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, 2018
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 ☑ No o
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 ☑ No o
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.
Large accelerated filer ☑ | Accelerated filer o | Non-accelerated filer o (do not check if a smaller reporting company) | Smaller reporting company o |
Emerging growth company o
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes o No ☑
On April 27, 2018, there were 10,139,354,414 shares of Bank of America Corporation Common Stock outstanding.
Bank of America Corporation and Subsidiaries
March 31, 2018
Form 10-Q
INDEX
Part I. Financial Information
Item 1. Financial Statements | Page | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||
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” 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, strategy 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 2017 Annual Report on Form 10-K and in any of the Corporation’s subsequent Securities and Exchange Commission filings: the Corporation’s potential claims, damages, penalties, fines and reputational damage resulting from pending or future litigation, regulatory proceedings and enforcement actions, 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, economic conditions, trade policies and potential geopolitical instability; 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 Corporation’s ability to achieve its expense targets, net interest income expectations, 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, which may change; uncertainty regarding the content, timing and impact of regulatory capital and liquidity requirements; the potential impact of total loss-absorbing capacity requirements; potential adverse changes to our global systemically important bank surcharge; the potential impact of Federal Reserve actions on the Corporation’s capital plans; the possible impact of the Corporation’s failure to remediate a shortcoming identified by banking regulators in the Corporation’s Resolution Plan; the effect of regulations, other guidance or additional information on our estimated impact of the Tax Cuts and Jobs Act; 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 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 cyber attacks; the impact on the Corporation’s business, financial condition and results of operations from the planned exit of the United Kingdom from the European Union; and other similar matters.
Forward-looking statements speak only as of the date they are made, and the Corporation undertakes no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.
Notes to the Consolidated Financial Statements referred to in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) are incorporated by reference into the MD&A. Certain prior-period amounts have been reclassified to conform to current-period presentation. Throughout the MD&A, the Corporation uses certain acronyms and abbreviations which are defined in the Glossary.
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, 2018, the Corporation had approximately $2.3 trillion in assets and a headcount of approximately 208,000 employees. Headcount has remained relatively unchanged since December 31, 2017.
As of March 31, 2018, we served clients through operations across the United States, its territories and more than 35 countries. Our retail banking footprint covers approximately 85 percent of the U.S. population, and we serve approximately 47 million consumer and small business relationships with approximately 4,400 retail financial centers, approximately 16,000 ATMs, and leading digital banking platforms (www.bankofamerica.com) with approximately 36 million active users, including approximately 25 million active mobile users. We offer industry-leading support to approximately three million small business owners. Our wealth management businesses, with client balances of over $2.7 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 2018 Economic and Business Environment
U.S. macroeconomic trends in the first quarter were characterized by moderate economic growth, low inflation and a strong labor market. Gross domestic product (GDP) growth for the first quarter of 2018 was moderate and lower than previously estimated, with actual GDP growth of 2.3 percent, well below the fourth quarter’s 2.9 percent annualized pace. Notably, retail sales slowed in the first quarter compared to the fourth quarter. Nevertheless, economic fundamentals point to a second-quarter pickup. Consumer confidence remains near cyclical highs, which along with the robust labor market, point to the likelihood of a household spending rebound in the second quarter. Business investment in equipment and software accelerated over 2017. Both manufacturing and non-manufacturing investments are near their highs of the current economic expansion.
Housing activity showed some signs of growth during the first quarter, with continued solid price appreciation when compared to the fourth quarter of 2017. Selling rates are near year-ago levels with continued persistent supply shortages.
Labor market conditions remain strong. Nonfarm payroll growth has been volatile month-to-month but solid on a trend basis. Initial jobless claims are near historic lows. The unemployment rate was 4.1 percent at the end of the quarter, unchanged for six consecutive months, as strong employment gains have been met with solid increases in labor force growth. Wage growth, however, has been relatively muted.
Inflation strengthened in the first quarter, led by gains in apparel, health care and energy. The core Consumer Price Index increased at a three-percent annualized rate, the fastest quarterly rise of the current business expansion, although the less volatile year-on-year rate remained at 2.1 percent.
Equity markets increased substantially through the end of 2017 and into early 2018, with anticipation and enactment of corporate tax reform being the main catalysts, as well as a synchronous global economic expansion. However, equity volatility increased sharply in early February and periodically in March. The S&P 500 finished the first quarter down 1.2 percent from the year end. The 10-year Treasury yield finished the first quarter at 2.76 percent, up from 2.41 percent at the end of 2017. Although the Treasury yield curve steepened during the equity sell-off, the curve subsequently flattened back to levels that prevailed at the end of 2017. The U.S. dollar index trended lower through most of the first quarter.
The Federal Reserve raised its target Federal funds rate corridor to 1.5 to 1.75 percent, the sixth 25-basis point (bp) rate increase of the current cycle. Current Federal Reserve baseline forecasts suggest gradual rate increases will continue into 2018 against a backdrop of solid economic expansion and a tightening labor market. The Federal Open Market Committee also upgraded their economic forecasts, with somewhat faster GDP growth expected this year and in 2019, and a lower trough anticipated for the unemployment rate. Federal Reserve balance sheet normalization is continuing as initially scheduled.
International trade tensions escalated in the first quarter. The U.S. Administration announced plans for broad-based tariffs on steel and aluminum, although subsequently gave exemptions to various trading partners. The Administration also announced plans for tariffs on imports from China, and the Chinese government announced retaliatory measures. Full enactment of the tariffs remains subject to negotiation and further review by the Administration.
After posting its strongest annual GDP growth in 10 years in 2017, economic activity in the eurozone lost some momentum in the first quarter of the year. Despite the positive trend in growth, underlying inflationary pressures have remained dormant. In this context, the European Central Bank continued with the tapering of its quantitative easing program. The impact of the 2016 U.K. referendum vote in favor of leaving the European Union (EU) continues to weigh on the U.K. economy which, in line with the eurozone, has also showed some signs of slowing in the first three months of the year.
Supported by a very accommodative monetary policy stance and sustained growth in external demand, the Japanese economy has continued to expand with headline inflation reaching its highest level since 2015. Across emerging nations, economic activity was supported by China’s continued transition towards a more consumption-based growth model.
3 Bank of America |
Recent Events
Capital Management
During the first quarter of 2018, we repurchased approximately $4.9 billion of common stock pursuant to the Board of Directors’ (the Board) June 2017 repurchase authorization under our 2017 Comprehensive Capital Analysis and Review (CCAR) capital plan, including repurchases to offset equity-based compensation awards, and an additional share repurchase authorization in December 2017. For more information, see Capital Management on page 18.
Trust Preferred Securities Redemption
On April 30, 2018, the Corporation announced that it has submitted redemption notices for 11 series of trust preferred securities, which will result in the redemption of such trust
preferred securities, along with the trust common securities (held by the Corporation or its affiliates), on June 6, 2018. The Corporation has received all necessary approvals for these redemptions. Upon the redemption of the trust preferred securities and the extinguishment of the related junior subordinated notes issued by the Corporation, expected to occur in the second quarter of 2018, the Corporation will record a charge to other income and pretax income estimated to be approximately $800 million, subject to certain redemption price calculations at that time. For additional information, see the Corporation’s Current Report on Form 8-K filed on April 30, 2018.
Selected Financial Data
Table 1 provides selected consolidated financial data for the three months ended March 31, 2018 and 2017, and at March 31, 2018 and December 31, 2017.
Table 1 | Selected Financial Data | |||||||
Three Months Ended March 31 | ||||||||
(Dollars in millions, except per share information) | 2018 | 2017 | ||||||
Income statement | ||||||||
Revenue, net of interest expense | $ | 23,125 | $ | 22,248 | ||||
Net income | 6,918 | 5,337 | ||||||
Diluted earnings per common share | 0.62 | 0.45 | ||||||
Dividends paid per common share | 0.12 | 0.075 | ||||||
Performance ratios | ||||||||
Return on average assets | 1.21 | % | 0.97 | % | ||||
Return on average common shareholders’ equity | 10.85 | 8.09 | ||||||
Return on average tangible common shareholders’ equity (1) | 15.26 | 11.44 | ||||||
Efficiency ratio | 60.09 | 63.34 | ||||||
March 31 2018 | December 31 2017 | |||||||
Balance sheet | ||||||||
Total loans and leases | $ | 934,078 | $ | 936,749 | ||||
Total assets | 2,328,478 | 2,281,234 | ||||||
Total deposits | 1,328,664 | 1,309,545 | ||||||
Total common shareholders’ equity | 241,552 | 244,823 | ||||||
Total shareholders’ equity | 266,224 | 267,146 |
(1) | Return on average tangible common shareholders’ equity is a non-GAAP financial measure. For more 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 48. |
Financial Highlights
Table 2 | Summary Income Statement | |||||||
Three Months Ended March 31 | ||||||||
(Dollars in millions) | 2018 | 2017 | ||||||
Net interest income | $ | 11,608 | $ | 11,058 | ||||
Noninterest income | 11,517 | 11,190 | ||||||
Total revenue, net of interest expense | 23,125 | 22,248 | ||||||
Provision for credit losses | 834 | 835 | ||||||
Noninterest expense | 13,897 | 14,093 | ||||||
Income before income taxes | 8,394 | 7,320 | ||||||
Income tax expense | 1,476 | 1,983 | ||||||
Net income | $ | 6,918 | $ | 5,337 | ||||
Preferred stock dividends | 428 | 502 | ||||||
Net income applicable to common shareholders | $ | 6,490 | $ | 4,835 | ||||
Per common share information | ||||||||
Earnings | $ | 0.63 | $ | 0.48 | ||||
Diluted earnings | 0.62 | 0.45 |
Net income was $6.9 billion, or $0.62 per diluted share for the three months ended March 31, 2018 compared to $5.3 billion, or $0.45 per diluted share for the same period in 2017. The results for the three months ended March 31, 2018 compared to the same period in 2017 were driven by an increase in net interest income and noninterest income, and a decline in noninterest expense as well as lower income tax expense due to the impacts of the Tax Cuts and Jobs Act (the Tax Act). These impacts include a reduction in the federal tax rate to 21 percent from 35 percent, an increase in U.S. taxes related to our non-U.S. operations and the elimination of tax deductions for Federal Deposit Insurance Corporation (FDIC) premiums. These changes resulted in a net reduction to our estimated annual effective tax rate of approximately nine percentage points.
Total assets increased $47.2 billion from December 31, 2017 to $2.3 trillion at March 31, 2018 driven by higher cash and cash equivalents from seasonally higher deposits and an increase in securities borrowed or purchased under agreements to resell to support Global Markets client activity. These increases were partially offset by a decrease in debt securities due to lower reinvestment-related purchases as well as market value declines.
Bank of America 4 |
Total liabilities increased $48.2 billion from December 31, 2017 to $2.1 trillion at March 31, 2018 primarily driven by seasonally higher deposits and an increase in trading account liabilities from increased activity in Global Markets. Shareholders’ equity decreased $922 million from December 31, 2017 primarily due to returns of capital to shareholders through common stock repurchases and common and preferred stock dividends, and market value declines on debt securities, largely offset by net income and issuances of preferred stock.
Net Interest Income
Net interest income increased $550 million to $11.6 billion for the three months ended March 31, 2018 compared to the same period in 2017, and the net interest yield increased one bp to 2.36 percent. These increases were primarily driven by the benefits from higher interest rates along with loan and deposit growth, partially offset by the sale of the non-U.S. consumer credit card business in the second quarter of 2017 and higher funding costs in Global Markets. For more information regarding interest rate risk management, see Interest Rate Risk Management for the Banking Book on page 45.
Noninterest Income
Table 3 | Noninterest Income | |||||||
Three Months Ended March 31 | ||||||||
(Dollars in millions) | 2018 | 2017 | ||||||
Card income | $ | 1,457 | $ | 1,449 | ||||
Service charges | 1,921 | 1,918 | ||||||
Investment and brokerage services | 3,664 | 3,417 | ||||||
Investment banking income | 1,353 | 1,584 | ||||||
Trading account profits | 2,699 | 2,331 | ||||||
Other income | 423 | 491 | ||||||
Total noninterest income | $ | 11,517 | $ | 11,190 |
Noninterest income increased $327 million to $11.5 billion for the three months ended March 31, 2018 compared to the same period in 2017. The following highlights the significant changes.
● | Investment and brokerage services income increased $247 million primarily driven by higher market valuations and the impact of assets under management (AUM) flows, partially offset by the impact of changing market dynamics on transactional revenue and AUM pricing. |
● | Investment banking income decreased $231 million primarily due to declines in advisory fees and equity and debt issuance fees. |
● | Trading account profits increased $368 million primarily due to increased client activity and a strong trading performance in equity derivatives, partially offset by lower activity and less favorable markets in credit products. |
● | Other income decreased $68 million primarily due to lower equity investment gains. |
Provision for Credit Losses
The provision for credit losses remained relatively unchanged for the three months ended March 31, 2018 compared to the same period in 2017 with continued improvement in the consumer real estate portfolio and the impact of the sale of the non-U.S. credit card business during the second quarter of 2017, largely offset by an increase in U.S. credit card due to portfolio seasoning and loan growth. For more information on the provision for credit losses, see Provision for Credit Losses on page 41.
Noninterest Expense
Table 4 | Noninterest Expense | |||||||
Three Months Ended March 31 | ||||||||
(Dollars in millions) | 2018 | 2017 | ||||||
Personnel | $ | 8,480 | $ | 8,475 | ||||
Occupancy | 1,014 | 1,000 | ||||||
Equipment | 442 | 438 | ||||||
Marketing | 345 | 332 | ||||||
Professional fees | 381 | 456 | ||||||
Data processing | 810 | 794 | ||||||
Telecommunications | 183 | 191 | ||||||
Other general operating | 2,242 | 2,407 | ||||||
Total noninterest expense | $ | 13,897 | $ | 14,093 |
Noninterest expense decreased $196 million to $13.9 billion for the three months ended March 31, 2018 compared to the same period in 2017 driven by lower non-personnel costs, primarily litigation expense and professional fees.
Income Tax Expense
Table 5 | Income Tax Expense | |||||||
Three Months Ended March 31 | ||||||||
(Dollars in millions) | 2018 | 2017 | ||||||
Income before income taxes | $ | 8,394 | $ | 7,320 | ||||
Income tax expense | 1,476 | 1,983 | ||||||
Effective tax rate | 17.6 | % | 27.1 | % |
The effective tax rate for 2018 reflects the new 21 percent federal tax rate and the other provisions of the Tax Act. Further, the effective tax rates for the three months ended March 31, 2018 and 2017 were lower than the applicable federal and state statutory rates due to our recurring tax preference benefits and tax benefits related to stock-based compensation. We expect the effective tax rate for 2018 to be approximately 20 percent, absent unusual items.
5 Bank of America |
Table 6 | Selected Quarterly Financial Data | |||||||||||||||||||
2018 Quarter Quarter | 2017 Quarters | |||||||||||||||||||
(In millions, except per share information) | First | Fourth | Third | Second | First | |||||||||||||||
Income statement | ||||||||||||||||||||
Net interest income | $ | 11,608 | $ | 11,462 | $ | 11,161 | $ | 10,986 | $ | 11,058 | ||||||||||
Noninterest income (1) | 11,517 | 8,974 | 10,678 | 11,843 | 11,190 | |||||||||||||||
Total revenue, net of interest expense | 23,125 | 20,436 | 21,839 | 22,829 | 22,248 | |||||||||||||||
Provision for credit losses | 834 | 1,001 | 834 | 726 | 835 | |||||||||||||||
Noninterest expense | 13,897 | 13,274 | 13,394 | 13,982 | 14,093 | |||||||||||||||
Income before income taxes | 8,394 | 6,161 | 7,611 | 8,121 | 7,320 | |||||||||||||||
Income tax expense (1) | 1,476 | 3,796 | 2,187 | 3,015 | 1,983 | |||||||||||||||
Net income (1) | 6,918 | 2,365 | 5,424 | 5,106 | 5,337 | |||||||||||||||
Net income applicable to common shareholders | 6,490 | 2,079 | 4,959 | 4,745 | 4,835 | |||||||||||||||
Average common shares issued and outstanding | 10,322.4 | 10,470.7 | 10,197.9 | 10,013.5 | 10,099.6 | |||||||||||||||
Average diluted common shares issued and outstanding | 10,472.7 | 10,621.8 | 10,746.7 | 10,834.8 | 10,919.7 | |||||||||||||||
Performance ratios | ||||||||||||||||||||
Return on average assets | 1.21 | % | 0.41 | % | 0.95 | % | 0.90 | % | 0.97 | % | ||||||||||
Four quarter trailing return on average assets (2) | 0.86 | 0.80 | 0.91 | 0.89 | 0.88 | |||||||||||||||
Return on average common shareholders’ equity | 10.85 | 3.29 | 7.89 | 7.75 | 8.09 | |||||||||||||||
Return on average tangible common shareholders’ equity (3) | 15.26 | 4.56 | 10.98 | 10.87 | 11.44 | |||||||||||||||
Return on average shareholders’ equity | 10.57 | 3.43 | 7.88 | 7.56 | 8.09 | |||||||||||||||
Return on average tangible shareholders’ equity (3) | 14.37 | 4.62 | 10.59 | 10.23 | 11.01 | |||||||||||||||
Total ending equity to total ending assets | 11.43 | 11.71 | 11.91 | 12.00 | 11.92 | |||||||||||||||
Total average equity to total average assets | 11.41 | 11.87 | 12.03 | 11.94 | 12.00 | |||||||||||||||
Dividend payout | 19.06 | 60.35 | 25.59 | 15.78 | 15.64 | |||||||||||||||
Per common share data | ||||||||||||||||||||
Earnings | $ | 0.63 | $ | 0.20 | $ | 0.49 | $ | 0.47 | $ | 0.48 | ||||||||||
Diluted earnings | 0.62 | 0.20 | 0.46 | 0.44 | 0.45 | |||||||||||||||
Dividends paid | 0.12 | 0.12 | 0.12 | 0.075 | 0.075 | |||||||||||||||
Book value | 23.74 | 23.80 | 23.87 | 24.85 | 24.34 | |||||||||||||||
Tangible book value (3) | 16.84 | 16.96 | 17.18 | 17.75 | 17.22 | |||||||||||||||
Market price per share of common stock | ||||||||||||||||||||
Closing | $ | 29.99 | $ | 29.52 | $ | 25.34 | $ | 24.26 | $ | 23.59 | ||||||||||
High closing | 32.84 | 29.88 | 25.45 | 24.32 | 25.50 | |||||||||||||||
Low closing | 29.17 | 25.45 | 22.89 | 22.23 | 22.05 | |||||||||||||||
Market capitalization | $ | 305,176 | $ | 303,681 | $ | 264,992 | $ | 239,643 | $ | 235,291 | ||||||||||
Average balance sheet | ||||||||||||||||||||
Total loans and leases | $ | 931,915 | $ | 927,790 | $ | 918,129 | $ | 914,717 | $ | 914,144 | ||||||||||
Total assets | 2,325,878 | 2,301,687 | 2,271,104 | 2,269,293 | 2,231,649 | |||||||||||||||
Total deposits | 1,297,268 | 1,293,572 | 1,271,711 | 1,256,838 | 1,256,632 | |||||||||||||||
Long-term debt | 229,603 | 227,644 | 227,309 | 224,019 | 221,468 | |||||||||||||||
Common shareholders’ equity | 242,713 | 250,838 | 249,214 | 245,756 | 242,480 | |||||||||||||||
Total shareholders’ equity | 265,480 | 273,162 | 273,238 | 270,977 | 267,700 | |||||||||||||||
Asset quality | ||||||||||||||||||||
Allowance for credit losses (4) | $ | 11,042 | $ | 11,170 | $ | 11,455 | $ | 11,632 | $ | 11,869 | ||||||||||
Nonperforming loans, leases and foreclosed properties (5) | 6,694 | 6,758 | 6,869 | 7,127 | 7,637 | |||||||||||||||
Allowance for loan and lease losses as a percentage of total loans and leases outstanding (6, 7) | 1.11 | % | 1.12 | % | 1.16 | % | 1.20 | % | 1.25 | % | ||||||||||
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (5, 6) | 161 | 161 | 163 | 160 | 156 | |||||||||||||||
Net charge-offs (7, 8) | $ | 911 | $ | 1,237 | $ | 900 | $ | 908 | $ | 934 | ||||||||||
Annualized net charge-offs as a percentage of average loans and leases outstanding (6, 8) | 0.40 | % | 0.53 | % | 0.39 | % | 0.40 | % | 0.42 | % | ||||||||||
Capital ratios at period end (9) | ||||||||||||||||||||
Common equity tier 1 capital | 11.3 | % | 11.5 | % | 11.9 | % | 11.5 | % | 11.0 | % | ||||||||||
Tier 1 capital | 13.0 | 13.0 | 13.4 | 13.2 | 12.6 | |||||||||||||||
Total capital | 14.8 | 14.8 | 15.1 | 15.0 | 14.3 | |||||||||||||||
Tier 1 leverage | 8.4 | 8.6 | 8.9 | 8.8 | 8.8 | |||||||||||||||
Supplementary leverage ratio | 6.8 | n/a | n/a | n/a | n/a | |||||||||||||||
Tangible equity (3) | 8.7 | 8.9 | 9.1 | 9.2 | 9.1 | |||||||||||||||
Tangible common equity (3) | 7.6 | 7.9 | 8.1 | 8.0 | 7.9 |
(1) | Net income for the fourth quarter of 2017 included an estimated charge of $2.9 billion related to the Tax Act effects which consisted of $946 million in noninterest income and $1.9 billion in income tax expense. |
(2) | Calculated as total net income for four consecutive quarters divided by annualized average assets for four consecutive quarters. |
(3) | Tangible equity ratios and tangible book value per share of common stock are non-GAAP financial measures. For more information on these ratios, see Supplemental Financial Data on page 7, and for corresponding reconciliations to GAAP financial measures, see Non-GAAP Reconciliations on page 48. |
(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 33 and corresponding Table 28, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 37 and corresponding Table 35. |
(6) | Asset quality metrics for the first quarter of 2017 include $242 million of non-U.S. credit card allowance for loan and lease losses and $9.5 billion of non-U.S. credit card loans, which were included in assets of business held for sale on the Consolidated Balance Sheet at March 31, 2017. The Corporation sold its non-U.S. consumer credit card business in the second quarter of 2017. |
(7) | Net charge-offs exclude $35 million, $46 million, $73 million, $55 million and $33 million of write-offs in the purchased credit-impaired (PCI) loan portfolio in the first quarter of 2018, and in the fourth, third, second and first quarters of 2017, respectively. For more information, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 31. |
(8) | Includes net charge-offs of $31 million and $44 million on non-U.S. credit card loans in the second and first quarters of 2017, which were included in assets of business held for sale on the Consolidated Balance Sheet at March 31, 2017. |
(9) | Basel 3 transition provisions for regulatory capital adjustments and deductions were fully phased-in as of January 1, 2018. Prior periods are presented on a fully phased-in basis. For more information, see Capital Management on page 18. |
n/a = not applicable
Bank of America 6 |
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 a 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 21 percent for 2018 (35 percent for all prior periods) 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) gains (losses)) which result in non-GAAP financial measures. We believe that the presentation of measures that exclude these items is useful because such measures 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 mortgage servicing rights (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.
For more information on the reconciliation of these non-GAAP financial measures to GAAP financial measures, see Non-GAAP Reconciliations on page 48.
7 Bank of America |
Table 7 | Quarterly Average Balances and Interest Rates - FTE Basis | |||||||||||||||||||||
Average Balance | Interest Income/ Expense | Yield/ Rate | Average Balance | Interest Income/ Expense | Yield/ Rate | |||||||||||||||||
(Dollars in millions) | First Quarter 2018 | First Quarter 2017 | ||||||||||||||||||||
Earning assets | ||||||||||||||||||||||
Interest-bearing deposits with the Federal Reserve, non-U.S. central banks and other banks | $ | 140,247 | $ | 422 | 1.22 | % | $ | 123,921 | $ | 202 | 0.66 | % | ||||||||||
Time deposits placed and other short-term investments | 10,786 | 61 | 2.31 | 11,497 | 47 | 1.65 | ||||||||||||||||
Federal funds sold and securities borrowed or purchased under agreements to resell (1) | 248,320 | 622 | 1.02 | 216,402 | 356 | 0.67 | ||||||||||||||||
Trading account assets | 131,123 | 1,147 | 3.54 | 125,661 | 1,111 | 3.58 | ||||||||||||||||
Debt securities | 433,096 | 2,830 | 2.58 | 430,234 | 2,573 | 2.38 | ||||||||||||||||
Loans and leases (2): | ||||||||||||||||||||||
Residential mortgage | 204,830 | 1,782 | 3.48 | 193,627 | 1,661 | 3.44 | ||||||||||||||||
Home equity | 56,952 | 643 | 4.56 | 65,508 | 639 | 3.94 | ||||||||||||||||
U.S. credit card | 94,423 | 2,313 | 9.93 | 89,628 | 2,111 | 9.55 | ||||||||||||||||
Non-U.S. credit card (3) | — | — | — | 9,367 | 211 | 9.15 | ||||||||||||||||
Direct/Indirect consumer (4) | 92,478 | 701 | 3.07 | 93,291 | 608 | 2.65 | ||||||||||||||||
Other consumer (5) | 2,814 | 27 | 4.00 | 2,547 | 27 | 4.07 | ||||||||||||||||
Total consumer | 451,497 | 5,466 | 4.89 | 453,968 | 5,257 | 4.68 | ||||||||||||||||
U.S. commercial | 299,850 | 2,717 | 3.68 | 287,468 | 2,222 | 3.14 | ||||||||||||||||
Non-U.S. commercial | 99,504 | 738 | 3.01 | 92,821 | 595 | 2.60 | ||||||||||||||||
Commercial real estate (6) | 59,231 | 587 | 4.02 | 57,764 | 479 | 3.36 | ||||||||||||||||
Commercial lease financing | 21,833 | 175 | 3.20 | 22,123 | 231 | 4.17 | ||||||||||||||||
Total commercial | 480,418 | 4,217 | 3.56 | 460,176 | 3,527 | 3.11 | ||||||||||||||||
Total loans and leases (3) | 931,915 | 9,683 | 4.20 | 914,144 | 8,784 | 3.88 | ||||||||||||||||
Other earning assets (1) | 84,345 | 984 | 4.72 | 73,514 | 760 | 4.19 | ||||||||||||||||
Total earning assets (1,7) | 1,979,832 | 15,749 | 3.21 | 1,895,373 | 13,833 | 2.96 | ||||||||||||||||
Cash and due from banks | 26,275 | 27,196 | ||||||||||||||||||||
Other assets, less allowance for loan and lease losses | 319,771 | 309,080 | ||||||||||||||||||||
Total assets | $ | 2,325,878 | $ | 2,231,649 | ||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||
U.S. interest-bearing deposits: | ||||||||||||||||||||||
Savings | $ | 54,747 | $ | 1 | 0.01 | % | $ | 52,193 | $ | 1 | 0.01 | % | ||||||||||
NOW and money market deposit accounts | 659,033 | 406 | 0.25 | 617,749 | 74 | 0.05 | ||||||||||||||||
Consumer CDs and IRAs | 41,313 | 33 | 0.33 | 46,711 | 31 | 0.27 | ||||||||||||||||
Negotiable CDs, public funds and other deposits | 40,639 | 157 | 1.56 | 33,695 | 52 | 0.63 | ||||||||||||||||
Total U.S. interest-bearing deposits | 795,732 | 597 | 0.30 | 750,348 | 158 | 0.09 | ||||||||||||||||
Non-U.S. interest-bearing deposits: | ||||||||||||||||||||||
Banks located in non-U.S. countries | 2,243 | 9 | 1.67 | 2,616 | 5 | 0.76 | ||||||||||||||||
Governments and official institutions | 1,154 | — | 0.02 | 1,013 | 2 | 0.81 | ||||||||||||||||
Time, savings and other | 67,334 | 154 | 0.92 | 58,418 | 117 | 0.81 | ||||||||||||||||
Total non-U.S. interest-bearing deposits | 70,731 | 163 | 0.93 | 62,047 | 124 | 0.81 | ||||||||||||||||
Total interest-bearing deposits | 866,463 | 760 | 0.36 | 812,395 | 282 | 0.14 | ||||||||||||||||
Federal funds purchased, securities loaned or sold under agreements to repurchase, short-term borrowings and other interest-bearing liabilities (1) | 278,931 | 1,135 | 1.65 | 266,837 | 573 | 0.87 | ||||||||||||||||
Trading account liabilities | 55,362 | 357 | 2.62 | 38,731 | 264 | 2.76 | ||||||||||||||||
Long-term debt | 229,603 | 1,739 | 3.06 | 221,468 | 1,459 | 2.65 | ||||||||||||||||
Total interest-bearing liabilities (1,7) | 1,430,359 | 3,991 | 1.13 | 1,339,431 | 2,578 | 0.78 | ||||||||||||||||
Noninterest-bearing sources: | ||||||||||||||||||||||
Noninterest-bearing deposits | 430,805 | 444,237 | ||||||||||||||||||||
Other liabilities (1) | 199,234 | 180,281 | ||||||||||||||||||||
Shareholders’ equity | 265,480 | 267,700 | ||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 2,325,878 | $ | 2,231,649 | ||||||||||||||||||
Net interest spread | 2.08 | % | 2.18 | % | ||||||||||||||||||
Impact of noninterest-bearing sources | 0.31 | 0.21 | ||||||||||||||||||||
Net interest income/yield on earning assets | $ | 11,758 | 2.39 | % | $ | 11,255 | 2.39 | % |
(1) | Certain prior-period amounts have been reclassified to conform to current period presentation. |
(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 are recorded at fair value upon acquisition and accrete interest income over the estimated life of the loan. |
(3) | Includes assets of the Corporation’s non-U.S. consumer credit card business, which was sold during the second quarter of 2017. |
(4) | Includes non-U.S. consumer loans of $2.9 billion in both the first quarter of 2018 and 2017. |
(5) | Includes consumer finance loans of $0 and $454 million; consumer leases of $2.6 billion and $1.9 billion, and consumer overdrafts of $167 million and $170 million in the first quarter of 2018 and 2017, respectively. |
(6) | Includes U.S. commercial real estate loans of $55.3 billion and $54.7 billion, and non-U.S. commercial real estate loans of $3.9 billion and $3.1 billion in the first quarter of 2018 and 2017, respectively. |
(7) | Interest income includes the impact of interest rate risk management contracts, which decreased interest income on the underlying assets by $7 million and $17 million in the first quarter of 2018 and 2017. Interest expense includes the impact of interest rate risk management contracts, which decreased interest expense on the underlying liabilities by $204 million and $424 million in the first quarter of 2018 and 2017. For more information, see Interest Rate Risk Management for the Banking Book on page 45. |
Bank of America 8 |
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 17. The capital allocated to the business segments
is referred to as allocated capital. Allocated equity in the reporting units is comprised of allocated capital plus capital for the portion of goodwill and intangibles specifically assigned to the reporting unit. For more information, see Note 8 – Goodwill and Intangible Assets to the Consolidated Financial Statements.
