quarterly cash dividends on common stock during the third quarter of 2015 and through October 30, 2015, see Note 11 – Shareholders' Equity to the Consolidated Financial Statements. The Corporation has certain warrants outstanding and exercisable to purchase 150.4 million shares of its common stock, expiring on January 16, 2019 and warrants outstanding and exercisable to purchase 121.8 million shares of its common stock, expiring on October 28, 2018. For more information on the original issuance and exercise price of these warrants, see Note 11 – Shareholders' Equity to the Consolidated Financial Statements.
Table 28 is a summary of our cash dividend declarations on preferred stock during the third quarter of 2015 and through October 30, 2015. During the third quarter of 2015, we declared $441 million of cash dividends on preferred stock. For more information on preferred stock, see Note 11 – Shareholders' Equity to the Consolidated Financial Statements.
|
| | | | | | | | | | | | | | | | |
Table 28 | | | | | | | | | | | |
Preferred Stock Cash Dividend Summary |
Preferred Stock | Outstanding Notional Amount (in millions) | | Declaration Date | | Record Date | | Payment Date | | Per Annum Dividend Rate | | Dividend Per Share |
Series B (1) | $ | 1 |
| | July 23, 2015 | | October 9, 2015 | | October 23, 2015 | | 7.00 | % | | $ | 1.75 |
|
| | | October 22, 2015 | | January 11, 2016 | | January 25, 2016 | | 7.00 |
| | 1.75 |
|
Series D (2) | $ | 654 |
| | July 9, 2015 | | August 31, 2015 | | September 14, 2015 | | 6.204 | % | | $ | 0.38775 |
|
| | | October 9, 2015 | | November 30, 2015 | | December 14, 2015 | | 6.204 |
| | 0.38775 |
|
Series E (2) | $ | 317 |
| | July 9, 2015 | | July 31, 2015 | | August 17, 2015 | | Floating |
| | $ | 0.25556 |
|
| | | October 9, 2015 | | October 30, 2015 | | November 16, 2015 | | Floating |
| | 0.25556 |
|
Series F | $ | 141 |
| | July 9, 2015 | | August 31, 2015 | | September 15, 2015 | | Floating |
| | $ | 1,022.22222 |
|
| | | October 9, 2015 | | November 30, 2015 | | December 15, 2015 | | Floating |
| | 1,011.11111 |
|
Series G | $ | 493 |
| | July 9, 2015 | | August 31, 2015 | | September 15, 2015 | | Adjustable |
| | $ | 1,022.22222 |
|
| | | October 9, 2015 | | November 30, 2015 | | December 15, 2015 | | Adjustable |
| | 1,011.11111 |
|
Series I (2) | $ | 365 |
| | July 9, 2015 | | September 15, 2015 | | October 1, 2015 | | 6.625 | % | | $ | 0.4140625 |
|
| | | October 9, 2015 | | December 15, 2015 | | January 4, 2016 | | 6.625 |
| | 0.4140625 |
|
Series K (3, 4) | $ | 1,544 |
| | July 9, 2015 | | July 15, 2015 | | July 30, 2015 | | Fixed-to-floating |
| | $ | 40.00 |
|
Series L | $ | 3,080 |
| | June 19, 2015 | | July 1, 2015 | | July 30, 2015 | | 7.25 | % | | $ | 18.125 |
|
| | | September 18, 2015 | | October 1, 2015 | | October 30, 2015 | | 7.25 |
| | 18.125 |
|
Series M (3, 4) | $ | 1,310 |
| | October 9, 2015 | | October 31, 2015 | | November 16, 2015 | | Fixed-to-floating |
| | $ | 40.625 |
|
Series T | $ | 5,000 |
| | July 23, 2015 | | September 25, 2015 | | October 13, 2015 | | 6.00 | % | | $ | 1,500.00 |
|
| | | October 22, 2015 | | December 26, 2015 | | January 11, 2016 | | 6.00 |
| | 1,500.00 |
|
Series U (3, 4) | $ | 1,000 |
| | October 9, 2015 | | November 15, 2015 | | December 1, 2015 | | Fixed-to-floating |
| | $ | 26.00 |
|
Series V (3, 4) | $ | 1,500 |
| | October 9, 2015 | | December 1, 2015 | | December 17, 2015 | | Fixed-to-floating |
| | $ | 25.625 |
|
Series W (2) | $ | 1,100 |
| | July 9, 2015 | | August 15, 2015 | | September 9, 2015 | | 6.625 | % | | $ | 0.4140625 |
|
| | | October 9, 2015 | | November 15, 2015 | | December 9, 2015 | | 6.625 |
| | 0.4140625 |
|
Series X (3, 4) | $ | 2,000 |
| | July 9, 2015 | | August 15, 2015 | | September 8, 2015 | | Fixed-to-floating |
| | $ | 31.25 |
|
Series Y (2) | $ | 1,100 |
| | June 19, 2015 | | July 1, 2015 | | July 27, 2015 | | 6.50 | % | | $ | 0.40625 |
|
| | | September 18, 2015 | | October 1, 2015 | | October 27, 2015 | | 6.50 |
| | 0.40625 |
|
Series Z (3, 4) | $ | 1,400 |
| | September 18, 2015 | | October 1, 2015 | | October 23, 2015 | | Fixed-to-floating |
| | $ | 32.50 |
|
Series AA (3, 4) | $ | 1,900 |
| | July 9, 2015 | | September 1, 2015 | | September 17, 2015 | | Fixed-to-floating |
| | $ | 30.50 |
|
| |
(1) | Dividends are cumulative. |
| |
(2) | Dividends per depositary share, each representing a 1/1,000th interest in a share of preferred stock. |
| |
(3) | Initially pays dividends semi-annually. |
| |
(4) | Dividends per depositary share, each representing a 1/25th interest in a share of preferred stock. |
|
| | | | | | | | | | | | | | | | |
Table 28 | | | | | | | | | | | |
Preferred Stock Cash Dividend Summary (continued) |
Preferred Stock | Outstanding Notional Amount (in millions) | | Declaration Date | | Record Date | | Payment Date | | Per Annum Dividend Rate | | Dividend Per Share |
Series 1 (5) | $ | 98 |
| | July 9, 2015 | | August 15, 2015 | | August 28, 2015 | | Floating |
| | $ | 0.18750 |
|
| | | October 9, 2015 | | November 15, 2015 | | November 30, 2015 | | Floating |
| | 0.18750 |
|
Series 2 (5) | $ | 299 |
| | July 9, 2015 | | August 15, 2015 | | August 28, 2015 | | Floating |
| | $ | 0.19167 |
|
| | | October 9, 2015 | | November 15, 2015 | | November 30, 2015 | | Floating |
| | 0.19167 |
|
Series 3 (5) | $ | 653 |
| | July 9, 2015 | | August 15, 2015 | | August 28, 2015 | | 6.375 | % | | $ | 0.3984375 |
|
| | | October 9, 2015 | | November 15, 2015 | | November 30, 2015 | | 6.375 |
| | 0.3984375 |
|
Series 4 (5) | $ | 210 |
| | July 9, 2015 | | August 15, 2015 | | August 28, 2015 | | Floating |
| | $ | 0.25556 |
|
| | | October 9, 2015 | | November 15, 2015 | | November 30, 2015 | | Floating |
| | 0.25556 |
|
Series 5 (5) | $ | 422 |
| | July 9, 2015 | | August 1, 2015 | | August 21, 2015 | | Floating |
| | $ | 0.25556 |
|
| | | October 9, 2015 | | November 1, 2015 | | November 23, 2015 | | Floating |
| | 0.25556 |
|
| |
(5) | Dividends per depositary share, each representing a 1/1,200th interest in a share of preferred stock. |
|
|
Liquidity Risk |
|
Funding and Liquidity Risk Management |
We define liquidity risk as the potential inability to meet our contractual and contingent financial obligations, on- or off-balance sheet, as they come due. Our primary liquidity risk management objective is to meet all contractual and contingent financial obligations at all times, including during periods of stress. To achieve that objective, we analyze and monitor our liquidity risk under expected and stressed conditions, maintain excess liquidity and access to diverse funding sources, including our stable deposit base, and seek to align liquidity-related incentives and risks.
We define excess liquidity as readily available assets, limited to cash and high-quality, liquid, unencumbered securities that we can use to meet our contractual and contingent financial obligations as those obligations arise. We manage our liquidity position through line of business and asset-liability management activities, as well as through our legal entity funding strategy, on both a forward and current (including intraday) basis under both expected and stressed conditions. We believe that a centralized approach to funding and liquidity risk management within Corporate Treasury enhances our ability to monitor liquidity requirements, maximizes access to funding sources, minimizes borrowing costs and facilitates timely responses to liquidity events. For more information regarding global funding and liquidity risk management, see Liquidity Risk – Funding and Liquidity Risk Management on page 65 of the MD&A of the Corporation's 2014 Annual Report on Form 10-K.
