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 March 31, 2017
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, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act (check one).
Large accelerated filer ü | Accelerated filer | Non-accelerated filer (do not check if a smaller reporting company) | Smaller reporting company |
Emerging growth company
Yes No ü
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Yes No
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes No ü
On May 1, 2017, there were 9,951,898,904 shares of Bank of America Corporation Common Stock outstanding.
Bank of America Corporation and Subsidiaries
March 31, 2017
Form 10-Q
INDEX
Part I. Financial Information
Item 1. Financial Statements | Page | |
Consolidated Statement of Income | ||
Consolidated Statement of Comprehensive Income | ||
Consolidated Balance Sheet | ||
Consolidated Statement of Changes in Shareholders' Equity | ||
Consolidated Statement of Cash Flows | ||
Notes to Consolidated Financial Statements | ||
Note 1 – Summary of Significant Accounting Principles | ||
Note 2 – Derivatives | ||
Note 3 – Securities | ||
Note 4 – Outstanding Loans and Leases | ||
Note 5 – Allowance for Credit Losses | ||
Note 6 – Securitizations and Other Variable Interest Entities | ||
Note 7 – Representations and Warranties Obligations and Corporate Guarantees | ||
Note 8 – Goodwill and Intangible Assets | ||
Note 9 – Federal Funds Sold or Purchased, Securities Financing Agreements and Short-term Borrowings | ||
Note 10 – Commitments and Contingencies | ||
Note 11 – Shareholders’ Equity | ||
Note 12 – Accumulated Other Comprehensive Income (Loss) | ||
Note 13 – Earnings Per Common Share | ||
Note 14 – Fair Value Measurements | ||
Note 15 – Fair Value Option | ||
Note 16 – Fair Value of Financial Instruments | ||
Note 17 – Business Segment Information | ||
Glossary |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | ||
Interest Rate Risk Management for the Banking Book | ||
Non-GAAP Reconciliations | ||
Item 3. Quantitative and Qualitative Disclosures about Market Risk | ||
Item 4. Controls and Procedures |
1 Bank of America
Part II. Other Information
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Bank of America Corporation (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,” “goals,” “believes,” “continue,” "suggests" and other similar expressions or future or conditional verbs such as “will,” “may,” “might,” “should,” “would” and “could.” Forward-looking statements represent the Corporation's current expectations, plans or forecasts of its future results, revenues, expenses, efficiency ratio, capital measures, 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 under Item 1A. Risk Factors of our 2016 Annual Report on Form 10-K and in any of the Corporation’s subsequent Securities and Exchange Commission filings: potential claims, damages, penalties, fines and reputational damage resulting from pending or future litigation and regulatory proceedings, including inquiries into our retail sales practices, and the possibility that amounts may be in excess of the Corporation’s recorded liability and estimated range of possible loss for litigation exposures; the possibility that the Corporation could face increased 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 Corporation’s ability to resolve representations and warranties repurchase and related claims, including claims brought by investors or trustees seeking to avoid the statute of limitations for repurchase claims; 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 impact on the Corporation's business, financial condition and results of operations of a potential higher interest rate environment; the possibility that future credit losses may be higher than currently expected due to changes in economic assumptions, customer behavior, adverse developments with respect to U.S. or global economic conditions, and other uncertainties; the impact on the Corporation’s business, financial condition and results of operations from a protracted period of lower oil prices or ongoing volatility with respect to oil prices; the Corporation's ability to achieve its expense targets or net interest income or other projections; 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 approval of our internal models methodology for calculating counterparty credit risk for derivatives; the potential impact of total loss-absorbing capacity requirements; potential adverse changes to our global systemically important bank (G-SIB) surcharge; the impact of Federal Reserve actions on the Corporation’s capital plans; the possible impact of the Corporation's failure to remediate shortcomings identified by banking regulators in the Corporation's Resolution Plan; the impact of implementation and compliance with U.S. and international laws, regulations and regulatory interpretations, including, but not limited to, recovery and resolution planning requirements, Federal Deposit Insurance Corporation (FDIC) assessments, the Volcker Rule, fiduciary standards and derivatives regulations; 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 cyberattacks; the impact on the Corporation's business, financial condition and results of operations from the planned exit of the United Kingdom (U.K.) from the European Union (EU); 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-year amounts have been reclassified to conform to current-year presentation. Throughout the MD&A, the Corporation uses certain acronyms and abbreviations which are defined in the Glossary.
Bank of America 2 |
Executive Summary
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 four business segments: Consumer Banking, Global Wealth & Investment Management (GWIM), Global Banking and Global Markets, with the remaining operations recorded in All Other. We operate our banking activities primarily under the Bank of America, National Association (Bank of America, N.A. or BANA) charter. At March 31, 2017, the Corporation had approximately $2.2 trillion in assets and approximately 209,000 full-time equivalent employees.
As of March 31, 2017, 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 83 percent of the U.S. population, and we serve approximately 47 million consumer and small business relationships with approximately 4,600 retail financial centers, approximately 15,900 ATMs, and leading digital banking platforms (www.bankofamerica.com) with approximately 35 million active users, including more than 22 million mobile active users. We offer industry-leading support to approximately three million small business owners. Our wealth management businesses, with client balances of approximately $2.6 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.
First Quarter 2017 Economic and Business Environment
Macroeconomic trends in the U.S. were largely stable during the first quarter. Following a pronounced deceleration in economic growth in the fourth quarter of 2016, there was little sign of a first quarter acceleration to start 2017. Consumer spending softened, as vehicle sales flattened at high levels and utility consumption was restrained by warmer than normal temperatures. Partially offsetting slower consumer spending, business investment (including energy-related equipment and infrastructure) strengthened on stabilizing energy costs and a lift in business confidence. Domestic final sales growth may have declined slightly below two percent on an annualized basis despite solid growth in housing construction. The labor market remained healthy, with sustained strong non-farm payroll gains in excess of 200,000 in both January and February. With signs of gradually firming inflation, the Federal Reserve raised the federal funds rate target range by 25 basis points (bps) to a range of 0.75 percent to one percent in March, in line with market expectations.
Consumer and business attitudes on the economy improved markedly, continuing trends that began with the Presidential election last November. Financial markets also responded to several ongoing developments: first, in response to the March rate hike and the potential for several additional hikes over 2017, the treasury yield curve flattened as short-term yields rose while longer term rates remained relatively unchanged. Second, with expectations of more expansionary fiscal policy and regulatory relief from the new Presidential Administration, equity markets rallied, with the S&P 500 index gaining over five percent in the first quarter of 2017. Meanwhile, the U.S. Dollar weakened, erasing some of the previous quarter’s gains. Forward markets captured the shift in financial market expectations and risks with federal fund futures falling and equity volatility remaining stable at historically low levels throughout the quarter.
Abroad, the impact of the U.K. vote to exit the EU (Brexit) has been muted to date, even as the British government approached and then triggered Article 50 of the Treaty on EU in late March. The resilient economic outlook, combined with a stronger than expected pickup in inflation, has shifted the Bank of England from a loosening to a tightening bias. Recent indicators suggest that the recovery in the eurozone has continued to gain momentum and move closer to historical trends. Inflationary pressures showed signs of building, as headline inflation moved closer to the European Central Bank’s inflation target. However, the pickup was mainly driven by food and energy prices; core inflation remained at historical low levels. As a result, although the European Central Bank kept its policy rate unchanged, it adopted a slightly more hawkish tone.
The upward revision of the fourth quarter GDP indicated that the Japanese recovery has gathered momentum, driven by a strengthening of domestic demand. The new monetary policy regime of yield curve targeting has kept the Japanese yield curve in check against the global rise in long-term interest rates. Underlying inflation also showed signs of bottoming and turning positive over the quarter. In China, the service sector remained a key driver of economic growth amid signs that activity in the industrial sector could pick up steam in the coming months. The Yuan was stable against the dollar during the quarter as efforts to stem capital outflows by the government started to show improvements.
Recent Events
Capital Management
During the first quarter of 2017, we repurchased approximately $2.7 billion of common stock pursuant to the Board of Directors’ (the Board) authorization of our 2016 Comprehensive Capital Analysis and Review (CCAR) capital plan and to offset equity-based compensation awards. This also included repurchases related to the January 13, 2017 announcement of our plan to repurchase an additional $1.8 billion of common stock during the first half of 2017. For additional information, see Capital Management on page 21.
3 Bank of America
Selected Financial Data
Table 1 provides selected consolidated financial data for the three months ended March 31, 2017 and 2016, and at March 31, 2017 and December 31, 2016.
Table 1 | Selected Financial Data | ||||||
Three Months Ended March 31 | |||||||
(Dollars in millions, except per share information) | 2017 | 2016 | |||||
Income statement | |||||||
Revenue, net of interest expense | $ | 22,248 | $ | 20,790 | |||
Net income | 4,856 | 3,472 | |||||
Diluted earnings per common share | 0.41 | 0.28 | |||||
Dividends paid per common share | 0.075 | 0.05 | |||||
Performance ratios | |||||||
Return on average assets | 0.88 | % | 0.64 | % | |||
Return on average common shareholders' equity | 7.27 | 5.11 | |||||
Return on average tangible common shareholders’ equity (1) | 10.28 | 7.33 | |||||
Efficiency ratio | 66.74 | 71.27 | |||||
March 31 2017 | December 31 2016 | ||||||
Balance sheet | |||||||
Total loans and leases | $ | 906,242 | $ | 906,683 | |||
Total assets | 2,247,701 | 2,187,702 | |||||
Total deposits | 1,272,141 | 1,260,934 | |||||
Total common shareholders’ equity | 242,933 | 241,620 | |||||
Total shareholders’ equity | 268,153 | 266,840 |
(1) | Return on average tangible common shareholders' equity is a non-GAAP financial measure. For additional information and a corresponding reconciliation to accounting principles generally accepted in the United States of America (GAAP) financial measures, see Non-GAAP Reconciliations on page 61. |
Financial Highlights
Net income was $4.9 billion, or $0.41 per diluted share for the three months ended March 31, 2017 compared to $3.5 billion, or $0.28 per diluted share for the same period in 2016. The results for the three months ended March 31, 2017 compared to the same period in 2016 were driven by higher revenue and lower provision for credit losses.
Total assets increased $60.0 billion from December 31, 2016 to $2.2 trillion at March 31, 2017 primarily driven by higher cash and cash equivalents from seasonal increases in deposits and higher short-term bank funding as well as seasonal increases in trading account assets due to increased client financing activities and securities borrowed or purchased under agreements to resell. Total liabilities increased $58.7 billion from December 31, 2016 to $2.0 trillion at March 31, 2017 primarily driven by higher securities loaned or sold under agreements to repurchase and short-term borrowings due to increased Federal Home Loan Bank (FHLB) advances for liquidity purposes as well as increases in trading account liabilities and a seasonal increase in deposits. Shareholders' equity increased $1.3 billion from December 31, 2016 primarily due to net income, partially offset by $2.7 billion of common stock repurchases.
Table 2 | Summary Income Statement | |||||||
Three Months Ended March 31 | ||||||||
(Dollars in millions) | 2017 | 2016 | ||||||
Net interest income | $ | 11,058 | $ | 10,485 | ||||
Noninterest income | 11,190 | 10,305 | ||||||
Total revenue, net of interest expense | 22,248 | 20,790 | ||||||
Provision for credit losses | 835 | 997 | ||||||
Noninterest expense | 14,848 | 14,816 | ||||||
Income before income taxes | 6,565 | 4,977 | ||||||
Income tax expense | 1,709 | 1,505 | ||||||
Net income | 4,856 | 3,472 | ||||||
Preferred stock dividends | 502 | 457 | ||||||
Net income applicable to common shareholders | $ | 4,354 | $ | 3,015 | ||||
Per common share information | ||||||||
Earnings | $ | 0.43 | $ | 0.29 | ||||
Diluted earnings | 0.41 | 0.28 |
Net Interest Income
Net interest income increased $573 million to $11.1 billion for the three months ended March 31, 2017 compared to the same period in 2016, and the net interest yield increased six bps to 2.35 percent. Among other factors, these increases were primarily driven by the higher interest rate environment, primarily short-end rates, and growth in loans and deposits. For information regarding interest rate risk management, see Interest Rate Risk Management for the Banking Book on page 58.
Bank of America 4 |
Noninterest Income
Table 3 | Noninterest Income | |||||||
Three Months Ended March 31 | ||||||||
(Dollars in millions) | 2017 | 2016 | ||||||
Card income | $ | 1,449 | $ | 1,430 | ||||
Service charges | 1,918 | 1,837 | ||||||
Investment and brokerage services | 3,262 | 3,182 | ||||||
Investment banking income | 1,584 | 1,153 | ||||||
Trading account profits | 2,331 | 1,662 | ||||||
Mortgage banking income | 122 | 433 | ||||||
Gains on sales of debt securities | 52 | 190 | ||||||
Other income | 472 | 418 | ||||||
Total noninterest income | $ | 11,190 | $ | 10,305 |
Noninterest income increased $885 million to $11.2 billion for the three months ended March 31, 2017 compared to the same period in 2016. The following highlights the more significant changes.
● | Investment banking income increased $431 million driven by higher debt and equity issuance fees, and advisory fees driven by an increase in overall client activity and market fee pools. |
● | Trading account profits increased $669 million due to a stronger performance across credit products led by mortgages, improved trading performance and increased client financing activity in equities. |
● | Mortgage banking income decreased $311 million primarily driven by lower net servicing income and a decline in production income. Net servicing income decreased primarily due to lower mortgage servicing rights (MSR) results, net of the related hedge performance and lower servicing fees driven by a smaller servicing portfolio. Production income declined primarily due to lower volume. |
● | Gains on sales of debt securities decreased $138 million primarily driven by lower sales volume. |
Provision for Credit Losses
The provision for credit losses decreased $162 million to $835 million for the three months ended March 31, 2017 compared to the same period in 2016 primarily driven by credit quality improvements in energy exposures in the commercial portfolio. We expect the provision for credit losses will approximate net charge-offs for the second quarter of 2017. For more information on the provision for credit losses, see Provision for Credit Losses on page 51. For more information on our energy sector exposure, see Commercial Portfolio Credit Risk Management – Industry Concentrations on page 47.
Noninterest Expense
Table 4 | Noninterest Expense | |||||||
Three Months Ended March 31 | ||||||||
(Dollars in millions) | 2017 | 2016 | ||||||
Personnel | $ | 9,158 | $ | 8,852 | ||||
Occupancy | 1,000 | 1,028 | ||||||
Equipment | 438 | 463 | ||||||
Marketing | 332 | 419 | ||||||
Professional fees | 456 | 425 | ||||||
Amortization of intangibles | 162 | 187 | ||||||
Data processing | 794 | 838 | ||||||
Telecommunications | 191 | 173 | ||||||
Other general operating | 2,317 | 2,431 | ||||||
Total noninterest expense | $ | 14,848 | $ | 14,816 |
Noninterest expense of $14.8 billion remained relatively unchanged for the three months ended March 31, 2017 compared to the same period in 2016 reflecting broad-based reductions in operating and support costs, offset by higher personnel and FDIC expenses. Personnel expense increased $306 million and included retirement-eligible incentive costs of $964 million compared to $850 million as well as seasonally elevated payroll tax costs. Also impacting the increase were higher incentive costs due to the impact of changes in share price on employee stock awards, and higher revenue-related incentive costs. Other general operating expense decreased $114 million largely driven by lower litigation expense.
Income Tax Expense
Table 5 | Income Tax Expense | |||||||
Three Months Ended March 31 | ||||||||
(Dollars in millions) | 2017 | 2016 | ||||||
Income before income taxes | $ | 6,565 | $ | 4,977 | ||||
Income tax expense | 1,709 | 1,505 | ||||||
Effective tax rate | 26.0 | % | 30.2 | % |
The effective tax rates for the three months ended March 31, 2017 and 2016 were driven by the impact of our recurring tax preference benefits. The effective tax rate for the three months ended March 31, 2017 also included a tax benefit of $222 million related to new accounting guidance for the tax impact associated with share-based compensation. For additional information, see Note 11 – Shareholders’ Equity to the Consolidated Financial Statements. We expect our effective tax rate to be approximately 30 percent for the remainder of 2017, absent unusual items.
5 Bank of America
Table 6 | Selected Quarterly Financial Data | |||||||||||||||||||
2017 Quarter | 2016 Quarters | |||||||||||||||||||
(Dollars in millions, except per share information) | First | Fourth | Third | Second | First | |||||||||||||||
Income statement | ||||||||||||||||||||
Net interest income | $ | 11,058 | $ | 10,292 | $ | 10,201 | $ | 10,118 | $ | 10,485 | ||||||||||
Noninterest income | 11,190 | 9,698 | 11,434 | 11,168 | 10,305 | |||||||||||||||
Total revenue, net of interest expense | 22,248 | 19,990 | 21,635 | 21,286 | 20,790 | |||||||||||||||
Provision for credit losses | 835 | 774 | 850 | 976 | 997 | |||||||||||||||
Noninterest expense | 14,848 | 13,161 | 13,481 | 13,493 | 14,816 | |||||||||||||||
Income before income taxes | 6,565 | 6,055 | 7,304 | 6,817 | 4,977 | |||||||||||||||
Income tax expense | 1,709 | 1,359 | 2,349 | 2,034 | 1,505 | |||||||||||||||
Net income | 4,856 | 4,696 | 4,955 | 4,783 | 3,472 | |||||||||||||||
Net income applicable to common shareholders | 4,354 | 4,335 | 4,452 | 4,422 | 3,015 | |||||||||||||||
Average common shares issued and outstanding | 10,100 | 10,170 | 10,250 | 10,328 | 10,370 | |||||||||||||||
Average diluted common shares issued and outstanding | 10,915 | 10,959 | 11,000 | 11,059 | 11,100 | |||||||||||||||
Performance ratios | ||||||||||||||||||||
Return on average assets | 0.88 | % | 0.85 | % | 0.90 | % | 0.88 | % | 0.64 | % | ||||||||||
Four quarter trailing return on average assets (1) | 0.88 | 0.82 | 0.76 | 0.74 | 0.73 | |||||||||||||||
Return on average common shareholders’ equity | 7.27 | 7.04 | 7.27 | 7.40 | 5.11 | |||||||||||||||
Return on average tangible common shareholders’ equity (2) | 10.28 | 9.92 | 10.28 | 10.54 | 7.33 | |||||||||||||||
Return on average shareholders' equity | 7.35 | 6.91 | 7.33 | 7.25 | 5.36 | |||||||||||||||
Return on average tangible shareholders’ equity (2) | 10.00 | 9.38 | 9.98 | 9.93 | 7.40 | |||||||||||||||
Total ending equity to total ending assets | 11.93 | 12.20 | 12.30 | 12.23 | 12.03 | |||||||||||||||
Total average equity to total average assets | 12.01 | 12.24 | 12.28 | 12.13 | 11.98 | |||||||||||||||
Dividend payout | 17.37 | 17.68 | 17.32 | 11.73 | 17.13 | |||||||||||||||
Per common share data | ||||||||||||||||||||
Earnings | $ | 0.43 | $ | 0.43 | $ | 0.43 | $ | 0.43 | $ | 0.29 | ||||||||||
Diluted earnings | 0.41 | 0.40 | 0.41 | 0.41 | 0.28 | |||||||||||||||
Dividends paid | 0.075 | 0.075 | 0.075 | 0.05 | 0.05 | |||||||||||||||
Book value | 24.36 | 24.04 | 24.19 | 23.71 | 23.14 | |||||||||||||||
Tangible book value (2) | 17.23 | 16.95 | 17.14 | 16.71 | 16.19 | |||||||||||||||
Market price per share of common stock | ||||||||||||||||||||
Closing | $ | 23.59 | $ | 22.10 | $ | 15.65 | $ | 13.27 | $ | 13.52 | ||||||||||
High closing | 25.50 | 23.16 | 16.19 | 15.11 | 16.43 | |||||||||||||||
Low closing | 22.05 | 15.63 | 12.74 | 12.18 | 11.16 | |||||||||||||||
Market capitalization | $ | 235,291 | $ | 222,163 | $ | 158,438 | $ | 135,577 | $ | 139,427 |
(1) | Calculated as total net income for four consecutive quarters divided by annualized average assets for four consecutive quarters. |
(2) | Tangible equity ratios and tangible book value per share of common stock are non-GAAP financial measures. For more information on these ratios and for corresponding reconciliations to GAAP financial measures, see Non-GAAP Reconciliations on page 61. |
(3) | For more information on the impact of the purchased credit-impaired (PCI) loan portfolio on asset quality, see Consumer Portfolio Credit Risk Management on page 31. |
(4) | Includes the allowance for loan and lease losses and the reserve for unfunded lending commitments. |
(5) | 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 41 and corresponding Table 31, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 46 and corresponding Table 38. |
(6) | Asset quality metrics include $242 million and $243 million of non-U.S. credit card allowance for loan and lease losses and $9.5 billion and $9.2 billion of non-U.S. credit card loans in the first quarter of 2017 and in the fourth quarter of 2016, which are included in assets of business held for sale on the Consolidated Balance Sheet. |
(7) | Primarily includes amounts allocated to the U.S. credit card and unsecured consumer lending portfolios in Consumer Banking, PCI loans and the non-U.S. credit card portfolio in All Other. |
(8) | Net charge-offs exclude $33 million, $70 million, $83 million, $82 million, and $105 million of write-offs in the PCI loan portfolio in the first quarter of 2017 and in the fourth, third, second and first quarters of 2016, respectively. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 39. |
(9) | Includes net charge-offs of $44 million and $41 million on non-U.S. credit card loans, which are included in assets of business held for sale on the Consolidated Balance Sheet at March 31, 2017 and December 31, 2016. |
(10) | Risk-based capital ratios are reported under Basel 3 Advanced - Transition. For additional information, see Capital Management on page 21. |
Bank of America 6 |
Table 6 | Selected Quarterly Financial Data (continued) | |||||||||||||||||||
2017 Quarter | 2016 Quarters | |||||||||||||||||||
(Dollars in millions) | First | Fourth | Third | Second | First | |||||||||||||||
Average balance sheet | ||||||||||||||||||||
Total loans and leases | $ | 914,144 | $ | 908,396 | $ | 900,594 | $ | 899,670 | $ | 892,984 | ||||||||||
Total assets | 2,231,420 | 2,208,039 | 2,189,490 | 2,188,241 | 2,173,922 | |||||||||||||||
Total deposits | 1,256,632 | 1,250,948 | 1,227,186 | 1,213,291 | 1,198,455 | |||||||||||||||
Long-term debt | 221,468 | 220,587 | 227,269 | 233,061 | 233,654 | |||||||||||||||
Common shareholders’ equity | 242,883 | 245,139 | 243,679 | 240,376 | 237,229 | |||||||||||||||
Total shareholders’ equity | 268,103 | 270,360 | 268,899 | 265,354 | 260,423 | |||||||||||||||
Asset quality (3) | ||||||||||||||||||||
Allowance for credit losses (4) | $ | 11,869 | $ | 11,999 | $ | 12,459 | $ | 12,587 | $ | 12,696 | ||||||||||
Nonperforming loans, leases and foreclosed properties (5) | 7,637 | 8,084 | 8,737 | 8,799 | 9,281 | |||||||||||||||
Allowance for loan and lease losses as a percentage of total loans and leases outstanding (5, 6) | 1.25 | % | 1.26 | % | 1.30 | % | 1.32 | % | 1.35 | % | ||||||||||
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (5, 6) | 156 | 149 | 140 | 142 | 136 | |||||||||||||||
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases, excluding the PCI loan portfolio (5, 6) | 150 | 144 | 135 | 135 | 129 | |||||||||||||||
Amounts included in allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases (7) | $ | 4,047 | $ | 3,951 | $ | 4,068 | $ | 4,087 | $ | 4,138 | ||||||||||
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 (5, 7) | 100 | % | 98 | % | 91 | % | 93 | % | 90 | % | ||||||||||
Net charge-offs (8, 9) | $ | 934 | $ | 880 | $ | 888 | $ | 985 | $ | 1,068 | ||||||||||
Annualized net charge-offs as a percentage of average loans and leases outstanding (5, 8) | 0.42 | % | 0.39 | % | 0.40 | % | 0.44 | % | 0.48 | % | ||||||||||
Annualized net charge-offs as a percentage of average loans and leases outstanding, excluding the PCI loan portfolio (5) | 0.42 | 0.39 | 0.40 | 0.45 | 0.49 | |||||||||||||||
Annualized net charge-offs and PCI write-offs as a percentage of average loans and leases outstanding (5) | 0.43 | 0.42 | 0.43 | 0.48 | 0.53 | |||||||||||||||
Nonperforming loans and leases as a percentage of total loans and leases outstanding (5, 6) | 0.80 | 0.85 | 0.93 | 0.94 | 0.99 | |||||||||||||||
Nonperforming loans, leases and foreclosed properties as a percentage of total loans, leases and foreclosed properties (5, 6) | 0.84 | 0.89 | 0.97 | 0.98 | 1.04 | |||||||||||||||
Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs (6, 8) | 3.00 | 3.28 | 3.31 | 2.99 | 2.81 | |||||||||||||||
Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the PCI loan portfolio (6) | 2.88 | 3.16 | 3.18 | 2.85 | 2.67 | |||||||||||||||
Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs and PCI write-offs (6) | 2.90 | 3.04 | 3.03 | 2.76 | 2.56 | |||||||||||||||
Capital ratios at period end (10) | ||||||||||||||||||||
Risk-based capital: | ||||||||||||||||||||
Common equity tier 1 capital | 11.0 | % | 11.0 | % | 11.0 | % | 10.6 | % | 10.3 | % | ||||||||||
Tier 1 capital | 12.5 | 12.4 | 12.4 | 12.0 | 11.5 | |||||||||||||||
Total capital | 14.4 | 14.3 | 14.2 | 13.9 | 13.4 | |||||||||||||||
Tier 1 leverage | 8.8 | 8.9 | 9.1 | 8.9 | 8.7 | |||||||||||||||
Tangible equity (2) | 9.1 | 9.2 | 9.4 | 9.3 | 9.1 | |||||||||||||||
Tangible common equity (2) | 7.9 | 8.1 | 8.2 | 8.1 | 7.9 |
For footnotes see page 6.
7 Bank of America
Supplemental Financial Data
In this Form 10-Q, we present certain non-GAAP financial measures. Non-GAAP financial measures exclude certain items or otherwise include components that differ from the most directly comparable measures calculated in accordance with GAAP. Non-GAAP financial measures are provided as additional useful information to assess our financial condition, results of operations (including period-to-period operating performance) or compliance with prospective regulatory requirements. These non-GAAP financial measures are not intended as a substitute for GAAP financial measures and may not be defined or calculated the same way as non-GAAP financial measures used by other companies.
We view net interest income and related ratios and analyses on an fully taxable-equivalent (FTE) basis, which when presented on a consolidated basis, are non-GAAP financial measures. 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 and a representative state tax rate. In addition, 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 believe that presentation of these items on an FTE basis allows for comparison of amounts from both taxable and tax-exempt sources and is consistent with industry practices.
We may present certain key performance indicators and ratios excluding certain items (e.g., debit valuation adjustment (DVA)) which result in non-GAAP financial measures. We believe that the presentation of measures that exclude these items are useful because they provide additional information to assess the underlying operational performance and trends of our businesses and to allow better comparison of period-to-period operating performance.
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 certain acquired 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 certain acquired 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 certain acquired 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. |
We believe that the use of ratios that utilize tangible equity provides additional useful information because they present measures of those assets that can generate income. Tangible book value per share provides additional useful information about the level of tangible assets in relation to outstanding shares of common stock.
The aforementioned supplemental data and performance measures are presented in Table 6.
Table 7 presents certain non-GAAP financial measures and performance measurements on an FTE basis.
Table 7 | Supplemental Financial Data | |||||||
Three Months Ended March 31 | ||||||||
(Dollars in millions) | 2017 | 2016 | ||||||
Fully taxable-equivalent basis data | ||||||||
Net interest income | $ | 11,255 | $ | 10,700 | ||||
Total revenue, net of interest expense | 22,445 | 21,005 | ||||||
Net interest yield | 2.39 | % | 2.33 | % | ||||
Efficiency ratio | 66.15 | 70.54 |
Bank of America 8 |
Table 8 | Quarterly Average Balances and Interest Rates – FTE Basis | |||||||||||||||||||||
First Quarter 2017 | First Quarter 2016 | |||||||||||||||||||||
(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 | $ | 123,921 | $ | 202 | 0.66 | % | $ | 138,574 | $ | 155 | 0.45 | % | ||||||||||
Time deposits placed and other short-term investments | 11,497 | 47 | 1.65 | 9,156 | 32 | 1.41 | ||||||||||||||||
Federal funds sold and securities borrowed or purchased under agreements to resell | 216,402 | 439 | 0.82 | 209,183 | 276 | 0.53 | ||||||||||||||||
Trading account assets | 125,661 | 1,111 | 3.58 | 136,306 | 1,212 | 3.57 | ||||||||||||||||
Debt securities (1) | 430,234 | 2,573 | 2.39 | 399,978 | 2,537 | 2.56 | ||||||||||||||||
Loans and leases (2): | ||||||||||||||||||||||
Residential mortgage | 193,627 | 1,661 | 3.44 | 186,980 | 1,629 | 3.49 | ||||||||||||||||
Home equity | 65,508 | 639 | 3.94 | 75,328 | 711 | 3.79 | ||||||||||||||||
U.S. credit card | 89,628 | 2,111 | 9.55 | 87,163 | 2,021 | 9.32 | ||||||||||||||||
Non-U.S. credit card | 9,367 | 211 | 9.15 | 9,822 | 253 | 10.36 | ||||||||||||||||
Direct/Indirect consumer (3) | 93,291 | 608 | 2.65 | 89,342 | 550 | 2.48 | ||||||||||||||||
Other consumer (4) | 2,547 | 27 | 4.07 | 2,138 | 16 | 3.03 | ||||||||||||||||
Total consumer | 453,968 | 5,257 | 4.68 | 450,773 | 5,180 | 4.61 | ||||||||||||||||
U.S. commercial | 287,468 | 2,222 | 3.14 | 270,511 | 1,936 | 2.88 | ||||||||||||||||
Commercial real estate (5) | 57,764 | 479 | 3.36 | 57,271 | 434 | 3.05 | ||||||||||||||||
Commercial lease financing | 22,123 | 231 | 4.17 | 21,077 | 182 | 3.46 | ||||||||||||||||
Non-U.S. commercial | 92,821 | 595 | 2.60 | 93,352 | 585 | 2.52 | ||||||||||||||||
Total commercial | 460,176 | 3,527 | 3.11 | 442,211 | 3,137 | 2.85 | ||||||||||||||||
Total loans and leases (1) | 914,144 | 8,784 | 3.88 | 892,984 | 8,317 | 3.74 | ||||||||||||||||
Other earning assets | 73,514 | 751 | 4.13 | 58,641 | 694 | 4.75 | ||||||||||||||||
Total earning assets (6) | 1,895,373 | 13,907 | 2.96 | 1,844,822 | 13,223 | 2.88 | ||||||||||||||||
Cash and due from banks (1) | 27,196 | 28,844 | ||||||||||||||||||||
Other assets, less allowance for loan and lease losses (1) | 308,851 | 300,256 | ||||||||||||||||||||
Total assets | $ | 2,231,420 | $ | 2,173,922 | ||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||
U.S. interest-bearing deposits: | ||||||||||||||||||||||
Savings | $ | 52,193 | $ | 1 | 0.01 | % | $ | 47,845 | $ | 1 | 0.01 | % | ||||||||||
NOW and money market deposit accounts | 617,749 | 74 | 0.05 | 577,779 | 71 | 0.05 | ||||||||||||||||
Consumer CDs and IRAs | 46,711 | 31 | 0.27 | 49,617 | 35 | 0.28 | ||||||||||||||||
Negotiable CDs, public funds and other deposits | 33,695 | 52 | 0.63 | 31,739 | 29 | 0.37 | ||||||||||||||||
Total U.S. interest-bearing deposits | 750,348 | 158 | 0.09 | 706,980 | 136 | 0.08 | ||||||||||||||||
Non-U.S. interest-bearing deposits: | ||||||||||||||||||||||
Banks located in non-U.S. countries | 2,616 | 5 | 0.76 | 4,123 | 9 | 0.84 | ||||||||||||||||
Governments and official institutions | 1,013 | 2 | 0.81 | 1,472 | 2 | 0.53 | ||||||||||||||||
Time, savings and other | 58,418 | 117 | 0.81 | 56,943 | 78 | 0.55 | ||||||||||||||||
Total non-U.S. interest-bearing deposits | 62,047 | 124 | 0.81 | 62,538 | 89 | 0.57 | ||||||||||||||||
Total interest-bearing deposits | 812,395 | 282 | 0.14 | 769,518 | 225 | 0.12 | ||||||||||||||||
Federal funds purchased, securities loaned or sold under agreements to repurchase and short-term borrowings | 231,717 | 647 | 1.13 | 221,990 | 613 | 1.11 | ||||||||||||||||
Trading account liabilities | 69,695 | 264 | 1.53 | 72,299 | 292 | 1.63 | ||||||||||||||||
Long-term debt | 221,468 | 1,459 | 2.65 | 233,654 | 1,393 | 2.39 | ||||||||||||||||
Total interest-bearing liabilities (6) | 1,335,275 | 2,652 | 0.80 | 1,297,461 | 2,523 | 0.78 | ||||||||||||||||
Noninterest-bearing sources: | ||||||||||||||||||||||
Noninterest-bearing deposits | 444,237 | 428,937 | ||||||||||||||||||||
Other liabilities | 183,805 | 187,101 | ||||||||||||||||||||
Shareholders’ equity | 268,103 | 260,423 | ||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 2,231,420 | $ | 2,173,922 | ||||||||||||||||||
Net interest spread | 2.16 | % | 2.10 | % | ||||||||||||||||||
Impact of noninterest-bearing sources | 0.23 | 0.23 | ||||||||||||||||||||
Net interest income/yield on earning assets | $ | 11,255 | 2.39 | % | $ | 10,700 | 2.33 | % |
(1) | Includes assets of the Corporation's non-U.S. consumer credit card business, which are included in assets of business held for sale on the Consolidated Balance Sheet at March 31, 2017. The impact on net interest yield of the earning assets included in assets of business held for sale is not significant. |
(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 estimated life of the loan. |
(3) | Includes non-U.S. consumer loans of $2.9 billion and $3.8 billion in the first quarter of 2017 and 2016. |
(4) | Includes consumer finance loans of $454 million and $551 million; consumer leases of $1.9 billion and $1.4 billion, and consumer overdrafts of $170 million and $161 million in the first quarter of 2017 and 2016, respectively. |
(5) | Includes U.S. commercial real estate loans of $54.7 billion and $53.8 billion, and non-U.S. commercial real estate loans of $3.1 billion and $3.4 billion in the first quarter of 2017 and 2016, respectively. |
(6) | Interest income includes the impact of interest rate risk management contracts, which decreased interest income on the underlying assets by $17 million and $35 million in the first quarter of 2017 and 2016. Interest expense includes the impact of interest rate risk management contracts, which decreased interest expense on the underlying liabilities by $424 million and $565 million in the first quarter of 2017 and 2016. For additional information, see Interest Rate Risk Management for the Banking Book on page 58. |
9 Bank of America
Business Segment Operations
Segment Description and Basis of Presentation
We report our results of operations through the following four business segments: Consumer Banking, GWIM, Global Banking and Global Markets, with the remaining operations recorded in All Other. We periodically review capital allocated to our businesses and allocate 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. Our 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 21. For more information on the basis of presentation for business segments and reconciliations to consolidated total revenue, net income and period-end total assets, see Note 17 – Business Segment Information to the Consolidated Financial Statements.