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
Deposits | Consumer Lending | Total Consumer Banking | ||||||||||||||||||||||
Three Months Ended March 31 | ||||||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | % Change | |||||||||||||||||
Net interest income (FTE basis) | $ | 3,741 | $ | 3,063 | $ | 2,769 | $ | 2,718 | $ | 6,510 | $ | 5,781 | 13 | % | ||||||||||
Noninterest income: | ||||||||||||||||||||||||
Card income | 2 | 2 | 1,277 | 1,222 | 1,279 | 1,224 | 4 | |||||||||||||||||
Service charges | 1,044 | 1,050 | — | — | 1,044 | 1,050 | (1 | ) | ||||||||||||||||
All other income | 108 | 102 | 91 | 127 | 199 | 229 | (13 | ) | ||||||||||||||||
Total noninterest income | 1,154 | 1,154 | 1,368 | 1,349 | 2,522 | 2,503 | 1 | |||||||||||||||||
Total revenue, net of interest expense (FTE basis) | 4,895 | 4,217 | 4,137 | 4,067 | 9,032 | 8,284 | 9 | |||||||||||||||||
Provision for credit losses | 41 | 55 | 894 | 783 | 935 | 838 | 12 | |||||||||||||||||
Noninterest expense | 2,651 | 2,527 | 1,829 | 1,883 | 4,480 | 4,410 | 2 | |||||||||||||||||
Income before income taxes (FTE basis) | 2,203 | 1,635 | 1,414 | 1,401 | 3,617 | 3,036 | 19 | |||||||||||||||||
Income tax expense (FTE basis) | 561 | 616 | 361 | 528 | 922 | 1,144 | (19 | ) | ||||||||||||||||
Net income | $ | 1,642 | $ | 1,019 | $ | 1,053 | $ | 873 | $ | 2,695 | $ | 1,892 | 42 | |||||||||||
Effective tax rate (1) | 25.5 | % | 37.7 | % | ||||||||||||||||||||
Net interest yield (FTE basis) | 2.25 | % | 1.96 | % | 4.09 | % | 4.34 | % | 3.73 | 3.50 | ||||||||||||||
Return on average allocated capital | 55 | 34 | 17 | 14 | 30 | 21 | ||||||||||||||||||
Efficiency ratio (FTE basis) | 54.15 | 59.94 | 44.21 | 46.29 | 49.60 | 53.24 | ||||||||||||||||||
Balance Sheet | ||||||||||||||||||||||||
Three Months Ended March 31 | ||||||||||||||||||||||||
Average | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | % Change | |||||||||||||||||
Total loans and leases | $ | 5,170 | $ | 4,979 | $ | 274,387 | $ | 252,966 | $ | 279,557 | $ | 257,945 | 8 | % | ||||||||||
Total earning assets (2) | 673,641 | 634,704 | 274,748 | 254,066 | 707,754 | 668,865 | 6 | |||||||||||||||||
Total assets (2) | 701,418 | 661,769 | 285,864 | 265,783 | 746,647 | 707,647 | 6 | |||||||||||||||||
Total deposits | 668,983 | 629,337 | 5,368 | 6,257 | 674,351 | 635,594 | 6 | |||||||||||||||||
Allocated capital | 12,000 | 12,000 | 25,000 | 25,000 | 37,000 | 37,000 | — | |||||||||||||||||
Period end | March 31 2018 | December 31 2017 | March 31 2018 | December 31 2017 | March 31 2018 | December 31 2017 | % Change | |||||||||||||||||
Total loans and leases | $ | 5,111 | $ | 5,143 | $ | 273,944 | $ | 275,330 | $ | 279,055 | $ | 280,473 | (1 | )% | ||||||||||
Total earning assets (2) | 700,420 | 675,485 | 274,977 | 275,742 | 735,247 | 709,832 | 4 | |||||||||||||||||
Total assets (2) | 728,063 | 703,330 | 286,343 | 287,390 | 774,256 | 749,325 | 3 | |||||||||||||||||
Total deposits | 695,514 | 670,802 | 5,974 | 5,728 | 701,488 | 676,530 | 4 | |||||||||||||||||
(1) | Estimated at the segment level only. |
(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. For more information about Consumer Banking, including our Deposits and Consumer Lending businesses, see Business Segment Operations in the MD&A of the Corporation’s 2017 Annual Report on Form 10-K.
Consumer Banking Results
Net income for Consumer Banking increased $803 million to $2.7 billion for the three months ended March 31, 2018 compared to the same period in 2017 primarily driven by higher pretax income, and lower tax expense. The impact of the reduction in the federal tax rate was somewhat offset by the elimination of tax deductions for FDIC premiums under the Tax Act. The increase in pretax income
9 Bank of America |
was driven by an increase in revenue partially offset by higher provision for credit losses and an increase in noninterest expense. Net interest income increased $729 million to $6.5 billion primarily due to the beneficial impact of an increase in investable assets as a result of higher deposits and higher interest rates, as well as pricing discipline and loan growth. Noninterest income increased $19 million to $2.5 billion driven by higher card income, partially offset by lower mortgage banking income.
The provision for credit losses increased $97 million to $935 million due to portfolio seasoning and loan growth in the U.S. credit card portfolio. Noninterest expense increased $70 million to $4.5 billion driven by investments in digital capabilities and business growth, including increased primary sales professionals, combined with investments in new financial centers and renovations, as well as higher personnel expense. These increases were largely offset by improved operating efficiencies and lower litigation expense.
The return on average allocated capital was 30 percent, up from 21 percent, driven by higher net income. For additional information on capital allocations, see Business Segment Operations on page 9.
Deposits and Consumer Lending include the net impact of migrating customers and their related deposit, brokerage asset and loan balances between Deposits, Consumer Lending and GWIM, as well as other client-managed business. For more information on the migration of customer balances to or from GWIM, see GWIM – Net Migration Summary on page 12.
Deposits
Net income for Deposits increased $623 million to $1.6 billion for the three months ended March 31, 2018 compared to the same period in 2017 driven by higher net interest income and lower income taxes, partially offset by higher noninterest expense. Net interest income increased $678 million to $3.7 billion primarily due to the beneficial impact of an increase in investable assets as a result of higher deposits, and pricing discipline. Noninterest income of $1.2 billion remained unchanged.
The provision for credit losses decreased $14 million to $41 million. Noninterest expense increased $124 million to $2.7 billion primarily driven by investments in digital capabilities and business growth, including increased primary sales professionals, combined with investments in new financial centers and renovations, as well as higher personnel expense.
Average deposits increased $39.6 billion to $669.0 billion driven by strong organic growth. Growth in checking, money market savings and traditional savings of $44.0 billion was partially offset by a decline in time deposits of $4.6 billion.
Key Statistics – Deposits | |||||||
Three Months Ended March 31 | |||||||
2018 | 2017 | ||||||
Total deposit spreads (excludes noninterest costs) (1) | 2.00 | % | 1.67 | % | |||
Period End | |||||||
Client brokerage assets (in millions) | $ | 182,110 | $ | 153,786 | |||
Active digital banking users (units in thousands) (2) | 35,518 | 33,702 | |||||
Active mobile banking users (units in thousands) | 24,801 | 22,217 | |||||
Financial centers | 4,435 | 4,559 | |||||
ATMs | 16,011 | 15,939 |
(1) | Includes deposits held in Consumer Lending. |
(2) | Digital users represents mobile and/or online users across consumer businesses; historical information has been reclassified primarily due to the sale of the Corporation’s non-U.S. consumer credit card business in the second quarter of 2017. |
Client brokerage assets increased $28.3 billion driven by strong client flows and market performance. Active mobile banking users increased 2.6 million reflecting continuing changes in our customers’ banking preferences. The number of financial centers declined by a net 124 reflecting 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
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 25. At March 31, 2018, total owned loans in the core portfolio held in Consumer Lending were $117.9 billion, an increase of $14.2 billion from March 31, 2017, primarily driven by higher residential mortgage balances, based on a decision to retain certain loans on the balance sheet, partially offset by a decline in home equity balances.
Net income for Consumer Lending increased $180 million to $1.1 billion for the three months ended March 31, 2018 compared to the same period in 2017 driven by lower income taxes, higher revenue and lower noninterest expense, partially offset by higher provision for credit losses. Net interest income increased $51 million to $2.8 billion primarily driven by the impact of an increase in loan balances. Noninterest income increased $19 million to $1.4 billion driven by higher card income, partially offset by lower mortgage banking income.
The provision for credit losses increased $111 million to $894 million due to portfolio seasoning and loan growth in the U.S. credit card portfolio. Noninterest expense decreased $54 million to $1.8 billion primarily driven by lower litigation expense and improved operating efficiencies.
Average loans increased $21.4 billion to $274.4 billion driven by increases in residential mortgages, as well as U.S credit card and consumer vehicle loans, partially offset by lower home equity loan balances.
Key Statistics – Consumer Lending | |||||||
Three Months Ended March 31 | |||||||
(Dollars in millions) | 2018 | 2017 | |||||
Total U.S. credit card (1) | |||||||
Gross interest yield | 9.93 | % | 9.55 | % | |||
Risk-adjusted margin | 8.32 | 8.89 | |||||
New accounts (in thousands) | 1,194 | 1,184 | |||||
Purchase volumes | $ | 61,347 | $ | 55,321 | |||
Debit card purchase volumes | $ | 76,052 | $ | 70,611 |
(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, 2018, the total U.S. credit card risk-adjusted margin decreased 57 bps primarily driven by increased net charge-offs and higher credit card rewards costs.
Total U.S. credit card purchase volumes increased $6.0 billion to $61.3 billion, and debit card purchase volumes increased $5.4 billion to $76.1 billion, reflecting higher levels of consumer spending.
Bank of America 10 |
Key Statistics - Loan Production (1) | |||||||
Three Months Ended March 31 | |||||||
(Dollars in millions) | 2018 | 2017 | |||||
Total (2): | |||||||
First mortgage | $ | 9,424 | $ | 11,442 | |||
Home equity | 3,749 | 4,053 | |||||
Consumer Banking: | |||||||
First mortgage | $ | 5,964 | $ | 7,629 | |||
Home equity | 3,345 | 3,667 |
(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 $1.7 billion and $2.0 billion in the three months ended March 31, 2018 compared to the same period in 2017 primarily driven by the higher interest rate environment driving lower first-lien mortgage refinances.
Home equity production in Consumer Banking and for the total Corporation decreased $322 million and $304 million for the three months ended March 31, 2018 compared to the same period in 2017 driven by a smaller market.
Global Wealth & Investment Management
Three Months Ended March 31 | |||||||||||
(Dollars in millions) | 2018 | 2017 | % Change | ||||||||
Net interest income (FTE basis) | $ | 1,594 | $ | 1,560 | 2 | % | |||||
Noninterest income: | |||||||||||
Investment and brokerage services | 3,040 | 2,791 | 9 | ||||||||
All other income | 222 | 241 | (8 | ) | |||||||
Total noninterest income | 3,262 | 3,032 | 8 | ||||||||
Total revenue, net of interest expense (FTE basis) | 4,856 | 4,592 | 6 | ||||||||
Provision for credit losses | 38 | 23 | 65 | ||||||||
Noninterest expense | 3,428 | 3,329 | 3 | ||||||||
Income before income taxes (FTE basis) | 1,390 | 1,240 | 12 | ||||||||
Income tax expense (FTE basis) | 355 | 467 | (24 | ) | |||||||
Net income | $ | 1,035 | $ | 773 | 34 | ||||||
Effective tax rate | 25.5 | % | 37.7 | % | |||||||
Net interest yield (FTE basis) | 2.46 | 2.28 | |||||||||
Return on average allocated capital | 29 | 22 | |||||||||
Efficiency ratio (FTE basis) | 70.60 | 72.51 | |||||||||
Balance Sheet | |||||||||||
Three Months Ended March 31 | |||||||||||
Average | 2018 | 2017 | % Change | ||||||||
Total loans and leases | $ | 159,095 | $ | 148,405 | 7 | % | |||||
Total earning assets | 262,775 | 277,989 | (5 | ) | |||||||
Total assets | 279,716 | 293,432 | (5 | ) | |||||||
Total deposits | 243,077 | 257,386 | (6 | ) | |||||||
Allocated capital | 14,500 | 14,000 | 4 | ||||||||
Period end | March 31 2018 | December 31 2017 | % Change | ||||||||
Total loans and leases | $ | 159,636 | $ | 159,378 | — | % | |||||
Total earning assets | 262,430 | 267,026 | (2 | ) | |||||||
Total assets | 279,331 | 284,321 | (2 | ) | |||||||
Total deposits | 241,531 | 246,994 | (2 | ) |
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). For more information about GWIM, see Business Segment Operations in the MD&A of the Corporation’s 2017 Annual Report on Form 10-K.
Net income for GWIM increased $262 million to $1.0 billion for the three months ended March 31, 2018 compared to the same period in 2017 reflecting higher pretax income, and lower tax expense. The impact of the reduction in the federal tax rate was somewhat offset by the elimination of tax deductions for FDIC premiums under the Tax Act. Pretax results were driven by higher revenue, partially offset by an increase in noninterest expense. The operating margin was 29 percent compared to 27 percent a year ago.
Net interest income increased $34 million to $1.6 billion primarily due to higher interest rates and higher loan balances. Noninterest income, which primarily includes investment and brokerage services income, increased $230 million to $3.3 billion. The increase in noninterest income was driven by higher market valuations and AUM flows, partially offset by the impact of changing market dynamics on transactional revenue and AUM pricing. Noninterest expense increased $99 million to $3.4 billion primarily due to higher revenue-related incentive costs.
Return on average allocated capital was 29 percent, up from 22 percent a year ago, primarily due to higher net income, somewhat offset by an increase in allocated capital.
11 Bank of America |
During the three months ended March 31, 2018, revenue from MLGWM of $4.0 billion increased six percent compared to the same period in 2017 due to higher net interest income and asset management fees driven by higher market valuations and AUM
flows, partially offset by lower transactional revenue and AUM pricing. U.S. Trust revenue of $860 million increased six percent reflecting higher net interest income and asset management fees primarily due to higher market valuations and AUM flows.
Key Indicators and Metrics | |||||||
Three Months Ended March 31 | |||||||
(Dollars in millions, except as noted) | 2018 | 2017 | |||||
Revenue by Business | |||||||
Merrill Lynch Global Wealth Management | $ | 3,996 | $ | 3,782 | |||
U.S. Trust | 860 | 809 | |||||
Other | — | 1 | |||||
Total revenue, net of interest expense (FTE basis) | $ | 4,856 | $ | 4,592 | |||
Client Balances by Business, at period end | |||||||
Merrill Lynch Global Wealth Management | $ | 2,284,803 | $ | 2,167,536 | |||
U.S. Trust | 440,683 | 417,841 | |||||
Total client balances | $ | 2,725,486 | $ | 2,585,377 | |||
Client Balances by Type, at period end | |||||||
Assets under management | $ | 1,084,717 | $ | 946,778 | |||
Brokerage and other assets | 1,236,799 | 1,232,195 | |||||
Deposits | 241,531 | 254,595 | |||||
Loans and leases (1) | 162,439 | 151,809 | |||||
Total client balances | $ | 2,725,486 | $ | 2,585,377 | |||
Assets Under Management Rollforward | |||||||
Assets under management, beginning of period | $ | 1,080,747 | $ | 886,148 | |||
Net client flows | 24,240 | 29,214 | |||||
Market valuation/other | (20,270 | ) | 31,416 | ||||
Total assets under management, end of period | $ | 1,084,717 | $ | 946,778 | |||
Associates, at period end (2) | |||||||
Number of financial advisors | 17,367 | 16,678 | |||||
Total wealth advisors, including financial advisors | 19,276 | 18,538 | |||||
Total primary sales professionals, including financial advisors and wealth advisors | 20,398 | 19,536 | |||||
Merrill Lynch Global Wealth Management Metric | |||||||
Financial advisor productivity (3) (in thousands) | $ | 1,038 | $ | 993 | |||
U.S. Trust Metric, at period end | |||||||
Primary sales professionals | 1,737 | 1,657 |
(1) | Includes margin receivables which are classified in customer and other receivables on the Consolidated Balance Sheet. |
(2) | Includes financial advisors in the Consumer Banking segment of 2,538 and 2,121 at March 31, 2018 and 2017. |
(3) | Financial advisor productivity is defined as annualized MLGWM total revenue, excluding the allocation of certain asset and liability management (ALM) activities, divided by the total average number of financial advisors (excluding financial advisors in the Consumer Banking segment). |
Client Balances
Client balances increased $140.1 billion, or five percent, to $2.7 trillion at March 31, 2018 compared to March 31, 2017. The increase in client balances was due to higher market valuations and positive net 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 following table. Migrations of client balances primarily result from the periodic
movement of clients and/or accounts between business segments based on changes in the nature of client relationships.
Net Migration Summary | |||||||
Three Months Ended March 31 | |||||||
(Dollars in millions) | 2018 | 2017 | |||||
Total deposits, net – to (from) GWIM | $ | 1,135 | $ | (97 | ) | ||
Total loans, net – from GWIM | (3 | ) | (126 | ) | |||
Total brokerage, net – to (from) GWIM | (48 | ) | 94 |
Bank of America 12 |
Global Banking
(Dollars in millions) | Three Months Ended March 31 | ||||||||||
2018 | 2017 | % Change | |||||||||
Net interest income (FTE basis) | $ | 2,640 | $ | 2,602 | 1 | % | |||||
Noninterest income: | |||||||||||
Service charges | 763 | 765 | — | ||||||||
Investment banking fees | 744 | 925 | (20 | ) | |||||||
All other income | 787 | 663 | 19 | ||||||||
Total noninterest income | 2,294 | 2,353 | (3 | ) | |||||||
Total revenue, net of interest expense (FTE basis) | 4,934 | 4,955 | — | ||||||||
Provision for credit losses | 16 | 17 | (6 | ) | |||||||
Noninterest expense | 2,195 | 2,163 | 1 | ||||||||
Income before income taxes (FTE basis) | 2,723 | 2,775 | (2 | ) | |||||||
Income tax expense (FTE basis) | 707 | 1,046 | (32 | ) | |||||||
Net income | $ | 2,016 | $ | 1,729 | 17 | ||||||
Effective tax rate | 26.0 | % | 37.7 | % | |||||||
Net interest yield (FTE basis) | 2.96 | 2.93 | |||||||||
Return on average allocated capital | 20 | 18 | |||||||||
Efficiency ratio (FTE basis) | 44.47 | 43.66 | |||||||||
Balance Sheet | |||||||||||
Three Months Ended March 31 | |||||||||||
Average | 2018 | 2017 | % Change | ||||||||
Total loans and leases | $ | 351,689 | $ | 342,857 | 3 | % | |||||
Total earning assets | 361,822 | 359,605 | 1 | ||||||||
Total assets | 420,594 | 415,908 | 1 | ||||||||
Total deposits | 324,405 | 305,197 | 6 | ||||||||
Allocated capital | 41,000 | 40,000 | 3 | ||||||||
Period end | March 31 2018 | December 31 2017 | % Change | ||||||||
Total loans and leases | $ | 355,165 | $ | 350,668 | 1 | % | |||||
Total earning assets | 365,895 | 365,560 | — | ||||||||
Total assets | 424,134 | 424,533 | — | ||||||||
Total deposits | 331,238 | 329,273 | 1 |
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. For more information about Global Banking, see Business Segment Operations in the MD&A of the Corporation’s 2017 Annual Report on Form 10-K.
Net income for Global Banking increased $287 million to $2.0 billion for the three months ended March 31, 2018 compared to the same period in 2017 primarily driven by lower tax expense, partially offset by modestly lower pretax income as discussed below. The impact of the reduction in the federal tax rate was somewhat offset by an increase in U.S. taxes related to our non-U.S. operations and the elimination of tax deductions for FDIC premiums under the Tax Act.
Pretax results were driven by higher noninterest expense and lower revenue. Revenue decreased $21 million to $4.9 billion for the three months ended March 31, 2018 compared to the same period in 2017 driven by lower noninterest income, partially offset by higher net interest income. Net interest income increased $38 million to $2.6 billion primarily due to the impact of higher interest rates on increased deposits, and loan growth. Noninterest income decreased $59 million to $2.3 billion primarily due to lower investment banking fees and the impact of tax reform on certain tax-advantaged investments, partially offset by higher leasing-related revenues.
Noninterest expense increased $32 million to $2.2 billion primarily due to higher personnel and operating expense.
The return on average allocated capital was 20 percent, up from 18 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 9.
13 Bank of America |
Global Corporate, Global Commercial and Business Banking
The table below and following discussion present a summary of the results, which exclude certain investment banking activities in Global Banking.
Global Corporate, Global Commercial and Business Banking | ||||||||||||||||||||||||||||||||
Global Corporate Banking | Global Commercial Banking | Business Banking | Total | |||||||||||||||||||||||||||||
Three Months Ended March 31 | ||||||||||||||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||
Business Lending | $ | 1,050 | $ | 1,102 | $ | 975 | $ | 1,044 | $ | 99 | $ | 101 | $ | 2,124 | $ | 2,247 | ||||||||||||||||
Global Transaction Services | 882 | 797 | 816 | 707 | 232 | 197 | 1,930 | 1,701 | ||||||||||||||||||||||||
Total revenue, net of interest expense | $ | 1,932 | $ | 1,899 | $ | 1,791 | $ | 1,751 | $ | 331 | $ | 298 | $ | 4,054 | $ | 3,948 | ||||||||||||||||
Balance Sheet | ||||||||||||||||||||||||||||||||
Average | ||||||||||||||||||||||||||||||||
Total loans and leases | $ | 162,073 | $ | 155,358 | $ | 172,360 | $ | 169,728 | $ | 17,259 | $ | 17,785 | $ | 351,692 | $ | 342,871 | ||||||||||||||||
Total deposits | 155,644 | 146,437 | 132,357 | 122,904 | 36,410 | 35,861 | 324,411 | 305,202 | ||||||||||||||||||||||||
Period end | ||||||||||||||||||||||||||||||||
Total loans and leases | $ | 163,563 | $ | 155,801 | $ | 174,580 | $ | 170,897 | $ | 17,008 | $ | 17,775 | $ | 355,151 | $ | 344,473 | ||||||||||||||||
Total deposits | 165,040 | 143,080 | 129,895 | 118,435 | 36,326 | 35,653 | 331,261 | 297,168 |
Business Lending revenue decreased $123 million for the three months ended March 31, 2018 compared to the same period in 2017 primarily driven by the impact of tax reform on certain tax-advantaged investments, partially offset by higher leasing-related revenues. Global Transaction Services revenue increased $229 million for the three months ended March 31, 2018 compared to the same period in 2017 driven by the impact of higher interest rates and an increase in the deposit base.
Average loans and leases increased three percent for the three months ended March 31, 2018 compared to the same period in 2017 driven by growth in commercial and industrial loans. Average deposits increased six percent due to 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. Global Banking originates certain deal-related transactions with our corporate and commercial clients that are executed and distributed by Global Markets. 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 | |||||||||||||||
Global Banking | Total Corporation | ||||||||||||||
Three Months Ended March 31 | |||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Products | |||||||||||||||
Advisory | $ | 276 | $ | 390 | $ | 296 | $ | 405 | |||||||
Debt issuance | 356 | 412 | 827 | 926 | |||||||||||
Equity issuance | 112 | 123 | 314 | 312 | |||||||||||
Gross investment banking fees | 744 | 925 | 1,437 | 1,643 | |||||||||||
Self-led deals | (34 | ) | (23 | ) | (84 | ) | (59 | ) | |||||||
Total investment banking fees | $ | 710 | $ | 902 | $ | 1,353 | $ | 1,584 |
Total Corporation investment banking fees, excluding self-led deals, of $1.4 billion, which are primarily included within Global Banking and Global Markets, decreased 15 percent for the three months ended March 31, 2018 compared to the same period in 2017 due to a decrease in market fee pools.
Bank of America 14 |
Global Markets
Three Months Ended March 31 | |||||||||||
(Dollars in millions) | 2018 | 2017 | % Change | ||||||||
Net interest income (FTE basis) | $ | 870 | $ | 1,049 | (17 | )% | |||||
Noninterest income: | |||||||||||
Investment and brokerage services | 488 | 531 | (8 | ) | |||||||
Investment banking fees | 609 | 666 | (9 | ) | |||||||
Trading account profits | 2,703 | 2,177 | 24 | ||||||||
All other income | 116 | 285 | (59 | ) | |||||||
Total noninterest income | 3,916 | 3,659 | 7 | ||||||||
Total revenue, net of interest expense (FTE basis) | 4,786 | 4,708 | 2 | ||||||||
Provision for credit losses | (3 | ) | (17 | ) | (82 | ) | |||||
Noninterest expense | 2,818 | 2,757 | 2 | ||||||||
Income before income taxes (FTE basis) | 1,971 | 1,968 | — | ||||||||
Income tax expense (FTE basis) | 513 | 671 | (24 | ) | |||||||
Net income | $ | 1,458 | $ | 1,297 | 12 | ||||||
Effective tax rate | 26.0 | % | 34.1 | % | |||||||
Return on average allocated capital | 17 | 15 | |||||||||
Efficiency ratio (FTE basis) | 58.87 | 58.56 | |||||||||
Balance Sheet | |||||||||||
Three Months Ended March 31 | |||||||||||
Average | 2018 | 2017 | % Change | ||||||||
Trading-related assets: | |||||||||||
Trading account securities | $ | 210,278 | $ | 203,866 | 3 | % | |||||
Reverse repurchases | 123,948 | 96,835 | 28 | ||||||||
Securities borrowed | 82,376 | 81,312 | 1 | ||||||||
Derivative assets | 46,567 | 40,346 | 15 | ||||||||
Total trading-related assets | 463,169 | 422,359 | 10 | ||||||||
Total loans and leases | 73,763 | 70,064 | 5 | ||||||||
Total earning assets | 486,107 | 429,906 | 13 | ||||||||
Total assets | 678,368 | 607,010 | 12 | ||||||||
Total deposits | 32,320 | 33,158 | (3 | ) | |||||||
Allocated capital | 35,000 | 35,000 | — | ||||||||
Period end | March 31 2018 | December 31 2017 | % Change | ||||||||
Total trading-related assets | $ | 450,512 | $ | 419,375 | 7 | % | |||||
Total loans and leases | 75,638 | 76,778 | (1 | ) | |||||||
Total earning assets | 478,857 | 449,314 | 7 | ||||||||
Total assets | 648,605 | 629,007 | 3 | ||||||||
Total deposits | 32,301 | 34,029 | (5 | ) |
Global Markets offers sales and trading services and research services 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. For more information about Global Markets, see Business Segment Operations in the MD&A of the Corporation’s 2017 Annual Report on Form 10-K.