Global Excess Liquidity Sources and Other Unencumbered Assets
We maintain excess liquidity available to Bank of America Corporation, including the parent company and selected subsidiaries, in the form of cash and high-quality, liquid, unencumbered securities. Our liquidity buffer, or Global Excess Liquidity Sources (GELS), is comprised of assets that are readily available to the parent company and selected subsidiaries, including bank and broker-dealer subsidiaries, even during stressed market conditions. Our cash is primarily on deposit with the Federal Reserve and, to a lesser extent, central banks outside of the U.S. We limit the composition of high-quality, liquid, unencumbered securities to U.S. government securities, U.S. agency securities, U.S. agency MBS and a select group of non-U.S. government and supranational securities. We believe we can quickly obtain cash for these securities, even in stressed conditions, through repurchase agreements or outright sales. We hold our GELS in legal entities that allow us to meet the liquidity requirements of our global businesses, and we consider the impact of potential regulatory, tax, legal and other restrictions that could limit the transferability of funds among entities. Our GELS are substantially the same in composition to what qualifies as High Quality Liquid Assets (HQLA) under the final LCR rules. For more information on the final rules, see Liquidity Risk – Basel 3 Liquidity Standards on page 70.
Our GELS were $499 billion and $439 billion at September 30, 2015 and December 31, 2014 and were maintained as shown in Table 29.
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Table 29 |
Global Excess Liquidity Sources |
(Dollars in billions) | September 30 2015 | | December 31 2014 | | Average for Three Months Ended September 30, 2015 |
Parent company | $ | 98 |
| | $ | 98 |
| | $ | 97 |
|
Bank subsidiaries | 354 |
| | 306 |
| | 359 |
|
Other regulated entities | 47 |
| | 35 |
| | 42 |
|
Total Global Excess Liquidity Sources | $ | 499 |
| | $ | 439 |
| | $ | 498 |
|
As shown in Table 29, parent company GELS totaled $98 billion at both September 30, 2015 and December 31, 2014. Parent company liquidity remained unchanged as subsidiary inflows and debt issuances were largely offset by debt maturities and derivative collateral outflows. Typically, parent company excess liquidity is in the form of cash deposited with BANA.
GELS available to our bank subsidiaries totaled $354 billion and $306 billion at September 30, 2015 and December 31, 2014. The increase in bank subsidiaries' liquidity was primarily due to deposit inflows and net debt issuances, partially offset by loan growth. GELS at bank subsidiaries exclude the cash deposited by the parent company. Our bank subsidiaries can also generate incremental liquidity by pledging a range of other unencumbered loans and securities to certain Federal Home Loan Banks (FHLBs) and the Federal Reserve Discount Window. The cash we could have obtained by borrowing against this pool of specifically-identified eligible assets was approximately $239 billion and $214 billion at September 30, 2015 and December 31, 2014. We have established operational procedures to enable us to borrow against these assets, including regularly monitoring our total pool of eligible loans and securities collateral. Eligibility is defined in guidelines from the FHLBs and the Federal Reserve and is subject to change at their discretion. Due to regulatory restrictions, liquidity generated by the bank subsidiaries can generally be used only to fund obligations within the bank subsidiaries and can only be transferred to the parent company or nonbank subsidiaries with prior regulatory approval.
GELS available to our other regulated entities, comprised primarily of broker-dealer subsidiaries, totaled $47 billion and $35 billion at September 30, 2015 and December 31, 2014. The increase in liquidity in other regulated entities is largely driven by parent company liquidity contributions to the Corporation's primary U.S. broker-dealer. Our other regulated entities also held other unencumbered investment-grade securities and equities that we believe could be used to generate additional liquidity. Liquidity held in an other regulated entity is primarily available to meet the obligations of that entity and transfers to the parent company or to any other subsidiary may be subject to prior regulatory approval due to regulatory restrictions and minimum requirements.
Table 30 presents the composition of GELS at September 30, 2015 and December 31, 2014.
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Table 30 |
Global Excess Liquidity Sources Composition |
(Dollars in billions) | September 30 2015 | | December 31 2014 |
Cash on deposit | $ | 130 |
| | $ | 97 |
|
U.S. Treasury securities | 49 |
| | 74 |
|
U.S. agency securities and mortgage-backed securities | 299 |
| | 252 |
|
Non-U.S. government and supranational securities | 21 |
| | 16 |
|
Total Global Excess Liquidity Sources | $ | 499 |
| | $ | 439 |
|
Time-to-required Funding and Stress Modeling
We use a variety of metrics to determine the appropriate amounts of excess liquidity to maintain at the parent company, our bank subsidiaries and other regulated entities. One metric we use to evaluate the appropriate level of excess liquidity at the parent company is "time-to-required funding." This debt coverage measure indicates the number of months that the parent company can continue to meet its unsecured contractual obligations as they come due using only the parent company's liquidity sources without issuing any new debt or accessing any additional liquidity sources. We define unsecured contractual obligations for purposes of this metric as maturities of senior or subordinated debt issued or guaranteed by Bank of America Corporation. These include certain unsecured debt instruments, primarily structured liabilities, which we may be required to settle for cash prior to maturity. Our time-to-required funding was 42 months at September 30, 2015. For purposes of calculating time-to-required funding at September 30, 2015, we have included in the amount of
unsecured contractual obligations $8.6 billion related to the BNY Mellon Settlement. The final conditions of the settlement have been satisfied, requiring the Corporation to make the settlement payment on or before February 9, 2016. For more information on the BNY Mellon Settlement, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements.
We also utilize liquidity stress analysis to assist us in determining the appropriate amounts of excess liquidity to maintain at the parent company, our bank subsidiaries and other regulated entities. The liquidity stress testing process is an integral part of analyzing our potential contractual and contingent cash outflows beyond the outflows considered in the time-to-required funding analysis. We evaluate the liquidity requirements under a range of scenarios with varying levels of severity and time horizons. The scenarios we consider and utilize incorporate market-wide and Corporation-specific events, including potential credit rating downgrades for the parent company and our subsidiaries, and are based on historical experience, regulatory guidance, and both expected and unexpected future events.
The types of potential contractual and contingent cash outflows we consider in our scenarios may include, but are not limited to, upcoming contractual maturities of unsecured debt and reductions in new debt issuance; diminished access to secured financing markets; potential deposit withdrawals; increased draws on loan commitments, liquidity facilities and letters of credit; additional collateral that counterparties could call if our credit ratings were downgraded; collateral and margin requirements arising from market value changes; and potential liquidity required to maintain businesses and finance customer activities. Changes in certain market factors including, but not limited to, credit rating downgrades, could negatively impact potential contractual and contingent outflows and the related financial instruments, and in some cases these impacts could be material to our financial results.
We consider all sources of funds that we could access during each stress scenario and focus particularly on matching available sources with corresponding liquidity requirements by legal entity. We also use the stress modeling results to manage our asset-liability profile and establish limits and guidelines on certain funding sources and businesses.
Basel 3 Liquidity Standards
The Basel Committee has issued two liquidity risk-related standards that are considered part of the Basel 3 liquidity standards: the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR).
In 2014, U.S. banking regulators finalized LCR requirements for the largest U.S. financial institutions on a consolidated basis and for their subsidiary depository institutions with total assets greater than $10 billion. The LCR is calculated as the amount of a financial institution's unencumbered HQLA relative to the estimated net cash outflows the institution could encounter over a 30-day period of significant liquidity stress, expressed as a percentage. Under the final rule, an initial minimum LCR of 80 percent was required as of January 2015, and will increase thereafter in 10 percentage point increments annually through January 2017. These minimum requirements are applicable to the Corporation on a consolidated basis and to our insured depository institutions. As of September 30, 2015, we estimate that the consolidated Corporation was above the 2017 LCR requirements. The Corporation's LCR may fluctuate from period to period due to normal business flows from customer activity.
In 2014, the Basel Committee issued a final standard for the NSFR, the standard that is intended to reduce funding risk over a longer time horizon. The NSFR is designed to ensure an appropriate amount of stable funding, generally capital and liabilities maturing beyond one year, given the mix of assets and off-balance sheet items. The final standard aligns the NSFR to the LCR and gives more credit to a wider range of funding. The final standard also includes adjustments to the stable funding required for certain types of assets, some of which reduce the stable funding requirement and some of which increase it. Basel Committee standards generally do not apply directly to U.S. financial institutions, but require adoption by U.S. banking regulators. U.S. banking regulators are expected to propose a similar NSFR regulation applicable to U.S. financial institutions in the near future. We expect to meet the NSFR requirement within the regulatory timeline.
Diversified Funding Sources
We fund our assets primarily with a mix of deposits and secured and unsecured liabilities through a centralized, globally coordinated funding strategy. We diversify our funding globally across products, programs, markets, currencies and investor groups.
The primary benefits of our centralized funding strategy include greater control, reduced funding costs, wider name recognition by investors and greater flexibility to meet the variable funding requirements of subsidiaries. Where regulations, time zone differences or other business considerations make parent company funding impractical, certain other subsidiaries may issue their own debt.
