UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ü] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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 every Interactive Data File required to be submitted 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 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 | 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 October 26, 2018, there were 9,814,196,864 shares of Bank of America Corporation Common Stock outstanding.
Bank of America Corporation and Subsidiaries
September 30, 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, monolines, private-label and other investors, or other parties involved in securitizations; 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, including tariffs, 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 September 30, 2018, the Corporation had approximately $2.3 trillion in assets and a headcount of approximately 205,000 employees.
As of September 30, 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 67 million consumer and small business clients with approximately 4,400 retail financial centers, approximately 16,100 ATMs, and
leading digital banking platforms (www.bankofamerica.com) with more than 36 million active users, including nearly 26 million active mobile users. We offer industry-leading support to approximately three million small business owners. Our wealth management businesses, with client balances of approximately $2.8 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.
Recent Events
Capital Management
During the third quarter of 2018, we repurchased $5.0 billion of common stock pursuant to the Board of Directors’ (the Board) 2018 repurchase authorization of approximately $20.6 billion announced on June 28, 2018. For additional information, see Capital Management on page 22. On July 26, 2018, the Board declared a quarterly common stock dividend of $0.15 per share, payable on September 28, 2018 to shareholders of record as of September 7, 2018. Additionally, on October 24, 2018, the Board declared a quarterly common stock dividend of $0.15 per share, payable on December 28, 2018 to shareholders of record as of December 7, 2018.
Financial Highlights
Table 1 | Summary Income Statement and Selected Financial Data | |||||||||||||||
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
(Dollars in millions, except per share information) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Income statement | ||||||||||||||||
Net interest income | $ | 11,870 | $ | 11,161 | $ | 35,128 | $ | 33,205 | ||||||||
Noninterest income | 10,907 | 10,678 | 33,383 | 33,711 | ||||||||||||
Total revenue, net of interest expense | 22,777 | 21,839 | 68,511 | 66,916 | ||||||||||||
Provision for credit losses | 716 | 834 | 2,377 | 2,395 | ||||||||||||
Noninterest expense | 13,067 | 13,394 | 40,248 | 41,469 | ||||||||||||
Income before income taxes | 8,994 | 7,611 | 25,886 | 23,052 | ||||||||||||
Income tax expense | 1,827 | 2,187 | 5,017 | 7,185 | ||||||||||||
Net income | 7,167 | 5,424 | 20,869 | 15,867 | ||||||||||||
Preferred stock dividends | 466 | 465 | 1,212 | 1,328 | ||||||||||||
Net income applicable to common shareholders | $ | 6,701 | $ | 4,959 | $ | 19,657 | $ | 14,539 | ||||||||
Per common share information | ||||||||||||||||
Earnings | $ | 0.67 | $ | 0.49 | $ | 1.93 | $ | 1.44 | ||||||||
Diluted earnings | 0.66 | 0.46 | 1.91 | 1.36 | ||||||||||||
Dividends paid | 0.15 | 0.12 | 0.39 | 0.27 | ||||||||||||
Performance ratios | ||||||||||||||||
Return on average assets | 1.23 | % | 0.95 | % | 1.20 | % | 0.94 | % | ||||||||
Return on average common shareholders’ equity | 10.99 | 7.89 | 10.86 | 7.91 | ||||||||||||
Return on average tangible common shareholders’ equity (1) | 15.48 | 10.98 | 15.30 | 11.10 | ||||||||||||
Efficiency ratio | 57.37 | 61.33 | 58.75 | 61.97 | ||||||||||||
September 30 2018 | December 31 2017 | |||||||||||||||
Balance sheet | ||||||||||||||||
Total loans and leases | $ | 929,801 | $ | 936,749 | ||||||||||||
Total assets | 2,338,833 | 2,281,234 | ||||||||||||||
Total deposits | 1,345,649 | 1,309,545 | ||||||||||||||
Total common shareholders’ equity | 239,832 | 244,823 | ||||||||||||||
Total shareholders’ equity | 262,158 | 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 52. |
3 Bank of America |
Net income was $7.2 billion and $20.9 billion, or $0.66 and $1.91 per diluted share for the three and nine months ended September 30, 2018 compared to $5.4 billion and $15.9 billion, or $0.46 and $1.36 per diluted share for the same periods in 2017. The improvement in net income for the three and nine months ended September 30, 2018 was driven by a decrease in income tax expense due to the impacts of the Tax Cuts and Jobs Act (the Tax Act), an increase in net interest income, higher noninterest income in the three-month period, lower provision for credit losses and a decline in noninterest expense, partially offset by a decline in noninterest income in the nine-month period. Impacts from the Tax Act include a reduction in the federal tax rate to 21 percent from 35 percent.
Total assets increased $57.6 billion from December 31, 2017 to $2.3 trillion at September 30, 2018 driven by higher cash and cash equivalents from liquidity management actions and an increase in securities borrowed or purchased under agreements to resell primarily due to short-term investments of cash largely resulting from deposit growth.
Total liabilities increased $62.6 billion from December 31, 2017 to $2.1 trillion at September 30, 2018 primarily driven by higher deposits due to organic growth and several large short-term
placements at the end of the quarter, increases in accrued expenses and other liabilities primarily due to trading-related payables, and higher trading account liabilities driven by client activity in Global Markets. Shareholders’ equity decreased $5.0 billion from December 31, 2017 primarily due to returns of capital to shareholders through common stock repurchases and common and preferred stock dividends, market value declines in debt securities and the redemption of preferred stock, partially offset by net income and issuances of preferred stock.
Net Interest Income
Net interest income increased $709 million to $11.9 billion, and $1.9 billion to $35.1 billion for the three and nine months ended September 30, 2018 compared to the same periods in 2017. The net interest yield increased eight basis points (bps) to 2.39 percent, and four bps to 2.36 percent for the same periods. These increases were primarily driven by higher interest rates as well as loan and deposit growth, partially offset by tightening spreads, and for the nine-month period, the impact of the sale of the non-U.S. consumer credit card business in the second quarter of 2017. For more information regarding interest rate risk management, see Interest Rate Risk Management for the Banking Book on page 49.
Noninterest Income
Table 2 | Noninterest Income | |||||||||||||||
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Card income | $ | 1,470 | $ | 1,429 | $ | 4,469 | $ | 4,347 | ||||||||
Service charges | 1,961 | 1,968 | 5,836 | 5,863 | ||||||||||||
Investment and brokerage services | 3,494 | 3,437 | 10,616 | 10,314 | ||||||||||||
Investment banking income | 1,204 | 1,477 | 3,979 | 4,593 | ||||||||||||
Trading account profits | 1,893 | 1,837 | 6,907 | 6,124 | ||||||||||||
Other income | 885 | 530 | 1,576 | 2,470 | ||||||||||||
Total noninterest income | $ | 10,907 | $ | 10,678 | $ | 33,383 | $ | 33,711 |
Noninterest income increased $229 million to $10.9 billion, and decreased $328 million to $33.4 billion for the three and nine months ended September 30, 2018 compared to the same periods in 2017. The following highlights the significant changes.
● | Card income increased $41 million and $122 million primarily driven by an increase in credit and debit card spending, as well as increased late fees and annual fees, partially offset by higher rewards costs and lower cash advance fees, and for the nine-month period, the sale of the non-U.S. consumer credit card business. |
• | Investment and brokerage services income increased $57 million and $302 million primarily due to assets under management (AUM) flows and higher market valuations, partially offset by the impact of changing market dynamics on transactional revenue, and AUM pricing. |
● | Investment banking income decreased $273 million and $614 million primarily due to declines in leveraged finance and advisory fees, partially offset by an increase in equity underwriting fees. |
● | Trading account profits increased $56 million for the three-month period primarily due to increased client activity in equity financing and derivatives, partially offset by weakness in rates products and municipal bonds, and increased $783 million for the nine-month period primarily due to increased client activity in equity financing and derivatives, and strong trading performance in equity derivatives and macro-related products, partially offset by weakness in credit products. |
● | Other income increased $355 million for the three-month period primarily due to increased results from economic hedging activities, lower provision for representations and warranties and a gain on the sale of an equity investment. The $894 million decrease for the nine-month period also reflected a $729 million charge related to the redemption of certain trust preferred securities, partially offset by $656 million of gains on the sale of certain loans, primarily non-core. The nine-month period in 2017 included a $793 million pretax gain recognized in connection with the sale of the non-U.S. consumer credit card business. |
Bank of America 4 |
Provision for Credit Losses
The provision for credit losses decreased $118 million to $716 million for the three months ended September 30, 2018 compared to the same period in 2017 primarily due to asset quality improvement in the commercial portfolio including energy exposures and a lower reserve build in the U.S. credit card portfolio. The provision for credit losses decreased $18 million to $2.4 billion for the nine months ended September 30, 2018
compared to the same period in 2017 primarily due to asset quality improvement in the commercial portfolio including energy exposures and the impact of the sale of the non-U.S. consumer credit card business during the second quarter of 2017, largely offset by portfolio seasoning and loan growth in the U.S. credit card portfolio and a slower pace of improvement in the consumer real estate portfolio. For more information on the provision for credit losses, see Provision for Credit Losses on page 44.
Noninterest Expense
Table 3 | Noninterest Expense | |||||||||||||||
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Personnel | $ | 7,721 | $ | 7,811 | $ | 24,145 | $ | 24,326 | ||||||||
Occupancy | 1,015 | 999 | 3,051 | 3,000 | ||||||||||||
Equipment | 421 | 416 | 1,278 | 1,281 | ||||||||||||
Marketing | 421 | 461 | 1,161 | 1,235 | ||||||||||||
Professional fees | 439 | 476 | 1,219 | 1,417 | ||||||||||||
Data processing | 791 | 777 | 2,398 | 2,344 | ||||||||||||
Telecommunications | 173 | 170 | 522 | 538 | ||||||||||||
Other general operating | 2,086 | 2,284 | 6,474 | 7,328 | ||||||||||||
Total noninterest expense | $ | 13,067 | $ | 13,394 | $ | 40,248 | $ | 41,469 |
Noninterest expense decreased $327 million to $13.1 billion and $1.2 billion to $40.2 billion for the three and nine months ended September 30, 2018 compared to the same periods in 2017. The decrease for both periods was primarily due to lower other general operating expense, primarily driven by a decline in litigation expense and, for the nine-month period, a $295 million impairment charge recognized in the second quarter of 2017 related to certain data centers. Personnel expense also declined for both periods.
Income Tax Expense
Table 4 | Income Tax Expense | |||||||||||||||
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Income before income taxes | $ | 8,994 | $ | 7,611 | $ | 25,886 | $ | 23,052 | ||||||||
Income tax expense | 1,827 | 2,187 | 5,017 | 7,185 | ||||||||||||
Effective tax rate | 20.3 | % | 28.7 | % | 19.4 | % | 31.2 | % |
The effective tax rates for the three and nine months ended September 30, 2018 reflect the 21 percent federal tax rate and the other provisions of the Tax Act, as well as the impact of our recurring tax preference benefits. The nine-month effective rate also included tax benefits related to stock-based compensation.
The effective tax rates for the three and nine months ended September 30, 2017 were driven by the impact of our recurring
tax preference benefits. The nine-month effective tax rate also included a tax charge related to the sale of the non-U.S. consumer credit card business during the second quarter of 2017, partially offset by tax benefits related to stock-based compensation recognized earlier in the year.
We expect the effective tax rate for 2018 to be approximately 20 percent, absent unusual items.
5 Bank of America |
Supplemental Financial Data
In this Form 10-Q, we present certain non-GAAP financial measures. Non-GAAP financial measures exclude certain items or otherwise include components that differ from the most directly comparable measures calculated in accordance with GAAP. Non-GAAP financial measures are provided as additional useful information to assess our financial condition, results of operations (including period-to-period operating performance) or compliance with prospective regulatory requirements. These non-GAAP financial measures are not intended as a substitute for GAAP financial measures and may not be defined or calculated the same way as non-GAAP financial measures used by other companies.
We view net interest income and related ratios and analyses on 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 Tables 5 and 6.
For more information on the reconciliation of these non-GAAP financial measures to GAAP financial measures, see Non-GAAP Reconciliations on page 52.
Bank of America 6 |
Table 5 | Selected Quarterly Financial Data | |||||||||||||||||||
2018 Quarters | 2017 Quarters | |||||||||||||||||||
(In millions, except per share information) | Third | Second | First | Fourth | Third | |||||||||||||||
Income statement | ||||||||||||||||||||
Net interest income | $ | 11,870 | $ | 11,650 | $ | 11,608 | $ | 11,462 | $ | 11,161 | ||||||||||
Noninterest income (1) | 10,907 | 10,959 | 11,517 | 8,974 | 10,678 | |||||||||||||||
Total revenue, net of interest expense | 22,777 | 22,609 | 23,125 | 20,436 | 21,839 | |||||||||||||||
Provision for credit losses | 716 | 827 | 834 | 1,001 | 834 | |||||||||||||||
Noninterest expense | 13,067 | 13,284 | 13,897 | 13,274 | 13,394 | |||||||||||||||
Income before income taxes | 8,994 | 8,498 | 8,394 | 6,161 | 7,611 | |||||||||||||||
Income tax expense (1) | 1,827 | 1,714 | 1,476 | 3,796 | 2,187 | |||||||||||||||
Net income (1) | 7,167 | 6,784 | 6,918 | 2,365 | 5,424 | |||||||||||||||
Net income applicable to common shareholders | 6,701 | 6,466 | 6,490 | 2,079 | 4,959 | |||||||||||||||
Average common shares issued and outstanding | 10,031.6 | 10,181.7 | 10,322.4 | 10,470.7 | 10,197.9 | |||||||||||||||
Average diluted common shares issued and outstanding | 10,170.8 | 10,309.4 | 10,472.7 | 10,621.8 | 10,746.7 | |||||||||||||||
Performance ratios | ||||||||||||||||||||
Return on average assets | 1.23 | % | 1.17 | % | 1.21 | % | 0.41 | % | 0.95 | % | ||||||||||
Four quarter trailing return on average assets (2) | 1.00 | 0.93 | 0.86 | 0.80 | 0.91 | |||||||||||||||
Return on average common shareholders’ equity | 10.99 | 10.75 | 10.85 | 3.29 | 7.89 | |||||||||||||||
Return on average tangible common shareholders’ equity (3) | 15.48 | 15.15 | 15.26 | 4.56 | 10.98 | |||||||||||||||
Return on average shareholders’ equity | 10.74 | 10.26 | 10.57 | 3.43 | 7.88 | |||||||||||||||
Return on average tangible shareholders’ equity (3) | 14.61 | 13.95 | 14.37 | 4.62 | 10.59 | |||||||||||||||
Total ending equity to total ending assets | 11.21 | 11.53 | 11.43 | 11.71 | 11.91 | |||||||||||||||
Total average equity to total average assets | 11.42 | 11.42 | 11.41 | 11.87 | 12.03 | |||||||||||||||
Dividend payout | 22.35 | 18.83 | 19.06 | 60.35 | 25.59 | |||||||||||||||
Per common share data | ||||||||||||||||||||
Earnings | $ | 0.67 | $ | 0.64 | $ | 0.63 | $ | 0.20 | $ | 0.49 | ||||||||||
Diluted earnings | 0.66 | 0.63 | 0.62 | 0.20 | 0.46 | |||||||||||||||
Dividends paid | 0.15 | 0.12 | 0.12 | 0.12 | 0.12 | |||||||||||||||
Book value | 24.33 | 24.07 | 23.74 | 23.80 | 23.87 | |||||||||||||||
Tangible book value (3) | 17.23 | 17.07 | 16.84 | 16.96 | 17.18 | |||||||||||||||
Market price per share of common stock | ||||||||||||||||||||
Closing | $ | 29.46 | $ | 28.19 | $ | 29.99 | $ | 29.52 | $ | 25.34 | ||||||||||
High closing | 31.80 | 31.22 | 32.84 | 29.88 | 25.45 | |||||||||||||||
Low closing | 27.78 | 28.19 | 29.17 | 25.45 | 22.89 | |||||||||||||||
Market capitalization | $ | 290,424 | $ | 282,259 | $ | 305,176 | $ | 303,681 | $ | 264,992 | ||||||||||
Average balance sheet | ||||||||||||||||||||
Total loans and leases | $ | 930,736 | $ | 934,818 | $ | 931,915 | $ | 927,790 | $ | 918,129 | ||||||||||
Total assets | 2,317,829 | 2,322,678 | 2,325,878 | 2,301,687 | 2,271,104 | |||||||||||||||
Total deposits | 1,316,345 | 1,300,659 | 1,297,268 | 1,293,572 | 1,271,711 | |||||||||||||||
Long-term debt | 233,475 | 229,037 | 229,603 | 227,644 | 227,309 | |||||||||||||||
Common shareholders’ equity | 241,812 | 241,313 | 242,713 | 250,838 | 249,214 | |||||||||||||||
Total shareholders’ equity | 264,653 | 265,181 | 265,480 | 273,162 | 273,238 | |||||||||||||||
Asset quality | ||||||||||||||||||||
Allowance for credit losses (4) | $ | 10,526 | $ | 10,837 | $ | 11,042 | $ | 11,170 | $ | 11,455 | ||||||||||
Nonperforming loans, leases and foreclosed properties (5) | 5,449 | 6,181 | 6,694 | 6,758 | 6,869 | |||||||||||||||
Allowance for loan and lease losses as a percentage of total loans and leases outstanding (5) | 1.05 | % | 1.08 | % | 1.11 | % | 1.12 | % | 1.16 | % | ||||||||||
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (5) | 189 | 170 | 161 | 161 | 163 | |||||||||||||||
Net charge-offs (6) | $ | 932 | $ | 996 | $ | 911 | $ | 1,237 | $ | 900 | ||||||||||
Annualized net charge-offs as a percentage of average loans and leases outstanding (5, 6) | 0.40 | % | 0.43 | % | 0.40 | % | 0.53 | % | 0.39 | % | ||||||||||
Capital ratios at period end (7) | ||||||||||||||||||||
Common equity tier 1 capital | 11.4 | % | 11.4 | % | 11.3 | % | 11.5 | % | 11.9 | % | ||||||||||
Tier 1 capital | 12.9 | 13.0 | 13.0 | 13.0 | 13.4 | |||||||||||||||
Total capital | 14.7 | 14.8 | 14.8 | 14.8 | 15.1 | |||||||||||||||
Tier 1 leverage | 8.3 | 8.4 | 8.4 | 8.6 | 8.9 | |||||||||||||||
Supplementary leverage ratio | 6.7 | 6.7 | 6.8 | n/a | n/a | |||||||||||||||
Tangible equity (3) | 8.5 | 8.7 | 8.7 | 8.9 | 9.1 | |||||||||||||||
Tangible common equity (3) | 7.5 | 7.7 | 7.6 | 7.9 | 8.1 |
(1) | Net income for the fourth quarter of 2017 included a 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 6, and for corresponding reconciliations to GAAP financial measures, see Non-GAAP Reconciliations on page 52. |
(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 36 and corresponding Table 28 and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 40 and corresponding Table 35. |