Consumer Banking
Three Months Ended March 31 | ||||||||||||||||||||||||
Deposits | Consumer Lending | Total Consumer Banking | ||||||||||||||||||||||
(Dollars in millions) | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | % Change | |||||||||||||||||
Net interest income (FTE basis) | $ | 3,063 | $ | 2,692 | $ | 2,718 | $ | 2,636 | $ | 5,781 | $ | 5,328 | 9 | % | ||||||||||
Noninterest income: | ||||||||||||||||||||||||
Card income | 2 | 3 | 1,222 | 1,208 | 1,224 | 1,211 | 1 | |||||||||||||||||
Service charges | 1,050 | 997 | — | — | 1,050 | 997 | 5 | |||||||||||||||||
Mortgage banking income (1) | — | — | 119 | 190 | 119 | 190 | (37 | ) | ||||||||||||||||
All other income | 102 | 115 | 8 | 16 | 110 | 131 | (16 | ) | ||||||||||||||||
Total noninterest income | 1,154 | 1,115 | 1,349 | 1,414 | 2,503 | 2,529 | (1 | ) | ||||||||||||||||
Total revenue, net of interest expense (FTE basis) | 4,217 | 3,807 | 4,067 | 4,050 | 8,284 | 7,857 | 5 | |||||||||||||||||
Provision for credit losses | 55 | 48 | 783 | 483 | 838 | 531 | 58 | |||||||||||||||||
Noninterest expense | 2,523 | 2,455 | 1,883 | 2,083 | 4,406 | 4,538 | (3 | ) | ||||||||||||||||
Income before income taxes (FTE basis) | 1,639 | 1,304 | 1,401 | 1,484 | 3,040 | 2,788 | 9 | |||||||||||||||||
Income tax expense (FTE basis) | 618 | 479 | 528 | 545 | 1,146 | 1,024 | 12 | |||||||||||||||||
Net income | $ | 1,021 | $ | 825 | $ | 873 | $ | 939 | $ | 1,894 | $ | 1,764 | 7 | |||||||||||
Net interest yield (FTE basis) | 1.96 | % | 1.88 | % | 4.34 | % | 4.52 | % | 3.50 | % | 3.53 | % | ||||||||||||
Return on average allocated capital | 35 | 28 | 14 | 17 | 21 | 21 | ||||||||||||||||||
Efficiency ratio (FTE basis) | 59.85 | 64.50 | 46.29 | 51.43 | 53.19 | 57.77 | ||||||||||||||||||
Balance Sheet | ||||||||||||||||||||||||
Three Months Ended March 31 | ||||||||||||||||||||||||
Average | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | % Change | |||||||||||||||||
Total loans and leases | $ | 4,979 | $ | 4,732 | $ | 252,966 | $ | 233,176 | $ | 257,945 | $ | 237,908 | 8 | % | ||||||||||
Total earning assets (2) | 634,704 | 576,634 | 254,066 | 234,362 | 668,865 | 607,302 | 10 | |||||||||||||||||
Total assets (2) | 661,769 | 603,429 | 265,783 | 246,781 | 707,647 | 646,516 | 9 | |||||||||||||||||
Total deposits | 629,337 | 571,462 | 6,257 | 6,731 | 635,594 | 578,193 | 10 | |||||||||||||||||
Allocated capital | 12,000 | 12,000 | 25,000 | 22,000 | 37,000 | 34,000 | 9 | |||||||||||||||||
Period end | March 31 2017 | December 31 2016 | March 31 2017 | December 31 2016 | March 31 2017 | December 31 2016 | % Change | |||||||||||||||||
Total loans and leases | $ | 4,938 | $ | 4,938 | $ | 253,483 | $ | 254,053 | $ | 258,421 | $ | 258,991 | — | % | ||||||||||
Total earning assets (2) | 660,888 | 631,172 | 254,291 | 255,511 | 694,883 | 662,698 | 5 | |||||||||||||||||
Total assets (2) | 688,277 | 658,316 | 266,106 | 268,002 | 734,087 | 702,333 | 5 | |||||||||||||||||
Total deposits | 655,714 | 625,727 | 5,893 | 7,059 | 661,607 | 632,786 | 5 |
(1) | Total consolidated mortgage banking income of $122 million and $433 million for the three months ended March 31, 2017 and 2016 was recorded primarily in Consumer Lending and All Other. |
(2) | 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. |
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 coast to
coast network including financial centers in 33 states and the District of Columbia. Our network includes approximately 4,600 financial centers, 15,900 ATMs, nationwide call centers, and online and mobile platforms.
Bank of America 10 |
Consumer Banking Results
Net income for Consumer Banking increased $130 million to $1.9 billion for the three months ended March 31, 2017 compared to the same period in 2016 primarily driven by higher net interest income and lower noninterest expense, partially offset by higher provision for credit losses. Net interest income increased $453 million to $5.8 billion primarily due to the beneficial impact of an increase in investable assets as a result of higher deposits. Noninterest income decreased $26 million to $2.5 billion.
The provision for credit losses increased $307 million to $838 million due to loan growth and portfolio seasoning in the U.S. credit card portfolio. The three months ended March 31, 2017 included a net reserve increase of $66 million compared to a $208 million release for the same period in 2016. Noninterest expense decreased $132 million to $4.4 billion driven by improved operating efficiencies, partially offset by higher FDIC expense.
The return on average allocated capital remained unchanged at 21 percent. For more information on capital allocations, see Business Segment Operations on page 10.
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. Net interest income 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 – Net Migration Summary on page 14.
Net income for Deposits increased $196 million to $1.0 billion for the three months ended March 31, 2017 compared to the same period in 2016 driven by higher revenue, partially offset by higher noninterest expense. Net interest income increased $371 million to $3.1 billion primarily due to the beneficial impact of an increase in investable assets as a result of higher deposits. Noninterest income increased $39 million to $1.2 billion primarily due to higher service charges. The prior-year period also included gains on certain divestitures.
The provision for credit losses increased $7 million to $55 million. Noninterest expense increased $68 million to $2.5 billion primarily driven by higher FDIC expense.
Average deposits increased $57.9 billion to $629.3 billion driven by strong organic growth. Growth in checking, traditional
savings and money market savings of $61.4 billion was partially offset by a decline in time deposits of $3.5 billion.
Key Statistics – Deposits | |||||||
Three Months Ended March 31 | |||||||
2017 | 2016 | ||||||
Total deposit spreads (excludes noninterest costs) (1) | 1.67 | % | 1.65 | % | |||
Period end | |||||||
Client brokerage assets (in millions) | $ | 153,786 | $ | 126,921 | |||
Digital banking active users (units in thousands) | 34,527 | 32,647 | |||||
Mobile banking active users (units in thousands) | 22,217 | 19,595 | |||||
Financial centers | 4,559 | 4,689 | |||||
ATMs | 15,939 | 16,003 |
(1) | Includes deposits held in Consumer Lending. |
Client brokerage assets increased $26.9 billion driven by strong client flows and market performance. Mobile banking active users increased 2.6 million reflecting continuing changes in our customers’ banking preferences. The number of financial centers declined 130 driven by changes in customer preferences to self-service options 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, 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 results also include the impact of servicing residential mortgages and home equity loans in the core portfolio, including loans held on the balance sheet of Consumer Lending and loans serviced for others.
We classify consumer real estate loans as core or non-core based on loan and customer characteristics such as origination date, product type, loan-to-value (LTV), Fair Isaac Corporation (FICO) score and delinquency status. For more information on the core and non-core portfolios, see Consumer Portfolio Credit Risk Management on page 31. At March 31, 2017, total owned loans in the core portfolio held in Consumer Lending were $103.7 billion, an increase of $11.3 billion from March 31, 2016, primarily driven by higher residential mortgage balances, partially offset by a decline in home equity.
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 – Net Migration Summary on page 14.
11 Bank of America
Net income for Consumer Lending decreased $66 million to $873 million for the three months ended March 31, 2017 compared to the same period in 2016 driven by higher provision for credit losses and lower noninterest income, partially offset by lower noninterest expense and higher net interest income. Net interest income increased $82 million to $2.7 billion primarily driven by the impact of an increase in loan balances. Noninterest income decreased $65 million to $1.3 billion driven by lower mortgage banking income, partially offset by higher card income.
The provision for credit losses increased $300 million to $783 million due to loan growth and portfolio seasoning in the U.S. credit card portfolio. The three months ended March 31, 2017 included a net reserve increase of $62 million compared to a $204 million release for the same period in 2016. Noninterest expense decreased $200 million to $1.9 billion primarily driven by improved operating efficiencies.
Average loans increased $19.8 billion to $253.0 billion primarily driven by increases in residential mortgages and consumer vehicle loans, partially offset by lower home equity loan balances.
Key Statistics – Consumer Lending | |||||||
Three Months Ended March 31 | |||||||
(Dollars in millions) | 2017 | 2016 | |||||
Total U.S. credit card (1) | |||||||
Gross interest yield | 9.55 | % | 9.32 | % | |||
Risk-adjusted margin | 8.89 | 9.05 | |||||
New accounts (in thousands) | 1,184 | 1,208 | |||||
Purchase volumes | $ | 55,321 | $ | 51,154 | |||
Debit card purchase volumes | $ | 70,611 | $ | 69,147 |
(1) | In addition to the U.S. credit card portfolio in Consumer Banking, the remaining U.S. credit card portfolio is in GWIM. |
During the three months ended March 31, 2017, the total U.S. credit card risk-adjusted margin decreased 16 bps primarily driven by higher credit card rewards costs. Total U.S. credit card purchase volumes increased $4.2 billion to $55.3 billion and debit card purchase volumes increased $1.5 billion to $70.6 billion, reflecting higher levels of consumer spending.
Mortgage Banking Income
Mortgage banking income in Consumer Banking includes production income and net servicing income. Production income 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 made in the sales transactions along with other obligations
incurred in the sales of mortgage loans. Production income decreased $84 million to $54 million for the three months ended March 31, 2017 compared to the same period in 2016 due to a decision to retain a higher percentage of residential mortgage production in Consumer Banking, as well as the impact of a higher interest rate environment driving lower refinances.
Net servicing income within Consumer Banking includes income earned in connection with servicing activities and MSR valuation adjustments for the core portfolio, net of results from risk management activities used to hedge certain market risks of the MSRs. Net servicing income increased $13 million to $65 million for the three months ended March 31, 2017 compared to the same period in 2016.
Mortgage Servicing Rights
At March 31, 2017, the core MSR portfolio, held within Consumer Lending, was $1.9 billion compared to $1.8 billion at March 31, 2016. The increase was primarily driven by changes in fair value as well as new additions, which exceeded the amortization of expected cash flows. For more information on MSRs, see Note 14 – Fair Value Measurements to the Consolidated Financial Statements.
Key Statistics | |||||||
Three Months Ended March 31 | |||||||
(Dollars in millions) | 2017 | 2016 | |||||
Loan production (1): | |||||||
Total (2): | |||||||
First mortgage | $ | 11,442 | $ | 12,623 | |||
Home equity | 4,053 | 3,805 | |||||
Consumer Banking: | |||||||
First mortgage | $ | 7,629 | $ | 9,078 | |||
Home equity | 3,667 | 3,515 |
(1) | The 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 decreased $1.4 billion and $1.2 billion in the three months ended March 31, 2017 compared to the same period in 2016 primarily driven by a higher interest rate environment driving lower first-lien mortgage refinances.
Home equity production in Consumer Banking and for the total Corporation increased $152 million and $248 million for the three months ended March 31, 2017 compared to the same period in 2016 due to a higher demand in the market based on improving housing trends.
Bank of America 12 |
Global Wealth & Investment Management
Three Months Ended March 31 | ||||||||||||
(Dollars in millions) | 2017 | 2016 | % Change | |||||||||
Net interest income (FTE basis) | $ | 1,560 | $ | 1,513 | 3 | % | ||||||
Noninterest income: | ||||||||||||
Investment and brokerage services | 2,648 | 2,536 | 4 | |||||||||
All other income | 384 | 420 | (9 | ) | ||||||||
Total noninterest income | 3,032 | 2,956 | 3 | |||||||||
Total revenue, net of interest expense (FTE basis) | 4,592 | 4,469 | 3 | |||||||||
Provision for credit losses | 23 | 25 | (8 | ) | ||||||||
Noninterest expense | 3,333 | 3,273 | 2 | |||||||||
Income before income taxes (FTE basis) | 1,236 | 1,171 | 6 | |||||||||
Income tax expense (FTE basis) | 466 | 430 | 8 | |||||||||
Net income | $ | 770 | $ | 741 | 4 | |||||||
Net interest yield (FTE basis) | 2.28 | % | 2.18 | % | ||||||||
Return on average allocated capital | 22 | 23 | ||||||||||
Efficiency ratio (FTE basis) | 72.58 | 73.25 | ||||||||||
Balance Sheet | ||||||||||||
Three Months Ended March 31 | ||||||||||||
Average | 2017 | 2016 | % Change | |||||||||
Total loans and leases | $ | 148,405 | $ | 139,098 | 7 | % | ||||||
Total earning assets | 277,989 | 279,605 | (1 | ) | ||||||||
Total assets | 293,432 | 295,710 | (1 | ) | ||||||||
Total deposits | 257,386 | 260,482 | (1 | ) | ||||||||
Allocated capital | 14,000 | 13,000 | 8 | |||||||||
Period end | March 31 2017 | December 31 2016 | % Change | |||||||||
Total loans and leases | $ | 149,110 | $ | 148,179 | 1 | % | ||||||
Total earning assets | 275,214 | 283,151 | (3 | ) | ||||||||
Total assets | 291,177 | 298,931 | (3 | ) | ||||||||
Total deposits | 254,595 | 262,530 | (3 | ) |
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 assets under management (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 per year depend 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.
Net income for GWIM increased $29 million to $770 million for the three months ended March 31, 2017 compared to the same period in 2016 due to higher revenue, partially offset by an increase in expense. The operating margin was 27 percent compared to 26 percent a year ago.
Net interest income increased $47 million to $1.6 billion driven by the impact of growth in loan balances. Noninterest income, which primarily includes investment and brokerage services income, increased $76 million to $3.0 billion. The increase in noninterest income was driven by higher asset management fees primarily due to higher market valuations and long-term AUM flows, partially offset by lower transactional revenue. Noninterest expense increased $60 million to $3.3 billion primarily due to higher revenue-related incentives and FDIC expense.
Return on average allocated capital was 22 percent, down from 23 percent a year ago as the impact of higher net income was more than offset by higher allocated capital.
13 Bank of America
Key Indicators and Metrics | ||||||||
Three Months Ended March 31 | ||||||||
(Dollars in millions, except as noted) | 2017 | 2016 | ||||||
Revenue by Business | ||||||||
Merrill Lynch Global Wealth Management | $ | 3,782 | $ | 3,667 | ||||
U.S. Trust | 809 | 777 | ||||||
Other (1) | 1 | 25 | ||||||
Total revenue, net of interest expense (FTE basis) | $ | 4,592 | $ | 4,469 | ||||
Client Balances by Business, at period end | ||||||||
Merrill Lynch Global Wealth Management | $ | 2,167,536 | $ | 1,998,145 | ||||
U.S. Trust | 417,841 | 390,262 | ||||||
Other (1) | — | 77,751 | ||||||
Total client balances | $ | 2,585,377 | $ | 2,466,158 | ||||
Client Balances by Type, at period end | ||||||||
Long-term assets under management | $ | 946,778 | $ | 812,916 | ||||
Liquidity assets under management (1) | — | 77,747 | ||||||
Assets under management | 946,778 | 890,663 | ||||||
Brokerage assets | 1,106,109 | 1,056,752 | ||||||
Assets in custody | 126,086 | 115,537 | ||||||
Deposits | 254,595 | 260,565 | ||||||
Loans and leases (2) | 151,809 | 142,641 | ||||||
Total client balances | $ | 2,585,377 | $ | 2,466,158 | ||||
Assets Under Management Rollforward | ||||||||
Assets under management, beginning of period | $ | 886,148 | $ | 900,863 | ||||
Net long-term client flows | 29,214 | (599 | ) | |||||
Net liquidity client flows | — | (3,820 | ) | |||||
Market valuation/other (1) | 31,416 | (5,781 | ) | |||||
Total assets under management, end of period | $ | 946,778 | $ | 890,663 | ||||
Associates, at period end (3, 4) | ||||||||
Number of financial advisors | 16,576 | 16,671 | ||||||
Total wealth advisors, including financial advisors | 18,435 | 18,486 | ||||||
Total primary sales professionals, including financial advisors and wealth advisors | 19,431 | 19,366 | ||||||
Merrill Lynch Global Wealth Management Metric (4) | ||||||||
Financial advisor productivity (5) (in thousands) | $ | 999 | $ | 984 | ||||
U.S. Trust Metric, at period end (4) | ||||||||
Primary sales professionals | 1,671 | 1,595 |
(1) | Includes the results of BofA Global Capital Management, the cash management division of Bank of America, and certain administrative items. Also reflects the sale to a third party of approximately $80 billion of BofA Global Capital Management's AUM during the three months ended June 30, 2016. |
(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 2,092 and 2,259 at March 31, 2017 and 2016. |
(4) | Associate headcount computation is based upon full-time equivalents. |
(5) | Financial advisor productivity is defined as MLGWM total revenue, excluding the allocation of certain asset and liability management (ALM) activities, divided by the total number of financial advisors (excluding financial advisors in the Consumer Banking segment). |
AUM increased $56.1 billion, or six percent, to $946.8 billion during the three months ended March 31, 2017 compared to the same period in 2016. The increase in AUM was primarily due to higher market valuations and positive net flows, which reflected client activity and a shift from brokerage assets to long-term AUM, partially offset by the sale of BofA Global Capital Management's liquidity AUM in the second quarter of 2016.
Client balances increased $119.2 billion, or five percent, to nearly $2.6 trillion at March 31, 2017 driven by higher market valuations and positive net flows, partially offset by the impact of the sale of liquidity AUM in 2016.
During the three months ended March 31, 2017, revenue from MLGWM of $3.8 billion increased three percent due to higher net interest income and asset management fees driven by higher market valuations and long-term AUM flows, partially offset by lower transactional revenue. U.S. Trust revenue of $809 million increased four percent reflecting higher net interest income and
asset management fees driven by higher market valuations and long-term AUM flows.
Net Migration Summary
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.
Net Migration Summary (1) | |||||||
Three Months Ended March 31 | |||||||
(Dollars in millions) | 2017 | 2016 | |||||
Total deposits, net – to (from) GWIM | $ | (97 | ) | $ | (391 | ) | |
Total loans, net – to (from) GWIM | (127 | ) | 9 | ||||
Total brokerage, net – to (from) GWIM | 94 | (240 | ) |
(1) | Migration occurs primarily between GWIM and Consumer Banking. |
Bank of America 14 |
Global Banking
Three Months Ended March 31 | |||||||||||
(Dollars in millions) | 2017 | 2016 | % Change | ||||||||
Net interest income (FTE basis) | $ | 2,774 | $ | 2,545 | 9 | % | |||||
Noninterest income: | |||||||||||
Service charges | 765 | 745 | 3 | ||||||||
Investment banking fees | 925 | 636 | 45 | ||||||||
All other income | 491 | 528 | (7 | ) | |||||||
Total noninterest income | 2,181 | 1,909 | 14 | ||||||||
Total revenue, net of interest expense (FTE basis) | 4,955 | 4,454 | 11 | ||||||||
Provision for credit losses | 17 | 553 | (97 | ) | |||||||
Noninterest expense | 2,163 | 2,174 | (1 | ) | |||||||
Income before income taxes (FTE basis) | 2,775 | 1,727 | 61 | ||||||||
Income tax expense (FTE basis) | 1,046 | 635 | 65 | ||||||||
Net income | $ | 1,729 | $ | 1,092 | 58 | ||||||
Net interest yield (FTE basis) | 3.08 | % | 3.00 | % | |||||||
Return on average allocated capital | 18 | 12 | |||||||||
Efficiency ratio (FTE basis) | 43.66 | 48.80 | |||||||||
Balance Sheet | |||||||||||
Three Months Ended March 31 | |||||||||||
Average | 2017 | 2016 | % Change | ||||||||
Total loans and leases | $ | 342,857 | $ | 328,643 | 4 | % | |||||
Total earning assets | 365,775 | 341,387 | 7 | ||||||||
Total assets | 415,856 | 391,775 | 6 | ||||||||
Total deposits | 304,137 | 297,134 | 2 | ||||||||
Allocated capital | 40,000 | 37,000 | 8 | ||||||||
Period end | March 31 2017 | December 31 2016 | % Change | ||||||||
Total loans and leases | $ | 344,451 | $ | 339,271 | 2 | % | |||||
Total earning assets | 366,567 | 356,241 | 3 | ||||||||
Total assets | 416,710 | 408,268 | 2 | ||||||||
Total deposits | 296,178 | 306,430 | (3 | ) |
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, 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 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.
Net income for Global Banking increased $637 million to $1.7 billion for the three months ended March 31, 2017 compared to the same period in 2016 driven by higher revenue and lower provision for credit losses.
Revenue increased $501 million to $5.0 billion for the three months ended March 31, 2017 compared to the same period in 2016 driven by higher net interest income and noninterest income. Net interest income increased $229 million to $2.8 billion driven by the impact of growth in loans and leases, partially offset by loan spread compression. Noninterest income increased $272 million to $2.2 billion largely due to higher investment banking fees.
The provision for credit losses decreased $536 million to $17 million driven by improvements in energy exposures. For additional information, see Commercial Portfolio Credit Risk Management – Industry Concentrations on page 47. Noninterest expense of $2.2 billion remained relatively unchanged as higher revenue-related incentives and FDIC expense were offset by lower other personnel and operating expense.
The return on average allocated capital was 18 percent, up from 12 percent, as higher net income was partially offset by an increased capital allocation. For more information on capital allocated to the business segments, see Business Segment Operations on page 10.
15 Bank of America
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 and following discussion presents a summary of the results, which exclude certain investment banking activities in Global Banking.
Global Corporate, Global Commercial and Business Banking | ||||||||||||||||||||||||||||||||
Three Months Ended March 31 | ||||||||||||||||||||||||||||||||
Global Corporate Banking | Global Commercial Banking | Business Banking | Total | |||||||||||||||||||||||||||||
(Dollars in millions) | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||
Business Lending | $ | 1,102 | $ | 1,054 | $ | 1,044 | $ | 1,009 | $ | 101 | $ | 97 | $ | 2,247 | $ | 2,160 | ||||||||||||||||
Global Transaction Services | 797 | 715 | 707 | 702 | 197 | 187 | 1,701 | 1,604 | ||||||||||||||||||||||||
Total revenue, net of interest expense | $ | 1,899 | $ | 1,769 | $ | 1,751 | $ | 1,711 | $ | 298 | $ | 284 | $ | 3,948 | $ | 3,764 | ||||||||||||||||
Balance Sheet | ||||||||||||||||||||||||||||||||
Average | ||||||||||||||||||||||||||||||||
Total loans and leases | $ | 155,358 | $ | 150,921 | $ | 169,818 | $ | 160,498 | $ | 17,696 | $ | 17,196 | $ | 342,872 | $ | 328,615 | ||||||||||||||||
Total deposits | 145,377 | 137,637 | 122,904 | 125,321 | 35,861 | 34,182 | 304,142 | 297,140 | ||||||||||||||||||||||||
Period end | ||||||||||||||||||||||||||||||||
Total loans and leases | $ | 155,801 | $ | 154,398 | $ | 171,074 | $ | 161,816 | $ | 17,599 | $ | 17,274 | $ | 344,474 | $ | 333,488 | ||||||||||||||||
Total deposits | 142,094 | 139,691 | 118,435 | 124,010 | 35,653 | 34,376 | 296,182 | 298,077 |
Business Lending revenue increased $87 million for the three months ended March 31, 2017 compared to the same period in 2016 driven by the impact of loan growth, partially offset by loan spread compression.
Global Transaction Services revenue increased $97 million for the three months ended March 31, 2017 compared to the same period in 2016 driven by growth in treasury-related revenue.
Average loans and leases increased four percent for the three months ended March 31, 2017 compared to the same period in 2016 driven by growth in the commercial and industrial, and leasing portfolios. Average deposits increased two percent due to continued portfolio growth with new and existing clients.
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 certain investment banking and underwriting activities are shared primarily between Global Banking and Global Markets under an internal revenue-sharing arrangement. To provide a complete discussion of our consolidated investment banking fees, the following table presents total Corporation investment banking fees and the portion attributable to Global Banking.
Investment Banking Fees | |||||||||||||||
Three Months Ended March 31 | |||||||||||||||
Global Banking | Total Corporation | ||||||||||||||
(Dollars in millions) | 2017 | 2016 | 2017 | 2016 | |||||||||||
Products | |||||||||||||||
Advisory | $ | 390 | $ | 305 | $ | 405 | $ | 346 | |||||||
Debt issuance | 412 | 265 | 926 | 669 | |||||||||||
Equity issuance | 123 | 66 | 312 | 188 | |||||||||||
Gross investment banking fees | 925 | 636 | 1,643 | 1,203 | |||||||||||
Self-led deals | (23 | ) | (11 | ) | (59 | ) | (50 | ) | |||||||
Total investment banking fees | $ | 902 | $ | 625 | $ | 1,584 | $ | 1,153 |
Total Corporation investment banking fees of $1.6 billion, excluding self-led deals, included within Global Banking and Global Markets, increased 37 percent for the three months ended March 31, 2017 compared to the same period in 2016 driven by higher debt and equity issuance fees and higher advisory fees driven by an increase in overall client activity and market fee pools.
Bank of America 16 |
Global Markets
Three Months Ended March 31 | |||||||||||
(Dollars in millions) | 2017 | 2016 | % Change | ||||||||
Net interest income (FTE basis) | $ | 1,049 | $ | 1,184 | (11 | )% | |||||
Noninterest income: | |||||||||||
Investment and brokerage services | 531 | 568 | (7 | ) | |||||||
Investment banking fees | 666 | 494 | 35 | ||||||||
Trading account profits | 2,177 | 1,595 | 36 | ||||||||
All other income | 285 | 110 | 159 | ||||||||
Total noninterest income | 3,659 | 2,767 | 32 | ||||||||
Total revenue, net of interest expense (FTE basis) | 4,708 | 3,951 | 19 | ||||||||
Provision for credit losses | (17 | ) | 9 | n/m | |||||||
Noninterest expense | 2,757 | 2,449 | 13 | ||||||||
Income before income taxes (FTE basis) | 1,968 | 1,493 | 32 | ||||||||
Income tax expense (FTE basis) | 671 | 520 | 29 | ||||||||
Net income | $ | 1,297 | $ | 973 | 33 | ||||||
Return on average allocated capital | 15 | % | 11 | % | |||||||
Efficiency ratio (FTE basis) | 58.56 | 62.01 | |||||||||
Balance Sheet | |||||||||||
Three Months Ended March 31 | |||||||||||
Average | 2017 | 2016 | % Change | ||||||||
Trading-related assets: | |||||||||||
Trading account securities | $ | 203,866 | $ | 187,931 | 8 | % | |||||
Reverse repurchases | 96,835 | 85,411 | 13 | ||||||||
Securities borrowed | 81,312 | 80,807 | 1 | ||||||||
Derivative assets | 40,346 | 53,512 | (25 | ) | |||||||
Total trading-related assets (1) | 422,359 | 407,661 | 4 | ||||||||
Total loans and leases | 70,064 | 69,283 | 1 | ||||||||
Total earning assets (1) | 429,906 | 418,198 | 3 | ||||||||
Total assets | 607,010 | 581,226 | 4 | ||||||||
Total deposits | 33,158 | 35,886 | (8 | ) | |||||||
Allocated capital | 35,000 | 37,000 | (5 | ) | |||||||
Period end | March 31 2017 | December 31 2016 | % Change | ||||||||
Total trading-related assets (1) | $ | 418,259 | $ | 380,562 | 10 | % | |||||
Total loans and leases | 71,053 | 72,743 | (2 | ) | |||||||
Total earning assets (1) | 425,582 | 397,023 | 7 | ||||||||
Total assets | 604,015 | 566,060 | 7 | ||||||||
Total deposits | 33,629 | 34,927 | (4 | ) |
(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 certain investment banking and underwriting activities are
shared primarily between Global Markets and Global Banking under an internal revenue-sharing arrangement. Global Banking originates certain deal-related transactions with our corporate and commercial clients that are executed and distributed by Global Markets. For information on investment banking fees on a consolidated basis, see page 16.
Net income for Global Markets increased $324 million to $1.3 billion for the three months ended March 31, 2017 compared to the same period in 2016 primarily driven by higher sales and trading revenue and investment banking fees, partially offset by higher noninterest expense. Net DVA losses were $130 million compared to gains of $154 million in the same period in 2016. Excluding net DVA, net income increased $500 million to $1.4 billion primarily driven by the same factors as described above. Sales and trading revenue, excluding net DVA, increased $741 million primarily due to a stronger performance across credit and mortgage products. Noninterest expense increased $308 million to $2.8 billion primarily due to litigation expense in the three
17 Bank of America
months ended March 31, 2017 compared to a litigation recovery in the same period in 2016 and higher revenue-related expenses, partially offset by lower operating and support costs.
Average earning assets increased $11.7 billion to $429.9 billion and period-end trading-related assets increased $37.7 billion to $418.3 billion both primarily driven by increased client financing activities in the global equities business.
The return on average allocated capital was 15 percent, up from 11 percent, reflecting an increase in net income and a decrease in 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 MBS, 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 following table 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 following table 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 additional useful information to assess the underlying performance of these businesses and to allow better comparison of period-to-period operating performance.
Sales and Trading Revenue (1, 2) | |||||||
Three Months Ended March 31 | |||||||
(Dollars in millions) | 2017 | 2016 | |||||
Sales and trading revenue | |||||||
Fixed-income, currencies and commodities | $ | 2,810 | $ | 2,405 | |||
Equities | 1,089 | 1,037 | |||||
Total sales and trading revenue | $ | 3,899 | $ | 3,442 | |||
Sales and trading revenue, excluding net DVA (3) | |||||||
Fixed-income, currencies and commodities | $ | 2,930 | $ | 2,265 | |||
Equities | 1,099 | 1,023 | |||||
Total sales and trading revenue, excluding net DVA | $ | 4,029 | $ | 3,288 |
(1) | Includes FTE adjustments of $47 million and $45 million for the three months ended March 31, 2017 and 2016. 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 $58 million and $159 million for the three months ended March 31, 2017 and 2016. |
(3) | Fixed-income, currencies and commodities (FICC) and Equities sales and trading revenue, excluding net DVA, is a non-GAAP financial measure. FICC net DVA losses were $120 million for the three months ended March 31, 2017 compared to net DVA gains of $140 million for the same period in 2016. Equities net DVA losses were $10 million for the three months ended March 31, 2017 compared to net DVA gains of $14 million for the same period in 2016. |
The explanations for period-over-period changes in sales and trading, FICC and Equities revenue, as set forth below, would be the same if net DVA was included.
FICC revenue, excluding net DVA, increased $665 million due to a more favorable market environment in credit and mortgage products with increased client activity combining for a stronger financial performance. Equities revenue, excluding net DVA, increased $76 million primarily due to stronger performance internationally in derivatives and client financing on improved investor sentiment. For more information on sales and trading revenue, see Note 2 – Derivatives to the Consolidated Financial Statements.
Bank of America 18 |
All Other
Three Months Ended March 31 | |||||||||||
(Dollars in millions) | 2017 | 2016 | % Change | ||||||||
Net interest income (FTE basis) | $ | 91 | $ | 130 | (30 | )% | |||||
Noninterest income: | |||||||||||
Card income | 42 | 44 | (5 | ) | |||||||
Mortgage banking income | 2 | 242 | (99 | ) | |||||||
Gains on sales of debt securities | 52 | 190 | (73 | ) | |||||||
All other loss | (281 | ) | (332 | ) | (15 | ) | |||||
Total noninterest income | (185 | ) | 144 | n/m | |||||||
Total revenue, net of interest expense (FTE basis) | (94 | ) | 274 | n/m | |||||||
Provision for credit losses | (26 | ) | (121 | ) | (79 | ) | |||||
Noninterest expense | 2,189 | 2,382 | (8 | ) | |||||||
Loss before income taxes (FTE basis) | (2,257 | ) | (1,987 | ) | 14 | ||||||
Income tax benefit (FTE basis) | (1,423 | ) | (889 | ) | 60 | ||||||
Net loss | $ | (834 | ) | $ | (1,098 | ) | (24 | ) | |||
Balance Sheet (1) | |||||||||||
Three Months Ended March 31 | |||||||||||
Average | 2017 | 2016 | % Change | ||||||||
Total loans and leases | $ | 94,873 | $ | 118,052 | (20 | )% | |||||
Total deposits | 26,357 | 26,760 | (2 | ) | |||||||
Period end | March 31 2017 | December 31 2016 | % Change | ||||||||
Total loans and leases (2) | $ | 92,712 | $ | 96,713 | (4 | )% | |||||
Total deposits | 26,132 | 24,261 | 8 |
(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 $522.0 billion and $493.5 billion for the three months ended March 31, 2017 and 2016, and $543.4 billion and $518.7 billion at March 31, 2017 and December 31, 2016. |
(2) | Includes $9.5 billion and $9.2 billion of non-U.S. credit card, which are included in assets of business held for sale on the Consolidated Balance Sheet at March 31, 2017 and December 31, 2016. |
n/m = not meaningful
All Other consists of ALM activities, equity investments, the non-U.S. consumer credit card business, non-core mortgage loans and servicing activities, the net impact of periodic revisions to the MSR valuation model for both core and non-core MSRs and the related economic hedge results and ineffectiveness, other liquidating businesses, residual expense allocations and other. ALM activities encompass certain residential mortgages, debt securities, interest rate and foreign currency risk management activities, the impact of certain allocation methodologies and accounting hedge ineffectiveness. The results of certain ALM activities are allocated to our business segments. For more information on our ALM activities, see Note 17 – 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.