We fund a substantial portion of our lending activities through our deposits, which were $1.16 trillion and $1.12 trillion at September 30, 2015 and December 31, 2014. Deposits are primarily generated by our Consumer Banking, GWIM and Global Banking segments. These deposits are diversified by clients, product type and geography, and the majority of our U.S. deposits are insured by the Federal Deposit Insurance Corporation. We consider a substantial portion of our deposits to be a stable, low-cost and consistent source
of funding. We believe this deposit funding is generally less sensitive to interest rate changes, market volatility or changes in our credit ratings than wholesale funding sources. Our lending activities may also be financed through secured borrowings, including credit card securitizations and securitizations with GSEs, the FHA and private-label investors, as well as FHLBs loans.
Our trading activities in other regulated entities are primarily funded on a secured basis through securities lending and repurchase agreements and these amounts will vary based on customer activity and market conditions. We believe funding these activities in the secured financing markets is more cost-efficient and less sensitive to changes in our credit ratings than unsecured financing. Repurchase agreements are generally short-term and often overnight. Disruptions in secured financing markets for financial institutions have occurred in prior market cycles which resulted in adverse changes in terms or significant reductions in the availability of such financing. We manage the liquidity risks arising from secured funding by sourcing funding globally from a diverse group of counterparties, providing a range of securities collateral and pursuing longer durations, when appropriate. For more information on secured financing agreements, see Note 9 – Federal Funds Sold or Purchased, Securities Financing Agreements and Short-term Borrowings to the Consolidated Financial Statements.
We issue long-term unsecured debt in a variety of maturities and currencies to achieve cost-efficient funding and to maintain an appropriate maturity profile. While the cost and availability of unsecured funding may be negatively impacted by general market conditions or by matters specific to the financial services industry or the Corporation, we seek to mitigate refinancing risk by actively managing the amount of our borrowings that we anticipate will mature within any month or quarter.
During the three and nine months ended September 30, 2015, we issued $8.3 billion and $34.0 billion of long-term debt, consisting of $6.6 billion and $21.1 billion for Bank of America Corporation, $76 million and $7.7 billion for Bank of America, N.A. and $1.6 billion and $5.2 billion of other debt.
Table 31 presents the carrying value of aggregate annual contractual maturities of long-term debt as of September 30, 2015. During the nine months ended September 30, 2015, we had total long-term debt maturities and purchases of $34.6 billion consisting of $20.6 billion for Bank of America Corporation, $6.3 billion for Bank of America, N.A. and $7.7 billion of other debt.
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Table 31 |
Long-term Debt By Maturity |
| Remainder of | | | | | | | | | | | | |
(Dollars in millions) | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | Thereafter | | Total |
Bank of America Corporation | | | | | | | | | | | | | |
Senior notes | $ | 2,483 |
| | $ | 16,945 |
| | $ | 18,568 |
| | $ | 20,420 |
| | $ | 17,056 |
| | $ | 49,231 |
| | $ | 124,703 |
|
Senior structured notes | 891 |
| | 4,177 |
| | 1,580 |
| | 1,737 |
| | 1,381 |
| | 7,140 |
| | 16,906 |
|
Subordinated notes | 660 |
| | 4,893 |
| | 4,952 |
| | 2,750 |
| | 1,511 |
| | 18,611 |
| | 33,377 |
|
Junior subordinated notes | — |
| | — |
| | — |
| | — |
| | — |
| | 7,303 |
| | 7,303 |
|
Total Bank of America Corporation | 4,034 |
| | 26,015 |
| | 25,100 |
| | 24,907 |
| | 19,948 |
| | 82,285 |
| | 182,289 |
|
Bank of America, N.A. | | | | | | | | | | | | | |
Senior notes | — |
| | 3,052 |
| | 3,653 |
| | 3,522 |
| | — |
| | 20 |
| | 10,247 |
|
Subordinated notes | — |
| | 1,060 |
| | 3,485 |
| | — |
| | 1 |
| | 1,732 |
| | 6,278 |
|
Advances from Federal Home Loan Banks | 499 |
| | 6,003 |
| | 10 |
| | 10 |
| | 15 |
| | 137 |
| | 6,674 |
|
Securitizations and other Bank VIEs (1) | 140 |
| | 1,290 |
| | 3,550 |
| | 2,300 |
| | 2,451 |
| | 934 |
| | 10,665 |
|
Other | 14 |
| | 53 |
| | 2,697 |
| | 6 |
| | 9 |
| | 71 |
| | 2,850 |
|
Total Bank of America, N.A. | 653 |
| | 11,458 |
| | 13,395 |
| | 5,838 |
| | 2,476 |
| | 2,894 |
| | 36,714 |
|
Other debt | | | | | | | | | | | | | |
Senior notes | — |
| | — |
| | 1 |
| | — |
| | — |
| | 30 |
| | 31 |
|
Structured liabilities | 345 |
| | 2,491 |
| | 2,000 |
| | 1,287 |
| | 875 |
| | 7,929 |
| | 14,927 |
|
Junior subordinated notes | — |
| | — |
| | — |
| | — |
| | — |
| | 340 |
| | 340 |
|
Nonbank VIEs (1) | — |
| | 456 |
| | 241 |
| | 38 |
| | 22 |
| | 1,500 |
| | 2,257 |
|
Other | 200 |
| | 500 |
| | — |
| | — |
| | — |
| | 30 |
| | 730 |
|
Total other debt | 545 |
| | 3,447 |
| | 2,242 |
| | 1,325 |
| | 897 |
| | 9,829 |
| | 18,285 |
|
Total long-term debt | $ | 5,232 |
| | $ | 40,920 |
| | $ | 40,737 |
| | $ | 32,070 |
| | $ | 23,321 |
| | $ | 95,008 |
| | $ | 237,288 |
|
| |
(1) | Represents the total long-term debt included in the liabilities of consolidated VIEs on the Consolidated Balance Sheet. |
Table 32 presents our long-term debt by major currency at September 30, 2015 and December 31, 2014.
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Table 32 |
Long-term Debt By Major Currency |
(Dollars in millions) | September 30 2015 | | December 31 2014 |
U.S. Dollar | $ | 189,384 |
| | $ | 191,264 |
|
Euro | 31,012 |
| | 30,687 |
|
British Pound | 7,384 |
| | 7,881 |
|
Japanese Yen | 3,632 |
| | 6,058 |
|
Australian Dollar | 1,759 |
| | 2,135 |
|
Canadian Dollar | 1,492 |
| | 1,779 |
|
Swiss Franc | 900 |
| | 897 |
|
Other | 1,725 |
| | 2,438 |
|
Total long-term debt | $ | 237,288 |
| | $ | 243,139 |
|
Total long-term debt decreased $5.9 billion, or two percent, during the nine months ended September 30, 2015 primarily due to the impact of revaluation of non-U.S. Dollar debt and changes in fair value for debt accounted for under the fair value option. These impacts were substantially offset through derivative hedge transactions. Excluding these two factors, total long-term debt remained relatively unchanged for the nine months ended September 30, 2015. We may, from time to time, purchase outstanding debt instruments in various transactions, depending on prevailing market conditions, liquidity and other factors. In addition, our other regulated entities may make markets in our debt instruments to provide liquidity for investors. For more information on long-term debt funding, see Note 11 – Long-term Debt to the Consolidated Financial Statements of the Corporation's 2014 Annual Report on Form 10-K and for more information regarding funding and liquidity risk management, see page 65 of the MD&A of the Corporation's 2014 Annual Report on Form 10-K.
We use derivative transactions to manage the duration, interest rate and currency risks of our borrowings, considering the characteristics of the assets they are funding. For further details on our ALM activities, see Interest Rate Risk Management for Non-trading Activities on page 118.
We may also issue unsecured debt in the form of structured notes for client purposes. During the three and nine months ended September 30, 2015, we issued $1.2 billion and $4.8 billion of structured notes, a majority of which was issued by Bank of America Corporation. Structured notes are debt obligations that pay investors returns linked to other debt or equity securities, indices, currencies or commodities. We typically hedge the returns we are obligated to pay on these liabilities with derivatives and/or investments in the underlying instruments, so that from a funding perspective, the cost is similar to our other unsecured long-term debt. We could be required to settle certain structured liability obligations for cash or other securities prior to maturity under certain circumstances, which we consider for liquidity planning purposes. We believe, however, that a portion of such borrowings will remain outstanding beyond the earliest put or redemption date. We had outstanding structured liabilities with a carrying value of $31.6 billion and $38.8 billion at September 30, 2015 and December 31, 2014.
Substantially all of our senior and subordinated debt obligations contain no provisions that could trigger a requirement for an early repayment, require additional collateral support, result in changes to terms, accelerate maturity or create additional financial obligations upon an adverse change in our credit ratings, financial ratios, earnings, cash flows or stock price.
Contingency Planning
We maintain contingency funding plans that outline our potential responses to liquidity stress events at various levels of severity. These policies and plans are based on stress scenarios and include potential funding strategies and communication and notification procedures that we would implement in the event we experienced stressed liquidity conditions. We periodically review and test the contingency funding plans to validate efficacy and assess readiness.