(6) | Net charge-offs exclude $95 million, $36 million, $35 million, $46 million and $73 million of write-offs in the purchased credit-impaired (PCI) loan portfolio in the third, second and first quarters of 2018, and in the fourth and third quarters of 2017, respectively. For more information, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 34. |
(7) | 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, including which approach is used to assess capital adequacy, see Capital Management on page 22. |
n/a = not applicable
Bank of America 7 |
Table 6 | Selected Year-to-Date Financial Data | |||||||
Nine Months Ended September 30 | ||||||||
(In millions, except per share information) | 2018 | 2017 | ||||||
Income statement | ||||||||
Net interest income | $ | 35,128 | $ | 33,205 | ||||
Noninterest income | 33,383 | 33,711 | ||||||
Total revenue, net of interest expense | 68,511 | 66,916 | ||||||
Provision for credit losses | 2,377 | 2,395 | ||||||
Noninterest expense | 40,248 | 41,469 | ||||||
Income before income taxes | 25,886 | 23,052 | ||||||
Income tax expense | 5,017 | 7,185 | ||||||
Net income | 20,869 | 15,867 | ||||||
Net income applicable to common shareholders | 19,657 | 14,539 | ||||||
Average common shares issued and outstanding | 10,177.5 | 10,103.4 | ||||||
Average diluted common shares issued and outstanding | 10,317.9 | 10,832.1 | ||||||
Performance ratios | ||||||||
Return on average assets | 1.20 | % | 0.94 | % | ||||
Return on average common shareholders’ equity | 10.86 | 7.91 | ||||||
Return on average tangible common shareholders’ equity (1) | 15.30 | 11.10 | ||||||
Return on average shareholders’ equity | 10.52 | 7.84 | ||||||
Return on average tangible shareholders’ equity (1) | 14.31 | 10.61 | ||||||
Total ending equity to total ending assets | 11.21 | 11.91 | ||||||
Total average equity to total average assets | 11.42 | 11.99 | ||||||
Dividend payout | 20.10 | 19.08 | ||||||
Per common share data | ||||||||
Earnings | $ | 1.93 | $ | 1.44 | ||||
Diluted earnings | 1.91 | 1.36 | ||||||
Dividends paid | 0.39 | 0.27 | ||||||
Book value | 24.33 | 23.87 | ||||||
Tangible book value (1) | 17.23 | 17.18 | ||||||
Market price per share of common stock | ||||||||
Closing | $ | 29.46 | $ | 25.34 | ||||
High closing | 32.84 | 25.50 | ||||||
Low closing | 27.78 | 22.05 | ||||||
Market capitalization | $ | 290,424 | $ | 264,992 |
(1) | Tangible equity ratios and tangible book value per share of common stock are non-GAAP financial measures. For more information on these ratios and for corresponding reconciliations to GAAP financial measures, see Non-GAAP Reconciliations on page 52. |
Bank of America 8 |
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) | Third Quarter 2018 | Third Quarter 2017 | ||||||||||||||||||||
Earning assets | ||||||||||||||||||||||
Interest-bearing deposits with the Federal Reserve, non-U.S. central banks and other banks | $ | 144,411 | $ | 523 | 1.44 | % | $ | 127,835 | $ | 323 | 1.00 | % | ||||||||||
Time deposits placed and other short-term investments | 8,328 | 48 | 2.26 | 12,503 | 68 | 2.17 | ||||||||||||||||
Federal funds sold and securities borrowed or purchased under agreements to resell (1) | 241,426 | 799 | 1.31 | 223,585 | 487 | 0.86 | ||||||||||||||||
Trading account assets | 128,896 | 1,195 | 3.68 | 124,068 | 1,125 | 3.60 | ||||||||||||||||
Debt securities | 445,813 | 3,014 | 2.66 | 436,886 | 2,670 | 2.44 | ||||||||||||||||
Loans and leases (2): | ||||||||||||||||||||||
Residential mortgage | 209,460 | 1,857 | 3.54 | 199,240 | 1,724 | 3.46 | ||||||||||||||||
Home equity | 53,050 | 656 | 4.91 | 61,225 | 664 | 4.31 | ||||||||||||||||
U.S. credit card | 94,710 | 2,435 | 10.20 | 91,602 | 2,253 | 9.76 | ||||||||||||||||
Direct/Indirect and other consumer (3) | 91,828 | 787 | 3.40 | 96,272 | 706 | 2.91 | ||||||||||||||||
Total consumer | 449,048 | 5,735 | 5.08 | 448,339 | 5,347 | 4.74 | ||||||||||||||||
U.S. commercial | 303,680 | 3,034 | 3.97 | 293,203 | 2,542 | 3.44 | ||||||||||||||||
Non-U.S. commercial | 96,019 | 831 | 3.43 | 95,725 | 676 | 2.80 | ||||||||||||||||
Commercial real estate (4) | 60,754 | 682 | 4.45 | 59,044 | 552 | 3.71 | ||||||||||||||||
Commercial lease financing | 21,235 | 173 | 3.25 | 21,818 | 160 | 2.92 | ||||||||||||||||
Total commercial | 481,688 | 4,720 | 3.89 | 469,790 | 3,930 | 3.32 | ||||||||||||||||
Total loans and leases | 930,736 | 10,455 | 4.46 | 918,129 | 9,277 | 4.02 | ||||||||||||||||
Other earning assets (1) | 72,827 | 1,082 | 5.91 | 76,496 | 849 | 4.41 | ||||||||||||||||
Total earning assets (1,5) | 1,972,437 | 17,116 | 3.45 | 1,919,502 | 14,799 | 3.06 | ||||||||||||||||
Cash and due from banks | 25,639 | 28,990 | ||||||||||||||||||||
Other assets, less allowance for loan and lease losses | 319,753 | 322,612 | ||||||||||||||||||||
Total assets | $ | 2,317,829 | $ | 2,271,104 | ||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||
U.S. interest-bearing deposits: | ||||||||||||||||||||||
Savings | $ | 53,929 | $ | 1 | 0.01 | % | $ | 54,328 | $ | 1 | 0.01 | % | ||||||||||
NOW and money market deposit accounts | 680,285 | 737 | 0.43 | 631,270 | 333 | 0.21 | ||||||||||||||||
Consumer CDs and IRAs | 39,160 | 40 | 0.41 | 44,239 | 31 | 0.27 | ||||||||||||||||
Negotiable CDs, public funds and other deposits | 54,192 | 275 | 2.01 | 38,119 | 101 | 1.05 | ||||||||||||||||
Total U.S. interest-bearing deposits | 827,566 | 1,053 | 0.50 | 767,956 | 466 | 0.24 | ||||||||||||||||
Non-U.S. interest-bearing deposits: | ||||||||||||||||||||||
Banks located in non-U.S. countries | 2,353 | 12 | 2.06 | 2,259 | 5 | 0.97 | ||||||||||||||||
Governments and official institutions | 709 | — | 0.01 | 1,012 | 3 | 1.04 | ||||||||||||||||
Time, savings and other | 63,179 | 165 | 1.04 | 63,716 | 150 | 0.93 | ||||||||||||||||
Total non-U.S. interest-bearing deposits | 66,241 | 177 | 1.07 | 66,987 | 158 | 0.93 | ||||||||||||||||
Total interest-bearing deposits | 893,807 | 1,230 | 0.55 | 834,943 | 624 | 0.30 | ||||||||||||||||
Federal funds purchased, securities loaned or sold under agreements to repurchase, short-term borrowings and other interest-bearing liabilities (1) | 264,168 | 1,526 | 2.30 | 270,364 | 846 | 1.24 | ||||||||||||||||
Trading account liabilities | 50,904 | 335 | 2.60 | 48,390 | 319 | 2.62 | ||||||||||||||||
Long-term debt | 233,475 | 2,004 | 3.42 | 227,309 | 1,609 | 2.82 | ||||||||||||||||
Total interest-bearing liabilities (1,5) | 1,442,354 | 5,095 | 1.40 | 1,381,006 | 3,398 | 0.98 | ||||||||||||||||
Noninterest-bearing sources: | ||||||||||||||||||||||
Noninterest-bearing deposits | 422,538 | 436,768 | ||||||||||||||||||||
Other liabilities (1) | 188,284 | 180,092 | ||||||||||||||||||||
Shareholders’ equity | 264,653 | 273,238 | ||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 2,317,829 | $ | 2,271,104 | ||||||||||||||||||
Net interest spread | 2.05 | % | 2.08 | % | ||||||||||||||||||
Impact of noninterest-bearing sources | 0.37 | 0.28 | ||||||||||||||||||||
Net interest income/yield on earning assets | $ | 12,021 | 2.42 | % | $ | 11,401 | 2.36 | % |
(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 non-U.S. consumer loans of $2.8 billion and $2.9 billion in the third quarter of 2018 and 2017. |
(4) | Includes U.S. commercial real estate loans of $56.8 billion and $55.2 billion, and non-U.S. commercial real estate loans of $4.0 billion and $3.8 billion in the third quarter of 2018 and 2017, respectively. |
(5) | Interest income includes the impact of interest rate risk management contracts, which decreased interest income on the underlying assets by $57 million and $7 million in the third quarter of 2018 and 2017. Interest expense includes the impact of interest rate risk management contracts, which increased (decreased) interest expense on the underlying liabilities by $68 million and $(346) million in the third quarter of 2018 and 2017. For more information, see Interest Rate Risk Management for the Banking Book on page 49. |
Bank of America 9 |
Table 8 | Year-to-Date Average Balances and Interest Rates - FTE Basis | |||||||||||||||||||||
Average Balance | Interest Income/ Expense | Yield/ Rate | Average Balance | Interest Income/ Expense | Yield/ Rate | |||||||||||||||||
Nine Months Ended September 30 | ||||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | ||||||||||||||||||||
Earning assets | ||||||||||||||||||||||
Interest-bearing deposits with the Federal Reserve, non-U.S. central banks and other banks | $ | 143,229 | $ | 1,432 | 1.34 | % | $ | 127,000 | $ | 786 | 0.83 | % | ||||||||||
Time deposits placed and other short-term investments | 9,700 | 157 | 2.16 | 11,820 | 173 | 1.96 | ||||||||||||||||
Federal funds sold and securities borrowed or purchased under agreements to resell (1) | 247,183 | 2,130 | 1.15 | 222,255 | 1,278 | 0.77 | ||||||||||||||||
Trading account assets | 130,931 | 3,574 | 3.65 | 128,547 | 3,435 | 3.57 | ||||||||||||||||
Debt securities | 436,080 | 8,729 | 2.62 | 432,775 | 7,875 | 2.42 | ||||||||||||||||
Loans and leases (2): | ||||||||||||||||||||||
Residential mortgage | 206,808 | 5,437 | 3.51 | 196,288 | 5,082 | 3.45 | ||||||||||||||||
Home equity | 54,941 | 1,939 | 4.72 | 63,339 | 1,967 | 4.15 | ||||||||||||||||
U.S. credit card | 94,222 | 7,046 | 10.00 | 90,238 | 6,492 | 9.62 | ||||||||||||||||
Non-U.S. credit card (3) | — | — | — | 5,253 | 358 | 9.12 | ||||||||||||||||
Direct/Indirect and other consumer (4) | 93,568 | 2,281 | 3.26 | 95,964 | 2,010 | 2.80 | ||||||||||||||||
Total consumer | 449,539 | 16,703 | 4.96 | 451,082 | 15,909 | 4.71 | ||||||||||||||||
U.S. commercial | 302,981 | 8,734 | 3.85 | 290,632 | 7,167 | 3.30 | ||||||||||||||||
Non-U.S. commercial | 98,246 | 2,385 | 3.25 | 93,762 | 1,886 | 2.69 | ||||||||||||||||
Commercial real estate (5) | 60,218 | 1,915 | 4.25 | 58,340 | 1,545 | 3.54 | ||||||||||||||||
Commercial lease financing | 21,501 | 516 | 3.20 | 21,862 | 547 | 3.33 | ||||||||||||||||
Total commercial | 482,946 | 13,550 | 3.75 | 464,596 | 11,145 | 3.21 | ||||||||||||||||
Total loans and leases (3) | 932,485 | 30,253 | 4.34 | 915,678 | 27,054 | 3.95 | ||||||||||||||||
Other earning assets (1) | 78,431 | 3,113 | 5.31 | 74,554 | 2,322 | 4.16 | ||||||||||||||||
Total earning assets (1,6) | 1,978,039 | 49,388 | 3.34 | 1,912,629 | 42,923 | 3.00 | ||||||||||||||||
Cash and due from banks | 25,746 | 27,955 | ||||||||||||||||||||
Other assets, less allowance for loan and lease losses | 318,314 | 316,909 | ||||||||||||||||||||
Total assets | $ | 2,322,099 | $ | 2,257,493 | ||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||
U.S. interest-bearing deposits: | ||||||||||||||||||||||
Savings | $ | 54,800 | $ | 4 | 0.01 | % | $ | 53,679 | $ | 4 | 0.01 | % | ||||||||||
NOW and money market deposit accounts | 667,851 | 1,679 | 0.34 | 622,920 | 512 | 0.11 | ||||||||||||||||
Consumer CDs and IRAs | 40,134 | 109 | 0.36 | 45,535 | 92 | 0.27 | ||||||||||||||||
Negotiable CDs, public funds and other deposits | 46,507 | 629 | 1.81 | 35,968 | 221 | 0.82 | ||||||||||||||||
Total U.S. interest-bearing deposits | 809,292 | 2,421 | 0.40 | 758,102 | 829 | 0.15 | ||||||||||||||||
Non-U.S. interest-bearing deposits: | ||||||||||||||||||||||
Banks located in non-U.S. countries | 2,309 | 32 | 1.88 | 2,643 | 16 | 0.82 | ||||||||||||||||
Governments and official institutions | 990 | — | 0.01 | 1,002 | 7 | 0.92 | ||||||||||||||||
Time, savings and other | 65,264 | 480 | 0.98 | 60,747 | 400 | 0.88 | ||||||||||||||||
Total non-U.S. interest-bearing deposits | 68,563 | 512 | 1.00 | 64,392 | 423 | 0.88 | ||||||||||||||||
Total interest-bearing deposits | 877,855 | 2,933 | 0.45 | 822,494 | 1,252 | 0.20 | ||||||||||||||||
Federal funds purchased, securities loaned or sold under agreements to repurchase, short-term borrowings and other interest-bearing liabilities (1) | 272,192 | 4,123 | 2.03 | 275,731 | 2,244 | 1.09 | ||||||||||||||||
Trading account liabilities | 52,815 | 1,040 | 2.63 | 44,128 | 890 | 2.70 | ||||||||||||||||
Long-term debt | 230,719 | 5,709 | 3.30 | 224,287 | 4,658 | 2.77 | ||||||||||||||||
Total interest-bearing liabilities (1,6) | 1,433,581 | 13,805 | 1.29 | 1,366,640 | 9,044 | 0.88 | ||||||||||||||||
Noninterest-bearing sources: | ||||||||||||||||||||||
Noninterest-bearing deposits | 426,972 | 439,288 | ||||||||||||||||||||
Other liabilities (1) | 196,444 | 180,907 | ||||||||||||||||||||
Shareholders’ equity | 265,102 | 270,658 | ||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 2,322,099 | $ | 2,257,493 | ||||||||||||||||||
Net interest spread | 2.05 | % | 2.12 | % | ||||||||||||||||||
Impact of noninterest-bearing sources | 0.34 | 0.24 | ||||||||||||||||||||
Net interest income/yield on earning assets | $ | 35,583 | 2.39 | % | $ | 33,879 | 2.36 | % |
(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 were recorded at fair value upon acquisition and accrete interest income over the estimated life of the loan. |
(3) | The nine months ended September 30, 2017 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 nine months ended September 30, 2018 and 2017. |
(5) | Includes U.S. commercial real estate loans of $56.2 billion and $55.0 billion, and non-U.S. commercial real estate loans of $4.0 billion and $3.4 billion for the nine months ended September 30, 2018 and 2017, respectively. |
(6) | Interest income includes the impact of interest rate risk management contracts, which decreased interest income on the underlying assets by $113 million and $48 million for the nine months ended September 30, 2018 and 2017. Interest expense includes the impact of interest rate risk management contracts, which decreased interest expense on the underlying liabilities by $103 million and $1.1 billion for the nine months ended September 30, 2018 and 2017. For additional information, see Interest Rate Risk Management for the Banking Book on page 49. |
Bank of America 10 |
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 22. 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 September 30 | ||||||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | % Change | |||||||||||||||||
Net interest income (FTE basis) | $ | 4,068 | $ | 3,440 | $ | 2,795 | $ | 2,772 | $ | 6,863 | $ | 6,212 | 10 | % | ||||||||||
Noninterest income: | ||||||||||||||||||||||||
Card income | 2 | 1 | 1,279 | 1,242 | 1,281 | 1,243 | 3 | |||||||||||||||||
Service charges | 1,097 | 1,082 | 1 | — | 1,098 | 1,082 | 1 | |||||||||||||||||
All other income | 100 | 97 | 61 | 140 | 161 | 237 | (32 | ) | ||||||||||||||||
Total noninterest income | 1,199 | 1,180 | 1,341 | 1,382 | 2,540 | 2,562 | (1 | ) | ||||||||||||||||
Total revenue, net of interest expense (FTE basis) | 5,267 | 4,620 | 4,136 | 4,154 | 9,403 | 8,774 | 7 | |||||||||||||||||
Provision for credit losses | 48 | 47 | 822 | 920 | 870 | 967 | (10 | ) | ||||||||||||||||
Noninterest expense | 2,618 | 2,617 | 1,737 | 1,844 | 4,355 | 4,461 | (2 | ) | ||||||||||||||||
Income before income taxes (FTE basis) | 2,601 | 1,956 | 1,577 | 1,390 | 4,178 | 3,346 | 25 | |||||||||||||||||
Income tax expense (FTE basis) | 663 | 737 | 402 | 523 | 1,065 | 1,260 | (15 | ) | ||||||||||||||||
Net income | $ | 1,938 | $ | 1,219 | $ | 1,175 | $ | 867 | $ | 3,113 | $ | 2,086 | 49 | |||||||||||
Effective tax rate (FTE basis) (1) | 25.5 | % | 37.7 | % | ||||||||||||||||||||
Net interest yield (FTE basis) | 2.35 | % | 2.08 | % | 3.95 | % | 4.16 | % | 3.78 | 3.56 | ||||||||||||||
Return on average allocated capital | 64 | 40 | 19 | 14 | 33 | 22 | ||||||||||||||||||
Efficiency ratio (FTE basis) | 49.70 | 56.65 | 41.97 | 44.40 | 46.30 | 50.85 | ||||||||||||||||||
Balance Sheet | ||||||||||||||||||||||||
Three Months Ended September 30 | ||||||||||||||||||||||||
Average | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | % Change | |||||||||||||||||
Total loans and leases | $ | 5,269 | $ | 5,079 | $ | 279,725 | $ | 263,731 | $ | 284,994 | $ | 268,810 | 6 | % | ||||||||||
Total earning assets (2) | 685,662 | 657,036 | 280,637 | 264,665 | 720,652 | 692,122 | 4 | |||||||||||||||||
Total assets (2) | 713,942 | 684,642 | 291,370 | 276,014 | 759,665 | 731,077 | 4 | |||||||||||||||||
Total deposits | 681,726 | 652,286 | 5,804 | 6,688 | 687,530 | 658,974 | 4 | |||||||||||||||||
Allocated capital | 12,000 | 12,000 | 25,000 | 25,000 | 37,000 | 37,000 | — |
(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. |
11 Bank of America |
Deposits | Consumer Lending | Total Consumer Banking | ||||||||||||||||||||||
Nine Months Ended September 30 | ||||||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | % Change | |||||||||||||||||
Net interest income (FTE basis) | $ | 11,728 | $ | 9,804 | $ | 8,265 | $ | 8,149 | $ | 19,993 | $ | 17,953 | 11 | % | ||||||||||
Noninterest income: | ||||||||||||||||||||||||
Card income | 6 | 6 | 3,896 | 3,710 | 3,902 | 3,716 | 5 | |||||||||||||||||
Service charges | 3,213 | 3,193 | 1 | 1 | 3,214 | 3,194 | 1 | |||||||||||||||||
All other income | 310 | 294 | 227 | 410 | 537 | 704 | (24 | ) | ||||||||||||||||
Total noninterest income | 3,529 | 3,493 | 4,124 | 4,121 | 7,653 | 7,614 | 1 | |||||||||||||||||
Total revenue, net of interest expense (FTE basis) | 15,257 | 13,297 | 12,389 | 12,270 | 27,646 | 25,567 | 8 | |||||||||||||||||
Provision for credit losses | 135 | 148 | 2,614 | 2,491 | 2,749 | 2,639 | 4 | |||||||||||||||||
Noninterest expense | 7,907 | 7,708 | 5,324 | 5,578 | 13,231 | 13,286 | — | |||||||||||||||||
Income before income taxes (FTE basis) | 7,215 | 5,441 | 4,451 | 4,201 | 11,666 | 9,642 | 21 | |||||||||||||||||
Income tax expense (FTE basis) | 1,840 | 2,052 | 1,135 | 1,584 | 2,975 | 3,636 | (18 | ) | ||||||||||||||||
Net income | $ | 5,375 | $ | 3,389 | $ | 3,316 | $ | 2,617 | $ | 8,691 | $ | 6,006 | 45 | |||||||||||
Effective tax rate (FTE basis) (1) | 25.5 | % | 37.7 | % | ||||||||||||||||||||
Net interest yield (FTE basis) | 2.30 | % | 2.02 | % | 3.99 | % | 4.21 | % | 3.73 | 3.52 | ||||||||||||||
Return on average allocated capital | 60 | 38 | 18 | 14 | 31 | 22 | ||||||||||||||||||
Efficiency ratio (FTE basis) | 51.83 | 57.97 | 42.97 | 45.46 | 47.86 | 51.96 | ||||||||||||||||||
Balance Sheet | ||||||||||||||||||||||||
Nine Months Ended September 30 | ||||||||||||||||||||||||
Average | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | % Change | |||||||||||||||||
Total loans and leases | $ | 5,211 | $ | 5,025 | $ | 276,556 | $ | 257,779 | $ | 281,767 | $ | 262,804 | 7 | % | ||||||||||
Total earning assets (2) | 681,922 | 647,887 | 277,295 | 258,659 | 716,475 | 682,436 | 5 | |||||||||||||||||
Total assets (2) | 709,997 | 675,159 | 288,224 | 270,196 | 755,479 | 721,245 | 5 | |||||||||||||||||
Total deposits | 677,684 | 642,783 | 5,595 | 6,421 | 683,279 | 649,204 | 5 | |||||||||||||||||
Allocated capital | 12,000 | 12,000 | 25,000 | 25,000 | 37,000 | 37,000 | — | |||||||||||||||||
Period end | September 30 2018 | December 31 2017 | September 30 2018 | December 31 2017 | September 30 2018 | December 31 2017 | % Change | |||||||||||||||||
Total loans and leases | $ | 5,276 | $ | 5,143 | $ | 282,001 | $ | 275,330 | $ | 287,277 | $ | 280,473 | 2 | % | ||||||||||
Total earning assets (2) | 690,968 | 675,485 | 282,921 | 275,742 | 726,494 | 709,832 | 2 | |||||||||||||||||
Total assets (2) | 719,126 | 703,330 | 293,766 | 287,390 | 765,497 | 749,325 | 2 | |||||||||||||||||
Total deposits | 686,723 | 670,802 | 6,047 | 5,728 | 692,770 | 676,530 | 2 |
See page 11 for footnotes.