Net income for Global Markets increased $161 million to $1.5 billion for the three months ended March 31, 2018 compared to the same period in 2017 driven by lower tax expense. The impact of the reduction in the federal tax rate was somewhat offset by an increase in U.S. taxes related to our non-U.S. operations under the Tax Act. Pretax results, which remained relatively unchanged, reflected higher revenue, largely offset by higher noninterest expense. Net DVA gains were $64 million compared to losses of $130 million during the same period in 2017. Excluding net DVA,
net income increased $31 million to $1.4 billion primarily driven by the impact of the Tax Act.
Sales and trading revenue, excluding net DVA, increased $24 million due to higher Equities revenue partially offset by lower Fixed-income, currencies and commodities (FICC) revenue. Noninterest expense increased $61 million to $2.8 billion primarily due to continued investments in technology.
Average assets increased $71.4 billion to $678.4 billion for the three months ended March 31, 2018 primarily driven by growth in client financing activities in the Equities business and increased levels of inventory across the FICC business to facilitate client demand. Total assets increased $19.6 billion in the three months ended March 31, 2018 to $648.6 billion due to increased levels of inventory across the FICC business to facilitate client demand.
The return on average allocated capital was 17 percent, up from 15 percent, reflecting higher net income.
15 Bank of America |
Sales and Trading Revenue
Revenue from sales and trading services includes unrealized and realized gains and losses on trading and other assets, net interest income, and fees primarily from commissions on equity securities. Revenue from research services is also included in sales and trading revenue. 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-over-period operating performance.
Sales and Trading Revenue (1, 2) | |||||||
Three Months Ended March 31 | |||||||
(Dollars in millions) | 2018 | 2017 | |||||
Sales and trading revenue | |||||||
Fixed-income, currencies and commodities | $ | 2,614 | $ | 2,810 | |||
Equities | 1,503 | 1,089 | |||||
Total sales and trading revenue | $ | 4,117 | $ | 3,899 | |||
Sales and trading revenue, excluding net DVA (3) | |||||||
Fixed-income, currencies and commodities | $ | 2,536 | $ | 2,930 | |||
Equities | 1,517 | 1,099 | |||||
Total sales and trading revenue, excluding net DVA | $ | 4,053 | $ | 4,029 |
(1) | Includes FTE adjustments of $67 million and $49 million for the three months ended March 31, 2018 and 2017. For more information on sales and trading revenue, see Note 3 – Derivatives to the Consolidated Financial Statements. |
(2) | Includes Global Banking sales and trading revenue of $166 million and $58 million for the three months ended March 31, 2018 and 2017. |
(3) | FICC and Equities sales and trading revenue, excluding net DVA, is a non-GAAP financial measure. FICC net DVA gains were $78 million and losses were $120 million for the three months ended March 31, 2018 and 2017. Equities net DVA losses were $14 million and $10 million for the three months ended March 31, 2018 and 2017. |
The following explanations for period-over-period changes in sales and trading, FICC and Equities revenue would be the same whether net DVA was included or excluded. FICC revenue, excluding net DVA, decreased $394 million in the three months ended March 31, 2018 compared to the same period in 2017, primarily due to lower activity and a less favorable market in credit-related products compared to the same period in 2017. The decline in FICC revenue
was also impacted by higher funding costs, which were driven by increases in market interest rates. Equities revenue, excluding net DVA, increased $418 million in the three months ended March 31, 2018 compared to the same period in 2017, driven by increased client activity and a strong trading performance in derivatives in the more volatile market environment.
All Other
Three Months Ended March 31 | |||||||||||
(Dollars in millions) | 2018 | 2017 | % Change | ||||||||
Net interest income (FTE basis) | $ | 144 | $ | 263 | (45 | )% | |||||
Noninterest loss | (477 | ) | (357 | ) | 34 | ||||||
Total revenue, net of interest expense (FTE basis) | (333 | ) | (94 | ) | n/m | ||||||
Provision for credit losses | (152 | ) | (26 | ) | n/m | ||||||
Noninterest expense | 976 | 1,434 | (32 | ) | |||||||
Loss before income taxes (FTE basis) | (1,157 | ) | (1,502 | ) | (23 | ) | |||||
Income tax benefit (FTE basis) | (871 | ) | (1,148 | ) | (24 | ) | |||||
Net loss | $ | (286 | ) | $ | (354 | ) | (19 | ) | |||
Balance Sheet | |||||||||||
Three Months Ended March 31 | |||||||||||
Average | 2018 | 2017 | % Change | ||||||||
Total loans and leases | $ | 67,811 | $ | 94,873 | (29 | )% | |||||
Total assets (1) | 200,553 | 207,652 | (3 | ) | |||||||
Total deposits | 23,115 | 25,297 | (9 | ) | |||||||
Period end | March 31 2018 | December 31 2017 | % Change | ||||||||
Total loans and leases | $ | 64,584 | $ | 69,452 | (7 | )% | |||||
Total assets (1) | 202,152 | 194,048 | 4 | ||||||||
Total deposits | 22,106 | 22,719 | (3 | ) |
(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. Average allocated assets were $514.6 billion and $522.0 billion for the three months ended March 31, 2018 and 2017, and period-end allocated assets were $543.3 billion and $520.4 billion at March 31, 2018 and December 31, 2017. |
n/m = not meaningful
All Other consists of ALM activities, equity investments, non-core mortgage loans and servicing activities, the net impact of periodic revisions to the MSR valuation model for core and non-core MSRs and the related economic hedge results, liquidating businesses and residual expense allocations. For more information about All Other, see Business Segment Operations in the MD&A of the Corporation’s 2017 Annual Report on Form 10-K.
Bank of America 16 |
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 25. 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 22 and Interest Rate Risk Management for the Banking Book on page 45. During the three months ended March 31, 2018, residential mortgage loans held for ALM activities decreased $1.3 billion to $27.2 billion at March 31, 2018 primarily as a result of payoffs and paydowns. 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, 2018, total non-core loans decreased $3.5 billion to $37.8 billion at March 31, 2018 due primarily to payoffs and paydowns, as well as transfers to loans held-for-sale (LHFS) of $1.1 billion and loan sales of $700 million.
The net loss for All Other improved $68 million to $286 million for the three months ended March 31, 2018 compared to the same period in 2017, driven by a lower pretax loss, partially offset by a lower income tax benefit due to the impact of the reduction in the federal income tax rate. Pretax results were driven by lower noninterest expense and a higher benefit in the provision for credit losses, partially offset by a decline in revenue.
Revenue decreased $239 million primarily due to the impact of the sale of the non-U.S. consumer credit card business in the second quarter of 2017. Gains on sales of loans included in noninterest loss, including nonperforming and other delinquent loans, were $37 million for the three months ended March 31, 2018 compared to gains of $17 million in the same period in 2017.
The provision for credit losses improved $126 million to a benefit of $152 million primarily driven by continued runoff of the non-core portfolio.
Noninterest expense decreased $458 million to $976 million driven by lower litigation expense, lower operating costs due to the sale of the non-U.S. consumer credit card business and a decline in non-core mortgage servicing costs.
The income tax benefit was $871 million for the three months ended March 31, 2018 compared to a benefit of $1.1 billion in the same period in 2017. The change was driven by the lower federal tax rate in effect in 2018 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 herein, Off-Balance Sheet Arrangements and Contractual Obligations in the MD&A of the Corporation’s 2017 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 2017 Annual Report on Form 10-K.
Representations and Warranties
For information on representations and warranties, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements of the Corporation’s 2017 Annual Report on Form 10-K and Representations and Warranties in Note 10 – Commitments and Contingencies to the Consolidated Financial Statements herein. For more information related to the sensitivity of the assumptions used to estimate our reserve for representations and warranties, see Complex Accounting Estimates – Representations and Warranties Liability in the MD&A of the Corporation’s 2017 Annual Report on Form 10-K.
Other Mortgage-related Matters
For more information on other mortgage-related matters, see Off-Balance Sheet Arrangements and Contractual Obligations – Other Mortgage-related Matters in the MD&A of the Corporation’s 2017 Annual Report on Form 10-K.
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 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 and is aligned with the Corporation’s strategic, capital and financial operating plans. 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 2017 Annual Report on Form 10-K.
17 Bank of America |
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 more information, see Business Segment Operations on page 9.
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.
On June 28, 2017, following the Federal Reserve’s non-objection to our 2017 CCAR capital plan, the Board authorized the repurchase of $12.0 billion in common stock from July 1, 2017 through June 30, 2018, plus repurchases expected to be approximately $900 million to offset the effect of equity-based compensation plans during the same period. On December 5, 2017, following approval by the Federal Reserve, the Board authorized the repurchase of an additional $5.0 billion of common stock through June 30, 2018. The common stock repurchase authorizations include both common stock and warrants. At March 31, 2018, our remaining stock repurchase authorization was $5.2 billion.
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 0.25 percent of Tier 1 capital, and which were not contemplated in our capital plan, subject to the Federal Reserve’s non-objection.
In April 2018, we submitted our 2018 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, 2018.
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. Under the Basel 3 regulatory capital transition provisions, certain deductions and adjustments to Common equity tier 1 capital were phased in through January 1, 2018. The Corporation and its primary affiliated banking entity, BANA, are Basel 3 Advanced approaches institutions and 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 Prompt Corrective Action (PCA) framework and for the Corporation was the Advanced approaches method for both periods presented. For more information on Basel 3, see Capital Management in the MD&A of the Corporation’s 2017 Annual Report on Form 10-K.
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, 2018.
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 are required to maintain a capital conservation buffer greater than 1.875 percent plus a G-SIB surcharge of 1.875 percent in 2018. 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 capital ratios and regulatory requirements, see Table 8.
Supplementary Leverage Ratio
Effective January 1, 2018, the Corporation is required to maintain a minimum supplementary leverage ratio (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 are required to maintain a minimum 6.0 percent SLR to be considered “well capitalized” under the PCA framework. 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.
Bank of America 18 |
Capital Composition and Ratios
Table 8 presents Bank of America Corporation’s capital ratios and related information in accordance with Basel 3 Standardized and Advanced approaches as measured at March 31, 2018 and December 31, 2017. As of March 31, 2018 and December 31, 2017, the Corporation met the definition of “well capitalized” under current regulatory requirements.
Table 8 | Bank of America Corporation Regulatory Capital under Basel 3 (1) | |||||||||||||
Standardized Approach | Advanced Approaches | Current Regulatory Minimum (2) | 2019 Regulatory Minimum (3) | |||||||||||
(Dollars in millions, except as noted) | March 31, 2018 | |||||||||||||
Risk-based capital metrics: | ||||||||||||||
Common equity tier 1 capital | $ | 164,828 | $ | 164,828 | ||||||||||
Tier 1 capital | 188,900 | 188,900 | ||||||||||||
Total capital (4) | 223,772 | 215,261 | ||||||||||||
Risk-weighted assets (in billions) | 1,452 | 1,458 | ||||||||||||
Common equity tier 1 capital ratio | 11.4 | % | 11.3 | % | 8.25 | % | 9.5 | % | ||||||
Tier 1 capital ratio | 13.0 | 13.0 | 9.75 | 11.0 | ||||||||||
Total capital ratio | 15.4 | 14.8 | 11.75 | 13.0 | ||||||||||
Leverage-based metrics: | ||||||||||||||
Adjusted quarterly average assets (in billions) (5) | $ | 2,247 | $ | 2,247 | ||||||||||
Tier 1 leverage ratio | 8.4 | % | 8.4 | % | 4.0 | 4.0 | ||||||||
SLR leverage exposure (in billions) | $ | 2,794 | ||||||||||||
SLR | 6.8 | % | 5.0 | 5.0 | ||||||||||
December 31, 2017 | ||||||||||||||
Risk-based capital metrics: | ||||||||||||||
Common equity tier 1 capital | $ | 168,461 | $ | 168,461 | ||||||||||
Tier 1 capital | 190,189 | 190,189 | ||||||||||||
Total capital (4) | 224,209 | 215,311 | ||||||||||||
Risk-weighted assets (in billions) | 1,443 | 1,459 | ||||||||||||
Common equity tier 1 capital ratio | 11.7 | % | 11.5 | % | 7.25 | % | 9.5 | % | ||||||
Tier 1 capital ratio | 13.2 | 13.0 | 8.75 | 11.0 | ||||||||||
Total capital ratio | 15.5 | 14.8 | 10.75 | 13.0 | ||||||||||
Leverage-based metrics: | ||||||||||||||
Adjusted quarterly average assets (in billions) (5) | $ | 2,223 | $ | 2,223 | ||||||||||
Tier 1 leverage ratio | 8.6 | % | 8.6 | % | 4.0 | 4.0 | ||||||||
SLR leverage exposure (in billions) | $ | 2,756 | ||||||||||||
SLR | 6.9 | % | 5.0 |
(1) | Basel 3 transition provisions for regulatory capital adjustments and deductions were fully phased-in as of January 1, 2018. Prior periods are presented on a fully phased-in basis. |
(2) | The March 31, 2018 and December 31, 2017 amounts include a transition capital conservation buffer of 1.875 percent and 1.25 percent and a transition G-SIB surcharge of 1.875 percent and 1.5 percent. The countercyclical capital buffer for both periods is zero. |
(3) | The 2019 regulatory minimums assume a capital conservation buffer of 2.5 percent and G-SIB surcharge of 2.5 percent. The countercyclical capital buffer is zero. We will be subject to regulatory minimums on January 1, 2019. The SLR minimum includes a leverage buffer of 2.0 percent and is applicable beginning on January 1, 2018. |
(4) | 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. |
(5) | Reflects adjusted average total assets for the three months ended March 31, 2018 and December 31, 2017. |
19 Bank of America |
Common equity tier 1 capital under Basel 3 Advanced approaches was $164.8 billion at March 31, 2018, a decrease of $3.6 billion compared to December 31, 2017 driven by common stock repurchases, market value declines included in accumulated other comprehensive income (OCI) and dividends, partially offset by earnings. During the three months ended March 31, 2018, total capital and risk-weighted assets remained relatively unchanged. Table 9 shows the capital composition as measured under Basel 3 Advanced approaches at March 31, 2018 and December 31, 2017.
Table 9 | Capital Composition under Basel 3 (1) | |||||||
(Dollars in millions) | March 31 2018 | December 31 2017 | ||||||
Total common shareholders’ equity | $ | 241,552 | $ | 244,823 | ||||
Goodwill | (68,576 | ) | (68,576 | ) | ||||
Deferred tax assets arising from net operating loss and tax credit carryforwards | (6,755 | ) | (6,555 | ) | ||||
Adjustments for amounts recorded in accumulated OCI attributed to certain cash flow hedges | 1,260 | 831 | ||||||
Intangibles, other than mortgage servicing rights and goodwill | (1,632 | ) | (1,743 | ) | ||||
Defined benefit pension fund assets | (1,189 | ) | (1,138 | ) | ||||
DVA related to liabilities and derivatives | 580 | 1,196 | ||||||
Other | (412 | ) | (377 | ) | ||||
Common equity tier 1 capital | 164,828 | 168,461 | ||||||
Qualifying preferred stock, net of issuance cost | 24,672 | 22,323 | ||||||
Other | (600 | ) | (595 | ) | ||||
Total Tier 1 capital | 188,900 | 190,189 | ||||||
Tier 2 capital instruments | 23,914 | 22,938 | ||||||
Eligible credit reserves included in Tier 2 capital | 2,531 | 2,272 | ||||||
Other | (84 | ) | (88 | ) | ||||
Total Basel 3 Capital | $ | 215,261 | $ | 215,311 |
(1) | Basel 3 transition provisions for regulatory capital adjustments and deductions were fully phased-in as of January 1, 2018. Prior periods are presented on a fully phased-in basis. |
Table 10 shows the components of risk-weighted assets as measured under Basel 3 at March 31, 2018 and December 31, 2017.
Table 10 | Risk-weighted Assets under Basel 3 (1) | |||||||||||||||
Standardized Approach | Advanced Approaches | Standardized Approach | Advanced Approaches | |||||||||||||
(Dollars in billions) | March 31, 2018 | December 31, 2017 | ||||||||||||||
Credit risk | $ | 1,391 | $ | 862 | $ | 1,384 | $ | 867 | ||||||||
Market risk | 61 | 61 | 59 | 58 | ||||||||||||
Operational risk | n/a | 500 | n/a | 500 | ||||||||||||
Risks related to credit valuation adjustments | n/a | 35 | n/a | 34 | ||||||||||||
Total risk-weighted assets | $ | 1,452 | $ | 1,458 | $ | 1,443 | $ | 1,459 |
(1) | Basel 3 transition provisions for regulatory capital adjustments and deductions were fully phased-in as of January 1, 2018. Prior periods are presented on a fully phased-in basis. |
n/a = not applicable
Bank of America, N.A. Regulatory Capital
Table 11 presents regulatory capital information for BANA in accordance with Basel 3 Standardized and Advanced approaches as measured at March 31, 2018 and December 31, 2017. BANA met the definition of “well capitalized” under the PCA framework for both periods.
Table 11 | Bank of America, N.A. Regulatory Capital under Basel 3 | ||||||||||||||||
Standardized Approach | Advanced Approaches | ||||||||||||||||
Ratio | Amount | Ratio | Amount | Minimum Required (1) | |||||||||||||
(Dollars in millions) | March 31, 2018 | ||||||||||||||||
Common equity tier 1 capital | 12.2 | % | $ | 147,645 | 14.7 | % | $ | 147,645 | 6.5 | % | |||||||
Tier 1 capital | 12.2 | 147,645 | 14.7 | 147,645 | 8.0 | ||||||||||||
Total capital | 13.3 | 160,158 | 15.1 | 151,968 | 10.0 | ||||||||||||
Tier 1 leverage | 8.8 | 147,645 | 8.8 | 147,645 | 5.0 | ||||||||||||
SLR leverage exposure (in billions) | $ | 2,088 | |||||||||||||||
SLR | 7.1 | % | 6.0 | ||||||||||||||
December 31, 2017 | |||||||||||||||||
Common equity tier 1 capital | 12.5 | % | $ | 150,552 | 14.9 | % | $ | 150,552 | 6.5 | % | |||||||
Tier 1 capital | 12.5 | 150,552 | 14.9 | 150,552 | 8.0 | ||||||||||||
Total capital | 13.6 | 163,243 | 15.4 | 154,675 | 10.0 | ||||||||||||
Tier 1 leverage | 9.0 | 150,552 | 9.0 | 150,552 | 5.0 |
(1) | Percent required to meet guidelines to be considered “well capitalized” under the PCA framework. |
Bank of America 20 |
Regulatory Developments
The following supplements the disclosure in Capital Management – Regulatory Developments in the MD&A of the Corporation’s 2017 Annual Report on Form 10-K.
Minimum Total Loss-Absorbing Capacity
The Federal Reserve’s final rule, which is effective January 1, 2019, includes minimum external total loss-absorbing capacity (TLAC) and long-term debt requirements to improve the resolvability and resiliency of large, interconnected BHCs. As of March 31, 2018, the Corporation’s TLAC and long-term debt exceeded our estimated 2019 minimum requirements.
Stress Buffer Requirements
On April 10, 2018, the Federal Reserve announced a proposal to integrate the annual quantitative assessment of the CCAR program with the buffer requirements in the Basel 3 capital rule by introducing stress buffer requirements as a replacement of the CCAR quantitative objection. Under the Standardized approach, the proposal replaces the existing static 2.5 percent capital conservation buffer with a stress capital buffer, calculated as the decrease in the Common equity tier 1 capital ratio in the supervisory severely adverse scenario of the modified CCAR stress test plus four quarters of planned common stock dividend payments, floored at 2.5 percent. The static 2.5 percent capital conservation buffer would be retained under the Advanced approaches. The proposal also introduces a stress leverage buffer requirement which would be calculated as the decrease in the Tier 1 leverage ratio in the supervisory severely adverse scenario of the modified CCAR stress test plus four quarters of planned common stock dividends, with no floor. The SLR would not incorporate a stress buffer requirement. The proposal also updates the capital distribution assumptions used in the CCAR stress test to better align with a firm’s expected actions in stress, notably removing the assumption that a BHC will carry out all of its planned capital actions under stress. If finalized, the proposal would be effective December 31, 2018, with the first stress buffer requirements generally becoming effective on October 1, 2019.
Enhanced Supplementary Leverage Ratio Requirements
On April 11, 2018, the Federal Reserve and OCC announced a proposal to modify the enhanced SLR standards applicable to U.S. G-SIBs and their insured depository institution subsidiaries. The proposal replaces the existing 2.0 percent leverage buffer with a leverage buffer tailored to each G-SIB, set at 50 percent of the applicable GSIB surcharge. This proposal also replaces the current 6.0 percent threshold at which a G-SIB’s insured depository institution subsidiaries are considered “well capitalized” under the PCA framework with a threshold set at 3.0 percent plus 50 percent of the G-SIB surcharge applicable to the subsidiary’s G-SIB holding company. Correspondingly, the proposal updates the external TLAC leverage buffer for each G-SIB to 50 percent of the applicable G-SIB surcharge and revises the leverage component of the minimum long-term debt requirements to be 2.5 percent plus 50 percent of the applicable G-SIB surcharge.
Revisions to Basel 3 to Address Current Expected Credit Loss Accounting
On April 13, 2018, the U.S. banking regulators announced a proposal to address the regulatory capital impact of using the current expected credit loss methodology to measure credit reserves under a new accounting standard which is effective on January 1, 2020. For more information on this standard, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements. The proposal provides an option to phase-in the impact to regulatory capital over a three-year period on a straight-line basis. It also updates the existing regulatory capital framework by creating a new defined term, allowance for credit losses (ACL), which would include credit losses on all financial instruments measured at amortized cost with the exception of purchased credit-impaired assets. The proposal continues to allow a limited amount of credit losses to be recognized in Tier 2 capital and maintains the existing limits under the Standardized and Advanced approaches.
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, 2018, MLPF&S’s regulatory net capital as defined by Rule 15c3-1 was $12.3 billion and exceeded the minimum requirement of $1.7 billion by $10.6 billion. MLPCC’s net capital of $4.5 billion exceeded the minimum requirement of $539 million by $4.0 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, 2018, 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, 2018, MLI’s capital resources were $35.1 billion, which exceeded the minimum Pillar 1 requirement of $17.7 billion.
21 Bank of America |
Common and Preferred Stock Dividends
Table 12 is a summary of our cash dividend declarations on preferred stock during the first quarter of 2018 and through April 30, 2018. During the first quarter of 2018, we declared $428 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 12 | Preferred Stock Cash Dividend Summary | ||||||||||||||||||
March 31, 2018 | |||||||||||||||||||
Preferred Stock | Outstanding Notional Amount (in millions) | Declaration Date | Record Date | Payment Date | Per Annum Dividend Rate | Dividend Per Share | |||||||||||||
Series B (1) | $ | 1 | April 25, 2018 | July 11, 2018 | July 25, 2018 | 7.00 | % | $ | 1.75 | ||||||||||
January 31, 2018 | April 11, 2018 | April 25, 2018 | 7.00 | 1.75 | |||||||||||||||
Series D (2) | $ | 654 | April 13, 2018 | May 31, 2018 | June 14, 2018 | 6.204 | % | $ | 0.38775 | ||||||||||
January 8, 2018 | February 28, 2018 | March 14, 2018 | 6.204 | 0.38775 | |||||||||||||||
Series E (2) | $ | 317 | April 13, 2018 | April 30, 2018 | May 15, 2018 | Floating | $ | 0.24722 | |||||||||||
January 8, 2018 | January 31, 2018 | February 15, 2018 | Floating | 0.25556 | |||||||||||||||
Series F | $ | 141 | April 13, 2018 | May 31, 2018 | June 15, 2018 | Floating | $ | 1,022.22222 | |||||||||||
January 8, 2018 | February 28, 2018 | March 15, 2018 | Floating | 1,000.00 | |||||||||||||||
Series G | $ | 493 | April 13, 2018 | May 31, 2018 | June 15, 2018 | Adjustable | $ | 1,022.22222 | |||||||||||
January 8, 2018 | February 28, 2018 | March 15, 2018 | Adjustable | 1,000.00 | |||||||||||||||
Series I (2) | $ | 365 | April 13, 2018 | June 15, 2018 | July 2, 2018 | 6.625 | % | $ | 0.4140625 | ||||||||||
January 8, 2018 | March 15, 2018 | April 2, 2018 | 6.625 | 0.4140625 | |||||||||||||||
Series K (3, 4) | $ | 1,544 | April 13, 2018 | April 15, 2018 | April 30, 2018 | Fixed-to-floating | $ | 13.49225 | |||||||||||
January 8, 2018 | January 15, 2018 | January 30, 2018 | Fixed-to-floating | 40.00 | |||||||||||||||
Series L | $ | 3,080 | March 20, 2018 | April 1, 2018 | April 30, 2018 | 7.25 | % | $ | 18.125 | ||||||||||
Series M (3, 4) | $ | 1,310 | April 13, 2018 | April 30, 2018 | May 15, 2018 | Fixed-to-floating | $ | 40.625 | |||||||||||
Series T (5) | $ | 35 | April 25, 2018 | June 25, 2018 | July 10, 2018 | 6.00 | % | $ | 1,500.00 | ||||||||||
January 31, 2018 | March 26, 2018 | April 10, 2018 | 6.00 | 1,500.00 | |||||||||||||||
Series U (3, 4) | $ | 1,000 | April 13, 2018 | May 15, 2018 | June 1, 2018 | Fixed-to-floating | $ | 26.00 | |||||||||||
Series V (3, 4) | $ | 1,500 | April 13, 2018 | June 1, 2018 | June 18, 2018 | Fixed-to-floating | $ | 25.625 | |||||||||||
Series W (2) | $ | 1,100 | April 13, 2018 | May 15, 2018 | June 11, 2018 | 6.625 | % | $ | 0.4140625 | ||||||||||
January 8, 2018 | February 15, 2018 | March 9, 2018 | 6.625 | 0.4140625 | |||||||||||||||
Series X (3, 4) | $ | 2,000 | January 8, 2018 | February 15, 2018 | March 5, 2018 | Fixed-to-floating | $ | 31.25 | |||||||||||
Series Y (2) | $ | 1,100 | March 20, 2018 | April 1, 2018 | April 27, 2018 | 6.50 | % | $ | 0.40625 | ||||||||||
Series Z (3,4) | $ | 1,400 | March 20, 2018 | April 1, 2018 | April 23, 2018 | Fixed-to-floating | $ | 32.50 | |||||||||||
Series AA (3, 4) | $ | 1,900 | January 8, 2018 | March 1, 2018 | March 19, 2018 | Fixed-to-floating | $ | 30.50 | |||||||||||
Series CC (2) | $ | 1,100 | March 20, 2018 | April 1, 2018 | April 30, 2018 | 6.20 | % | $ | 0.3875 | ||||||||||
Series DD (3, 4) | $ | 1,000 | January 8, 2018 | February 15, 2018 | March 12, 2018 | Fixed-to-floating | $ | 31.50 | |||||||||||
Series EE (2) | $ | 900 | March 20, 2018 | April 1, 2018 | April 25, 2018 | 6.00 | % | $ | 0.375 | ||||||||||
Series 1 (6) | $ | 98 | April 13, 2018 | May 15, 2018 | May 29, 2018 | Floating | $ | 0.18750 | |||||||||||
January 8, 2018 | February 15, 2018 | February 28, 2018 | Floating | 0.18750 | |||||||||||||||
Series 2 (6) | $ | 299 | April 13, 2018 | May 15, 2018 | May 29, 2018 | Floating | $ | 0.18542 | |||||||||||
January 8, 2018 | February 15, 2018 | February 28, 2018 | Floating | 0.19167 | |||||||||||||||
Series 3 (6) | $ | 653 | April 13, 2018 | May 15, 2018 | May 29, 2018 | 6.375 | % | $ | 0.3984375 | ||||||||||
January 8, 2018 | February 15, 2018 | February 28, 2018 | 6.375 | 0.3984375 | |||||||||||||||
Series 4 (6) | $ | 210 | April 13, 2018 | May 15, 2018 | May 29, 2018 | Floating | $ | 0.24722 | |||||||||||
January 8, 2018 | February 15, 2018 | February 28, 2018 | Floating | 0.25556 | |||||||||||||||
Series 5 (6) | $ | 422 | April 13, 2018 | May 1, 2018 | May 21, 2018 | Floating | $ | 0.24722 | |||||||||||
January 8, 2018 | February 1, 2018 | February 21, 2018 | Floating | 0.25556 |
(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) | Represents shares that were not surrendered when the holders of Series T preferred stock exercised warrants to acquire common stock in the third quarter of 2017. |
(6) | Dividends per depositary share, each representing a 1/1,200th interest in a share of preferred stock. |
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 enhances our ability to monitor liquidity requirements, maximizes access to funding sources, minimizes borrowing costs and facilitates timely responses to liquidity events. For more information regarding global funding and liquidity risk management, see Liquidity Risk – Funding and Liquidity Risk Management in the MD&A of the Corporation’s 2017 Annual Report on Form 10-K.