On December 20, 2016, we entered into an agreement to sell our non-U.S. consumer credit card business to a third party. Subject to regulatory approval, this transaction is expected to close by mid-2017. For more information on the sale of our non-U.S. consumer credit card business, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
The Corporation classifies consumer real estate loans as core or non-core based on loan and customer characteristics such as
origination date, product type, LTV, FICO score and delinquency status. For more information on the core and non-core portfolios, see Consumer Portfolio Credit Risk Management on page 31. Residential mortgage loans that are held for ALM purposes, including interest rate or liquidity risk management, are classified as core and are presented on the balance sheet of All Other. For more information on our interest rate and liquidity risk management activities, see Liquidity Risk on page 28 and Interest Rate Risk Management for the Banking Book on page 58. During the three months ended March 31, 2017, residential mortgage loans held for ALM activities decreased $1.9 billion to $32.8 billion at March 31, 2017 primarily as a result of payoffs, paydowns and loan sales outpacing new originations. Non-core residential mortgage and home equity loans, which are principally run-off portfolios, including certain loans accounted for under the fair value option and MSRs pertaining to non-core loans serviced for others, are also held in All Other. During the three months ended March 31, 2017, total non-core loans decreased $2.7 billion to $50.4 billion at March 31, 2017 due largely to payoffs and paydowns, as well as loan sales.
The net loss for All Other decreased $264 million to $834 million for the three months ended March 31, 2017 compared to the same period in 2016 due to lower noninterest expense and a higher income tax benefit, partially offset by lower mortgage banking income, lower gains on sales of debt securities and a decrease in the benefit in the provision for credit losses.
19 Bank of America
Mortgage banking income in All Other decreased $240 million primarily driven by lower MSR results, net of the related hedge performance, and lower servicing fees driven by a smaller servicing portfolio. Gains on sales of loans, including nonperforming and other delinquent loans were $17 million compared to gains of $157 million in the same period in 2016.
The benefit in the provision for credit losses decreased $95 million to a benefit of $26 million resulting in lower reserve releases in the non-core consumer real estate loan portfolio as it continues to run-off. Noninterest expense decreased $193 million to $2.2 billion driven by lower litigation expense and a decline in non-core mortgage servicing costs. Annual retirement-eligible incentive costs of $964 million and $850 million were recorded on a consolidated basis for the three months ended March 31, 2017 and 2016. These costs are allocated to the business segments throughout the year.
The income tax benefit was $1.4 billion for the three months ended March 31, 2017 compared to a benefit of $889 million in the same period in 2016. The increase was driven by a $222 million tax benefit related to new accounting guidance effective this quarter for the tax impact associated with share-based compensation, and the change in the pretax loss. Both periods include income tax benefit adjustments to eliminate the FTE treatment of certain tax credits recorded in Global Banking.
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 in the MD&A of the Corporation's 2016 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 2016 Annual Report on Form 10-K.
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 Freddie Mac (FHLMC) and Fannie Mae (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 or in the form of whole loans. In connection with these transactions, we or certain of our subsidiaries or legacy companies make and have 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 investors, securitization trusts, guarantors, insurers or other parties (collectively, repurchases).
At both March 31, 2017 and December 31, 2016, we had $18.3 billion of unresolved repurchase claims, predominately
related to subprime and pay option first-lien loans and home equity loans. Outstanding repurchase claims remain unresolved primarily due to (1) the level of detail, support and analysis accompanying such claims, which impact overall claim quality and, therefore, claim resolution and (2) the lack of an established process to resolve disputes related to these claims.
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 $1.3 billion at both March 31, 2017 and December 31, 2016. There were no new notifications received during the three months ended March 31, 2017.
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. At March 31, 2017 and 2016, the liability for representations and warranties was $2.3 billion and $2.8 billion. The representations and warranties provision was a benefit of $3 million for the three months ended March 31, 2017 compared to a provision of $42 million for the same period in 2016.
In addition, we currently estimate that the range of possible loss for representations and warranties exposures could be up to $2 billion over existing accruals at March 31, 2017. The estimated range of possible loss 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.
Future provisions and/or ranges of possible loss associated with obligations under representations and warranties may be significantly impacted if future experiences are different from historical experience or our understandings, interpretations or assumptions. Adverse developments, with respect to one or more of the assumptions underlying the liability for representations and warranties and the corresponding estimated range of possible loss, such as counterparties successfully challenging or avoiding the application of the relevant statute of limitations, could result in significant increases to future provisions and/or the estimated range of possible loss. For more information on representations and warranties, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements 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 in the MD&A of the Corporation's 2016 Annual Report on Form 10-K.
Other Mortgage-related Matters
We continue to be subject to additional mortgage-related litigation and disputes, as well as governmental and regulatory scrutiny and investigations, related to our past and current origination, servicing, transfer of servicing and servicing rights, servicing compliance obligations, foreclosure activities, indemnification obligations, and mortgage insurance and captive reinsurance practices with mortgage insurers. 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
Bank of America 20 |
certain products and services. For more information on management’s estimate of the aggregate range of possible loss for certain litigation matters and on regulatory investigations, see Note 10 – Commitments and Contingencies to the Consolidated Financial Statements.
Managing Risk
Risk is inherent in all our business activities. The seven key types of risk faced by the Corporation are strategic, credit, market, liquidity, compliance, operational and reputational risks. Sound risk management enables us 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 Enterprise Risk Committee (ERC) and the Board.
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 more information on our risk management activities, including our Risk Framework, and the key types of risk faced by the Corporation, see the Managing Risk through Reputational Risk sections in the MD&A of the Corporation's 2016 Annual Report on Form 10-K.
Capital Management
The Corporation manages its capital position so its capital is more than adequate 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, meet obligations to creditors and counterparties, 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 periodically review capital allocated to our businesses and allocate capital annually during the strategic and capital planning processes. For additional information, see Business Segment Operations on page 10.
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 CCAR capital plan.
Our 2016 CCAR capital plan included requests: (i) to repurchase $5.0 billion of common stock over four quarters beginning in the third quarter of 2016, (ii) to repurchase common stock to offset the dilution resulting from certain equity-based compensation awards, and (iii) to increase the quarterly common stock dividend from $0.05 per share to $0.075 per share.
On January 13, 2017, we announced a plan to repurchase an additional $1.8 billion of common stock during the first half of 2017, outside of the scope of the 2016 CCAR capital plan, to which the Federal Reserve did not object. The common stock repurchase authorization includes both common stock and warrants. As of March 31, 2017, we have repurchased $5.5 billion in connection with our 2016 CCAR capital plan and this additional authorization.
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 “well-capitalized” BHC, we may notify the Federal Reserve of our intention to make additional capital distributions not to exceed one percent of Tier 1 capital (0.25 percent of Tier 1 capital beginning April 1, 2017), and which were not contemplated in our capital plan, subject to the Federal Reserve's non-objection.
In April 2017, we submitted our 2017 CCAR capital plan and related supervisory stress tests. The Federal Reserve has announced that it will release CCAR capital plan summary results, including supervisory projections of capital ratios, losses and revenues under stress scenarios, and publish the results of stress tests conducted under the supervisory adverse and supervisory severely adverse scenarios by June 30, 2017.
21 Bank of America
Regulatory Capital
As a financial services holding company, we are subject to regulatory capital rules issued by U.S. banking regulators including Basel 3, which includes certain transition provisions through January 1, 2019. The Corporation and its primary affiliated banking entity, BANA, are Basel 3 Advanced approaches institutions.
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 other comprehensive income (OCI), net of deductions and adjustments primarily related to goodwill, deferred tax assets, intangibles, MSRs and defined benefit pension assets. Under the Basel 3 regulatory capital transition provisions, certain deductions and adjustments to Common equity tier 1 capital are phased in through January 1, 2018. As of January 1, 2017, under the transition provisions, 80 percent of these deductions and adjustments was recognized. Basel 3 also revised minimum capital ratios and buffer requirements, added a supplementary leverage ratio (SLR), and addressed the adequately capitalized minimum requirements under the Prompt Corrective Action (PCA) framework. Finally, Basel 3 established two methods of calculating risk-weighted assets, the Standardized approach and the Advanced approaches. The Standardized approach relies primarily on supervisory risk weights based on exposure type, and the Advanced approaches determine risk weights based on internal models.
As an Advanced approaches institution, we are 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 used to assess capital adequacy including under the PCA framework.
Minimum Capital Requirements
Minimum capital requirements and related buffers are being phased in from January 1, 2014 through January 1, 2019. The PCA framework establishes categories of capitalization including “well capitalized,” based on the Basel 3 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 March 31, 2017.
We are subject to a capital conservation buffer, a countercyclical capital buffer and a global systemically important bank (G-SIB) surcharge that are being 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 a G-SIB surcharge in order to avoid restrictions on capital distributions and discretionary bonus payments. The buffers and surcharge must be comprised solely of Common equity tier 1 capital. Under the phase-in provisions, we were required to maintain a capital conservation buffer greater than 1.25 percent plus a G-SIB surcharge of 1.5 percent at March 31, 2017. The countercyclical capital buffer is currently set at zero. We estimate that our fully phased-in G-SIB surcharge will be 2.5 percent. The G-SIB surcharge may differ from this estimate over time. For more information on the Corporation's transition and fully phased-in capital ratios and regulatory requirements, see Table 9.
Supplementary Leverage Ratio
Basel 3 also requires Advanced approaches institutions to disclose an 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. Effective January 1, 2018, the Corporation will be required to maintain a minimum SLR of 3.0 percent, plus a leverage buffer of 2.0 percent in order to avoid certain restrictions on capital distributions and discretionary bonus payments. Insured depository institution subsidiaries of BHCs will be required to maintain a minimum 6.0 percent SLR to be considered "well capitalized" under the PCA framework.
Bank of America 22 |
Capital Composition and Ratios
Table 9 presents Bank of America Corporation’s transition and fully phased-in capital ratios and related information in accordance with Basel 3 Standardized and Advanced approaches as measured at March 31, 2017 and December 31, 2016. Fully phased-in estimates are non-GAAP financial measures that the Corporation
considers to be useful measures in evaluating compliance with new regulatory capital requirements that are not yet effective. For reconciliations to GAAP financial measures, see Table 12. As of March 31, 2017 and December 31, 2016, the Corporation meets the definition of “well capitalized” under current regulatory requirements.
Table 9 | Bank of America Corporation Regulatory Capital under Basel 3 (1) | |||||||||||||||||||||
March 31, 2017 | ||||||||||||||||||||||
Transition | Fully Phased-in | |||||||||||||||||||||
(Dollars in millions) | Standardized Approach | Advanced Approaches | Regulatory Minimum (2) | Standardized Approach | Advanced Approaches (3) | Regulatory Minimum (4) | ||||||||||||||||
Risk-based capital metrics: | ||||||||||||||||||||||
Common equity tier 1 capital | $ | 167,351 | $ | 167,351 | $ | 164,333 | $ | 164,333 | ||||||||||||||
Tier 1 capital | 190,332 | 190,332 | 188,954 | 188,954 | ||||||||||||||||||
Total capital (5) | 227,250 | 218,112 | 223,955 | 214,817 | ||||||||||||||||||
Risk-weighted assets (in billions) | 1,398 | 1,517 | 1,416 | 1,498 | ||||||||||||||||||
Common equity tier 1 capital ratio | 12.0 | % | 11.0 | % | 7.25 | % | 11.6 | % | 11.0 | % | 9.5 | % | ||||||||||
Tier 1 capital ratio | 13.6 | 12.5 | 8.75 | 13.3 | 12.6 | 11.0 | ||||||||||||||||
Total capital ratio | 16.3 | 14.4 | 10.75 | 15.8 | 14.3 | 13.0 | ||||||||||||||||
Leverage-based metrics: | ||||||||||||||||||||||
Adjusted quarterly average assets (in billions) (6) | $ | 2,153 | $ | 2,153 | $ | 2,152 | $ | 2,152 | ||||||||||||||
Tier 1 leverage ratio | 8.8 | % | 8.8 | % | 4.0 | 8.8 | % | 8.8 | % | 4.0 | ||||||||||||
SLR leverage exposure (in billions) | $ | 2,716 | ||||||||||||||||||||
SLR | 7.0 | % | 5.0 | |||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||
Risk-based capital metrics: | ||||||||||||||||||||||
Common equity tier 1 capital | $ | 168,866 | $ | 168,866 | $ | 162,729 | $ | 162,729 | ||||||||||||||
Tier 1 capital | 190,315 | 190,315 | 187,559 | 187,559 | ||||||||||||||||||
Total capital (5) | 228,187 | 218,981 | 223,130 | 213,924 | ||||||||||||||||||
Risk-weighted assets (in billions) | 1,399 | 1,530 | 1,417 | 1,512 | ||||||||||||||||||
Common equity tier 1 capital ratio | 12.1 | % | 11.0 | % | 5.875 | % | 11.5 | % | 10.8 | % | 9.5 | % | ||||||||||
Tier 1 capital ratio | 13.6 | 12.4 | 7.375 | 13.2 | 12.4 | 11.0 | ||||||||||||||||
Total capital ratio | 16.3 | 14.3 | 9.375 | 15.8 | 14.2 | 13.0 | ||||||||||||||||
Leverage-based metrics: | ||||||||||||||||||||||
Adjusted quarterly average assets (in billions) (6) | $ | 2,131 | $ | 2,131 | $ | 2,131 | $ | 2,131 | ||||||||||||||
Tier 1 leverage ratio | 8.9 | % | 8.9 | % | 4.0 | 8.8 | % | 8.8 | % | 4.0 | ||||||||||||
SLR leverage exposure (in billions) | $ | 2,702 | ||||||||||||||||||||
SLR | 6.9 | % | 5.0 |
(1) | As an Advanced approaches institution, we are 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 and was the Advanced approaches method at March 31, 2017 and December 31, 2016. |
(2) | The March 31, 2017 and December 31, 2016 amounts include a transition capital conservation buffer of 1.25 percent and 0.625 percent, and a transition G-SIB surcharge of 1.5 percent and 0.75 percent. The countercyclical capital buffer for both periods is zero. |
(3) | Basel 3 fully phased-in Advanced approaches estimates assume approval by U.S. banking regulators of our internal analytical models, including approval of the internal models methodology (IMM) for calculating counterparty credit risk regulatory capital for derivatives. Basel 3 fully phased-in Common equity tier 1 capital ratio would be reduced by approximately 25 bps if IMM is not used. |
(4) | Fully phased-in regulatory minimums assume a capital conservation buffer of 2.5 percent and estimated G-SIB surcharge of 2.5 percent. The estimated fully phased-in countercyclical capital buffer is currently set at zero. We will be subject to fully phased-in regulatory minimums on January 1, 2019. The fully phased-in SLR minimum assumes a leverage buffer of 2.0 percent and is applicable on January 1, 2018. |
(5) | 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. |
(6) | Reflects adjusted average total assets for the three months ended March 31, 2017 and December 31, 2016. |
Common equity tier 1 capital under Basel 3 Advanced – Transition was $167.4 billion at March 31, 2017, a decrease of $1.5 billion compared to December 31, 2016 driven by the phase-in under Basel 3 transition provisions of deductions, primarily related to deferred tax assets, common stock repurchases and dividends, partially offset by earnings. During the three months ended March 31, 2017, Total capital decreased $869 million primarily driven by the same factors as the decrease in Common
equity tier 1 capital, along with maturities of subordinated debt and phase-out under the Basel 3 transition provisions of trust preferred securities.
Risk-weighted assets decreased $13 billion during the three months ended March 31, 2017 to $1,517 billion primarily due to lower credit card exposures, lower market risk, and lower exposures and improved credit quality on legacy retail products.
23 Bank of America
Table 10 presents the capital composition as measured under Basel 3 – Transition at March 31, 2017 and December 31, 2016.
Table 10 | Capital Composition under Basel 3 – Transition (1, 2) | |||||||
(Dollars in millions) | March 31 2017 | December 31 2016 | ||||||
Total common shareholders’ equity | $ | 242,933 | $ | 241,620 | ||||
Goodwill | (69,187 | ) | (69,191 | ) | ||||
Deferred tax assets arising from net operating loss and tax credit carryforwards | (6,375 | ) | (4,976 | ) | ||||
Adjustments for amounts recorded in accumulated OCI attributed to defined benefit postretirement plans | 691 | 1,392 | ||||||
Net unrealized (gains) losses on debt and equity securities and net (gains) losses on derivatives recorded in accumulated OCI, net-of-tax | 1,130 | 1,402 | ||||||
Intangibles, other than mortgage servicing rights and goodwill | (1,497 | ) | (1,198 | ) | ||||
DVA related to liabilities and derivatives | 513 | 413 | ||||||
Other | (857 | ) | (596 | ) | ||||
Common equity tier 1 capital | 167,351 | 168,866 | ||||||
Qualifying preferred stock, net of issuance cost | 25,220 | 25,220 | ||||||
Deferred tax assets arising from net operating loss and tax credit carryforwards | (1,594 | ) | (3,318 | ) | ||||
Defined benefit pension fund assets | (175 | ) | (341 | ) | ||||
DVA related to liabilities and derivatives under transition | 128 | 276 | ||||||
Other | (598 | ) | (388 | ) | ||||
Total Tier 1 capital | 190,332 | 190,315 | ||||||
Long-term debt qualifying as Tier 2 capital | 22,952 | 23,365 | ||||||
Eligible credit reserves included in Tier 2 capital | 2,973 | 3,035 | ||||||
Nonqualifying capital instruments subject to phase out from Tier 2 capital | 1,893 | 2,271 | ||||||
Other | (38 | ) | (5 | ) | ||||
Total Basel 3 Capital | $ | 218,112 | $ | 218,981 |
(1) | See Table 9, footnote 1. |
(2) | Deductions from and adjustments to regulatory capital subject to transition provisions under Basel 3 are generally recognized in 20 percent annual increments, and will be fully recognized as of January 1, 2018. Any assets that are a direct deduction from the computation of capital are excluded from risk-weighted assets and adjusted average total assets. |
Table 11 presents the components of our risk-weighted assets as measured under Basel 3 – Transition at March 31, 2017 and December 31, 2016.
Table 11 | Risk-weighted assets under Basel 3 – Transition | |||||||||||||||
March 31, 2017 | December 31, 2016 | |||||||||||||||
(Dollars in billions) | Standardized Approach | Advanced Approaches | Standardized Approach | Advanced Approaches | ||||||||||||
Credit risk | $ | 1,337 | $ | 896 | $ | 1,334 | $ | 903 | ||||||||
Market risk | 61 | 60 | 65 | 63 | ||||||||||||
Operational risk | n/a | 500 | n/a | 500 | ||||||||||||
Risks related to CVA | n/a | 61 | n/a | 64 | ||||||||||||
Total risk-weighted assets | $ | 1,398 | $ | 1,517 | $ | 1,399 | $ | 1,530 |
n/a = not applicable
Bank of America 24 |
Table 12 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 March 31, 2017 and December 31, 2016.
Table 12 | Regulatory Capital Reconciliations between Basel 3 Transition to Fully Phased-in (1) | |||||||
(Dollars in millions) | March 31 2017 | December 31 2016 | ||||||
Common equity tier 1 capital (transition) | $ | 167,351 | $ | 168,866 | ||||
Deferred tax assets arising from net operating loss and tax credit carryforwards phased in during transition | (1,594 | ) | (3,318 | ) | ||||
Accumulated OCI phased in during transition | (964 | ) | (1,899 | ) | ||||
Intangibles phased in during transition | (375 | ) | (798 | ) | ||||
Defined benefit pension fund assets phased in during transition | (175 | ) | (341 | ) | ||||
DVA related to liabilities and derivatives phased in during transition | 128 | 276 | ||||||
Other adjustments and deductions phased in during transition | (38 | ) | (57 | ) | ||||
Common equity tier 1 capital (fully phased-in) | 164,333 | 162,729 | ||||||
Additional Tier 1 capital (transition) | 22,981 | 21,449 | ||||||
Deferred tax assets arising from net operating loss and tax credit carryforwards phased out during transition | 1,594 | 3,318 | ||||||
Defined benefit pension fund assets phased out during transition | 175 | 341 | ||||||
DVA related to liabilities and derivatives phased out during transition | (128 | ) | (276 | ) | ||||
Other transition adjustments to additional Tier 1 capital | (1 | ) | (2 | ) | ||||
Additional Tier 1 capital (fully phased-in) | 24,621 | 24,830 | ||||||
Tier 1 capital (fully phased-in) | 188,954 | 187,559 | ||||||
Tier 2 capital (transition) | 27,780 | 28,666 | ||||||
Nonqualifying capital instruments phased out during transition | (1,893 | ) | (2,271 | ) | ||||
Other adjustments to Tier 2 capital | 9,114 | 9,176 | ||||||
Tier 2 capital (fully phased-in) | 35,001 | 35,571 | ||||||
Basel 3 Standardized approach Total capital (fully phased-in) | 223,955 | 223,130 | ||||||
Change in Tier 2 qualifying allowance for credit losses | (9,138 | ) | (9,206 | ) | ||||
Basel 3 Advanced approaches Total capital (fully phased-in) | $ | 214,817 | $ | 213,924 | ||||
Risk-weighted assets – As reported to Basel 3 (fully phased-in) | ||||||||
Basel 3 Standardized approach risk-weighted assets as reported | $ | 1,398,343 | $ | 1,399,477 | ||||
Changes in risk-weighted assets from reported to fully phased-in | 17,784 | 17,638 | ||||||
Basel 3 Standardized approach risk-weighted assets (fully phased-in) | $ | 1,416,127 | $ | 1,417,115 | ||||
Basel 3 Advanced approaches risk-weighted assets as reported | $ | 1,516,686 | $ | 1,529,903 | ||||
Changes in risk-weighted assets from reported to fully phased-in | (19,133 | ) | (18,113 | ) | ||||
Basel 3 Advanced approaches risk-weighted assets (fully phased-in) (2) | $ | 1,497,553 | $ | 1,511,790 |
(1) | See Table 9, footnote 1. |
(2) | Basel 3 fully phased-in Advanced approaches estimates assume approval by U.S. banking regulators of our internal analytical models, including approval of the IMM for calculating counterparty credit risk regulatory capital for derivatives. Basel 3 fully phased-in Common equity tier 1 capital ratio would be reduced by approximately 25 bps if IMM is not used. |
Bank of America, N.A. Regulatory Capital
Table 13 presents transition regulatory capital information for BANA in accordance with Basel 3 Standardized and Advanced approaches as measured at March 31, 2017 and December 31, 2016. As of March 31, 2017, BANA met the definition of “well capitalized” under the PCA framework.
Table 13 | Bank of America, N.A. Regulatory Capital under Basel 3 | |||||||||||||||||||
March 31, 2017 | ||||||||||||||||||||
Standardized Approach | Advanced Approaches | |||||||||||||||||||
(Dollars in millions) | Ratio | Amount | Minimum Required (1) | Ratio | Amount | Minimum Required (1) | ||||||||||||||
Common equity tier 1 capital | 12.6 | % | $ | 147,808 | 6.5 | % | 14.3 | % | $ | 147,808 | 6.5 | % | ||||||||
Tier 1 capital | 12.6 | 147,808 | 8.0 | 14.3 | 147,808 | 8.0 | ||||||||||||||
Total capital | 13.7 | 161,375 | 10.0 | 14.7 | 152,689 | 10.0 | ||||||||||||||
Tier 1 leverage | 9.1 | 147,808 | 5.0 | 9.1 | 147,808 | 5.0 | ||||||||||||||
December 31, 2016 | ||||||||||||||||||||
Common equity tier 1 capital | 12.7 | % | $ | 149,755 | 6.5 | % | 14.3 | % | $ | 149,755 | 6.5 | % | ||||||||
Tier 1 capital | 12.7 | 149,755 | 8.0 | 14.3 | 149,755 | 8.0 | ||||||||||||||
Total capital | 13.9 | 163,471 | 10.0 | 14.8 | 154,697 | 10.0 | ||||||||||||||
Tier 1 leverage | 9.3 | 149,755 | 5.0 | 9.3 | 149,755 | 5.0 |
(1) | Percent required to meet guidelines to be considered “well capitalized” under the PCA framework. |
25 Bank of America
Regulatory Developments
Minimum Total Loss-Absorbing Capacity
The Federal Reserve has established a final rule effective January 1, 2019, which includes minimum external total loss-absorbing capacity (TLAC) requirements to improve the resolvability and resiliency of large, interconnected BHCs. We estimate our minimum required external TLAC would be the greater of 22.5 percent of risk-weighted assets or 9.5 percent of SLR leverage exposure. In addition, U.S. G-SIBs must meet a minimum long-term debt requirement. Our minimum required long-term debt is estimated to be the greater of 8.5 percent of risk-weighted assets or 4.5 percent of SLR leverage exposure. The impact of the TLAC rule is not expected to be material to our results of operations.
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 standardized approach for credit risk, standardized approach for operational risk, revisions to the credit valuation adjustment (CVA) risk framework and constraints on the use of internal models. The Basel Committee has also finalized a revised standardized model for counterparty credit risk, revisions to the securitization framework and its fundamental review of the trading book, which updates both modeled and standardized approaches for market risk measurement. These revisions are to 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, both at the input parameter and aggregate risk-weighted asset level. The Basel Committee expects to finalize the outstanding proposals in 2017. U.S. banking regulators may update the U.S. Basel 3 rules to incorporate the Basel Committee revisions.
Revisions to the G-SIB Assessment Framework
On March 30, 2017, the Basel Committee issued a consultative document with proposed revisions to the G-SIB surcharge assessment framework. The proposed revisions would include removing the cap on the substitutability category, expanding the scope of consolidation to include insurance subsidiaries in three categories (size, interconnectedness and complexity) and modifying the substitutability category weights with the
introduction of a new trading volume indicator. The Basel Committee has also requested feedback on a new short-term wholesale funding indicator, which would be included in the interconnectedness category. The U.S. banking regulators may update the U.S. G-SIB surcharge rule to incorporate the Basel Committee revisions.
For more information on our Regulatory Developments see Capital Management – Regulatory Developments in the MD&A of the Corporation's 2016 Annual Report on Form 10-K.
Broker-dealer Regulatory Capital and Securities Regulation
The Corporation’s principal U.S. broker-dealer subsidiaries are Merrill Lynch, Pierce, Fenner & Smith Incorporated (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 Securities and Exchange Commission (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 March 31, 2017, MLPF&S’s regulatory net capital as defined by Rule 15c3-1 was $12.5 billion and exceeded the minimum requirement of $1.7 billion by $10.8 billion. MLPCC’s net capital of $3.4 billion exceeded the minimum requirement of $518 million by $2.9 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 March 31, 2017, 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 March 31, 2017, MLI’s capital resources were $35.4 billion which exceeded the minimum requirement of $16.5 billion.
Bank of America 26 |
Common and Preferred Stock Dividends
Table 14 is a summary of our cash dividend declarations on preferred stock during the first quarter of 2017 and through May 2, 2017. During the first quarter of 2017, we declared $502 million
of cash dividends on preferred stock. For more information on preferred stock and a summary of our declared quarterly cash dividends on common stock, see Note 11 – Shareholders’ Equity to the Consolidated Financial Statements.
Table 14 | Preferred Stock Cash Dividend Summary | ||||||||||||||||||
March 31, 2017 | |||||||||||||||||||
Preferred Stock | Outstanding Notional Amount (in millions) | Declaration Date | Record Date | Payment Date | Per Annum Dividend Rate | Dividend Per Share | |||||||||||||
Series B (1) | $ | 1 | January 26, 2017 | April 11, 2017 | April 25, 2017 | 7.00 | % | $ | 1.75 | ||||||||||
April 26, 2017 | July 11, 2017 | July 25, 2017 | 7.00 | 1.75 | |||||||||||||||
Series D (2) | $ | 654 | January 9, 2017 | February 28, 2017 | March 14, 2017 | 6.204 | % | $ | 0.38775 | ||||||||||
April 14, 2017 | May 31, 2017 | June 14, 2017 | 6.204 | 0.38775 | |||||||||||||||
Series E (2) | $ | 317 | January 9, 2017 | January 31, 2017 | February 15, 2017 | Floating | $ | 0.25556 | |||||||||||
April 14, 2017 | April 28, 2017 | May 15, 2017 | Floating | 0.24722 | |||||||||||||||
Series F | $ | 141 | January 9, 2017 | February 28, 2017 | March 15, 2017 | Floating | $ | 1,000.00 | |||||||||||
April 14, 2017 | May 31, 2017 | June 15, 2017 | Floating | 1,022.22222 | |||||||||||||||
Series G | $ | 493 | January 9, 2017 | February 28, 2017 | March 15, 2017 | Adjustable | $ | 1,000.00 | |||||||||||
April 14, 2017 | May 31, 2017 | June 15, 2017 | Adjustable | 1,022.22222 | |||||||||||||||
Series I (2) | $ | 365 | January 9, 2017 | March 15, 2017 | April 3, 2017 | 6.625 | % | $ | 0.4140625 | ||||||||||
April 14, 2017 | June 15, 2017 | July 3, 2017 | 6.625 | 0.4140625 | |||||||||||||||
Series K (3, 4) | $ | 1,544 | January 9, 2017 | January 15, 2017 | January 30, 2017 | Fixed-to-floating | $ | 40.00 | |||||||||||
Series L | $ | 3,080 | March 17, 2017 | April 1, 2017 | May 1, 2017 | 7.25 | % | $ | 18.125 | ||||||||||
Series M (3, 4) | $ | 1,310 | April 14, 2017 | April 30, 2017 | May 15, 2017 | Fixed-to-floating | $ | 40.625 | |||||||||||
Series T | $ | 5,000 | January 26, 2017 | March 26, 2017 | April 10, 2017 | 6.00 | % | $ | 1,500.00 | ||||||||||
April 26, 2017 | June 25, 2017 | July 10, 2017 | 6.00 | 1,500.00 | |||||||||||||||
Series U (3, 4) | $ | 1,000 | April 14, 2017 | May 15, 2017 | June 1, 2017 | Fixed-to-floating | $ | 26.00 | |||||||||||
Series V (3, 4) | $ | 1,500 | April 14, 2017 | June 1, 2017 | June 19, 2017 | Fixed-to-floating | $ | 25.625 | |||||||||||
Series W (2) | $ | 1,100 | January 9, 2017 | February 15, 2017 | March 9, 2017 | 6.625 | % | $ | 0.4140625 | ||||||||||
April 14, 2017 | May 15, 2017 | June 9, 2017 | 6.625 | 0.4140625 | |||||||||||||||
Series X (3, 4) | $ | 2,000 | January 9, 2017 | February 15, 2017 | March 6, 2017 | Fixed-to-floating | $ | 31.25 | |||||||||||
Series Y (2) | $ | 1,100 | March 17, 2017 | April 1, 2017 | April 27, 2017 | 6.50 | % | $ | 0.40625 | ||||||||||
Series Z (3, 4) | $ | 1,400 | March 17, 2017 | April 1, 2017 | April 24, 2017 | Fixed-to-floating | $ | 32.50 | |||||||||||
Series AA (3, 4) | $ | 1,900 | January 9, 2017 | March 1, 2017 | March 17, 2017 | Fixed-to-floating | $ | 30.50 | |||||||||||
Series CC (2) | $ | 1,100 | March 17, 2017 | April 1, 2017 | May 1, 2017 | 6.20 | % | $ | 0.3875 | ||||||||||
Series DD (3,4) | $ | 1,000 | January 9, 2017 | February 15, 2017 | March 10, 2017 | Fixed-to-floating | $ | 31.50 | |||||||||||
Series EE (2) | $ | 900 | March 17, 2017 | April 1, 2017 | April 25, 2017 | 6.00 | % | $ | 0.375 | ||||||||||
Series 1 (5) | $ | 98 | January 9, 2017 | February 15, 2017 | February 28, 2017 | Floating | $ | 0.18750 | |||||||||||
April 14, 2017 | May 15, 2017 | May 30, 2017 | Floating | 0.18750 | |||||||||||||||
Series 2 (5) | $ | 299 | January 9, 2017 | February 15, 2017 | February 28, 2017 | Floating | $ | 0.19167 | |||||||||||
April 14, 2017 | May 15, 2017 | May 30, 2017 | Floating | 0.18542 | |||||||||||||||
Series 3 (5) | $ | 653 | January 9, 2017 | February 15, 2017 | February 28, 2017 | 6.375 | % | $ | 0.3984375 | ||||||||||
April 14, 2017 | May 15, 2017 | May 30, 2017 | 6.375 | 0.3984375 | |||||||||||||||
Series 4 (5) | $ | 210 | January 9, 2017 | February 15, 2017 | February 28, 2017 | Floating | $ | 0.25556 | |||||||||||
April 14, 2017 | May 15, 2017 | May 30, 2017 | Floating | 0.24722 | |||||||||||||||
Series 5 (5) | $ | 422 | January 9, 2017 | February 1, 2017 | February 21, 2017 | Floating | $ | 0.25556 | |||||||||||
April 14, 2017 | May 1, 2017 | May 22, 2017 | Floating | 0.24722 |
(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. |
(5) | Dividends per depositary share, each representing a 1/1,200th interest in a share of preferred stock. |
27 Bank of America
Liquidity Risk
Funding and Liquidity Risk Management
Our primary liquidity risk management objective is to meet expected or unexpected cash flow and collateral needs while continuing to support our businesses and customers under a range of economic conditions. To achieve that objective, we analyze and monitor our liquidity risk under expected and stressed conditions, maintain liquidity and access to diverse funding sources, including our stable deposit base, and seek to align liquidity-related incentives and risks.
We define 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 ALM 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 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 – Time-to-required Funding and Stress Modeling in the MD&A of the Corporation's 2016 Annual Report on Form 10-K.
NB Holdings, Inc.
We have intercompany arrangements with certain key subsidiaries under which we transferred certain of our parent company assets, and agreed to transfer certain additional parent company assets, to NB Holdings, Inc., a wholly-owned holding company subsidiary (NB Holdings). The parent company is expected to continue to have access to the same flow of dividends, interest and other amounts of cash necessary to service its debt, pay dividends and perform other obligations as it would have had if it had not entered into these arrangements and transferred any assets.
In consideration for the transfer of assets, NB Holdings issued a subordinated note to the parent company in a principal amount equal to the value of the transferred assets. The aggregate principal amount of the note will increase by the amount of any future asset transfers. NB Holdings also provided the parent company with a committed line of credit that allows the parent company to draw funds necessary to service near-term cash needs. These arrangements support our preferred single point of entry resolution strategy, under which only the parent company would be resolved under the U.S Bankruptcy Code. These arrangements include provisions to terminate the line of credit, forgive the subordinated note and require the parent company to transfer its remaining financial assets to NB Holdings if our projected liquidity resources deteriorate so severely that resolution of the parent company becomes imminent.
Global Liquidity Sources and Other Unencumbered Assets
We maintain liquidity available to the Corporation, including the parent company and selected subsidiaries, in the form of cash and high-quality, liquid, unencumbered securities. Our liquidity buffer, referred to as Global Liquidity Sources (GLS), is comprised of assets that are readily available to the parent company and selected subsidiaries, including holding company, 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 securities. We believe we can quickly obtain cash for these securities, even in stressed conditions, through repurchase agreements or outright sales. We hold our GLS 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 GLS are substantially the same in composition to what qualifies as High Quality Liquid Assets (HQLA) under the final U.S. Liquidity Coverage Ratio (LCR) rules. For more information on the final LCR rules, see Liquidity Risk – Basel 3 Liquidity Standards on page 29.