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. 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 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
Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017
Net income for Consumer Banking increased $1.0 billion to $3.1 billion primarily driven by higher pretax income and lower income tax expense from the reduction in the federal income tax rate. The increase in pretax income was driven by higher net interest income and lower noninterest expense and provision for credit losses. Net interest income increased $651 million to $6.9 billion primarily due to the beneficial impact of an increase in investable assets as a result of higher interest rates and an increase in deposits, as well as pricing discipline and loan growth. Noninterest income decreased modestly to $2.5 billion as lower mortgage banking income was largely offset by higher card income and service charges.
The provision for credit losses decreased $97 million to $870 million primarily due to a lower reserve build in the U.S. credit card portfolio. Noninterest expense decreased $106 million to $4.4 billion driven by operating efficiencies partially offset by investments in digital capabilities and business growth combined with investments in new financial centers and renovations.
The return on average allocated capital was 33 percent, up from 22 percent, driven by higher net income. For additional information on capital allocations, see Business Segment Operations on page 11.
Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Net income for Consumer Banking increased $2.7 billion to $8.7 billion primarily driven by the same factors as described in the three-month discussion. The increase in pretax income was driven by higher revenue and lower noninterest expense, partially offset by higher provision for credit losses. Net interest income increased $2.0 billion to $20.0 billion primarily due to the same factors as described in the three-month discussion. Noninterest income remained relatively unchanged at $7.7 billion as higher card income and service charges were largely offset by lower mortgage banking income.
The provision for credit losses increased $110 million to $2.7 billion driven by portfolio seasoning and loan growth in the U.S. credit card portfolio. Noninterest expense decreased $55 million to $13.2 billion driven by operating efficiencies and lower litigation
Bank of America 12 |
expense. These decreases were largely offset by investments in digital capabilities and business growth, including increased primary sales professionals, combined with investments in new financial centers and renovations.
The return on average allocated capital was 31 percent, up from 22 percent, driven by higher net income. For additional information on capital allocations, see Business Segment Operations on page 11.
Deposits
Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017
Net income for Deposits increased $719 million to $1.9 billion driven by higher revenue and lower income tax expense. Net interest income increased $628 million to $4.1 billion primarily due to the beneficial impact of an increase in investable assets as a result of higher deposits, and pricing discipline. Noninterest income increased $19 million to $1.2 billion driven by higher service charges.
The provision for credit losses remained relatively unchanged at $48 million. Noninterest expense remained relatively unchanged at $2.6 billion as investments in new financial centers, renovations and digital capabilities combined with higher personnel expense were offset by lower litigation expense.
Average deposits increased $29.4 billion to $681.7 billion driven by strong organic growth. Growth in checking and money market savings of $34.6 billion was partially offset by a decline in time deposits of $4.8 billion.
Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Net income for Deposits increased $2.0 billion to $5.4 billion driven by higher revenue and lower income tax expense, partially offset by higher noninterest expense. Net interest income increased $1.9 billion to $11.7 billion, and noninterest income increased $36 million to $3.5 billion. These increases were primarily driven by the same factors as described in the three-month discussion.
The provision for credit losses decreased $13 million to $135 million. Noninterest expense increased $199 million to $7.9 billion primarily driven by investments in digital capabilities and business growth, including increased primary sales professionals. These increases, combined with investments in new financial centers and renovations, were partially offset by lower litigation expense.
Average deposits increased $34.9 billion to $677.7 billion primarily driven by the same factor as described in the three-month discussion.
Key Statistics – Deposits | |||||||||||||
Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||
Total deposit spreads (excludes noninterest costs) (1) | 2.19 | % | 1.88 | % | 2.10 | % | 1.82 | % | |||||
Period end | |||||||||||||
Client brokerage assets (in millions) | $ | 203,882 | $ | 167,274 | |||||||||
Active digital banking users (units in thousands) (2) | 36,174 | 34,472 | |||||||||||
Active mobile banking users (units in thousands) | 25,990 | 23,572 | |||||||||||
Financial centers | 4,385 | 4,515 | |||||||||||
ATMs | 16,089 | 15,973 |
(1) | Includes deposits held in Consumer Lending. |
(2) | Digital users represents mobile and/or online users across consumer businesses. |
Client brokerage assets increased $36.6 billion driven by strong client flows and market performance. Active mobile banking users increased 2.4 million reflecting continuing changes in our customers’ banking preferences. The number of financial centers declined by a net 130 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
Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017
Net income for Consumer Lending increased $308 million to $1.2 billion driven by lower income tax expense, noninterest expense and provision for credit losses, partially offset by lower noninterest income. Net interest income increased $23 million to $2.8 billion primarily driven by higher interest rates and the impact of an increase in loan balances. Noninterest income decreased $41 million to $1.3 billion primarily driven by lower mortgage banking income, partially offset by higher card income.
The provision for credit losses decreased $98 million to $822 million primarily due to a lower reserve build in the U.S. credit card portfolio. Noninterest expense decreased $107 million to $1.7 billion primarily driven by operating efficiencies.
Average loans increased $16.0 billion to $279.7 billion driven by increases in residential mortgages and U.S credit card loans, partially offset by lower home equity and consumer vehicle loan balances.
Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Net income for Consumer Lending increased $699 million to $3.3 billion driven by lower income tax expense and noninterest expense, and higher net interest income, partially offset by higher provision for credit losses. Net interest income increased $116 million to $8.3 billion driven by the same factors as described in the three-month discussion. Noninterest income remained relatively unchanged at $4.1 billion as higher card income was offset by lower mortgage banking income.
The provision for credit losses increased $123 million to $2.6 billion driven by portfolio seasoning and loan growth in the U.S. credit card portfolio. Noninterest expense decreased $254 million to $5.3 billion driven by the same factor as described in the three-month discussion.
Average loans increased $18.8 billion to $276.6 billion driven by increases in residential mortgages and U.S. credit card loans, partially offset by lower home equity balances.
13 Bank of America |
At September 30, 2018, total owned loans in the core portfolio held in Consumer Lending were $125.5 billion, an increase of $13.9 billion from September 30, 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. For more information on the core portfolio, see Consumer Portfolio Credit Risk Management on page 28.
Key Statistics – Consumer Lending | |||||||||||||||
Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Total U.S. credit card (1) | |||||||||||||||
Gross interest yield | 10.20 | % | 9.76 | % | 10.00 | % | 9.62 | % | |||||||
Risk-adjusted margin | 8.15 | 8.63 | 8.18 | 8.64 | |||||||||||
New accounts (in thousands) | 1,116 | 1,315 | 3,496 | 3,801 | |||||||||||
Purchase volumes | $ | 66,490 | $ | 62,244 | $ | 194,658 | $ | 179,230 | |||||||
Debit card purchase volumes | $ | 79,920 | $ | 74,769 | $ | 236,669 | $ | 220,729 |
(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 and nine months ended September 30, 2018, the total U.S. credit card risk-adjusted margin decreased 48 bps and 46 bps compared to the same periods in 2017, primarily driven by increased net charge-offs and higher credit card rewards costs.
During the three and nine months ended September 30, 2018, total U.S. credit card purchase volumes increased $4.2 billion to $66.5 billion, and $15.4 billion to $194.7 billion compared to the same periods in 2017, and debit card purchase volumes increased $5.2 billion to $79.9 billion, and $15.9 billion to $236.7 billion, reflecting higher levels of consumer spending.
Key Statistics – Loan Production (1) | |||||||||||||||
Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Total (2): | |||||||||||||||
First mortgage | $ | 10,682 | $ | 13,183 | $ | 31,778 | $ | 37,876 | |||||||
Home equity | 3,399 | 4,133 | 11,229 | 12,871 | |||||||||||
Consumer Banking: | |||||||||||||||
First mortgage | $ | 7,208 | $ | 9,044 | $ | 21,053 | $ | 25,679 | |||||||
Home equity | 3,053 | 3,722 | 10,042 | 11,604 |
(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 $1.8 billion and $2.5 billion in the three months ended September 30, 2018 compared to the same period in 2017 primarily driven by a higher interest rate environment driving lower first-lien mortgage refinances. First mortgage loan originations in Consumer Banking and for the total Corporation decreased $4.6 billion and $6.1 billion in the nine months ended September 30, 2018 primarily driven by the same factor as described in the three-month discussion.
Home equity production in Consumer Banking and for the total Corporation decreased $669 million and $734 million for the three months ended September 30, 2018 compared to the same period in 2017 driven by lower demand. Home equity production in Consumer Banking and for the total Corporation each decreased $1.6 billion for the nine months ended September 30, 2018 primarily driven by the same factor as described in the three-month discussion.
Bank of America 14 |
Global Wealth & Investment Management
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | % Change | 2018 | 2017 | % Change | ||||||||||||||||
Net interest income (FTE basis) | $ | 1,536 | $ | 1,496 | 3 | % | $ | 4,673 | $ | 4,653 | — | % | ||||||||||
Noninterest income: | ||||||||||||||||||||||
Investment and brokerage services | 3,004 | 2,854 | 5 | 8,981 | 8,474 | 6 | ||||||||||||||||
All other income | 243 | 270 | (10 | ) | 694 | 780 | (11 | ) | ||||||||||||||
Total noninterest income | 3,247 | 3,124 | 4 | 9,675 | 9,254 | 5 | ||||||||||||||||
Total revenue, net of interest expense (FTE basis) | 4,783 | 4,620 | 4 | 14,348 | 13,907 | 3 | ||||||||||||||||
Provision for credit losses | 13 | 16 | (19 | ) | 63 | 50 | 26 | |||||||||||||||
Noninterest expense | 3,414 | 3,369 | 1 | 10,235 | 10,085 | 1 | ||||||||||||||||
Income before income taxes (FTE basis) | 1,356 | 1,235 | 10 | 4,050 | 3,772 | 7 | ||||||||||||||||
Income tax expense (FTE basis) | 346 | 465 | (26 | ) | 1,033 | 1,422 | (27 | ) | ||||||||||||||
Net income | $ | 1,010 | $ | 770 | 31 | $ | 3,017 | $ | 2,350 | 28 | ||||||||||||
Effective tax rate (FTE basis) | 25.5 | % | 37.7 | % | 25.5 | % | 37.7 | % | ||||||||||||||
Net interest yield (FTE basis) | 2.38 | 2.29 | 2.42 | 2.32 | ||||||||||||||||||
Return on average allocated capital | 28 | 22 | 28 | 23 | ||||||||||||||||||
Efficiency ratio (FTE basis) | 71.40 | 72.91 | 71.34 | 72.52 | ||||||||||||||||||
Balance Sheet | ||||||||||||||||||||||
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||
Average | 2018 | 2017 | % Change | 2018 | 2017 | % Change | ||||||||||||||||
Total loans and leases | $ | 161,869 | $ | 154,333 | 5 | % | $ | 160,609 | $ | 151,205 | 6 | % | ||||||||||
Total earning assets | 256,285 | 259,564 | (1 | ) | 258,044 | 267,732 | (4 | ) | ||||||||||||||
Total assets | 273,581 | 275,570 | (1 | ) | 275,182 | 283,324 | (3 | ) | ||||||||||||||
Total deposits | 238,291 | 239,647 | (1 | ) | 239,176 | 247,389 | (3 | ) | ||||||||||||||
Allocated capital | 14,500 | 14,000 | 4 | 14,500 | 14,000 | 4 | ||||||||||||||||
Period end | September 30 2018 | December 31 2017 | % Change | |||||||||||||||||||
Total loans and leases | $ | 162,191 | $ | 159,378 | 2 | % | ||||||||||||||||
Total earning assets | 258,561 | 267,026 | (3 | ) | ||||||||||||||||||
Total assets | 276,146 | 284,321 | (3 | ) | ||||||||||||||||||
Total deposits | 239,654 | 246,994 | (3 | ) |
GWIM consists of two primary businesses: Merrill Lynch Global Wealth Management (MLGWM) and U.S. Trust, Bank of America Private Wealth Management (U.S. Trust). For more information about GWIM, see Business Segment Operations in the MD&A of the Corporation’s 2017 Annual Report on Form 10-K.
Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017
Net income for GWIM increased $240 million to $1.0 billion primarily due to higher revenue and lower income tax expense from the reduction in the federal income tax rate, partially offset by an increase in noninterest expense. The operating margin was 28 percent compared to 27 percent a year ago.
Net interest income increased $40 million to $1.5 billion primarily due to higher deposit spreads and average loan balances, partially offset by lower loan spreads.
Noninterest income, which primarily includes investment and brokerage services income, increased $123 million to $3.2 billion. The increase was driven by the impact of AUM flows and higher market valuations, partially offset by the impact of changing market dynamics on transactional revenue and AUM pricing. Noninterest expense of $3.4 billion increased modestly, as higher revenue-related incentive expense and investment in sales professionals were largely offset by continued expense discipline.
Return on average allocated capital was 28 percent, up from 22 percent, primarily due to higher net income, somewhat offset by an increase in allocated capital.
MLGWM revenue of $3.9 billion increased three percent reflecting higher asset management fees driven by higher net
flows and market valuations and an increase in net interest income, partially offset by lower AUM pricing and transactional revenue. U.S. Trust revenue of $859 million increased five percent reflecting higher asset management fees driven by increased net flows and market valuations, and higher net interest income.
Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Net income for GWIM increased $667 million to $3.0 billion due to higher revenue and lower income tax expense, partially offset by an increase in noninterest expense. The decrease in tax expense was driven by the reduction in the federal tax rate. The operating margin was 28 percent compared to 27 percent a year ago.
Net interest income increased $20 million to $4.7 billion due to the same factors as described in the three-month discussion. Noninterest income, which primarily includes investment and brokerage services income, increased $421 million to $9.7 billion due to the same factors as described in the three-month discussion. Noninterest expense increased $150 million to $10.2 billion primarily due to higher revenue-related incentive expense and investment in sales professionals, partially offset by expense discipline.
The return on average allocated capital was 28 percent, up from 23 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 11.
15 Bank of America |
Revenue from MLGWM of $11.8 billion increased three percent due to higher asset management fees driven by higher AUM flows and market valuations, partially offset by lower AUM pricing, transactional revenue and net interest income. U.S. Trust revenue of $2.6 billion increased five percent due to the same factors as described in the three-month discussion.
Key Indicators and Metrics | ||||||||||||||||
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
(Dollars in millions, except as noted) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Revenue by Business | ||||||||||||||||
Merrill Lynch Global Wealth Management | $ | 3,924 | $ | 3,796 | $ | 11,780 | $ | 11,452 | ||||||||
U.S. Trust | 859 | 822 | 2,567 | 2,450 | ||||||||||||
Other | — | 2 | 1 | 5 | ||||||||||||
Total revenue, net of interest expense (FTE basis) | $ | 4,783 | $ | 4,620 | $ | 14,348 | $ | 13,907 | ||||||||
Client Balances by Business, at period end | ||||||||||||||||
Merrill Lynch Global Wealth Management | $ | 2,385,479 | $ | 2,245,499 | ||||||||||||
U.S. Trust | 455,894 | 430,684 | ||||||||||||||
Total client balances | $ | 2,841,373 | $ | 2,676,183 | ||||||||||||
Client Balances by Type, at period end | ||||||||||||||||
Assets under management | $ | 1,144,375 | $ | 1,036,048 | ||||||||||||
Brokerage and other assets | 1,292,219 | 1,243,858 | ||||||||||||||
Deposits | 239,654 | 237,771 | ||||||||||||||
Loans and leases (1) | 165,125 | 158,506 | ||||||||||||||
Total client balances | $ | 2,841,373 | $ | 2,676,183 | ||||||||||||
Assets Under Management Rollforward | ||||||||||||||||
Assets under management, beginning of period | $ | 1,101,001 | $ | 990,709 | $ | 1,080,747 | $ | 886,148 | ||||||||
Net client flows | 7,572 | 20,749 | 42,587 | 77,479 | ||||||||||||
Market valuation/other | 35,802 | 24,590 | 21,041 | 72,421 | ||||||||||||
Total assets under management, end of period | $ | 1,144,375 | $ | 1,036,048 | $ | 1,144,375 | $ | 1,036,048 | ||||||||
Associates, at period end (2) | ||||||||||||||||
Number of financial advisors | 17,456 | 17,221 | ||||||||||||||
Total wealth advisors, including financial advisors | 19,344 | 19,108 | ||||||||||||||
Total primary sales professionals, including financial advisors and wealth advisors | 20,437 | 20,089 | ||||||||||||||
Merrill Lynch Global Wealth Management Metric | ||||||||||||||||
Financial advisor productivity (3) (in thousands) | $ | 1,035 | $ | 994 | $ | 1,030 | $ | 1,009 | ||||||||
U.S. Trust Metric, at period end | ||||||||||||||||
Primary sales professionals | 1,711 | 1,696 |
(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 2,618 and 2,267 at September 30, 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 $165.2 billion, or six percent, to $2.8 trillion at September 30, 2018 compared to September 30, 2017. The increase in client balances was due to higher market valuations and positive net flows. Positive net client flows in AUM decreased from the same period a year ago primarily due to a smaller shift from brokerage assets to AUM.
Bank of America 16 |
Global Banking
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | % Change | 2018 | 2017 | % Change | ||||||||||||||||
Net interest income (FTE basis) | $ | 2,706 | $ | 2,642 | 2 | % | $ | 8,057 | $ | 7,786 | 3 | % | ||||||||||
Noninterest income: | ||||||||||||||||||||||
Service charges | 754 | 776 | (3 | ) | 2,285 | 2,351 | (3 | ) | ||||||||||||||
Investment banking fees | 643 | 806 | (20 | ) | 2,130 | 2,661 | (20 | ) | ||||||||||||||
All other income | 635 | 763 | (17 | ) | 2,122 | 2,182 | (3 | ) | ||||||||||||||
Total noninterest income | 2,032 | 2,345 | (13 | ) | 6,537 | 7,194 | (9 | ) | ||||||||||||||
Total revenue, net of interest expense (FTE basis) | 4,738 | 4,987 | (5 | ) | 14,594 | 14,980 | (3 | ) | ||||||||||||||
Provision for credit losses | (70 | ) | 48 | n/m | (77 | ) | 80 | n/m | ||||||||||||||
Noninterest expense | 2,120 | 2,119 | — | 6,471 | 6,435 | 1 | ||||||||||||||||
Income before income taxes (FTE basis) | 2,688 | 2,820 | (5 | ) | 8,200 | 8,465 | (3 | ) | ||||||||||||||
Income tax expense (FTE basis) | 699 | 1,062 | (34 | ) | 2,132 | 3,192 | (33 | ) | ||||||||||||||
Net income | $ | 1,989 | $ | 1,758 | 13 | $ | 6,068 | $ | 5,273 | 15 | ||||||||||||
Effective tax rate (FTE basis) | 26.0 | % | 37.7 | % | 26.0 | % | 37.7 | % | ||||||||||||||
Net interest yield (FTE basis) | 2.96 | 2.94 | 2.97 | 2.91 | ||||||||||||||||||
Return on average allocated capital | 19 | 17 | 20 | 18 | ||||||||||||||||||
Efficiency ratio (FTE basis) | 44.79 | 42.52 | 44.34 | 42.97 | ||||||||||||||||||
Balance Sheet | ||||||||||||||||||||||
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||
Average | 2018 | 2017 | % Change | 2018 | 2017 | % Change | ||||||||||||||||
Total loans and leases | $ | 352,712 | $ | 346,093 | 2 | % | $ | 353,167 | $ | 344,683 | 2 | % | ||||||||||
Total earning assets | 362,316 | 357,014 | 1 | 362,910 | 357,999 | 1 | ||||||||||||||||
Total assets | 422,255 | 414,755 | 2 | 422,041 | 414,867 | 2 | ||||||||||||||||
Total deposits | 337,685 | 315,692 | 7 | 328,484 | 307,163 | 7 | ||||||||||||||||
Allocated capital | 41,000 | 40,000 | 3 | 41,000 | 40,000 | 3 | ||||||||||||||||
Period end | September 30 2018 | December 31 2017 | % Change | |||||||||||||||||||
Total loans and leases | $ | 352,332 | $ | 350,668 | — | % | ||||||||||||||||
Total earning assets | 369,555 | 365,560 | 1 | |||||||||||||||||||
Total assets | 430,846 | 424,533 | 1 | |||||||||||||||||||
Total deposits | 350,748 | 329,273 | 7 |
n/m = not meaningful
Global Banking, which includes Global Corporate Banking, Global Commercial Banking, Business Banking and Global Investment Banking, provides a wide range of lending-related products and services, integrated working capital management and treasury solutions, 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.
Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017
Net income for Global Banking increased $231 million to $2.0 billion primarily driven by lower income tax expense from the reduction in the federal income tax rate, partially offset by lower pretax income discussed below.
Pretax results were driven by lower revenue and lower provision for credit losses with noninterest expense remaining flat. Revenue decreased $249 million to $4.7 billion driven by lower noninterest
income, partially offset by higher net interest income. Net interest income increased $64 million to $2.7 billion primarily due to the impact of higher interest rates, as well as deposit growth. Noninterest income decreased $313 million to $2.0 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. The provision for credit losses improved $118 million to a benefit of $70 million, driven by continued improvements in the energy sector and broader loan quality.
Noninterest expense was unchanged at $2.1 billion as slightly lower personnel expense was offset by higher operating expense.
The return on average allocated capital was 19 percent, up from 17 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 11.
17 Bank of America |
Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Net income for Global Banking increased $795 million to $6.1 billion primarily driven by lower income tax expense from the reduction in the federal income tax rate, partially offset by lower pretax income.