Bank of America 22 |
NB Holdings Corporation
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 not needed to satisfy anticipated near-term expenditures, to NB Holdings Corporation, 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. 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. For more information on these arrangements, see Liquidity Risk – NB Holdings Corporation in the MD&A of the Corporation’s 2017 Annual Report on Form 10-K.
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. For more information on our liquidity sources, see Liquidity Risk – Global Liquidity Sources and Other Unencumbered Assets in the MD&A of the Corporation’s 2017 Annual Report on Form 10-K.
Table 13 | Average Global Liquidity Sources | |||||||
Three Months Ended | ||||||||
(Dollars in billions) | March 31 2018 | December 31 2017 | ||||||
Parent company and NB Holdings | $ | 77 | $ | 79 | ||||
Bank subsidiaries | 396 | 394 | ||||||
Other regulated entities | 49 | 49 | ||||||
Total Average Global Liquidity Sources | $ | 522 | $ | 522 |
Parent company and NB Holdings average liquidity was $77 billion and $79 billion for the three months ended March 31, 2018 and December 31, 2017. Typically, parent company and NB Holdings liquidity is in the form of cash deposited with BANA.
Average liquidity held at our bank subsidiaries was $396 billion and $394 billion for the three months ended March 31, 2018 and December 31, 2017. Our bank subsidiaries’ liquidity is primarily driven by deposit and lending activity, as well as securities valuation and net debt activity. 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 Federal Home Loan Banks (FHLBs) and the Federal Reserve Discount Window. The cash we could have obtained by borrowing against this pool of specifically-identified eligible assets was $308 billion at both March 31, 2018 and December 31, 2017. 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 transfers to the parent company or nonbank subsidiaries may be subject to prior regulatory approval.
Average liquidity held at our other regulated entities, comprised primarily of broker-dealer subsidiaries, was $49 billion for both the three months ended March 31, 2018 and December 31, 2017. Our other regulated entities also held unencumbered investment-
grade securities and equities that we believe could be used to generate additional liquidity. Liquidity held in an other regulated entity is primarily available to meet the obligations of that entity and transfers to the parent company or to any other subsidiary may be subject to prior regulatory approval due to regulatory restrictions and minimum requirements.
Table 14 presents the composition of average global liquidity sources (GLS) for the three months ended March 31, 2018 and December 31, 2017.
Table 14 | Average Global Liquidity Sources Composition | |||||||
Three Months Ended | ||||||||
(Dollars in billions) | March 31 2018 | December 31 2017 | ||||||
Cash on deposit | $ | 128 | $ | 118 | ||||
U.S. Treasury securities | 64 | 62 | ||||||
U.S. agency securities and mortgage-backed securities | 320 | 330 | ||||||
Non-U.S. government securities | 10 | 12 | ||||||
Total Average Global Liquidity Sources | $ | 522 | $ | 522 |
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. However, HQLA for purposes of calculating LCR is not reported at market value, but at a lower value that incorporates regulatory deductions and the exclusion of excess liquidity held at certain subsidiaries. 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. Our average consolidated HQLA, on a net basis, was $444 billion and $439 billion for the three months ended March 31, 2018 and December 31, 2017. For the same periods, the average consolidated LCR was 124 percent and 125 percent. Our LCR will fluctuate due to normal business flows from customer activity.
Liquidity Stress Analysis and Time-to-required Funding
We utilize liquidity stress analysis to assist us in determining the appropriate amounts of liquidity to maintain at the parent company and our subsidiaries to meet contractual and contingent cash outflows under a range of scenarios. For more information on our liquidity stress analysis, see Liquidity Risk – Liquidity Stress Analysis and Time-to-required Funding in the MD&A of the Corporation’s 2017 Annual Report on Form 10-K.
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 56 months at March 31, 2018 compared to 49 months at December 31, 2017. The increase in TTF was driven by higher parent company and NB Holdings liquidity.
23 Bank of America |
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. We fund a substantial portion of our lending activities through our deposits, which were $1.33 trillion and $1.31 trillion at March 31, 2018 and December 31, 2017.
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.
During the three months ended March 31, 2018, we issued $20.9 billion of long-term debt consisting of $14.4 billion for Bank of America Corporation, substantially all of which was TLAC compliant, $4.1 billion for Bank of America, N.A. and $2.4 billion of other debt.
Table 15 presents the carrying value of aggregate annual contractual maturities of long-term debt as of March 31, 2018. During the three months ended March 31, 2018, we had total long-term debt maturities and purchases of $13.4 billion consisting of $8.0 billion for Bank of America Corporation, $2.9 billion for Bank of America, N.A. and $2.5 billion of other debt.
Table 15 | Long-term Debt by Maturity | |||||||||||||||||||||||||||
(Dollars in millions) | Remainder of 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | Total | |||||||||||||||||||||
Bank of America Corporation | ||||||||||||||||||||||||||||
Senior notes | $ | 13,996 | $ | 15,235 | $ | 10,561 | $ | 16,225 | $ | 11,813 | $ | 80,166 | $ | 147,996 | ||||||||||||||
Senior structured notes | 1,768 | 1,485 | 923 | 430 | 2,048 | 8,081 | 14,735 | |||||||||||||||||||||
Subordinated notes | 1,606 | 1,576 | — | 382 | 469 | 20,188 | 24,221 | |||||||||||||||||||||
Junior subordinated notes | — | — | — | — | — | 3,829 | 3,829 | |||||||||||||||||||||
Total Bank of America Corporation | 17,370 | 18,296 | 11,484 | 17,037 | 14,330 | 112,264 | 190,781 | |||||||||||||||||||||
Bank of America, N.A. | ||||||||||||||||||||||||||||
Senior notes | 3,990 | — | — | — | — | 21 | 4,011 | |||||||||||||||||||||
Subordinated notes | — | 1 | — | — | — | 1,626 | 1,627 | |||||||||||||||||||||
Advances from Federal Home Loan Banks | 3,005 | 4,513 | 11 | 2 | 3 | 106 | 7,640 | |||||||||||||||||||||
Securitizations and other Bank VIEs (1) | 1,199 | 3,200 | 3,072 | 1,572 | — | 47 | 9,090 | |||||||||||||||||||||
Other | 53 | 166 | 11 | — | 1 | 97 | 328 | |||||||||||||||||||||
Total Bank of America, N.A. | 8,247 | 7,880 | 3,094 | 1,574 | 4 | 1,897 | 22,696 | |||||||||||||||||||||
Other debt | ||||||||||||||||||||||||||||
Structured liabilities | 4,009 | 3,199 | 1,887 | 821 | 746 | 7,138 | 17,800 | |||||||||||||||||||||
Nonbank VIEs (1) | 20 | 52 | — | — | — | 889 | 961 | |||||||||||||||||||||
Other | — | — | — | — | — | 18 | 18 | |||||||||||||||||||||
Total other debt | 4,029 | 3,251 | 1,887 | 821 | 746 | 8,045 | 18,779 | |||||||||||||||||||||
Total long-term debt | $ | 29,646 | $ | 29,427 | $ | 16,465 | $ | 19,432 | $ | 15,080 | $ | 122,206 | $ | 232,256 |
(1) | Represents the total long-term debt included in the liabilities of consolidated variable interest entities (VIEs) on the Consolidated Balance Sheet. |
Table 16 presents our long-term debt by major currency at March 31, 2018 and December 31, 2017.
Table 16 | Long-term Debt by Major Currency | |||||||
(Dollars in millions) | March 31 2018 | December 31 2017 | ||||||
U.S. dollar | $ | 181,398 | $ | 175,623 | ||||
Euro | 34,487 | 35,481 | ||||||
British pound | 7,127 | 7,016 | ||||||
Japanese yen | 3,035 | 2,993 | ||||||
Australian dollar | 3,015 | 3,046 | ||||||
Canadian dollar | 1,915 | 1,966 | ||||||
Other | 1,279 | 1,277 | ||||||
Total long-term debt | $ | 232,256 | $ | 227,402 |
Total long-term debt increased $4.9 billion, or two percent, during the three months ended March 31, 2018, 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 funding and liquidity risk management, see Liquidity Risk – Liquidity Stress Analysis and Time-to-required Funding on page 23, and for more information regarding long-term debt funding, see Note 11 – Long-term Debt to the Consolidated
Financial Statements of the Corporation’s 2017 Annual Report on Form 10-K.
We use derivative transactions to manage the duration, interest rate and currency risks of our borrowings, considering the characteristics of the assets they are funding. For more information on our ALM activities, see Interest Rate Risk Management for the Banking Book on page 45.
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, 2018, we issued $1.4 billion 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.
Bank of America 24 |
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 17 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 2017 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 2017 Annual Report on Form 10-K.
For more 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 a credit rating downgrade, see Note 3 – Derivatives to the Consolidated Financial Statements herein and Item 1A. Risk Factors of the Corporation’s 2017 Annual Report on Form 10-K.
Table 17 | 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 | A3 | P-2 | Stable | A- | A-2 | Stable | A | F1 | Stable | |||||||||
Bank of America, N.A. | Aa3 | P-1 | Stable | A+ | A-1 | Stable | A+ | F1 | Stable | |||||||||
Merrill Lynch, Pierce, Fenner & Smith Incorporated | 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 information on our credit risk management activities, see Consumer Portfolio Credit Risk Management below, Commercial Portfolio Credit Risk Management on page 34, Non-U.S. Portfolio on page 40, Provision for Credit Losses on page 41, Allowance for Credit Losses on page 41, and Note 5 – Outstanding Loans and Leases and Note 6 – 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 and are a component of our consumer credit risk management process. These models 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 home prices continued during the three months ended March 31, 2018 resulting in improved credit quality and lower credit losses in the consumer real estate portfolio, partially offset by seasoning and loan growth in the U.S. credit card portfolio compared to the same period in 2017.
Improved credit quality and continued loan balance run-off in the consumer real estate portfolio, partially offset by seasoning
within the U.S. credit card portfolio, drove a $133 million decrease in the consumer allowance for loan and lease losses during the three months ended March 31, 2018 to $5.3 billion at March 31, 2018. For more information, see Allowance for Credit Losses on page 41.
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 2017 Annual Report on Form 10-K.
Table 18 presents our outstanding consumer loans and leases, 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 (bankruptcy loans 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 Federal Housing Administration (FHA) or individually insured under long-term standby agreements with Fannie Mae and Freddie Mac (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 the Government National Mortgage Association (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.
For more information on PCI loans, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 31 and Note 5 – Outstanding Loans and Leases to the Consolidated Financial Statements.
25 Bank of America |
Table 18 | Consumer Credit Quality | |||||||||||||||||||||||
Outstandings | Nonperforming | Accruing Past Due 90 Days or More | ||||||||||||||||||||||
(Dollars in millions) | March 31 2018 | December 31 2017 | March 31 2018 | December 31 2017 | March 31 2018 | December 31 2017 | ||||||||||||||||||
Residential mortgage (1) | $ | 204,112 | $ | 203,811 | $ | 2,262 | $ | 2,476 | $ | 2,885 | $ | 3,230 | ||||||||||||
Home equity | 55,308 | 57,744 | 2,598 | 2,644 | — | — | ||||||||||||||||||
U.S. credit card | 93,014 | 96,285 | n/a | n/a | 925 | 900 | ||||||||||||||||||
Direct/Indirect consumer (2) | 91,213 | 93,830 | 46 | 46 | 38 | 40 | ||||||||||||||||||
Other consumer (3) | 2,860 | 2,678 | — | — | 1 | — | ||||||||||||||||||
Consumer loans excluding loans accounted for under the fair value option | $ | 446,507 | $ | 454,348 | $ | 4,906 | $ | 5,166 | $ | 3,849 | $ | 4,170 | ||||||||||||
Loans accounted for under the fair value option (4) | 894 | 928 | ||||||||||||||||||||||
Total consumer loans and leases | $ | 447,401 | $ | 455,276 | ||||||||||||||||||||
Percentage of outstanding consumer loans and leases (5) | n/a | n/a | 1.10 | % | 1.14 | % | 0.86 | % | 0.92 | % | ||||||||||||||
Percentage of outstanding consumer loans and leases, excluding PCI and fully-insured loan portfolios (5) | n/a | n/a | 1.19 | 1.23 | 0.23 | 0.22 |
(1) | Residential mortgage loans accruing past due 90 days or more are fully-insured loans. At March 31, 2018 and December 31, 2017, residential mortgage includes $2.0 billion and $2.2 billion of loans on which interest had been curtailed by the FHA, and therefore were no longer accruing interest, although principal was still insured, and $885 million and $1.0 billion of loans on which interest was still accruing. |
(2) | Outstandings include auto and specialty lending loans of $49.1 billion and $49.9 billion, unsecured consumer lending loans of $428 million and $469 million, U.S. securities-based lending loans of $38.1 billion and $39.8 billion, non-U.S. consumer loans of $2.9 billion and $3.0 billion and other consumer loans of $676 million and $684 million at March 31, 2018 and December 31, 2017. |
(3) | Outstandings include consumer leases of $2.7 billion and $2.5 billion and consumer overdrafts of $129 million and $163 million at March 31, 2018 and December 31, 2017. |
(4) | Consumer loans accounted for under the fair value option include residential mortgage loans of $523 million and $567 million and home equity loans of $371 million and $361 million at March 31, 2018 and December 31, 2017. For more information on the fair value option, see Note 15 – Fair Value Option to the Consolidated Financial Statements. |
(5) | Excludes consumer loans accounted for under the fair value option. At March 31, 2018 and December 31, 2017, $25 million and $26 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 19 presents net charge-offs and related ratios for consumer loans and leases.
Table 19 | Consumer Net Charge-offs and Related Ratios | |||||||||||||
Net Charge-offs (1) | Net Charge-off Ratios (1, 2) | |||||||||||||
Three Months Ended March 31 | ||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||
Residential mortgage | $ | (6 | ) | $ | 17 | (0.01 | )% | 0.04 | % | |||||
Home equity | 33 | 64 | 0.23 | 0.40 | ||||||||||
U.S. credit card | 701 | 606 | 3.01 | 2.74 | ||||||||||
Non-U.S. credit card (3) | — | 44 | — | 1.91 | ||||||||||
Direct/Indirect consumer | 58 | 48 | 0.26 | 0.21 | ||||||||||
Other consumer | 44 | 48 | 6.34 | 7.61 | ||||||||||
Total | $ | 830 | $ | 827 | 0.75 | 0.74 |
(1) | Net charge-offs exclude write-offs in the PCI loan portfolio. For more information, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 31. |
(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. |
(3) | Represents net charge-offs related to the non-U.S. credit card loan portfolio, which was sold during the second quarter of 2017. |
Net charge-offs, as shown in Tables 19 and 20, exclude write-offs in the PCI loan portfolio of $17 million and $9 million in residential mortgage and $18 million and $24 million in home equity for the three months ended March 31, 2018 and 2017. Net charge-off ratios including the PCI write-offs were 0.02 percent and 0.06 percent for residential mortgage and 0.36 percent and 0.55 percent for home equity for the three months ended March 31, 2018 and 2017. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 31.
Table 20 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. All other loans are generally characterized as non-core loans and represent run-off portfolios. Core loans as reported in Table 20 include loans held in the Consumer Banking and GWIM segments, as well as loans held for ALM activities in All Other. For more information, see Note 5 – Outstanding Loans and Leases to the Consolidated Financial Statements.
As shown in Table 20, outstanding core consumer real estate loans increased $1.3 billion during the three months ended March 31, 2018 driven by an increase of $3.0 billion in residential mortgage, partially offset by a $1.7 billion decrease in home equity.
Bank of America 26 |
Table 20 | Consumer Real Estate Portfolio (1) | |||||||||||||||||||||||
Outstandings | Nonperforming | Net Charge-offs (2) | ||||||||||||||||||||||
March 31 2018 | December 31 2017 | March 31 2018 | December 31 2017 | Three Months Ended March 31 | ||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | ||||||||||||||||||||||
Core portfolio | ||||||||||||||||||||||||
Residential mortgage | $ | 179,578 | $ | 176,618 | $ | 1,073 | $ | 1,087 | $ | 9 | $ | 4 | ||||||||||||
Home equity | 42,568 | 44,245 | 1,118 | 1,079 | 23 | 31 | ||||||||||||||||||
Total core portfolio | 222,146 | 220,863 | 2,191 | 2,166 | 32 | 35 | ||||||||||||||||||
Non-core portfolio | ||||||||||||||||||||||||
Residential mortgage | 24,534 | 27,193 | 1,189 | 1,389 | (15 | ) | 13 | |||||||||||||||||
Home equity | 12,740 | 13,499 | 1,480 | 1,565 | 10 | 33 | ||||||||||||||||||
Total non-core portfolio | 37,274 | 40,692 | 2,669 | 2,954 | (5 | ) | 46 | |||||||||||||||||
Consumer real estate portfolio | ||||||||||||||||||||||||
Residential mortgage | 204,112 | 203,811 | 2,262 | 2,476 | (6 | ) | 17 | |||||||||||||||||
Home equity | 55,308 | 57,744 | 2,598 | 2,644 | 33 | 64 | ||||||||||||||||||
Total consumer real estate portfolio | $ | 259,420 | $ | 261,555 | $ | 4,860 | $ | 5,120 | $ | 27 | $ | 81 | ||||||||||||
Allowance for Loan and Lease Losses | Provision for Loan and Lease Losses | |||||||||||||||||||||||
March 31 2018 | December 31 2017 | Three Months Ended March 31 | ||||||||||||||||||||||
2018 | 2017 | |||||||||||||||||||||||
Core portfolio | ||||||||||||||||||||||||
Residential mortgage | $ | 216 | $ | 218 | $ | 8 | $ | (1 | ) | |||||||||||||||
Home equity | 343 | 367 | (1 | ) | (11 | ) | ||||||||||||||||||
Total core portfolio | 559 | 585 | 7 | (12 | ) | |||||||||||||||||||
Non-core portfolio | ||||||||||||||||||||||||
Residential mortgage | 395 | 483 | (86 | ) | 33 | |||||||||||||||||||
Home equity | 576 | 652 | (49 | ) | (92 | ) | ||||||||||||||||||
Total non-core portfolio | 971 | 1,135 | (135 | ) | (59 | ) | ||||||||||||||||||
Consumer real estate portfolio | ||||||||||||||||||||||||
Residential mortgage | 611 | 701 | (78 | ) | 32 | |||||||||||||||||||
Home equity | 919 | 1,019 | (50 | ) | (103 | ) | ||||||||||||||||||
Total consumer real estate portfolio | $ | 1,530 | $ | 1,720 | $ | (128 | ) | $ | (71 | ) |
(1) | Outstandings and nonperforming loans exclude loans accounted for under the fair value option. Consumer loans accounted for under the fair value option included residential mortgage loans of $523 million and $567 million and home equity loans of $371 million and $361 million at March 31, 2018 and December 31, 2017. For more information, 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, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 31. |
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 31.
Residential Mortgage
The residential mortgage portfolio makes up the largest percentage of our consumer loan portfolio at 46 percent of consumer loans and leases at March 31, 2018. Approximately 39 percent of the residential mortgage portfolio is in Consumer Banking and approximately 36 percent is in GWIM. The remaining portion 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.
Outstanding balances in the residential mortgage portfolio, excluding loans accounted for under the fair value option, increased $301 million during the three months ended March 31, 2018 as retention of new originations was partially offset by loan transfers to held for sale of $1.3 billion, loan sales of $812 million and run-off.
At March 31, 2018 and December 31, 2017, the residential mortgage portfolio included $22.7 billion and $23.7 billion of outstanding fully-insured loans. At March 31, 2018 and December 31, 2017, $16.5 billion and $17.4 billion had FHA insurance with the remainder protected by long-term standby agreements. At March 31, 2018 and December 31, 2017, $4.8 billion and $5.2 billion of the FHA-insured loan population were repurchases of delinquent FHA loans pursuant to our servicing agreements with GNMA.
27 Bank of America |
Table 21 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, the fully-insured loan portfolio and loans accounted for under the fair value option. Additionally, in the “Reported Basis” columns in the following table, 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 31.
Table 21 | Residential Mortgage – Key Credit Statistics | ||||||||||||||||
Reported Basis (1) | Excluding Purchased Credit-impaired and Fully-insured Loans (1) | ||||||||||||||||
(Dollars in millions) | March 31 2018 | December 31 2017 | March 31 2018 | December 31 2017 | |||||||||||||
Outstandings | $ | 204,112 | $ | 203,811 | $ | 173,813 | $ | 172,069 | |||||||||
Accruing past due 30 days or more | 5,192 | 5,987 | 1,277 | 1,521 | |||||||||||||
Accruing past due 90 days or more | 2,885 | 3,230 | — | — | |||||||||||||
Nonperforming loans | 2,262 | 2,476 | 2,262 | 2,476 | |||||||||||||
Percent of portfolio | |||||||||||||||||
Refreshed LTV greater than 90 but less than or equal to 100 | 3 | % | 3 | % | 2 | % | 2 | % | |||||||||
Refreshed LTV greater than 100 | 2 | 2 | 1 | 1 | |||||||||||||
Refreshed FICO below 620 | 6 | 6 | 2 | 3 | |||||||||||||
2006 and 2007 vintages (2) | 9 | 10 | 7 | 8 | |||||||||||||
Three Months Ended March 31 | |||||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||||
Net charge-off ratio (3) | (0.01 | )% | 0.04 | % | (0.01 | )% | 0.05 | % |
(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 accounted for $729 million, or 32 percent, and $825 million, or 33 percent, of nonperforming residential mortgage loans at March 31, 2018 and December 31, 2017. |
(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 $214 million during the three months ended March 31, 2018 as outflows, including sales of $257 million, outpaced new inflows. Of the nonperforming residential mortgage loans at March 31, 2018, $789 million, or 35 percent, were current on contractual payments. Loans accruing past due 30 days or more decreased $244 million from seasonal declines.
Net charge-offs decreased $23 million to a net recovery of $6 million for the three months ended March 31, 2018 compared to $17 million of net charge-offs for the same period in 2017. This change was driven in part by net recoveries of $18 million related to loan sales during the three months ended March 31, 2018 compared to loan sale-related net recoveries of $11 million for the same period in 2017. Additionally, net charge-offs declined due to favorable portfolio trends and decreased write-downs on loans greater than 180 days past due driven by improvement in home prices and the U.S. economy.
Loans with a refreshed LTV greater than 100 percent represented one percent of the residential mortgage loan portfolio at both March 31, 2018 and December 31, 2017. Of the loans with a refreshed LTV greater than 100 percent, 99 percent were performing at March 31, 2018 compared to 98 percent at December 31, 2017. 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 due to home price deterioration since 2006, partially offset by subsequent appreciation.
Of the $173.8 billion in total residential mortgage loans outstanding at March 31, 2018, as shown in Table 22, 32 percent were originated as interest-only loans. The outstanding balance of
interest-only residential mortgage loans that have entered the amortization period was $9.9 billion, or 18 percent, at March 31, 2018. 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, 2018, $251 million, or three 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, 2018, $432 million, or four percent, of outstanding interest-only residential mortgage loans that had entered the amortization period were nonperforming, of which $166 million were contractually current, compared to $2.3 billion, or one percent, for the entire residential mortgage portfolio, of which $789 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 90 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 22 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 of outstandings at both March 31, 2018 and December 31, 2017. In the New York area, the New York-Northern New Jersey-Long Island MSA made up 13 percent of outstandings at both March 31, 2018 and December 31, 2017.
Bank of America 28 |
Table 22 | Residential Mortgage State Concentrations | |||||||||||||||||||||||
Outstandings (1) | Nonperforming (1) | Net Charge-offs (2) | ||||||||||||||||||||||
March 31 2018 | December 31 2017 | March 31 2018 | December 31 2017 | Three Months Ended March 31 | ||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | ||||||||||||||||||||||
California | $ | 69,368 | $ | 68,455 | $ | 384 | $ | 433 | $ | (10 | ) | $ | (4 | ) | ||||||||||
New York (3) | 17,613 | 17,239 | 221 | 227 | 4 | (2 | ) | |||||||||||||||||
Florida (3) | 10,887 | 10,880 | 281 | 280 | (5 | ) | 1 | |||||||||||||||||
Texas | 7,298 | 7,237 | 127 | 126 | 1 | 1 | ||||||||||||||||||
New Jersey (3) | 6,202 | 6,099 | 118 | 130 | 2 | 1 | ||||||||||||||||||
Other | 62,445 | 62,159 | 1,131 | 1,280 | 2 | 20 | ||||||||||||||||||
Residential mortgage loans (4) | $ | 173,813 | $ | 172,069 | $ | 2,262 | $ | 2,476 | $ | (6 | ) | $ | 17 | |||||||||||
Fully-insured loan portfolio | 22,709 | 23,741 | ||||||||||||||||||||||
Purchased credit-impaired residential mortgage loan portfolio (5) | 7,590 | 8,001 | ||||||||||||||||||||||
Total residential mortgage loan portfolio | $ | 204,112 | $ | 203,811 |
(1) | Outstandings and nonperforming loans exclude loans accounted for under the fair value option. |
(2) | Net charge-offs excluded $17 million and $9 million of write-offs in the residential mortgage PCI loan portfolio for the three months ended March 31, 2018 and 2017. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 31. |
(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 both March 31, 2018 and December 31, 2017, 47 percent of PCI residential mortgage loans were in California. There were no other significant single state concentrations. |
Home Equity
At March 31, 2018, the home equity portfolio made up 12 percent of the consumer portfolio and is comprised of home equity lines of credit (HELOCs), home equity loans and reverse mortgages.
At March 31, 2018, our HELOC portfolio had an outstanding balance of $49.0 billion, or 89 percent of the total home equity portfolio, compared to $51.2 billion, or 89 percent, at December 31, 2017. HELOCs generally have an initial draw period of 10 years, and after the initial draw period ends, the loans generally convert to 15-year amortizing loans.