Our GLS were $519 billion and $499 billion at March 31, 2017 and December 31, 2016 and were as shown in Table 15.
Table 15 | Global Liquidity Sources | |||||||||||
Average Three Months Ended March 31 2017 | ||||||||||||
(Dollars in billions) | March 31 2017 | December 31 2016 | ||||||||||
Parent company and NB Holdings | $ | 79 | $ | 76 | $ | 78 | ||||||
Bank subsidiaries | 392 | 372 | 381 | |||||||||
Other regulated entities | 48 | 51 | 48 | |||||||||
Total Global Liquidity Sources | $ | 519 | $ | 499 | $ | 507 |
As shown in Table 15, parent company and NB Holdings liquidity totaled $79 billion and $76 billion at March 31, 2017 and December 31, 2016. The increase in parent company and NB Holdings liquidity was primarily due to net debt issuance during the quarter. Typically, parent company and NB Holdings liquidity is in the form of cash deposited with BANA.
Liquidity held at our bank subsidiaries totaled $392 billion and $372 billion at March 31, 2017 and December 31, 2016. The increase in bank subsidiaries’ liquidity was primarily due to net FHLB advances and deposit growth. Liquidity at bank subsidiaries excludes the cash deposited by the parent company and NB Holdings. Our bank subsidiaries can also generate incremental liquidity by pledging a range of unencumbered loans and securities to certain FHLBs and the Federal Reserve Discount Window. The cash we could have obtained by borrowing against this pool of specifically-identified eligible assets was $292 billion and $310 billion at March 31, 2017 and December 31, 2016. 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.
Liquidity held at our other regulated entities, comprised primarily of broker-dealer subsidiaries, totaled $48 billion and $51 billion at March 31, 2017 and December 31, 2016. The decrease in other regulated entities’ liquidity was primarily due to broker-dealer funding requirements. Our other regulated entities also held unencumbered investment-grade securities and equities that we
Bank of America 28 |
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 16 presents the composition of GLS at March 31, 2017 and December 31, 2016.
Table 16 | Global Liquidity Sources Composition | |||||||
(Dollars in billions) | March 31 2017 | December 31 2016 | ||||||
Cash on deposit | $ | 132 | $ | 106 | ||||
U.S. Treasury securities | 59 | 58 | ||||||
U.S. agency securities and mortgage-backed securities | 317 | 318 | ||||||
Non-U.S. government securities | 11 | 17 | ||||||
Total Global Liquidity Sources | $ | 519 | $ | 499 |
Time-to-required Funding and Liquidity Stress Analysis
We use a variety of metrics to determine the appropriate amounts of liquidity to maintain at the parent company and our subsidiaries. One metric we use to evaluate the appropriate level of liquidity at the parent company and NB Holdings is “time-to-required funding (TTF).” This debt coverage measure indicates the number of months the parent company can continue to meet its unsecured contractual obligations as they come due using only the parent company and NB Holdings' 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. TTF was 40 months at March 31, 2017 compared to 35 months at December 31, 2016. The increase in TTF was driven by debt issuances outpacing maturities.
We also utilize liquidity stress analysis to assist us in determining the appropriate amounts of liquidity to maintain at the parent company and our subsidiaries. The liquidity stress testing process is an integral part of analyzing our potential contractual and contingent cash outflows. 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 more severe events including potential resolution scenarios. The scenarios are based on our historical experience, experience of distressed and failed financial institutions, 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 and liability profile and establish limits and guidelines on certain funding sources and businesses.
Basel 3 Liquidity Standards
Basel 3 has two liquidity risk-related standards: the LCR and the Net Stable Funding Ratio (NSFR).
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. The LCR regulatory requirement of 100 percent as of January 1, 2017 is applicable to the Corporation on a consolidated basis and to our insured depository institutions. As of March 31, 2017, the consolidated Corporation and its insured depository institutions were above the 2017 LCR requirements. Our LCR may fluctuate from period to period due to normal business flows from customer activity. Beginning with the second quarter 2017 results, we will be required to disclose publicly, on a quarterly basis, quantitative information about our LCR calculation and a discussion of the factors that have a significant effect on our LCR. We plan on disclosing this information in a Pillar 3 Liquidity Disclosure report on our Investor Relations website.
U.S. banking regulators have issued a proposal for an NSFR requirement applicable to U.S. financial institutions following the Basel Committee's final standard. While not finalized, the U.S. NSFR would apply to the Corporation on a consolidated basis and to our insured depository institutions beginning on January 1, 2018. We expect to meet the NSFR requirement within the regulatory timeline. The standard 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.
Diversified Funding Sources
We fund our assets primarily with a mix of deposits and secured and unsecured liabilities through a centralized, globally coordinated funding approach diversified across products, programs, markets, currencies and investor groups.
The primary benefits of our centralized funding approach 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 $1.27 trillion and $1.26 trillion at March 31, 2017 and December 31, 2016. 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 FDIC. We consider a substantial portion of our deposits to be a stable, low-cost and consistent source of funding. We believe
29 Bank of America
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 FHLB 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 months ended March 31, 2017, we issued $17.1 billion of long-term debt consisting of $12.7 billion for Bank of America Corporation, substantially all of which was TLAC compliant, $2.0 billion for Bank of America, N.A. and $2.4 billion of other debt.
Table 17 presents the carrying value of aggregate annual contractual maturities of long-term debt as of March 31, 2017. During the three months ended March 31, 2017, we had total long-term debt maturities and purchases of $13.5 billion consisting of $6.0 billion for Bank of America Corporation, $4.3 billion for Bank of America, N.A. and $3.2 billion of other debt.
Table 17 | Long-term Debt by Maturity | |||||||||||||||||||||||||||
(Dollars in millions) | Remainder of 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Total | |||||||||||||||||||||
Bank of America Corporation | ||||||||||||||||||||||||||||
Senior notes | $ | 15,068 | $ | 19,705 | $ | 17,849 | $ | 12,188 | $ | 10,468 | $ | 56,050 | $ | 131,328 | ||||||||||||||
Senior structured notes | 3,054 | 3,088 | 1,356 | 989 | 410 | 7,617 | 16,514 | |||||||||||||||||||||
Subordinated notes | 2,968 | 2,636 | 1,441 | — | 352 | 21,148 | 28,545 | |||||||||||||||||||||
Junior subordinated notes | — | — | — | — | — | 3,834 | 3,834 | |||||||||||||||||||||
Total Bank of America Corporation | 21,090 | 25,429 | 20,646 | 13,177 | 11,230 | 88,649 | 180,221 | |||||||||||||||||||||
Bank of America, N.A. | ||||||||||||||||||||||||||||
Senior notes | 1,900 | 5,763 | — | — | — | 20 | 7,683 | |||||||||||||||||||||
Subordinated notes | 1,300 | — | 1 | — | — | 1,672 | 2,973 | |||||||||||||||||||||
Advances from Federal Home Loan Banks | 8 | 9 | 14 | 11 | 2 | 115 | 159 | |||||||||||||||||||||
Securitizations and other Bank VIEs (1) | 3,049 | 2,284 | 3,195 | 1,999 | — | 163 | 10,690 | |||||||||||||||||||||
Other | 2,961 | 104 | 111 | 7 | — | 57 | 3,240 | |||||||||||||||||||||
Total Bank of America, N.A. | 9,218 | 8,160 | 3,321 | 2,017 | 2 | 2,027 | 24,745 | |||||||||||||||||||||
Other debt | ||||||||||||||||||||||||||||
Senior notes | 1 | — | — | — | — | — | 1 | |||||||||||||||||||||
Structured liabilities | 1,737 | 2,337 | 1,533 | 1,272 | 894 | 7,357 | 15,130 | |||||||||||||||||||||
Nonbank VIEs (1) | 214 | 22 | 4 | — | — | 1,014 | 1,254 | |||||||||||||||||||||
Other | — | — | — | — | — | 34 | 34 | |||||||||||||||||||||
Total other debt | 1,952 | 2,359 | 1,537 | 1,272 | 894 | 8,405 | 16,419 | |||||||||||||||||||||
Total long-term debt | $ | 32,260 | $ | 35,948 | $ | 25,504 | $ | 16,466 | $ | 12,126 | $ | 99,081 | $ | 221,385 |
(1) | Represents the total long-term debt included in the liabilities of consolidated variable interest entities (VIEs) on the Consolidated Balance Sheet. |
Table 18 presents our long-term debt by major currency at March 31, 2017 and December 31, 2016.
Table 18 | Long-term Debt by Major Currency | |||||||
March 31 2017 | December 31 2016 | |||||||
(Dollars in millions) | ||||||||
U.S. Dollar | $ | 171,957 | $ | 172,082 | ||||
Euro | 32,041 | 28,236 | ||||||
British Pound | 6,625 | 6,588 | ||||||
Japanese Yen | 4,195 | 3,919 | ||||||
Australian Dollar | 2,936 | 2,900 | ||||||
Canadian Dollar | 1,761 | 1,049 | ||||||
Other | 1,870 | 2,049 | ||||||
Total long-term debt | $ | 221,385 | $ | 216,823 |
Total long-term debt increased $4.6 billion, or two percent, in three months ended March 31, 2017, primarily due to issuances outpacing maturities. 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 information on long-term debt funding, see Note 11 – Long-term Debt to the Consolidated Financial Statements of the Corporation's 2016 Annual Report on Form 10-K and for more information regarding funding and liquidity risk management, see Liquidity Risk – Time-to-required Funding and Stress Modeling in the MD&A of the Corporation's 2016 Annual Report on Form 10-K.
Bank of America 30 |
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 more information on our ALM activities, see Interest Rate Risk Management for the Banking Book on page 58.
We may also issue unsecured debt in the form of structured notes for client purposes, certain of which qualify as TLAC eligible debt. During the three months ended March 31, 2017, we issued $682 million of structured notes, which 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 note 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.
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
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. Table 19 presents the Corporation's current long-term/short-term senior debt ratings and outlooks expressed by the rating agencies. These ratings have not changed from those disclosed in the Corporation's 2016 Annual Report on Form 10-K. For more information on credit ratings, see Liquidity Risk – Credit Ratings in the MD&A of the Corporation's 2016 Annual Report on Form 10-K.
For information on the additional collateral and termination payments that could be required in connection with certain over-the-counter (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 2016 Annual Report on Form 10-K.
Table 19 | Senior Debt Ratings | |||||||||||||||||
Moody’s Investors Service | Standard & Poor’s Global Ratings | Fitch Ratings | ||||||||||||||||
Long-term | Short-term | Outlook | Long-term | Short-term | Outlook | Long-term | Short-term | Outlook | ||||||||||
Bank of America Corporation | Baa1 | P-2 | Positive | BBB+ | A-2 | Stable | A | F1 | Stable | |||||||||
Bank of America, N.A. | A1 | P-1 | Positive | A+ | A-1 | Stable | A+ | F1 | Stable | |||||||||
Merrill Lynch, Pierce, Fenner & Smith | NR | NR | NR | A+ | A-1 | Stable | A+ | F1 | Stable | |||||||||
Merrill Lynch International | NR | NR | NR | A+ | A-1 | Stable | A | F1 | Stable |
NR = not rated
Credit Risk Management
For more information on our credit risk management activities, see Consumer Portfolio Credit Risk Management below, Commercial Portfolio Credit Risk Management on page 42, Non-U.S. Portfolio on page 50, Provision for Credit Losses on page 51, Allowance for Credit Losses on page 51, and Note 4 – Outstanding Loans and Leases and Note 5 – Allowance for Credit Losses to the Consolidated Financial Statements.
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.
Consumer Credit Portfolio
Improvement in the U.S. unemployment rate and home prices continued during the three months ended March 31, 2017 resulting in improved credit quality and lower credit losses in the consumer real estate portfolio compared to the same period in 2016. The 30 and 90 days or more past due balances declined across most consumer loan portfolios during the three months ended March 31, 2017 as a result of improved delinquency trends.
31 Bank of America
Improved credit quality, continued loan balance run-off and sales in the consumer real estate portfolio drove an $86 million decrease in the consumer allowance for loan and lease losses in the three months ended March 31, 2017 to $6.1 billion at March 31, 2017. For additional information, see Allowance for Credit Losses on page 51.
For more information on our accounting policies regarding delinquencies, nonperforming status, charge-offs and troubled debt restructurings (TDRs) for the consumer portfolio, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements of the Corporation's 2016 Annual Report on Form 10-K.
In connection with an agreement to sell our non-U.S. consumer credit card business, this business, which includes $9.5 billion and $9.2 billion of non-U.S. credit card loans and related allowance
for loan and lease losses of $242 million and $243 million, is presented in assets of business held for sale on the Consolidated Balance Sheet as of March 31, 2017 and December 31, 2016. In this section, all applicable amounts and ratios include these balances, unless otherwise noted.
Table 20 presents our outstanding consumer loans and leases, and the PCI loan portfolio. In addition to being included in the “Outstandings” columns in Table 20, PCI loans are also shown separately 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 39 and Note 4 – Outstanding Loans and Leases to the Consolidated Financial Statements.
Table 20 | Consumer Loans and Leases | |||||||||||||||
Outstandings | Purchased Credit-impaired Loan Portfolio | |||||||||||||||
(Dollars in millions) | March 31 2017 | December 31 2016 | March 31 2017 | December 31 2016 | ||||||||||||
Residential mortgage (1) | $ | 193,843 | $ | 191,797 | $ | 9,831 | $ | 10,127 | ||||||||
Home equity | 63,915 | 66,443 | 3,396 | 3,611 | ||||||||||||
U.S. credit card | 88,552 | 92,278 | n/a | n/a | ||||||||||||
Non-U.S. credit card | 9,505 | 9,214 | n/a | n/a | ||||||||||||
Direct/Indirect consumer (2) | 92,794 | 94,089 | n/a | n/a | ||||||||||||
Other consumer (3) | 2,539 | 2,499 | n/a | n/a | ||||||||||||
Consumer loans excluding loans accounted for under the fair value option | 451,148 | 456,320 | 13,227 | 13,738 | ||||||||||||
Loans accounted for under the fair value option (4) | 1,032 | 1,051 | n/a | n/a | ||||||||||||
Total consumer loans and leases (5) | $ | 452,180 | $ | 457,371 | $ | 13,227 | $ | 13,738 |
(1) | Outstandings include pay option loans of $1.8 billion at both March 31, 2017 and December 31, 2016. We no longer originate pay option loans. |
(2) | Outstandings include auto and specialty lending loans of $48.7 billion and $48.9 billion, unsecured consumer lending loans of $530 million and $585 million, U.S. securities-based lending loans of $39.5 billion and $40.1 billion, non-U.S. consumer loans of $2.9 billion and $3.0 billion, student loans of $479 million and $497 million and other consumer loans of $644 million and $1.1 billion at March 31, 2017 and December 31, 2016. |
(3) | Outstandings include consumer finance loans of $441 million and $465 million, consumer leases of $2.0 billion and $1.9 billion and consumer overdrafts of $124 million and $157 million at March 31, 2017 and December 31, 2016. |
(4) | Consumer loans accounted for under the fair value option include residential mortgage loans of $694 million and $710 million and home equity loans of $338 million and $341 million at March 31, 2017 and December 31, 2016. For more information on the fair value option, see Note 15 – Fair Value Option to the Consolidated Financial Statements. |
(5) | Includes $9.5 billion and $9.2 billion of non-U.S. credit card, which are included in assets of business held for sale on the Consolidated Balance Sheet at March 31, 2017 and December 31, 2016. |
n/a = not applicable
Bank of America 32 |
Table 21 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 loans not secured by real estate (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.
Table 21 | Consumer Credit Quality | |||||||||||||||
Nonperforming | Accruing Past Due 90 Days or More | |||||||||||||||
(Dollars in millions) | March 31 2017 | December 31 2016 | March 31 2017 | December 31 2016 | ||||||||||||
Residential mortgage (1) | $ | 2,729 | $ | 3,056 | $ | 4,226 | $ | 4,793 | ||||||||
Home equity | 2,796 | 2,918 | — | — | ||||||||||||
U.S. credit card | n/a | n/a | 801 | 782 | ||||||||||||
Non-U.S. credit card | n/a | n/a | 71 | 66 | ||||||||||||
Direct/Indirect consumer | 19 | 28 | 31 | 34 | ||||||||||||
Other consumer | 2 | 2 | 4 | 4 | ||||||||||||
Total (2) | $ | 5,546 | $ | 6,004 | $ | 5,133 | $ | 5,679 | ||||||||
Consumer loans and leases as a percentage of outstanding consumer loans and leases (2) | 1.23 | % | 1.32 | % | 1.14 | % | 1.24 | % | ||||||||
Consumer loans and leases as a percentage of outstanding loans and leases, excluding PCI and fully-insured loan portfolios (2) | 1.35 | 1.45 | 0.22 | 0.21 |
(1) | Residential mortgage loans accruing past due 90 days or more are fully-insured loans. At March 31, 2017 and December 31, 2016, residential mortgage included $2.7 billion and $3.0 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 $1.5 billion and $1.8 billion of loans on which interest was still accruing. |
(2) | Balances exclude consumer loans accounted for under the fair value option. At March 31, 2017 and December 31, 2016, $43 million and $48 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 22 presents net charge-offs and related ratios for consumer loans and leases.
Table 22 | Consumer Net Charge-offs and Related Ratios | |||||||||||||
Three Months Ended March 31 | ||||||||||||||
Net Charge-offs (1) | Net Charge-off Ratios (1, 2) | |||||||||||||
(Dollars in millions) | 2017 | 2016 | 2017 | 2016 | ||||||||||
Residential mortgage | $ | 17 | $ | 91 | 0.04 | % | 0.20 | % | ||||||
Home equity | 64 | 112 | 0.40 | 0.60 | ||||||||||
U.S. credit card | 606 | 587 | 2.74 | 2.71 | ||||||||||
Non-U.S. credit card | 44 | 45 | 1.91 | 1.85 | ||||||||||
Direct/Indirect consumer | 48 | 34 | 0.21 | 0.15 | ||||||||||
Other consumer | 48 | 48 | 7.61 | 9.07 | ||||||||||
Total | $ | 827 | $ | 917 | 0.74 | 0.82 |
(1) | Net charge-offs exclude write-offs in the PCI loan portfolio. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 39. |
(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 0.05 percent and 0.26 percent for residential mortgage, 0.42 percent and 0.64 percent for home equity and 0.82 percent and 0.93 percent for the total consumer portfolio for the three months ended March 31, 2017 and 2016, respectively. These are the only product classifications that include PCI and fully-insured loans.
Net charge-offs, as shown in Tables 22 and 23, exclude write-offs in the PCI loan portfolio of $9 million and $39 million in
residential mortgage and $24 million and $66 million in home equity for the three months ended March 31, 2017 and 2016. Net charge-off ratios including the PCI write-offs were 0.06 percent and 0.28 percent for residential mortgage and 0.55 percent and 0.95 percent for home equity for the three months ended March 31, 2017 and 2016. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 39.
33 Bank of America
Table 23 presents outstandings, nonperforming balances, net charge-offs, allowance for loan and lease losses and provision for loan and lease losses for the core and non-core portfolios within the consumer real estate portfolio. We categorize consumer real estate loans as core and non-core based on loan and customer characteristics such as origination date, product type, LTV, FICO score and delinquency status consistent with our current consumer and mortgage servicing strategy. Generally, loans that were originated after January 1, 2010, qualified under government-sponsored enterprise underwriting guidelines, or otherwise met our underwriting guidelines in place in 2015 are characterized as core loans. Loans held in legacy private-label securitizations, government-insured loans originated prior to 2010, loan products no longer originated, and loans originated prior to 2010 and classified as nonperforming or modified in a TDR prior to 2016
are generally characterized as non-core loans, and are principally run-off portfolios. Core loans as reported in Table 23 include loans held in the Consumer Banking and GWIM segments, as well as loans held for ALM activities in All Other. For more information on core and non-core loans, see Note 4 – Outstanding Loans and Leases to the Consolidated Financial Statements.
As shown in Table 23, outstanding core consumer real estate loans increased $2.2 billion during the three months ended March 31, 2017 driven by an increase of $3.9 billion in residential mortgage, partially offset by a $1.6 billion decrease in home equity. The increase in residential mortgage was due to a decision to retain a higher percentage of residential mortgage production in Consumer Banking and GWIM. The decrease in home equity was driven by paydowns outpacing new originations and draws on existing lines.
Table 23 | Consumer Real Estate Portfolio (1) | |||||||||||||||||||||||
Outstandings | Nonperforming | Net Charge-offs (2) | ||||||||||||||||||||||
March 31 2017 | December 31 2016 | March 31 2017 | December 31 2016 | Three Months Ended March 31 | ||||||||||||||||||||
(Dollars in millions) | 2017 | 2016 | ||||||||||||||||||||||
Core portfolio | ||||||||||||||||||||||||
Residential mortgage | $ | 160,359 | $ | 156,497 | $ | 1,099 | $ | 1,274 | $ | 4 | $ | 19 | ||||||||||||
Home equity | 47,730 | 49,373 | 939 | 969 | 31 | 45 | ||||||||||||||||||
Total core portfolio | 208,089 | 205,870 | 2,038 | 2,243 | 35 | 64 | ||||||||||||||||||
Non-core portfolio | ||||||||||||||||||||||||
Residential mortgage | 33,484 | 35,300 | 1,630 | 1,782 | 13 | 72 | ||||||||||||||||||
Home equity | 16,185 | 17,070 | 1,857 | 1,949 | 33 | 67 | ||||||||||||||||||
Total non-core portfolio | 49,669 | 52,370 | 3,487 | 3,731 | 46 | 139 | ||||||||||||||||||
Consumer real estate portfolio | ||||||||||||||||||||||||
Residential mortgage | 193,843 | 191,797 | 2,729 | 3,056 | 17 | 91 | ||||||||||||||||||
Home equity | 63,915 | 66,443 | 2,796 | 2,918 | 64 | 112 | ||||||||||||||||||
Total consumer real estate portfolio | $ | 257,758 | $ | 258,240 | $ | 5,525 | $ | 5,974 | $ | 81 | $ | 203 | ||||||||||||
Allowance for Loan and Lease Losses | Provision for Loan and Lease Losses | |||||||||||||||||||||||
March 31 2017 | December 31 2016 | Three Months Ended March 31 | ||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
Core portfolio | ||||||||||||||||||||||||
Residential mortgage | $ | 247 | $ | 252 | $ | (1 | ) | $ | (14 | ) | ||||||||||||||
Home equity | 518 | 560 | (11 | ) | 25 | |||||||||||||||||||
Total core portfolio | 765 | 812 | (12 | ) | 11 | |||||||||||||||||||
Non-core portfolio | ||||||||||||||||||||||||
Residential mortgage | 771 | 760 | 33 | (43 | ) | |||||||||||||||||||
Home equity | 1,029 | 1,178 | (92 | ) | (118 | ) | ||||||||||||||||||
Total non-core portfolio | 1,800 | 1,938 | (59 | ) | (161 | ) | ||||||||||||||||||
Consumer real estate portfolio | ||||||||||||||||||||||||
Residential mortgage | 1,018 | 1,012 | 32 | (57 | ) | |||||||||||||||||||
Home equity | 1,547 | 1,738 | (103 | ) | (93 | ) | ||||||||||||||||||
Total consumer real estate portfolio | $ | 2,565 | $ | 2,750 | $ | (71 | ) | $ | (150 | ) |
(1) | Outstandings and nonperforming loans exclude loans accounted for under the fair value option. Consumer loans accounted for under the fair value option include residential mortgage loans of $694 million and $710 million and home equity loans of $338 million and $341 million at March 31, 2017 and December 31, 2016. For more information on the fair value option, see Note 15 – Fair Value Option to the Consolidated Financial Statements. |
(2) | Net charge-offs exclude write-offs in the PCI loan portfolio. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 39. |
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 39.
Bank of America 34 |
Residential Mortgage
The residential mortgage portfolio makes up the largest percentage of our consumer loan portfolio at 43 percent of consumer loans and leases at March 31, 2017. Approximately 35 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. Approximately 34 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. 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, increased $2.0 billion during the three months ended March 31, 2017 as retention of new originations was partially offset by loan sales of $687 million, and run-off.
At March 31, 2017 and December 31, 2016, the residential mortgage portfolio included $27.6 billion and $28.7 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 that provide for the transfer of credit risk to FNMA and FHLMC. At March 31, 2017 and December 31, 2016, $21.0 billion and $22.3 billion had FHA insurance with the remainder protected by long-term standby agreements. At March 31, 2017 and December 31, 2016, $6.8 billion and $7.4 billion of the FHA-insured loan population were repurchases of delinquent FHA loans pursuant to our servicing agreements with GNMA.
Table 24 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 39.
Table 24 | Residential Mortgage – Key Credit Statistics | |||||||||||||||
Reported Basis (1) | Excluding Purchased Credit-impaired and Fully-insured Loans | |||||||||||||||
(Dollars in millions) | March 31 2017 | December 31 2016 | March 31 2017 | December 31 2016 | ||||||||||||
Outstandings | $ | 193,843 | $ | 191,797 | $ | 156,452 | $ | 152,941 | ||||||||
Accruing past due 30 days or more | 6,862 | 8,232 | 1,331 | 1,835 | ||||||||||||
Accruing past due 90 days or more | 4,226 | 4,793 | — | — | ||||||||||||
Nonperforming loans | 2,729 | 3,056 | 2,729 | 3,056 | ||||||||||||
Percent of portfolio | ||||||||||||||||
Refreshed LTV greater than 90 but less than or equal to 100 | 4 | % | 5 | % | 3 | % | 3 | % | ||||||||
Refreshed LTV greater than 100 | 4 | 4 | 2 | 3 | ||||||||||||
Refreshed FICO below 620 | 8 | 9 | 3 | 4 | ||||||||||||
2006 and 2007 vintages (2) | 13 | 13 | 11 | 12 | ||||||||||||
Three Months Ended March 31 | ||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net charge-off ratio (3) | 0.04 | % | 0.20 | % | 0.05 | % | 0.26 | % |
(1) | Outstandings, accruing past due, nonperforming loans and percentages of portfolio exclude loans accounted for under the fair value option. |
(2) | These vintages of loans account for $880 million, or 32 percent, and $931 million, or 31 percent, of nonperforming residential mortgage loans at March 31, 2017 and December 31, 2016. For the three months ended March 31, 2017 and 2016, these vintages accounted for $5 million, or 30 percent, and $7 million, or eight percent of total 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 $327 million during the three months ended March 31, 2017 as outflows, including a transfer to held-for-sale of $143 million and sales of $142 million, outpaced new inflows. Of the nonperforming residential mortgage loans at March 31, 2017, $869 million, or 32 percent, were current on contractual payments. Loans accruing past due 30 days or more decreased $504 million primarily due to an improvement in collections associated with the consumer real estate servicer conversion that occurred during the fourth quarter of 2016.
Net charge-offs decreased $74 million to $17 million for the three months ended March 31, 2017, compared to $91 million for the same period in 2016. This decrease in net charge-offs was primarily driven by recoveries of $11 million related to nonperforming loan sales during the three months ended March 31, 2017 compared to nonperforming loan sale-related charge-offs of $42 million for the same period in 2016. Additionally, 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.
Loans with a refreshed LTV greater than 100 percent represented two percent and three percent of the residential mortgage loan portfolio at March 31, 2017 and December 31, 2016. Of the loans with a refreshed LTV greater than 100 percent, 99 percent and 98 percent were performing at March 31, 2017 and December 31, 2016. 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, partially offset by subsequent appreciation.
35 Bank of America
Of the $156.5 billion in total residential mortgage loans outstanding at March 31, 2017, as shown in Table 25, 36 percent were originated as interest-only loans. The outstanding balance of interest-only residential mortgage loans that have entered the amortization period was $11.0 billion, or 19 percent, at March 31, 2017. 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 March 31, 2017, $272 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 $1.3 billion, or one percent for the entire residential mortgage portfolio. In addition, at March 31, 2017, $456 million, or four percent of outstanding interest-only residential mortgage loans that had entered the amortization period were nonperforming, of which $239 million were contractually current, compared to $2.7 billion, or two percent for the entire residential mortgage portfolio, of which $869 million were contractually current. Loans that have yet to enter the amortization period in our interest-only residential
mortgage portfolio are primarily well-collateralized loans to our wealth management clients and have an interest-only period of three to ten years. More than 80 percent of these loans that have yet to enter the amortization period will not be required to make a fully-amortizing payment until 2020 or later.
Table 25 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 16 percent and 15 percent of outstandings at March 31, 2017 and December 31, 2016. For the three months ended March 31, 2017 and 2016, loans within this MSA contributed net charge-offs of $5 million and net recoveries of $3 million within the residential mortgage portfolio. In the New York area, the New York-Northern New Jersey-Long Island MSA made up 12 percent of outstandings at both March 31, 2017 and December 31, 2016. For the three months ended March 31, 2017 and 2016, loans within this MSA contributed a net recovery of $1 million and net charge-offs of $22 million within the residential mortgage portfolio.
Table 25 | Residential Mortgage State Concentrations | |||||||||||||||||||||||
Outstandings (1) | Nonperforming (1) | Net Charge-offs (2) | ||||||||||||||||||||||
March 31 2017 | December 31 2016 | March 31 2017 | December 31 2016 | Three Months Ended March 31 | ||||||||||||||||||||
(Dollars in millions) | 2017 | 2016 | ||||||||||||||||||||||
California | $ | 60,188 | $ | 58,295 | $ | 468 | $ | 554 | $ | (4 | ) | $ | (23 | ) | ||||||||||
New York (3) | 15,339 | 14,476 | 262 | 290 | (2 | ) | 14 | |||||||||||||||||
Florida (3) | 10,328 | 10,213 | 306 | 322 | 1 | 15 | ||||||||||||||||||
Texas | 6,728 | 6,607 | 124 | 132 | 1 | 6 | ||||||||||||||||||
Massachusetts | 5,411 | 5,344 | 69 | 77 | — | 3 | ||||||||||||||||||
Other U.S./Non-U.S. | 58,458 | 58,006 | 1,500 | 1,681 | 21 | 76 | ||||||||||||||||||
Residential mortgage loans (4) | $ | 156,452 | $ | 152,941 | $ | 2,729 | $ | 3,056 | $ | 17 | $ | 91 | ||||||||||||
Fully-insured loan portfolio | 27,560 | 28,729 | ||||||||||||||||||||||
Purchased credit-impaired residential mortgage loan portfolio (5) | 9,831 | 10,127 | ||||||||||||||||||||||
Total residential mortgage loan portfolio | $ | 193,843 | $ | 191,797 |
(1) | Outstandings and nonperforming loans exclude loans accounted for under the fair value option. |
(2) | Net charge-offs exclude $9 million and $39 million of write-offs in the residential mortgage PCI loan portfolio for the three months ended March 31, 2017 and 2016. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 39. |
(3) | In these states, foreclosure requires a court order following a legal proceeding (judicial states). |
(4) | Amounts exclude the PCI residential mortgage and fully-insured loan portfolios. |
(5) | At March 31, 2017 and December 31, 2016, 47 percent and 48 percent of PCI residential mortgage loans were in California. There were no other significant single state concentrations. |
Home Equity
At March 31, 2017, the home equity portfolio made up 14 percent of the consumer portfolio and is comprised of home equity lines of credit (HELOCs), home equity loans and reverse mortgages.
At March 31, 2017, our HELOC portfolio had an outstanding balance of $56.4 billion, or 88 percent of the total home equity portfolio compared to $58.6 billion, or 88 percent, at December 31, 2016. HELOCs generally have an initial draw period of 10 years and the 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 March 31, 2017, our home equity loan portfolio had an outstanding balance of $5.5 billion, or nine percent of the total home equity portfolio compared to $5.9 billion, or nine percent, at December 31, 2016. Home equity loans are almost all fixed-rate loans with amortizing payment terms of 10 to 30 years and of the $5.5 billion at March 31, 2017, 56 percent have 25- to 30-year terms. At March 31, 2017, our reverse mortgage portfolio had an outstanding balance, excluding loans accounted for under the fair value option, of $2.0 billion, or three percent of the total
home equity portfolio compared to $1.9 billion, or three percent, at December 31, 2016. We no longer originate reverse mortgages.
At March 31, 2017, approximately 67 percent of the home equity portfolio was in Consumer Banking, 25 percent was in All Other 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 $2.5 billion during the three months ended March 31, 2017 primarily due to paydowns and charge-offs outpacing new originations and draws on existing lines. Of the total home equity portfolio at March 31, 2017 and December 31, 2016, $19.3 billion and $19.6 billion, or 30 percent and 29 percent, were in first-lien positions (32 percent and 31 percent excluding the PCI home equity portfolio). At March 31, 2017, 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 $10.5 billion, or 17 percent of our total home equity portfolio excluding the PCI loan portfolio.
Unused HELOCs totaled $46.9 billion at March 31, 2017 compared to $47.2 billion at December 31, 2016. The decrease was primarily due to accounts reaching the end of their draw period,
Bank of America 36 |
which automatically eliminates open line exposure, and customers choosing to close accounts. Both of these more than offset the impact of new production. The HELOC utilization rate was 55 percent at both March 31, 2017 and December 31, 2016.
Table 26 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 39.
Table 26 | Home Equity – Key Credit Statistics | |||||||||||||||
Reported Basis (1) | Excluding Purchased Credit-impaired Loans | |||||||||||||||
(Dollars in millions) | March 31 2017 | December 31 2016 | March 31 2017 | December 31 2016 | ||||||||||||
Outstandings | $ | 63,915 | $ | 66,443 | $ | 60,519 | $ | 62,832 | ||||||||
Accruing past due 30 days or more (2) | 533 | 566 | 533 | 566 | ||||||||||||
Nonperforming loans (2) | 2,796 | 2,918 | 2,796 | 2,918 | ||||||||||||
Percent of portfolio | ||||||||||||||||
Refreshed CLTV greater than 90 but less than or equal to 100 | 5 | % | 5 | % | 4 | % | 4 | % | ||||||||
Refreshed CLTV greater than 100 | 8 | 8 | 7 | 7 | ||||||||||||
Refreshed FICO below 620 | 7 | 7 | 6 | 6 | ||||||||||||
2006 and 2007 vintages (3) | 35 | 37 | 32 | 34 | ||||||||||||
Three Months Ended March 31 | ||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net charge-off ratio (4) | 0.40 | % | 0.60 | % | 0.42 | % | 0.64 | % |
(1) | Outstandings, accruing past due, nonperforming loans and percentages of the portfolio exclude loans accounted for under the fair value option. |
(2) | Accruing past due 30 days or more includes $72 million and $81 million and nonperforming loans include $344 million and $340 million of loans where we serviced the underlying first-lien at March 31, 2017 and December 31, 2016. |
(3) | These vintages of loans have higher refreshed combined LTV ratios and accounted for 52 percent and 50 percent of nonperforming home equity loans at March 31, 2017 and December 31, 2016, and 89 percent and 41 percent of net charge-offs for the three months ended March 31, 2017 and 2016. |
(4) | 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 outstanding balances in the home equity portfolio decreased $122 million during the three months ended March 31, 2017 as outflows, including $78 million of transfers to held-for-sale, outpaced new inflows. Of the nonperforming home equity portfolio at March 31, 2017, $1.5 billion, or 52 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, junior-lien loans where the underlying first-lien is 90 days or more past due, as well as loans that have not yet demonstrated a sustained period of payment performance following a TDR. In addition, $820 million, or 29 percent of nonperforming home equity 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 $33 million during the three months ended March 31, 2017, primarily due to the improvement in collections associated with a consumer real estate servicer conversion that occurred during the fourth quarter of 2016.