Pretax results were driven by lower revenue, slightly higher noninterest expense and lower provision for credit losses. Revenue decreased $386 million to $14.6 billion driven by lower noninterest income, partially offset by higher net interest income. Net interest income increased $271 million to $8.1 billion primarily due to the impact of higher interest rates on increased deposits. Noninterest income decreased $657 million to $6.5 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. The provision for credit losses improved
$157 million to a benefit of $77 million, primarily driven by continued improvements in the energy sector and broader loan quality.
Noninterest expense increased $36 million to $6.5 billion primarily due to higher 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 11.
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 September 30 | ||||||||||||||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||
Revenue (FTE basis) | ||||||||||||||||||||||||||||||||
Business Lending | $ | 960 | $ | 1,127 | $ | 1,025 | $ | 1,090 | $ | 99 | $ | 101 | $ | 2,084 | $ | 2,318 | ||||||||||||||||
Global Transaction Services | 914 | 840 | 814 | 758 | 244 | 217 | 1,972 | 1,815 | ||||||||||||||||||||||||
Total revenue, net of interest expense | $ | 1,874 | $ | 1,967 | $ | 1,839 | $ | 1,848 | $ | 343 | $ | 318 | $ | 4,056 | $ | 4,133 | ||||||||||||||||
Balance Sheet | ||||||||||||||||||||||||||||||||
Average | ||||||||||||||||||||||||||||||||
Total loans and leases | $ | 162,249 | $ | 159,417 | $ | 174,315 | $ | 168,945 | $ | 16,127 | $ | 17,659 | $ | 352,691 | $ | 346,021 | ||||||||||||||||
Total deposits | 165,522 | 149,564 | 134,486 | 129,440 | 37,703 | 36,687 | 337,711 | 315,691 | ||||||||||||||||||||||||
Global Corporate Banking | Global Commercial Banking | Business Banking | Total | |||||||||||||||||||||||||||||
Nine Months Ended September 30 | ||||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Revenue (FTE basis) | ||||||||||||||||||||||||||||||||
Business Lending | $ | 3,103 | $ | 3,322 | $ | 2,974 | $ | 3,186 | $ | 297 | $ | 301 | $ | 6,374 | $ | 6,809 | ||||||||||||||||
Global Transaction Services | 2,708 | 2,470 | 2,441 | 2,217 | 713 | 625 | 5,862 | 5,312 | ||||||||||||||||||||||||
Total revenue, net of interest expense | $ | 5,811 | $ | 5,792 | $ | 5,415 | $ | 5,403 | $ | 1,010 | $ | 926 | $ | 12,236 | $ | 12,121 | ||||||||||||||||
Balance Sheet | ||||||||||||||||||||||||||||||||
Average | ||||||||||||||||||||||||||||||||
Total loans and leases | $ | 162,652 | $ | 157,144 | $ | 173,788 | $ | 169,751 | $ | 16,720 | $ | 17,762 | $ | 353,160 | $ | 344,657 | ||||||||||||||||
Total deposits | 159,500 | 146,627 | 132,115 | 124,446 | 36,889 | 36,092 | 328,504 | 307,165 | ||||||||||||||||||||||||
Period end | ||||||||||||||||||||||||||||||||
Total loans and leases | $ | 162,004 | $ | 161,441 | $ | 174,452 | $ | 170,825 | $ | 15,880 | $ | 17,579 | $ | 352,336 | $ | 349,845 | ||||||||||||||||
Total deposits | 174,709 | 147,893 | 138,425 | 135,249 | 37,640 | 36,402 | 350,774 | 319,544 |
Business Lending revenue decreased $234 million and $435 million for the three and nine months ended September 30, 2018 compared to the same periods in 2017. The decreases for both periods were primarily driven by the impact of tax reform on certain tax-advantaged investments and lower leasing-related revenues.
Global Transaction Services revenue increased $157 million and $550 million for the three and nine months ended September 30, 2018 driven by higher short-term rates and increased deposit balances.
Average loans and leases increased two percent for both the three and nine months ended September 30, 2018 compared to the same periods in 2017 driven by growth in the commercial and industrial, and commercial real estate portfolios. Average deposits increased seven percent for both the three and nine months ended September 30, 2018. The increase for both periods was due to growth in international and domestic interest-bearing balances.
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.
Bank of America 18 |
Investment Banking Fees | |||||||||||||||||||||||||||||||
Global Banking | Total Corporation | Global Banking | Total Corporation | ||||||||||||||||||||||||||||
Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||
Products | |||||||||||||||||||||||||||||||
Advisory | $ | 237 | $ | 321 | $ | 262 | $ | 374 | $ | 782 | $ | 1,177 | $ | 861 | $ | 1,262 | |||||||||||||||
Debt issuance | 295 | 397 | 684 | 962 | 1,018 | 1,170 | 2,385 | 2,789 | |||||||||||||||||||||||
Equity issuance | 111 | 88 | 307 | 193 | 330 | 314 | 911 | 736 | |||||||||||||||||||||||
Gross investment banking fees | 643 | 806 | 1,253 | 1,529 | 2,130 | 2,661 | 4,157 | 4,787 | |||||||||||||||||||||||
Self-led deals | (14 | ) | (18 | ) | (49 | ) | (52 | ) | (63 | ) | (89 | ) | (178 | ) | (194 | ) | |||||||||||||||
Total investment banking fees | $ | 629 | $ | 788 | $ | 1,204 | $ | 1,477 | $ | 2,067 | $ | 2,572 | $ | 3,979 | $ | 4,593 |
Total Corporation investment banking fees, excluding self-led deals, of $1.2 billion and $4.0 billion, which are primarily included within Global Banking and Global Markets, decreased 18 percent and 13 percent for the three and nine months ended September 30, 2018 compared to the same periods in 2017 primarily due to declines in leveraged finance and advisory fees, partially offset by an increase in equity underwriting fees.
Global Markets
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | % Change | 2018 | 2017 | % Change | ||||||||||||||||
Net interest income (FTE basis) | $ | 754 | $ | 899 | (16 | )% | $ | 2,425 | $ | 2,812 | (14 | )% | ||||||||||
Noninterest income: | ||||||||||||||||||||||
Investment and brokerage services | 388 | 496 | (22 | ) | 1,306 | 1,548 | (16 | ) | ||||||||||||||
Investment banking fees | 523 | 624 | (16 | ) | 1,783 | 1,879 | (5 | ) | ||||||||||||||
Trading account profits | 1,727 | 1,714 | 1 | 6,614 | 5,634 | 17 | ||||||||||||||||
All other income | 451 | 168 | n/m | 722 | 682 | 6 | ||||||||||||||||
Total noninterest income | 3,089 | 3,002 | 3 | 10,425 | 9,743 | 7 | ||||||||||||||||
Total revenue, net of interest expense (FTE basis) | 3,843 | 3,901 | (1 | ) | 12,850 | 12,555 | 2 | |||||||||||||||
Provision for credit losses | (2 | ) | (6 | ) | (67 | ) | (6 | ) | 2 | n/m | ||||||||||||
Noninterest expense | 2,612 | 2,711 | (4 | ) | 8,145 | 8,117 | — | |||||||||||||||
Income before income taxes (FTE basis) | 1,233 | 1,196 | 3 | 4,711 | 4,436 | 6 | ||||||||||||||||
Income tax expense (FTE basis) | 321 | 440 | (27 | ) | 1,225 | 1,553 | (21 | ) | ||||||||||||||
Net income | $ | 912 | $ | 756 | 21 | $ | 3,486 | $ | 2,883 | 21 | ||||||||||||
Effective tax rate (FTE basis) | 26.0 | % | 36.8 | % | 26.0 | % | 35.0 | % | ||||||||||||||
Return on average allocated capital | 10 | 9 | 13 | 11 | ||||||||||||||||||
Efficiency ratio (FTE basis) | 67.99 | 69.48 | 63.39 | 64.64 | ||||||||||||||||||
Balance Sheet | ||||||||||||||||||||||
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||
Average | 2018 | 2017 | % Change | 2018 | 2017 | % Change | ||||||||||||||||
Trading-related assets: | ||||||||||||||||||||||
Trading account securities | $ | 215,397 | $ | 216,988 | (1 | )% | $ | 211,668 | $ | 214,190 | (1 | )% | ||||||||||
Reverse repurchases | 124,842 | 101,556 | 23 | 127,019 | 99,998 | 27 | ||||||||||||||||
Securities borrowed | 74,648 | 81,950 | (9 | ) | 80,073 | 83,770 | (4 | ) | ||||||||||||||
Derivative assets | 45,392 | 41,789 | 9 | 46,754 | 41,184 | 14 | ||||||||||||||||
Total trading-related assets | 460,279 | 442,283 | 4 | 465,514 | 439,142 | 6 | ||||||||||||||||
Total loans and leases | 71,231 | 72,347 | (2 | ) | 73,340 | 70,692 | 4 | |||||||||||||||
Total earning assets | 459,073 | 446,754 | 3 | 478,455 | 444,478 | 8 | ||||||||||||||||
Total assets | 652,481 | 642,428 | 2 | 669,688 | 631,684 | 6 | ||||||||||||||||
Total deposits | 30,721 | 32,125 | (4 | ) | 31,253 | 32,397 | (4 | ) | ||||||||||||||
Allocated capital | 35,000 | 35,000 | — | 35,000 | 35,000 | — | ||||||||||||||||
Period end | September 30 2018 | December 31 2017 | % Change | |||||||||||||||||||
Total trading-related assets | $ | 456,643 | $ | 419,375 | 9 | % | ||||||||||||||||
Total loans and leases | 73,023 | 76,778 | (5 | ) | ||||||||||||||||||
Total earning assets | 447,304 | 449,314 | — | |||||||||||||||||||
Total assets | 646,359 | 629,013 | 3 | |||||||||||||||||||
Total deposits | 41,102 | 34,029 | 21 |
n/m = not meaningful
19 Bank of America |
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.
Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017
Net income for Global Markets increased $156 million to $912 million. Net DVA losses were $99 million compared to losses of $21 million. Excluding net DVA, net income increased $218 million to $987 million. These increases were primarily driven by lower noninterest expense and a decrease in income tax expense from the reduction in the federal income tax rate.
Sales and trading revenue, excluding net DVA, decreased $79 million primarily due to lower fixed-income, currencies and commodities (FICC) revenue. Noninterest expense decreased $99 million to $2.6 billion driven by lower operating costs.
Average assets increased $10.1 billion to $652.5 billion primarily driven by increased levels of inventory to facilitate client demand.
The return on average allocated capital was 10 percent, up from nine percent, reflecting higher net income.
Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Net income for Global Markets increased $603 million to $3.5 billion. Net DVA losses were $214 million compared to losses of
$310 million. Excluding net DVA, net income increased $574 million to $3.6 billion. These increases were primarily driven by higher revenue and lower income tax expense from the reduction in the federal income tax rate.
Sales and trading revenue, excluding net DVA, increased $172 million due to higher Equities revenue, partially offset by lower FICC revenue. Noninterest expense increased $28 million to $8.1 billion primarily due to continued investments in technology, partially offset by lower operating costs.
Average assets increased $38.0 billion to $669.7 billion primarily driven by increased levels of inventory in FICC to facilitate client demand and growth in Equities client financing activities. Total period-end assets increased $17.3 billion from December 31, 2017 to $646.4 billion at September 30, 2018 due to growth in Equities client financing activities.
The return on average allocated capital was 13 percent, up from 11 percent, reflecting higher net income.
Sales and Trading Revenue
For a description of sales and trading revenue, see Business Segment Operations in the MD&A of the Corporation’s 2017 Annual Report on Form 10-K. 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 net DVA, which is a non-GAAP financial measure. For more information on net DVA, see Supplemental Financial Data on page 6.
Sales and Trading Revenue (1, 2) | |||||||||||||||
Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Sales and trading revenue | |||||||||||||||
Fixed-income, currencies and commodities | $ | 1,982 | $ | 2,152 | $ | 6,702 | $ | 7,068 | |||||||
Equities | 990 | 977 | 3,804 | 3,170 | |||||||||||
Total sales and trading revenue | $ | 2,972 | $ | 3,129 | $ | 10,506 | $ | 10,238 | |||||||
Sales and trading revenue, excluding net DVA (3) | |||||||||||||||
Fixed-income, currencies and commodities | $ | 2,062 | $ | 2,166 | $ | 6,888 | $ | 7,350 | |||||||
Equities | 1,009 | 984 | 3,832 | 3,198 | |||||||||||
Total sales and trading revenue, excluding net DVA | $ | 3,071 | $ | 3,150 | $ | 10,720 | $ | 10,548 |
(1) | Includes FTE adjustments of $53 million and $199 million for the three and nine months ended September 30, 2018 compared to $61 million and $162 million for the same periods in 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 $66 million and $307 million for the three and nine months ended September 30, 2018 compared to $61 million and $175 million for the same periods in 2017. |
(3) | FICC and Equities sales and trading revenue, excluding net DVA, is a non-GAAP financial measure. FICC net DVA losses were $80 million and $186 million for the three and nine months ended September 30, 2018 compared to losses of $14 million and $282 million for the same periods in 2017. Equities net DVA losses were $19 million and $28 million for the three and nine months ended September 30, 2018 compared to losses of $7 million and $28 million for the same periods in 2017. |
The following explanations for period-over-period changes in sales and trading, FICC and Equities revenue exclude net DVA, but would be the same whether net DVA was included or excluded.
Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017
FICC revenue decreased $104 million primarily due to lower client activity in rates products and a weaker environment for municipal bonds. Equities revenue increased $25 million due to increased client activity in financing.
Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
FICC revenue decreased $462 million primarily due to lower activity and a less favorable market in credit-related products. The decline in FICC revenue was also impacted by higher funding costs, which were driven by increases in market interest rates. Equities revenue increased $634 million driven by increased client activity in financing and derivatives.
Bank of America 20 |
All Other
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | % Change | 2018 | 2017 | % Change | ||||||||||||||||
Net interest income (FTE basis) | $ | 162 | $ | 152 | 7 | % | $ | 435 | $ | 675 | (36 | )% | ||||||||||
Noninterest income (loss) | (1 | ) | (355 | ) | (100 | )% | (907 | ) | (94 | ) | n/m | |||||||||||
Total revenue, net of interest expense (FTE basis) | 161 | (203 | ) | n/m | (472 | ) | 581 | n/m | ||||||||||||||
Provision for credit losses | (95 | ) | (191 | ) | (50 | ) | (352 | ) | (376 | ) | (6 | ) | ||||||||||
Noninterest expense | 566 | 734 | (23 | ) | 2,166 | 3,546 | (39 | ) | ||||||||||||||
Loss before income taxes (FTE basis) | (310 | ) | (746 | ) | (58 | ) | (2,286 | ) | (2,589 | ) | (12 | ) | ||||||||||
Income tax expense (benefit) (FTE basis) | (453 | ) | (800 | ) | (43 | ) | (1,893 | ) | (1,944 | ) | (3 | ) | ||||||||||
Net income (loss) | $ | 143 | $ | 54 | n/m | $ | (393 | ) | $ | (645 | ) | (39 | ) | |||||||||
Balance Sheet | ||||||||||||||||||||||
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||
Average | 2018 | 2017 | % Change | 2018 | 2017 | % Change | ||||||||||||||||
Total loans and leases | $ | 59,930 | $ | 76,546 | (22 | )% | $ | 63,602 | $ | 86,294 | (26 | )% | ||||||||||
Total assets (1) | 209,847 | 207,274 | 1 | 199,709 | 206,373 | (3 | ) | |||||||||||||||
Total deposits | 22,118 | 25,273 | (12 | ) | 22,635 | 25,629 | (12 | ) | ||||||||||||||
Period end | September 30 2018 | December 31 2017 | % Change | |||||||||||||||||||
Total loans and leases | $ | 54,978 | $ | 69,452 | (21 | )% | ||||||||||||||||
Total assets (1) | 219,985 | 194,042 | 13 | |||||||||||||||||||
Total deposits | 21,375 | 22,719 | (6 | ) |
(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 $516.3 billion and $516.8 billion for the three and nine months ended September 30, 2018 compared to $510.1 billion and $517.9 billion for the same periods in 2017, and period-end allocated assets were $531.3 billion and $520.4 billion at September 30, 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.
The Corporation classifies consumer real estate loans as core or non-core based on loan and customer characteristics. For more information on the core and non-core portfolios, see Consumer Portfolio Credit Risk Management on page 28. 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. During the nine months ended September 30, 2018, residential mortgage loans held for ALM activities decreased $3.2 billion to $25.3 billion at September 30, 2018 primarily as a result of payoffs and paydowns. Non-core residential mortgage and home equity loans, which are principally run-off portfolios, are also held in All Other. During the nine months ended September 30, 2018, total non-core loans decreased $11.4 billion to $29.9 billion at September 30, 2018 due primarily to payoffs and paydowns, as well as loan sales of $5.9 billion.
Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017
Net income for All Other increased $89 million to $143 million driven by a lower pretax loss, partially offset by a lower income tax benefit due to the reduction in the federal income tax rate. Pretax results were driven by higher revenue and lower noninterest expense, partially offset by a decrease in the benefit in provision for credit losses.
Revenue increased $364 million to $161 million primarily due to a lower provision for representations and warranties as well as a gain of $84 million from the sale of a non-core consumer real estate loan portfolio.
The benefit in the provision for credit losses declined $96 million to $95 million due to a slower pace of portfolio improvement in the non-core consumer real estate portfolio.
Noninterest expense decreased $168 million to $566 million due to lower non-core mortgage costs and litigation expense.
The income tax benefit was $453 million compared to $800 million. The decrease in the benefit was due to the reduction in the federal income tax rate and the change in the pretax loss. Both periods included income tax benefit adjustments to eliminate the FTE treatment of certain tax credits recorded in Global Banking.
Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
The net loss for All Other improved $252 million to a loss of $393 million, reflecting lower noninterest expense, partially offset by lower revenue.
Revenue decreased $1.1 billion to a loss of $472 million primarily due to a prior-year $793 million pretax gain recognized in connection with the sale of the non-U.S. consumer credit card business and, in the current-year period, a $729 million charge related to the redemption of certain trust preferred securities, partially offset by gains of $656 million from the sale of primarily non-core mortgage loans.
Noninterest expense decreased $1.4 billion to $2.2 billion primarily due to lower non-core mortgage costs and reduced operational costs from the sale of the non-U.S. consumer credit card business. Also, the prior-year period included a $295 million impairment charge related to certain data centers.
21 Bank of America |
The income tax benefit was $1.9 billion in both periods. The current-year period reflects the lower federal income tax rate, while the prior-year period included tax expense related to the sale of the non-U.S. consumer credit card business. Both periods included 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 as well as Off-Balance Sheet Arrangements and Contractual Obligations in the MD&A, 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 reviewed at least annually and approved by the Enterprise Risk Committee and the Board.
Our Risk Framework is the foundation for consistent and effective management of 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 Framework, our risk management activities 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.
Capital Management
The Corporation manages its capital position so that its capital is more than adequate to support its business activities and to ensure capital, risk and risk appetite are aligned. Additionally, we seek to maintain safety and soundness at all times, even under adverse scenarios, take advantage of organic growth opportunities, meet obligations to creditors and counterparties, maintain ready access to financial markets, continue to serve as a credit intermediary, remain a source of strength for our subsidiaries, and satisfy current and future regulatory capital requirements. Capital management is integrated into our risk and governance processes, as capital is a key consideration in the development of our strategic plan, risk appetite and risk limits.
We periodically review capital allocated to our businesses and allocate capital annually during the strategic and capital planning processes. For additional information, see Business Segment Operations on page 11.
CCAR and Capital Planning
The Federal Reserve requires BHCs to submit a capital plan and requests for capital actions on an annual basis, consistent with the rules governing the Comprehensive Capital Analysis and Review (CCAR) capital plan.
On June 28, 2018, following the Federal Reserve’s non-objection to our 2018 CCAR capital plan, the Board authorized the repurchase of approximately $20.6 billion in common stock from July 1, 2018 through June 30, 2019, which includes approximately $600 million in repurchases to offset shares awarded under equity-based compensation plans during the same period.
The repurchase program, which covers both common stock and warrants, 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 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 amended. 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.
Regulatory Capital
As a financial services holding company, we are subject to regulatory capital rules issued by U.S. banking regulators including Basel 3. 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. As of September 30, 2018, Common equity tier 1 (CET1) and Tier 1 capital ratios for the Corporation
Bank of America 22 |
were lower under the Standardized approach whereas Advanced approaches yielded a lower Total capital ratio. 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.
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 CET1 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.
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. Our insured depository institution subsidiaries are required to maintain a minimum 6.0 percent SLR to be considered well capitalized under the PCA framework. For more information on the Corporation’s capital ratios and regulatory requirements, see Table 9.
Capital Composition and Ratios
Table 9 presents Bank of America Corporation’s capital ratios and related information in accordance with Basel 3 Standardized and Advanced approaches as measured at September 30, 2018 and December 31, 2017. As of the periods presented, the Corporation met the definition of well capitalized under current regulatory requirements.