At March 31, 2018, our home equity loan portfolio had an outstanding balance of $4.1 billion, or seven percent of the total home equity portfolio, compared to $4.4 billion, or seven percent, at December 31, 2017. Home equity loans are almost all fixed-rate loans with amortizing payment terms of 10 to 30 years, and of the $4.1 billion at March 31, 2018, 58 percent have 25- to 30-year terms. At March 31, 2018, our reverse mortgage portfolio had an outstanding balance, excluding loans accounted for under the fair value option, of $2.2 billion, or four percent of the total home equity portfolio, compared to $2.1 billion, also four percent, at December 31, 2017. We no longer originate reverse mortgages.
At March 31, 2018, approximately 70 percent of the home equity portfolio was in Consumer Banking, 23 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 $2.4 billion during the three months ended March 31, 2018 primarily due to paydowns and charge-offs outpacing new originations and draws on existing lines. Of the total home equity portfolio at March 31,
2018 and December 31, 2017, $18.2 billion and $18.7 billion, or 33 percent and 32 percent, were in first-lien positions (34 percent for both periods excluding the PCI home equity portfolio). At March 31, 2018, 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 $8.9 billion, or 17 percent of our total home equity portfolio excluding the PCI loan portfolio.
Unused HELOCs totaled $43.9 billion at March 31, 2018 compared to $44.2 billion at December 31, 2017. The decrease was primarily due to accounts reaching the end of their draw period, 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 53 percent and 54 percent at March 31, 2018 and December 31, 2017.
Table 23 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 following table, 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 31.
29 Bank of America |
Table 23 | Home Equity – Key Credit Statistics | |||||||||||||||
Reported Basis (1) | Excluding Purchased Credit-impaired Loans (1) | |||||||||||||||
(Dollars in millions) | March 31 2018 | December 31 2017 | March 31 2018 | December 31 2017 | ||||||||||||
Outstandings | $ | 55,308 | $ | 57,744 | $ | 52,763 | $ | 55,028 | ||||||||
Accruing past due 30 days or more (2) | 460 | 502 | 460 | 502 | ||||||||||||
Nonperforming loans (2) | 2,598 | 2,644 | 2,598 | 2,644 | ||||||||||||
Percent of portfolio | ||||||||||||||||
Refreshed CLTV greater than 90 but less than or equal to 100 | 3 | % | 3 | % | 3 | % | 3 | % | ||||||||
Refreshed CLTV greater than 100 | 5 | 5 | 4 | 4 | ||||||||||||
Refreshed FICO below 620 | 6 | 6 | 6 | 6 | ||||||||||||
2006 and 2007 vintages (3) | 28 | 29 | 26 | 27 | ||||||||||||
Three Months Ended March 31 | ||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net charge-off ratio (4) | 0.23 | % | 0.40 | % | 0.24 | % | 0.42 | % |
(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 included $53 million and $67 million and nonperforming loans included $325 million and $344 million of loans where we serviced the underlying first-lien at March 31, 2018 and December 31, 2017. |
(3) | These vintages of loans have higher refreshed combined loan-to-value (CLTV) ratios and accounted for 53 percent and 52 percent of nonperforming home equity loans at March 31, 2018 and December 31, 2017, and 89 percent of net charge-offs in both the three months ended March 31, 2018 and 2017. |
(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 $46 million during the three months ended March 31, 2018 as outflows, including $12 million of sales, outpaced new inflows. Of the nonperforming home equity portfolio at March 31, 2018, $1.4 billion, or 54 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, $690 million, or 27 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 $42 million during the three months ended March 31, 2018.
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. 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 loan. At March 31, 2018, we estimate that $776 million of current and $121 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 $152 million of these combined amounts, with the remaining $745 million serviced by third parties. Of the $897 million 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 $294 million had first-lien loans that were 90 days or more past due.
Net charge-offs decreased $31 million to $33 million for the three months ended March 31, 2018 compared to $64 million for the same period in 2017 driven by favorable portfolio trends due in part to improvement in home prices and the U.S. economy.
Outstanding balances with a refreshed CLTV greater than 100 percent comprised four percent of the home equity portfolio at both March 31, 2018 and December 31, 2017. Outstanding balances 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 91 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, 2018.
Of the $52.8 billion in total home equity portfolio outstandings at March 31, 2018, as shown in Table 24, 26 percent require interest-only payments. The outstanding balance of HELOCs that have reached the end of their draw period and have entered the amortization period was $18.6 billion at March 31, 2018. 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, 2018, $341 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, 2018, $2.1 billion, or 12 percent, of outstanding HELOCs that had entered the amortization period were nonperforming, of which $1.2 billion were contractually current. Loans in our HELOC portfolio generally have an initial draw period of 10 years and six percent of these loans will enter the amortization period during the remainder of 2018 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, 2018, approximately 27 percent of these customers with an outstanding balance did not pay any principal on their HELOCs.
Bank of America 30 |
Table 24 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, 2018 and December 31, 2017. Loans within this MSA contributed 32 percent and 20 percent of net charge-offs within the home equity portfolio for the three
months ended March 31, 2018 and 2017. The Los Angeles-Long Beach-Santa Ana MSA within California made up 11 percent of the outstanding home equity portfolio at both March 31, 2018 and December 31, 2017. Loans within this MSA contributed net recoveries of $5 million and $4 million within the home equity portfolio for the three months ended March 31, 2018 and 2017.
Table 24 | Home Equity State Concentrations | |||||||||||||||||||||||
Outstandings (1) | Nonperforming (1) | Net Charge-offs (2) | ||||||||||||||||||||||
March 31 2018 | December 31 2017 | March 31 2018 | December 31 2017 | Three Months Ended March 31 | ||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | ||||||||||||||||||||||
California | $ | 14,506 | $ | 15,145 | $ | 740 | $ | 766 | $ | (7 | ) | $ | (7 | ) | ||||||||||
Florida (3) | 6,033 | 6,308 | 432 | 411 | 10 | 11 | ||||||||||||||||||
New Jersey (3) | 4,333 | 4,546 | 190 | 191 | 9 | 10 | ||||||||||||||||||
New York (3) | 4,024 | 4,195 | 250 | 252 | 6 | 8 | ||||||||||||||||||
Massachusetts | 2,645 | 2,751 | 90 | 92 | 2 | 1 | ||||||||||||||||||
Other | 21,222 | 22,083 | 896 | 932 | 13 | 41 | ||||||||||||||||||
Home equity loans (4) | $ | 52,763 | $ | 55,028 | $ | 2,598 | $ | 2,644 | $ | 33 | $ | 64 | ||||||||||||
Purchased credit-impaired home equity portfolio (5) | 2,545 | 2,716 | ||||||||||||||||||||||
Total home equity loan portfolio | $ | 55,308 | $ | 57,744 |
(1) | Outstandings and nonperforming loans exclude loans accounted for under the fair value option. |
(2) | Net charge-offs excluded $18 million and $24 million of write-offs in the home equity PCI loan portfolio for the three months ended March 31, 2018 and 2017. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio. |
(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, 2018 and December 31, 2017, 28 percent of PCI home equity loans were in California. There were no other significant single state concentrations. |
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 standards for PCI loans. For more information, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements of the
Corporation’s 2017 Annual Report on Form 10-K and Note 5 – Outstanding Loans and Leases to the Consolidated Financial Statements.
Table 25 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 25 | Purchased Credit-impaired Loan Portfolio | ||||||||||||||||||
Unpaid Principal Balance | Gross Carrying Value | Related Valuation Allowance | Carrying Value Net of Valuation Allowance | Percent of Unpaid Principal Balance | |||||||||||||||
(Dollars in millions) | March 31, 2018 | ||||||||||||||||||
Residential mortgage (1) | $ | 7,698 | $ | 7,590 | $ | 84 | $ | 7,506 | 97.51 | % | |||||||||
Home equity | 2,614 | 2,545 | 158 | 2,387 | 91.32 | ||||||||||||||
Total purchased credit-impaired loan portfolio | $ | 10,312 | $ | 10,135 | $ | 242 | $ | 9,893 | 95.94 | ||||||||||
December 31, 2017 | |||||||||||||||||||
Residential mortgage (1) | $ | 8,117 | $ | 8,001 | $ | 117 | $ | 7,884 | 97.13 | % | |||||||||
Home equity | 2,787 | 2,716 | 172 | 2,544 | 91.28 | ||||||||||||||
Total purchased credit-impaired loan portfolio | $ | 10,904 | $ | 10,717 | $ | 289 | $ | 10,428 | 95.63 |
(1) | At March 31, 2018 and December 31, 2017, pay option loans had an unpaid principal balance of $1.3 billion and $1.4 billion and a carrying value of $1.3 billion and $1.4 billion. This includes $1.1 billion and $1.2 billion of loans that were credit-impaired upon acquisition and $119 million and $141 million of loans that were 90 days or more past due at March 31, 2018 and December 31, 2017. The total unpaid principal balance of pay option loans with accumulated negative amortization was $134 million and $160 million, including $7 million and $9 million of negative amortization at March 31, 2018 and December 31, 2017. |
31 Bank of America |
The total PCI unpaid principal balance decreased $592 million, or five percent, during the three months ended March 31, 2018 primarily driven by payoffs, paydowns, write-offs and PCI loan sales with a carrying value of $109 million compared to no sales during the same period in 2017.
Of the unpaid principal balance of $10.3 billion at March 31, 2018, $9.3 billion, or 90 percent, was current based on the contractual terms, $608 million, or six percent, was in early stage delinquency, and $314 million was 180 days or more past due, including $253 million of first-lien mortgages and $61 million of home equity loans.
The PCI residential mortgage loan and home equity portfolios represented 75 percent and 25 percent of the total PCI loan portfolio at March 31, 2018. Those loans to borrowers with a refreshed FICO score below 620 represented 24 percent and 17 percent of the PCI residential mortgage loan and home equity portfolios at March 31, 2018. Residential mortgage and home equity loans with a refreshed LTV or CLTV greater than 90 percent, after consideration of purchase accounting adjustments and the related valuation allowance, represented 14 percent and 34 percent of their respective PCI loan portfolios and 15 percent and 36 percent based on the unpaid principal balance at March 31, 2018.
U.S. Credit Card
At March 31, 2018, 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 $3.3 billion to $93.0 billion during the three months ended March 31, 2018 due to paydowns and a seasonal decline in purchase volumes. Net charge-offs increased $95 million to $701 million during the three months ended March 31, 2018 compared to the same period in 2017 due to portfolio seasoning and loan growth. U.S. credit card loans 30 days or more past due and still accruing interest decreased $52 million during the three months ended March 31, 2018 from seasonal declines while loans 90 days or more past due and still accruing interest increased $25 million, driven by the same factors as described for net charge-offs.
Unused lines of credit for U.S. credit card totaled $334.1 billion and $326.3 billion at March 31, 2018 and December 31, 2017. 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.
Table 26 presents certain state concentrations for the U.S. credit card portfolio.
Table 26 | U.S. Credit Card State Concentrations | |||||||||||||||||||||||
Outstandings | Accruing Past Due 90 Days or More | Net Charge-Offs | ||||||||||||||||||||||
March 31 2018 | December 31 2017 | March 31 2018 | December 31 2017 | Three Months Ended March 31 | ||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | ||||||||||||||||||||||
California | $ | 14,841 | $ | 15,254 | $ | 141 | $ | 136 | $ | 116 | $ | 96 | ||||||||||||
Florida | 8,174 | 8,359 | 116 | 94 | 77 | 67 | ||||||||||||||||||
Texas | 7,303 | 7,451 | 79 | 76 | 56 | 47 | ||||||||||||||||||
New York | 5,796 | 5,977 | 91 | 91 | 70 | 45 | ||||||||||||||||||
Washington | 4,153 | 4,350 | 22 | 20 | 15 | 14 | ||||||||||||||||||
Other | 52,747 | 54,894 | 476 | 483 | 367 | 337 | ||||||||||||||||||
Total U.S. credit card portfolio | $ | 93,014 | $ | 96,285 | $ | 925 | $ | 900 | $ | 701 | $ | 606 |
Direct/Indirect and Other Consumer
At March 31, 2018, approximately 54 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). At March 31, 2018, approximately 95 percent of the $2.9 billion other consumer portfolio was consumer auto leases included in Consumer Banking.
Outstandings in the direct/indirect portfolio decreased $2.6 billion to $91.2 billion during the three months ended March 31, 2018 primarily due to lower draws and seasonal utilization in the securities-based lending portfolio. Net charge-offs increased $10 million to $58 million during the three months ended March 31, 2018 compared to the same period in 2017 due largely to portfolio seasoning.
Table 27 presents certain state concentrations for the direct/indirect consumer loan portfolio.
Table 27 | Direct/Indirect State Concentrations | |||||||||||||||||||||||
Outstandings | Accruing Past Due 90 Days or More | Net Charge-Offs | ||||||||||||||||||||||
March 31 2018 | December 31 2017 | March 31 2018 | December 31 2017 | Three Months Ended March 31 | ||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | ||||||||||||||||||||||
California | $ | 11,659 | $ | 12,502 | $ | 3 | $ | 3 | $ | 6 | $ | 5 | ||||||||||||
Florida | 10,612 | 10,946 | 5 | 5 | 9 | 9 | ||||||||||||||||||
Texas | 10,338 | 10,623 | 4 | 5 | 9 | 10 | ||||||||||||||||||
New York | 5,907 | 6,058 | 2 | 2 | 3 | 1 | ||||||||||||||||||
Georgia | 3,483 | 3,502 | 4 | 4 | 4 | 3 | ||||||||||||||||||
Other | 49,214 | 50,199 | 20 | 21 | 27 | 20 | ||||||||||||||||||
Total direct/indirect loan portfolio | $ | 91,213 | $ | 93,830 | $ | 38 | $ | 40 | $ | 58 | $ | 48 |
Bank of America 32 |
Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity
Table 28 presents nonperforming consumer loans, leases and foreclosed properties activity during the three months ended March 31, 2018 and 2017. For more information on nonperforming loans, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements of the Corporation’s 2017 Annual Report on Form 10-K and Note 5 – Outstanding Loans and Leases to the Consolidated Financial Statements. During the three months ended March 31, 2018, nonperforming consumer loans declined $260 million to $4.9 billion driven by loan sales of $269 million.
At March 31, 2018, $1.5 billion, or 31 percent, of nonperforming loans were 180 days or more past due and had been written down to their estimated property value less costs to sell. In addition, at March 31, 2018, $2.2 billion, or 45 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 increased $28 million to $264 million during the three months ended March 31, 2018 as additions
outpaced liquidations. 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. Certain delinquent government-guaranteed loans (principally FHA-insured loans) are excluded 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 accrued during the holding period.
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, 2018 and December 31, 2017, $294 million and $330 million of such junior-lien home equity loans were included in nonperforming loans and leases.
Nonperforming loans also include certain loans that have been modified in TDRs where economic concessions have been granted to borrowers experiencing financial difficulties. Nonperforming TDRs, excluding those modified loans in the PCI loan portfolio, are included in Table 28.
Table 28 | Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity (1) | |||||||
Three Months Ended March 31 | ||||||||
(Dollars in millions) | 2018 | 2017 | ||||||
Nonperforming loans and leases, January 1 | $ | 5,166 | $ | 6,004 | ||||
Additions | 812 | 818 | ||||||
Reductions: | ||||||||
Paydowns and payoffs | (245 | ) | (296 | ) | ||||
Sales | (269 | ) | (142 | ) | ||||
Returns to performing status (2) | (364 | ) | (386 | ) | ||||
Charge-offs | (147 | ) | (174 | ) | ||||
Transfers to foreclosed properties | (45 | ) | (57 | ) | ||||
Transfers to loans held-for-sale | (2 | ) | (221 | ) | ||||
Total net reductions to nonperforming loans and leases | (260 | ) | (458 | ) | ||||
Total nonperforming loans and leases, March 31 (3) | 4,906 | 5,546 | ||||||
Foreclosed properties, March 31 (4) | 264 | 328 | ||||||
Nonperforming consumer loans, leases and foreclosed properties, March 31 | $ | 5,170 | $ | 5,874 | ||||
Nonperforming consumer loans and leases as a percentage of outstanding consumer loans and leases (5) | 1.10 | % | 1.23 | % | ||||
Nonperforming consumer loans, leases and foreclosed properties as a percentage of outstanding consumer loans, leases and foreclosed properties (5) | 1.16 | 1.30 |
(1) | Balances do not include nonperforming LHFS of $4 million and $179 million and nonaccruing TDRs removed from the PCI loan portfolio prior to January 1, 2010 of $24 million and $28 million at March 31, 2018 and 2017 as well as loans accruing past due 90 days or more as presented in Table 18 and Note 5 – 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) | At March 31, 2018, 31 percent of nonperforming loans were 180 days or more past due. |
(4) | Foreclosed property balances do not include properties insured by certain government-guaranteed loans, principally FHA-insured, of $680 million and $1.1 billion at March 31, 2018 and 2017. |
(5) | Outstanding consumer loans and leases exclude loans accounted for under the fair value option. |
Table 29 presents TDRs for the consumer real estate portfolio. Performing TDR balances are excluded from nonperforming loans and leases in Table 28.
Table 29 | Consumer Real Estate Troubled Debt Restructurings | |||||||||||||||||||||||
March 31, 2018 | December 31, 2017 | |||||||||||||||||||||||
(Dollars in millions) | Nonperforming | Performing | Total | Nonperforming | Performing | Total | ||||||||||||||||||
Residential mortgage (1, 2, 3) | $ | 1,425 | $ | 6,594 | $ | 8,019 | $ | 1,535 | $ | 8,163 | $ | 9,698 | ||||||||||||
Home equity (4) | 1,444 | 1,409 | 2,853 | 1,457 | 1,399 | 2,856 | ||||||||||||||||||
Total consumer real estate troubled debt restructurings | $ | 2,869 | $ | 8,003 | $ | 10,872 | $ | 2,992 | $ | 9,562 | $ | 12,554 |
(1) | At March 31, 2018 and December 31, 2017, residential mortgage TDRs deemed collateral dependent totaled $1.8 billion and $2.8 billion, and included $1.1 billion and $1.2 billion of loans classified as nonperforming and $709 million and $1.6 billion of loans classified as performing. |
(2) | Residential mortgage performing TDRs included $3.5 billion and $3.7 billion of loans that were fully-insured at March 31, 2018 and December 31, 2017. |
(3) | During the three months ended March 31, 2018, the Corporation transferred impaired residential mortgage loans with a carrying value of $1.2 billion to held for sale. |
(4) | Home equity TDRs deemed collateral dependent totaled $1.6 billion for both periods and included $1.2 billion for both periods of loans classified as nonperforming, and $389 million and $388 million of loans classified as performing at March 31, 2018 and December 31, 2017. |
33 Bank of America |
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).
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 28 as substantially all of the loans remain on accrual status until either charged off or paid in full. At March 31, 2018 and December 31, 2017, our renegotiated TDR portfolio was $501 million and $490 million, of which $433 million and $426 million were current or less than 30 days past due under the modified terms. The increase in the renegotiated TDR portfolio was primarily driven by new renegotiated enrollments outpacing the run off of existing portfolios. For more information on the renegotiated TDR portfolio, see Note 5 – 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 34, 37 and 42 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, see Commercial Portfolio Credit Risk Management – Industry Concentrations on page 37 and Table 37.
For more information on our accounting policies regarding nonperforming status, net charge-offs and delinquencies for the commercial portfolio, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements of the Corporation’s 2017 Annual Report on Form 10-K.
Commercial Credit Portfolio
During the three months ended March 31, 2018, credit quality among large corporate borrowers was strong and there was continued improvement in the energy portfolio. Credit quality of commercial real estate borrowers continued to be strong with conservative LTV ratios, stable market rents in most sectors and vacancy rates that remain low.
Total commercial utilized credit exposure increased $8.9 billion during the three months ended March 31, 2018 primarily driven by increases in derivative assets and loans and leases, partially offset by decreases in LHFS. The utilization rate for loans and leases, standby letters of credit (SBLCs) and financial guarantees, and commercial letters of credit, in the aggregate, was 58 percent and 59 percent at March 31, 2018 and December 31, 2017.
Table 30 presents commercial credit exposure by type for utilized, unfunded and total binding committed credit exposure. Commercial utilized credit exposure includes SBLCs and financial guarantees 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.
Table 30 | Commercial Credit Exposure by Type | |||||||||||||||||||||||
Commercial Utilized (1) | Commercial Unfunded (2, 3, 4) | Total Commercial Committed | ||||||||||||||||||||||
(Dollars in millions) | March 31 2018 | December 31 2017 | March 31 2018 | December 31 2017 | March 31 2018 | December 31 2017 | ||||||||||||||||||
Loans and leases (5) | $ | 492,900 | $ | 487,748 | $ | 375,888 | $ | 364,743 | $ | 868,788 | $ | 852,491 | ||||||||||||
Derivative assets (6) | 47,869 | 37,762 | — | — | 47,869 | 37,762 | ||||||||||||||||||
Standby letters of credit and financial guarantees | 33,969 | 34,517 | 583 | 863 | 34,552 | 35,380 | ||||||||||||||||||
Debt securities and other investments | 26,998 | 28,161 | 4,461 | 4,864 | 31,459 | 33,025 | ||||||||||||||||||
Loans held-for-sale | 5,653 | 10,257 | 16,887 | 9,742 | 22,540 | 19,999 | ||||||||||||||||||
Commercial letters of credit | 1,351 | 1,467 | 117 | 155 | 1,468 | 1,622 | ||||||||||||||||||
Other | 948 | 888 | — | — | 948 | 888 | ||||||||||||||||||
Total | $ | 609,688 | $ | 600,800 | $ | 397,936 | $ | 380,367 | $ | 1,007,624 | $ | 981,167 |
(1) | Commercial utilized exposure includes loans of $5.1 billion and $4.8 billion and issued letters of credit with a notional amount of $193 million and $232 million accounted for under the fair value option at March 31, 2018 and December 31, 2017. |
(2) | Commercial unfunded exposure includes commitments accounted for under the fair value option with a notional amount of $4.2 billion and $4.6 billion at March 31, 2018 and December 31, 2017. |
(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 (i.e., syndicated or participated) to other financial institutions. The distributed amounts were $10.9 billion and $11.0 billion at March 31, 2018 and December 31, 2017. |
(5) | Includes credit risk exposure associated with assets under operating lease arrangements of $6.2 billion and $6.3 billion at March 31, 2018 and December 31, 2017. |
(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 $36.5 billion and $34.6 billion at March 31, 2018 and December 31, 2017. Not reflected in utilized and committed exposure is additional non-cash derivative collateral held of $36.9 billion and $26.2 billion at March 31, 2018 and December 31, 2017, which consists primarily of other marketable securities. |
Outstanding commercial loans and leases increased $5.2 billion during the three months ended March 31, 2018 primarily due to growth in commercial and industrial loans. During the three months ended March 31, 2018, reservable criticized balances decreased $197 million to $13.4 billion primarily driven by improvements in the energy sector, while nonperforming commercial loans and leases, excluding loans accounted for under
the fair value option, increased $168 million to $1.5 billion. The allowance for loan and lease losses for the commercial portfolio was unchanged at $5.0 billion at March 31, 2018. For more information, see Allowance for Credit Losses on page 41. Table 31 presents our commercial loans and leases portfolio and related credit quality information at March 31, 2018 and December 31, 2017.
Bank of America 34 |
Table 31 | Commercial Credit Quality | |||||||||||||||||||||||
Outstandings | Nonperforming | Accruing Past Due 90 Days or More | ||||||||||||||||||||||
(Dollars in millions) | March 31 2018 | December 31 2017 | March 31 2018 | December 31 2017 | March 31 2018 | December 31 2017 | ||||||||||||||||||
Commercial and industrial: | ||||||||||||||||||||||||
U.S. commercial | $ | 288,476 | $ | 284,836 | $ | 1,059 | $ | 814 | $ | 98 | $ | 144 | ||||||||||||
Non-U.S. commercial | 97,365 | 97,792 | 255 | 299 | — | 3 | ||||||||||||||||||
Total commercial and industrial | 385,841 | 382,628 | 1,314 | 1,113 | 98 | 147 | ||||||||||||||||||
Commercial real estate (1) | 60,085 | 58,298 | 73 | 112 | 13 | 4 | ||||||||||||||||||
Commercial lease financing | 21,764 | 22,116 | 27 | 24 | 8 | 19 | ||||||||||||||||||
467,690 | 463,042 | 1,414 | 1,249 | 119 | 170 | |||||||||||||||||||
U.S. small business commercial (2) | 13,892 | 13,649 | 58 | 55 | 76 | 75 | ||||||||||||||||||
Commercial loans excluding loans accounted for under the fair value option | 481,582 | 476,691 | 1,472 | 1,304 | 195 | 245 | ||||||||||||||||||
Loans accounted for under the fair value option (3) | 5,095 | 4,782 | 12 | 43 | — | — | ||||||||||||||||||
Total commercial loans and leases | $ | 486,677 | $ | 481,473 | $ | 1,484 | $ | 1,347 | $ | 195 | $ | 245 |
(1) | Includes U.S. commercial real estate of $55.6 billion and $54.8 billion and non-U.S. commercial real estate of $4.5 billion and $3.5 billion at March 31, 2018 and December 31, 2017. |
(2) | Includes card-related products. |
(3) | Commercial loans accounted for under the fair value option include U.S. commercial of $3.2 billion and $2.6 billion and non-U.S. commercial of $1.9 billion and $2.2 billion at March 31, 2018 and December 31, 2017. For more information on the fair value option, see Note 15 – Fair Value Option to the Consolidated Financial Statements. |
Table 32 presents net charge-offs and related ratios for our commercial loans and leases for the three months ended March 31, 2018 and 2017. Net charge-offs declined $26 million for the three months ended March 31, 2018 compared to the same period in 2017.
Table 32 | Commercial Net Charge-offs and Related Ratios | |||||||||||||
Net Charge-offs | Net Charge-off Ratios (1) | |||||||||||||
Three Months Ended March 31 | ||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||
Commercial and industrial: | ||||||||||||||
U.S. commercial | $ | 24 | $ | 44 | 0.03 | % | 0.06 | % | ||||||
Non-U.S. commercial | 4 | 15 | 0.02 | 0.07 | ||||||||||
Total commercial and industrial | 28 | 59 | 0.03 | 0.07 | ||||||||||
Commercial real estate | (3 | ) | (4 | ) | (0.02 | ) | (0.03 | ) | ||||||
Commercial lease financing | (1 | ) | — | (0.01 | ) | — | ||||||||
24 | 55 | 0.02 | 0.05 | |||||||||||
U.S. small business commercial | 57 | 52 | 1.67 | 1.61 | ||||||||||
Total commercial | $ | 81 | $ | 107 | 0.07 | 0.10 |
(1) | Net charge-off ratios are calculated as net charge-offs divided by average outstanding loans and leases excluding loans accounted for under the fair value option. |
Table 33 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 $197 million, or one percent, during the three months ended March 31, 2018 primarily driven by upgrades and paydowns in the energy portfolio. Approximately 86 percent and 84 percent of commercial utilized reservable criticized exposure was secured at March 31, 2018 and December 31, 2017.
Table 33 | Commercial Utilized Reservable Criticized Exposure | |||||||||||||
Amount (1) | Percent (2) | Amount (1) | Percent (2) | |||||||||||
(Dollars in millions) | March 31, 2018 | December 31, 2017 | ||||||||||||
Commercial and industrial: | ||||||||||||||
U.S. commercial | $ | 9,874 | 3.12 | % | $ | 9,891 | 3.15 | % | ||||||
Non-U.S. commercial | 1,719 | 1.66 | 1,766 | 1.70 | ||||||||||
Total commercial and industrial | 11,593 | 2.76 | 11,657 | 2.79 | ||||||||||
Commercial real estate | 523 | 0.85 | 566 | 0.95 | ||||||||||
Commercial lease financing | 489 | 2.25 | 581 | 2.63 | ||||||||||
12,605 | 2.50 | 12,804 | 2.57 | |||||||||||
U.S. small business commercial | 761 | 5.48 | 759 | 5.56 | ||||||||||
Total commercial utilized reservable criticized exposure | $ | 13,366 | 2.58 | $ | 13,563 | 2.65 |
(1) | Total commercial utilized reservable criticized exposure includes loans and leases of $12.3 billion and $12.5 billion and commercial letters of credit of $1.1 billion at both March 31, 2018 and December 31, 2017. |
(2) | Percentages are calculated as commercial utilized reservable criticized exposure divided by total commercial utilized reservable exposure for each exposure category. |
35 Bank of America |
Commercial and Industrial
Commercial and industrial loans include U.S. commercial and non-U.S. commercial portfolios.