In some cases, the junior-lien home equity outstanding balance that we hold is performing, but the underlying first-lien is not. For outstanding balances in the home equity portfolio on which we service the first-lien loan, we are able to track whether the first-lien loan is in default. For loans where the first-lien is serviced by a third party, we utilize credit bureau data to estimate the delinquency status of the first-lien. Given that the credit bureau database we use does not include a property address for the mortgages, we are unable to identify with certainty whether a reported delinquent first-lien mortgage pertains to the same property for which we hold a junior-lien loan. For certain loans, we utilize a third-party vendor to combine credit bureau and public
record data to better link a junior-lien loan with the underlying first-lien mortgage. At March 31, 2017, we estimate that $966 million of current and $143 million of 30 to 89 days past due junior-lien loans were behind a delinquent first-lien loan. We service the first-lien loans on $156 million of these combined amounts, with the remaining $953 million serviced by third parties. Of the $1.1 billion of current to 89 days past due junior-lien loans, based on available credit bureau data and our own internal servicing data, we estimate that approximately $412 million had first-lien loans that were 90 days or more past due.
Net charge-offs decreased $48 million to $64 million for the three months ended March 31, 2017, compared to $112 million for the same period in 2016 driven by favorable portfolio trends due in part to improvement in home prices and the U.S. economy.
Outstanding balances with refreshed combined loan-to-value (CLTV) greater than 100 percent comprised seven percent of the home equity portfolio at both March 31, 2017 and December 31, 2016. Outstanding balances in the home equity portfolio with a refreshed CLTV greater than 100 percent reflect loans where our loan and available line of credit combined with any outstanding senior liens against the property are equal to or greater than the most recent valuation of the property securing the loan. Depending on the value of the property, there may be collateral in excess of the first-lien that is available to reduce the severity of loss on the second-lien. Of those outstanding balances with a refreshed CLTV greater than 100 percent, 95 percent of the customers were current on their home equity loan and 89 percent of second-lien loans with a refreshed CLTV greater than 100 percent were current on both their second-lien and underlying first-lien loans at March 31, 2017.
37 Bank of America
Of the $60.5 billion in total home equity portfolio outstandings at March 31, 2017, as shown in Table 27, 47 percent require interest-only payments. The outstanding balance of HELOCs that have entered the amortization period was $15.7 billion at March 31, 2017. The HELOCs that have entered the amortization period have experienced a higher percentage of early stage delinquencies and nonperforming status when compared to the HELOC portfolio as a whole. At March 31, 2017, $300 million, or two percent of outstanding HELOCs that had entered the amortization period were accruing past due 30 days or more. In addition, at March 31, 2017, $1.8 billion, or 12 percent of outstanding HELOCs that had entered the amortization period were nonperforming, of which $931 million were contractually current. Loans in our HELOC portfolio generally have an initial draw period of 10 years and 17 percent of these loans will enter the amortization period in the remainder of 2017 and will be required to make fully-amortizing payments. We communicate to contractually current customers more than a year prior to the end of their draw period to inform them of the potential change to the payment structure before entering the amortization period, and provide payment options to customers prior to the end of the draw period.
Although we do not actively track how many of our home equity
customers pay only the minimum amount due on their home equity loans and lines, we can infer some of this information through a review of our HELOC portfolio that we service and that is still in its revolving period (i.e., customers may draw on and repay their line of credit, but are generally only required to pay interest on a monthly basis). During the three months ended March 31, 2017, approximately 38 percent of these customers with an outstanding balance did not pay any principal on their HELOCs.
Table 27 presents outstandings, nonperforming balances and net charge-offs by certain state concentrations for the home equity portfolio. In the New York area, the New York-Northern New Jersey-Long Island MSA made up 13 percent of the outstanding home equity portfolio at both March 31, 2017 and December 31, 2016. For the three months ended March 31, 2017 and 2016, loans within this MSA contributed 20 percent and 13 percent of net charge-offs within the home equity portfolio. The Los Angeles-Long Beach-Santa Ana MSA within California made up 11 percent of the outstanding home equity portfolio at both March 31, 2017 and December 31, 2016. For the three months ended March 31, 2017 and 2016, loans within this MSA contributed net recoveries of $4 million and net charge-offs of $2 million within the home equity portfolio.
Table 27 | Home Equity State Concentrations | |||||||||||||||||||||||
Outstandings (1) | Nonperforming (1) | Net Charge-offs (2) | ||||||||||||||||||||||
March 31 2017 | December 31 2016 | March 31 2017 | December 31 2016 | Three Months Ended March 31 | ||||||||||||||||||||
(Dollars in millions) | 2017 | 2016 | ||||||||||||||||||||||
California | $ | 16,837 | $ | 17,563 | $ | 806 | $ | 829 | $ | (7 | ) | $ | 10 | |||||||||||
Florida (3) | 7,026 | 7,319 | 422 | 442 | 11 | 17 | ||||||||||||||||||
New Jersey (3) | 4,935 | 5,102 | 194 | 201 | 10 | 11 | ||||||||||||||||||
New York (3) | 4,577 | 4,720 | 264 | 271 | 8 | 10 | ||||||||||||||||||
Massachusetts | 2,979 | 3,078 | 100 | 100 | 1 | 3 | ||||||||||||||||||
Other U.S./Non-U.S. | 24,165 | 25,050 | 1,010 | 1,075 | 41 | 61 | ||||||||||||||||||
Home equity loans (4) | $ | 60,519 | $ | 62,832 | $ | 2,796 | $ | 2,918 | $ | 64 | $ | 112 | ||||||||||||
Purchased credit-impaired home equity portfolio (5) | 3,396 | 3,611 | ||||||||||||||||||||||
Total home equity loan portfolio | $ | 63,915 | $ | 66,443 |
(1) | Outstandings and nonperforming loans exclude loans accounted for under the fair value option. |
(2) | Net charge-offs exclude $24 million and $66 million of write-offs in the home equity PCI loan portfolio for the three months ended March 31, 2017 and 2016. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 39. |
(3) | In these states, foreclosure requires a court order following a legal proceeding (judicial states). |
(4) | Amount excludes the PCI home equity portfolio. |
(5) | At both March 31, 2017 and December 31, 2016, 29 percent of PCI home equity loans were in California. There were no other significant single state concentrations. |
Bank of America 38 |
Purchased Credit-impaired Loan Portfolio
Loans acquired with evidence of credit quality deterioration since origination and for which it is probable at purchase that we will be unable to collect all contractually required payments are accounted for under the accounting guidance for PCI loans. For more information on PCI loans, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements of
the Corporation's 2016 Annual Report on Form 10-K and Note 4 – Outstanding Loans and Leases to the Consolidated Financial Statements.
Table 28 presents the unpaid principal balance, carrying value, related valuation allowance and the net carrying value as a percentage of the unpaid principal balance for the PCI loan portfolio.
Table 28 | Purchased Credit-impaired Loan Portfolio | ||||||||||||||||||
March 31, 2017 | |||||||||||||||||||
(Dollars in millions) | Unpaid Principal Balance | Gross Carrying Value | Related Valuation Allowance | Carrying Value Net of Valuation Allowance | Percent of Unpaid Principal Balance | ||||||||||||||
Residential mortgage (1) | $ | 10,026 | $ | 9,831 | $ | 219 | $ | 9,612 | 95.87 | % | |||||||||
Home equity | 3,470 | 3,396 | 235 | 3,161 | 91.10 | ||||||||||||||
Total purchased credit-impaired loan portfolio | $ | 13,496 | $ | 13,227 | $ | 454 | $ | 12,773 | 94.64 | ||||||||||
December 31, 2016 | |||||||||||||||||||
Residential mortgage (1) | $ | 10,330 | $ | 10,127 | $ | 169 | $ | 9,958 | 96.40 | % | |||||||||
Home equity | 3,689 | 3,611 | 250 | 3,361 | 91.11 | ||||||||||||||
Total purchased credit-impaired loan portfolio | $ | 14,019 | $ | 13,738 | $ | 419 | $ | 13,319 | 95.01 |
(1) | At March 31, 2017 and December 31, 2016, pay option loans had an unpaid principal balance of $1.8 billion and $1.9 billion and a carrying value of $1.8 billion for both periods. This includes $1.5 billion and $1.6 billion of loans that were credit-impaired upon acquisition and $189 million and $226 million of loans that are 90 days or more past due at March 31, 2017 and December 31, 2016. The total unpaid principal balance of pay option loans with accumulated negative amortization was $278 million and $303 million, including $15 million and $16 million of negative amortization at March 31, 2017 and December 31, 2016. |
The total PCI unpaid principal balance decreased $523 million, or four percent, during the three months ended March 31, 2017 primarily driven by payoffs, paydowns and write-offs. During the three months ended March 31, 2017, we had no PCI loan sales compared to sales of $174 million for the same period in 2016.
Of the unpaid principal balance of $13.5 billion at March 31, 2017, $12.0 billion, or 89 percent, was current based on the contractual terms, $795 million, or six percent, was in early stage delinquency, and $534 million was 180 days or more past due, including $465 million of first-lien mortgages and $69 million of home equity loans.
During the three months ended March 31, 2017, we recorded a provision expense of $68 million for the PCI loan portfolio which included $59 million for residential mortgage and $9 million for home equity. This compared to a total provision benefit of $77 million for the three months ended March 31, 2016. The provision expense for the three months ended March 31, 2017 was primarily driven by lower expected cash flows.
The PCI valuation allowance increased $35 million during the three months ended March 31, 2017 due to a provision expense of $68 million, partially offset by write-offs in the PCI loan portfolio of $9 million in residential mortgage and $24 million in home equity.
The PCI residential mortgage loan portfolio represented 74 percent of the total PCI loan portfolio at March 31, 2017. Those loans to borrowers with a refreshed FICO score below 620 represented 27 percent of the PCI residential mortgage loan portfolio at March 31, 2017. Loans with a refreshed LTV greater than 90 percent, after consideration of purchase accounting adjustments and the related valuation allowance, represented 21 percent of the PCI residential mortgage loan portfolio and 24 percent based on the unpaid principal balance at March 31, 2017.
The PCI home equity portfolio represented 26 percent of the total PCI loan portfolio at March 31, 2017. Those loans with a refreshed FICO score below 620 represented 16 percent of the PCI home equity portfolio at March 31, 2017. Loans with a refreshed CLTV greater than 90 percent, after consideration of purchase accounting adjustments and the related valuation allowance, represented 45 percent of the PCI home equity portfolio and 48 percent based on the unpaid principal balance at March 31, 2017.
U.S. Credit Card
At March 31, 2017, 97 percent of the U.S. credit card portfolio was managed in Consumer Banking with the remainder in GWIM. Outstandings in the U.S. credit card portfolio decreased $3.7 billion during the three months ended March 31, 2017 due to paydowns and a seasonal decline in purchase volume. Net charge-offs increased $19 million to $606 million in the three months ended March 31, 2017 compared to the same period in 2016 due to loan growth and portfolio seasoning. U.S. credit card loans 30 days or more past due and still accruing interest decreased $15 million from seasonal declines while loans 90 days or more past due and still accruing interest increased $19 million during the three months ended March 31, 2017, driven by the same factors as described for net charge-offs.
Unused lines of credit for U.S. credit card totaled $327.4 billion and $321.6 billion at March 31, 2017 and December 31, 2016. The increase was driven by a seasonal decrease in line utilization due to a decrease in transaction volume as well as account growth and lines of credit increases.
39 Bank of America
Table 29 presents certain state concentrations for the U.S. credit card portfolio.
Table 29 | U.S. Credit Card State Concentrations | |||||||||||||||||||||||
Outstandings | Accruing Past Due 90 Days or More | Net Charge-offs | ||||||||||||||||||||||
March 31 2017 | December 31 2016 | March 31 2017 | December 31 2016 | Three Months Ended March 31 | ||||||||||||||||||||
(Dollars in millions) | 2017 | 2016 | ||||||||||||||||||||||
California | $ | 13,800 | $ | 14,251 | $ | 120 | $ | 115 | $ | 96 | $ | 92 | ||||||||||||
Florida | 7,606 | 7,864 | 87 | 85 | 67 | 64 | ||||||||||||||||||
Texas | 6,864 | 7,037 | 67 | 65 | 47 | 41 | ||||||||||||||||||
New York | 5,473 | 5,683 | 63 | 60 | 45 | 40 | ||||||||||||||||||
Washington | 3,931 | 4,128 | 18 | 18 | 14 | 14 | ||||||||||||||||||
Other U.S. | 50,878 | 53,315 | 446 | 439 | 337 | 336 | ||||||||||||||||||
Total U.S. credit card portfolio | $ | 88,552 | $ | 92,278 | $ | 801 | $ | 782 | $ | 606 | $ | 587 |
Non-U.S. Credit Card
On December 20, 2016, we entered into an agreement to sell our non-U.S. consumer credit card business to a third party. Subject to regulatory approval, this transaction is expected to close by mid-2017. For more information on the sale of our non-U.S. consumer credit card business, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
Outstandings in the non-U.S. credit card portfolio, which are recorded in All Other, increased $291 million during the three months ended March 31, 2017 primarily driven by higher cash and purchase volumes as well as strengthening of the British Pound against the U.S. Dollar. For the three months ended March 31, 2017, net charge-offs decreased $1 million to $44 million compared to the same period in 2016.
Unused lines of credit for non-U.S. credit card totaled $25.2 billion and $24.4 billion at March 31, 2017 and December 31,
2016. The $784 million increase was driven by account growth and line of credit increases coupled with strengthening of the British Pound against the U.S. Dollar.
Direct/Indirect Consumer
At March 31, 2017, approximately 53 percent of the direct/indirect portfolio was included in Consumer Banking (consumer auto and specialty lending – automotive, marine, aircraft, recreational vehicle loans and consumer personal loans) and 46 percent was included in GWIM (principally securities-based lending loans).
Outstandings in the direct/indirect portfolio decreased $1.3 billion during the three months ended March 31, 2017 primarily driven by lower draws and utilization in the securities-based lending portfolio.
Table 30 presents certain state concentrations for the direct/indirect consumer loan portfolio.
Table 30 | Direct/Indirect State Concentrations | |||||||||||||||||||||||
Outstandings | Accruing Past Due 90 Days or More | Net Charge-offs | ||||||||||||||||||||||
March 31 2017 | December 31 2016 | March 31 2017 | December 31 2016 | Three Months Ended March 31 | ||||||||||||||||||||
(Dollars in millions) | 2017 | 2016 | ||||||||||||||||||||||
California | $ | 11,218 | $ | 11,300 | $ | 2 | $ | 3 | $ | 5 | $ | 4 | ||||||||||||
Florida | 9,406 | 9,418 | 4 | 3 | 9 | 7 | ||||||||||||||||||
Texas | 9,391 | 9,406 | 4 | 5 | 10 | 4 | ||||||||||||||||||
New York | 5,107 | 5,253 | 1 | 1 | 1 | 1 | ||||||||||||||||||
Georgia | 3,249 | 3,255 | 3 | 4 | 3 | 3 | ||||||||||||||||||
Other U.S./Non-U.S. | 54,423 | 55,457 | 17 | 18 | 20 | 15 | ||||||||||||||||||
Total direct/indirect loan portfolio | $ | 92,794 | $ | 94,089 | $ | 31 | $ | 34 | $ | 48 | $ | 34 |
Other Consumer
At March 31, 2017, approximately 78 percent of the $2.5 billion other consumer portfolio was consumer auto leases included in Consumer Banking. The remainder is primarily associated with certain consumer finance businesses that we previously exited.
Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity
Table 31 presents nonperforming consumer loans, leases and foreclosed properties activity for the three months ended March 31, 2017 and 2016. For more information on nonperforming loans, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements of the Corporation's 2016
Annual Report on Form 10-K and Note 4 – Outstanding Loans and Leases to the Consolidated Financial Statements. During the three months ended March 31, 2017, nonperforming consumer loans declined $458 million to $5.5 billion primarily driven by net transfers of loans to held-for-sale of $221 million and loan sales of $142 million. Additionally, nonperforming loans declined as outflows outpaced new inflows.
The outstanding balance of a real estate-secured loan that is in excess of the estimated property value less costs to sell is charged off no later than the end of the month in which the loan becomes 180 days past due unless repayment of the loan is fully insured. At March 31, 2017, $2.3 billion, or 40 percent of nonperforming consumer real estate loans and foreclosed
Bank of America 40 |
properties had been written down to their estimated property value less costs to sell, including $2.0 billion of nonperforming loans 180 days or more past due and $328 million of foreclosed properties. In addition, at March 31, 2017, $2.3 billion, or 42 percent of nonperforming consumer loans were modified and are now current after successful trial periods, or are current loans classified as nonperforming loans in accordance with applicable policies.
Foreclosed properties decreased $35 million during the three months ended March 31, 2017 as liquidations outpaced additions. PCI loans are excluded from nonperforming loans as these loans were written down to fair value at the acquisition date; however, once we acquire the underlying real estate upon foreclosure of the delinquent PCI loan, it is included in foreclosed properties. PCI-related foreclosed properties decreased $10 million during the three months ended March 31, 2017. Not included in foreclosed properties at March 31, 2017 was $1.1 billion of real estate that was acquired upon foreclosure of certain delinquent government-
guaranteed loans (principally FHA-insured loans). We exclude these amounts from our nonperforming loans and foreclosed properties activity as we expect we will be reimbursed once the property is conveyed to the guarantor for principal and, up to certain limits, costs incurred during the foreclosure process and interest incurred during the holding period.
Nonperforming loans also include certain loans that have been modified in TDRs where economic concessions have been granted to borrowers experiencing financial difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructuring and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. Nonperforming TDRs, excluding those modified loans in the PCI loan portfolio, are included in Table 31.
Table 31 | Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity (1) | |||||||
Three Months Ended March 31 | ||||||||
(Dollars in millions) | 2017 | 2016 | ||||||
Nonperforming loans and leases, January 1 | $ | 6,004 | $ | 8,165 | ||||
Additions to nonperforming loans and leases: | ||||||||
New nonperforming loans and leases | 818 | 951 | ||||||
Reductions to nonperforming loans and leases: | ||||||||
Paydowns and payoffs | (230 | ) | (133 | ) | ||||
Sales | (142 | ) | (823 | ) | ||||
Returns to performing status (2) | (386 | ) | (441 | ) | ||||
Charge-offs | (240 | ) | (395 | ) | ||||
Transfers to foreclosed properties (3) | (57 | ) | (77 | ) | ||||
Transfers to loans held-for-sale | (221 | ) | — | |||||
Total net reductions to nonperforming loans and leases | (458 | ) | (918 | ) | ||||
Total nonperforming loans and leases, March 31 (4) | 5,546 | 7,247 | ||||||
Foreclosed properties, January 1 | 363 | 444 | ||||||
Additions to foreclosed properties: | ||||||||
New foreclosed properties (3) | 99 | 110 | ||||||
Reductions to foreclosed properties: | ||||||||
Sales | (110 | ) | (119 | ) | ||||
Write-downs | (24 | ) | (14 | ) | ||||
Total net reductions to foreclosed properties | (35 | ) | (23 | ) | ||||
Total foreclosed properties, March 31 (5) | 328 | 421 | ||||||
Nonperforming consumer loans, leases and foreclosed properties, March 31 | $ | 5,874 | $ | 7,668 | ||||
Nonperforming consumer loans and leases as a percentage of outstanding consumer loans and leases (6) | 1.23 | % | 1.62 | % | ||||
Nonperforming consumer loans, leases and foreclosed properties as a percentage of outstanding consumer loans, leases and foreclosed properties (6) | 1.30 | 1.71 |
(1) | Balances do not include nonperforming LHFS of $179 million and $5 million and nonaccruing TDRs removed from the PCI loan portfolio prior to January 1, 2010 of $28 million and $36 million at March 31, 2017 and 2016 as well as loans accruing past due 90 days or more as presented in Table 21 and Note 4 – Outstanding Loans and Leases to the Consolidated Financial Statements. |
(2) | Consumer loans may be returned to performing status when all principal and interest is current and full repayment of the remaining contractual principal and interest is expected, or when the loan otherwise becomes well-secured and is in the process of collection. |
(3) | New foreclosed properties represents transfers of nonperforming loans to foreclosed properties net of charge-offs taken during the first 90 days after transfer of a loan to foreclosed properties. New foreclosed properties also includes properties obtained upon foreclosure of delinquent PCI loans, properties repurchased due to representations and warranties exposure and properties acquired with newly consolidated subsidiaries. |
(4) | At March 31, 2017, 36 percent of nonperforming loans were 180 days or more past due. |
(5) | Foreclosed property balances do not include properties insured by certain government-guaranteed loans, principally FHA-insured loans, of $1.1 billion and $1.4 billion at March 31, 2017 and 2016. |
(6) | Outstanding consumer loans and leases exclude loans accounted for under the fair value option. |
41 Bank of America
Our policy is to record any losses in the value of foreclosed properties as a reduction in the allowance for loan and lease losses during the first 90 days after transfer of a loan to foreclosed properties. Thereafter, further losses in value as well as gains and losses on sale are recorded in noninterest expense. New foreclosed properties included in Table 31 are net of $19 million and $18 million of charge-offs and write-offs of PCI loans for the three months ended March 31, 2017 and 2016, recorded during the first 90 days after transfer.
We classify junior-lien home equity loans as nonperforming when the first-lien loan becomes 90 days past due even if the junior-lien loan is performing. At March 31, 2017 and December 31, 2016, $412 million and $428 million of such junior-lien home equity loans were included in nonperforming loans and leases.
Table 32 presents TDRs for the consumer real estate portfolio. Performing TDR balances are excluded from nonperforming loans and leases in Table 31.
Table 32 | Consumer Real Estate Troubled Debt Restructurings | |||||||||||||||||||||||
March 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
(Dollars in millions) | Total | Nonperforming | Performing | Total | Nonperforming | Performing | ||||||||||||||||||
Residential mortgage (1, 2) | $ | 11,880 | $ | 1,779 | $ | 10,101 | $ | 12,631 | $ | 1,992 | $ | 10,639 | ||||||||||||
Home equity (3) | 2,842 | 1,563 | 1,279 | 2,777 | 1,566 | 1,211 | ||||||||||||||||||
Total consumer real estate troubled debt restructurings | $ | 14,722 | $ | 3,342 | $ | 11,380 | $ | 15,408 | $ | 3,558 | $ | 11,850 |
(1) | At March 31, 2017 and December 31, 2016, residential mortgage TDRs deemed collateral dependent totaled $3.3 billion and $3.5 billion, and included $1.4 billion and $1.6 billion of loans classified as nonperforming and $1.9 billion of loans classified as performing for both periods. |
(2) | Residential mortgage performing TDRs included $4.9 billion and $5.3 billion of loans that were fully-insured at March 31, 2017 and December 31, 2016. |
(3) | Home equity TDRs deemed collateral dependent totaled $1.7 billion and $1.6 billion, and included $1.3 billion of loans classified as nonperforming for both periods, and $337 million and $301 million of loans classified as performing at March 31, 2017 and December 31, 2016, respectively. |
In addition to modifying consumer real estate loans, we work with customers who are experiencing financial difficulty by modifying credit card and other consumer loans. Credit card and other consumer loan modifications generally involve a reduction in the customer’s interest rate on the account and placing the customer on a fixed payment plan not exceeding 60 months, all of which are considered TDRs (the renegotiated TDR portfolio). In addition, the accounts of non-U.S. credit card customers who do not qualify for a fixed payment plan may have their interest rates reduced, as required by certain local jurisdictions. These modifications, which are also TDRs, tend to experience higher payment default rates given that the borrowers may lack the ability to repay even with the interest rate reduction. In all cases, the customer’s available line of credit is canceled.
Modifications of credit card and other consumer loans are made through renegotiation programs utilizing direct customer contact, but may also utilize external renegotiation programs. The renegotiated TDR portfolio is excluded in large part from Table 31 as substantially all of the loans remain on accrual status until either charged off or paid in full. At March 31, 2017 and December 31, 2016, our renegotiated TDR portfolio was $594 million and $610 million, of which $474 million and $493 million were current or less than 30 days past due under the modified terms. The decline in the renegotiated TDR portfolio was primarily driven by paydowns and charge-offs as well as lower program enrollments. For more information on the renegotiated TDR portfolio, see Note 4 – Outstanding Loans and Leases to the Consolidated Financial Statements.
Commercial Portfolio Credit Risk Management
Commercial credit risk is evaluated and managed with the goal that concentrations of credit exposure do not result in undesirable levels of risk. We review, measure and manage concentrations of credit exposure by industry, product, geography, customer relationship and loan size. We also review, measure and manage commercial real estate loans by geographic location and property type. In addition, within our non-U.S. portfolio, we evaluate exposures by region and by country. Tables 37, 40 and 45 summarize our concentrations. We also utilize syndications of exposure to third parties, loan sales, hedging and other risk mitigation techniques to manage the size and risk profile of the commercial credit portfolio. For more information on our industry concentrations, including our utilized exposure to the energy sector, which was three percent of total commercial utilized exposure at both March 31, 2017 and December 31, 2016, see Commercial Portfolio Credit Risk Management – Industry Concentrations on page 47 and Table 40.
For more information on our accounting policies regarding delinquencies, nonperforming status and net charge-offs for the commercial portfolio, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements of the Corporation's 2016 Annual Report on Form 10-K.
Bank of America 42 |
Commercial Credit Portfolio
During the three months ended March 31, 2017, other than in the higher risk energy sub-sectors, credit quality among large corporate borrowers was strong. We saw further improvement in the energy sector in the three months ended March 31, 2017, with continued stability in oil prices. Credit quality of commercial real estate borrowers continued to be strong with conservative LTV ratios, stable market rents in most sectors and vacancy rates remaining low.
Outstanding commercial loans and leases increased $5.0 billion during the three months ended March 31, 2017 primarily in U.S. commercial. Nonperforming commercial loans and leases decreased $7 million to $1.8 billion during the three months ended
March 31, 2017. Nonperforming commercial loans and leases as a percentage of outstanding commercial loans and leases, excluding loans accounted for under the fair value option, was 0.38 percent at both March 31, 2017 and December 31, 2016. Reservable criticized balances decreased $252 million to $16.1 billion during the three months ended March 31, 2017 driven by improvements in the energy sector. The allowance for loan and lease losses for the commercial portfolio decreased $40 million to $5.2 billion at March 31, 2017. For additional information, see Allowance for Credit Losses on page 51.
Table 33 presents our commercial loans and leases portfolio and related credit quality information at March 31, 2017 and December 31, 2016.
Table 33 | Commercial Loans and Leases | |||||||||||||||||||||||
Outstandings | Nonperforming | Accruing Past Due 90 Days or More | ||||||||||||||||||||||
(Dollars in millions) | March 31 2017 | December 31 2016 | March 31 2017 | December 31 2016 | March 31 2017 | December 31 2016 | ||||||||||||||||||
U.S. commercial | $ | 274,868 | $ | 270,372 | $ | 1,246 | $ | 1,256 | $ | 112 | $ | 106 | ||||||||||||
Commercial real estate (1) | 57,849 | 57,355 | 74 | 72 | — | 7 | ||||||||||||||||||
Commercial lease financing | 21,873 | 22,375 | 37 | 36 | 9 | 19 | ||||||||||||||||||
Non-U.S. commercial | 89,179 | 89,397 | 311 | 279 | 45 | 5 | ||||||||||||||||||
443,769 | 439,499 | 1,668 | 1,643 | 166 | 137 | |||||||||||||||||||
U.S. small business commercial (2) | 13,302 | 12,993 | 60 | 60 | 69 | 71 | ||||||||||||||||||
Commercial loans excluding loans accounted for under the fair value option | 457,071 | 452,492 | 1,728 | 1,703 | 235 | 208 | ||||||||||||||||||
Loans accounted for under the fair value option (3) | 6,496 | 6,034 | 52 | 84 | — | — | ||||||||||||||||||
Total commercial loans and leases | $ | 463,567 | $ | 458,526 | $ | 1,780 | $ | 1,787 | $ | 235 | $ | 208 |
(1) | Includes U.S. commercial real estate loans of $54.7 billion and $54.3 billion at March 31, 2017 and December 31, 2016 and includes $3.1 billion of non-U.S. commercial real estate loans for both periods. |
(2) | Includes card-related products. |
(3) | Commercial loans accounted for under the fair value option include U.S. commercial loans of $3.5 billion and $2.9 billion and non-U.S. commercial loans of $3.0 billion and $3.1 billion at March 31, 2017 and December 31, 2016. For more information on the fair value option, see Note 15 – Fair Value Option to the Consolidated Financial Statements. |
Table 34 presents net charge-offs and related ratios for our commercial loans and leases for the three months ended March 31, 2017 and 2016. The decrease in net charge-offs of $44 million for the three months ended March 31, 2017 compared to the same period in 2016 was primarily due to lower energy sector related losses.
Table 34 | Commercial Net Charge-offs and Related Ratios | |||||||||||||
Three Months Ended March 31 | ||||||||||||||
Net Charge-offs | Net Charge-off Ratios (1) | |||||||||||||
(Dollars in millions) | 2017 | 2016 | 2017 | 2016 | ||||||||||
U.S. commercial | $ | 44 | $ | 65 | 0.06 | % | 0.10 | % | ||||||
Commercial real estate | (4 | ) | (6 | ) | (0.03 | ) | (0.04 | ) | ||||||
Commercial lease financing | — | (2 | ) | — | (0.05 | ) | ||||||||
Non-U.S. commercial | 15 | 42 | 0.07 | 0.19 | ||||||||||
55 | 99 | 0.05 | 0.09 | |||||||||||
U.S. small business commercial | 52 | 52 | 1.61 | 1.64 | ||||||||||
Total commercial | $ | 107 | $ | 151 | 0.10 | 0.14 |
(1) | 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. |
43 Bank of America
Table 35 presents commercial credit exposure by type for utilized, unfunded and total binding committed credit exposure. Commercial utilized credit exposure includes standby letters of credit (SBLCs) and financial guarantees, bankers’ acceptances and commercial letters of credit that have been issued and for which we are legally bound to advance funds under prescribed conditions during a specified time period and excludes exposure related to trading account assets. Although funds have not yet
been advanced, these exposure types are considered utilized for credit risk management purposes.
Total commercial utilized credit exposure increased $9.3 billion during the three months ended March 31, 2017 primarily driven by increases in loans and leases and LHFS. The utilization rate for loans and leases, SBLCs and financial guarantees, commercial letters of credit and bankers acceptances, in the aggregate, was 58 percent at March 31, 2017 and December 31, 2016.
Table 35 | Commercial Credit Exposure by Type | |||||||||||||||||||||||
Commercial Utilized (1) | Commercial Unfunded (2, 3, 4) | Total Commercial Committed | ||||||||||||||||||||||
(Dollars in millions) | March 31 2017 | December 31 2016 | March 31 2017 | December 31 2016 | March 31 2017 | December 31 2016 | ||||||||||||||||||
Loans and leases (5) | $ | 469,329 | $ | 464,260 | $ | 359,969 | $ | 366,106 | $ | 829,298 | $ | 830,366 | ||||||||||||
Derivative assets (6) | 40,078 | 42,512 | — | — | 40,078 | 42,512 | ||||||||||||||||||
Standby letters of credit and financial guarantees | 33,465 | 33,135 | 596 | 660 | 34,061 | 33,795 | ||||||||||||||||||
Debt securities and other investments | 26,318 | 26,244 | 5,618 | 5,474 | 31,936 | 31,718 | ||||||||||||||||||
Loans held-for-sale | 12,964 | 6,510 | 2,433 | 3,824 | 15,397 | 10,334 | ||||||||||||||||||
Commercial letters of credit | 1,313 | 1,464 | 121 | 112 | 1,434 | 1,576 | ||||||||||||||||||
Bankers’ acceptances | 364 | 395 | — | 13 | 364 | 408 | ||||||||||||||||||
Other | 391 | 372 | — | — | 391 | 372 | ||||||||||||||||||
Total | $ | 584,222 | $ | 574,892 | $ | 368,737 | $ | 376,189 | $ | 952,959 | $ | 951,081 |
(1) | Commercial utilized exposure includes loans of $6.5 billion and $6.0 billion and issued letters of credit with a notional amount of $308 million and $284 million accounted for under the fair value option at March 31, 2017 and December 31, 2016. |
(2) | Commercial unfunded exposure includes commitments accounted for under the fair value option with a notional amount of $5.6 billion and $6.7 billion at March 31, 2017 and December 31, 2016. |
(3) | Excludes unused business card lines which are not legally binding. |
(4) | Includes the notional amount of unfunded legally binding lending commitments net of amounts distributed (e.g., syndicated or participated) to other financial institutions. The distributed amounts were $11.9 billion and $12.1 billion at March 31, 2017 and December 31, 2016. |
(5) | Includes credit risk exposure associated with assets under operating lease arrangements of $5.8 billion and $5.7 billion at March 31, 2017 and December 31, 2016. |
(6) | Derivative assets are carried at fair value, reflect the effects of legally enforceable master netting agreements and have been reduced by cash collateral of $35.5 billion and $43.3 billion at March 31, 2017 and December 31, 2016. Not reflected in utilized and committed exposure is additional non-cash derivative collateral held of $24.8 billion and $25.3 billion at March 31, 2017 and December 31, 2016, which consists primarily of other marketable securities. |
Table 36 presents commercial utilized reservable criticized exposure by loan type. Criticized exposure corresponds to the Special Mention, Substandard and Doubtful asset categories as defined by regulatory authorities. Total commercial utilized reservable criticized exposure decreased $252 million, or two
percent, during the three months ended March 31, 2017 driven by paydowns and net upgrades in the energy portfolio. Approximately 76 percent of commercial utilized reservable criticized exposure was secured at both March 31, 2017 and December 31, 2016.