Table 9 | 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) | September 30, 2018 | |||||||||||||
Risk-based capital metrics: | ||||||||||||||
Common equity tier 1 capital | $ | 164,386 | $ | 164,386 | ||||||||||
Tier 1 capital | 186,189 | 186,189 | ||||||||||||
Total capital (4) | 218,159 | 209,950 | ||||||||||||
Risk-weighted assets (in billions) | 1,439 | 1,424 | ||||||||||||
Common equity tier 1 capital ratio | 11.4 | % | 11.5 | % | 8.25 | % | 9.5 | % | ||||||
Tier 1 capital ratio | 12.9 | 13.1 | 9.75 | 11.0 | ||||||||||
Total capital ratio | 15.2 | 14.7 | 11.75 | 13.0 | ||||||||||
Leverage-based metrics: | ||||||||||||||
Adjusted quarterly average assets (in billions) (5) | $ | 2,240 | $ | 2,240 | ||||||||||
Tier 1 leverage ratio | 8.3 | % | 8.3 | % | 4.0 | 4.0 | ||||||||
SLR leverage exposure (in billions) | $ | 2,788 | ||||||||||||
SLR | 6.7 | % | 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 |
(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 September 30, 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 include 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 was 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 September 30, 2018 and December 31, 2017. |
23 Bank of America |
CET1 capital was $164.4 billion at September 30, 2018, a decrease of $4.1 billion from December 31, 2017, driven by common stock repurchases, market value declines in available-for-sale (AFS) debt securities included in accumulated other comprehensive income (OCI) and dividends, partially offset by earnings. During the nine months ended September 30, 2018, Total capital under the Advanced approaches decreased $5.4
billion driven by the same factors as CET1 capital and a decrease in subordinated debt included in Tier 2 capital. Standardized risk-weighted assets, which yielded the lower CET1 capital ratio for September 30, 2018, remained relatively unchanged from December 31, 2017.
Table 10 shows the capital composition at September 30, 2018 and December 31, 2017.
Table 10 | Capital Composition under Basel 3 (1) | |||||||
(Dollars in millions) | September 30 2018 | December 31 2017 | ||||||
Total common shareholders’ equity | $ | 239,832 | $ | 244,823 | ||||
Goodwill, net of related deferred tax liabilities | (68,574 | ) | (68,576 | ) | ||||
Deferred tax assets arising from net operating loss and tax credit carryforwards | (6,166 | ) | (6,555 | ) | ||||
Intangibles, other than mortgage servicing rights and goodwill, net of related deferred tax liabilities | (1,407 | ) | (1,743 | ) | ||||
Other | 701 | 512 | ||||||
Common equity tier 1 capital | 164,386 | 168,461 | ||||||
Qualifying preferred stock, net of issuance cost | 22,326 | 22,323 | ||||||
Other | (523 | ) | (595 | ) | ||||
Tier 1 capital | 186,189 | 190,189 | ||||||
Tier 2 capital instruments | 21,444 | 22,938 | ||||||
Eligible credit reserves included in Tier 2 capital | 2,317 | 2,272 | ||||||
Other | — | (88 | ) | |||||
Total capital under the Advanced approaches | $ | 209,950 | $ | 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 11 shows the components of risk-weighted assets as measured under Basel 3 at September 30, 2018 and December 31, 2017.
Table 11 | Risk-weighted Assets under Basel 3 (1) | |||||||||||||||
Standardized Approach | Advanced Approaches | Standardized Approach | Advanced Approaches | |||||||||||||
(Dollars in billions) | September 30, 2018 | December 31, 2017 | ||||||||||||||
Credit risk | $ | 1,387 | $ | 840 | $ | 1,384 | $ | 867 | ||||||||
Market risk | 52 | 51 | 59 | 58 | ||||||||||||
Operational risk | n/a | 500 | n/a | 500 | ||||||||||||
Risks related to credit valuation adjustments | n/a | 33 | n/a | 34 | ||||||||||||
Total risk-weighted assets | $ | 1,439 | $ | 1,424 | $ | 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 12 presents regulatory capital information for BANA in accordance with Basel 3 Standardized and Advanced approaches as measured at September 30, 2018 and December 31, 2017. BANA met the definition of well capitalized under the PCA framework for both periods.
Table 12 | Bank of America, N.A. Regulatory Capital under Basel 3 | ||||||||||||||||
Standardized Approach | Advanced Approaches | ||||||||||||||||
Ratio | Amount | Ratio | Amount | Minimum Required (1) | |||||||||||||
(Dollars in millions) | September 30, 2018 | ||||||||||||||||
Common equity tier 1 capital | 12.2 | % | $ | 146,659 | 14.8 | % | $ | 146,659 | 6.5 | % | |||||||
Tier 1 capital | 12.2 | 146,659 | 14.8 | 146,659 | 8.0 | ||||||||||||
Total capital | 13.2 | 158,657 | 15.3 | 150,754 | 10.0 | ||||||||||||
Tier 1 leverage | 8.6 | 146,659 | 8.6 | 146,659 | 5.0 | ||||||||||||
SLR | 7.0 | 146,659 | 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 24 |
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 September 30, 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 CET1 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.
Enhanced Supplementary Leverage Ratio and TLAC 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 G-SIB 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 external long-term debt requirement from 4.5 percent to 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, 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.
Single-Counterparty Credit Limits
On June 14, 2018, the Federal Reserve published a final rule establishing single-counterparty credit limits (SCCL) for BHCs with total consolidated assets of $250 billion or more. The SCCL rule is designed to ensure that the maximum possible loss that a BHC could incur due to the default of a single counterparty or a group of connected counterparties would not endanger the BHC’s survival, thereby reducing the probability of future financial crises. Beginning January 1, 2020, G-SIBs must calculate SCCL on a daily basis by dividing the aggregate net credit exposure to a given counterparty by the G-SIB’s Tier 1 capital, ensuring that exposures to other G-SIBs and nonbank financial institutions regulated by the Federal Reserve do not breach 15 percent of Tier 1 capital and exposures to most other counterparties do not breach 25 percent of Tier 1 capital. Certain exposures, including exposures to the U.S. government, U.S. government-sponsored entities and qualifying central counterparties, are exempt from the credit limits.
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 September 30, 2018, MLPF&S’s regulatory net capital as defined by Rule 15c3-1 was $14.1 billion and exceeded the minimum requirement of $1.9 billion by $12.2 billion. MLPCC’s net capital of $4.6 billion exceeded the minimum requirement of $614 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 September 30, 2018, MLPF&S had tentative net capital and net capital in excess of the minimum and notification requirements.
The current business of MLPF&S is expected to be reorganized into two affiliated broker-dealers: MLPF&S and a newly formed broker-dealer. Under the contemplated reorganization, which is expected to occur during 2019, the newly formed broker-dealer would become the legal entity for the institutional services that are now provided by MLPF&S. MLPF&S' retail services would remain within MLPF&S. The contemplated reorganization is subject to regulatory approval.
25 Bank of America |
Merrill Lynch International (MLI), a U.K. investment firm, is regulated by the Prudential Regulation Authority and the Financial Conduct Authority, and is subject to certain regulatory capital requirements. At September 30, 2018, MLI’s capital resources were $34.7 billion, which exceeded the minimum Pillar 1 requirement of $13.9 billion.
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, as well as our liquidity sources, liquidity arrangements, contingency planning and credit ratings discussed below, see Liquidity Risk in the MD&A of the Corporation’s 2017 Annual Report on Form 10-K.
NB Holdings Corporation
We have intercompany arrangements with certain key subsidiaries under which we transferred certain assets of Bank of America Corporation, as the parent company, which is a separate and distinct legal entity from our banking and nonbank subsidiaries, 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.
Global Liquidity Sources and Other Unencumbered Assets
Table 13 shows average global liquidity sources (GLS) for the three months ended September 30, 2018 and December 31, 2017.
Table 13 | Average Global Liquidity Sources | |||||||
Three Months Ended | ||||||||
(Dollars in billions) | September 30 2018 | December 31 2017 | ||||||
Parent company and NB Holdings | $ | 80 | $ | 79 | ||||
Bank subsidiaries | 410 | 394 | ||||||
Other regulated entities | 47 | 49 | ||||||
Total Average Global Liquidity Sources | $ | 537 | $ | 522 |
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. Typically, parent company and NB Holdings liquidity is in the form of cash deposited with BANA.
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 $325 billion and $308 billion at September 30, 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.
Liquidity held in other regulated entities, comprised primarily of broker-dealer subsidiaries, 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. Our other regulated entities also hold unencumbered investment-grade securities and equities that we believe could be used to generate additional liquidity.
Table 14 presents the composition of average GLS for the three months ended September 30, 2018 and December 31, 2017.
Table 14 | Average Global Liquidity Sources Composition | |||||||
Three Months Ended | ||||||||
(Dollars in billions) | September 30 2018 | December 31 2017 | ||||||
Cash on deposit | $ | 130 | $ | 118 | ||||
U.S. Treasury securities | 64 | 62 | ||||||
U.S. agency securities and mortgage-backed securities | 334 | 330 | ||||||
Non-U.S. government securities | 9 | 12 | ||||||
Total Average Global Liquidity Sources | $ | 537 | $ | 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 $440 billion and $439 billion for the three months ended September 30, 2018 and December 31, 2017. For the same periods, the average consolidated LCR was 120 percent and 125 percent. Our LCR will fluctuate due to normal business flows from customer activity.
Bank of America 26 |
Liquidity Stress Analysis
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.
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 $1.35 trillion and $1.31 trillion at September 30, 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 nine months ended September 30, 2018, we issued $60.9 billion of long-term debt consisting of $30.2 billion for Bank of America Corporation, substantially all of which was TLAC compliant, $18.6 billion for Bank of America, N.A. and $12.1 billion of other debt.
Table 15 presents the carrying value of aggregate annual contractual maturities of long-term debt at September 30, 2018. During the nine months ended September 30, 2018, we had total long-term debt contractual and non-contractual maturities of $43.9 billion consisting of $27.2 billion for Bank of America Corporation, $6.5 billion for Bank of America, N.A. and $10.2 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 | $ | 1,127 | $ | 14,888 | $ | 10,340 | $ | 15,836 | $ | 14,933 | $ | 88,562 | $ | 145,686 | ||||||||||||||
Senior structured notes | 150 | 1,401 | 866 | 495 | 1,946 | 9,005 | 13,863 | |||||||||||||||||||||
Subordinated notes | — | 1,516 | — | 354 | 387 | 19,848 | 22,105 | |||||||||||||||||||||
Junior subordinated notes | — | — | — | — | — | 740 | 740 | |||||||||||||||||||||
Total Bank of America Corporation | 1,277 | 17,805 | 11,206 | 16,685 | 17,266 | 118,155 | 182,394 | |||||||||||||||||||||
Bank of America, N.A. | ||||||||||||||||||||||||||||
Senior notes | 2,209 | — | 1,740 | — | — | 20 | 3,969 | |||||||||||||||||||||
Subordinated notes | — | 1 | — | — | — | 1,576 | 1,577 | |||||||||||||||||||||
Advances from Federal Home Loan Banks | 2,501 | 11,762 | 3,010 | 2 | 3 | 105 | 17,383 | |||||||||||||||||||||
Securitizations and other Bank VIEs (1) | — | 3,200 | 3,098 | 4,022 | — | 59 | 10,379 | |||||||||||||||||||||
Other | 1 | 178 | 78 | — | 10 | 61 | 328 | |||||||||||||||||||||
Total Bank of America, N.A. | 4,711 | 15,141 | 7,926 | 4,024 | 13 | 1,821 | 33,636 | |||||||||||||||||||||
Other debt | ||||||||||||||||||||||||||||
Structured liabilities | 1,382 | 4,843 | 2,061 | 1,088 | 576 | 7,475 | 17,425 | |||||||||||||||||||||
Nonbank VIEs (1) | 6 | 41 | — | — | — | 598 | 645 | |||||||||||||||||||||
Total other debt | 1,388 | 4,884 | 2,061 | 1,088 | 576 | 8,073 | 18,070 | |||||||||||||||||||||
Total long-term debt | $ | 7,376 | $ | 37,830 | $ | 21,193 | $ | 21,797 | $ | 17,855 | $ | 128,049 | $ | 234,100 |
(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 September 30, 2018 and December 31, 2017.
Table 16 | Long-term Debt by Major Currency | |||||||
(Dollars in millions) | September 30 2018 | December 31 2017 | ||||||
U.S. dollar | $ | 184,299 | $ | 175,623 | ||||
Euro | 34,802 | 35,481 | ||||||
British pound | 5,480 | 7,016 | ||||||
Canadian dollar | 3,044 | 1,966 | ||||||
Japanese yen | 2,927 | 2,993 | ||||||
Australian dollar | 2,341 | 3,046 | ||||||
Other | 1,207 | 1,277 | ||||||
Total long-term debt | $ | 234,100 | $ | 227,402 |
Total long-term debt increased $6.7 billion during the nine months ended September 30, 2018 primarily due to issuances outpacing maturities and redemptions, including the redemption of trust preferred securities, partially offset by changes in the fair value of hedged debt. We may, from time to time, purchase outstanding debt instruments in various transactions, depending on 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 above, 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 49.
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 nine months ended September 30, 2018, we issued $5.1 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
27 Bank of America |
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.
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.
The ratings from Fitch Ratings have not changed from those disclosed in the Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018.
The ratings from Standard & Poor’s Global Ratings and Moody’s Investors Service have not changed from those disclosed in 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 | AA- | F1+ | Stable | |||||||||
Merrill Lynch, Pierce, Fenner & Smith Incorporated | NR | NR | NR | A+ | A-1 | Stable | AA- | 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 37, Non-U.S. Portfolio on page 43, Provision for Credit Losses on page 44, Allowance for Credit Losses on page 44, 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 and nine months ended September 30, 2018 resulting in improved credit quality and lower credit losses in the home equity portfolio, partially offset by seasoning and loan growth in the U.S. credit card portfolio compared to the same periods in 2017.
Improved credit quality, continued loan balance run-off and sales primarily in the non-core consumer real estate portfolio,
partially offset by seasoning within the U.S. credit card portfolio, drove a $403 million decrease in the consumer allowance for loan and lease losses during the nine months ended September 30, 2018 to $5.0 billion at September 30, 2018. For additional information, see Allowance for Credit Losses on page 44.
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 34 and Note 5 – Outstanding Loans and Leases to the Consolidated Financial Statements.
Bank of America 28 |
Table 18 | Consumer Credit Quality | |||||||||||||||||||||||
Outstandings | Nonperforming | Accruing Past Due 90 Days or More | ||||||||||||||||||||||
(Dollars in millions) | September 30 2018 | December 31 2017 | September 30 2018 | December 31 2017 | September 30 2018 | December 31 2017 | ||||||||||||||||||
Residential mortgage (1) | $ | 208,186 | $ | 203,811 | $ | 2,034 | $ | 2,476 | $ | 2,161 | $ | 3,230 | ||||||||||||
Home equity | 51,235 | 57,744 | 2,226 | 2,644 | — | — | ||||||||||||||||||
U.S. credit card | 94,829 | 96,285 | n/a | n/a | 872 | 900 | ||||||||||||||||||
Direct/Indirect consumer (2) | 91,338 | 96,342 | 46 | 46 | 35 | 40 | ||||||||||||||||||
Other consumer (3) | 203 | 166 | — | — | — | — | ||||||||||||||||||
Consumer loans excluding loans accounted for under the fair value option | $ | 445,791 | $ | 454,348 | $ | 4,306 | $ | 5,166 | $ | 3,068 | $ | 4,170 | ||||||||||||
Loans accounted for under the fair value option (4) | 755 | 928 | ||||||||||||||||||||||
Total consumer loans and leases | $ | 446,546 | $ | 455,276 | ||||||||||||||||||||
Percentage of outstanding consumer loans and leases (5) | n/a | n/a | 0.97 | % | 1.14 | % | 0.69 | % | 0.92 | % | ||||||||||||||
Percentage of outstanding consumer loans and leases, excluding PCI and fully-insured loan portfolios (5) | n/a | n/a | 1.03 | 1.23 | 0.22 | 0.22 |
(1) | Residential mortgage loans accruing past due 90 days or more are fully-insured loans. At September 30, 2018 and December 31, 2017, residential mortgage includes $1.6 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 $579 million and $1.0 billion of loans on which interest was still accruing. |
(2) | Outstandings include auto and specialty lending loans and leases of $50.1 billion and $52.4 billion, unsecured consumer lending loans of $392 million and $469 million, U.S. securities-based lending loans of $37.4 billion and $39.8 billion, non-U.S. consumer loans of $2.7 billion and $3.0 billion and other consumer loans of $756 million and $684 million at September 30, 2018 and December 31, 2017. |
(3) | Substantially all of other consumer at September 30, 2018 and December 31, 2017 is consumer overdrafts. |
(4) | Consumer loans accounted for under the fair value option include residential mortgage loans of $407 million and $567 million and home equity loans of $348 million and $361 million at September 30, 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 September 30, 2018 and December 31, 2017, $16 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 September 30 | Nine Months Ended September 30 | Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||
Residential mortgage | $ | 12 | $ | (82 | ) | $ | 13 | $ | (84 | ) | 0.02 | % | (0.16 | )% | 0.01 | % | (0.06 | )% | ||||||||||
Home equity | (20 | ) | 83 | 13 | 197 | (0.15 | ) | 0.54 | 0.03 | 0.42 | ||||||||||||||||||
U.S. credit card | 698 | 612 | 2,138 | 1,858 | 2.92 | 2.65 | 3.03 | 2.75 | ||||||||||||||||||||
Non-U.S. credit card (3) | — | — | — | 75 | — | — | — | 1.91 | ||||||||||||||||||||
Direct/Indirect consumer | 42 | 68 | 142 | 149 | 0.18 | 0.28 | 0.20 | 0.21 | ||||||||||||||||||||
Other consumer | 44 | 50 | 130 | 114 | n/m | n/m | n/m | n/m | ||||||||||||||||||||
Total | $ | 776 | $ | 731 | $ | 2,436 | $ | 2,309 | 0.69 | 0.65 | 0.73 | 0.69 |
(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 34. |
(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. |
n/m = not meaningful
Net charge-offs, as shown in Tables 19 and 20, exclude write-offs in the PCI loan portfolio of $61 million and $92 million in residential mortgage and $34 million and $74 million in home equity for the three and nine months ended September 30, 2018 compared to $62 million and $112 million in residential mortgage and $11 million and $49 million in home equity for the same periods in 2017. Net charge-off (recovery) ratios including the PCI write-offs were 0.14 percent and 0.07 percent for residential mortgage and 0.11 percent and 0.22 percent for home equity for the three and nine months ended September 30, 2018 compared to (0.04) percent and 0.02 percent for residential mortgage and 0.61 percent and 0.52 percent for home equity for the same periods in 2017. For additional information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 34.
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, loan-to-value (LTV), Fair Isaac Corporation (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 $9.0 billion during the nine months ended September 30, 2018 driven by an increase of $12.7 billion in residential mortgage, partially offset by a $3.6 billion decrease in home equity.
29 Bank of America |
During the three and nine months ended September 30, 2018, certain consumer real estate loans, primarily non-core, with carrying values of $3.7 billion and $4.9 billion were sold, resulting in gains of $84 million and $656 million recorded in other income in the Consolidated Statement of Income.
Table 20 | Consumer Real Estate Portfolio (1) | |||||||||||||||||||||||||||||||
Outstandings | Nonperforming | Net Charge-offs (2) | ||||||||||||||||||||||||||||||
September 30 2018 | December 31 2017 | September 30 2018 | December 31 2017 | Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||||||
Core portfolio | ||||||||||||||||||||||||||||||||
Residential mortgage | $ | 189,290 | $ | 176,618 | $ | 1,011 | $ | 1,087 | $ | — | $ | (42 | ) | $ | 13 | $ | (40 | ) | ||||||||||||||
Home equity | 40,596 | 44,245 | 1,056 | 1,079 | 15 | 26 | 52 | 85 | ||||||||||||||||||||||||
Total core portfolio | 229,886 | 220,863 | 2,067 | 2,166 | 15 | (16 | ) | 65 | 45 | |||||||||||||||||||||||
Non-core portfolio | ||||||||||||||||||||||||||||||||
Residential mortgage | 18,896 | 27,193 | 1,023 | 1,389 | 12 | (40 | ) | — | (44 | ) | ||||||||||||||||||||||
Home equity | 10,639 | 13,499 | 1,170 | 1,565 | (35 | ) | 57 | (39 | ) | 112 | ||||||||||||||||||||||
Total non-core portfolio | 29,535 | 40,692 | 2,193 | 2,954 | (23 | ) | 17 | (39 | ) | 68 | ||||||||||||||||||||||
Consumer real estate portfolio | ||||||||||||||||||||||||||||||||
Residential mortgage | 208,186 | 203,811 | 2,034 | 2,476 | 12 | (82 | ) | 13 | (84 | ) | ||||||||||||||||||||||
Home equity | 51,235 | 57,744 | 2,226 | 2,644 | (20 | ) | 83 | 13 | 197 | |||||||||||||||||||||||
Total consumer real estate portfolio | $ | 259,421 | $ | 261,555 | $ | 4,260 | $ | 5,120 | $ | (8 | ) | $ | 1 | $ | 26 | $ | 113 | |||||||||||||||
Allowance for Loan and Lease Losses | Provision for Loan and Lease Losses | |||||||||||||||||||||||||||||||
September 30 2018 | December 31 2017 | Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||
Core portfolio | ||||||||||||||||||||||||||||||||
Residential mortgage | $ | 211 | $ | 218 | $ | (2 | ) | $ | (49 | ) | $ | 7 | $ | (60 | ) | |||||||||||||||||
Home equity | 264 | 367 | (27 | ) | (10 | ) | (51 | ) | (19 | ) | ||||||||||||||||||||||
Total core portfolio | 475 | 585 | (29 | ) | (59 | ) | (44 | ) | (79 | ) | ||||||||||||||||||||||
Non-core portfolio | ||||||||||||||||||||||||||||||||
Residential mortgage | 289 | 483 | 22 | (59 | ) | (103 | ) | (111 | ) | |||||||||||||||||||||||
Home equity | 394 | 652 | (112 | ) | (86 | ) | (221 | ) | (255 | ) | ||||||||||||||||||||||
Total non-core portfolio | 683 | 1,135 | (90 | ) | (145 | ) | (324 | ) | (366 | ) | ||||||||||||||||||||||
Consumer real estate portfolio | ||||||||||||||||||||||||||||||||
Residential mortgage | 500 | 701 | 20 | (108 | ) | (96 | ) | (171 | ) | |||||||||||||||||||||||
Home equity | 658 | 1,019 | (139 | ) | (96 | ) | (272 | ) | (274 | ) | ||||||||||||||||||||||
Total consumer real estate portfolio | $ | 1,158 | $ | 1,720 | $ | (119 | ) | $ | (204 | ) | $ | (368 | ) | $ | (445 | ) |
(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 $407 million and $567 million and home equity loans of $348 million and $361 million at September 30, 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 34. |
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 tables and discussions of the residential mortgage and home equity portfolios, we exclude loans accounted for under the fair value option and provide information that excludes the impact of the PCI loan portfolio and the fully-insured loan portfolio in certain credit quality statistics. We separately disclose information on the PCI loan portfolio on page 34.