Our U.S. bank subsidiaries can access contingency funding through the Federal Reserve Discount Window. Certain non-U.S. subsidiaries have access to central bank facilities in the jurisdictions in which they operate. While we do not rely on these sources in our liquidity modeling, we maintain the policies, procedures and governance processes that would enable us to access these sources if necessary.
Credit Ratings
Our borrowing costs and ability to raise funds are impacted by our credit ratings. In addition, credit ratings may be important to customers or counterparties when we compete in certain markets and when we seek to engage in certain transactions, including OTC derivatives. Thus, it is our objective to maintain high-quality credit ratings, and management maintains an active dialogue with the rating agencies.
Credit ratings and outlooks are opinions expressed by rating agencies on our creditworthiness and that of our obligations or securities, including long-term debt, short-term borrowings, preferred stock and other securities, including asset securitizations. Our credit ratings are subject to ongoing review by the rating agencies, and they consider a number of factors, including our own financial strength, performance, prospects and operations, as well as factors not under our control. The rating agencies could make adjustments to our ratings at any time, and they provide no assurances that they will maintain our ratings at current levels.
Other factors that influence our credit ratings include changes to the rating agencies' methodologies for our industry or certain security types; the rating agencies' assessment of the general operating environment for financial services companies; our relative positions in the markets in which we compete; our various risk exposures and risk management policies and activities; pending litigation and other contingencies or potential tail risks; our reputation; our liquidity position, diversity of funding sources and funding costs; the current and expected level and volatility of our earnings; our capital position and capital management practices; our corporate governance; the sovereign credit ratings of the U.S. government; current or future regulatory and legislative initiatives; and the agencies' views on whether the U.S. government would provide meaningful support to the Corporation or its subsidiaries in a crisis.
On July 23, 2015, Standard & Poor's Ratings Services (S&P) concluded a periodic review of the eight U.S. G-SIBs. As a result, S&P upgraded Bank of America's stand-alone credit profile (SACP) to 'a-' from 'bbb+', reflecting S&P's view that the Corporation's potential legal and regulatory risks have declined, and that it has made steady progress on reducing the size of its legacy mortgage portfolio resulting in lower credit costs and an improved risk profile. S&P concurrently upgraded the ratings of Bank of America Corporation's preferred stock and trust preferred securities to BB+ from BB. S&P also revised the outlook to positive from stable on the ratings of Bank of America's core rated operating subsidiaries, including Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Merrill Lynch International, and Bank of America Merrill Lynch International Limited. Those entities' long-term and short-term senior debt ratings remain unchanged at A and A-1. S&P also left Bank of America Corporation's long-term and short-term senior debt ratings unchanged at A- and A-2, but retained a negative outlook. The negative outlook on the holding company ratings reflects S&P's ongoing evaluation of whether it deems the U.S. G-SIB resolution regime to be effective and thus eliminates the remaining notch of uplift in those ratings for potential extraordinary government support. The positive outlook on the operating subsidiary ratings reflects the possibility that for those subsidiaries, S&P could offset the elimination of the notch of uplift for government support with two notches of uplift from the agency's implementation of a new framework for incorporating additional loss-absorbing debt and equity capital buffers at the holding company into operating company credit ratings.
On May 28, 2015, Moody's Investors Service, Inc. (Moody's) concluded its previously announced review of several global investment banking groups, including Bank of America, which followed the publication of the agency's new bank rating methodology. As a result, Moody's upgraded Bank of America Corporation's long-term senior debt rating to Baa1 from Baa2, and the preferred stock rating to Ba2 from Ba3. Moody's also upgraded the long-term senior debt and long-term deposit ratings of Bank of America, N.A. to A1 from A2. Moody's affirmed the short-term ratings at P-2 for Bank of America Corporation and P-1 for Bank of America, N.A. Moody's now has a stable outlook on all of our ratings.
On May 19, 2015, Fitch Ratings (Fitch) completed its review of sovereign support for 12 large, complex securities trading and universal banks, including Bank of America. As a result, Fitch revised the support rating floors for the U.S. global systemically important BHCs to No Floor from A, effectively removing the implied government support uplift from those institutions' ratings. The rating agency also upgraded Bank of America Corporation's stand-alone rating, or Viability Rating to 'a' from 'a-', while affirming its long-term and short-term senior debt ratings at A and F1, respectively. Fitch indicated that the upgrade of the Viability Rating was driven by the Corporation's maintenance of good capital and liquidity levels, materially lower potential litigation costs compared to recent years and a gradually improving earnings profile. Fitch concurrently upgraded Bank of America, N.A.'s long-term senior debt rating to A+ from A, and its long-term deposit rating to AA- from A+. Fitch set the outlook on these ratings at stable. Fitch also revised the outlook to positive on the ratings of Bank of America's material international operating subsidiaries, including Merrill Lynch International.
Table 33 presents the Corporation's current long-term/short-term senior debt ratings and outlooks expressed by the rating agencies.
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Table 33 |
Senior Debt Ratings |
| | Moody's Investors Service | | Standard & Poor's | | Fitch Ratings |
| Long-term | | Short-term | | Outlook | | Long-term | | Short-term | | Outlook | | Long-term | | Short-term | | Outlook |
Bank of America Corporation | Baa1 | | P-2 | | Stable | | A- | | A-2 | | Negative | | A | | F1 | | Stable |
Bank of America, N.A. | A1 | | P-1 | | Stable | | A | | A-1 | | Positive | | A+ | | F1 | | Stable |
Merrill Lynch, Pierce, Fenner & Smith | NR | | NR | | NR | | A | | A-1 | | Positive | | A+ | | F1 | | Stable |
Merrill Lynch International | NR | | NR | | NR | | A | | A-1 | | Positive | | A | | F1 | | Positive |
NR = not rated
A reduction in certain of our credit ratings or the ratings of certain asset-backed securitizations may have a material adverse effect on our liquidity, potential loss of access to credit markets, the related cost of funds, our businesses and on certain trading revenues, particularly in those businesses where counterparty creditworthiness is critical. In addition, under the terms of certain OTC derivative contracts and other trading agreements, in the event of downgrades of our or our rated subsidiaries' credit ratings, the counterparties to those agreements may require us to provide additional collateral, or to terminate these contracts or agreements, which could cause us to sustain losses and/or adversely impact our liquidity. If the short-term credit ratings of our parent company, bank or broker-dealer subsidiaries were downgraded by one or more levels, the potential loss of access to short-term funding sources such as repo financing and the effect on our incremental cost of funds could be material.
While certain potential impacts are contractual and quantifiable, the full scope of the consequences of a credit rating downgrade to a financial institution is inherently uncertain, as it depends upon numerous dynamic, complex and inter-related factors and assumptions, including whether any downgrade of a company's long-term credit ratings precipitates downgrades to its short-term credit ratings, and assumptions about the potential behaviors of various customers, investors and counterparties. For more information on potential impacts of credit rating downgrades, see Liquidity Risk – Time-to-required Funding and Stress Modeling on page 69.
For more information on the additional collateral and termination payments that could be required in connection with certain OTC derivative contracts and other trading agreements as a result of such a credit rating downgrade, see Note 2 – Derivatives to the Consolidated Financial Statements herein and Item 1A. Risk Factors of the Corporation's 2014 Annual Report on Form 10-K.
Credit quality remained strong in the third quarter of 2015 driven by lower U.S. unemployment and improving home prices as well as our proactive credit risk management activities positively impacting our credit portfolio as nonperforming loans and leases and delinquencies continued to improve. For additional information, see Executive Summary – Third Quarter 2015 Economic and Business Environment on page 4.
We proactively refine our underwriting and credit risk management practices as well as credit standards to meet the changing economic environment. To actively mitigate losses and enhance customer support in our consumer businesses, we have in place collection programs and loan modification and customer assistance infrastructures. We utilize a number of actions to mitigate losses in the commercial businesses including increasing the frequency and intensity of portfolio monitoring, hedging activity and our practice of transferring management of deteriorating commercial exposures to independent special asset officers as credits enter criticized categories.
We have non-U.S. exposure largely in Europe and Asia Pacific. For more information on our exposures and related risks in non-U.S. countries, see Non-U.S. Portfolio on page 106 and Item 1A. Risk Factors of the Corporation's 2014 Annual Report on Form 10-K.
For more information on our credit risk management activities, see Consumer Portfolio Credit Risk Management on page 75, Commercial Portfolio Credit Risk Management on page 95, Non-U.S. Portfolio on page 106, Provision for Credit Losses on page 108, Allowance for Credit Losses on page 108, and Note 4 – Outstanding Loans and Leases and Note 5 – Allowance for Credit Losses to the Consolidated Financial Statements.
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Consumer Portfolio Credit Risk Management |
Credit risk management for the consumer portfolio begins with initial underwriting and continues throughout a borrower's credit cycle. Statistical techniques in conjunction with experiential judgment are used in all aspects of portfolio management including underwriting, product pricing, risk appetite, setting credit limits, and establishing operating processes and metrics to quantify and balance risks and returns. Statistical models are built using detailed behavioral information from external sources such as credit bureaus and/or internal historical experience. These models are a component of our consumer credit risk management process and are used in part to assist in making both new and ongoing credit decisions, as well as portfolio management strategies, including authorizations and line management, collection practices and strategies, and determination of the allowance for loan and lease losses and allocated capital for credit risk.