U.S. Commercial
At March 31, 2018, 70 percent of the U.S. commercial loan portfolio, excluding small business, was managed in Global Banking, 17 percent in Global Markets, 12 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 $3.6 billion, or one percent, during the three months ended March 31, 2018 due to growth across most of the commercial businesses. Nonperforming loans and leases increased $245 million, or 30 percent, during the three months ended March 31, 2018 driven by a small number of client downgrades across industries. Reservable criticized balances decreased $17 million, or less than one percent. Net charge-offs decreased $20 million for the three months ended March 31, 2018 compared to the same period in 2017.
Non-U.S. Commercial
At March 31, 2018, 79 percent of the non-U.S. commercial loan portfolio was managed in Global Banking and 21 percent in Global Markets. Outstanding loans, excluding loans accounted for under the fair value option, decreased $427 million during the three months ended March 31, 2018. Nonperforming loans and leases decreased $44 million, or 15 percent, and reservable criticized balances decreased $47 million, or three percent. Net charge-offs decreased $11 million for the three months ended March 31, 2018 to $4 million. For more information on the non-U.S. commercial portfolio, see Non-U.S. Portfolio on page 40.
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, 2018 and December 31, 2017. The commercial real estate portfolio is predominantly managed in Global Banking and consists of loans made primarily to public and private developers, and commercial real estate firms. Outstanding loans increased $1.8 billion, or three percent, during the three months ended March 31, 2018 to $60.1 billion due to new originations outpacing paydowns.
For the three months ended March 31, 2018, 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 decreased $39 million, or 24 percent, during the three months ended March 31, 2018 to $125 million at March 31, 2018 and reservable criticized balances decreased $43 million, or eight percent, to $523 million primarily due to loan paydowns. Net recoveries were $3 million for the three months ended March 31, 2018 compared to $4 million for the same period in 2017.
Table 34 presents outstanding commercial real estate loans by geographic region, based on the geographic location of the collateral, and by property type.
Table 34 | Outstanding Commercial Real Estate Loans | |||||||
(Dollars in millions) | March 31 2018 | December 31 2017 | ||||||
By Geographic Region | ||||||||
California | $ | 14,059 | $ | 13,607 | ||||
Northeast | 9,898 | 10,072 | ||||||
Southwest | 7,092 | 6,970 | ||||||
Southeast | 5,708 | 5,487 | ||||||
Midwest | 3,883 | 3,769 | ||||||
Florida | 3,425 | 3,170 | ||||||
Midsouth | 3,386 | 2,962 | ||||||
Illinois | 2,838 | 3,263 | ||||||
Northwest | 2,487 | 2,657 | ||||||
Non-U.S. | 4,506 | 3,538 | ||||||
Other (1) | 2,803 | 2,803 | ||||||
Total outstanding commercial real estate loans | $ | 60,085 | $ | 58,298 | ||||
By Property Type | ||||||||
Non-residential | ||||||||
Office | $ | 17,442 | $ | 16,718 | ||||
Shopping centers / Retail | 8,927 | 8,825 | ||||||
Multi-family rental | 8,401 | 8,280 | ||||||
Hotels / Motels | 6,410 | 6,344 | ||||||
Industrial / Warehouse | 5,948 | 6,070 | ||||||
Unsecured | 3,039 | 2,187 | ||||||
Multi-use | 2,445 | 2,771 | ||||||
Land and land development | 149 | 160 | ||||||
Other | 6,101 | 5,485 | ||||||
Total non-residential | 58,862 | 56,840 | ||||||
Residential | 1,223 | 1,458 | ||||||
Total outstanding commercial real estate loans | $ | 60,085 | $ | 58,298 |
(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. |
Bank of America 36 |
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 of the U.S. small business commercial portfolio at both March 31, 2018 and December 31, 2017. Net charge-offs were $57 million for the three months ended March 31, 2018 compared to $52 million for the same period in 2017. Of the U.S. small business commercial net charge-offs, 95 percent were credit card-related products for the three months ended March 31, 2018 compared to 88 percent for the same period in 2017.
Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity
Table 35 presents the nonperforming commercial loans, leases and foreclosed properties activity during the three months ended March 31, 2018 and 2017. Nonperforming loans do not include loans accounted for under the fair value option. During the three months ended March 31, 2018, nonperforming commercial loans and leases increased $168 million to $1.5 billion. Approximately 83 percent of commercial nonperforming loans, leases and foreclosed properties were secured and approximately 55 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 35 | Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity (1, 2) | |||||||
Three Months Ended March 31 | ||||||||
(Dollars in millions) | 2018 | 2017 | ||||||
Nonperforming loans and leases, January 1 | $ | 1,304 | $ | 1,703 | ||||
Additions | 436 | 472 | ||||||
Reductions: | ||||||||
Paydowns | (169 | ) | (267 | ) | ||||
Sales | (24 | ) | (22 | ) | ||||
Returns to performing status (3) | (27 | ) | (54 | ) | ||||
Charge-offs | (48 | ) | (82 | ) | ||||
Transfers to foreclosed properties | — | (22 | ) | |||||
Total net additions to nonperforming loans and leases | 168 | 25 | ||||||
Total nonperforming loans and leases, March 31 | 1,472 | 1,728 | ||||||
Foreclosed properties, March 31 | 52 | 35 | ||||||
Nonperforming commercial loans, leases and foreclosed properties, March 31 | $ | 1,524 | $ | 1,763 | ||||
Nonperforming commercial loans and leases as a percentage of outstanding commercial loans and leases (4) | 0.31 | % | 0.38 | % | ||||
Nonperforming commercial loans, leases and foreclosed properties as a percentage of outstanding commercial loans, leases and foreclosed properties (4) | 0.32 | 0.39 |
(1) | Balances do not include nonperforming LHFS of $228 million and $246 million at March 31, 2018 and 2017. |
(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) | Outstanding commercial loans exclude loans accounted for under the fair value option. |
Table 36 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 5 – Outstanding Loans and Leases to the Consolidated Financial Statements.
Table 36 | Commercial Troubled Debt Restructurings | |||||||||||||||||||||||
March 31, 2018 | December 31, 2017 | |||||||||||||||||||||||
(Dollars in millions) | Nonperforming | Performing | Total | Nonperforming | Performing | Total | ||||||||||||||||||
Commercial and industrial: | ||||||||||||||||||||||||
U.S. commercial | $ | 432 | $ | 919 | $ | 1,351 | $ | 370 | $ | 866 | $ | 1,236 | ||||||||||||
Non-U.S. commercial | 224 | 220 | 444 | 11 | 219 | 230 | ||||||||||||||||||
Total commercial and industrial | 656 | 1,139 | 1,795 | 381 | 1,085 | 1,466 | ||||||||||||||||||
Commercial real estate | 18 | 3 | 21 | 38 | 9 | 47 | ||||||||||||||||||
Commercial lease financing | 4 | 11 | 15 | 5 | 13 | 18 | ||||||||||||||||||
678 | 1,153 | 1,831 | 424 | 1,107 | 1,531 | |||||||||||||||||||
U.S. small business commercial | 4 | 16 | 20 | 4 | 15 | 19 | ||||||||||||||||||
Total commercial troubled debt restructurings | $ | 682 | $ | 1,169 | $ | 1,851 | $ | 428 | $ | 1,122 | $ | 1,550 |
Industry Concentrations
Table 37 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 $26.5 billion, or three percent, during the three
months ended March 31, 2018 to $1.0 trillion. The increase in commercial committed exposure was concentrated in the Asset Managers and Funds, Real Estate, Capital Goods, Materials and Media industry sectors. Increases were partially offset by reduced exposure to the Food and Staples Retailing and Retailing industry sectors.
37 Bank of America |
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.
Asset Managers and Funds, our largest industry concentration with committed exposure of $103.5 billion, increased $12.4 billion, or 14 percent, during the three months ended March 31, 2018. The increase primarily reflected an increase in exposure to several counterparties.
Real Estate, our second largest industry concentration with committed exposure of $88.8 billion, increased $5.0 billion, or six percent, during the three months ended March 31, 2018. For more information on the commercial real estate and related portfolios, see Commercial Portfolio Credit Risk Management – Commercial Real Estate on page 36.
Capital Goods, our third largest industry concentration with committed exposure of $73.7 billion, increased $3.2 billion, or five percent, during the three months ended March 31, 2018. The increase in committed exposure occurred primarily as a result of increases in aerospace and defense and large conglomerates.
Our energy-related committed exposure decreased $1.2 billion, or three percent, during the three months ended March 31, 2018 to $35.6 billion. Energy sector net charge-offs were $11 million for the three months ended March 31, 2018 compared to $3 million for the same period in 2017. Energy sector reservable criticized exposure decreased $228 million during the three months ended March 31, 2018 to $1.4 billion due to improvement in credit quality of some borrowers coupled with exposure reductions. The energy allowance for credit losses decreased $75 million during the three months ended March 31, 2018 to $485 million.
Table 37 | Commercial Credit Exposure by Industry (1) | |||||||||||||||
Commercial Utilized | Total Commercial Committed (2) | |||||||||||||||
(Dollars in millions) | March 31 2018 | December 31 2017 | March 31 2018 | December 31 2017 | ||||||||||||
Asset managers and funds | $ | 70,819 | $ | 59,190 | $ | 103,466 | $ | 91,092 | ||||||||
Real estate (3) | 64,507 | 61,940 | 88,750 | 83,773 | ||||||||||||
Capital goods | 39,560 | 36,705 | 73,650 | 70,417 | ||||||||||||
Healthcare equipment and services | 37,456 | 37,780 | 58,960 | 57,256 | ||||||||||||
Government and public education | 47,499 | 48,684 | 57,269 | 58,067 | ||||||||||||
Finance companies | 31,984 | 34,050 | 52,392 | 53,107 | ||||||||||||
Materials | 26,213 | 24,001 | 50,569 | 47,386 | ||||||||||||
Retailing | 25,679 | 26,117 | 45,241 | 48,796 | ||||||||||||
Food, beverage and tobacco | 22,351 | 23,252 | 44,620 | 42,815 | ||||||||||||
Consumer services | 27,160 | 27,191 | 43,005 | 43,605 | ||||||||||||
Media | 13,089 | 19,155 | 36,778 | 33,955 | ||||||||||||
Commercial services and supplies | 22,686 | 22,100 | 36,387 | 35,496 | ||||||||||||
Energy | 15,888 | 16,345 | 35,564 | 36,765 | ||||||||||||
Global commercial banks | 28,142 | 29,491 | 30,218 | 31,764 | ||||||||||||
Transportation | 21,652 | 21,704 | 30,121 | 29,946 | ||||||||||||
Utilities | 11,515 | 11,342 | 28,639 | 27,935 | ||||||||||||
Individuals and trusts | 19,276 | 18,549 | 25,161 | 25,097 | ||||||||||||
Technology hardware and equipment | 10,116 | 10,728 | 21,691 | 22,071 | ||||||||||||
Software and services | 7,971 | 8,562 | 20,757 | 18,202 | ||||||||||||
Vehicle dealers | 16,621 | 16,896 | 20,409 | 20,361 | ||||||||||||
Pharmaceuticals and biotechnology | 4,785 | 5,653 | 20,116 | 18,623 | ||||||||||||
Consumer durables and apparel | 9,286 | 8,859 | 18,535 | 17,296 | ||||||||||||
Automobiles and components | 7,097 | 5,988 | 13,993 | 13,318 | ||||||||||||
Insurance | 6,230 | 6,411 | 12,853 | 12,990 | ||||||||||||
Telecommunication services | 6,234 | 6,389 | 12,823 | 13,108 | ||||||||||||
Food and staples retailing | 5,298 | 4,955 | 11,452 | 15,589 | ||||||||||||
Religious and social organizations | 3,823 | 4,454 | 5,697 | 6,318 | ||||||||||||
Financial markets infrastructure (clearinghouses) | 1,499 | 688 | 3,261 | 2,403 | ||||||||||||
Other | 5,252 | 3,621 | 5,247 | 3,616 | ||||||||||||
Total commercial credit exposure by industry | $ | 609,688 | $ | 600,800 | $ | 1,007,624 | $ | 981,167 | ||||||||
Net credit default protection purchased on total commitments (4) | $ | (2,194 | ) | $ | (2,129 | ) |
(1) | Includes U.S. small business commercial exposure. |
(2) | Includes the notional amount of unfunded legally binding lending commitments net of amounts distributed (i.e., syndicated or participated) to other financial institutions. The distributed amounts were $10.9 billion and $11.0 billion at March 31, 2018 and December 31, 2017. |
(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 more information, see Commercial Portfolio Credit Risk Management – Risk Mitigation. |
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, 2018 and December 31, 2017, 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 $2.2 billion and $2.1 billion. We recorded net losses of $9 million for the three months ended March 31, 2018 compared to net losses of $31 million for the same period in 2017 on these
Bank of America 38 |
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 45. For more information, see Trading Risk Management on page 43.
Tables 38 and 39 present the maturity profiles and the credit exposure debt ratings of the net credit default protection portfolio at March 31, 2018 and December 31, 2017.
Table 38 | Net Credit Default Protection by Maturity | |||||
March 31 2018 | December 31 2017 | |||||
Less than or equal to one year | 40 | % | 42 | % | ||
Greater than one year and less than or equal to five years | 53 | 58 | ||||
Greater than five years | 7 | — | ||||
Total net credit default protection | 100 | % | 100 | % |
Table 39 | Net Credit Default Protection by Credit Exposure Debt Rating | |||||||||||||
Net Notional (1) | Percent of Total | Net Notional (1) | Percent of Total | |||||||||||
(Dollars in millions) | March 31, 2018 | December 31, 2017 | ||||||||||||
Ratings (2, 3) | ||||||||||||||
A | $ | (375 | ) | 17.1 | % | $ | (280 | ) | 13.2 | % | ||||
BBB | (326 | ) | 14.9 | (459 | ) | 21.6 | ||||||||
BB | (1,152 | ) | 52.5 | (893 | ) | 41.9 | ||||||||
B | (208 | ) | 9.5 | (403 | ) | 18.9 | ||||||||
CCC and below | (118 | ) | 5.4 | (84 | ) | 3.9 | ||||||||
NR (4) | (15 | ) | 0.6 | (10 | ) | 0.5 | ||||||||
Total net credit default protection | $ | (2,194 | ) | 100.0 | % | $ | (2,129 | ) | 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 40 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 3 – Derivatives to the Consolidated Financial Statements.
The credit risk amounts discussed above and presented in Table 40 take into consideration the effects of legally enforceable master netting agreements while amounts disclosed in Note 3 – 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 40 | Credit Derivatives | |||||||
Contract/ Notional | Credit Risk | |||||||
(Dollars in millions) | March 31, 2018 | |||||||
Purchased credit derivatives: | ||||||||
Credit default swaps | $ | 484,071 | $ | 2,383 | ||||
Total return swaps/options | 67,587 | 298 | ||||||
Total purchased credit derivatives | $ | 551,658 | $ | 2,681 | ||||
Written credit derivatives: | ||||||||
Credit default swaps | $ | 457,370 | n/a | |||||
Total return swaps/options | 65,220 | n/a | ||||||
Total written credit derivatives | $ | 522,590 | n/a | |||||
December 31, 2017 | ||||||||
Purchased credit derivatives: | ||||||||
Credit default swaps | $ | 470,907 | $ | 2,434 | ||||
Total return swaps/options | 54,135 | 277 | ||||||
Total purchased credit derivatives | $ | 525,042 | $ | 2,711 | ||||
Written credit derivatives: | ||||||||
Credit default swaps | $ | 448,201 | n/a | |||||
Total return swaps/options | 55,223 | n/a | ||||||
Total written credit derivatives | $ | 503,424 | 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 41. We calculate credit valuation adjustments (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 more information, see Note 3 – 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 following table 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 41 | Credit Valuation Gains and Losses | |||||||||||||||||||
Three Months Ended March 31 | ||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | ||||||||||||||||||
Gains (Losses) | Gross | Hedge | Net | Gross | Hedge | Net | ||||||||||||||
Credit valuation | $ | (24 | ) | $ | 42 | $ | 18 | $ | 161 | $ | (135 | ) | $ | 26 |
39 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 42 presents our 20 largest non-U.S. country exposures as of March 31, 2018. These exposures accounted for 87 percent and 86 percent of our total non-U.S. exposure at March 31, 2018 and December 31, 2017. Net country exposure for these 20 countries increased $27.4 billion in the three months ended March 31, 2018, primarily driven by increases in the U.K., Germany and Japan.
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.
Funded loans and loan equivalents include loans, leases, and other extensions of credit and funds, including letters of credit and due from placements. 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. 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. Net country exposure represents country exposure less hedges and credit default protection purchased, net of credit default protection sold. For more information on our non-U.S. credit and trading portfolios, see Non-U.S. Portfolio in the MD&A of the Corporation’s 2017 Annual Report on Form 10-K.
Table 42 | 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 2018 | Hedges and Credit Default Protection | Net Country Exposure at March 31 2018 | Increase (Decrease) from December 31 2017 | ||||||||||||||||||||||||
United Kingdom | $ | 26,362 | $ | 18,105 | $ | 6,710 | $ | 1,478 | $ | 52,655 | $ | (5,714 | ) | $ | 46,941 | $ | 9,346 | |||||||||||||||
Germany | 18,749 | 8,751 | 1,590 | 1,766 | 30,856 | (3,250 | ) | 27,606 | 6,103 | |||||||||||||||||||||||
Canada | 7,262 | 7,373 | 1,838 | 2,020 | 18,493 | (844 | ) | 17,649 | (1,074 | ) | ||||||||||||||||||||||
China | 13,118 | 940 | 1,293 | 1,255 | 16,606 | (282 | ) | 16,324 | 399 | |||||||||||||||||||||||
Japan | 12,992 | 639 | 1,318 | 473 | 15,422 | (1,472 | ) | 13,950 | 4,860 | |||||||||||||||||||||||
France | 5,539 | 5,818 | 2,436 | 3,070 | 16,863 | (5,098 | ) | 11,765 | 1,222 | |||||||||||||||||||||||
India | 7,332 | 357 | 344 | 3,366 | 11,399 | (78 | ) | 11,321 | 824 | |||||||||||||||||||||||
Brazil | 7,309 | 1,078 | 606 | 2,796 | 11,789 | (532 | ) | 11,257 | 541 | |||||||||||||||||||||||
Australia | 5,422 | 2,879 | 566 | 1,618 | 10,485 | (431 | ) | 10,054 | (535 | ) | ||||||||||||||||||||||
Netherlands | 6,897 | 2,332 | 769 | 1,287 | 11,285 | (1,785 | ) | 9,500 | 1,033 | |||||||||||||||||||||||
Hong Kong | 7,388 | 188 | 559 | 1,051 | 9,186 | (79 | ) | 9,107 | 429 | |||||||||||||||||||||||
South Korea | 5,054 | 609 | 632 | 2,736 | 9,031 | (357 | ) | 8,674 | 773 | |||||||||||||||||||||||
Switzerland | 4,951 | 2,966 | 215 | 229 | 8,361 | (1,122 | ) | 7,239 | 1,442 | |||||||||||||||||||||||
Singapore | 3,488 | 153 | 591 | 2,316 | 6,548 | (76 | ) | 6,472 | 209 | |||||||||||||||||||||||
Mexico | 3,088 | 1,954 | 112 | 248 | 5,402 | (485 | ) | 4,917 | (570 | ) | ||||||||||||||||||||||
Spain | 2,618 | 1,062 | 193 | 1,440 | 5,313 | (730 | ) | 4,583 | 1,475 | |||||||||||||||||||||||
Belgium | 2,741 | 968 | 112 | 1,077 | 4,898 | (411 | ) | 4,487 | 522 | |||||||||||||||||||||||
Italy | 2,947 | 1,491 | 520 | 825 | 5,783 | (1,350 | ) | 4,433 | 187 | |||||||||||||||||||||||
United Arab Emirates | 2,824 | 349 | 273 | 60 | 3,506 | (42 | ) | 3,464 | 77 | |||||||||||||||||||||||
Turkey | 2,707 | 83 | 49 | 321 | 3,160 | (12 | ) | 3,148 | 159 | |||||||||||||||||||||||
Total top 20 non-U.S. countries exposure | $ | 148,788 | $ | 58,095 | $ | 20,726 | $ | 29,432 | $ | 257,041 | $ | (24,150 | ) | $ | 232,891 | $ | 27,422 |
A number of economic conditions and geopolitical events have given rise to risk aversion in certain emerging markets. Our largest emerging market country exposure at March 31, 2018 was China, with net exposure of $16.3 billion, concentrated in large state-owned companies, subsidiaries of multinational corporations and commercial banks. At March 31, 2018, net exposure to Brazil was $11.3 billion, concentrated in sovereign securities, oil and gas companies 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. Additionally, we believe that the uncertainty in the U.K.’s ability to negotiate a favorable exit from the EU will further weigh on economic performance. Our largest EU country exposure at March 31, 2018 was the U.K. with net exposure of $46.9 billion, a $9.3 billion increase from December 31, 2017. The increase was driven by corporate loan growth and increased placements with the central bank as part of liquidity management. For more information, see Executive Summary – First Quarter 2018 Economic and Business Environment on page 3.
Bank of America 40 |
Provision for Credit Losses
The provision for credit losses remained relatively unchanged at $834 million for the three months ended March 31, 2018 compared to the same period in 2017. The provision for credit losses was $77 million lower than net charge-offs for the three months ended March 31, 2018, resulting in a reduction in the allowance for credit losses. This compared to a reduction of $99 million in the allowance for credit losses for the three months ended March 31, 2017.
The provision for credit losses for the consumer portfolio decreased $24 million to $748 million for the three months ended March 31, 2018 compared to the same period in 2017. The decrease was primarily driven by improvement in the consumer real estate portfolio, including a benefit of $11 million related to the PCI loan portfolio compared to an expense of $68 million for the same period in 2017. Provision related to the credit card and other consumer portfolio increased $33 million for the three months ended March 31, 2018 compared to the same period in 2017 due to U.S. credit card portfolio seasoning and loan growth, partially offset by the impact of the sale of the non-U.S. consumer credit card business in the second quarter of 2017.
The provision for credit losses for the commercial portfolio, including unfunded lending commitments, increased $23 million to $86 million for the three months ended March 31, 2018 compared to the same period in 2017 driven by loan growth.
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 2017 Annual Report on Form 10-K.
During the three months ended March 31, 2018, 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 strong labor markets, proactive credit risk management initiatives and the impact of high credit quality originations. Evidencing the improvements in the U.S. economy and strong labor
markets are low levels of unemployment and increases in home prices. In addition to these improvements, in the consumer portfolio, nonperforming consumer loans decreased $260 million in the three months ended March 31, 2018 as returns to performing status, loan sales, paydowns and charge-offs continued to outpace new nonaccrual loans. During the three months ended March 31, 2018, the allowance for loan and lease losses in the commercial portfolio reflected decreased energy reserves primarily driven by reductions in energy exposures including utilized reservable criticized exposures.
The allowance for loan and lease losses for the consumer portfolio, as presented in Table 44, was $5.3 billion at March 31, 2018, a decrease of $133 million from December 31, 2017. The decrease was primarily in the consumer real estate portfolio, partially offset by an increase in the U.S. credit card portfolio. The reduction in the allowance for the consumer real estate portfolio was due to improved home prices, lower nonperforming loans and a decrease in loan balances in our non-core portfolio. The increase in the allowance for the U.S. credit card portfolio was driven by portfolio seasoning.
The allowance for loan and lease losses for the commercial portfolio, as presented in Table 44, was $5.0 billion at March 31, 2018, unchanged from December 31, 2017. Commercial utilized reservable criticized exposure decreased to $13.4 billion at March 31, 2018 from $13.6 billion (to 2.58 percent from 2.65 percent of total commercial utilized reservable exposure) at December 31, 2017, largely due to an improvement in energy exposures. Nonperforming commercial loans increased to $1.5 billion at March 31, 2018 from $1.3 billion (to 0.31 percent from 0.27 percent of outstanding commercial loans excluding loans accounted for under the fair value option) at December 31, 2017 with the increase spread across multiple industries. See Tables 31, 32 and 33 for more details on key commercial credit statistics.
The allowance for loan and lease losses as a percentage of total loans and leases outstanding was 1.11 percent at March 31, 2018 compared to 1.12 percent at December 31, 2017.
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 2017 Annual Report on Form 10-K.
The reserve for unfunded lending commitments was $782 million at March 31, 2018 compared to $777 million at December 31, 2017.
41 Bank of America |
Table 43 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, 2018 and 2017.
Table 43 | Allowance for Credit Losses | |||||||
Three Months Ended March 31 | ||||||||
(Dollars in millions) | 2018 | 2017 | ||||||
Allowance for loan and lease losses, January 1 (1) | $ | 10,393 | $ | 11,237 | ||||
Loans and leases charged off | ||||||||
Residential mortgage | (56 | ) | (61 | ) | ||||
Home equity | (118 | ) | (143 | ) | ||||
U.S. credit card | (824 | ) | (718 | ) | ||||
Non-U.S. credit card (2) | — | (59 | ) | |||||
Direct/Indirect consumer | (133 | ) | (114 | ) | ||||
Other consumer | (49 | ) | (55 | ) | ||||
Total consumer charge-offs | (1,180 | ) | (1,150 | ) | ||||
U.S. commercial (3) | (108 | ) | (137 | ) | ||||
Non-U.S. commercial | (7 | ) | (20 | ) | ||||
Commercial lease financing | (1 | ) | (3 | ) | ||||
Total commercial charge-offs | (116 | ) | (160 | ) | ||||
Total loans and leases charged off | (1,296 | ) | (1,310 | ) | ||||
Recoveries of loans and leases previously charged off | ||||||||
Residential mortgage | 62 | 44 | ||||||
Home equity | 85 | 79 | ||||||
U.S. credit card | 123 | 112 | ||||||
Non-U.S. credit card (2) | — | 15 | ||||||
Direct/Indirect consumer | 75 | 66 | ||||||
Other consumer | 5 | 7 | ||||||
Total consumer recoveries | 350 | 323 | ||||||
U.S. commercial (4) | 27 | 41 | ||||||
Non-U.S. commercial | 3 | 5 | ||||||
Commercial real estate | 3 | 4 | ||||||
Commercial lease financing | 2 | 3 | ||||||
Total commercial recoveries | 35 | 53 | ||||||
Total recoveries of loans and leases previously charged off | 385 | 376 | ||||||
Net charge-offs | (911 | ) | (934 | ) | ||||
Write-offs of PCI loans | (35 | ) | (33 | ) | ||||
Provision for loan and lease losses | 829 | 840 | ||||||
Other (5) | (16 | ) | 2 | |||||
Allowance for loan and lease losses, March 31 (1) | 10,260 | 11,112 | ||||||
Reserve for unfunded lending commitments, January 1 | 777 | 762 | ||||||
Provision for unfunded lending commitments | 5 | (5 | ) | |||||
Reserve for unfunded lending commitments, March 31 | 782 | 757 | ||||||
Allowance for credit losses, March 31 (1) | $ | 11,042 | $ | 11,869 |
(1) | Excludes $242 million and $243 million at March 31, 2017 and January 1, 2017 of allowance for loan and lease losses related to the non-U.S. credit card loan portfolio, which was sold in the second quarter of 2017. |
(2) | Represents net charge-offs related to the non-U.S. credit card loan portfolio. See footnote 1 for more information. |
(3) | Includes U.S. small business commercial charge-offs of $68 million and $64 million for the three months ended March 31, 2018 and 2017. |
(4) | Includes U.S. small business commercial recoveries of $11 million and $12 million for the three months ended March 31, 2018 and 2017. |
(5) | Primarily represents the net impact of portfolio sales, consolidations and deconsolidations, foreign currency translation adjustments, transfers to held for sale and certain other reclassifications. |
Bank of America 42 |
Table 43 | Allowance for Credit Losses (continued) | |||||||
Three Months Ended March 31 | ||||||||
(Dollars in millions) | 2018 | 2017 | ||||||
Loan and allowance ratios (6): | ||||||||
Loans and leases outstanding at March 31 (7) | $ | 928,089 | $ | 908,219 | ||||
Allowance for loan and lease losses as a percentage of total loans and leases outstanding at March 31 (7) | 1.11 | % | 1.25 | % | ||||
Consumer allowance for loan and lease losses as a percentage of total consumer loans and leases outstanding at March 31 (8) | 1.18 | 1.36 | ||||||
Commercial allowance for loan and lease losses as a percentage of total commercial loans and leases outstanding at March 31 (9) | 1.04 | 1.14 | ||||||
Average loans and leases outstanding (7) | $ | 926,297 | $ | 906,585 | ||||
Annualized net charge-offs as a percentage of average loans and leases outstanding (7, 10) | 0.40 | % | 0.42 | % | ||||
Annualized net charge-offs and PCI write-offs as a percentage of average loans and leases outstanding (7) | 0.41 | 0.43 | ||||||
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases at March 31 (7, 11) | 161 | 156 | ||||||
Ratio of the allowance for loan and lease losses at March 31 to annualized net charge-offs (10) | 2.78 | 3.00 | ||||||
Ratio of the allowance for loan and lease losses at March 31 to annualized net charge-offs and PCI write-offs | 2.67 | 2.90 | ||||||
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) | $ | 3,992 | $ | 4,047 | ||||
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) | 98 | % | 100 | % |
(6) | Loan and allowance ratios for the three months ended March 31, 2017 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 were sold in the second quarter of 2017. |
(7) | Outstanding loan and lease balances and ratios do not include loans accounted for under the fair value option of $6.0 billion and $7.5 billion at March 31, 2018 and 2017. Average loans accounted for under the fair value option were $5.6 billion and $7.6 billion for the three months ended March 31, 2018 and 2017. |
(8) | Excludes consumer loans accounted for under the fair value option of $894 million and $1.0 billion at March 31, 2018 and 2017. |
(9) | Excludes commercial loans accounted for under the fair value option of $5.1 billion and $6.5 billion at March 31, 2018 and 2017. |
(10) | Net charge-offs exclude $35 million and $33 million of write-offs in the PCI loan portfolio for the three months ended March 31, 2018 and 2017. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 31. |
(11) | For more information on our definition of nonperforming loans, see page 33 and page 37. |
(12) | Primarily includes amounts allocated to U.S. credit card and unsecured consumer lending portfolios in Consumer Banking and PCI loans and the non-U.S. credit card portfolio in All Other. |
For reporting purposes, we allocate the allowance for credit losses across products as presented in Table 44.