Residential Mortgage
The residential mortgage portfolio made up the largest percentage of our consumer loan portfolio at 47 percent of consumer loans and leases at September 30, 2018. At September 30, 2018, 43 percent of the residential mortgage portfolio was in Consumer Banking and 36 percent was in GWIM. The remaining portion was
in All Other and was 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 increased $4.4 billion during the nine months ended September 30, 2018 as retention of new originations was partially offset by loan sales of $5.7 billion and run-off.
At September 30, 2018 and December 31, 2017, the residential mortgage portfolio included $20.8 billion and $23.7 billion of outstanding fully-insured loans, of which $14.7 billion and $17.4 billion had FHA insurance with the remainder protected by long-term standby agreements. At September 30, 2018 and December 31, 2017, $3.9 billion and $5.2 billion of the FHA-insured loan population were repurchases of delinquent FHA loans pursuant to our servicing agreements with GNMA.
Bank of America 30 |
Table 21 presents certain residential mortgage key credit statistics on both a reported basis and excluding the PCI loan portfolio and the fully-insured loan portfolio. 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 and the fully-insured loan portfolio. For more information on the PCI loan portfolio, see page 34.
Table 21 | Residential Mortgage – Key Credit Statistics | |||||||||||||||||||||||||||
Reported Basis (1) | Excluding Purchased Credit-impaired and Fully-insured Loans (1) | |||||||||||||||||||||||||||
(Dollars in millions) | September 30 2018 | December 31 2017 | September 30 2018 | December 31 2017 | ||||||||||||||||||||||||
Outstandings | $ | 208,186 | $ | 203,811 | $ | 181,996 | $ | 172,069 | ||||||||||||||||||||
Accruing past due 30 days or more | 4,533 | 5,987 | 1,350 | 1,521 | ||||||||||||||||||||||||
Accruing past due 90 days or more | 2,161 | 3,230 | — | — | ||||||||||||||||||||||||
Nonperforming loans | 2,034 | 2,476 | 2,034 | 2,476 | ||||||||||||||||||||||||
Percent of portfolio | ||||||||||||||||||||||||||||
Refreshed LTV greater than 90 but less than or equal to 100 | 2 | % | 3 | % | 2 | % | 2 | % | ||||||||||||||||||||
Refreshed LTV greater than 100 | 1 | 2 | 1 | 1 | ||||||||||||||||||||||||
Refreshed FICO below 620 | 4 | 6 | 2 | 3 | ||||||||||||||||||||||||
2006 and 2007 vintages (2) | 7 | 10 | 6 | 8 | ||||||||||||||||||||||||
Reported Basis | Excluding Purchased Credit-impaired and Fully-insured Loans | |||||||||||||||||||||||||||
Three Months Ended September 30 | Nine Months Ended September 30 | Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||
Net charge-off ratio (3) | 0.02 | % | (0.16 | )% | 0.01 | % | (0.06 | )% | 0.03 | % | (0.20 | )% | 0.01 | % | (0.07 | )% |
(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 $616 million, or 30 percent, and $825 million or 33 percent, of nonperforming residential mortgage loans at September 30, 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 $442 million during the nine months ended September 30, 2018 driven by sales of $377 million. Of the nonperforming residential mortgage loans at September 30, 2018, $757 million, or 37 percent, were current on contractual payments. Loans accruing past due 30 days or more decreased $171 million due to continued improvement in credit quality as well as loan sales in the non-core portfolio.
Net charge-offs increased $94 million to $12 million and $97 million to $13 million for the three and nine months ended September 30, 2018 compared to the same periods in 2017 primarily due to net recoveries related to loan sales in the three and nine months ended September 30, 2017.
Loans with a refreshed LTV greater than 100 percent represented one percent of the residential mortgage loan portfolio at both September 30, 2018 and December 31, 2017. Of the loans with a refreshed LTV greater than 100 percent, 99 percent were performing at September 30, 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 $182.0 billion in total residential mortgage loans outstanding at September 30, 2018, as shown in Table 21, 30
percent were originated as interest-only loans. The outstanding balance of interest-only residential mortgage loans that have entered the amortization period was $9.6 billion, or 17 percent, at September 30, 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 September 30, 2018, $235 million, or two percent, of outstanding interest-only residential mortgages that had entered the amortization period were accruing past due 30 days or more compared to $1.4 billion, or one percent, for the entire residential mortgage portfolio. In addition, at September 30, 2018, $425 million, or four percent, of outstanding interest-only residential mortgage loans that had entered the amortization period were nonperforming, of which $162 million were contractually current, compared to $2.0 billion, or one percent, for the entire residential mortgage portfolio, of which $757 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.
31 Bank of America |
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 September 30, 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 September 30, 2018 and December 31, 2017.
Table 22 | Residential Mortgage State Concentrations | |||||||||||||||||||||||||||||||
Outstandings (1) | Nonperforming (1) | Net Charge-offs (2) | ||||||||||||||||||||||||||||||
September 30 2018 | December 31 2017 | September 30 2018 | December 31 2017 | Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||||||
California | $ | 73,127 | $ | 68,455 | $ | 353 | $ | 433 | $ | (1 | ) | $ | (59 | ) | $ | (18 | ) | $ | (84 | ) | ||||||||||||
New York (3) | 18,669 | 17,239 | 217 | 227 | 4 | (1 | ) | 10 | (2 | ) | ||||||||||||||||||||||
Florida (3) | 11,235 | 10,880 | 249 | 280 | (2 | ) | (9 | ) | (7 | ) | (11 | ) | ||||||||||||||||||||
Texas | 7,658 | 7,237 | 115 | 126 | — | 1 | 3 | 2 | ||||||||||||||||||||||||
New Jersey (3) | 6,761 | 6,099 | 100 | 130 | — | (1 | ) | 5 | 1 | |||||||||||||||||||||||
Other | 64,546 | 62,159 | 1,000 | 1,280 | 11 | (13 | ) | 20 | 10 | |||||||||||||||||||||||
Residential mortgage loans (4) | $ | 181,996 | $ | 172,069 | $ | 2,034 | $ | 2,476 | $ | 12 | $ | (82 | ) | $ | 13 | $ | (84 | ) | ||||||||||||||
Fully-insured loan portfolio | 20,849 | 23,741 | ||||||||||||||||||||||||||||||
Purchased credit-impaired residential mortgage loan portfolio (5) | 5,341 | 8,001 | ||||||||||||||||||||||||||||||
Total residential mortgage loan portfolio | $ | 208,186 | $ | 203,811 |
(1) | Outstandings and nonperforming loans exclude loans accounted for under the fair value option. |
(2) | Net charge-offs exclude $61 million and $92 million of write-offs in the residential mortgage PCI loan portfolio for the three and nine months ended September 30, 2018 compared to $62 million and $112 million for the same periods in 2017. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 34. |
(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 September 30, 2018 and December 31, 2017, 49 percent and 47 percent of PCI residential mortgage loans were in California. There were no other significant single state concentrations. |
Home Equity
At September 30, 2018, the home equity portfolio made up 11 percent of the consumer portfolio and is comprised of home equity lines of credit (HELOCs), home equity loans and reverse mortgages.
At September 30, 2018, our HELOC portfolio had an outstanding balance of $45.9 billion, or 90 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 September 30, 2018, our home equity loan portfolio had an outstanding balance of $3.1 billion, or six 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 $3.1 billion at September 30, 2018, 60 percent have 25- to 30-year terms. At September 30, 2018, our reverse mortgage portfolio had an outstanding balance of $2.2 billion, or four percent of the total home equity portfolio, compared to $2.1 billion, or four percent, at December 31, 2017. We no longer originate reverse mortgages.
At September 30, 2018, 72 percent of the home equity portfolio was in Consumer Banking, 21 percent was in All Other and the remainder of the portfolio was primarily in GWIM. Outstanding balances in the home equity portfolio decreased $6.5 billion during the nine months ended September 30, 2018 primarily due to paydowns and loan sales of $859 million outpacing new originations and draws on existing lines. Of the total home equity portfolio at September 30, 2018 and December 31, 2017, $17.6 billion and $18.7 billion, or 34 percent and 32 percent, were in first-lien positions (36 percent and 34 percent excluding the PCI home equity portfolio). At September 30, 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 $8.2 billion, or 17 percent of our total home equity portfolio excluding the PCI loan portfolio.
Unused HELOCs totaled $43.2 billion at September 30, 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 52 percent and 54 percent at September 30, 2018 and December 31, 2017.
Bank of America 32 |
Table 23 presents certain home equity portfolio key credit statistics on both a reported basis and excluding the PCI loan portfolio. 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. For more information on the PCI loan portfolio, see page 34.
Table 23 | Home Equity – Key Credit Statistics | |||||||||||||||||||||||||||
Reported Basis (1) | Excluding Purchased Credit-impaired Loans (1) | |||||||||||||||||||||||||||
(Dollars in millions) | September 30 2018 | December 31 2017 | September 30 2018 | December 31 2017 | ||||||||||||||||||||||||
Outstandings | $ | 51,235 | $ | 57,744 | $ | 49,424 | $ | 55,028 | ||||||||||||||||||||
Accruing past due 30 days or more (2) | 404 | 502 | 404 | 502 | ||||||||||||||||||||||||
Nonperforming loans (2) | 2,226 | 2,644 | 2,226 | 2,644 | ||||||||||||||||||||||||
Percent of portfolio | ||||||||||||||||||||||||||||
Refreshed CLTV greater than 90 but less than or equal to 100 | 3 | % | 3 | % | 2 | % | 3 | % | ||||||||||||||||||||
Refreshed CLTV greater than 100 | 4 | 5 | 3 | 4 | ||||||||||||||||||||||||
Refreshed FICO below 620 | 6 | 6 | 6 | 6 | ||||||||||||||||||||||||
2006 and 2007 vintages (3) | 25 | 29 | 23 | 27 | ||||||||||||||||||||||||
Reported Basis | Excluding Purchased Credit-impaired Loans | |||||||||||||||||||||||||||
Three Months Ended September 30 | Nine Months Ended September 30 | Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||
Net charge-off ratio (4) | (0.15 | )% | 0.54 | % | 0.03 | % | 0.42 | % | (0.15 | )% | 0.56 | % | 0.03 | % | 0.44 | % |
(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 include $54 million and $67 million and nonperforming loans include $270 million and $344 million of loans where we serviced the underlying first lien at September 30, 2018 and December 31, 2017. |
(3) | These vintages of loans have higher refreshed combined loan-to-value (CLTV) ratios and accounted for 51 percent and 52 percent of nonperforming home equity loans at September 30, 2018 and December 31, 2017, and $12 million of net recoveries and $25 million of net charge-offs for the three and nine months ended September 30, 2018, and $67 million and $170 million of net charge-offs for the same periods in 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 $418 million during the nine months ended September 30, 2018 as outflows, including $154 million of sales, outpaced new inflows. Of the nonperforming home equity portfolio at September 30, 2018, $1.3 billion, or 56 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, $583 million, or 26 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 $98 million during the nine months ended September 30, 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 September 30, 2018, we estimate that $690 million of current and $109 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 $149 million of these combined amounts, with the remaining $650 million serviced by third parties. Of the $799 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 $225 million had first-lien loans that were 90 days or more past due.
Net charge-offs decreased $103 million to a $20 million net recovery and $184 million to a $13 million net charge-off for the three and nine months ended September 30, 2018 compared to the same periods 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 three percent and four percent of the home equity portfolio at September 30, 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, 96 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 September 30, 2018.
Of the $49.4 billion in total home equity portfolio outstandings at September 30, 2018, as shown in Table 24, 21 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 $17.1 billion at September 30, 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 September 30, 2018, $302 million, or two percent, of outstanding HELOCs that had entered the amortization period were accruing past due 30 days or more. In addition, at September 30,
33 Bank of America |
2018, $1.9 billion, or 11 percent, of outstanding HELOCs that had entered the amortization period were nonperforming, of which $1.1 billion were contractually current. 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. During the three months ended September 30, 2018, 27 percent of these customers with an outstanding balance did not pay any principal on their HELOCs.
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 September 30, 2018 and December 31, 2017. For the three and nine months ended September 30, 2018, loans within this MSA contributed $9 million and $25 million of net charge-offs within the home equity portfolio compared to $24 million and $52 million for the same periods in 2017. The Los Angeles-Long Beach-Santa Ana MSA within California made up 11 percent of the outstanding home equity portfolio at both September 30, 2018 and December 31, 2017. For the three and nine months ended September 30, 2018, loans within this MSA contributed net recoveries of $7 million and $18 million within the home equity portfolio compared to net recoveries of $7 million and $16 million for the same periods in 2017.
Table 24 | Home Equity State Concentrations | |||||||||||||||||||||||||||||||
Outstandings (1) | Nonperforming (1) | Net Charge-offs (2) | ||||||||||||||||||||||||||||||
September 30 2018 | December 31 2017 | September 30 2018 | December 31 2017 | Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||||||
California | $ | 13,685 | $ | 15,145 | $ | 650 | $ | 766 | $ | (20 | ) | $ | (9 | ) | $ | (41 | ) | $ | (24 | ) | ||||||||||||
Florida (3) | 5,592 | 6,308 | 366 | 411 | (4 | ) | 13 | 9 | 34 | |||||||||||||||||||||||
New Jersey (3) | 4,005 | 4,546 | 168 | 191 | 6 | 16 | 20 | 37 | ||||||||||||||||||||||||
New York (3) | 3,732 | 4,195 | 222 | 252 | 8 | 14 | 16 | 31 | ||||||||||||||||||||||||
Massachusetts | 2,471 | 2,751 | 76 | 92 | (1 | ) | 5 | 2 | 7 | |||||||||||||||||||||||
Other | 19,939 | 22,083 | 744 | 932 | (9 | ) | 44 | 7 | 112 | |||||||||||||||||||||||
Home equity loans (4) | $ | 49,424 | $ | 55,028 | $ | 2,226 | $ | 2,644 | $ | (20 | ) | $ | 83 | $ | 13 | $ | 197 | |||||||||||||||
Purchased credit-impaired home equity portfolio (5) | 1,811 | 2,716 | ||||||||||||||||||||||||||||||
Total home equity loan portfolio | $ | 51,235 | $ | 57,744 |
(1) | Outstandings and nonperforming loans exclude loans accounted for under the fair value option. |
(2) | Net charge-offs exclude $34 million and $74 million of write-offs in the home equity PCI loan portfolio for the three and nine months ended September 30, 2018 compared to $11 million and $49 million for the same periods in 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 September 30, 2018 and December 31, 2017, 30 percent and 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 herein.
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) | September 30, 2018 | ||||||||||||||||||
Residential mortgage (1) | $ | 5,454 | $ | 5,341 | $ | 51 | $ | 5,290 | 96.99 | % | |||||||||
Home equity | 1,872 | 1,811 | 99 | 1,712 | 91.45 | ||||||||||||||
Total purchased credit-impaired loan portfolio | $ | 7,326 | $ | 7,152 | $ | 150 | $ | 7,002 | 95.58 | ||||||||||
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 September 30, 2018 and December 31, 2017, pay option loans had an unpaid principal balance of $974 million and $1.4 billion and a carrying value of $965 million and $1.4 billion. This includes $852 million and $1.2 billion of loans that were credit-impaired upon acquisition and $87 million and $141 million of loans that were 90 days or more past due at September 30, 2018 and December 31, 2017. The total unpaid principal balance of pay option loans with accumulated negative amortization was $90 million and $160 million, including $5 million and $9 million of negative amortization at September 30, 2018 and December 31, 2017. |
Bank of America 34 |
The total PCI unpaid principal balance decreased $3.6 billion, or 33 percent, during the nine months ended September 30, 2018 primarily driven by loan sales with a carrying value of $2.1 billion compared to sales of $742 million for the same period in 2017.
Of the unpaid principal balance of $7.3 billion at September 30, 2018, $6.5 billion, or 89 percent, was current based on the contractual terms, $464 million, or six percent, was in early stage delinquency, and $252 million was 180 days or more past due, including $210 million of first-lien mortgages and $42 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 September 30, 2018. Those loans to borrowers with a refreshed FICO score below 620 represented 22 percent and 16 percent of the PCI residential mortgage loan and home equity portfolios at September 30, 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 12 percent and 29 percent of their respective PCI loan portfolios and 13 percent and 32 percent based on the unpaid principal balance at September 30, 2018.
U.S. Credit Card
At September 30, 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 $1.5 billion to $94.8 billion during the nine months ended September 30, 2018 due to paydowns and a seasonal decline in purchase volume, as well as a portfolio transfer of approximately $600 million to held for sale in the first quarter. Net charge-offs increased $86 million to $698 million and $280 million to $2.1 billion for the three and nine months ended September 30, 2018 compared to the same periods 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 $42 million during the nine months ended September 30, 2018 driven by a reduction in 2017 hurricane-related delinquencies, and loans 90 days or more past due and still accruing interest decreased $28 million.
Unused lines of credit for U.S. credit card totaled $337.9 billion and $326.3 billion at September 30, 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 | ||||||||||||||||||||||||||||||
September 30 2018 | December 31 2017 | September 30 2018 | December 31 2017 | Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||||||
California | $ | 15,304 | $ | 15,254 | $ | 141 | $ | 136 | $ | 119 | $ | 104 | $ | 357 | $ | 303 | ||||||||||||||||
Florida | 8,408 | 8,359 | 102 | 94 | 80 | 58 | 248 | 195 | ||||||||||||||||||||||||
Texas | 7,448 | 7,451 | 75 | 76 | 54 | 46 | 169 | 143 | ||||||||||||||||||||||||
New York | 5,886 | 5,977 | 74 | 91 | 66 | 59 | 208 | 155 | ||||||||||||||||||||||||
Washington | 4,329 | 4,350 | 20 | 20 | 15 | 13 | 47 | 41 | ||||||||||||||||||||||||
Other | 53,454 | 54,894 | 460 | 483 | 364 | 332 | 1,109 | 1,021 | ||||||||||||||||||||||||
Total U.S. credit card portfolio | $ | 94,829 | $ | 96,285 | $ | 872 | $ | 900 | $ | 698 | $ | 612 | $ | 2,138 | $ | 1,858 |
Direct/Indirect Consumer
At September 30, 2018, 55 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 45 percent was included in GWIM (principally securities-based lending loans).
Outstandings in the direct/indirect portfolio decreased $5.0 billion to $91.3 billion during the nine months ended September 30, 2018 primarily due to declines in securities-based lending due
to higher paydowns, and in our auto portfolio as paydowns outpaced originations. Net charge-offs decreased $26 million to $42 million and $7 million to $142 million for the three and nine months ended September 30, 2018 compared to the same periods in 2017 due largely to clarifying regulatory guidance related to bankruptcy and repossession issued during 2017.
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 | ||||||||||||||||||||||||||||||
September 30 2018 | December 31 2017 | September 30 2018 | December 31 2017 | Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||||||
California | $ | 11,868 | $ | 12,897 | $ | 3 | $ | 3 | $ | 5 | $ | 7 | $ | 16 | $ | 14 | ||||||||||||||||
Florida | 10,242 | 11,184 | 4 | 5 | 9 | 15 | 28 | 31 | ||||||||||||||||||||||||
Texas | 9,951 | 10,676 | 6 | 5 | 6 | 13 | 22 | 29 | ||||||||||||||||||||||||
New York | 6,403 | 6,557 | 2 | 2 | 2 | 2 | 7 | 3 | ||||||||||||||||||||||||
New Jersey | 3,306 | 3,449 | 1 | 1 | — | — | 2 | 2 | ||||||||||||||||||||||||
Other | 49,568 | 51,579 | 19 | 24 | 20 | 31 | 67 | 70 | ||||||||||||||||||||||||
Total direct/indirect loan portfolio | $ | 91,338 | $ | 96,342 | $ | 35 | $ | 40 | $ | 42 | $ | 68 | $ | 142 | $ | 149 |
35 Bank of America |
Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity
Table 28 presents nonperforming consumer loans, leases and foreclosed properties activity for the three and nine months ended September 30, 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 herein. During the nine months ended September 30, 2018, nonperforming consumer loans declined $860 million to $4.3 billion primarily driven by loan sales of $531 million.