During the nine months ended September 30, 2015, we completed approximately 41,600 customer loan modifications with a total unpaid principal balance of approximately $7.0 billion, including approximately 17,700 permanent modifications, under the U.S. government's Making Home Affordable Program. Of the loan modifications completed during the nine months ended September 30, 2015, in terms of both the volume of modifications and the unpaid principal balance associated with the underlying loans, more than half were in the Corporation's held-for-investment (HFI) portfolio. For modified loans on our balance sheet, these modification types are generally considered troubled debt restructurings (TDR). For more information on TDRs and portfolio impacts, see Consumer Portfolio Credit Risk Management – Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity on page 92 and Note 4 – Outstanding Loans and Leases to the Consolidated Financial Statements.
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Consumer Credit Portfolio |
Improvement in the U.S. unemployment rate and home prices continued during the three and nine months ended September 30, 2015 resulting in improved credit quality and lower credit losses across most major consumer portfolios compared to the same periods in 2014. Nearly all consumer loan portfolios 30 and 90 days or more past due declined during the nine months ended September 30, 2015 as a result of improved delinquency trends. Although home prices have shown steady improvement since the beginning of 2012, they have not fully recovered to their 2006 levels.
Improved credit quality, continued loan balance run-off and sales across the consumer portfolio drove a $2.0 billion decrease in the consumer allowance for loan and lease losses during the nine months ended September 30, 2015 to $8.0 billion at September 30, 2015. For additional information, see Allowance for Credit Losses on page 108.
For more information on our accounting policies regarding delinquencies, nonperforming status, charge-offs and TDRs for the consumer portfolio, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements of the Corporation's 2014 Annual Report on Form 10-K. For more information on representations and warranties related to our residential mortgage and home equity portfolios, see Off-Balance Sheet Arrangements and Contractual Obligations – Representations and Warranties on page 50 and Note 7 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements.
Table 34 presents our outstanding consumer loans and leases, and the PCI loan portfolio. In addition to being included in the "Outstandings" columns in Table 34, PCI loans are also shown separately, net of purchase accounting adjustments, in the "Purchased Credit-impaired Loan Portfolio" columns. The impact of the PCI loan portfolio on certain credit statistics is reported where appropriate. For more information on PCI loans, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 87 and Note 4 – Outstanding Loans and Leases to the Consolidated Financial Statements.
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Table 34 |
Consumer Loans and Leases |
| Outstandings | | Purchased Credit-impaired Loan Portfolio |
(Dollars in millions) | September 30 2015 | | December 31 2014 | | September 30 2015 | | December 31 2014 |
Residential mortgage (1) | $ | 187,939 |
| | $ | 216,197 |
| | $ | 12,581 |
| | $ | 15,152 |
|
Home equity | 78,030 |
| | 85,725 |
| | 4,865 |
| | 5,617 |
|
U.S. credit card | 88,339 |
| | 91,879 |
| | n/a |
| | n/a |
|
Non-U.S. credit card | 10,066 |
| | 10,465 |
| | n/a |
| | n/a |
|
Direct/Indirect consumer (2) | 87,314 |
| | 80,381 |
| | n/a |
| | n/a |
|
Other consumer (3) | 2,012 |
| | 1,846 |
| | n/a |
| | n/a |
|
Consumer loans excluding loans accounted for under the fair value option | 453,700 |
| | 486,493 |
| | 17,446 |
| | 20,769 |
|
Loans accounted for under the fair value option (4) | 1,944 |
| | 2,077 |
| | n/a |
| | n/a |
|
Total consumer loans and leases | $ | 455,644 |
| | $ | 488,570 |
| | $ | 17,446 |
| | $ | 20,769 |
|
| |
(1) | Outstandings include pay option loans of $2.4 billion and $3.2 billion at September 30, 2015 and December 31, 2014. We no longer originate pay option loans. |
| |
(2) | Outstandings include auto and specialty lending loans of $41.7 billion and $37.7 billion, unsecured consumer lending loans of $1.0 billion and $1.5 billion, U.S. securities-based lending loans of $39.2 billion and $35.8 billion, non-U.S. consumer loans of $3.9 billion and $4.0 billion, student loans of $581 million and $632 million and other consumer loans of $834 million and $761 million at September 30, 2015 and December 31, 2014. |
| |
(3) | Outstandings include consumer finance loans of $591 million and $676 million, consumer leases of $1.2 billion and $1.0 billion and consumer overdrafts of $189 million and $162 million at September 30, 2015 and December 31, 2014. |
| |
(4) | Consumer loans accounted for under the fair value option include residential mortgage loans of $1.7 billion and $1.9 billion and home equity loans of $225 million and $196 million at September 30, 2015 and December 31, 2014. For more information on the fair value option, see Consumer Portfolio Credit Risk Management – Consumer Loans Accounted for Under the Fair Value Option on page 91 and Note 15 – Fair Value Option to the Consolidated Financial Statements. |
n/a = not applicable
Table 35 presents consumer nonperforming loans and accruing consumer loans past due 90 days or more. Nonperforming loans do not include past due consumer credit card loans, other unsecured loans and in general, consumer non-real estate-secured loans (loans discharged in Chapter 7 bankruptcy are included) as these loans are typically charged off no later than the end of the month in which the loan becomes 180 days past due. Real estate-secured past due consumer loans that are insured by the FHA or individually insured under long-term standby agreements with FNMA and FHLMC (collectively, the fully-insured loan portfolio) are reported as accruing as opposed to nonperforming since the principal repayment is insured. Fully-insured loans included in accruing past due 90 days or more are primarily from our repurchases of delinquent FHA loans pursuant to our servicing agreements with GNMA. Additionally, nonperforming loans and accruing balances past due 90 days or more do not include the PCI loan portfolio or loans accounted for under the fair value option even though the customer may be contractually past due.
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Table 35 |
Consumer Credit Quality |
| Nonperforming | | Accruing Past Due 90 Days or More |
(Dollars in millions) | September 30 2015 | | December 31 2014 | | September 30 2015 | | December 31 2014 |
Residential mortgage (1) | $ | 5,242 |
| | $ | 6,889 |
| | $ | 7,616 |
| | $ | 11,407 |
|
Home equity | 3,429 |
| | 3,901 |
| | — |
| | — |
|
U.S. credit card | n/a |
| | n/a |
| | 721 |
| | 866 |
|
Non-U.S. credit card | n/a |
| | n/a |
| | 78 |
| | 95 |
|
Direct/Indirect consumer | 25 |
| | 28 |
| | 38 |
| | 64 |
|
Other consumer | 1 |
| | 1 |
| | 2 |
| | 1 |
|
Total (2) | $ | 8,697 |
| | $ | 10,819 |
| | $ | 8,455 |
| | $ | 12,433 |
|
Consumer loans and leases as a percentage of outstanding consumer loans and leases (2) | 1.92 | % | | 2.22 | % | | 1.86 | % | | 2.56 | % |
Consumer loans and leases as a percentage of outstanding loans and leases, excluding PCI and fully-insured loan portfolios (2) | 2.19 |
| | 2.70 |
| | 0.21 |
| | 0.26 |
|
| |
(1) | Residential mortgage loans accruing past due 90 days or more are fully-insured loans. At September 30, 2015 and December 31, 2014, residential mortgage included $4.6 billion and $7.3 billion of loans on which interest has been curtailed by the FHA, and therefore are no longer accruing interest, although principal is still insured, and $3.0 billion and $4.1 billion of loans on which interest was still accruing. |
| |
(2) | Balances exclude consumer loans accounted for under the fair value option. At September 30, 2015 and December 31, 2014, $321 million and $392 million of loans accounted for under the fair value option were past due 90 days or more and not accruing interest. |
n/a = not applicable
Table 36 presents net charge-offs and related ratios for consumer loans and leases.