Table 44 | Allocation of the Allowance for Credit Losses by Product Type | |||||||||||||||||||
Amount | Percent of Total | Percent of Loans and Leases Outstanding (1) | Amount | Percent of Total | Percent of Loans and Leases Outstanding (1) | |||||||||||||||
(Dollars in millions) | March 31, 2018 | December 31, 2017 | ||||||||||||||||||
Allowance for loan and lease losses | ||||||||||||||||||||
Residential mortgage | $ | 611 | 5.96 | % | 0.30 | % | $ | 701 | 6.74 | % | 0.34 | % | ||||||||
Home equity | 919 | 8.96 | 1.66 | 1,019 | 9.80 | 1.76 | ||||||||||||||
U.S. credit card | 3,425 | 33.38 | 3.68 | 3,368 | 32.41 | 3.50 | ||||||||||||||
Direct/Indirect consumer | 262 | 2.55 | 0.29 | 262 | 2.52 | 0.28 | ||||||||||||||
Other consumer | 33 | 0.32 | 1.17 | 33 | 0.32 | 1.22 | ||||||||||||||
Total consumer | 5,250 | 51.17 | 1.18 | 5,383 | 51.79 | 1.18 | ||||||||||||||
U.S. commercial (2) | 3,091 | 30.12 | 1.02 | 3,113 | 29.95 | 1.04 | ||||||||||||||
Non-U.S. commercial | 801 | 7.81 | 0.82 | 803 | 7.73 | 0.82 | ||||||||||||||
Commercial real estate | 953 | 9.29 | 1.59 | 935 | 9.00 | 1.60 | ||||||||||||||
Commercial lease financing | 165 | 1.61 | 0.76 | 159 | 1.53 | 0.72 | ||||||||||||||
Total commercial | 5,010 | 48.83 | 1.04 | 5,010 | 48.21 | 1.05 | ||||||||||||||
Allowance for loan and lease losses (3) | 10,260 | 100.00 | % | 1.11 | 10,393 | 100.00 | % | 1.12 | ||||||||||||
Reserve for unfunded lending commitments | 782 | 777 | ||||||||||||||||||
Allowance for credit losses | $ | 11,042 | $ | 11,170 |
(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 $523 million and $567 million and home equity loans of $371 million and $361 million at March 31, 2018 and December 31, 2017. Commercial loans accounted for under the fair value option included U.S. commercial loans of $3.2 billion and $2.6 billion and non-U.S. commercial loans of $1.9 billion and $2.2 billion at March 31, 2018 and December 31, 2017. |
(2) | Includes allowance for loan and lease losses for U.S. small business commercial loans of $446 million and $439 million at March 31, 2018 and December 31, 2017. |
(3) | Includes $242 million and $289 million of valuation allowance presented with the allowance for loan and lease losses related to PCI loans at March 31, 2018 and December 31, 2017. |
Market Risk Management
For more information on our market risk management process, see Market Risk Management in the MD&A of the Corporation’s 2017 Annual Report on Form 10-K.
Trading Risk Management
To evaluate risk arising from trading activities, the Corporation focuses on the actual and potential volatility of revenues generated by individual positions as well as portfolios of positions.
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. For more information on our trading risk management process, see Trading Risk
43 Bank of America |
Management in the MD&A of the Corporation’s 2017 Annual Report on Form 10-K.
Table 45 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. For more information on the market risk VaR for trading activities, see Trading Risk Management in the MD&A of the Corporation’s 2017 Annual Report on Form 10-K.
The total market-based portfolio VaR results in Table 45 include market risk, excluding CVA and DVA, to which we are exposed from
all business segments. The majority of this portfolio is within the Global Markets segment. Table 45 presents period-end, average, high and low daily trading VaR for the three months ended March 31, 2018, December 31, 2017 and March 31, 2017 using a 99 percent confidence level.
The average total market-based trading portfolio VaR increased for the three months ended March 31, 2018 compared to the previous quarter primarily due to increased exposure in the interest rate and commodities markets.
Table 45 | Market Risk VaR for Trading Activities | |||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||
March 31, 2018 | December 31, 2017 | March 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||
(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 | $ | 8 | $ | 8 | $ | 12 | $ | 6 | $ | 7 | $ | 7 | $ | 9 | $ | 5 | $ | 23 | $ | 12 | $ | 23 | $ | 5 | ||||||||||||||||||||||||
Interest rate | 33 | 23 | 33 | 18 | 22 | 21 | 28 | 14 | 28 | 17 | 28 | 11 | ||||||||||||||||||||||||||||||||||||
Credit | 28 | 27 | 31 | 23 | 29 | 27 | 33 | 21 | 26 | 26 | 29 | 22 | ||||||||||||||||||||||||||||||||||||
Equity | 16 | 19 | 28 | 14 | 19 | 19 | 24 | 14 | 24 | 19 | 30 | 14 | ||||||||||||||||||||||||||||||||||||
Commodity | 10 | 6 | 12 | 3 | 5 | 4 | 6 | 3 | 6 | 4 | 7 | 3 | ||||||||||||||||||||||||||||||||||||
Portfolio diversification | (57 | ) | (49 | ) | — | — | (49 | ) | (48 | ) | — | — | (58 | ) | (45 | ) | — | — | ||||||||||||||||||||||||||||||
Total covered positions trading portfolio | 38 | 34 | 43 | 25 | 33 | 30 | 38 | 23 | 49 | 33 | 49 | 25 | ||||||||||||||||||||||||||||||||||||
Impact from less liquid exposures | 4 | 6 | — | — | 5 | 6 | — | — | 10 | 5 | — | — | ||||||||||||||||||||||||||||||||||||
Total market-based trading portfolio | 42 | 40 | 51 | 29 | 38 | 36 | 47 | 26 | 59 | 38 | 59 | 28 | ||||||||||||||||||||||||||||||||||||
Fair value option loans | 12 | 10 | 12 | 8 | 9 | 9 | 11 | 7 | 11 | 12 | 14 | 11 | ||||||||||||||||||||||||||||||||||||
Fair value option hedges | 9 | 8 | 10 | 6 | 7 | 7 | 11 | 5 | 6 | 6 | 7 | 5 | ||||||||||||||||||||||||||||||||||||
Fair value option portfolio diversification | (11 | ) | (9 | ) | — | — | (7 | ) | (8 | ) | — | — | (7 | ) | (8 | ) | — | — | ||||||||||||||||||||||||||||||
Total fair value option portfolio | 10 | 9 | 10 | 7 | 9 | 8 | 11 | 6 | 10 | 10 | 11 | 9 | ||||||||||||||||||||||||||||||||||||
Portfolio diversification | (3 | ) | (4 | ) | — | — | (4 | ) | (3 | ) | — | — | (6 | ) | (4 | ) | — | — | ||||||||||||||||||||||||||||||
Total market-based portfolio | $ | 49 | $ | 45 | 57 | 33 | $ | 43 | $ | 41 | $ | 53 | $ | 30 | $ | 63 | $ | 44 | 63 | 32 |
(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, is not relevant. |
The graph below presents the daily total market-based trading portfolio VaR for the previous five quarters, corresponding to the data in Table 45.

Additional VaR statistics produced within our single VaR model are provided in Table 46 at the same level of detail as in Table 45. 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 46 presents average trading VaR statistics at 99 percent and 95 percent confidence levels for the three months ended March 31, 2018, December 31, 2017 and March 31, 2017.
Bank of America 44 |
Table 46 | Average Market Risk VaR for Trading Activities – 99 percent and 95 percent VaR Statistics | ||||||||||||||||||||||||
Three Months Ended | |||||||||||||||||||||||||
March 31, 2018 | December 31, 2017 | March 31, 2017 | |||||||||||||||||||||||
(Dollars in millions) | 99 percent | 95 percent | 99 percent | 95 percent | 99 percent | 95 percent | |||||||||||||||||||
Foreign exchange | $ | 8 | $ | 5 | $ | 7 | $ | 4 | $ | 12 | $ | 8 | |||||||||||||
Interest rate | 23 | 15 | 21 | 14 | 17 | 11 | |||||||||||||||||||
Credit | 27 | 16 | 27 | 15 | 26 | 14 | |||||||||||||||||||
Equity | 19 | 10 | 19 | 10 | 19 | 10 | |||||||||||||||||||
Commodity | 6 | 3 | 4 | 2 | 4 | 3 | |||||||||||||||||||
Portfolio diversification | (49 | ) | (30 | ) | (48 | ) | (30 | ) | (45 | ) | (28 | ) | |||||||||||||
Total covered positions trading portfolio | 34 | 19 | 30 | 15 | 33 | 18 | |||||||||||||||||||
Impact from less liquid exposures | 6 | 2 | 6 | 2 | 5 | 3 | |||||||||||||||||||
Total market-based trading portfolio | 40 | 21 | 36 | 17 | 38 | 21 | |||||||||||||||||||
Fair value option loans | 10 | 5 | 9 | 6 | 12 | 7 | |||||||||||||||||||
Fair value option hedges | 8 | 6 | 7 | 5 | 6 | 4 | |||||||||||||||||||
Fair value option portfolio diversification | (9 | ) | (6 | ) | (8 | ) | (6 | ) | (8 | ) | (5 | ) | |||||||||||||
Total fair value option portfolio | 9 | 5 | 8 | 5 | 10 | 6 | |||||||||||||||||||
Portfolio diversification | (4 | ) | (3 | ) | (3 | ) | (3 | ) | (4 | ) | (4 | ) | |||||||||||||
Total market-based portfolio | $ | 45 | $ | 23 | $ | 41 | $ | 19 | $ | 44 | $ | 23 |
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. For more information on our backtesting process, see Trading Risk Management – Backtesting in the MD&A of the Corporation’s 2017 Annual Report on Form 10-K.
During the three months ended March 31, 2018, 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 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 20 – Fair Value Measurements to the Consolidated Financial Statements of the Corporation’s 2017 Annual Report on Form 10-K. 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.
The following histogram is a graphic depiction of trading volatility and illustrates the daily level of trading-related revenue for the three months ended March 31, 2018 compared to the three months ended December 31, 2017. During the three months ended March 31, 2018, positive trading-related revenue was recorded for 100 percent of the trading days, of which 88 percent were daily trading gains of over $25 million. This compares to the three months ended December 31, 2017 where positive trading-related revenue was recorded for 100 percent of the trading days, of which 63 percent were daily trading gains of over $25 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. For additional information, see Trading Risk Management – Trading Portfolio Stress Testing in the MD&A of the Corporation’s 2017 Annual Report on Form 10-K.
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.
45 Bank of America |
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 47 presents the spot and 12-month forward rates used in our baseline forecasts at March 31, 2018 and December 31, 2017.
Table 47 | Forward Rates | ||||||||
March 31, 2018 | |||||||||
Federal Funds | Three-month LIBOR | 10-Year Swap | |||||||
Spot rates | 1.75 | % | 2.31 | % | 2.78 | % | |||
12-month forward rates | 2.25 | 2.57 | 2.83 | ||||||
December 31, 2017 | |||||||||
Spot rates | 1.50 | % | 1.69 | % | 2.40 | % | |||
12-month forward rates | 2.00 | 2.14 | 2.48 |
Table 48 shows the pretax impact to forecasted net interest income over the next 12 months from March 31, 2018 and December 31, 2017, 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, 2018, 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 impact 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 Basel 3, see Capital Management – Regulatory Capital on page 18.
Table 48 | Estimated Banking Book Net Interest Income Sensitivity | |||||||||||||
Short Rate (bps) | Long Rate (bps) | |||||||||||||
(Dollars in millions) | March 31 2018 | December 31 2017 | ||||||||||||
Curve Change | ||||||||||||||
Parallel Shifts | ||||||||||||||
+100 bps instantaneous shift | +100 | +100 | $ | 2,964 | $ | 3,317 | ||||||||
-100 bps instantaneous shift | -100 | -100 | (3,717 | ) | (5,183 | ) | ||||||||
Flatteners | ||||||||||||||
Short-end instantaneous change | +100 | — | 2,188 | 2,182 | ||||||||||
Long-end instantaneous change | — | -100 | (1,641 | ) | (2,765 | ) | ||||||||
Steepeners | ||||||||||||||
Short-end instantaneous change | -100 | — | (2,057 | ) | (2,394 | ) | ||||||||
Long-end instantaneous change | — | +100 | 785 | 1,135 |
The sensitivity analysis in Table 48 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 48 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 3 – Derivatives to the Consolidated Financial Statements. For more information on interest rate contracts and risk management, see Interest Rate Risk Management for the Banking Book in the MD&A of the Corporation’s 2017 Annual Report on Form 10-K.
Bank of America 46 |
Table 49 presents derivatives utilized in our ALM activities 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, 2018 and December 31, 2017. These amounts do not include derivative hedges on our MSRs.
Table 49 | Asset and Liability Management Interest Rate and Foreign Exchange Contracts | ||||||||||||||||||||||||||||||||||
March 31, 2018 | |||||||||||||||||||||||||||||||||||
Expected Maturity | |||||||||||||||||||||||||||||||||||
(Dollars in millions, average estimated duration in years) | Fair Value | Total | Remainder of 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | Average Estimated Duration | ||||||||||||||||||||||||||
Receive-fixed interest rate swaps (1) | $ | (1,096 | ) | 5.23 | |||||||||||||||||||||||||||||||
Notional amount | $ | 190,804 | $ | 17,211 | $ | 27,176 | $ | 16,347 | $ | 9,548 | $ | 19,120 | $ | 101,402 | |||||||||||||||||||||
Weighted-average fixed-rate | 2.47 | % | 3.79 | % | 1.87 | % | 1.88 | % | 2.81 | % | 2.10 | % | 2.55 | % | |||||||||||||||||||||
Pay-fixed interest rate swaps (1) | 827 | 5.27 | |||||||||||||||||||||||||||||||||
Notional amount | $ | 45,565 | $ | 11,247 | $ | 1,210 | $ | 4,344 | $ | 1,616 | $ | — | $ | 27,148 | |||||||||||||||||||||
Weighted-average fixed-rate | 2.14 | % | 1.70 | % | 2.07 | % | 2.16 | % | 2.22 | % | — | % | 2.32 | % | |||||||||||||||||||||
Same-currency basis swaps (2) | (20 | ) | |||||||||||||||||||||||||||||||||
Notional amount | $ | 41,342 | $ | 6,290 | $ | 6,792 | $ | 8,576 | $ | 2,812 | $ | 955 | $ | 15,917 | |||||||||||||||||||||
Foreign exchange basis swaps (1, 3, 4) | (1,329 | ) | |||||||||||||||||||||||||||||||||
Notional amount | 112,409 | 22,898 | 12,449 | 17,550 | 9,527 | 7,169 | 42,816 | ||||||||||||||||||||||||||||
Option products (5) | 3 | ||||||||||||||||||||||||||||||||||
Notional amount (6) | 1,249 | 1,232 | — | — | — | — | 17 | ||||||||||||||||||||||||||||
Foreign exchange contracts (1, 4, 7) | 1,186 | ||||||||||||||||||||||||||||||||||
Notional amount (6) | (5,905 | ) | (23,224 | ) | 2,296 | (20 | ) | 2,546 | 2,934 | 9,563 | |||||||||||||||||||||||||
Net ALM contracts | $ | (429 | ) | ||||||||||||||||||||||||||||||||
December 31, 2017 | |||||||||||||||||||||||||||||||||||
Expected Maturity | |||||||||||||||||||||||||||||||||||
(Dollars in millions, average estimated duration in years) | Fair Value | Total | 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | Average Estimated Duration | ||||||||||||||||||||||||||
Receive-fixed interest rate swaps (1) | $ | 2,330 | 5.38 | ||||||||||||||||||||||||||||||||
Notional amount | $ | 176,390 | $ | 21,850 | $ | 27,176 | $ | 16,347 | $ | 6,498 | $ | 19,120 | $ | 85,399 | |||||||||||||||||||||
Weighted-average fixed-rate | 2.42 | % | 3.20 | % | 1.87 | % | 1.88 | % | 2.99 | % | 2.10 | % | 2.52 | % | |||||||||||||||||||||
Pay-fixed interest rate swaps (1) | (37 | ) | 5.63 | ||||||||||||||||||||||||||||||||
Notional amount | $ | 45,873 | $ | 11,555 | $ | 1,210 | $ | 4,344 | $ | 1,616 | $ | — | $ | 27,148 | |||||||||||||||||||||
Weighted-average fixed-rate | 2.15 | % | 1.73 | % | 2.07 | % | 2.16 | % | 2.22 | % | — | % | 2.32 | % | |||||||||||||||||||||
Same-currency basis swaps (2) | (17 | ) | |||||||||||||||||||||||||||||||||
Notional amount | $ | 38,622 | $ | 11,028 | $ | 6,789 | $ | 1,180 | $ | 2,807 | $ | 955 | $ | 15,863 | |||||||||||||||||||||
Foreign exchange basis swaps (1, 3, 4) | (1,616 | ) | |||||||||||||||||||||||||||||||||
Notional amount | 107,263 | 24,886 | 11,922 | 13,367 | 9,301 | 6,860 | 40,927 | ||||||||||||||||||||||||||||
Option products (5) | 13 | ||||||||||||||||||||||||||||||||||
Notional amount (6) | 1,218 | 1,201 | — | — | — | — | 17 | ||||||||||||||||||||||||||||
Foreign exchange contracts (1, 4, 7) | 1,424 | ||||||||||||||||||||||||||||||||||
Notional amount (6) | (11,783 | ) | (28,689 | ) | 2,231 | (24 | ) | 2,471 | 2,919 | 9,309 | |||||||||||||||||||||||||
Net ALM contracts | $ | 2,097 |
(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, 2018 and December 31, 2017, the notional amount of same-currency basis swaps included $41.3 billion and $38.6 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 $1.2 billion at both March 31, 2018 and December 31, 2017 was substantially all in foreign exchange options. |
(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 $(5.9) billion at March 31, 2018 was comprised of $30.0 billion in foreign currency-denominated and cross-currency receive-fixed swaps, $(30.8) billion in net foreign currency forward rate contracts, $(6.4) billion in foreign currency-denominated pay-fixed swaps and $1.3 billion in net foreign currency futures contracts. Foreign exchange contracts of $(11.8) billion at December 31, 2017 were comprised of $29.1 billion in foreign currency-denominated and cross-currency receive-fixed swaps, $(35.6) billion in net foreign currency forward rate contracts, $(6.2) billion in foreign currency-denominated pay-fixed swaps and $940 million in foreign currency futures contracts. |
47 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 $1.6 billion and $1.3 billion, on a pretax basis, at March 31, 2018 and December 31, 2017. 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, 2018, the pretax net losses are expected to be reclassified into earnings as follows: $354 million, or 21 percent, within the next year, 58 percent in years two through five, and 13 percent in years six through 10, with the remaining eight percent thereafter. For more information on derivatives designated as cash flow hedges, see Note 3 – 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, 2018.
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 interest rate lock commitments (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, 2018 and 2017, we recorded gains of $69 million and $25 million related to the change in fair value of the MSRs, IRLCs and LHFS, net of gains and losses on the hedge portfolio. For more information on MSRs, see Note 14 – Fair Value Measurements to the Consolidated Financial Statements.
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 2017 Annual Report on Form 10-K and Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements of the Corporation’s 2017 Annual Report on Form 10-K.
Non-GAAP Reconciliations
Tables 50 and 51 provide reconciliations of certain non-GAAP financial measures to GAAP financial measures.
Table 50 | Quarterly Supplemental Financial Data and Reconciliations to GAAP Financial Measures | |||||||||||||||||||||||
Three Months Ended March 31 | ||||||||||||||||||||||||
2018 | 2017 | |||||||||||||||||||||||
(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 | $ | 11,608 | $ | 150 | $ | 11,758 | $ | 11,058 | $ | 197 | $ | 11,255 | ||||||||||||
Total revenue, net of interest expense | 23,125 | 150 | 23,275 | 22,248 | 197 | 22,445 | ||||||||||||||||||
Income tax expense | 1,476 | 150 | 1,626 | 1,983 | 197 | 2,180 |
Bank of America 48 |
Table 51 | Period-end and Average Supplemental Financial Data and Reconciliations to GAAP Financial Measures | |||||||||||||||
Period-end | Average | |||||||||||||||
March 31 2018 | December 31 2017 | Three Months Ended March 31 | ||||||||||||||
(Dollars in millions) | 2018 | 2017 | ||||||||||||||
Common shareholders’ equity | $ | 241,552 | $ | 244,823 | $ | 242,713 | $ | 242,480 | ||||||||
Goodwill | (68,951 | ) | (68,951 | ) | (68,951 | ) | (69,744 | ) | ||||||||
Intangible assets (excluding MSRs) | (2,177 | ) | (2,312 | ) | (2,261 | ) | (2,923 | ) | ||||||||
Related deferred tax liabilities | 920 | 943 | 939 | 1,539 | ||||||||||||
Tangible common shareholders’ equity | $ | 171,344 | $ | 174,503 | $ | 172,440 | $ | 171,352 | ||||||||
Shareholders’ equity | $ | 266,224 | $ | 267,146 | $ | 265,480 | $ | 267,700 | ||||||||
Goodwill | (68,951 | ) | (68,951 | ) | (68,951 | ) | (69,744 | ) | ||||||||
Intangible assets (excluding MSRs) | (2,177 | ) | (2,312 | ) | (2,261 | ) | (2,923 | ) | ||||||||
Related deferred tax liabilities | 920 | 943 | 939 | 1,539 | ||||||||||||
Tangible shareholders’ equity | $ | 196,016 | $ | 196,826 | $ | 195,207 | $ | 196,572 | ||||||||
Total assets | $ | 2,328,478 | $ | 2,281,234 | ||||||||||||
Goodwill | (68,951 | ) | (68,951 | ) | ||||||||||||
Intangible assets (excluding MSRs) | (2,177 | ) | (2,312 | ) | ||||||||||||
Related deferred tax liabilities | 920 | 943 | ||||||||||||||
Tangible assets | $ | 2,258,270 | $ | 2,210,914 |
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See Market Risk Management on page 43 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, 2018, that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
49 Bank of America |
Part I. Financial Information
Item 1. Financial Statements
Bank of America Corporation and Subsidiaries
Consolidated Statement of Income | |||||||
Three Months Ended March 31 | |||||||
(In millions, except per share information) | 2018 | 2017 | |||||
Interest income | |||||||
Loans and leases | $ | 9,623 | $ | 8,754 | |||
Debt securities | 2,804 | 2,541 | |||||
Federal funds sold and securities borrowed or purchased under agreements to resell | 622 | 439 | |||||
Trading account assets | 1,136 | 1,076 | |||||
Other interest income | 1,414 | 900 | |||||
Total interest income | 15,599 | 13,710 | |||||
Interest expense | |||||||
Deposits | 760 | 282 | |||||
Short-term borrowings | 1,135 | 647 | |||||
Trading account liabilities | 357 | 264 | |||||
Long-term debt | 1,739 | 1,459 | |||||
Total interest expense | 3,991 | 2,652 | |||||
Net interest income | 11,608 | 11,058 | |||||
Noninterest income | |||||||
Card income | 1,457 | 1,449 | |||||
Service charges | 1,921 | 1,918 | |||||
Investment and brokerage services | 3,664 | 3,417 | |||||
Investment banking income | 1,353 | 1,584 | |||||
Trading account profits | 2,699 | 2,331 | |||||
Other income | 423 | 491 | |||||
Total noninterest income | 11,517 | 11,190 | |||||
Total revenue, net of interest expense | 23,125 | 22,248 | |||||
Provision for credit losses | 834 | 835 | |||||
Noninterest expense | |||||||
Personnel | 8,480 | 8,475 | |||||
Occupancy | 1,014 | 1,000 | |||||
Equipment | 442 | 438 | |||||
Marketing | 345 | 332 | |||||
Professional fees | 381 | 456 | |||||
Data processing | 810 | 794 | |||||
Telecommunications | 183 | 191 | |||||
Other general operating | 2,242 | 2,407 | |||||
Total noninterest expense | 13,897 | 14,093 | |||||
Income before income taxes | 8,394 | 7,320 | |||||
Income tax expense | 1,476 | 1,983 | |||||
Net income | $ | 6,918 | $ | 5,337 | |||
Preferred stock dividends | 428 | 502 | |||||
Net income applicable to common shareholders | $ | 6,490 | $ | 4,835 | |||
Per common share information | |||||||
Earnings | $ | 0.63 | $ | 0.48 | |||
Diluted earnings | 0.62 | 0.45 | |||||
Dividends paid | 0.12 | 0.075 | |||||
Average common shares issued and outstanding | 10,322.4 | 10,099.6 | |||||
Average diluted common shares issued and outstanding | 10,472.7 | 10,919.7 |
See accompanying Notes to Consolidated Financial Statements.
Bank of America 50 |
Bank of America Corporation and Subsidiaries
Consolidated Statement of Comprehensive Income | |||||||
Three Months Ended March 31 | |||||||
(Dollars in millions) | 2018 | 2017 | |||||
Net income | $ | 6,918 | $ | 5,337 | |||
Other comprehensive income (loss), net-of-tax: | |||||||
Net change in debt and equity securities | (3,963 | ) | (99 | ) | |||
Net change in debit valuation adjustments | 273 | 9 | |||||
Net change in derivatives | (275 | ) | 38 | ||||
Employee benefit plan adjustments | 30 | 27 | |||||
Net change in foreign currency translation adjustments | (48 | ) | (3 | ) | |||
Other comprehensive income (loss) | (3,983 | ) | (28 | ) | |||
Comprehensive income | $ | 2,935 | $ | 5,309 |
See accompanying Notes to Consolidated Financial Statements.