At September 30, 2018, $1.3 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 September 30, 2018, $2.1 billion, or 48 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 $29 million to $265 million during the nine months ended September 30, 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 September 30, 2018 and December 31, 2017, $225 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 | |||||||||||||||
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Nonperforming loans and leases, beginning of period | $ | 4,639 | $ | 5,282 | $ | 5,166 | $ | 6,004 | ||||||||
Additions | 484 | 999 | 1,895 | 2,499 | ||||||||||||
Reductions: | ||||||||||||||||
Paydowns and payoffs | (238 | ) | (253 | ) | (744 | ) | (811 | ) | ||||||||
Sales | (145 | ) | (162 | ) | (531 | ) | (423 | ) | ||||||||
Returns to performing status (1) | (309 | ) | (347 | ) | (1,009 | ) | (1,101 | ) | ||||||||
Charge-offs | (89 | ) | (210 | ) | (350 | ) | (551 | ) | ||||||||
Transfers to foreclosed properties | (36 | ) | (57 | ) | (119 | ) | (167 | ) | ||||||||
Transfers to loans held-for-sale | — | — | (2 | ) | (198 | ) | ||||||||||
Total net reductions to nonperforming loans and leases | (333 | ) | (30 | ) | (860 | ) | (752 | ) | ||||||||
Total nonperforming loans and leases, September 30 | 4,306 | 5,252 | 4,306 | 5,252 | ||||||||||||
Foreclosed properties, September 30 (2) | 265 | 259 | 265 | 259 | ||||||||||||
Nonperforming consumer loans, leases and foreclosed properties, September 30 | $ | 4,571 | $ | 5,511 | $ | 4,571 | $ | 5,511 | ||||||||
Nonperforming consumer loans and leases as a percentage of outstanding consumer loans and leases (3) | 0.97 | % | 1.17 | % | ||||||||||||
Nonperforming consumer loans, leases and foreclosed properties as a percentage of outstanding consumer loans, leases and foreclosed properties (3) | 1.03 | 1.23 |
(1) | 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. |
(2) | Foreclosed property balances do not include properties insured by certain government-guaranteed loans, principally FHA-insured, of $500 million and $879 million at September 30, 2018 and 2017. |
(3) | 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 | |||||||||||||||||||||||
September 30, 2018 | December 31, 2017 | |||||||||||||||||||||||
(Dollars in millions) | Nonperforming | Performing | Total | Nonperforming | Performing | Total | ||||||||||||||||||
Residential mortgage (1, 2) | $ | 1,295 | $ | 5,703 | $ | 6,998 | $ | 1,535 | $ | 8,163 | $ | 9,698 | ||||||||||||
Home equity (3) | 1,308 | 1,369 | 2,677 | 1,457 | 1,399 | 2,856 | ||||||||||||||||||
Total consumer real estate troubled debt restructurings | $ | 2,603 | $ | 7,072 | $ | 9,675 | $ | 2,992 | $ | 9,562 | $ | 12,554 |
(1) | At September 30, 2018 and December 31, 2017, residential mortgage TDRs deemed collateral dependent totaled $1.7 billion and $2.8 billion, and included $1.0 billion and $1.2 billion of loans classified as nonperforming and $668 million and $1.6 billion of loans classified as performing. |
(2) | Residential mortgage performing TDRs included $3.0 billion and $3.7 billion of loans that were fully-insured at September 30, 2018 and December 31, 2017. |
(3) | Home equity TDRs deemed collateral dependent totaled $1.5 billion and $1.6 billion and included $1.1 billion and $1.2 billion of loans classified as nonperforming at September 30, 2018 and December 31, 2017, and $363 million and $388 million of loans classified as performing. |
Bank of America 36 |
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 September 30, 2018 and December 31, 2017, our renegotiated TDR portfolio was $541 million and $490 million, of which $465 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 continue to be aligned with our risk appetite. 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 41 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 41 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 nine months ended September 30, 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 in most sectors remained stable with conservative LTV ratios, stable market rents and vacancy rates that remain low.
Total commercial utilized credit exposure decreased $895 million during the nine months ended September 30, 2018 primarily driven by decreases in loans held-for-sale (LHFS) and debt securities and other investments, partially offset by an increase in derivative assets. The utilization rate for loans and leases, standby letters of credit (SBLCs) and financial guarantees, and commercial letters of credit, in the aggregate, was 59 percent at both September 30, 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) | September 30 2018 | December 31 2017 | September 30 2018 | December 31 2017 | September 30 2018 | December 31 2017 | ||||||||||||||||||
Loans and leases (5) | $ | 489,368 | $ | 487,748 | $ | 369,332 | $ | 364,743 | $ | 858,700 | $ | 852,491 | ||||||||||||
Derivative assets (6) | 45,617 | 37,762 | — | — | 45,617 | 37,762 | ||||||||||||||||||
Standby letters of credit and financial guarantees | 33,271 | 34,517 | 524 | 863 | 33,795 | 35,380 | ||||||||||||||||||
Debt securities and other investments | 25,636 | 28,161 | 4,692 | 4,864 | 30,328 | 33,025 | ||||||||||||||||||
Loans held-for-sale | 3,737 | 10,257 | 16,171 | 9,742 | 19,908 | 19,999 | ||||||||||||||||||
Commercial letters of credit | 1,336 | 1,467 | 296 | 155 | 1,632 | 1,622 | ||||||||||||||||||
Other | 940 | 888 | — | — | 940 | 888 | ||||||||||||||||||
Total | $ | 599,905 | $ | 600,800 | $ | 391,015 | $ | 380,367 | $ | 990,920 | $ | 981,167 |
(1) | Commercial utilized exposure includes loans of $5.0 billion and $4.8 billion and issued letters of credit with a notional amount of $55 million and $232 million accounted for under the fair value option at September 30, 2018 and December 31, 2017. |
(2) | Commercial unfunded exposure includes commitments accounted for under the fair value option with a notional amount of $3.1 billion and $4.6 billion at September 30, 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 $10.8 billion and $11.0 billion at September 30, 2018 and December 31, 2017. |
(5) | Includes credit risk exposure associated with assets under operating lease arrangements of $6.1 billion and $6.3 billion at September 30, 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 $32.0 billion and $34.6 billion at September 30, 2018 and December 31, 2017. Not reflected in utilized and committed exposure is additional non-cash derivative collateral held of $35.7 billion and $26.2 billion at September 30, 2018 and December 31, 2017, which consists primarily of other marketable securities. |
Outstanding commercial loans and leases increased $1.8 billion during the nine months ended September 30, 2018 primarily in the commercial real estate portfolio. The allowance for loan and lease losses for the commercial portfolio decreased $256 million to $4.8 billion at September 30, 2018. For more information, see Allowance for Credit Losses on page 44. Table 31 presents our commercial loans and leases portfolio and related credit quality information at September 30, 2018 and December 31, 2017.
37 Bank of America |
Table 31 | Commercial Credit Quality | |||||||||||||||||||||||
Outstandings | Nonperforming | Accruing Past Due 90 Days or More | ||||||||||||||||||||||
(Dollars in millions) | September 30 2018 | December 31 2017 | September 30 2018 | December 31 2017 | September 30 2018 | December 31 2017 | ||||||||||||||||||
Commercial and industrial: | ||||||||||||||||||||||||
U.S. commercial | $ | 285,662 | $ | 284,836 | $ | 699 | $ | 814 | $ | 114 | $ | 144 | ||||||||||||
Non-U.S. commercial | 96,002 | 97,792 | 31 | 299 | — | 3 | ||||||||||||||||||
Total commercial and industrial | 381,664 | 382,628 | 730 | 1,113 | 114 | 147 | ||||||||||||||||||
Commercial real estate (1) | 60,835 | 58,298 | 46 | 112 | 1 | 4 | ||||||||||||||||||
Commercial lease financing | 21,546 | 22,116 | 14 | 24 | 33 | 19 | ||||||||||||||||||
464,045 | 463,042 | 790 | 1,249 | 148 | 170 | |||||||||||||||||||
U.S. small business commercial (2) | 14,234 | 13,649 | 58 | 55 | 73 | 75 | ||||||||||||||||||
Commercial loans excluding loans accounted for under the fair value option | 478,279 | 476,691 | 848 | 1,304 | 221 | 245 | ||||||||||||||||||
Loans accounted for under the fair value option (3) | 4,976 | 4,782 | — | 43 | — | — | ||||||||||||||||||
Total commercial loans and leases | $ | 483,255 | $ | 481,473 | $ | 848 | $ | 1,347 | $ | 221 | $ | 245 |
(1) | Includes U.S. commercial real estate of $56.9 billion and $54.8 billion and non-U.S. commercial real estate of $3.9 billion and $3.5 billion at September 30, 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 $3.6 billion and $2.6 billion and non-U.S. commercial of $1.4 billion and $2.2 billion at September 30, 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 and nine months ended September 30, 2018 and 2017.
Table 32 | Commercial Net Charge-offs and Related Ratios | |||||||||||||||||||||||||||
Net Charge-offs | Net Charge-off Ratios (1) | |||||||||||||||||||||||||||
Three Months Ended September 30 | Nine Months Ended September 30 | Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||
Commercial and industrial: | ||||||||||||||||||||||||||||
U.S. commercial | $ | 70 | $ | 80 | $ | 172 | $ | 176 | 0.10 | % | 0.11 | % | 0.08 | % | 0.09 | % | ||||||||||||
Non-U.S. commercial | 25 | 33 | 48 | 94 | 0.10 | 0.14 | 0.07 | 0.14 | ||||||||||||||||||||
Total commercial and industrial | 95 | 113 | 220 | 270 | 0.10 | 0.12 | 0.08 | 0.10 | ||||||||||||||||||||
Commercial real estate | 2 | 2 | 3 | 3 | 0.02 | 0.02 | 0.01 | 0.01 | ||||||||||||||||||||
Commercial lease financing | — | (1 | ) | — | — | — | (0.02 | ) | — | — | ||||||||||||||||||
97 | 114 | 223 | 273 | 0.08 | 0.10 | 0.06 | 0.08 | |||||||||||||||||||||
U.S. small business commercial | 59 | 55 | 180 | 160 | 1.67 | 1.61 | 1.72 | 1.60 | ||||||||||||||||||||
Total commercial | $ | 156 | $ | 169 | $ | 403 | $ | 433 | 0.13 | 0.14 | 0.11 | 0.13 |
(1) | Net charge-off ratios are calculated as annualized net charge-offs divided by average outstanding loans and leases excluding loans accounted for under the fair value option. |
Table 33 presents commercial reservable criticized utilized exposure by loan type. Criticized exposure corresponds to the Special Mention, Substandard and Doubtful asset categories as defined by regulatory authorities. Total commercial reservable criticized utilized exposure decreased $2.0 billion, or 14 percent, during the nine months ended September 30, 2018 driven by broad-based improvements including the energy sector. At September 30, 2018 and December 31, 2017, 87 percent and 84 percent of commercial reservable criticized utilized exposure was secured.
Table 33 | Commercial Reservable Criticized Utilized Exposure (1, 2) | |||||||||||||
(Dollars in millions) | September 30, 2018 | December 31, 2017 | ||||||||||||
Commercial and industrial: | ||||||||||||||
U.S. commercial | $ | 8,631 | 2.75 | % | $ | 9,891 | 3.15 | % | ||||||
Non-U.S. commercial | 1,298 | 1.27 | 1,766 | 1.70 | ||||||||||
Total commercial and industrial | 9,929 | 2.39 | 11,657 | 2.79 | ||||||||||
Commercial real estate | 565 | 0.91 | 566 | 0.95 | ||||||||||
Commercial lease financing | 373 | 1.73 | 581 | 2.63 | ||||||||||
10,867 | 2.18 | 12,804 | 2.57 | |||||||||||
U.S. small business commercial | 730 | 5.13 | 759 | 5.56 | ||||||||||
Total commercial reservable criticized utilized exposure (1) | $ | 11,597 | 2.26 | $ | 13,563 | 2.65 |
(1) | Total commercial reservable criticized utilized exposure includes loans and leases of $10.7 billion and $12.5 billion and commercial letters of credit of $866 million and $1.1 billion at September 30, 2018 and December 31, 2017. |
(2) | Percentages are calculated as commercial reservable criticized utilized exposure divided by total commercial reservable utilized exposure for each exposure category. |
Bank of America 38 |
Commercial and Industrial
Commercial and industrial loans include U.S. commercial and non-U.S. commercial portfolios.
U.S. Commercial
At September 30, 2018, 69 percent of the U.S. commercial loan portfolio, excluding small business, was managed in Global Banking, 16 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 remained relatively unchanged during the nine months ended September 30, 2018. Reservable criticized utilized exposure decreased $1.3 billion, or 13 percent, driven by broad-based improvements including the energy sector.
Non-U.S. Commercial
At September 30, 2018, 80 percent of the non-U.S. commercial loan portfolio was managed in Global Banking and 20 percent in Global Markets. Outstanding loans decreased $1.8 billion during the nine months ended September 30, 2018 driven by paydowns primarily in Global Markets. Reservable criticized utilized exposure decreased $468 million, or 27 percent, and nonperforming loans and leases decreased $268 million, or 90 percent, due primarily to paydowns and sales. For additional information on the non-U.S. commercial portfolio, see Non-U.S. Portfolio on page 43.
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 September 30, 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 $2.5 billion, or four percent, during the nine months ended September 30, 2018 to $60.8 billion due to new originations, including higher hold levels on syndicated loans, outpacing paydowns.
For the three and nine months ended September 30, 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 $88 million, or 54 percent, during the nine months ended September 30, 2018 to $76 million at September 30, 2018, primarily due to loan paydowns.
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) | September 30 2018 | December 31 2017 | ||||||
By Geographic Region | ||||||||
California | $ | 14,227 | $ | 13,607 | ||||
Northeast | 10,954 | 10,072 | ||||||
Southwest | 7,374 | 6,970 | ||||||
Southeast | 5,718 | 5,487 | ||||||
Midwest | 3,916 | 3,769 | ||||||
Florida | 3,559 | 3,170 | ||||||
Illinois | 2,970 | 3,263 | ||||||
Midsouth | 2,917 | 2,962 | ||||||
Northwest | 2,290 | 2,657 | ||||||
Non-U.S. | 3,937 | 3,538 | ||||||
Other (1) | 2,973 | 2,803 | ||||||
Total outstanding commercial real estate loans | $ | 60,835 | $ | 58,298 | ||||
By Property Type | ||||||||
Non-residential | ||||||||
Office | $ | 17,680 | $ | 16,718 | ||||
Shopping centers / Retail | 8,752 | 8,825 | ||||||
Multi-family rental | 8,180 | 8,280 | ||||||
Hotels / Motels | 6,944 | 6,344 | ||||||
Industrial / Warehouse | 5,364 | 6,070 | ||||||
Unsecured | 3,146 | 2,187 | ||||||
Multi-use | 2,390 | 2,771 | ||||||
Land and land development | 140 | 160 | ||||||
Other | 6,642 | 5,485 | ||||||
Total non-residential | 59,238 | 56,840 | ||||||
Residential | 1,597 | 1,458 | ||||||
Total outstanding commercial real estate loans | $ | 60,835 | $ | 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. |
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 51 percent and 50 percent of the U.S. small business commercial portfolio at September 30, 2018 and December 31, 2017. Of the U.S. small business commercial net charge-offs, 95 percent and 94 percent were credit card-related products for the three and nine months ended September 30, 2018 compared to 92 percent and 90 percent for the same periods in 2017.
39 Bank of America |
Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity
Table 35 presents the nonperforming commercial loans, leases and foreclosed properties activity during the three and nine months ended September 30, 2018 and 2017. Nonperforming loans do not include loans accounted for under the fair value option. During the nine months ended September 30, 2018, nonperforming commercial loans and leases decreased $456 million to $848
million. At September 30, 2018, 96 percent of commercial nonperforming loans, leases and foreclosed properties were secured and 46 percent were contractually current. Commercial nonperforming loans were carried at 82 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 collateral value less costs to sell.
Table 35 | Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity (1, 2) | |||||||||||||||
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Nonperforming loans and leases, beginning of period | $ | 1,258 | $ | 1,520 | $ | 1,304 | $ | 1,703 | ||||||||
Additions | 235 | 412 | 915 | 1,172 | ||||||||||||
Reductions: | ||||||||||||||||
Paydowns | (287 | ) | (270 | ) | (649 | ) | (803 | ) | ||||||||
Sales | (130 | ) | (61 | ) | (204 | ) | (116 | ) | ||||||||
Returns to performing status (3) | (95 | ) | (100 | ) | (213 | ) | (240 | ) | ||||||||
Charge-offs | (116 | ) | (145 | ) | (276 | ) | (312 | ) | ||||||||
Transfers to foreclosed properties | (12 | ) | — | (12 | ) | (27 | ) | |||||||||
Transfers to loans held-for-sale | (5 | ) | (38 | ) | (17 | ) | (59 | ) | ||||||||
Total net reductions to nonperforming loans and leases | (410 | ) | (202 | ) | (456 | ) | (385 | ) | ||||||||
Total nonperforming loans and leases, September 30 | 848 | 1,318 | 848 | 1,318 | ||||||||||||
Foreclosed properties, September 30 | 30 | 40 | 30 | 40 | ||||||||||||
Nonperforming commercial loans, leases and foreclosed properties, September 30 | $ | 878 | $ | 1,358 | $ | 878 | $ | 1,358 | ||||||||
Nonperforming commercial loans and leases as a percentage of outstanding commercial loans and leases (4) | 0.18 | % | 0.28 | % | ||||||||||||
Nonperforming commercial loans, leases and foreclosed properties as a percentage of outstanding commercial loans, leases and foreclosed properties (4) | 0.18 | 0.29 |
(1) | Balances do not include nonperforming LHFS of $177 million and $322 million at September 30, 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 | |||||||||||||||||||||||
September 30, 2018 | December 31, 2017 | |||||||||||||||||||||||
(Dollars in millions) | Nonperforming | Performing | Total | Nonperforming | Performing | Total | ||||||||||||||||||
Commercial and industrial: | ||||||||||||||||||||||||
U.S. commercial | $ | 285 | $ | 1,058 | $ | 1,343 | $ | 370 | $ | 866 | $ | 1,236 | ||||||||||||
Non-U.S. commercial | 9 | 204 | 213 | 11 | 219 | 230 | ||||||||||||||||||
Total commercial and industrial | 294 | 1,262 | 1,556 | 381 | 1,085 | 1,466 | ||||||||||||||||||
Commercial real estate | 4 | 6 | 10 | 38 | 9 | 47 | ||||||||||||||||||
Commercial lease financing | 2 | 72 | 74 | 5 | 13 | 18 | ||||||||||||||||||
300 | 1,340 | 1,640 | 424 | 1,107 | 1,531 | |||||||||||||||||||
U.S. small business commercial | 4 | 18 | 22 | 4 | 15 | 19 | ||||||||||||||||||
Total commercial troubled debt restructurings | $ | 304 | $ | 1,358 | $ | 1,662 | $ | 428 | $ | 1,122 | $ | 1,550 |
Bank of America 40 |
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 $9.8 billion, or one percent, during the nine months ended September 30, 2018 to $990.9 billion. The increase in commercial committed exposure was concentrated in the Asset Managers and Funds, Real Estate, Capital Goods and Food, Beverage and Tobacco industry sectors. Increases were partially offset by reduced exposure to the Food and Staples Retailing, Media and Global Commercial Banks industry sectors.
Industry limits are used internally to manage industry concentrations and are based on committed exposure that is allocated on an industry-by-industry basis. A risk management framework is in place to set and approve industry limits as well as to provide ongoing monitoring. The Management Risk Committee oversees industry limit governance.
Asset Managers and Funds, our largest industry concentration with committed exposure of $103.1 billion, increased $12.0 billion, or 13 percent, during the nine months ended September 30, 2018. The change reflects an increase in exposure to several counterparties.
Real Estate, our second largest industry concentration with committed exposure of $90.7 billion, increased $6.9 billion, or eight percent, during the nine months ended September 30, 2018. For more information on the commercial real estate and related portfolios, see Commercial Portfolio Credit Risk Management – Commercial Real Estate on page 39.
Capital Goods, our third largest industry concentration with committed exposure of $74.7 billion, increased $4.3 billion, or six percent, during the nine months ended September 30, 2018. The increase in committed exposure occurred primarily as a result of increases in large conglomerates, as well as trading companies and distributors, partially offset by a decrease in machinery companies.
Our energy-related committed exposure decreased $2.3 billion, or six percent, during the nine months ended September 30, 2018 to $34.5 billion. Energy sector net charge-offs were $34 million for the nine months ended September 30, 2018 compared to $131 million for the same period in 2017. Energy sector reservable criticized exposure decreased $745 million during the nine months ended September 30, 2018 to $875 million due to improvement in credit quality of some borrowers coupled with exposure reductions. The energy allowance for credit losses decreased $225 million during the nine months ended September 30, 2018 to $335 million.