Table 36 | Commercial Utilized Reservable Criticized Exposure | |||||||||||||
March 31, 2017 | December 31, 2016 | |||||||||||||
(Dollars in millions) | Amount (1) | Percent (2) | Amount (1) | Percent (2) | ||||||||||
U.S. commercial | $ | 10,337 | 3.42 | % | $ | 10,311 | 3.46 | % | ||||||
Commercial real estate | 387 | 0.65 | 399 | 0.68 | ||||||||||
Commercial lease financing | 828 | 3.78 | 810 | 3.62 | ||||||||||
Non-U.S. commercial | 3,668 | 3.86 | 3,974 | 4.17 | ||||||||||
15,220 | 3.18 | 15,494 | 3.27 | |||||||||||
U.S. small business commercial | 848 | 6.37 | 826 | 6.36 | ||||||||||
Total commercial utilized reservable criticized exposure | $ | 16,068 | 3.27 | $ | 16,320 | 3.35 |
(1) | Total commercial utilized reservable criticized exposure includes loans and leases of $14.8 billion and $14.9 billion and commercial letters of credit of $1.3 billion and $1.4 billion at March 31, 2017 and December 31, 2016. |
(2) | Percentages are calculated as commercial utilized reservable criticized exposure divided by total commercial utilized reservable exposure for each exposure category. |
U.S. Commercial
At March 31, 2017, 72 percent of the U.S. commercial loan portfolio, excluding small business, was managed in Global Banking, 16 percent in Global Markets, 10 percent in GWIM (generally business-purpose loans for high net worth clients) and the remainder primarily in Consumer Banking. U.S. commercial loans, excluding loans accounted for under the fair value option, increased $4.5 billion, or two percent, during the three months ended March 31, 2017 due to growth across most of the commercial businesses. Reservable criticized balances increased and nonperforming loans and leases decreased in the three months ended March 31, 2017, each with changes of less than
one percent. Net charge-offs decreased $21 million for the three months ended March 31, 2017 compared to the same period in 2016 due to lower energy sector related losses.
Commercial Real Estate
Commercial real estate primarily includes commercial loans and leases secured by non-owner-occupied real estate and is dependent on the sale or lease of the real estate as the primary source of repayment. The portfolio remains diversified across property types and geographic regions. California represented the largest state concentration at 23 percent of the commercial real estate loans and leases portfolio at both March 31, 2017 and December 31, 2016. The commercial real estate portfolio is
Bank of America 44 |
predominantly managed in Global Banking and consists of loans made primarily to public and private developers, and commercial real estate firms. Outstanding loans increased $494 million, or one percent, during the three months ended March 31, 2017 due to new originations slightly outpacing paydowns.
For the three months ended March 31, 2017, we continued to see low default rates and solid credit quality in both the residential and non-residential portfolios. We use a number of proactive risk mitigation initiatives to reduce adversely rated exposure in the commercial real estate portfolio, including transfers of deteriorating exposures to management by independent special
asset officers and the pursuit of loan restructurings or asset sales to achieve the best results for our customers and the Corporation.
Nonperforming commercial real estate loans and foreclosed properties increased $23 million, or 27 percent, due to higher foreclosed properties. Reservable criticized balances decreased $12 million, or three percent, during the three months ended March 31, 2017 primarily due to loan resolutions. Net recoveries were $4 million and $6 million for the three months ended March 31, 2017 and 2016. Table 37 presents outstanding commercial real estate loans by geographic region, based on the geographic location of the collateral, and by property type.
Table 37 | Outstanding Commercial Real Estate Loans | |||||||
(Dollars in millions) | March 31 2017 | December 31 2016 | ||||||
By Geographic Region | ||||||||
California | $ | 13,158 | $ | 13,450 | ||||
Northeast | 9,939 | 10,329 | ||||||
Southwest | 7,559 | 7,567 | ||||||
Southeast | 5,915 | 5,630 | ||||||
Midwest | 4,412 | 4,380 | ||||||
Florida | 3,380 | 3,213 | ||||||
Northwest | 2,684 | 2,430 | ||||||
Midsouth | 2,605 | 2,346 | ||||||
Illinois | 2,452 | 2,408 | ||||||
Non-U.S. | 3,118 | 3,103 | ||||||
Other (1) | 2,627 | 2,499 | ||||||
Total outstanding commercial real estate loans | $ | 57,849 | $ | 57,355 | ||||
By Property Type | ||||||||
Non-residential | ||||||||
Office | $ | 17,207 | $ | 16,643 | ||||
Shopping centers/retail | 8,908 | 8,794 | ||||||
Multi-family rental | 8,472 | 8,817 | ||||||
Hotels / Motels | 5,819 | 5,550 | ||||||
Industrial / Warehouse | 5,162 | 5,357 | ||||||
Multi-Use | 2,935 | 2,822 | ||||||
Unsecured | 1,967 | 1,730 | ||||||
Land and land development | 315 | 357 | ||||||
Other | 5,428 | 5,595 | ||||||
Total non-residential | 56,213 | 55,665 | ||||||
Residential | 1,636 | 1,690 | ||||||
Total outstanding commercial real estate loans | $ | 57,849 | $ | 57,355 |
(1) | Includes unsecured loans to real estate investment trusts and national home builders whose portfolios of properties span multiple geographic regions and properties in the states of Colorado, Utah, Hawaii, Wyoming and Montana. |
At March 31, 2017, total committed non-residential exposure was $78.4 billion compared to $76.9 billion at December 31, 2016, of which $56.2 billion and $55.7 billion were funded loans. Non-residential nonperforming loans and foreclosed properties increased $24 million, or 30 percent, to $104 million at March 31, 2017 due to higher foreclosed properties. The non-residential nonperforming loans and foreclosed properties represented 0.18 percent and 0.14 percent of total non-residential loans and foreclosed properties at March 31, 2017 and December 31, 2016. Non-residential utilized reservable criticized exposure decreased $12 million, or three percent, to $385 million at March 31, 2017 compared to $397 million at December 31, 2016, which represented 0.67 percent and 0.70 percent of non-residential utilized reservable exposure, related to strong commercial real estate fundamentals in most sectors. For the non-residential portfolio, net recoveries decreased $2 million to $4 million for the three months ended March 31, 2017 compared to the same period in 2016.
At March 31, 2017, total committed residential exposure was $3.3 billion compared to $3.7 billion at December 31, 2016, of which $1.6 billion and $1.7 billion were funded secured loans. The nonperforming loans, leases and foreclosed properties and the utilized reservable criticized ratios for the residential portfolio were 0.32 percent and 0.13 percent at March 31, 2017 compared to 0.35 percent and 0.16 percent at December 31, 2016.
At March 31, 2017 and December 31, 2016, the commercial real estate loan portfolio included $7.0 billion and $6.8 billion of funded construction and land development loans that were originated to fund the construction and/or rehabilitation of commercial properties. Reservable criticized construction and land development loans totaled $122 million and $107 million, and nonperforming construction and land development loans and foreclosed properties totaled $56 million and $44 million at March 31, 2017 and December 31, 2016. During a property’s construction phase, interest income is typically paid from interest reserves that are established at the inception of the loan. As construction is completed and the property is put into service,
45 Bank of America
these interest reserves are depleted and interest payments from operating cash flows begin. We do not recognize interest income on nonperforming loans regardless of the existence of an interest reserve.
Non-U.S. Commercial
At March 31, 2017, 78 percent of the non-U.S. commercial loan portfolio was managed in Global Banking and 22 percent in Global Markets. Outstanding loans, excluding loans accounted for under the fair value option, decreased $218 million during the three months ended March 31, 2017 primarily due to payoffs. Net charge-offs decreased $27 million to $15 million for the three months ended March 31, 2017 compared to the same period in 2016, primarily due to a decline in energy sector related losses. For more information on the non-U.S. commercial portfolio, see Non-U.S. Portfolio on page 50.
U.S. Small Business Commercial
The U.S. small business commercial loan portfolio is comprised of small business card loans and small business loans managed in Consumer Banking. Credit card-related products were 50 percent and 48 percent of the U.S. small business commercial portfolio at March 31, 2017 and December 31, 2016. Net charge-offs were
unchanged at $52 million for the three months ended March 31, 2017 compared to the same period in 2016. Of the U.S. small business commercial net charge-offs, 88 percent were credit card-related products for the three months ended March 31, 2017 compared to 89 percent for the same period in 2016.
Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity
Table 38 presents the nonperforming commercial loans, leases and foreclosed properties activity during the three months ended March 31, 2017 and 2016. Nonperforming loans do not include loans accounted for under the fair value option. During the three months ended March 31, 2017, nonperforming commercial loans and leases increased $25 million to $1.7 billion. Approximately 76 percent of commercial nonperforming loans, leases and foreclosed properties were secured and approximately 67 percent were contractually current. Commercial nonperforming loans were carried at approximately 89 percent of their unpaid principal balance before consideration of the allowance for loan and lease losses as the carrying value of these loans has been reduced to the estimated property value less costs to sell.
Table 38 | Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity (1, 2) | |||||||
Three Months Ended March 31 | ||||||||
(Dollars in millions) | 2017 | 2016 | ||||||
Nonperforming loans and leases, January 1 | $ | 1,703 | $ | 1,212 | ||||
Additions to nonperforming loans and leases: | ||||||||
New nonperforming loans and leases | 458 | 697 | ||||||
Advances | 14 | 9 | ||||||
Reductions to nonperforming loans and leases: | ||||||||
Paydowns | (267 | ) | (120 | ) | ||||
Sales | (22 | ) | (6 | ) | ||||
Returns to performing status (3) | (54 | ) | (47 | ) | ||||
Charge-offs | (82 | ) | (142 | ) | ||||
Transfers to foreclosed properties (4) | (22 | ) | — | |||||
Total net additions to nonperforming loans and leases | 25 | 391 | ||||||
Total nonperforming loans and leases, March 31 | 1,728 | 1,603 | ||||||
Foreclosed properties, January 1 | 14 | 15 | ||||||
Additions to foreclosed properties: | ||||||||
New foreclosed properties (4) | 21 | — | ||||||
Reductions to foreclosed properties: | ||||||||
Sales | — | (5 | ) | |||||
Total net additions (reductions) to foreclosed properties | 21 | (5 | ) | |||||
Total foreclosed properties, March 31 | 35 | 10 | ||||||
Nonperforming commercial loans, leases and foreclosed properties, March 31 | $ | 1,763 | $ | 1,613 | ||||
Nonperforming commercial loans and leases as a percentage of outstanding commercial loans and leases (5) | 0.38 | % | 0.36 | % | ||||
Nonperforming commercial loans, leases and foreclosed properties as a percentage of outstanding commercial loans, leases and foreclosed properties (5) | 0.39 | 0.36 |
(1) | Balances do not include nonperforming LHFS of $246 million and $260 million at March 31, 2017 and 2016. |
(2) | Includes U.S. small business commercial activity. Small business card loans are excluded as they are not classified as nonperforming. |
(3) | Commercial loans and leases may be returned to performing status when all principal and interest is current and full repayment of the remaining contractual principal and interest is expected, or when the loan otherwise becomes well-secured and is in the process of collection. TDRs are generally classified as performing after a sustained period of demonstrated payment performance. |
(4) | New foreclosed properties represents transfers of nonperforming loans to foreclosed properties net of charge-offs recorded during the first 90 days after transfer of a loan to foreclosed properties. |
(5) | Outstanding commercial loans exclude loans accounted for under the fair value option. |
Bank of America 46 |
Table 39 presents our commercial TDRs by product type and performing status. U.S. small business commercial TDRs are comprised of renegotiated small business card loans and small business loans. The renegotiated small business card loans are
not classified as nonperforming as they are charged off no later than the end of the month in which the loan becomes 180 days past due. For more information on TDRs, see Note 4 – Outstanding Loans and Leases to the Consolidated Financial Statements.
Table 39 | Commercial Troubled Debt Restructurings | |||||||||||||||||||||||
March 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
(Dollars in millions) | Total | Non-performing | Performing | Total | Non-performing | Performing | ||||||||||||||||||
U.S. commercial | $ | 1,574 | $ | 553 | $ | 1,021 | $ | 1,860 | $ | 720 | $ | 1,140 | ||||||||||||
Commercial real estate | 80 | 41 | 39 | 140 | 45 | 95 | ||||||||||||||||||
Commercial lease financing | 2 | — | 2 | 4 | 2 | 2 | ||||||||||||||||||
Non-U.S. commercial | 263 | 13 | 250 | 308 | 25 | 283 | ||||||||||||||||||
1,919 | 607 | 1,312 | 2,312 | 792 | 1,520 | |||||||||||||||||||
U.S. small business commercial | 13 | — | 13 | 15 | 2 | 13 | ||||||||||||||||||
Total commercial troubled debt restructurings | $ | 1,932 | $ | 607 | $ | 1,325 | $ | 2,327 | $ | 794 | $ | 1,533 |
Industry Concentrations
Table 40 presents commercial committed and utilized credit exposure by industry and the total net credit default protection purchased to cover the funded and unfunded portions of certain credit exposures. Our commercial credit exposure is diversified across a broad range of industries. Total commercial committed exposure increased $1.9 billion, or less than one percent, during the three months ended March 31, 2017 to $953.0 billion. The increase in commercial committed exposure was concentrated in the Food, Beverage and Tobacco sector and the Materials sector. Increases were partially offset by lower exposure to the Diversified Financials, Healthcare Equipment and Services, and Banking sectors.
Industry limits are used internally to manage industry concentrations and are based on committed exposure that is allocated on an industry-by-industry basis. A risk management framework is in place to set and approve industry limits as well as to provide ongoing monitoring. The Management Risk Committee oversees industry limit governance.
Diversified Financials, our largest industry concentration with committed exposure of $121.4 billion, decreased $3.2 billion, or three percent, during the three months ended March 31, 2017.The
decrease primarily reflected a decline in several counterparties.
Real estate, our second largest industry concentration with committed exposure of $85.3 billion, increased $1.6 billion, or two percent, during the three months ended March 31, 2017. For more information on the commercial real estate and related portfolios, see Commercial Portfolio Credit Risk Management – Commercial Real Estate on page 44.
Retailing committed exposure decreased $1.5 billion, or two percent, to $67.0 billion during the three months ended March 31, 2017. The decrease in committed exposure occurred primarily in the Specialty Retail sector.
Our energy-related committed exposure decreased $1.3 billion, or three percent, to $37.9 billion during the three months ended March 31, 2017. Energy sector net charge-offs were $3 million during the three months ended March 31, 2017 compared to $102 million for the same period in 2016. Energy sector reservable criticized exposure decreased $725 million to $4.8 billion during the three months ended March 31, 2017 due to exposure reductions and fewer new criticized exposures. The energy allowance for credit losses decreased $75 million to $850 million during the three months ended March 31, 2017.
47 Bank of America
Table 40 | Commercial Credit Exposure by Industry (1) | |||||||||||||||
Commercial Utilized | Total Commercial Committed (2) | |||||||||||||||
(Dollars in millions) | March 31 2017 | December 31 2016 | March 31 2017 | December 31 2016 | ||||||||||||
Diversified financials | $ | 78,211 | $ | 81,156 | $ | 121,369 | $ | 124,535 | ||||||||
Real estate (3) | 63,384 | 61,203 | 85,286 | 83,658 | ||||||||||||
Retailing | 41,548 | 41,630 | 67,003 | 68,507 | ||||||||||||
Capital goods | 34,234 | 34,278 | 64,304 | 64,202 | ||||||||||||
Healthcare equipment and services | 38,737 | 37,656 | 62,117 | 64,663 | ||||||||||||
Government and public education | 45,843 | 45,694 | 54,354 | 54,626 | ||||||||||||
Materials | 23,645 | 22,578 | 46,485 | 44,357 | ||||||||||||
Banking | 38,184 | 39,877 | 45,320 | 47,799 | ||||||||||||
Consumer services | 28,994 | 27,413 | 44,141 | 42,523 | ||||||||||||
Food, beverage and tobacco | 21,205 | 19,669 | 41,273 | 37,145 | ||||||||||||
Energy | 18,002 | 19,686 | 37,920 | 39,231 | ||||||||||||
Commercial services and supplies | 21,372 | 21,241 | 34,164 | 35,360 | ||||||||||||
Utilities | 12,805 | 11,349 | 27,925 | 27,140 | ||||||||||||
Transportation | 19,645 | 19,805 | 27,609 | 27,483 | ||||||||||||
Media | 13,156 | 13,419 | 25,492 | 27,116 | ||||||||||||
Individuals and trusts | 16,404 | 16,364 | 22,854 | 21,764 | ||||||||||||
Technology hardware and equipment | 7,822 | 7,793 | 19,104 | 18,429 | ||||||||||||
Software and services | 9,540 | 7,991 | 19,084 | 19,790 | ||||||||||||
Pharmaceuticals and biotechnology | 5,943 | 5,539 | 18,858 | 18,910 | ||||||||||||
Telecommunication services | 7,020 | 6,317 | 17,593 | 16,925 | ||||||||||||
Insurance, including monolines | 6,724 | 7,406 | 13,779 | 13,936 | ||||||||||||
Automobiles and components | 5,744 | 5,459 | 13,111 | 12,969 | ||||||||||||
Consumer durables and apparel | 5,965 | 6,042 | 11,185 | 11,460 | ||||||||||||
Food and staples retailing | 5,724 | 4,795 | 9,565 | 8,869 | ||||||||||||
Religious and social organizations | 4,732 | 4,423 | 6,419 | 6,252 | ||||||||||||
Other | 9,639 | 6,109 | 16,645 | 13,432 | ||||||||||||
Total commercial credit exposure by industry | $ | 584,222 | $ | 574,892 | $ | 952,959 | $ | 951,081 | ||||||||
Net credit default protection purchased on total commitments (4) | $ | (3,099 | ) | $ | (3,477 | ) |
(1) | Includes U.S. small business commercial exposure. |
(2) | Includes the notional amount of unfunded legally binding lending commitments net of amounts distributed (e.g., syndicated or participated) to other financial institutions. The distributed amounts were $11.9 billion and $12.1 billion at March 31, 2017 and December 31, 2016. |
(3) | Industries are viewed from a variety of perspectives to best isolate the perceived risks. For purposes of this table, the real estate industry is defined based on the borrowers’ or counterparties’ primary business activity using operating cash flows and primary source of repayment as key factors. |
(4) | Represents net notional credit protection purchased. For additional information, see Commercial Portfolio Credit Risk Management – Risk Mitigation below. |
Risk Mitigation
We purchase credit protection to cover the funded portion as well as the unfunded portion of certain credit exposures. To lower the cost of obtaining our desired credit protection levels, we may add credit exposure within an industry, borrower or counterparty group by selling protection.
At March 31, 2017 and December 31, 2016, net notional credit default protection purchased in our credit derivatives portfolio to hedge our funded and unfunded exposures for which we elected the fair value option, as well as certain other credit exposures, was $3.1 billion and $3.5 billion. We recorded net losses of $31 million for the three months ended March 31, 2017 compared to net losses of $203 million for the same period in 2016 on these positions. The gains and losses on these instruments were offset by gains and losses on the related exposures. The Value-at-Risk (VaR) results for these exposures are included in the fair value option portfolio information in Table 48. For additional information, see Trading Risk Management on page 54.
Tables 41 and 42 present the maturity profiles and the credit exposure debt ratings of the net credit default protection portfolio at March 31, 2017 and December 31, 2016.
Table 41 | Net Credit Default Protection by Maturity | |||||
March 31 2017 | December 31 2016 | |||||
Less than or equal to one year | 65 | % | 56 | % | ||
Greater than one year and less than or equal to five years | 32 | 41 | ||||
Greater than five years | 3 | 3 | ||||
Total net credit default protection | 100 | % | 100 | % |
Bank of America 48 |
Table 42 | Net Credit Default Protection by Credit Exposure Debt Rating | |||||||||||||
March 31, 2017 | December 31, 2016 | |||||||||||||
(Dollars in millions) | Net Notional (1) | Percent of Total | Net Notional (1) | Percent of Total | ||||||||||
Ratings (2, 3) | ||||||||||||||
A | $ | (135 | ) | 4.4 | % | $ | (135 | ) | 3.9 | % | ||||
BBB | (1,735 | ) | 56.0 | (1,884 | ) | 54.2 | ||||||||
BB | (723 | ) | 23.3 | (871 | ) | 25.1 | ||||||||
B | (416 | ) | 13.4 | (477 | ) | 13.7 | ||||||||
CCC and below | (67 | ) | 2.2 | (81 | ) | 2.3 | ||||||||
NR (4) | (23 | ) | 0.7 | (29 | ) | 0.8 | ||||||||
Total net credit default protection | $ | (3,099 | ) | 100.0 | % | $ | (3,477 | ) | 100.0 | % |
(1) | Represents net credit default protection purchased. |
(2) | Ratings are refreshed on a quarterly basis. |
(3) | Ratings of BBB- or higher are considered to meet the definition of investment grade. |
(4) | NR is comprised of index positions held and any names that have not been rated. |
In addition to our net notional credit default protection purchased to cover the funded and unfunded portion of certain credit exposures, credit derivatives are used for market-making activities for clients and establishing positions intended to profit from directional or relative value changes. We execute the majority of our credit derivative trades in the OTC market with large, multinational financial institutions, including broker-dealers and, to a lesser degree, with a variety of other investors. Because these
transactions are executed in the OTC market, we are subject to settlement risk. We are also subject to credit risk in the event that these counterparties fail to perform under the terms of these contracts. In most cases, credit derivative transactions are executed on a daily margin basis. Therefore, events such as a credit downgrade, depending on the ultimate rating level, or a breach of credit covenants would typically require an increase in the amount of collateral required by the counterparty, where applicable, and/or allow us to take additional protective measures such as early termination of all trades.
Table 43 presents the total contract/notional amount of credit derivatives outstanding and includes both purchased and written credit derivatives. The credit risk amounts are measured as net asset exposure by counterparty, taking into consideration all contracts with the counterparty. For more information on our written credit derivatives, see Note 2 – Derivatives to the Consolidated Financial Statements.
The credit risk amounts discussed above and presented in Table 43 take into consideration the effects of legally enforceable master netting agreements while amounts disclosed in Note 2 – Derivatives to the Consolidated Financial Statements are shown on a gross basis. Credit risk reflects the potential benefit from offsetting exposure to non-credit derivative products with the same counterparties that may be netted upon the occurrence of certain events, thereby reducing our overall exposure.
Table 43 | Credit Derivatives | |||||||||||||||
March 31, 2017 | December 31, 2016 | |||||||||||||||
(Dollars in millions) | Contract/ Notional | Credit Risk | Contract/ Notional | Credit Risk | ||||||||||||
Purchased credit derivatives: | ||||||||||||||||
Credit default swaps | $ | 599,908 | $ | 2,522 | $ | 603,979 | $ | 2,732 | ||||||||
Total return swaps/other | 34,256 | 291 | 21,165 | 433 | ||||||||||||
Total purchased credit derivatives | $ | 634,164 | $ | 2,813 | $ | 625,144 | $ | 3,165 | ||||||||
Written credit derivatives: | ||||||||||||||||
Credit default swaps | $ | 595,823 | n/a | $ | 614,355 | n/a | ||||||||||
Total return swaps/other | 41,476 | n/a | 25,354 | n/a | ||||||||||||
Total written credit derivatives | $ | 637,299 | n/a | $ | 639,709 | n/a |
n/a = not applicable
Counterparty Credit Risk Valuation Adjustments
We record counterparty credit risk valuation adjustments on certain derivative assets, including our credit default protection purchased, in order to properly reflect the credit risk of the counterparty, as presented in Table 44. We calculate CVA based on a modeled expected exposure that incorporates current market risk factors including changes in market spreads and non-credit related market factors that affect the value of a derivative. The exposure also takes into consideration credit mitigants such as legally enforceable master netting agreements and collateral. For additional information, see Note 2 – Derivatives to the Consolidated Financial Statements.
We enter into risk management activities to offset market driven exposures. We often hedge the counterparty spread risk in CVA with credit default swaps (CDS). We hedge other market risks
in CVA primarily with currency and interest rate swaps. In certain instances, the net-of-hedge amounts in the table below move in the same direction as the gross amount or may move in the opposite direction. This movement is a consequence of the complex interaction of the risks being hedged, resulting in limitations in the ability to perfectly hedge all of the market exposures at all times.
Table 44 | Credit Valuation Gains and Losses | |||||||||||||||||||
Three Months Ended March 31 | ||||||||||||||||||||
Gains (Losses) | 2017 | 2016 | ||||||||||||||||||
(Dollars in millions) | Gross | Hedge | Net | Gross | Hedge | Net | ||||||||||||||
Credit valuation | $ | 161 | $ | (135 | ) | $ | 26 | $ | (209 | ) | $ | 261 | $ | 52 |
49 Bank of America
Non-U.S. Portfolio
Our non-U.S. credit and trading portfolios are subject to country risk. We define country risk as the risk of loss from unfavorable economic and political conditions, currency fluctuations, social instability and changes in government policies. A risk management framework is in place to measure, monitor and manage non-U.S. risk and exposures. In addition to the direct risk of doing business in a country, we also are exposed to indirect country risks (e.g., related to the collateral received on secured financing transactions or related to client clearing activities). These indirect exposures are managed in the normal course of business through credit, market and operational risk governance, rather than through country risk governance.
Table 45 presents our 20 largest non-U.S. country exposures as of March 31, 2017. These exposures accounted for 87 percent and 88 percent of our total non-U.S. exposure at March 31, 2017 and December 31, 2016. Net country exposure for these 20 countries increased $2.7 billion in the three months ended March 31, 2017 primarily driven by increases in the United Kingdom, Germany and Australia, partially offset by reductions in Switzerland, Japan and Canada. On a product basis, the increase was driven by an increase in funded loans and loan equivalents in the United Kingdom, Singapore and Japan, and higher unfunded commitments in Australia and Germany.
Non-U.S. exposure is presented on an internal risk management basis and includes sovereign and non-sovereign credit exposure, securities and other investments issued by or domiciled in countries other than the U.S. The risk assignments by country can be adjusted for external guarantees and certain collateral types. Exposures that are subject to external guarantees are reported under the country of the guarantor. Exposures with tangible collateral are reflected in the country where the collateral is held. For securities received, other than cross-border resale
agreements, outstandings are assigned to the domicile of the issuer of the securities.
Funded loans and loan equivalents include loans, leases, and other extensions of credit and funds, including letters of credit and due from placements, which have not been reduced by collateral, hedges or credit default protection. Funded loans and loan equivalents are reported net of charge-offs but prior to any allowance for loan and lease losses. Unfunded commitments are the undrawn portion of legally binding commitments related to loans and loan equivalents.
Net counterparty exposure includes the fair value of derivatives, including the counterparty risk associated with CDS, and secured financing transactions. Derivatives exposures are presented net of collateral, which is predominantly cash, pledged under legally enforceable master netting agreements. Secured financing transaction exposures are presented net of eligible cash or securities pledged as collateral.
Securities and other investments are carried at fair value and long securities exposures are netted against short exposures with the same underlying issuer to, but not below, zero (i.e., negative issuer exposures are reported as zero).
Net country exposure represents country exposure less hedges and credit default protection purchased, net of credit default protection sold. We hedge certain country exposures with credit default protection primarily in the form of single-name, as well as indexed and tranched CDS. The exposures associated with these hedges represent the amount that would be realized upon the isolated default of an individual issuer in the relevant country assuming a zero recovery rate for that individual issuer, and are calculated based on the CDS notional amount adjusted for any fair value receivable or payable. Changes in the assumption of an isolated default can produce different results in a particular tranche.
Table 45 | Top 20 Non-U.S. Countries Exposure | |||||||||||||||||||||||||||||||
(Dollars in millions) | Funded Loans and Loan Equivalents | Unfunded Loan Commitments | Net Counterparty Exposure | Securities/ Other Investments | Country Exposure at March 31 2017 | Hedges and Credit Default Protection | Net Country Exposure at March 31 2017 | Increase (Decrease) from December 31 2016 | ||||||||||||||||||||||||
United Kingdom | $ | 34,566 | $ | 15,773 | $ | 6,235 | $ | 1,431 | $ | 58,005 | $ | (4,947 | ) | $ | 53,058 | $ | 5,325 | |||||||||||||||
Germany | 13,018 | 9,915 | 1,846 | 3,110 | 27,889 | (4,187 | ) | 23,702 | 1,324 | |||||||||||||||||||||||
Canada | 7,127 | 7,099 | 1,750 | 2,425 | 18,401 | (1,750 | ) | 16,651 | (2,123 | ) | ||||||||||||||||||||||
Brazil | 8,787 | 419 | 560 | 3,617 | 13,383 | (273 | ) | 13,110 | (556 | ) | ||||||||||||||||||||||
Japan | 13,098 | 586 | 1,272 | 509 | 15,465 | (2,843 | ) | 12,622 | (2,389 | ) | ||||||||||||||||||||||
France | 3,454 | 5,115 | 1,953 | 5,667 | 16,189 | (4,959 | ) | 11,230 | 536 | |||||||||||||||||||||||
China | 9,139 | 696 | 670 | 1,208 | 11,713 | (552 | ) | 11,161 | 276 | |||||||||||||||||||||||
Australia | 4,951 | 4,286 | 328 | 1,061 | 10,626 | (456 | ) | 10,170 | 1,247 | |||||||||||||||||||||||
India | 6,497 | 205 | 366 | 2,353 | 9,421 | (548 | ) | 8,873 | (355 | ) | ||||||||||||||||||||||
Netherlands | 4,363 | 3,024 | 1,042 | 1,633 | 10,062 | (1,843 | ) | 8,219 | 821 | |||||||||||||||||||||||
Hong Kong | 5,727 | 199 | 438 | 770 | 7,134 | (43 | ) | 7,091 | (388 | ) | ||||||||||||||||||||||
South Korea | 4,377 | 646 | 852 | 1,775 | 7,650 | (585 | ) | 7,065 | 959 | |||||||||||||||||||||||
Switzerland | 3,965 | 3,951 | 368 | 221 | 8,505 | (1,549 | ) | 6,956 | (2,690 | ) | ||||||||||||||||||||||
Singapore | 3,826 | 278 | 520 | 1,607 | 6,231 | (60 | ) | 6,171 | 753 | |||||||||||||||||||||||
Mexico | 3,073 | 1,416 | 136 | 480 | 5,105 | (383 | ) | 4,722 | 238 | |||||||||||||||||||||||
Turkey | 2,727 | 115 | 15 | 133 | 2,990 | (1 | ) | 2,989 | 299 | |||||||||||||||||||||||
Italy | 1,835 | 960 | 532 | 787 | 4,114 | (1,142 | ) | 2,972 | (1,115 | ) | ||||||||||||||||||||||
United Arab Emirates | 2,085 | 139 | 498 | 42 | 2,764 | (89 | ) | 2,675 | (68 | ) | ||||||||||||||||||||||
Belgium | 1,186 | 683 | 118 | 746 | 2,733 | (363 | ) | 2,370 | 444 | |||||||||||||||||||||||
Taiwan | 1,566 | 34 | 341 | 310 | 2,251 | (1 | ) | 2,250 | 169 | |||||||||||||||||||||||
Total top 20 non-U.S. countries exposure | $ | 135,367 | $ | 55,539 | $ | 19,840 | $ | 29,885 | $ | 240,631 | $ | (26,574 | ) | $ | 214,057 | $ | 2,707 |
Bank of America 50 |
A number of economic conditions and geopolitical events have driven risk aversion in certain emerging markets. Our two largest emerging market country exposures at March 31, 2017 were Brazil and China. At March 31, 2017, net exposure to Brazil was $13.1 billion, concentrated in sovereign securities, oil and gas companies and commercial banks. At March 31, 2017, net exposure to China was $11.2 billion, concentrated in large state-owned companies, subsidiaries of multinational corporations and commercial banks.
The outlook for policy direction and therefore economic performance in the EU remains uncertain as a consequence of reduced political cohesion among EU countries. Our largest EU country exposure at March 31, 2017 was the United Kingdom. At March 31, 2017, net exposure to the United Kingdom was $53.1 billion, concentrated in multinational corporations and sovereign clients. For additional information, see Executive Summary – First Quarter 2017 Economic and Business Environment on page 3.
Provision for Credit Losses
The provision for credit losses decreased $162 million to $835 million for the three months ended March 31, 2017 compared to the same period in 2016. The provision for credit losses was $99 million lower than net charge-offs for the three months ended March 31, 2017, resulting in a reduction in the allowance for credit losses. This compared to a reduction of $71 million in the allowance for credit losses for the three months ended March 31, 2016. We expect the provision for credit losses will approximate net charge-offs for the second quarter of 2017.
The provision for credit losses for the consumer portfolio increased $370 million to $772 million for the three months ended March 31, 2017 compared to the same period in 2016 due to loan growth and portfolio seasoning in the U.S. credit card portfolio. Included in the provision is an expense of $68 million related to the PCI loan portfolio for the three months ended March 31, 2017 compared to a benefit of $77 million for the same period in 2016.
The provision for credit losses for the commercial portfolio, including unfunded lending commitments, decreased $532 million to $63 million for the three months ended March 31, 2017 compared to the same period in 2016 driven by improvements in energy exposures due in part to stabilized oil prices.
Allowance for Credit Losses
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is comprised of two components. The first component covers nonperforming commercial loans and TDRs. The second component covers loans and leases on which there are incurred losses that are not yet individually identifiable, as well as incurred losses that may not be represented in the loss forecast models. We evaluate the adequacy of the allowance for loan and lease losses based on the total of these two components. The allowance for loan and lease losses excludes LHFS and loans accounted for under the fair value option as the fair value reflects a credit risk component. For more information on the allowance for loan and lease losses, see Allowance for Credit Losses in the MD&A of the Corporation's 2016 Annual Report on Form 10-K.
During the three months ended March 31, 2017, the factors that impacted the allowance for loan and lease losses included improvements in the credit quality of the consumer real estate
portfolios driven by continuing improvements in the U.S. economy and labor markets, proactive credit risk management initiatives and the impact of high credit quality originations. Evidencing the improvements in the U.S. economy and labor markets are downward unemployment trends and increases in home prices. In addition to these improvements, in the consumer portfolio, nonperforming consumer loans decreased $458 million in the three months ended March 31, 2017 as returns to performing status, paydowns, loan sales and charge-offs continued to outpace new nonaccrual loans. During the three months ended March 31, 2017, the allowance for loan and lease losses in the commercial portfolio reflected decreased energy reserves due in part to stabilized oil prices which contributed to a modest improvement in energy-related exposure.
The allowance for loan and lease losses for the consumer portfolio, as presented in Table 47, was $6.1 billion at March 31, 2017, a decrease of $86 million from December 31, 2016. The decrease was primarily in the home equity portfolio, partially offset by an increase in the U.S. credit card portfolio. The reductions in the home equity portfolio were due to improved home prices, lower nonperforming loans and a decrease in consumer loan balances. The increase in the U.S. credit card portfolio was driven by loan growth and the seasoning of newer vintages within the portfolio.
The allowance for loan and lease losses for the commercial portfolio, as presented in Table 47, was $5.2 billion at March 31, 2017, a decrease of $40 million from December 31, 2016 driven by decreased energy reserves for the higher risk energy sub-sectors due in part to stabilized oil prices. Commercial utilized reservable criticized exposure decreased to $16.1 billion at March 31, 2017 from $16.3 billion (to 3.27 percent from 3.35 percent of total commercial utilized reservable exposure) at December 31, 2016, largely due to net upgrades and paydowns in the energy portfolio. Nonperforming commercial loans were $1.7 billion (0.38 percent of outstanding commercial loans excluding loans accounted for under the fair value option) at both March 31, 2017 and December 31, 2016. See Tables 33, 34 and 36 for additional details on key commercial credit statistics.