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Table 36 | | | | | | | | |
Consumer Net Charge-offs and Related Ratios | | | | | | | | |
| Net Charge-offs (1) | | Net Charge-off Ratios (1, 2) |
| Three Months Ended September 30 | | Nine Months Ended September 30 | | Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in millions) | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
Residential mortgage | $ | 26 |
| | $ | 53 |
| | $ | 400 |
| | $ | 145 |
| | 0.05 | % | | 0.09 | % | | 0.26 | % | | 0.08 | % |
Home equity | 120 |
| | 89 |
| | 443 |
| | 630 |
| | 0.60 |
| | 0.40 |
| | 0.72 |
| | 0.93 |
|
U.S. credit card | 546 |
| | 625 |
| | 1,751 |
| | 2,026 |
| | 2.46 |
| | 2.79 |
| | 2.66 |
| | 3.05 |
|
Non-U.S. credit card | 47 |
| | 67 |
| | 142 |
| | 190 |
| | 1.83 |
| | 2.26 |
| | 1.88 |
| | 2.17 |
|
Direct/Indirect consumer | 25 |
| | 34 |
| | 83 |
| | 125 |
| | 0.12 |
| | 0.17 |
| | 0.13 |
| | 0.20 |
|
Other consumer | 57 |
| | 56 |
| | 139 |
| | 161 |
| | 11.21 |
| | 10.48 |
| | 9.72 |
| | 10.58 |
|
Total | $ | 821 |
| | $ | 924 |
| | $ | 2,958 |
| | $ | 3,277 |
| | 0.71 |
| | 0.72 |
| | 0.84 |
| | 0.85 |
|
| |
(1) | Net charge-offs exclude write-offs in the PCI loan portfolio. These write-offs decreased the PCI valuation allowance included as part of the allowance for loan and lease losses. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 87. |
| |
(2) | Net charge-off ratios are calculated as annualized net charge-offs divided by average outstanding loans and leases excluding loans accounted for under the fair value option. |
Net charge-off ratios, excluding the PCI and fully-insured loan portfolios, were 0.08 percent and 0.39 percent for residential mortgage, 0.64 percent and 0.77 percent for home equity, and 0.82 percent and 1.00 percent for the total consumer portfolio for the three and nine months ended September 30, 2015, respectively. Net charge-off ratios, excluding the PCI and fully-insured loan portfolios, were 0.15 percent and 0.14 percent for residential mortgage, 0.43 percent and 1.00 percent for home equity, and 0.90 percent and 1.07 percent for the total consumer portfolio for the three and nine months ended September 30, 2014, respectively. These are the only product classifications that include PCI and fully-insured loans for these periods.
Net charge-offs, as shown in Tables 36 and 37, exclude write-offs in the PCI loan portfolio of $128 million and $580 million in residential mortgage and $20 million and $146 million in home equity for the three and nine months ended September 30, 2015, and $196 million and $547 million in residential mortgage and $50 million and $250 million in home equity for the three and nine months ended September 30, 2014. These write-offs decreased the PCI valuation allowance included as part of the allowance for loan and lease losses. Net charge-off ratios including the PCI write-offs were 0.32 percent and 0.64 percent for residential mortgage and 0.70 percent and 0.96 percent for home equity for the three and nine months ended September 30, 2015, and 0.42 percent and 0.38 percent for residential mortgage and 0.63 percent and 1.30 percent for home equity for the three and nine months ended September 30, 2014. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 87.
Table 37 presents outstandings, nonperforming balances, net charge-offs, allowance for loan and lease losses and provision for loan and lease losses for the Core portfolio and the Legacy Assets & Servicing portfolio within the consumer real estate portfolio. For more information on the Legacy Assets & Servicing portfolio, see LAS on page 44.
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Table 37 | | | | |
Consumer Real Estate Portfolio (1) | | | | |
| Outstandings | | Nonperforming | | Net Charge-offs (2) |
| September 30 2015 | | December 31 2014 | | September 30 2015 | | December 31 2014 | | Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in millions) | | | | | 2015 | | 2014 | | 2015 | | 2014 |
Core portfolio | | | | | | | | | | | | | | | |
Residential mortgage | $ | 143,221 |
| | $ | 162,220 |
| | $ | 1,949 |
| | $ | 2,398 |
| | $ | 14 |
| | $ | 42 |
| | $ | 97 |
| | $ | 141 |
|
Home equity | 48,983 |
| | 51,887 |
| | 1,376 |
| | 1,496 |
| | 45 |
| | 47 |
| | 147 |
| | 201 |
|
Total Core portfolio | 192,204 |
| | 214,107 |
| | 3,325 |
| | 3,894 |
| | 59 |
| | 89 |
| | 244 |
| | 342 |
|
Legacy Assets & Servicing portfolio | | | | | | | | | | | | | | | |
Residential mortgage | 44,718 |
| | 53,977 |
| | 3,293 |
| | 4,491 |
| | 12 |
| | 11 |
| | 303 |
| | 4 |
|
Home equity | 29,047 |
| | 33,838 |
| | 2,053 |
| | 2,405 |
| | 75 |
| | 42 |
| | 296 |
| | 429 |
|
Total Legacy Assets & Servicing portfolio | 73,765 |
| | 87,815 |
| | 5,346 |
| | 6,896 |
| | 87 |
| | 53 |
| | 599 |
| | 433 |
|
Consumer real estate portfolio | | | | | | | | | | | | | | | |
Residential mortgage | 187,939 |
| | 216,197 |
| | 5,242 |
| | 6,889 |
| | 26 |
| | 53 |
| | 400 |
| | 145 |
|
Home equity | 78,030 |
| | 85,725 |
| | 3,429 |
| | 3,901 |
| | 120 |
| | 89 |
| | 443 |
| | 630 |
|
Total consumer real estate portfolio | $ | 265,969 |
| | $ | 301,922 |
| | $ | 8,671 |
| | $ | 10,790 |
| | $ | 146 |
| | $ | 142 |
| | $ | 843 |
| | $ | 775 |
|
| | | | | | | | | | | | | | | |
| | | | | Allowance for Loan and Lease Losses | | Provision for Loan and Lease Losses |
| | | | | September 30 2015 | | December 31 2014 | | Three Months Ended September 30 | | Nine Months Ended September 30 |
| | | | | | | 2015 | | 2014 | | 2015 | | 2014 |
Core portfolio | | | | | | | | | | | | | | | |
Residential mortgage | | | | | $ | 430 |
| | $ | 593 |
| | $ | (33 | ) | | $ | (6 | ) | | $ | (66 | ) | | $ | (2 | ) |
Home equity | | | | | 711 |
| | 702 |
| | 70 |
| | 4 |
| | 156 |
| | 22 |
|
Total Core portfolio |
| |
| | 1,141 |
| | 1,295 |
| | 37 |
| | (2 | ) | | 90 |
| | 20 |
|
Legacy Assets & Servicing portfolio | | | | | | | | | | | | | | | |
Residential mortgage | | | | | 1,325 |
| | 2,307 |
| | (55 | ) | | 63 |
| | (99 | ) | | (359 | ) |
Home equity | | | | | 1,934 |
| | 2,333 |
| | 6 |
| | (103 | ) | | 77 |
| | (128 | ) |
Total Legacy Assets & Servicing portfolio |
|
| |
|
| | 3,259 |
| | 4,640 |
| | (49 | ) | | (40 | ) | | (22 | ) | | (487 | ) |
Consumer real estate portfolio | | | | | | | | | | | | | | | |
Residential mortgage | | | | | 1,755 |
| | 2,900 |
| | (88 | ) | | 57 |
| | (165 | ) | | (361 | ) |
Home equity | | | | | 2,645 |
| | 3,035 |
| | 76 |
| | (99 | ) | | 233 |
| | (106 | ) |
Total consumer real estate portfolio | | | | | $ | 4,400 |
| | $ | 5,935 |
| | $ | (12 | ) | | $ | (42 | ) | | $ | 68 |
| | $ | (467 | ) |
| |
(1) | Outstandings and nonperforming amounts exclude loans accounted for under the fair value option. Consumer loans accounted for under the fair value option include residential mortgage loans of $1.7 billion and $1.9 billion and home equity loans of $225 million and $196 million at September 30, 2015 and December 31, 2014. For more information on the fair value option, see Consumer Portfolio Credit Risk Management – Consumer Loans Accounted for Under the Fair Value Option on page 91 and Note 15 – Fair Value Option to the Consolidated Financial Statements. |
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(2) | Net charge-offs exclude write-offs in the PCI loan portfolio. Write-offs in the PCI loan portfolio decrease the PCI valuation allowance included as part of the allowance for loan and lease losses. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 87. |
We believe that the presentation of information adjusted to exclude the impact of the PCI loan portfolio, the fully-insured loan portfolio and loans accounted for under the fair value option is more representative of the ongoing operations and credit quality of the business. As a result, in the following discussions of the residential mortgage and home equity portfolios, we provide information that excludes the impact of the PCI loan portfolio, the fully-insured loan portfolio and loans accounted for under the fair value option in certain credit quality statistics. We separately disclose information on the PCI loan portfolio on page 87.
Residential Mortgage
The residential mortgage portfolio makes up the largest percentage of our consumer loan portfolio at 41 percent of consumer loans and leases at September 30, 2015. Approximately 60 percent of the residential mortgage portfolio is in All Other and is comprised of originated loans, purchased loans used in our overall ALM activities, delinquent FHA loans repurchased pursuant to our servicing agreements with GNMA as well as loans repurchased related to our representations and warranties. Approximately 29 percent of the residential mortgage portfolio is in GWIM and represents residential mortgages originated for the home purchase and refinancing needs of our wealth management clients and the remaining portion of the portfolio is primarily in Consumer Banking.
Outstanding balances in the residential mortgage portfolio, excluding loans accounted for under the fair value option, decreased $28.3 billion during the nine months ended September 30, 2015 due to loan sales of $23.6 billion, including $16.4 billion of loans with standby insurance agreements, $2.5 billion of nonperforming and other delinquent loans, $4.5 billion of loans in consolidated agency residential mortgage securitization vehicles, and runoff outpacing the retention of new originations. These declines were partially offset by repurchases of delinquent loans pursuant to our servicing agreements with GNMA, which are part of our mortgage banking activities.