51 Bank of America |
Bank of America Corporation and Subsidiaries
Consolidated Balance Sheet | |||||||
(Dollars in millions) | March 31 2018 | December 31 2017 | |||||
Assets | |||||||
Cash and due from banks | $ | 26,247 | $ | 29,480 | |||
Interest-bearing deposits with the Federal Reserve, non-U.S. central banks and other banks | 177,994 | 127,954 | |||||
Cash and cash equivalents | 204,241 | 157,434 | |||||
Time deposits placed and other short-term investments | 8,069 | 11,153 | |||||
Federal funds sold and securities borrowed or purchased under agreements to resell (includes $68,556 and $52,906 measured at fair value) | 244,630 | 212,747 | |||||
Trading account assets (includes $107,906 and $106,274 pledged as collateral) | 198,477 | 209,358 | |||||
Derivative assets | 47,869 | 37,762 | |||||
Debt securities: | |||||||
Carried at fair value | 303,298 | 315,117 | |||||
Held-to-maturity, at cost (fair value – $119,132 and $123,299) | 123,539 | 125,013 | |||||
Total debt securities | 426,837 | 440,130 | |||||
Loans and leases (includes $5,989 and $5,710 measured at fair value) | 934,078 | 936,749 | |||||
Allowance for loan and lease losses | (10,260 | ) | (10,393 | ) | |||
Loans and leases, net of allowance | 923,818 | 926,356 | |||||
Premises and equipment, net | 9,399 | 9,247 | |||||
Goodwill | 68,951 | 68,951 | |||||
Loans held-for-sale (includes $3,091 and $2,156 measured at fair value) | 9,227 | 11,430 | |||||
Customer and other receivables | 58,127 | 61,623 | |||||
Other assets (includes $20,575 and $22,581 measured at fair value) | 128,833 | 135,043 | |||||
Total assets | $ | 2,328,478 | $ | 2,281,234 | |||
Assets of consolidated variable interest entities included in total assets above (isolated to settle the liabilities of the variable interest entities) | |||||||
Trading account assets | $ | 6,065 | $ | 6,521 | |||
Loans and leases | 46,590 | 48,929 | |||||
Allowance for loan and lease losses | (984 | ) | (1,016 | ) | |||
Loans and leases, net of allowance | 45,606 | 47,913 | |||||
Loans held-for-sale | 13 | 27 | |||||
All other assets | 399 | 1,694 | |||||
Total assets of consolidated variable interest entities | $ | 52,083 | $ | 56,155 |
See accompanying Notes to Consolidated Financial Statements.
Bank of America 52 |
Bank of America Corporation and Subsidiaries
Consolidated Balance Sheet (continued) | |||||||
(Dollars in millions) | March 31 2018 | December 31 2017 | |||||
Liabilities | |||||||
Deposits in U.S. offices: | |||||||
Noninterest-bearing | $ | 434,709 | $ | 430,650 | |||
Interest-bearing (includes $435 and $449 measured at fair value) | 811,212 | 796,576 | |||||
Deposits in non-U.S. offices: | |||||||
Noninterest-bearing | 13,768 | 14,024 | |||||
Interest-bearing | 68,975 | 68,295 | |||||
Total deposits | 1,328,664 | 1,309,545 | |||||
Federal funds purchased and securities loaned or sold under agreements to repurchase (includes $35,116 and $36,182 measured at fair value) | 178,528 | 176,865 | |||||
Trading account liabilities | 100,218 | 81,187 | |||||
Derivative liabilities | 33,900 | 34,300 | |||||
Short-term borrowings (includes $2,284 and $1,494 measured at fair value) | 38,073 | 32,666 | |||||
Accrued expenses and other liabilities (includes $20,176 and $22,840 measured at fair value and $782 and $777 of reserve for unfunded lending commitments) | 150,615 | 152,123 | |||||
Long-term debt (includes $30,062 and $31,786 measured at fair value) | 232,256 | 227,402 | |||||
Total liabilities | 2,062,254 | 2,014,088 | |||||
Commitments and contingencies (Note 7 – Securitizations and Other Variable Interest Entities and Note 10 – Commitments and Contingencies) | |||||||
Shareholders’ equity | |||||||
Preferred stock, $0.01 par value; authorized – 100,000,000 shares; issued and outstanding – 3,931,683 and 3,837,683 shares | 24,672 | 22,323 | |||||
Common stock and additional paid-in capital, $0.01 par value; authorized – 12,800,000,000 shares; issued and outstanding – 10,175,910,851 and 10,287,302,431 shares | 133,532 | 138,089 | |||||
Retained earnings | 120,298 | 113,816 | |||||
Accumulated other comprehensive income (loss) | (12,278 | ) | (7,082 | ) | |||
Total shareholders’ equity | 266,224 | 267,146 | |||||
Total liabilities and shareholders’ equity | $ | 2,328,478 | $ | 2,281,234 | |||
Liabilities of consolidated variable interest entities included in total liabilities above | |||||||
Short-term borrowings | $ | 286 | $ | 312 | |||
Long-term debt (includes $10,050 and $9,872 of non-recourse debt) | 10,051 | 9,873 | |||||
All other liabilities (includes $35 and $34 of non-recourse liabilities) | 38 | 37 | |||||
Total liabilities of consolidated variable interest entities | $ | 10,375 | $ | 10,222 |
See accompanying Notes to Consolidated Financial Statements.
53 Bank of America |
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 | ||||||||||||||||||
(In millions) | Shares | Amount | ||||||||||||||||||||
Balance, December 31, 2016 | $ | 25,220 | 10,052.6 | $ | 147,038 | $ | 101,225 | $ | (7,288 | ) | $ | 266,195 | ||||||||||
Net income | 5,337 | 5,337 | ||||||||||||||||||||
Net change in debt and 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 | (756 | ) | (756 | ) | ||||||||||||||||||
Preferred | (502 | ) | (502 | ) | ||||||||||||||||||
Common stock issued under employee plans, net | 36.0 | 472 | 472 | |||||||||||||||||||
Common stock repurchased | (114.4 | ) | (2,728 | ) | (2,728 | ) | ||||||||||||||||
Balance, March 31, 2017 | $ | 25,220 | 9,974.2 | $ | 144,782 | $ | 105,304 | $ | (7,316 | ) | $ | 267,990 | ||||||||||
Balance, December 31, 2017 | $ | 22,323 | 10,287.3 | $ | 138,089 | $ | 113,816 | $ | (7,082 | ) | $ | 267,146 | ||||||||||
Cumulative adjustment for adoption of new hedge accounting standard | (32 | ) | 57 | 25 | ||||||||||||||||||
Adoption of accounting standard related to certain tax effects stranded in accumulated other comprehensive income (loss) | 1,270 | (1,270 | ) | — | ||||||||||||||||||
Net income | 6,918 | 6,918 | ||||||||||||||||||||
Net change in debt and equity securities | (3,963 | ) | (3,963 | ) | ||||||||||||||||||
Net change in debit valuation adjustments | 273 | 273 | ||||||||||||||||||||
Net change in derivatives | (275 | ) | (275 | ) | ||||||||||||||||||
Employee benefit plan adjustments | 30 | 30 | ||||||||||||||||||||
Net change in foreign currency translation adjustments | (48 | ) | (48 | ) | ||||||||||||||||||
Dividends declared: | ||||||||||||||||||||||
Common | (1,237 | ) | (1,237 | ) | ||||||||||||||||||
Preferred | (428 | ) | (428 | ) | ||||||||||||||||||
Issuance of preferred stock | 2,349 | 2,349 | ||||||||||||||||||||
Common stock issued under employee plans, net and other | 41.2 | 301 | (9 | ) | 292 | |||||||||||||||||
Common stock repurchased | (152.6 | ) | (4,858 | ) | (4,858 | ) | ||||||||||||||||
Balance, March 31, 2018 | $ | 24,672 | 10,175.9 | $ | 133,532 | $ | 120,298 | $ | (12,278 | ) | $ | 266,224 |
See accompanying Notes to Consolidated Financial Statements.
Bank of America 54 |
Bank of America Corporation and Subsidiaries
Consolidated Statement of Cash Flows | |||||||
Three Months Ended March 31 | |||||||
(Dollars in millions) | 2018 | 2017 | |||||
Operating activities | |||||||
Net income | $ | 6,918 | $ | 5,337 | |||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||
Provision for credit losses | 834 | 835 | |||||
Gains on sales of debt securities | (2 | ) | (52 | ) | |||
Depreciation and premises improvements amortization | 376 | 372 | |||||
Amortization of intangibles | 135 | 162 | |||||
Net amortization of premium/discount on debt securities | 475 | 544 | |||||
Deferred income taxes | 804 | 1,382 | |||||
Stock-based compensation | 415 | 306 | |||||
Loans held-for-sale: | |||||||
Originations and purchases | (5,745 | ) | (13,309 | ) | |||
Proceeds from sales and paydowns of loans originally classified as held for sale and instruments from related securitization activities | 9,876 | 7,755 | |||||
Net change in: | |||||||
Trading and derivative instruments | 15,807 | (16,723 | ) | ||||
Other assets | 11,233 | 3,532 | |||||
Accrued expenses and other liabilities | (814 | ) | (4,518 | ) | |||
Other operating activities, net | 42 | 1,388 | |||||
Net cash provided by (used in) operating activities | 40,354 | (12,989 | ) | ||||
Investing activities | |||||||
Net change in: | |||||||
Time deposits placed and other short-term investments | 3,084 | (2,106 | ) | ||||
Federal funds sold and securities borrowed or purchased under agreements to resell | (31,883 | ) | (12,509 | ) | |||
Debt securities carried at fair value: | |||||||
Proceeds from sales | 683 | 22,087 | |||||
Proceeds from paydowns and maturities | 19,052 | 24,015 | |||||
Purchases | (14,176 | ) | (44,198 | ) | |||
Held-to-maturity debt securities: | |||||||
Proceeds from paydowns and maturities | 3,764 | 3,874 | |||||
Purchases | (2,453 | ) | (3,033 | ) | |||
Loans and leases: | |||||||
Proceeds from sales of loans originally classified as held for investment and instruments from related securitization activities | 2,684 | 2,590 | |||||
Purchases | (1,609 | ) | (1,648 | ) | |||
Other changes in loans and leases, net | (1,190 | ) | (1,811 | ) | |||
Other investing activities, net | (805 | ) | (1,202 | ) | |||
Net cash used in investing activities | (22,849 | ) | (13,941 | ) | |||
Financing activities | |||||||
Net change in: | |||||||
Deposits | 19,119 | 11,207 | |||||
Federal funds purchased and securities loaned or sold under agreements to repurchase | 1,626 | 15,807 | |||||
Short-term borrowings | 5,407 | 20,131 | |||||
Long-term debt: | |||||||
Proceeds from issuance | 20,934 | 17,378 | |||||
Retirement | (13,577 | ) | (13,552 | ) | |||
Proceeds from issuance of preferred stock | 2,349 | — | |||||
Common stock repurchased | (4,858 | ) | (2,728 | ) | |||
Cash dividends paid | (1,674 | ) | (1,255 | ) | |||
Other financing activities, net | (724 | ) | (584 | ) | |||
Net cash provided by financing activities | 28,602 | 46,404 | |||||
Effect of exchange rate changes on cash and cash equivalents | 700 | 813 | |||||
Net increase in cash and cash equivalents | 46,807 | 20,287 | |||||
Cash and cash equivalents at January 1 | 157,434 | 147,738 | |||||
Cash and cash equivalents at March 31 | $ | 204,241 | $ | 168,025 |
See accompanying Notes to Consolidated Financial Statements.
55 Bank of America |
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 materially 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 2017 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.
Change in Tax Law
On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act (the Tax Act) which made significant changes to federal income tax law including, among other things, reducing the statutory corporate income tax rate to 21 percent from 35 percent and changing the taxation of the Corporation’s non-U.S. business activities. On the same date, the SEC issued Staff Accounting Bulletin No. 118 which specifies, among other things, that
reasonable estimates of the income tax effects of the Tax Act should be used, if determinable. The Corporation has accounted for the effects of the Tax Act using reasonable estimates based on currently available information and its interpretations thereof. This accounting may change due to, among other things, changes in interpretations the Corporation has made and the issuance of new tax or accounting guidance.
Accounting Standards Adopted on January 1, 2018
Effective January 1, 2018, the Corporation adopted the following new accounting standards on a prospective basis. For additional information, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements of the Corporation’s 2017 Annual Report on Form 10-K.
● | Revenue Recognition – The new accounting standard addresses the recognition of revenue from contracts with customers. For additional information, see Revenue Recognition Accounting Policies in this Note, Note 2 – Noninterest Income and Note 17 – Business Segment Information. |
● | Hedge Accounting – The new accounting standard simplifies and expands the ability to apply hedge accounting to certain risk management activities. For additional information, see Note 3 – Derivatives. |
● | Recognition and Measurement of Financial Assets and Liabilities – The new accounting standard relates to the recognition and measurement of financial instruments, including equity investments. For additional information, see Note 4 – Securities and Note 16 – Fair Value of Financial Instruments. |
● | Tax Effects in Accumulated Other Comprehensive Income – The new accounting standard addresses certain tax effects stranded in accumulated other comprehensive income (OCI) related to the Tax Act. For additional information, see Note 12 – Accumulated Other Comprehensive Income (Loss). |
Effective January 1, 2018, the Corporation adopted the following new accounting standards on a retrospective basis, resulting in restatement of all prior periods presented in the Consolidated Statement of Income and the Consolidated Statement of Cash Flows. The changes in presentation are not material to the individual line items affected.
● | Presentation of Pension Costs – The new accounting standard requires separate presentation of the service cost component of pension expense from all other components of net pension benefit/cost in the Consolidated Statement of Income. As a result, the service cost component continues to be presented in personnel expense while other components of net pension benefit/cost (e.g., interest cost, actual return on plan assets, amortization of prior service cost) are now presented in other general operating expense. |
● | Classification of Cash Flows and Restricted Cash – The new accounting standards address the classification of certain cash receipts and cash payments in the statement of cash flows as well as the presentation and disclosure of restricted cash. For more information on restricted cash, see Note 9 – Federal Funds Sold or Purchased, Securities Financing Agreements, Short-term Borrowings and Restricted Cash. |
Bank of America 56 |
Accounting Standards Issued and Not Yet Adopted
Lease Accounting
The Financial Accounting Standards Board (FASB) issued a new accounting standard effective on January 1, 2019 that requires substantially all leases to be recorded as assets and liabilities on the balance sheet. On January 5, 2018, the FASB issued an exposure draft proposing an amendment to the standard that, if approved, would permit companies the option to apply the provisions of the new lease standard either prospectively as of the effective date, without adjusting comparative periods presented, or using a modified retrospective transition applicable to all prior periods presented. The Corporation is in the process of reviewing its existing lease portfolios, including certain service contracts for embedded leases, to evaluate the impact of the standard on the consolidated financial statements, as well as the impact to regulatory capital and risk-weighted assets. The effect of the adoption will depend on the lease portfolio at the time of transition and the transition options ultimately available; however, the Corporation does not expect the new accounting standard to have a material impact on its consolidated financial position, results of operations or disclosures in the Notes to the Consolidated Financial Statements.
Accounting for Financial Instruments -- Credit Losses
The FASB issued a new accounting standard effective on January 1, 2020, with early adoption permitted on January 1, 2019, that will replace the existing measurement of the allowance for credit losses with management’s best estimate of probable credit losses inherent in the Corporation’s lending activities. The new standard will reflect management’s best estimate of all expected credit losses for substantially all of the Corporation’s financial assets that are recognized at amortized cost. The standard also requires expanded credit quality disclosures. The Corporation is in the process of identifying and implementing required changes to credit loss estimation models and processes and evaluating the impact of this new accounting standard, which at the date of adoption may increase the allowance for credit losses with a resulting negative adjustment to retained earnings. The change will be dependent on the characteristics of the Corporation’s portfolio at adoption date as well as the macroeconomic conditions and forecast as of that date. While a final decision has not been made, the Corporation does not expect to early adopt the standard.
Revenue Recognition Accounting Policies
The following summarizes the Corporation’s revenue recognition accounting policies for certain noninterest income activities.
Card Income
Card income includes annual, late and over-limit fees as well as fees earned from interchange, cash advances and other miscellaneous transactions and is presented net of direct costs. Interchange fees are recognized upon settlement of the credit and debit card payment transactions and are generally determined on a percentage basis for credit cards and fixed rates for debit cards based on the corresponding payment network’s rates. Substantially all card fees are recognized at the transaction date, except for certain time-based fees such as annual fees, which are recognized over 12 months. Fees charged to cardholders that are
estimated to be uncollectible are reserved in the allowance for loan and lease losses. Rewards paid to cardholders are related to points earned by the cardholder that can be redeemed for a broad range of rewards including cash, travel and gift cards. Based on past redemption behavior, card product type, account transaction activity and other historical card performance, the Corporation estimates a liability based on the amount of earned reward points that are expected to be redeemed. The Corporation also makes payments to credit card partners. The payments are based on revenue-sharing agreements that are generally driven by cardholder transactions and partner sales volumes.
Service Charges
Service charges include deposit and lending-related fees. Deposit-related fees consist of fees earned on consumer and commercial deposit activities and are generally recognized when the transactions occur or as the service is performed. Consumer fees are earned on consumer deposit accounts for account maintenance and various transaction-based services, such as ATM transactions, wire transfer activities, check and money order processing and insufficient funds/overdraft transactions. Commercial deposit-related fees are from the Corporation’s Global Transaction Services business and consist of commercial deposit and treasury management services, including account maintenance and other services, such as payroll, sweep account and other cash management services. Lending-related fees generally represent transactional fees earned from certain loan commitments, financial guarantees and standby letters of credit (SBLCs).
Investment and Brokerage Services
Investment and brokerage services consist of asset management and brokerage fees. Asset management fees are earned from the management of client assets under advisory agreements or the full discretion of the Corporation’s financial advisors (collectively referred to as assets under management (AUM)). Asset management fees are earned as a percentage of the client’s AUM and generally range from 50 basis points (bps) to 150 bps of the AUM. In cases where a third party is used to obtain a client’s investment allocation, the fee remitted to the third party is recorded net and is not reflected in the transaction price, as the Corporation is an agent for those services.
Brokerage fees include income earned from transaction-based services that are performed as part of investment management services and are based on a fixed price per unit or as a percentage of the total transaction amount. Brokerage fees also include distribution fees and sales commissions that are primarily in the Global Wealth & Investment Management (GWIM) segment and are earned over time. In addition, primarily in the Global Markets segment, brokerage fees are earned when the Corporation fills customer orders to buy or sell various financial products or when it acknowledges, affirms, settles and clears transactions and/or submits trade information to the appropriate clearing broker. Certain customers pay brokerage, clearing and/or exchange fees imposed by relevant regulatory bodies or exchanges in order to execute or clear trades. These fees are recorded net and are not reflected in the transaction price, as the Corporation is an agent for those services.
57 Bank of America |
Investment Banking Income
Investment banking income includes underwriting income and financial advisory services income. Underwriting consists of fees earned for the placement of a customer’s debt or equity securities. The revenue is generally earned based on a percentage of the fixed number of shares or principal placed. Once the number of shares or notes is determined and the service is completed, the underwriting fees are recognized. The Corporation incurs certain out-of-pocket expenses, such as legal costs, in performing these services. These expenses are recovered through the revenue the Corporation earns from the customer and are included in operating expenses. Syndication fees represent fees earned as the agent or lead lender responsible for structuring, arranging and administering a loan syndication.
Financial advisory services consist of fees earned for assisting customers with transactions related to mergers and acquisitions
and financial restructurings. Revenue varies depending on the size and number of services performed for each contract and is generally contingent on successful execution of the transaction. Revenue is typically recognized once the transaction is completed and all services have been rendered. Additionally, the Corporation may earn a fixed fee in merger and acquisition transactions to provide a fairness opinion, with the fees recognized when the opinion is delivered to the customer.
Other Revenue Measurement and Recognition Policies
The Corporation did not disclose the value of any open performance obligations at March 31, 2018, as its contracts with customers generally have a fixed term that is less than one year, an open term with a cancellation period that is less than one year, or provisions that allow the Corporation to recognize revenue at the amount it has the right to invoice.
NOTE 2 Noninterest Income
The table below presents the Corporation’s noninterest income disaggregated by revenue source for the three months ended March 31, 2018 and 2017. For more information, see Note 1 – Summary of Significant Accounting Principles. For a disaggregation of noninterest income by business segment and All Other, see Note 17 – Business Segment Information.
Three Months Ended March 31 | |||||||
(Dollars in millions) | 2018 | 2017 | |||||
Card income | |||||||
Interchange fees (1) | $ | 971 | $ | 958 | |||
Other card income | 486 | 491 | |||||
Total card income | 1,457 | 1,449 | |||||
Service charges | |||||||
Deposit-related fees | 1,646 | 1,653 | |||||
Lending-related fees | 275 | 265 | |||||
Total service charges | 1,921 | 1,918 | |||||
Investment and brokerage services | |||||||
Asset management fees | 2,564 | 2,200 | |||||
Brokerage fees | 1,100 | 1,217 | |||||
Total investment and brokerage services | 3,664 | 3,417 | |||||
Investment banking income | |||||||
Underwriting income | 740 | 779 | |||||
Syndication fees | 316 | 400 | |||||
Financial advisory services | 297 | 405 | |||||
Total investment banking income | 1,353 | 1,584 | |||||
Trading account profits | 2,699 | 2,331 | |||||
Other income | 423 | 491 | |||||
Total noninterest income | $ | 11,517 | $ | 11,190 |
(1) | Gross interchange fees were $2.2 billion and $2.0 billion for the three months ended March 31, 2018 and 2017, and are presented net of $1.3 billion and $1.1 billion of expenses for rewards and partner payments. |
Bank of America 58 |
NOTE 3 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 2017 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, 2018 and December 31, 2017. 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 cash collateral received or paid.
March 31, 2018 | ||||||||||||||||||||||||||||
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 | Qualifying Accounting Hedges | Total | |||||||||||||||||||||
Interest rate contracts | ||||||||||||||||||||||||||||
Swaps | $ | 17,401.6 | $ | 166.4 | $ | 2.2 | $ | 168.6 | $ | 160.8 | $ | 3.5 | $ | 164.3 | ||||||||||||||
Futures and forwards | 6,470.8 | 1.6 | — | 1.6 | 1.6 | — | 1.6 | |||||||||||||||||||||
Written options | 1,274.0 | — | — | — | 33.7 | — | 33.7 | |||||||||||||||||||||
Purchased options | 1,258.0 | 35.4 | — | 35.4 | — | — | — | |||||||||||||||||||||
Foreign exchange contracts | ||||||||||||||||||||||||||||
Swaps | 2,044.4 | 35.8 | 2.0 | 37.8 | 37.3 | 2.5 | 39.8 | |||||||||||||||||||||
Spot, futures and forwards | 4,734.3 | 43.4 | 0.8 | 44.2 | 40.5 | 0.7 | 41.2 | |||||||||||||||||||||
Written options | 363.3 | — | — | — | 5.1 | — | 5.1 | |||||||||||||||||||||
Purchased options | 323.2 | 4.9 | — | 4.9 | — | — | — | |||||||||||||||||||||
Equity contracts | ||||||||||||||||||||||||||||
Swaps | 271.1 | 5.7 | — | 5.7 | 5.8 | — | 5.8 | |||||||||||||||||||||
Futures and forwards | 102.4 | 0.9 | — | 0.9 | 0.7 | — | 0.7 | |||||||||||||||||||||
Written options | 521.5 | — | — | — | 25.5 | — | 25.5 | |||||||||||||||||||||
Purchased options | 491.0 | 38.3 | — | 38.3 | — | — | — | |||||||||||||||||||||
Commodity contracts | ||||||||||||||||||||||||||||
Swaps | 49.4 | 1.9 | — | 1.9 | 4.6 | — | 4.6 | |||||||||||||||||||||
Futures and forwards | 52.8 | 3.6 | — | 3.6 | 0.7 | — | 0.7 | |||||||||||||||||||||
Written options | 23.1 | — | — | — | 1.5 | — | 1.5 | |||||||||||||||||||||
Purchased options | 24.3 | 1.6 | — | 1.6 | — | — | — | |||||||||||||||||||||
Credit derivatives (2) | ||||||||||||||||||||||||||||
Purchased credit derivatives: | ||||||||||||||||||||||||||||
Credit default swaps | 484.1 | 3.9 | — | 3.9 | 11.4 | — | 11.4 | |||||||||||||||||||||
Total return swaps/options | 67.6 | 0.2 | — | 0.2 | 1.3 | — | 1.3 | |||||||||||||||||||||
Written credit derivatives: | ||||||||||||||||||||||||||||
Credit default swaps | 457.4 | 11.0 | — | 11.0 | 3.4 | — | 3.4 | |||||||||||||||||||||
Total return swaps/options | 65.2 | 0.8 | — | 0.8 | 0.3 | — | 0.3 | |||||||||||||||||||||
Gross derivative assets/liabilities | $ | 355.4 | $ | 5.0 | $ | 360.4 | $ | 334.2 | $ | 6.7 | $ | 340.9 | ||||||||||||||||
Less: Legally enforceable master netting agreements | (276.0 | ) | — | (276.0 | ) | |||||||||||||||||||||||
Less: Cash collateral received/paid | (36.5 | ) | (31.0 | ) | ||||||||||||||||||||||||
Total derivative assets/liabilities | $ | 47.9 | $ | 33.9 |
(1) | Represents the total contract/notional amount of derivative assets and liabilities outstanding. |
(2) | The net derivative asset and notional amount of written credit derivatives for which the Corporation held purchased credit derivatives with identical underlying referenced names were $6.7 billion and $456.5 billion at March 31, 2018. |
59 Bank of America |
December 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 | Qualifying Accounting Hedges | Total | ||||||||||||||||||||
Interest rate contracts | |||||||||||||||||||||||||||
Swaps | $ | 15,416.4 | $ | 175.1 | $ | 2.9 | $ | 178.0 | $ | 172.5 | $ | 1.7 | $ | 174.2 | |||||||||||||
Futures and forwards | 4,332.4 | 0.5 | — | 0.5 | 0.5 | — | 0.5 | ||||||||||||||||||||
Written options | 1,170.5 | — | — | — | 35.5 | — | 35.5 | ||||||||||||||||||||
Purchased options | 1,184.5 | 37.6 | — | 37.6 | — | — | — | ||||||||||||||||||||
Foreign exchange contracts | |||||||||||||||||||||||||||
Swaps | 2,011.1 | 35.6 | 2.2 | 37.8 | 36.1 | 2.7 | 38.8 | ||||||||||||||||||||
Spot, futures and forwards | 3,543.3 | 39.1 | 0.7 | 39.8 | 39.1 | 0.8 | 39.9 | ||||||||||||||||||||
Written options | 291.8 | — | — | — | 5.1 | — | 5.1 | ||||||||||||||||||||
Purchased options | 271.9 | 4.6 | — | 4.6 | — | — | — | ||||||||||||||||||||
Equity contracts | |||||||||||||||||||||||||||
Swaps | 265.6 | 4.8 | — | 4.8 | 4.4 | — | 4.4 | ||||||||||||||||||||
Futures and forwards | 106.9 | 1.5 | — | 1.5 | 0.9 | — | 0.9 | ||||||||||||||||||||
Written options | 480.8 | — | — | — | 23.9 | — | 23.9 | ||||||||||||||||||||
Purchased options | 428.2 | 24.7 | — | 24.7 | — | — | — | ||||||||||||||||||||
Commodity contracts | |||||||||||||||||||||||||||
Swaps | 46.1 | 1.8 | — | 1.8 | 4.6 | — | 4.6 | ||||||||||||||||||||
Futures and forwards | 47.1 | 3.5 | — | 3.5 | 0.6 | — | 0.6 | ||||||||||||||||||||
Written options | 21.7 | — | — | — | 1.4 | — | 1.4 | ||||||||||||||||||||
Purchased options | 22.9 | 1.4 | — | 1.4 | — | — | — | ||||||||||||||||||||
Credit derivatives (2) | |||||||||||||||||||||||||||
Purchased credit derivatives: | |||||||||||||||||||||||||||
Credit default swaps | 470.9 | 4.1 | — | 4.1 | 11.1 | — | 11.1 | ||||||||||||||||||||
Total return swaps/options | 54.1 | 0.1 | — | 0.1 | 1.3 | — | 1.3 | ||||||||||||||||||||
Written credit derivatives: |