The allowance for loan and lease losses as a percentage of total loans and leases outstanding was 1.25 percent at March 31, 2017 compared to 1.26 percent at December 31, 2016. The March 31, 2017 and December 31, 2016 ratios above include the PCI loan portfolio. Excluding the PCI loan portfolio, the allowance for loan and lease losses as a percentage of total loans and leases outstanding was 1.22 percent and 1.24 percent at March 31, 2017 and December 31, 2016.
Reserve for Unfunded Lending Commitments
In addition to the allowance for loan and lease losses, we also estimate probable losses related to unfunded lending commitments such as letters of credit, financial guarantees, unfunded bankers’ acceptances and binding loan commitments, excluding commitments accounted for under the fair value option. For more information on the reserve for unfunded lending commitments, see Allowance for Credit Losses in the MD&A of the Corporation's 2016 Annual Report on Form 10-K.
The reserve for unfunded lending commitments of $757 million at March 31, 2017 remained relatively unchanged from December 31, 2016.
51 Bank of America
Table 46 presents a rollforward of the allowance for credit losses, which includes the allowance for loan and lease losses and the reserve for unfunded lending commitments, for the three months ended March 31, 2017 and 2016.
Table 46 | Allowance for Credit Losses | |||||||
Three Months Ended March 31 | ||||||||
(Dollars in millions) | 2017 | 2016 | ||||||
Allowance for loan and lease losses, January 1 | $ | 11,237 | $ | 12,234 | ||||
Loans and leases charged off | ||||||||
Residential mortgage | (61 | ) | (185 | ) | ||||
Home equity | (143 | ) | (193 | ) | ||||
U.S. credit card | (718 | ) | (693 | ) | ||||
Non-U.S. credit card | (59 | ) | (61 | ) | ||||
Direct/Indirect consumer | (114 | ) | (101 | ) | ||||
Other consumer | (55 | ) | (57 | ) | ||||
Total consumer charge-offs | (1,150 | ) | (1,290 | ) | ||||
U.S. commercial (1) | (137 | ) | (158 | ) | ||||
Commercial real estate | — | (5 | ) | |||||
Commercial lease financing | (3 | ) | — | |||||
Non-U.S. commercial | (20 | ) | (43 | ) | ||||
Total commercial charge-offs | (160 | ) | (206 | ) | ||||
Total loans and leases charged off | (1,310 | ) | (1,496 | ) | ||||
Recoveries of loans and leases previously charged off | ||||||||
Residential mortgage | 44 | 94 | ||||||
Home equity | 79 | 81 | ||||||
U.S. credit card | 112 | 106 | ||||||
Non-U.S. credit card | 15 | 16 | ||||||
Direct/Indirect consumer | 66 | 67 | ||||||
Other consumer | 7 | 9 | ||||||
Total consumer recoveries | 323 | 373 | ||||||
U.S. commercial (2) | 41 | 41 | ||||||
Commercial real estate | 4 | 11 | ||||||
Commercial lease financing | 3 | 2 | ||||||
Non-U.S. commercial | 5 | 1 | ||||||
Total commercial recoveries | 53 | 55 | ||||||
Total recoveries of loans and leases previously charged off | 376 | 428 | ||||||
Net charge-offs (3) | (934 | ) | (1,068 | ) | ||||
Write-offs of PCI loans | (33 | ) | (105 | ) | ||||
Provision for loan and lease losses | 840 | 1,016 | ||||||
Other (4) | 1 | (8 | ) | |||||
Allowance for loan and lease losses, March 31 | 11,111 | 12,069 | ||||||
Less: Change in the allowance included in assets of business held for sale (5) | 1 | — | ||||||
Total allowance for loan and lease losses, March 31 | 11,112 | 12,069 | ||||||
Reserve for unfunded lending commitments, January 1 | 762 | 646 | ||||||
Provision for unfunded lending commitments | (5 | ) | (19 | ) | ||||
Reserve for unfunded lending commitments, March 31 | 757 | 627 | ||||||
Allowance for credit losses, March 31 | $ | 11,869 | $ | 12,696 |
(1) | Includes U.S. small business commercial charge-offs of $64 million and $62 million for the three months ended March 31, 2017 and 2016. |
(2) | Includes U.S. small business commercial recoveries of $12 million and $10 million for the three months ended March 31, 2017 and 2016. |
(3) | Includes net charge-offs of $44 million on non-U.S. credit card loans, which are included in assets of business held for sale on the Consolidated Balance Sheet at March 31, 2017. |
(4) | Primarily represents the net impact of portfolio sales, consolidations and deconsolidations, foreign currency translation adjustments and certain other reclassifications. |
(5) | Represents the change in the allowance for loan and lease losses related to the non-U.S. credit card loan portfolio, which is included in assets of business held for sale on the Consolidated Balance Sheet at March 31, 2017. |
Bank of America 52 |
Table 46 | Allowance for Credit Losses (continued) | |||||||
Three Months Ended March 31 | ||||||||
(Dollars in millions) | 2017 | 2016 | ||||||
Loan and allowance ratios (6): | ||||||||
Loans and leases outstanding at March 31 (7) | $ | 908,219 | $ | 892,901 | ||||
Allowance for loan and lease losses as a percentage of total loans and leases outstanding at March 31 (7) | 1.25 | % | 1.35 | % | ||||
Consumer allowance for loan and lease losses as a percentage of total consumer loans and leases outstanding at March 31 (8) | 1.36 | 1.51 | ||||||
Commercial allowance for loan and lease losses as a percentage of total commercial loans and leases outstanding at March 31 (9) | 1.14 | 1.19 | ||||||
Average loans and leases outstanding (7) | $ | 906,585 | $ | 885,655 | ||||
Annualized net charge-offs as a percentage of average loans and leases outstanding (7, 10) | 0.42 | % | 0.48 | % | ||||
Annualized net charge-offs and PCI write-offs as a percentage of average loans and leases outstanding (7) | 0.43 | 0.53 | ||||||
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases at March 31 (7, 11) | 156 | 136 | ||||||
Ratio of the allowance for loan and lease losses at March 31 to annualized net charge-offs (10) | 3.00 | 2.81 | ||||||
Ratio of the allowance for loan and lease losses at March 31 to annualized net charge-offs and PCI write-offs | 2.90 | 2.56 | ||||||
Amounts included in allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases at March 31 (12) | $ | 4,047 | $ | 4,138 | ||||
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 at March 31 (7, 12) | 100 | % | 90 | % | ||||
Loan and allowance ratios excluding PCI loans and the related valuation allowance: (6, 13) | ||||||||
Allowance for loan and lease losses as a percentage of total loans and leases outstanding at March 31 (7) | 1.22 | % | 1.31 | % | ||||
Consumer allowance for loan and lease losses as a percentage of total consumer loans and leases outstanding at March 31 (8) | 1.30 | 1.42 | ||||||
Annualized net charge-offs as a percentage of average loans and leases outstanding (7) | 0.42 | 0.49 | ||||||
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases at March 31 (7, 11) | 150 | 129 | ||||||
Ratio of the allowance for loan and lease losses at March 31 to annualized net charge-offs | 2.88 | 2.67 |
(6) | Loan and allowance ratios include $242 million of non-U.S. credit card allowance for loan and lease losses and $9.5 billion of ending non-U.S. credit card loans, which are included in assets of business held for sale on the Consolidated Balance Sheet at March 31, 2017. |
(7) | Outstanding loan and lease balances and ratios do not include loans accounted for under the fair value option of $7.5 billion and $8.2 billion at March 31, 2017 and 2016. Average loans accounted for under the fair value option were $7.6 billion and $7.3 billion for the three months ended March 31, 2017 and 2016. |
(8) | Excludes consumer loans accounted for under the fair value option of $1.0 billion and $1.9 billion at March 31, 2017 and 2016. |
(9) | Excludes commercial loans accounted for under the fair value option of $6.5 billion and $6.3 billion at March 31, 2017 and 2016. |
(10) | Net charge-offs exclude $33 million and $105 million of write-offs in the PCI loan portfolio for the three months ended March 31, 2017 and 2016. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 39. |
(11) | For more information on our definition of nonperforming loans, see pages 41 and 46. |
(12) | Primarily includes amounts allocated to U.S. credit card and unsecured consumer lending portfolios in Consumer Banking, PCI loans and the non-U.S. credit card portfolio in All Other. |
(13) | For more information on the PCI loan portfolio and the valuation allowance for PCI loans, see Note 4 – Outstanding Loans and Leases and Note 5 – Allowance for Credit Losses to the Consolidated Financial Statements. |
For reporting purposes, we allocate the allowance for credit losses across products as presented in Table 47.
Table 47 | Allocation of the Allowance for Credit Losses by Product Type | |||||||||||||||||||
March 31, 2017 | December 31, 2016 | |||||||||||||||||||
(Dollars in millions) | Amount | Percent of Total | Percent of Loans and Leases Outstanding (1) | Amount | Percent of Total | Percent of Loans and Leases Outstanding (1) | ||||||||||||||
Allowance for loan and lease losses | ||||||||||||||||||||
Residential mortgage | $ | 1,018 | 8.97 | % | 0.53 | % | $ | 1,012 | 8.82 | % | 0.53 | % | ||||||||
Home equity | 1,547 | 13.62 | 2.42 | 1,738 | 15.14 | 2.62 | ||||||||||||||
U.S. credit card | 3,003 | 26.45 | 3.39 | 2,934 | 25.56 | 3.18 | ||||||||||||||
Non-U.S. credit card | 242 | 2.13 | 2.54 | 243 | 2.12 | 2.64 | ||||||||||||||
Direct/Indirect consumer | 276 | 2.43 | 0.30 | 244 | 2.13 | 0.26 | ||||||||||||||
Other consumer | 50 | 0.44 | 2.00 | 51 | 0.44 | 2.01 | ||||||||||||||
Total consumer | 6,136 | 54.04 | 1.36 | 6,222 | 54.21 | 1.36 | ||||||||||||||
U.S. commercial (2) | 3,306 | 29.12 | 1.15 | 3,326 | 28.97 | 1.17 | ||||||||||||||
Commercial real estate | 927 | 8.16 | 1.60 | 920 | 8.01 | 1.60 | ||||||||||||||
Commercial lease financing | 135 | 1.19 | 0.62 | 138 | 1.20 | 0.62 | ||||||||||||||
Non-U.S. commercial | 850 | 7.49 | 0.95 | 874 | 7.61 | 0.98 | ||||||||||||||
Total commercial (3) | 5,218 | 45.96 | 1.14 | 5,258 | 45.79 | 1.16 | ||||||||||||||
Allowance for loan and lease losses (4) | 11,354 | 100.00 | % | 1.25 | 11,480 | 100.00 | % | 1.26 | ||||||||||||
Less: Allowance included in assets of business held for sale (5) | (242 | ) | (243 | ) | ||||||||||||||||
Total allowance for loan and lease losses | 11,112 | 11,237 | ||||||||||||||||||
Reserve for unfunded lending commitments | 757 | 762 | ||||||||||||||||||
Allowance for credit losses | $ | 11,869 | $ | 11,999 |
(1) | Ratios are calculated as allowance for loan and lease losses as a percentage of loans and leases outstanding excluding loans accounted for under the fair value option. Consumer loans accounted for under the fair value option included residential mortgage loans of $694 million and $710 million and home equity loans of $338 million and $341 million at March 31, 2017 and December 31, 2016. Commercial loans accounted for under the fair value option included U.S. commercial loans of $3.5 billion and $2.9 billion and non-U.S. commercial loans of $3.0 billion and $3.1 billion at March 31, 2017 and December 31, 2016. |
(2) | Includes allowance for loan and lease losses for U.S. small business commercial loans of $415 million and $416 million at March 31, 2017 and December 31, 2016. |
(3) | Includes allowance for loan and lease losses for impaired commercial loans of $274 million and $273 million at March 31, 2017 and December 31, 2016. |
(4) | Includes $454 million and $419 million of valuation allowance presented with the allowance for loan and lease losses related to PCI loans at March 31, 2017 and December 31, 2016. |
(5) | Represents allowance for loan and lease losses related to the non-U.S. credit card loan portfolio, which is included in assets of business held for sale on the Consolidated Balance Sheet. |
53 Bank of America
Market Risk Management
For more information on our market risk management process, see Market Risk Management in the MD&A of the Corporation's 2016 Annual Report on Form 10-K.
Trading Risk Management
To evaluate risk in our trading activities, we focus on the actual and potential volatility of revenues generated by individual positions as well as portfolios of positions. Various techniques and procedures are utilized to enable the most complete understanding of these risks. Quantitative measures of market risk are evaluated on a daily basis from a single position to the portfolio of the Corporation. These measures include sensitivities of positions to various market risk factors, such as the potential impact on revenue from a one basis point change in interest rates, and statistical measures utilizing both actual and hypothetical market moves, such as VaR and stress testing. Periods of extreme market stress influence the reliability of these techniques to varying degrees. Qualitative evaluations of market risk utilize the suite of quantitative risk measures while understanding each of their respective limitations. Additionally, risk managers independently evaluate the risk of the portfolios under the current market environment and potential future environments.
VaR is a common statistic used to measure market risk as it allows the aggregation of market risk factors, including the effects of portfolio diversification. A VaR model simulates the value of a portfolio under a range of scenarios in order to generate a distribution of potential gains and losses. VaR represents the loss a portfolio is not expected to exceed more than a certain number of times per period, based on a specified holding period, confidence level and window of historical data. We use one VaR model consistently across the trading portfolios and it uses a historical simulation approach based on a three-year window of historical data. Our primary VaR statistic is equivalent to a 99 percent confidence level. This means that for a VaR with a one-day holding period, there should not be losses in excess of VaR, on average, 99 out of 100 trading days.
Within any VaR model, there are significant and numerous assumptions that will differ from company to company. The accuracy of a VaR model depends on the availability and quality of historical data for each of the risk factors in the portfolio. A VaR model may require additional modeling assumptions for new products that do not have the necessary historical market data or for less liquid positions for which accurate daily prices are not consistently available. For positions with insufficient historical data for the VaR calculation, the process for establishing an appropriate proxy is based on fundamental and statistical analysis of the new product or less liquid position. This analysis identifies reasonable alternatives that replicate both the expected volatility and correlation to other market risk factors that the missing data would be expected to experience.
VaR may not be indicative of realized revenue volatility as changes in market conditions or in the composition of the portfolio can have a material impact on the results. In particular, the historical data used for the VaR calculation might indicate higher or lower levels of portfolio diversification than will be experienced. In order for the VaR model to reflect current market conditions, Global Risk Management updates the historical data underlying our VaR model on a weekly basis, or more frequently during periods of market stress, and regularly review the assumptions underlying the model. A relatively minor portion of risks related to our trading positions is not included in VaR. These risks are reviewed as part
of our Internal Capital Adequacy Assessment Process (ICAAP). For more information regarding ICAAP, see Capital Management in the MD&A of the Corporation's 2016 Annual Report on Form 10-K.
Global Risk Management continually reviews, evaluates and enhances our VaR model so that it reflects the material risks in our trading portfolio. Changes to the VaR model are reviewed and approved prior to implementation and any material changes are reported to management through the appropriate management committees.
Given the noted limitations of the VaR statistic, we also consider other quantitative measures of market risk. For example, Maximum Observed Loss is the largest estimated loss using a 10-day holding period over the historical dates since 2007. This statistic is calculated on a daily basis for the Corporation and across lines of businesses. For individual risks and product types, Global Risk Management reviews estimated gains and losses for specific scenarios, such as a 25 percent decrease in equity prices or sudden exchange rate movements. Global Markets Risk Management also has an extensive stress testing program. For more information, see Trading Portfolio Stress Testing on page 57.
Trading limits on quantitative risk measures, such as those described above, are independently set by Global Markets Risk Management and reviewed on a regular basis to ensure the limits remain relevant and within our overall risk appetite for market risks. Trading limits are reviewed in the context of market liquidity, volatility and strategic business priorities. Trading limits are set at both a granular level to allow for extensive coverage of risks as well as at aggregated portfolios to account for correlations among risk factors. All trading limits are approved at least annually. Approved trading limits are stored and tracked in a centralized limits management system. Trading limit excesses are communicated to management for review. Certain quantitative market risk measures and corresponding limits have been identified as critical in the Corporation’s Risk Appetite Statement. These risk appetite limits are reported on a daily basis and are approved at least annually by the ERC and the Board.
In periods of market stress, Global Markets senior leadership communicates daily to discuss losses, key risk positions and any limit excesses. As a result of this process, the businesses may selectively reduce risk.
Table 48 presents the total market-based trading portfolio VaR which is the combination of the covered positions trading portfolio and the impact from less liquid trading exposures. Covered positions are defined by regulatory standards as trading assets and liabilities, both on- and off-balance sheet, that meet a defined set of specifications. These specifications identify the most liquid trading positions which are intended to be held for a short-term horizon and where we are able to hedge the material risk elements in a two-way market. Positions in less liquid markets, or where there are restrictions on the ability to trade the positions, typically do not qualify as covered positions. Foreign exchange and commodity positions are always considered covered positions, except for structural foreign currency positions that are excluded with prior regulatory approval. In addition, Table 48 presents our fair value option portfolio, which includes substantially all of the funded and unfunded exposures for which we elect the fair value option, and their corresponding hedges. The fair value option portfolio combined with the total market-based trading portfolio VaR represents our total market-based portfolio VaR. Additionally, market risk VaR for trading activities as presented in Table 48 differs from VaR used for regulatory capital calculations due to the holding period being used. The holding period for VaR used for
Bank of America 54 |
regulatory capital calculations is 10 days, while for the market risk VaR presented below it is one day. Both measures utilize the same process and methodology.
The total market-based portfolio VaR results in Table 48 include market risk to which we are exposed from all business segments,
excluding CVA and DVA. The majority of this portfolio is within the Global Markets segment. Table 48 presents period-end, average, high and low daily trading VaR for the three months ended March 31, 2017, December 31, 2016 and March 31, 2016, using a 99 percent confidence level.
Table 48 | Market Risk VaR for Trading Activities | |||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||
March 31, 2017 | December 31, 2016 | March 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in millions) | Period End | Average | High (1) | Low (1) | Period End | Average | High (1) | Low (1) | Period End | Average | High (1) | Low (1) | ||||||||||||||||||||||||||||||||||||
Foreign exchange | $ | 23 | $ | 12 | $ | 23 | $ | 5 | $ | 8 | $ | 8 | $ | 12 | $ | 5 | $ | 10 | $ | 11 | $ | 16 | $ | 7 | ||||||||||||||||||||||||
Interest rate | 28 | 17 | 28 | 11 | 11 | 13 | 16 | 10 | 18 | 23 | 30 | 16 | ||||||||||||||||||||||||||||||||||||
Credit | 26 | 26 | 29 | 22 | 25 | 28 | 33 | 25 | 31 | 31 | 35 | 27 | ||||||||||||||||||||||||||||||||||||
Equity | 24 | 19 | 30 | 14 | 19 | 16 | 28 | 11 | 15 | 19 | 27 | 13 | ||||||||||||||||||||||||||||||||||||
Commodity | 6 | 4 | 7 | 3 | 4 | 7 | 12 | 4 | 5 | 5 | 7 | 3 | ||||||||||||||||||||||||||||||||||||
Portfolio diversification | (58 | ) | (45 | ) | — | — | (39 | ) | (43 | ) | — | — | (44 | ) | (50 | ) | — | — | ||||||||||||||||||||||||||||||
Total covered positions trading portfolio | 49 | 33 | 49 | 25 | 28 | 29 | 41 | 24 | 35 | 39 | 50 | 29 | ||||||||||||||||||||||||||||||||||||
Impact from less liquid exposures | 10 | 5 | — | — | 6 | 7 | — | — | 5 | 3 | — | — | ||||||||||||||||||||||||||||||||||||
Total market-based trading portfolio | 59 | 38 | 59 | 28 | 34 | 36 | 49 | 28 | 40 | 42 | 58 | 34 | ||||||||||||||||||||||||||||||||||||
Fair value option loans | 11 | 12 | 14 | 11 | 14 | 14 | 16 | 12 | 28 | 35 | 40 | 28 | ||||||||||||||||||||||||||||||||||||
Fair value option hedges | 6 | 6 | 7 | 5 | 6 | 7 | 8 | 5 | 15 | 18 | 22 | 14 | ||||||||||||||||||||||||||||||||||||
Fair value option portfolio diversification | (7 | ) | (8 | ) | — | — | (10 | ) | (11 | ) | — | — | (31 | ) | (38 | ) | — | — | ||||||||||||||||||||||||||||||
Total fair value option portfolio | 10 | 10 | 11 | 9 | 10 | 10 | 12 | 8 | 12 | 15 | 20 | 11 | ||||||||||||||||||||||||||||||||||||
Portfolio diversification | (6 | ) | (4 | ) | — | — | (4 | ) | (4 | ) | — | — | (4 | ) | (7 | ) | — | — | ||||||||||||||||||||||||||||||
Total market-based portfolio | $ | 63 | $ | 44 | $ | 63 | $ | 32 | $ | 40 | $ | 42 | $ | 55 | $ | 32 | $ | 48 | $ | 50 | $ | 69 | $ | 40 |
(1) | The high and low for each portfolio may have occurred on different trading days than the high and low for the components. Therefore the impact from less liquid exposures and the amount of portfolio diversification, which is the difference between the total portfolio and the sum of the individual components, are not relevant. |
The average total market-based trading portfolio VaR decreased for the three months ended March 31, 2017 compared to the same period in 2016 primarily due to reduced exposure to the interest rate and credit markets.
The graph below presents the daily total market-based trading portfolio VaR for the previous five quarters, corresponding to the data in Table 48.

55 Bank of America
Additional VaR statistics produced within our single VaR model are provided in Table 49 at the same level of detail as in Table 48. Evaluating VaR with additional statistics allows for an increased understanding of the risks in the portfolio as the historical market data used in the VaR calculation does not necessarily follow a
predefined statistical distribution. Table 49 presents average trading VaR statistics at 99 percent and 95 percent confidence levels for the three months ended March 31, 2017, December 31, 2016 and March 31, 2016.
Table 49 | Average Market Risk VaR for Trading Activities – 99 percent and 95 percent VaR Statistics | ||||||||||||||||||||||||
Three Months Ended | |||||||||||||||||||||||||
March 31, 2017 | December 31, 2016 | March 31, 2016 | |||||||||||||||||||||||
(Dollars in millions) | 99 percent | 95 percent | 99 percent | 95 percent | 99 percent | 95 percent | |||||||||||||||||||
Foreign exchange | $ | 12 | $ | 8 | $ | 8 | $ | 4 | $ | 11 | $ | 6 | |||||||||||||
Interest rate | 17 | 11 | 13 | 8 | 23 | 14 | |||||||||||||||||||
Credit | 26 | 14 | 28 | 17 | 31 | 18 | |||||||||||||||||||
Equity | 19 | 10 | 16 | 10 | 19 | 12 | |||||||||||||||||||
Commodity | 4 | 3 | 7 | 4 | 5 | 2 | |||||||||||||||||||
Portfolio diversification | (45 | ) | (28 | ) | (43 | ) | (27 | ) | (50 | ) | (31 | ) | |||||||||||||
Total covered positions trading portfolio | 33 | 18 | 29 | 16 | 39 | 21 | |||||||||||||||||||
Impact from less liquid exposures | 5 | 3 | 7 | 3 | 3 | 2 | |||||||||||||||||||
Total market-based trading portfolio | 38 | 21 | 36 | 19 | 42 | 23 | |||||||||||||||||||
Fair value option loans | 12 | 7 | 14 | 8 | 35 | 19 | |||||||||||||||||||
Fair value option hedges | 6 | 4 | 7 | 5 | 18 | 11 | |||||||||||||||||||
Fair value option portfolio diversification | (8 | ) | (5 | ) | (11 | ) | (7 | ) | (38 | ) | (21 | ) | |||||||||||||
Total fair value option portfolio | 10 | 6 | 10 | 6 | 15 | 9 | |||||||||||||||||||
Portfolio diversification | (4 | ) | (4 | ) | (4 | ) | (3 | ) | (7 | ) | (5 | ) | |||||||||||||
Total market-based portfolio | $ | 44 | $ | 23 | $ | 42 | $ | 22 | $ | 50 | $ | 27 |
Backtesting
The accuracy of the VaR methodology is evaluated by backtesting, which compares the daily VaR results, utilizing a one-day holding period, against a comparable subset of trading revenue. A backtesting excess occurs when a trading loss exceeds the VaR for the corresponding day. These excesses are evaluated to understand the positions and market moves that produced the trading loss and to ensure that the VaR methodology accurately represents those losses. The frequency of trading losses in excess of VaR are expected to be in line with the confidence level of the VaR statistic being tested. For example, with a 99 percent confidence level, one trading loss in excess of VaR is expected every 100 days or between two to three trading losses in excess of VaR over the course of a year. The number of backtesting excesses observed can differ from the statistically expected number of excesses if the current level of market volatility is materially different than the level of market volatility that existed during the three years of historical data used in the VaR calculation.
The trading revenue used for backtesting is defined by regulatory agencies in order to most closely align with the VaR component of the regulatory capital calculation. This revenue differs from total trading-related revenue in that it excludes revenue from trading activities that either do not generate market risk or the market risk cannot be included in VaR. Some examples of the types of revenue excluded for backtesting are fees, commissions, reserves, net interest income and intraday trading revenues.
Global Risk Management conducts daily backtesting on our trading portfolios, ranging from the total market-based portfolio to
individual trading areas. Additionally, daily backtesting is conducted on the VaR results used for regulatory capital calculations as well as the VaR results for key legal entities, regions and risk factors. These results are reported to senior market risk management. Senior management regularly reviews and evaluates the results of these tests.
During the three months ended March 31, 2017, there were no days in which there was a backtesting excess for our total market-based portfolio VaR, utilizing a one-day holding period.
Total Trading-related Revenue
Total trading-related revenue, excluding brokerage fees, and CVA, DVA and funding valuation adjustment (FVA) gains (losses), represents the total amount earned from trading positions, including market-based net interest income, which are taken in a diverse range of financial instruments and markets. Trading account assets and liabilities are reported at fair value. For more information on fair value, see Note 14 – Fair Value Measurements to the Consolidated Financial Statements. Trading-related revenue can be volatile and is largely driven by general market conditions and customer demand. Also, trading-related revenue is dependent on the volume and type of transactions, the level of risk assumed, and the volatility of price and rate movements at any given time within the ever-changing market environment. Significant daily revenue by business is monitored and the primary drivers of these are reviewed.
Bank of America 56 |
The histogram below is a graphic depiction of trading volatility and illustrates the daily level of trading-related revenue for the three months ended March 31, 2017 compared to the three months ended December 31, 2016. During the three months ended March 31, 2017, positive trading-related revenue was recorded for all of the trading days, of which 89 percent were daily
trading gains of over $25 million. This compares to the three months ended December 31, 2016 where positive trading-related revenue was recorded for 97 percent of the trading days, of which 75 percent were daily trading gains of over $25 million and the largest loss was $24 million.

Trading Portfolio Stress Testing
Because the very nature of a VaR model suggests results can exceed our estimates and it is dependent on a limited historical window, we also stress test our portfolio using scenario analysis. This analysis estimates the change in the value of our trading portfolio that may result from abnormal market movements.
A set of scenarios, categorized as either historical or hypothetical, are computed daily for the overall trading portfolio and individual businesses. These scenarios include shocks to underlying market risk factors that may be well beyond the shocks found in the historical data used to calculate VaR. Historical scenarios simulate the impact of the market moves that occurred during a period of extended historical market stress. Generally, a multi-week period representing the most severe point during a crisis is selected for each historical scenario. Hypothetical
scenarios provide estimated portfolio impacts from potential future market stress events. Scenarios are reviewed and updated in response to changing positions and new economic or political information. In addition, new or ad hoc scenarios are developed to address specific potential market events or particular vulnerabilities in the portfolio. The stress tests are reviewed on a regular basis and the results are presented to senior management.
Stress testing for the trading portfolio is integrated with enterprise-wide stress testing and incorporated into the limits framework. The macroeconomic scenarios used for enterprise-wide stress testing purposes differ from the typical trading portfolio scenarios in that they have a longer time horizon and the results are forecasted over multiple periods for use in consolidated capital and liquidity planning. For additional information, see Managing Risk on page 21.
57 Bank of America
Interest Rate Risk Management for the Banking Book
The following discussion presents net interest income for banking book activities.
Interest rate risk represents the most significant market risk exposure to our banking book balance sheet. Interest rate risk is measured as the potential change in net interest income caused by movements in market interest rates. Client-facing activities, primarily lending and deposit-taking, create interest rate sensitive positions on our balance sheet.
We prepare forward-looking forecasts of net interest income. The baseline forecast takes into consideration expected future business growth, ALM positioning and the direction of interest rate movements as implied by the market-based forward curve. We then measure and evaluate the impact that alternative interest rate scenarios have on the baseline forecast in order to assess interest rate sensitivity under varied conditions. The net interest income forecast is frequently updated for changing assumptions and differing outlooks based on economic trends, market conditions and business strategies. Thus, we continually monitor our balance sheet position in order to maintain an acceptable level of exposure to interest rate changes.
The interest rate scenarios that we analyze incorporate balance sheet assumptions such as loan and deposit growth and pricing, changes in funding mix, product repricing, maturity characteristics and investment securities premium amortization. Our overall goal is to manage interest rate risk so that movements in interest rates do not significantly adversely affect earnings and capital.
Table 50 presents the spot and 12-month forward rates used in our baseline forecasts at March 31, 2017 and December 31, 2016.
Table 50 | Forward Rates | ||||||||
March 31, 2017 | |||||||||
Federal Funds | Three-month LIBOR | 10-Year Swap | |||||||
Spot rates | 1.00 | % | 1.15 | % | 2.38 | % | |||
12-month forward rates | 1.50 | 1.64 | 2.54 | ||||||
December 31, 2016 | |||||||||
Spot rates | 0.75 | % | 1.00 | % | 2.34 | % | |||
12-month forward rates | 1.25 | 1.51 | 2.49 |
Table 51 shows the pretax dollar impact to forecasted net interest income over the next 12 months from March 31, 2017 and December 31, 2016, resulting from instantaneous parallel and non-parallel shocks to the market-based forward curve. Periodically we evaluate the scenarios presented so that they are meaningful in the context of the current rate environment.
In the three months ended March 31, 2017, the asset sensitivity of our balance sheet to rising rates was largely unchanged. We continue to be asset sensitive to a parallel move in interest rates with the majority of that benefit coming from the short end of the yield curve. Additionally, higher interest rates impact the fair value of debt securities and, accordingly, for debt securities classified as available-for-sale (AFS), may adversely affect accumulated OCI and thus capital levels under the Basel 3 capital rules. Under instantaneous upward parallel shifts, the near-term adverse impact to Basel 3 capital is reduced over time by offsetting positive impacts to net interest income. For more
information on the transition provisions of Basel 3, see Capital Management – Regulatory Capital on page 22.
Table 51 | Estimated Banking Book Net Interest Income Sensitivity | |||||||||||||
Short Rate (bps) | Long Rate (bps) | |||||||||||||
(Dollars in millions) | March 31 2017 | December 31 2016 | ||||||||||||
Curve Change | ||||||||||||||
Parallel Shifts | ||||||||||||||
+100 bps instantaneous shift | +100 | +100 | $ | 3,337 | $ | 3,370 | ||||||||
-50 bps instantaneous shift | -50 | -50 | (2,237 | ) | (2,900 | ) | ||||||||
Flatteners | ||||||||||||||
Short-end instantaneous change | +100 | — | 2,476 | 2,473 | ||||||||||
Long-end instantaneous change | — | -50 | (903 | ) | (961 | ) | ||||||||
Steepeners | ||||||||||||||
Short-end instantaneous change | -50 | — | (1,317 | ) | (1,918 | ) | ||||||||
Long-end instantaneous change | — | +100 | 876 | 928 |
The sensitivity analysis in Table 51 assumes that we take no action in response to these rate shocks and does not assume any change in other macroeconomic variables normally correlated with changes in interest rates. As part of our ALM activities, we use securities, certain residential mortgages, and interest rate and foreign exchange derivatives in managing interest rate sensitivity.
The behavior of our deposit portfolio in the baseline forecast and in alternate interest rate scenarios is a key assumption in our projected estimates of net interest income. The sensitivity analysis in Table 51 assumes no change in deposit portfolio size or mix from the baseline forecast in alternate rate environments. In higher rate scenarios, any customer activity resulting in the replacement of low-cost or noninterest-bearing deposits with higher-yielding deposits or market-based funding would reduce our benefit in those scenarios.
Interest Rate and Foreign Exchange Derivative Contracts
Interest rate and foreign exchange derivative contracts are utilized in our ALM activities and serve as an efficient tool to manage our interest rate and foreign exchange risk. We use derivatives to hedge the variability in cash flows or changes in fair value on our balance sheet due to interest rate and foreign exchange components. For more information on our hedging activities, see Note 2 – Derivatives to the Consolidated Financial Statements.
Our interest rate contracts are generally non-leveraged generic interest rate and foreign exchange basis swaps, options, futures and forwards. In addition, we use foreign exchange contracts, including cross-currency interest rate swaps, foreign currency futures contracts, foreign currency forward contracts and options to mitigate the foreign exchange risk associated with foreign currency-denominated assets and liabilities.
Changes to the composition of our derivatives portfolio during the three months ended March 31, 2017 reflect actions taken for interest rate and foreign exchange rate risk management. The decisions to reposition our derivatives portfolio are based on the current assessment of economic and financial conditions including the interest rate and foreign currency environments, balance sheet
Bank of America 58 |
composition and trends, and the relative mix of our cash and derivative positions.
Table 52 presents derivatives utilized in our ALM activities including those designated as accounting and economic hedging instruments and shows the notional amount, fair value, weighted-
average receive-fixed and pay-fixed rates, expected maturity and average estimated durations of our open ALM derivatives at March 31, 2017 and December 31, 2016. These amounts do not include derivative hedges on our MSRs.