At September 30, 2015 and December 31, 2014, the residential mortgage portfolio included $38.6 billion and $65.0 billion of outstanding fully-insured loans. On this portion of the residential mortgage portfolio, we are protected against principal loss as a result of either FHA insurance or long-term standby agreements with FNMA and FHLMC. At September 30, 2015 and December 31, 2014, $35.6 billion and $47.8 billion had FHA insurance with the remainder protected by long-term standby agreements. At September 30, 2015 and December 31, 2014, $12.4 billion and $15.9 billion of the FHA-insured loan population were repurchases of delinquent FHA loans pursuant to our servicing agreements with GNMA.
The long-term standby agreements with FNMA and FHLMC reduce our regulatory risk-weighted assets due to the transfer of a portion of our credit risk to unaffiliated parties. At September 30, 2015, these programs had the cumulative effect of reducing our risk-weighted assets by $904 million, and increasing both our Tier 1 capital ratio and Common equity tier 1 capital ratio by one bp under the Basel 3 Standardized – Transition. This compared to reducing our risk-weighted assets by $5.2 billion, and increasing both our Tier 1 capital ratio and Tier 1 Common capital ratio by five bps at December 31, 2014 under Basel 3 Standardized – Transition.
Table 38 presents certain residential mortgage key credit statistics on both a reported basis excluding loans accounted for under the fair value option, and excluding the PCI loan portfolio, our fully-insured loan portfolio and loans accounted for under the fair value option. Additionally, in the "Reported Basis" columns in the table below, accruing balances past due and nonperforming loans do not include the PCI loan portfolio, in accordance with our accounting policies, even though the customer may be contractually past due. As such, the following discussion presents the residential mortgage portfolio excluding the PCI loan portfolio, the fully-insured loan portfolio and loans accounted for under the fair value option. For more information on the PCI loan portfolio, see page 87.
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Table 38 |
Residential Mortgage – Key Credit Statistics |
| | | Reported Basis (1) | | Excluding Purchased Credit-impaired and Fully-insured Loans |
(Dollars in millions) | | | | | | | | | September 30 2015 | | December 31 2014 | | September 30 2015 | | December 31 2014 |
Outstandings | | | | | | | | | $ | 187,939 |
| | $ | 216,197 |
| | $ | 136,786 |
| | $ | 136,075 |
|
Accruing past due 30 days or more | | | | | | | | 12,120 |
| | 16,485 |
| | 1,653 |
| | 1,868 |
|
Accruing past due 90 days or more | | | | | | | | 7,616 |
| | 11,407 |
| | — |
| | — |
|
Nonperforming loans | | | | | | | | | 5,242 |
| | 6,889 |
| | 5,242 |
| | 6,889 |
|
Percent of portfolio | | | | | | | | | | | | | | | |
Refreshed LTV greater than 90 but less than or equal to 100 | | 8 | % | | 9 | % | | 5 | % | | 6 | % |
Refreshed LTV greater than 100 | | | | | | 10 |
| | 12 |
| | 5 |
| | 7 |
|
Refreshed FICO below 620 | | | | | | | | 14 |
| | 16 |
| | 6 |
| | 8 |
|
2006 and 2007 vintages (2) | | | | | | | | 18 |
| | 19 |
| | 18 |
| | 22 |
|
| | | | | | | | | | | | | | | |
| Reported Basis | | Excluding Purchased Credit-impaired and Fully-insured Loans |
| Three Months Ended September 30 | | Nine Months Ended September 30 | | Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
Net charge-off ratio (3) | 0.05 | % | | 0.09 | % | | 0.26 | % | | 0.08 | % | | 0.08 | % | | 0.15 | % | | 0.39 | % | | 0.14 | % |
| |
(1) | Outstandings, accruing past due, nonperforming loans and percentages of portfolio exclude loans accounted for under the fair value option. There were $1.7 billion and $1.9 billion of residential mortgage loans accounted for under the fair value option at September 30, 2015 and December 31, 2014. For more information on the fair value option, see Consumer Portfolio Credit Risk Management – Consumer Loans Accounted for Under the Fair Value Option on page 91 and Note 15 – Fair Value Option to the Consolidated Financial Statements. |
| |
(2) | These vintages of loans account for $1.9 billion, or 36 percent, and $2.8 billion, or 41 percent of nonperforming residential mortgage loans at September 30, 2015 and December 31, 2014. For the three and nine months ended September 30, 2015, these vintages accounted for $4 million of recoveries, and $114 million, or 29 percent of total residential mortgage net charge-offs. For the three months ended September 30, 2014, these vintages accounted for $13 million, or 26 percent of total residential mortgage net charge-offs. For the nine months ended September 30, 2014, these vintages accounted for no residential mortgage net charge-offs. |
| |
(3) | Net charge-off ratios are calculated as annualized net charge-offs divided by average outstanding loans excluding loans accounted for under the fair value option. |
Nonperforming residential mortgage loans decreased $1.6 billion during the nine months ended September 30, 2015 including sales of $1.2 billion, partially offset by a $246 million net increase related to the settlement with the DoJ for those loans that are no longer fully insured. Excluding these items, nonperforming residential mortgage loans decreased as outflows, including the transfer of certain qualifying borrowers discharged in a Chapter 7 bankruptcy to performing status, outpaced new inflows. Of the nonperforming residential mortgage loans at September 30, 2015, $1.8 billion, or 34 percent, were current on contractual payments. Nonperforming loans that are contractually current primarily consist of collateral-dependent TDRs, including those that have been discharged in Chapter 7 bankruptcy, as well as loans that have not yet demonstrated a sustained period of payment performance following a TDR. In addition, $2.3 billion, or 43 percent of nonperforming residential mortgage loans were 180 days or more past due and had been written down to the estimated fair value of the collateral, less costs to sell. Accruing loans that were 30 days or more past due decreased $215 million during the nine months ended September 30, 2015.
Net charge-offs decreased $27 million to $26 million for the three months ended September 30, 2015, or 0.08 percent of total average residential mortgage loans, compared to net charge-offs of $53 million, or 0.15 percent, for the same period in 2014. This decrease in net charge-offs was primarily driven by higher recoveries of $57 million related to nonperforming loan sales during the three months ended September 30, 2015 compared to $39 million for the same period in 2014, favorable portfolio trends and decreased write-downs on loans greater than 180 days past due, which were written down to the estimated fair value of the collateral, less costs to sell, due in part to improvement in home prices and the U.S. economy. These improvements were partially offset by $49 million of net charge-offs during the three months ended September 30, 2015 related to the consumer relief portion of the settlement with the DoJ. Net charge-offs increased $255 million to $400 million for the nine months ended September 30, 2015, or 0.39 percent of total average residential mortgage loans, compared to net charge-offs of $145 million, or 0.14 percent, for the same period in 2014. This increase in net charge-offs was primarily driven by $379 million of charge-offs during the nine months ended September 30, 2015 related to the consumer relief portion of the settlement with the DoJ. In addition, net charge-offs included recoveries of $119 million related to nonperforming loan sales during the nine months ended September 30, 2015 compared to $224 million for the same period in 2014. Excluding these items, net charge-offs declined driven by favorable portfolio trends and decreased write-downs on loans greater than 180 days past due, which were written down to the estimated fair value of the collateral, less costs to sell, due in part to improvement in home prices and the U.S. economy.
Residential mortgage loans with a greater than 90 percent but less than or equal to 100 percent refreshed loan-to-value (LTV) represented five percent and six percent of the residential mortgage portfolio at September 30, 2015 and December 31, 2014. Loans with a refreshed LTV greater than 100 percent represented five percent and seven percent of the residential mortgage loan portfolio at September 30, 2015 and December 31, 2014. Of the loans with a refreshed LTV greater than 100 percent, 97 percent and 96 percent were performing at September 30, 2015 and December 31, 2014. Loans with a refreshed LTV greater than 100 percent reflect loans where the outstanding carrying value of the loan is greater than the most recent valuation of the property securing the loan. The majority of these loans have a refreshed LTV greater than 100 percent primarily due to home price deterioration since 2006, somewhat mitigated by subsequent appreciation. Loans to borrowers with refreshed FICO scores below 620 represented six percent and eight percent of the residential mortgage portfolio at September 30, 2015 and December 31, 2014.
Of the $136.8 billion in total residential mortgage loans outstanding at September 30, 2015, as shown in Table 39, 40 percent were originated as interest-only loans. The outstanding balance of interest-only residential mortgage loans that have entered the amortization period was $12.2 billion, or 22 percent, at September 30, 2015. Residential mortgage loans that have entered the amortization period generally have experienced a higher rate of early stage delinquencies and nonperforming status compared to the residential mortgage portfolio as a whole. At September 30, 2015, $225 million, or two percent of outstanding interest-only residential mortgages that had entered the amortization period were accruing past due 30 days or more compared to $1.7 billion, or one percent for the entire residential mortgage portfolio. In addition, at September 30, 2015, $783 million, or six percent of outstanding interest-only residential mortgage loans that had entered the amortization period were nonperforming, of which $388 million were contractually current, compared to $5.2 billion, or four percent for the entire residential mortgage portfolio, of which $1.8 billion were contractually current. Loans in our interest-only residential mortgage portfolio have an interest-only period of three to ten years and more than 90 percent of these loans have yet to enter the amortization period and will not be required to make a fully-amortizing payment until 2016 or later.