Table 52 | Asset and Liability Management Interest Rate and Foreign Exchange Contracts | ||||||||||||||||||||||||||||||||||
March 31, 2017 | |||||||||||||||||||||||||||||||||||
Expected Maturity | |||||||||||||||||||||||||||||||||||
(Dollars in millions, average estimated duration in years) | Fair Value | Total | Remainder of 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Average Estimated Duration | ||||||||||||||||||||||||||
Receive-fixed interest rate swaps (1) | $ | 3,332 | 5.26 | ||||||||||||||||||||||||||||||||
Notional amount | $ | 130,974 | $ | 14,649 | $ | 25,851 | $ | 10,283 | $ | 9,515 | $ | 5,307 | $ | 65,369 | |||||||||||||||||||||
Weighted-average fixed-rate | 2.68 | % | 3.54 | % | 2.80 | % | 2.31 | % | 1.98 | % | 3.18 | % | 2.56 | % | |||||||||||||||||||||
Pay-fixed interest rate swaps (1) | (48 | ) | 5.39 | ||||||||||||||||||||||||||||||||
Notional amount | $ | 27,080 | $ | 75 | $ | 7,120 | $ | — | $ | — | $ | — | $ | 19,885 | |||||||||||||||||||||
Weighted-average fixed-rate | 2.06 | % | 1.08 | % | 1.56 | % | — | % | — | % | — | % | 2.24 | % | |||||||||||||||||||||
Same-currency basis swaps (2) | (38 | ) | |||||||||||||||||||||||||||||||||
Notional amount | $ | 52,238 | $ | 13,708 | $ | 11,028 | $ | 6,786 | $ | 1,180 | $ | 2,802 | $ | 16,734 | |||||||||||||||||||||
Foreign exchange basis swaps (1, 3, 4) | (3,920 | ) | |||||||||||||||||||||||||||||||||
Notional amount | 120,117 | 17,992 | 22,972 | 12,148 | 12,211 | 8,663 | 46,131 | ||||||||||||||||||||||||||||
Option products (5) | (3 | ) | |||||||||||||||||||||||||||||||||
Notional amount (6) | (2,500 | ) | (2,514 | ) | — | — | — | — | 14 | ||||||||||||||||||||||||||
Foreign exchange contracts (1, 4, 7) | 1,278 | ||||||||||||||||||||||||||||||||||
Notional amount (6) | 10,638 | (758 | ) | (1,932 | ) | 2,011 | (8 | ) | 2,232 | 9,093 | |||||||||||||||||||||||||
Futures and forward rate contracts | 1 | ||||||||||||||||||||||||||||||||||
Notional amount (6) | 32,013 | 32,013 | — | — | — | — | — | ||||||||||||||||||||||||||||
Net ALM contracts | $ | 602 | |||||||||||||||||||||||||||||||||
December 31, 2016 | |||||||||||||||||||||||||||||||||||
Expected Maturity | |||||||||||||||||||||||||||||||||||
(Dollars in millions, average estimated duration in years) | Fair Value | Total | 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Average Estimated Duration | ||||||||||||||||||||||||||
Receive-fixed interest rate swaps (1) | $ | 4,055 | 4.81 | ||||||||||||||||||||||||||||||||
Notional amount | $ | 118,603 | $ | 21,453 | $ | 25,788 | $ | 10,283 | $ | 7,515 | $ | 5,307 | $ | 48,257 | |||||||||||||||||||||
Weighted-average fixed-rate | 2.83 | % | 3.64 | % | 2.81 | % | 2.31 | % | 2.07 | % | 3.18 | % | 2.67 | % | |||||||||||||||||||||
Pay-fixed interest rate swaps (1) | 159 | 2.77 | |||||||||||||||||||||||||||||||||
Notional amount | $ | 22,400 | $ | 1,527 | $ | 9,168 | $ | 2,072 | $ | 7,975 | $ | 213 | $ | 1,445 | |||||||||||||||||||||
Weighted-average fixed-rate | 1.37 | % | 1.84 | % | 1.47 | % | 0.97 | % | 1.08 | % | 1.00 | % | 2.45 | % | |||||||||||||||||||||
Same-currency basis swaps (2) | (26 | ) | |||||||||||||||||||||||||||||||||
Notional amount | $ | 59,274 | $ | 20,775 | $ | 11,027 | $ | 6,784 | $ | 1,180 | $ | 2,799 | $ | 16,709 | |||||||||||||||||||||
Foreign exchange basis swaps (1, 3, 4) | (4,233 | ) | |||||||||||||||||||||||||||||||||
Notional amount | 125,522 | 26,509 | 22,724 | 12,178 | 12,150 | 8,365 | 43,596 | ||||||||||||||||||||||||||||
Option products (5) | 5 | ||||||||||||||||||||||||||||||||||
Notional amount (6) | 1,687 | 1,673 | — | — | — | — | 14 | ||||||||||||||||||||||||||||
Foreign exchange contracts (1, 4, 7) | 3,180 | ||||||||||||||||||||||||||||||||||
Notional amount (6) | (20,285 | ) | (30,199 | ) | 197 | 1,961 | (8 | ) | 881 | 6,883 | |||||||||||||||||||||||||
Futures and forward rate contracts | 19 | ||||||||||||||||||||||||||||||||||
Notional amount (6) | 37,896 | 37,896 | — | — | — | — | — | ||||||||||||||||||||||||||||
Net ALM contracts | $ | 3,159 |
(1) | Does not include basis adjustments on either fixed-rate debt issued by the Corporation or AFS debt securities, which are hedged using derivatives designated as fair value hedging instruments, that substantially offset the fair values of these derivatives. |
(2) | At March 31, 2017 and December 31, 2016, the notional amount of same-currency basis swaps included $52.2 billion and $59.3 billion in both foreign currency and U.S. Dollar-denominated basis swaps in which both sides of the swap are in the same currency. |
(3) | Foreign exchange basis swaps consisted of cross-currency variable interest rate swaps used separately or in conjunction with receive-fixed interest rate swaps. |
(4) | Does not include foreign currency translation adjustments on certain non-U.S. debt issued by the Corporation that substantially offset the fair values of these derivatives. |
(5) | The notional amount of option products of $(2.5) billion at March 31, 2017 was comprised of $(2.5) billion in foreign exchange options and $14 million in purchased caps/floors. Option products of $1.7 billion at December 31, 2016 were comprised of $1.7 billion in foreign exchange options and $14 million in purchased caps/floors. |
(6) | Reflects the net of long and short positions. Amounts shown as negative reflect a net short position. |
(7) | The notional amount of foreign exchange contracts of $10.6 billion at March 31, 2017 was comprised of $23.6 billion in foreign currency-denominated and cross-currency receive-fixed swaps, $(10.0) billion in net foreign currency forward rate contracts, $(4.1) billion in foreign currency-denominated pay-fixed swaps and $1.1 billion in net foreign currency futures contracts. Foreign exchange contracts of $(20.3) billion at December 31, 2016 were comprised of $21.5 billion in foreign currency-denominated and cross-currency receive-fixed swaps, $(38.5) billion in net foreign currency forward rate contracts, $(4.6) billion in foreign currency-denominated pay-fixed swaps and $1.3 billion in foreign currency futures contracts. |
59 Bank of America
We use interest rate derivative instruments to hedge the variability in the cash flows of our assets and liabilities and other forecasted transactions (collectively referred to as cash flow hedges). The net losses on both open and terminated cash flow hedge derivative instruments recorded in accumulated OCI were $1.4 billion, on a pretax basis, at both March 31, 2017 and December 31, 2016. These net losses are expected to be reclassified into earnings in the same period as the hedged cash flows affect earnings and will decrease income or increase expense on the respective hedged cash flows. Assuming no change in open cash flow derivative hedge positions and no changes in prices or interest rates beyond what is implied in forward yield curves at March 31, 2017, the pretax net losses are expected to be reclassified into earnings as follows: $301 million, or 22 percent within the next year, 51 percent in years two through five, and 16 percent in years six through ten, with the remaining 11 percent thereafter. For more information on derivatives designated as cash flow hedges, see Note 2 – Derivatives to the Consolidated Financial Statements.
We hedge our net investment in non-U.S. operations determined to have functional currencies other than the U.S. Dollar using forward foreign exchange contracts that typically settle in less than 180 days, cross-currency basis swaps and foreign exchange options. We recorded net after-tax losses on derivatives in accumulated OCI associated with net investment hedges which were offset by gains on our net investments in consolidated non-U.S. entities at March 31, 2017.
Mortgage Banking Risk Management
We originate, fund and service mortgage loans, which subject us to credit, liquidity and interest rate risks, among others. We determine whether loans will be held-for-investment or held-for-sale at the time of commitment and manage credit and liquidity risks by selling or securitizing a portion of the loans we originate.
Interest rate risk and market risk can be substantial in the mortgage business. Changes in interest rates and other market factors impact the volume of mortgage originations. Changes in interest rates also impact the value of IRLCs and the related residential first mortgage LHFS between the date of the IRLC and the date the loans are sold to the secondary market. An increase in mortgage interest rates typically leads to a decrease in the value of these instruments. Conversely, the value of the MSRs will increase driven by lower prepayment expectations when there is an increase in interest rates. Because the interest rate risks of these two hedged items offset, we combine them into one overall hedged item with one combined economic hedge portfolio consisting of derivative contracts and securities.
For the three months ended March 31, 2017, we recorded gains in mortgage banking income of $25 million related to the change in fair value of the MSRs, IRLCs and LHFS, net of gains and losses on the hedge portfolio, compared to gains of $131 million for the same period in 2016. For more information on MSRs, see Note 14 – Fair Value Measurements to the Consolidated Financial Statements and for more information on mortgage banking income, see Consumer Banking on page 10.
Complex Accounting Estimates
Our significant accounting principles are essential in understanding the MD&A. Many of our significant accounting principles require complex judgments to estimate the values of assets and liabilities. We have procedures and processes in place to facilitate making these judgments. For additional information, see Complex Accounting Estimates in the MD&A of the Corporation's 2016 Annual Report on Form 10-K and Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements of the Corporation's 2016 Annual Report on Form 10-K.
Bank of America 60 |
Non-GAAP Reconciliations
Tables 53 and 54 provide reconciliations of certain non-GAAP financial measures to GAAP financial measures.
Table 53 | Quarterly Supplemental Financial Data and Reconciliations to GAAP Financial Measures | |||||||||||||||||||||||
Three Months Ended March 31 | ||||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
(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 | $ | 11,058 | $ | 197 | $ | 11,255 | $ | 10,485 | $ | 215 | $ | 10,700 | ||||||||||||
Total revenue, net of interest expense | 22,248 | 197 | 22,445 | 20,790 | 215 | 21,005 | ||||||||||||||||||
Income tax expense | 1,709 | 197 | 1,906 | 1,505 | 215 | 1,720 |
Table 54 | Period-end and Average Supplemental Financial Data and Reconciliations to GAAP Financial Measures | |||||||||||||||
Average | ||||||||||||||||
Period-end | Three Months Ended March 31 | |||||||||||||||
(Dollars in millions) | March 31 2017 | December 31 2016 | 2017 | 2016 | ||||||||||||
Common shareholders' equity | $ | 242,933 | $ | 241,620 | $ | 242,883 | $ | 237,229 | ||||||||
Goodwill | (69,744 | ) | (69,744 | ) | (69,744 | ) | (69,761 | ) | ||||||||
Intangible assets (excluding MSRs) | (2,827 | ) | (2,989 | ) | (2,923 | ) | (3,687 | ) | ||||||||
Related deferred tax liabilities | 1,513 | 1,545 | 1,539 | 1,707 | ||||||||||||
Tangible common shareholders' equity | $ | 171,875 | $ | 170,432 | $ | 171,755 | $ | 165,488 | ||||||||
Shareholders' equity | $ | 268,153 | $ | 266,840 | $ | 268,103 | $ | 260,423 | ||||||||
Goodwill | (69,744 | ) | (69,744 | ) | (69,744 | ) | (69,761 | ) | ||||||||
Intangible assets (excluding MSRs) | (2,827 | ) | (2,989 | ) | (2,923 | ) | (3,687 | ) | ||||||||
Related deferred tax liabilities | 1,513 | 1,545 | 1,539 | 1,707 | ||||||||||||
Tangible shareholders' equity | $ | 197,095 | $ | 195,652 | $ | 196,975 | $ | 188,682 | ||||||||
Total assets | $ | 2,247,701 | $ | 2,187,702 | ||||||||||||
Goodwill | (69,744 | ) | (69,744 | ) | ||||||||||||
Intangible assets (excluding MSRs) | (2,827 | ) | (2,989 | ) | ||||||||||||
Related deferred tax liabilities | 1,513 | 1,545 | ||||||||||||||
Tangible assets | $ | 2,176,643 | $ | 2,116,514 |
Bank of America 61 |
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See Market Risk Management on page 54 in the MD&A and the sections referenced therein for Quantitative and Qualitative Disclosures about Market Risk.
Disclosure Controls and Procedures
As of the end of the period covered by this report, the Corporation's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness and design of the Corporation's disclosure controls and procedures (as that term is defined in Rule 13a-15(e) of the Exchange Act). Based upon that evaluation, the Corporation's Chief Executive Officer and Chief Financial Officer concluded that the Corporation's disclosure controls and procedures were effective, as of the end of the period covered by this report, in recording, processing, summarizing and reporting information required to be disclosed by the Corporation in reports that it files or submits under the Exchange Act, within the time periods specified in the Securities and Exchange Commission’s rules and forms.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Corporation's internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the three months ended March 31, 2017, that have materially affected, or are reasonably likely to materially affect, the Corporation's internal control over financial reporting.
Bank of America 62 |
Part I. Financial Information
Item 1. Financial Statements
Bank of America Corporation and Subsidiaries
Consolidated Statement of Income | |||||||
Three Months Ended March 31 | |||||||
(Dollars in millions, except per share information) | 2017 | 2016 | |||||
Interest income | |||||||
Loans and leases | $ | 8,754 | $ | 8,260 | |||
Debt securities | 2,541 | 2,517 | |||||
Federal funds sold and securities borrowed or purchased under agreements to resell | 439 | 276 | |||||
Trading account assets | 1,076 | 1,179 | |||||
Other interest income | 900 | 776 | |||||
Total interest income | 13,710 | 13,008 | |||||
Interest expense | |||||||
Deposits | 282 | 225 | |||||
Short-term borrowings | 647 | 613 | |||||
Trading account liabilities | 264 | 292 | |||||
Long-term debt | 1,459 | 1,393 | |||||
Total interest expense | 2,652 | 2,523 | |||||
Net interest income | 11,058 | 10,485 | |||||
Noninterest income | |||||||
Card income | 1,449 | 1,430 | |||||
Service charges | 1,918 | 1,837 | |||||
Investment and brokerage services | 3,262 | 3,182 | |||||
Investment banking income | 1,584 | 1,153 | |||||
Trading account profits | 2,331 | 1,662 | |||||
Mortgage banking income | 122 | 433 | |||||
Gains on sales of debt securities | 52 | 190 | |||||
Other income | 472 | 418 | |||||
Total noninterest income | 11,190 | 10,305 | |||||
Total revenue, net of interest expense | 22,248 | 20,790 | |||||
Provision for credit losses | 835 | 997 | |||||
Noninterest expense | |||||||
Personnel | 9,158 | 8,852 | |||||
Occupancy | 1,000 | 1,028 | |||||
Equipment | 438 | 463 | |||||
Marketing | 332 | 419 | |||||
Professional fees | 456 | 425 | |||||
Amortization of intangibles | 162 | 187 | |||||
Data processing | 794 | 838 | |||||
Telecommunications | 191 | 173 | |||||
Other general operating | 2,317 | 2,431 | |||||
Total noninterest expense | 14,848 | 14,816 | |||||
Income before income taxes | 6,565 | 4,977 | |||||
Income tax expense | 1,709 | 1,505 | |||||
Net income | $ | 4,856 | $ | 3,472 | |||
Preferred stock dividends | 502 | 457 | |||||
Net income applicable to common shareholders | $ | 4,354 | $ | 3,015 | |||
Per common share information | |||||||
Earnings | $ | 0.43 | $ | 0.29 | |||
Diluted earnings | 0.41 | 0.28 | |||||
Dividends paid | 0.075 | 0.05 | |||||
Average common shares issued and outstanding (in thousands) | 10,099,557 | 10,370,094 | |||||
Average diluted common shares issued and outstanding (in thousands) | 10,914,815 | 11,100,067 |
See accompanying Notes to Consolidated Financial Statements.
63 Bank of America
Bank of America Corporation and Subsidiaries
Consolidated Statement of Comprehensive Income | |||||||
Three Months Ended March 31 | |||||||
(Dollars in millions) | 2017 | 2016 | |||||
Net income | $ | 4,856 | $ | 3,472 | |||
Other comprehensive income (loss), net-of-tax: | |||||||
Net change in debt and marketable equity securities | (99 | ) | 2,356 | ||||
Net change in debit valuation adjustments | 9 | 127 | |||||
Net change in derivatives | 38 | 24 | |||||
Employee benefit plan adjustments | 27 | 10 | |||||
Net change in foreign currency translation adjustments | (3 | ) | 12 | ||||
Other comprehensive income (loss) | (28 | ) | 2,529 | ||||
Comprehensive income | $ | 4,828 | $ | 6,001 |
See accompanying Notes to Consolidated Financial Statements.
Bank of America 64 |
Bank of America Corporation and Subsidiaries
Consolidated Balance Sheet | |||||||
(Dollars in millions) | March 31 2017 | December 31 2016 | |||||
Assets | |||||||
Cash and due from banks | $ | 28,955 | $ | 30,719 | |||
Interest-bearing deposits with the Federal Reserve, non-U.S. central banks and other banks | 139,070 | 117,019 | |||||
Cash and cash equivalents | 168,025 | 147,738 | |||||
Time deposits placed and other short-term investments | 11,967 | 9,861 | |||||
Federal funds sold and securities borrowed or purchased under agreements to resell (includes $58,545 and $49,750 measured at fair value) | 210,733 | 198,224 | |||||
Trading account assets (includes $119,058 and $106,057 pledged as collateral) | 209,044 | 180,209 | |||||
Derivative assets | 40,078 | 42,512 | |||||
Debt securities: | |||||||
Carried at fair value (includes $27,870 and $29,804 pledged as collateral) | 312,012 | 313,660 | |||||
Held-to-maturity, at cost (fair value – $114,003 and $115,285; $8,244 and $8,233 pledged as collateral) | 116,033 | 117,071 | |||||
Total debt securities | 428,045 | 430,731 | |||||
Loans and leases (includes $7,528 and $7,085 measured at fair value and $47,410 and $31,805 pledged as collateral) | 906,242 | 906,683 | |||||
Allowance for loan and lease losses | (11,112 | ) | (11,237 | ) | |||
Loans and leases, net of allowance | 895,130 | 895,446 | |||||
Premises and equipment, net | 9,319 | 9,139 | |||||
Mortgage servicing rights | 2,610 | 2,747 | |||||
Goodwill | 68,969 | 68,969 | |||||
Intangible assets | 2,766 | 2,922 | |||||
Loans held-for-sale (includes $3,745 and $4,026 measured at fair value) | 14,751 | 9,066 | |||||
Customer and other receivables (includes $250 measured at fair value at March 31, 2017) | 59,534 | 58,759 | |||||
Assets of business held for sale (includes $691 and $619 measured at fair value) | 11,025 | 10,670 | |||||
Other assets (includes $14,639 and $13,802 measured at fair value) | 115,705 | 120,709 | |||||
Total assets | $ | 2,247,701 | $ | 2,187,702 | |||
Assets of consolidated variable interest entities included in total assets above (isolated to settle the liabilities of the variable interest entities) | |||||||
Trading account assets | $ | 5,180 | $ | 5,773 | |||
Loans and leases | 53,187 | 56,001 | |||||
Allowance for loan and lease losses | (1,004 | ) | (1,032 | ) | |||
Loans and leases, net of allowance | 52,183 | 54,969 | |||||
Loans held-for-sale | 128 | 188 | |||||
All other assets | 2,161 | 1,596 | |||||
Total assets of consolidated variable interest entities | $ | 59,652 | $ | 62,526 |
See accompanying Notes to Consolidated Financial Statements.
65 Bank of America
Bank of America Corporation and Subsidiaries
Consolidated Balance Sheet (continued) | |||||||
(Dollars in millions) | March 31 2017 | December 31 2016 | |||||
Liabilities | |||||||
Deposits in U.S. offices: | |||||||
Noninterest-bearing | $ | 436,972 | $ | 438,125 | |||
Interest-bearing (includes $598 and $731 measured at fair value) | 762,161 | 750,891 | |||||
Deposits in non-U.S. offices: | |||||||
Noninterest-bearing | 13,223 | 12,039 | |||||
Interest-bearing | 59,785 | 59,879 | |||||
Total deposits | 1,272,141 | 1,260,934 | |||||
Federal funds purchased and securities loaned or sold under agreements to repurchase (includes $36,663 and $35,766 measured at fair value) | 186,098 | 170,291 | |||||
Trading account liabilities | 77,283 | 63,031 | |||||
Derivative liabilities | 36,428 | 39,480 | |||||
Short-term borrowings (includes $1,041 and $2,024 measured at fair value) | 44,162 | 23,944 | |||||
Accrued expenses and other liabilities (includes $16,245 and $14,630 measured at fair value and $757 and $762 of reserve for unfunded lending commitments) | 142,051 | 146,359 | |||||
Long-term debt (includes $29,617 and $30,037 measured at fair value) | 221,385 | 216,823 | |||||
Total liabilities | 1,979,548 | 1,920,862 | |||||
Commitments and contingencies (Note 6 – Securitizations and Other Variable Interest Entities, Note 7 – Representations and Warranties Obligations and Corporate Guarantees and Note 10 – Commitments and Contingencies) | |||||||
Shareholders’ equity | |||||||
Preferred stock, $0.01 par value; authorized – 100,000,000 shares; issued and outstanding – 3,887,329 and 3,887,329 shares | 25,220 | 25,220 | |||||
Common stock and additional paid-in capital, $0.01 par value; authorized – 12,800,000,000 shares; issued and outstanding – 9,974,189,863 and 10,052,625,604 shares | 144,782 | 147,038 | |||||
Retained earnings | 105,467 | 101,870 | |||||
Accumulated other comprehensive income (loss) | (7,316 | ) | (7,288 | ) | |||
Total shareholders’ equity | 268,153 | 266,840 | |||||
Total liabilities and shareholders’ equity | $ | 2,247,701 | $ | 2,187,702 | |||
Liabilities of consolidated variable interest entities included in total liabilities above | |||||||
Short-term borrowings | $ | 185 | $ | 348 | |||
Long-term debt (includes $11,730 and $10,417 of non-recourse debt) | 11,944 | 10,646 | |||||
All other liabilities (includes $34 and $38 of non-recourse liabilities) | 37 | 41 | |||||
Total liabilities of consolidated variable interest entities | $ | 12,166 | $ | 11,035 |
See accompanying Notes to Consolidated Financial Statements.
Bank of America 66 |
Bank of America Corporation and Subsidiaries
Consolidated Statement of Changes in Shareholders’ Equity | ||||||||||||||||||||||
Preferred Stock | Common Stock and Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | ||||||||||||||||||
(Dollars in millions, shares in thousands) | Shares | Amount | ||||||||||||||||||||
Balance, December 31, 2015 | $ | 22,273 | 10,380,265 | $ | 151,042 | $ | 88,219 | $ | (5,358 | ) | $ | 256,176 | ||||||||||
Net income | 3,472 | 3,472 | ||||||||||||||||||||
Net change in debt and marketable equity securities | 2,356 | 2,356 | ||||||||||||||||||||
Net change in debit valuation adjustments | 127 | 127 | ||||||||||||||||||||
Net change in derivatives | 24 | 24 | ||||||||||||||||||||
Employee benefit plan adjustments | 10 | 10 | ||||||||||||||||||||
Net change in foreign currency translation adjustments | 12 | 12 | ||||||||||||||||||||
Dividends declared: | ||||||||||||||||||||||
Common | (517 | ) | (517 | ) | ||||||||||||||||||
Preferred | (457 | ) | (457 | ) | ||||||||||||||||||
Issuance of preferred stock | 2,069 | 2,069 | ||||||||||||||||||||
Common stock issued under employee plans, net, and related tax effects | 4,936 | 732 | 732 | |||||||||||||||||||
Common stock repurchased | (72,541 | ) | (1,000 | ) | (1,000 | ) | ||||||||||||||||
Balance, March 31, 2016 | $ | 24,342 | 10,312,660 | $ | 150,774 | $ | 90,717 | $ | (2,829 | ) | $ | 263,004 | ||||||||||
Balance, December 31, 2016 | $ | 25,220 | 10,052,626 | $ | 147,038 | $ | 101,870 | $ | (7,288 | ) | $ | 266,840 | ||||||||||
Net income | 4,856 | 4,856 | ||||||||||||||||||||
Net change in debt and marketable equity securities | (99 | ) | (99 | ) | ||||||||||||||||||
Net change in debit valuation adjustments | 9 | 9 | ||||||||||||||||||||
Net change in derivatives | 38 | 38 | ||||||||||||||||||||
Employee benefit plan adjustments | 27 | 27 | ||||||||||||||||||||
Net change in foreign currency translation adjustments | (3 | ) | (3 | ) | ||||||||||||||||||
Dividends declared: | ||||||||||||||||||||||
Common | (757 | ) | (757 | ) | ||||||||||||||||||
Preferred | (502 | ) | (502 | ) | ||||||||||||||||||
Common stock issued under employee plans, net | 35,949 | 472 | 472 | |||||||||||||||||||
Common stock repurchased | (114,385 | ) | (2,728 | ) | (2,728 | ) | ||||||||||||||||
Balance, March 31, 2017 | $ | 25,220 | 9,974,190 | $ | 144,782 | $ | 105,467 | $ | (7,316 | ) | $ | 268,153 |
See accompanying Notes to Consolidated Financial Statements.
67 Bank of America
Bank of America Corporation and Subsidiaries
Consolidated Statement of Cash Flows | |||||||
Three Months Ended March 31 | |||||||
(Dollars in millions) | 2017 | 2016 | |||||
Operating activities | |||||||
Net income | $ | 4,856 | $ | 3,472 | |||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | |||||||
Provision for credit losses | 835 | 997 | |||||
Gains on sales of debt securities | (52 | ) | (190 | ) | |||
Realized debit valuation adjustments on structured liabilities | 6 | 7 | |||||
Depreciation and premises improvements amortization | 372 | 379 | |||||
Amortization of intangibles | 162 | 187 | |||||
Net amortization of premium/discount on debt securities | 544 | 528 | |||||
Deferred income taxes | 1,109 | 1,704 | |||||
Stock-based compensation | 1,060 | 831 | |||||
Loans held-for-sale: | |||||||
Originations and purchases | (13,309 | ) | (5,728 | ) | |||
Proceeds from sales and paydowns of loans originally classified as held-for-sale | 7,528 | 6,675 | |||||
Net change in: | |||||||
Trading and derivative instruments | (16,463 | ) | 8,135 | ||||
Other assets | 3,577 | 2,361 | |||||
Accrued expenses and other liabilities | (4,518 | ) | (8,556 | ) | |||
Other operating activities, net | 1,447 | 95 | |||||
Net cash (used in) provided by operating activities | (12,846 | ) | 10,897 | ||||
Investing activities | |||||||
Net change in: | |||||||
Time deposits placed and other short-term investments | (2,106 | ) | 1,853 | ||||
Federal funds sold and securities borrowed or purchased under agreements to resell | (12,509 | ) | (28,647 | ) | |||
Debt securities carried at fair value: | |||||||
Proceeds from sales | 22,087 | 17,384 | |||||
Proceeds from paydowns and maturities | 24,015 | 25,510 | |||||
Purchases | (44,198 | ) | (30,988 | ) | |||
Held-to-maturity debt securities: | |||||||
Proceeds from paydowns and maturities | 3,874 | 2,768 | |||||
Purchases | (3,033 | ) | (4,334 | ) | |||
Loans and leases: | |||||||
Proceeds from sales | 2,557 | 8,021 | |||||
Purchases | (1,648 | ) | (4,224 | ) | |||
Other changes in loans and leases, net | (1,811 | ) | (9,309 | ) | |||
Other investing activities, net | (1,247 | ) | 592 | ||||
Net cash used in investing activities | (14,019 | ) | (21,374 | ) | |||
Financing activities | |||||||
Net change in: | |||||||
Deposits | 11,207 | 20,002 | |||||
Federal funds purchased and securities loaned or sold under agreements to repurchase | 15,807 | 14,669 | |||||
Short-term borrowings | 20,131 | 2,783 | |||||
Long-term debt: | |||||||
Proceeds from issuance | 17,378 | 6,260 | |||||
Retirement of long-term debt | (13,617 | ) | (14,404 | ) | |||
Preferred stock: Proceeds from issuance | — | 2,069 | |||||
Common stock repurchased | (2,728 | ) | (1,000 | ) | |||
Cash dividends paid | (1,255 | ) | (974 | ) | |||
Other financing activities, net | (584 | ) | (77 | ) | |||
Net cash provided by financing activities | 46,339 | 29,328 | |||||
Effect of exchange rate changes on cash and cash equivalents | 813 | 1,406 | |||||
Net increase in cash and cash equivalents | 20,287 | 20,257 | |||||
Cash and cash equivalents at January 1 | 147,738 | 159,353 | |||||
Cash and cash equivalents at March 31 | $ | 168,025 | $ | 179,610 |
See accompanying Notes to Consolidated Financial Statements.
Bank of America 68 |
Bank of America Corporation and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1 Summary of Significant Accounting Principles
Bank of America Corporation, a bank holding company and a financial holding company, provides a diverse range of financial services and products throughout the U.S. and in certain international markets. The term “the Corporation” as used herein 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.
Principles of Consolidation and Basis of Presentation
The Consolidated Financial Statements include the accounts of the Corporation and its majority-owned subsidiaries and those variable interest entities (VIEs) where the Corporation is the primary beneficiary. Intercompany accounts and transactions have been eliminated. Results of operations of acquired companies are included from the dates of acquisition and for VIEs, from the dates that the Corporation became the primary beneficiary. Assets held in an agency or fiduciary capacity are not included in the Consolidated Financial Statements. The Corporation accounts for investments in companies for which it owns a voting interest and for which it has the ability to exercise significant influence over operating and financing decisions using the equity method of accounting. These investments are included in other assets. Equity method investments are subject to impairment testing, and the Corporation’s proportionate share of income or loss is included in other income.
The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect reported amounts and disclosures. Realized results could differ from those estimates and assumptions.
These unaudited Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements of the Corporation's 2016 Annual Report on Form 10-K.
The nature of the Corporation's business is such that the results of any interim period are not necessarily indicative of results for a full year. In the opinion of management, all adjustments, which consist of normal recurring adjustments necessary for a fair statement of the interim period results have been made. The Corporation evaluates subsequent events through the date of filing with the Securities and Exchange Commission (SEC). Certain prior-period amounts have been reclassified to conform to current period presentation.
On December 20, 2016, the Corporation entered into an agreement to sell its non-U.S. consumer credit card business to a third party. Subject to regulatory approval, this transaction is expected to close by mid-2017. After closing, the Corporation will retain substantially all payment protection insurance (PPI) exposure above existing reserves. The Corporation has considered this exposure in its estimate of a small after-tax gain on the sale. This transaction will reduce risk-weighted assets and goodwill upon closing, benefiting regulatory capital. The assets of this business, which are presented in the assets of business held for sale line on the Consolidated Balance Sheet, included consumer credit card receivables of $9.5 billion and $9.2 billion, an allowance for loan
losses of $242 million and $243 million, goodwill of $775 million for both periods, available-for-sale (AFS) debt securities of $691 million and $619 million and all other assets of $296 million and $305 million at March 31, 2017 and December 31, 2016, respectively. Liabilities are primarily comprised of intercompany borrowings. This business is included in All Other for reporting purposes.
New Accounting Pronouncements
Accounting for Financial Instruments -- Credit Losses
The Financial Accounting Standards Board (FASB) issued new accounting guidance effective on January 1, 2020, with early adoption permitted on January 1, 2019, that will require the earlier recognition of credit losses on loans and other financial instruments based on an expected loss model, replacing the incurred loss model that is currently in use. The Corporation is in the process of identifying and implementing required changes to loan loss estimation models and processes and evaluating the impact of this new accounting guidance, which at the date of adoption is expected to increase the allowance for credit losses with a resulting negative adjustment to retained earnings.
Revenue Recognition
The FASB issued new accounting guidance effective on January 1, 2018 for recognizing revenue from contracts with customers. While the new guidance does not apply to revenue associated with loans or securities, the Corporation has been working to identify the customer contracts within the scope of the new guidance and assess the related revenues to determine if any accounting or internal control changes will be required for the new provisions. While the assessment is not complete, the timing of the Corporation’s revenue recognition is not expected to materially change. The classification of certain contract costs continues to be evaluated, and the final interpretation may impact the presentation of certain contract costs. Overall, the Corporation does not expect the new guidance to have a material impact on its consolidated financial position or results of operations. The next phase of the Corporation’s implementation work will be to evaluate any changes that may be required to the Corporation’s applicable disclosures.
Lease Accounting
The FASB issued new accounting guidance effective on January 1, 2019 that requires substantially all leases to be recorded as assets and liabilities on the balance sheet. This new accounting guidance uses a modified retrospective transition that will be applied to all prior periods presented. The Corporation is in the process of reviewing its existing lease portfolios, as well as other service contracts for embedded leases, to evaluate the impact of the new accounting guidance on the financial statements, as well as the impact to regulatory capital and risk-weighted assets. The effect of the adoption will depend on its lease portfolio at the time of transition; however, the Corporation does not expect the new accounting guidance to have a material impact on its consolidated financial position or results of operations. Upon completion of the inventory review and consideration of system requirements, the Corporation will evaluate the impacts of adopting the new accounting guidance on its disclosures.
69 Bank of America
Recognition and Measurement of Financial Assets and Financial Liabilities
The FASB issued new accounting guidance effective on January 1, 2018, with early adoption permitted for the provisions related to debit valuation adjustment (DVA), on recognition and measurement of financial instruments, including certain equity investments and financial liabilities recorded at fair value under the fair value option. In 2015, the Corporation early adopted, retrospective to January 1, 2015, the provisions of this new accounting guidance related to DVA on financial liabilities accounted for under the fair value option. The Corporation does not expect the remaining provisions of this new accounting guidance to have a material impact on its consolidated financial position or results of operations.
NOTE 2 Derivatives
Derivative Balances
Derivatives are entered into on behalf of customers, for trading, or to support risk management activities. Derivatives used in risk
management activities include derivatives that may or may not be designated in qualifying hedge accounting relationships. Derivatives that are not designated in qualifying hedge accounting relationships are referred to as other risk management derivatives. For more information on the Corporation’s derivatives and hedging activities, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements of the Corporation's 2016 Annual Report on Form 10-K. The following tables present derivative instruments included on the Consolidated Balance Sheet in derivative assets and liabilities at March 31, 2017 and December 31, 2016. Balances are presented on a gross basis, prior to the application of counterparty and cash collateral netting. Total derivative assets and liabilities are adjusted on an aggregate basis to take into consideration the effects of legally enforceable master netting agreements and have been reduced by the cash collateral received or paid.
March 31, 2017 | |||||||||||||||||||||||||||
Gross Derivative Assets | Gross Derivative Liabilities | ||||||||||||||||||||||||||
(Dollars in billions) | Contract/ Notional (1) | Trading and Other Risk Management Derivatives | Qualifying Accounting Hedges | Total | Trading and Other Risk Management Derivatives |