Table 39 presents outstandings, nonperforming loans and net charge-offs by certain state concentrations for the residential mortgage portfolio. The Los Angeles-Long Beach-Santa Ana Metropolitan Statistical Area (MSA) within California represented 13 percent of outstandings at both September 30, 2015 and December 31, 2014. For the three and nine months ended September 30, 2015, loans within this MSA contributed net recoveries of $6 million and $10 million within the residential mortgage portfolio. For the three and nine months ended September 30, 2014, loans within this MSA contributed net recoveries of $10 million and $32 million within the residential mortgage portfolio. In the New York area, the New York-Northern New Jersey-Long Island MSA made up 11 percent of outstandings at both September 30, 2015 and December 31, 2014. For the three and nine months ended September 30, 2015, loans within this MSA contributed net charge-offs of $13 million and $86 million within the residential mortgage portfolio. For the three and nine months ended September 30, 2014, loans within this MSA contributed net charge-offs of $15 million and $44 million within the residential mortgage portfolio.
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Table 39 | | | | |
Residential Mortgage State Concentrations | | | | |
| Outstandings (1) | | Nonperforming (1) | | Net Charge-offs (2) |
| September 30 2015 | | December 31 2014 | | September 30 2015 | | December 31 2014 | | Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in millions) | | | | | 2015 | | 2014 | | 2015 | | 2014 |
California | $ | 47,244 |
| | $ | 45,496 |
| | $ | 1,071 |
| | $ | 1,459 |
| | $ | (30 | ) | | $ | (25 | ) | | $ | (37 | ) | | $ | (119 | ) |
New York (3) | 12,422 |
| | 11,826 |
| | 446 |
| | 477 |
| | 11 |
| | 7 |
| | 46 |
| | 24 |
|
Florida (3) | 9,978 |
| | 10,116 |
| | 595 |
| | 858 |
| | 5 |
| | (4 | ) | | 51 |
| | (12 | ) |
Texas | 6,165 |
| | 6,635 |
| | 203 |
| | 269 |
| | — |
| | (2 | ) | | 9 |
| | 2 |
|
Virginia | 4,147 |
| | 4,402 |
| | 176 |
| | 244 |
| | 3 |
| | (3 | ) | | 17 |
| | 7 |
|
Other U.S./Non-U.S. | 56,830 |
| | 57,600 |
| | 2,751 |
| | 3,582 |
| | 37 |
| | 80 |
| | 314 |
| | 243 |
|
Residential mortgage loans (4) | $ | 136,786 |
| | $ | 136,075 |
| | $ | 5,242 |
| | $ | 6,889 |
| | $ | 26 |
| | $ | 53 |
| | $ | 400 |
| | $ | 145 |
|
Fully-insured loan portfolio | 38,572 |
| | 64,970 |
| | | | | | | | | | | | |
Purchased credit-impaired residential mortgage loan portfolio | 12,581 |
| | 15,152 |
| | | | | | | | | | | | |
Total residential mortgage loan portfolio | $ | 187,939 |
| | $ | 216,197 |
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(1) | Outstandings and nonperforming loans exclude loans accounted for under the fair value option. There were $1.7 billion and $1.9 billion of residential mortgage loans accounted for under the fair value option at September 30, 2015 and December 31, 2014. For more information on the fair value option, see Consumer Portfolio Credit Risk Management – Consumer Loans Accounted for Under the Fair Value Option on page 91 and Note 15 – Fair Value Option to the Consolidated Financial Statements. |
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(2) | Net charge-offs exclude $128 million and $580 million of write-offs in the residential mortgage PCI loan portfolio for the three and nine months ended September 30, 2015 compared to $196 million and $547 million for the same periods in 2014. These write-offs decreased the PCI valuation allowance included as part of the allowance for loan and lease losses. For additional information, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 87. |
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(3) | In these states, foreclosure requires a court order following a legal proceeding (judicial states). |
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(4) | Amounts exclude the PCI residential mortgage and fully-insured loan portfolios. |
The Community Reinvestment Act (CRA) encourages banks to meet the credit needs of their communities for housing and other purposes, particularly in neighborhoods with low or moderate incomes. Our CRA portfolio was $8.2 billion and $9.0 billion at September 30, 2015 and December 31, 2014, or six percent and seven percent of the residential mortgage portfolio. The CRA portfolio included $641 million and $986 million of nonperforming loans at September 30, 2015 and December 31, 2014, representing 12 percent and 14 percent of total nonperforming residential mortgage loans. There were no net charge-offs in the CRA portfolio for the three months ended September 30, 2015, compared to $24 million, or 45 percent of total net charge-offs for the residential mortgage portfolio for the same period in 2014. Net charge-offs in the CRA portfolio were $71 million and $45 million for the nine months ended September 30, 2015 and 2014, or 18 percent and 31 percent of total net charge-offs for the residential mortgage portfolio.
Home Equity
At September 30, 2015, the home equity portfolio made up 17 percent of the consumer portfolio and is comprised of home equity lines of credit (HELOCs), home equity loans and reverse mortgages.
At September 30, 2015, our HELOC portfolio had an outstanding balance of $67.7 billion, or 87 percent of the total home equity portfolio compared to $74.2 billion, or 87 percent, at December 31, 2014. HELOCs generally have an initial draw period of 10 years and those borrowers typically are only required to pay the interest due on the loans on a monthly basis. After the initial draw period ends, the loans generally convert to 15-year amortizing loans.
At September 30, 2015, our home equity loan portfolio had an outstanding balance of $8.4 billion, or 11 percent of the total home equity portfolio compared to $9.8 billion, or 11 percent, at December 31, 2014. Home equity loans are almost all fixed-rate loans with amortizing payment terms of 10 to 30 years and of the $8.4 billion at September 30, 2015, 54 percent have 25- to 30-year terms. At September 30, 2015, our reverse mortgage portfolio had an outstanding balance, excluding loans accounted for under the fair value option, of $1.9 billion, or two percent of the total home equity portfolio compared to $1.7 billion, or two percent, at December 31, 2014. We no longer originate reverse mortgages.
At September 30, 2015, approximately 56 percent of the home equity portfolio was included in Consumer Banking, 35 percent was included in LAS and the remainder of the portfolio was primarily in GWIM. Outstanding balances in the home equity portfolio, excluding loans accounted for under the fair value option, decreased $7.7 billion during the nine months ended September 30, 2015 primarily due to paydowns and charge-offs outpacing new originations and draws on existing lines. Of the total home equity portfolio at September 30, 2015 and December 31, 2014, $20.3 billion and $20.6 billion, or 26 percent and 24 percent, were in first-lien positions (28 percent and 26 percent excluding the PCI home equity portfolio). At September 30, 2015, outstanding balances in the home equity portfolio that were in a second-lien or more junior-lien position and where we also held the first-lien loan totaled $13.4 billion, or 18 percent of our total home equity portfolio excluding the PCI loan portfolio.
Unused HELOCs totaled $51.1 billion at September 30, 2015 compared to $53.7 billion at December 31, 2014. The decrease was primarily due to customers choosing to close accounts, as well as accounts reaching the end of their draw period, which automatically eliminates open line exposure. Both of these more than offset customer paydowns of principal balances and the impact of new production. The HELOC utilization rate was 57 percent at September 30, 2015 compared to 58 percent at December 31, 2014.
Table 40 presents certain home equity portfolio key credit statistics on both a reported basis excluding loans accounted for under the fair value option, and excluding the PCI loan portfolio and loans accounted for under the fair value option. Additionally, in the "Reported Basis" columns in the table below, accruing balances past due 30 days or more and nonperforming loans do not include the PCI loan portfolio, in accordance with our accounting policies, even though the customer may be contractually past due. As such, the following discussion presents the home equity portfolio excluding the PCI loan portfolio and loans accounted for under the fair value option. For more information on the PCI loan portfolio, see page 87.
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Table 40 |
Home Equity – Key Credit Statistics |
| | | | | | | | | Reported Basis (1) | | Excluding Purchased Credit-impaired Loans |
(Dollars in millions) | | | | | | | | | September 30 2015 | | December 31 2014 | | September 30 2015 | | December 31 2014 |
Outstandings | | | | | | | | | $ | 78,030 |
| | $ | 85,725 |
| | $ | 73,165 |
| | $ | 80,108 |
|
Accruing past due 30 days or more (2) | | | | | | 614 |
| | 640 |
| | 614 |
| | 640 |
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Nonperforming loans (2) | | | | | | 3,429 |
| | 3,901 |
| | 3,429 |
| | 3,901 |
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Percent of portfolio | | | | | | | | | |
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Refreshed CLTV greater than 90 but less than or equal to 100 | |