Table 37 | Commercial Credit Exposure by Industry (1) | |||||||||||||||
Commercial Utilized | Total Commercial Committed (2) | |||||||||||||||
(Dollars in millions) | September 30 2018 | December 31 2017 | September 30 2018 | December 31 2017 | ||||||||||||
Asset managers and funds | $ | 68,733 | $ | 59,190 | $ | 103,066 | $ | 91,092 | ||||||||
Real estate (3) | 64,460 | 61,940 | 90,664 | 83,773 | ||||||||||||
Capital goods | 40,327 | 36,705 | 74,720 | 70,417 | ||||||||||||
Government and public education | 44,436 | 48,684 | 55,296 | 58,067 | ||||||||||||
Healthcare equipment and services | 34,943 | 37,780 | 54,889 | 57,256 | ||||||||||||
Finance companies | 33,549 | 34,050 | 53,375 | 53,107 | ||||||||||||
Materials | 25,727 | 24,001 | 49,461 | 47,386 | ||||||||||||
Retailing | 25,714 | 26,117 | 47,823 | 48,796 | ||||||||||||
Food, beverage and tobacco | 23,199 | 23,252 | 45,166 | 42,815 | ||||||||||||
Consumer services | 24,975 | 27,191 | 42,276 | 43,605 | ||||||||||||
Commercial services and supplies | 21,861 | 22,100 | 37,644 | 35,496 | ||||||||||||
Energy | 16,319 | 16,345 | 34,462 | 36,765 | ||||||||||||
Transportation | 21,887 | 21,704 | 30,694 | 29,946 | ||||||||||||
Media | 10,581 | 19,155 | 28,523 | 33,955 | ||||||||||||
Global commercial banks | 25,471 | 29,491 | 27,752 | 31,764 | ||||||||||||
Utilities | 11,496 | 11,342 | 27,495 | 27,935 | ||||||||||||
Individuals and trusts | 18,706 | 18,549 | 25,332 | 25,097 | ||||||||||||
Technology hardware and equipment | 10,054 | 10,728 | 21,759 | 22,071 | ||||||||||||
Pharmaceuticals and biotechnology | 7,430 | 5,653 | 19,396 | 18,623 | ||||||||||||
Vehicle dealers | 15,930 | 16,896 | 19,128 | 20,361 | ||||||||||||
Consumer durables and apparel | 9,432 | 8,859 | 18,129 | 17,296 | ||||||||||||
Software and services | 7,489 | 8,562 | 16,558 | 18,202 | ||||||||||||
Automobiles and components | 6,990 | 5,988 | 14,271 | 13,318 | ||||||||||||
Insurance | 5,818 | 6,411 | 13,785 | 12,990 | ||||||||||||
Telecommunication services | 6,837 | 6,389 | 12,786 | 13,108 | ||||||||||||
Food and staples retailing | 4,840 | 4,955 | 10,100 | 15,589 | ||||||||||||
Religious and social organizations | 3,705 | 4,454 | 5,586 | 6,318 | ||||||||||||
Financial markets infrastructure (clearinghouses) | 1,111 | 688 | 2,906 | 2,403 | ||||||||||||
Other | 7,885 | 3,621 | 7,878 | 3,616 | ||||||||||||
Total commercial credit exposure by industry | $ | 599,905 | $ | 600,800 | $ | 990,920 | $ | 981,167 | ||||||||
Net credit default protection purchased on total commitments (4) | $ | (2,197 | ) | $ | (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 $10.8 billion and $11.0 billion at September 30, 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 primary business activity of the borrowers or counterparties 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. |
41 Bank of America |
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 September 30, 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 $33 million and $43 million for the three and nine months ended September 30, 2018 compared to net losses of $10 million and $57 million for the same periods in 2017 on these positions. The gains and losses on these instruments were offset by gains and losses on the related exposures. The Value-at-Risk (VaR) results for these exposures are included in the fair value option portfolio information in Table 44. For more information, see Trading Risk Management on page 47.
Tables 38 and 39 present the maturity profiles and the credit exposure debt ratings of the net credit default protection portfolio at September 30, 2018 and December 31, 2017.
Table 38 | Net Credit Default Protection by Maturity | |||||
September 30 2018 | December 31 2017 | |||||
Less than or equal to one year | 33 | % | 42 | % | ||
Greater than one year and less than or equal to five years | 61 | 58 | ||||
Greater than five years | 6 | — | ||||
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) | September 30, 2018 | December 31, 2017 | ||||||||||||
Ratings (2, 3) | ||||||||||||||
A | $ | (546 | ) | 24.9 | % | $ | (280 | ) | 13.2 | % | ||||
BBB | (259 | ) | 11.8 | (459 | ) | 21.6 | ||||||||
BB | (794 | ) | 36.1 | (893 | ) | 41.9 | ||||||||
B | (373 | ) | 17.0 | (403 | ) | 18.9 | ||||||||
CCC and below | (198 | ) | 9.0 | (84 | ) | 3.9 | ||||||||
NR (4) | (27 | ) | 1.2 | (10 | ) | 0.5 | ||||||||
Total net credit default protection | $ | (2,197 | ) | 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 billions) | September 30, 2018 | |||||||
Purchased credit derivatives: | ||||||||
Credit default swaps | $ | 430.3 | $ | 2.2 | ||||
Total return swaps/options | 64.6 | 0.5 | ||||||
Total purchased credit derivatives | $ | 494.9 | $ | 2.7 | ||||
Written credit derivatives: | ||||||||
Credit default swaps | $ | 398.2 | n/a | |||||
Total return swaps/options | 62.5 | n/a | ||||||
Total written credit derivatives | $ | 460.7 | n/a | |||||
December 31, 2017 | ||||||||
Purchased credit derivatives: | ||||||||
Credit default swaps | $ | 470.9 | $ | 2.4 | ||||
Total return swaps/options | 54.1 | 0.3 | ||||||
Total purchased credit derivatives | $ | 525.0 | $ | 2.7 | ||||
Written credit derivatives: | ||||||||
Credit default swaps | $ | 448.2 | n/a | |||||
Total return swaps/options | 55.2 | n/a | ||||||
Total written credit derivatives | $ | 503.4 | n/a |
n/a = not applicable
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. For more information, see Note 3 – Derivatives to the Consolidated Financial Statements herein and Note 2 – Derivatives to the Consolidated Financial Statements of the Corporation’s 2017 Annual Report on Form 10-K.
Bank of America 42 |
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 41 presents our 20 largest non-U.S. country exposures at September 30, 2018. These exposures accounted for 90 percent and 86 percent of our total non-U.S. exposure at September 30, 2018 and December 31, 2017. Net country exposure for these 20 countries increased $45.5 billion in the nine months ended September 30, 2018, primarily driven by increased placements with central banks in the U.K., Japan and Germany.
Non-U.S. exposure is presented on an internal risk management basis and includes sovereign and non-sovereign credit exposure, securities and other investments issued by or domiciled in countries other than the U.S.
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 credit default swaps, 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 41 | 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 September 30 2018 | Hedges and Credit Default Protection | Net Country Exposure at September 30 2018 | Increase (Decrease) from December 31 2017 | ||||||||||||||||||||||||
United Kingdom | $ | 39,114 | $ | 15,034 | $ | 5,601 | $ | 1,111 | $ | 60,860 | $ | (3,757 | ) | $ | 57,103 | $ | 19,508 | |||||||||||||||
Germany | 26,417 | 6,278 | 2,428 | 789 | 35,912 | (3,499 | ) | 32,413 | 10,910 | |||||||||||||||||||||||
Japan | 17,109 | 2,280 | 1,397 | 2,781 | 23,567 | (1,418 | ) | 22,149 | 13,059 | |||||||||||||||||||||||
Canada | 7,515 | 6,944 | 1,669 | 2,682 | 18,810 | (462 | ) | 18,348 | (375 | ) | ||||||||||||||||||||||
France | 6,654 | 5,590 | 2,935 | 3,347 | 18,526 | (3,429 | ) | 15,097 | 4,554 | |||||||||||||||||||||||
China | 12,307 | 377 | 1,096 | 866 | 14,646 | (292 | ) | 14,354 | (1,571 | ) | ||||||||||||||||||||||
Netherlands | 7,220 | 2,044 | 817 | 1,306 | 11,387 | (922 | ) | 10,465 | 1,998 | |||||||||||||||||||||||
Australia | 5,188 | 3,524 | 589 | 1,550 | 10,851 | (612 | ) | 10,239 | (350 | ) | ||||||||||||||||||||||
Brazil | 6,779 | 811 | 326 | 2,323 | 10,239 | (391 | ) | 9,848 | (868 | ) | ||||||||||||||||||||||
India | 6,656 | 513 | 343 | 2,205 | 9,717 | (104 | ) | 9,613 | (884 | ) | ||||||||||||||||||||||
South Korea | 5,561 | 613 | 684 | 1,554 | 8,412 | (284 | ) | 8,128 | 227 | |||||||||||||||||||||||
Hong Kong | 6,144 | 216 | 475 | 1,289 | 8,124 | (34 | ) | 8,090 | (588 | ) | ||||||||||||||||||||||
Switzerland | 4,752 | 3,128 | 331 | 199 | 8,410 | (1,030 | ) | 7,380 | 1,583 | |||||||||||||||||||||||
Singapore | 3,305 | 142 | 602 | 1,739 | 5,788 | (71 | ) | 5,717 | (546 | ) | ||||||||||||||||||||||
Mexico | 3,349 | 1,450 | 99 | 684 | 5,582 | (151 | ) | 5,431 | (56 | ) | ||||||||||||||||||||||
Belgium | 3,444 | 1,029 | 124 | 407 | 5,004 | (509 | ) | 4,495 | 530 | |||||||||||||||||||||||
United Arab Emirates | 2,895 | 154 | 142 | 107 | 3,298 | (17 | ) | 3,281 | (106 | ) | ||||||||||||||||||||||
Spain | 2,470 | 990 | 144 | 860 | 4,464 | (1,379 | ) | 3,085 | (23 | ) | ||||||||||||||||||||||
Taiwan | 1,741 | 13 | 405 | 597 | 2,756 | — | 2,756 | 44 | ||||||||||||||||||||||||
Italy | 2,256 | 1,007 | 615 | 527 | 4,405 | (1,679 | ) | 2,726 | (1,520 | ) | ||||||||||||||||||||||
Total top 20 non-U.S. countries exposure | $ | 170,876 | $ | 52,137 | $ | 20,822 | $ | 26,923 | $ | 270,758 | $ | (20,040 | ) | $ | 250,718 | $ | 45,526 |
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 September 30, 2018 was China, with net exposure of $14.4 billion, concentrated in large state-owned companies, subsidiaries of multinational corporations and commercial banks.
The outlook for policy direction and therefore economic performance in the EU remains uncertain as a consequence of reduced political cohesion among EU countries. 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 September 30, 2018 was the U.K. with net exposure of $57.1 billion, a $19.5 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.
Markets have reacted negatively to the escalating tensions between the U.S. and several key trading partners. We are closely monitoring our exposures to tariff-sensitive industries and our international exposure, particularly to countries that account for a large percentage of U.S. trade.
43 Bank of America |
Provision for Credit Losses
The provision for credit losses decreased $118 million to $716 million, and $18 million to $2.4 billion for the three and nine months ended September 30, 2018 compared to the same periods in 2017. The provision for credit losses was $216 million and $462 million lower than net charge-offs for the three and nine months ended September 30, 2018, resulting in a decrease in the allowance for credit losses. This compared to a reduction of $66 million and $347 million in the allowance for credit losses for the three and nine months ended September 30, 2017.
The provision for credit losses for the consumer portfolio decreased $20 million to $710 million, and increased $107 million to $2.2 billion for the three and nine months ended September 30, 2018 compared to the same periods in 2017. The decrease in the three-month period was primarily driven by a lower reserve build in the U.S. credit card portfolio. The increase in the nine-month period was primarily driven by portfolio seasoning and loan growth in the U.S. credit card portfolio and a slower pace of improvement in the consumer real estate portfolio, partially offset by the sale of the non-U.S. consumer credit card business in the second quarter of 2017. Included in the provision is an expense of $53 million and $28 million related to the PCI loan portfolio for the three and nine months ended September 30, 2018 compared to an expense of $12 million and $56 million for the same periods in 2017.
The provision for credit losses for the commercial portfolio, including unfunded lending commitments, decreased $98 million to $6 million, and $125 million to $162 million for the three and nine months ended September 30, 2018 compared to the same periods in 2017. The decrease for both periods was primarily driven by improvement in asset quality in the commercial portfolio including energy exposures.
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 and nine months ended September 30, 2018, the factors that impacted the allowance for loan and lease losses included improvement 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 $860 million in the nine months ended September 30, 2018 as returns to performing status, paydowns, loan sales and charge-offs continued to outpace new nonaccrual loans. During the nine months ended September 30, 2018, the allowance for loan and lease losses in the commercial portfolio reflected decreased energy reserves primarily driven by improvement in energy exposures including reservable criticized utilized exposures.
The allowance for loan and lease losses for the consumer portfolio, as presented in Table 43, was $5.0 billion at September 30, 2018, a decrease of $403 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 43, was $4.8 billion at September 30, 2018, a decrease of $256 million from December 31, 2017 primarily driven by improvement in energy exposures. Commercial reservable criticized utilized exposure decreased to $11.6 billion at September 30, 2018 from $13.6 billion (to 2.26 percent from 2.65 percent of total commercial reservable utilized exposure) at December 31, 2017, driven by broad-based improvements including the energy sector. Nonperforming commercial loans decreased to $848 million at September 30, 2018 from $1.3 billion (to 0.18 percent from 0.27 percent of outstanding commercial loans excluding loans accounted for under the fair value option) at December 31, 2017. 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 1.05 percent at September 30, 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 $792 million at September 30, 2018 compared to $777 million at December 31, 2017.
Bank of America 44 |
Table 42 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 and nine months ended September 30, 2018 and 2017.
Table 42 | Allowance for Credit Losses | |||||||||||||||
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Allowance for loan and lease losses, beginning of period | $ | 10,050 | $ | 10,875 | $ | 10,393 | $ | 11,237 | ||||||||
Loans and leases charged off | ||||||||||||||||
Residential mortgage | (45 | ) | (51 | ) | (137 | ) | (157 | ) | ||||||||
Home equity | (110 | ) | (180 | ) | (329 | ) | (476 | ) | ||||||||
U.S. credit card | (826 | ) | (727 | ) | (2,515 | ) | (2,198 | ) | ||||||||
Non-U.S. credit card (1) | — | — | — | (103 | ) | |||||||||||
Direct/Indirect consumer | (120 | ) | (136 | ) | (376 | ) | (358 | ) | ||||||||
Other consumer | (46 | ) | (56 | ) | (140 | ) | (160 | ) | ||||||||
Total consumer charge-offs | (1,147 | ) | (1,150 | ) | (3,497 | ) | (3,452 | ) | ||||||||
U.S. commercial (2) | (161 | ) | (171 | ) | (437 | ) | (449 | ) | ||||||||
Non-U.S. commercial | (25 | ) | (34 | ) | (61 | ) | (100 | ) | ||||||||
Commercial real estate | (2 | ) | (4 | ) | (9 | ) | (12 | ) | ||||||||
Commercial lease financing | (1 | ) | (3 | ) | (6 | ) | (9 | ) | ||||||||
Total commercial charge-offs | (189 | ) | (212 | ) | (513 | ) | (570 | ) | ||||||||
Total loans and leases charged off | (1,336 | ) | (1,362 | ) | (4,010 | ) | (4,022 | ) | ||||||||
Recoveries of loans and leases previously charged off | ||||||||||||||||
Residential mortgage | 33 | 133 | 124 | 241 | ||||||||||||
Home equity | 130 | 97 | 316 | 279 | ||||||||||||
U.S. credit card | 128 | 115 | 377 | 340 | ||||||||||||
Non-U.S. credit card (1) | — | — | — | 28 | ||||||||||||
Direct/Indirect consumer | 78 | 68 | 234 | 209 | ||||||||||||
Other consumer | 2 | 6 | 10 | 46 | ||||||||||||
Total consumer recoveries | 371 | 419 | 1,061 | 1,143 | ||||||||||||
U.S. commercial (3) | 32 | 36 | 85 | 113 | ||||||||||||
Non-U.S. commercial | — | 1 | 13 | 6 | ||||||||||||
Commercial real estate | — | 2 | 6 | 9 | ||||||||||||
Commercial lease financing | 1 | 4 | 6 | 9 | ||||||||||||
Total commercial recoveries | 33 | 43 | 110 | 137 | ||||||||||||
Total recoveries of loans and leases previously charged off | 404 | 462 | 1,171 | 1,280 | ||||||||||||
Net charge-offs | (932 | ) | (900 | ) | (2,839 | ) | (2,742 | ) | ||||||||
Write-offs of PCI loans | (95 | ) | (73 | ) | (166 | ) | (161 | ) | ||||||||
Provision for loan and lease losses | 711 | 829 | 2,362 | 2,395 | ||||||||||||
Other (4) | — | (38 | ) | (16 | ) | (36 | ) | |||||||||
Allowance for loan and lease losses, September 30 | 9,734 | 10,693 | 9,734 | 10,693 | ||||||||||||
Reserve for unfunded lending commitments, beginning of period | 787 | 757 | 777 | 762 | ||||||||||||
Provision for unfunded lending commitments | 5 | 5 | 15 | — | ||||||||||||
Reserve for unfunded lending commitments, September 30 | 792 | 762 | 792 | 762 | ||||||||||||
Allowance for credit losses, September 30 | $ | 10,526 | $ | 11,455 | $ | 10,526 | $ | 11,455 |
(1) | Represents net charge-offs related to the non-U.S. credit card loan portfolio, which was sold in the second quarter of 2017. |
(2) | Includes U.S. small business commercial charge-offs of $72 million and $215 million for the three and nine months ended September 30, 2018 compared to $65 million and $193 million for the same periods in 2017. |
(3) | Includes U.S. small business commercial recoveries of $13 million and $35 million for the three and nine months ended September 30, 2018 compared to $10 million and $33 million for the same periods in 2017. |
(4) | Primarily represents the net impact of portfolio sales, consolidations and deconsolidations, foreign currency translation adjustments, transfers to held for sale and certain other reclassifications. |
45 Bank of America |
Table 42 | Allowance for Credit Losses (continued) | |||||||||||||||
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Loan and allowance ratios: | ||||||||||||||||
Loans and leases outstanding at September 30 (5) | $ | 924,070 | $ | 920,832 | $ | 924,070 | $ | 920,832 | ||||||||
Allowance for loan and lease losses as a percentage of total loans and leases outstanding at September 30 (5) | 1.05 | % | 1.16 | % | 1.05 | % | 1.16 | % | ||||||||
Consumer allowance for loan and lease losses as a percentage of total consumer loans and leases outstanding at September 30 (6) | 1.12 | 1.25 | 1.12 | 1.25 | ||||||||||||
Commercial allowance for loan and lease losses as a percentage of total commercial loans and leases outstanding at September 30 (7) | 0.99 | 1.08 | 0.99 | 1.08 | ||||||||||||
Average loans and leases outstanding (5) | $ | 925,091 | $ | 911,945 | $ | 926,664 | $ | 908,670 | ||||||||
Annualized net charge-offs as a percentage of average loans and leases outstanding (5, 8) | 0.40 | % | 0.39 | % | 0.41 | % | 0.40 | % | ||||||||
Annualized net charge-offs and PCI write-offs as a percentage of average loans and leases outstanding (5) | 0.44 | 0.42 | 0.43 | 0.43 | ||||||||||||
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases at September 30 (5) | 189 | 163 | 189 | 163 | ||||||||||||
Ratio of the allowance for loan and lease losses at September 30 to annualized net charge-offs (8) | 2.63 | 3.00 | 2.56 | 2.92 | ||||||||||||
Ratio of the allowance for loan and lease losses at September 30 to annualized net charge-offs and PCI write-offs | 2.39 | 2.77 | 2.42 | 2.76 | ||||||||||||
Amounts included in allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases at September 30 (9) | $ | 4,027 | $ | 3,880 | $ | 4,027 | $ | 3,880 | ||||||||
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 September 30 (5, 9) | 111 | % | 104 | % | 111 | % | 104 | % |
(5) | Outstanding loan and lease balances and ratios do not include loans accounted for under the fair value option of $5.7 billion and $6.3 billion at September 30, 2018 and 2017. Average loans accounted for under the fair value option were $5.6 billion and $5.8 billion for the three and nine months ended September 30, 2018 compared to $6.2 billion and $7.0 billion for the same periods in 2017. |
(6) | Excludes consumer loans accounted for under the fair value option of $755 million and $978 million at September 30, 2018 and 2017. |
(7) | Excludes commercial loans accounted for under the fair value option of $5.0 billion and $5.3 billion at September 30, 2018 and 2017. |
(8) | Net charge-offs exclude $95 million and $166 million of write-offs in the PCI loan portfolio for the three and nine months ended September 30, 2018 compared to $73 million and $161 million for the same periods in 2017. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 34. |
(9) | Primarily includes amounts allocated to U.S. credit card and unsecured consumer lending portfolios in Consumer Banking and PCI loans in All Other. |
For reporting purposes, we allocate the allowance for credit losses across products as presented in Table 43.
Table 43 | 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) | September 30, 2018 | December 31, 2017 | ||||||||||||||||||
Allowance for loan and lease losses | ||||||||||||||||||||
Residential mortgage | $ | 500 | 5.14 | % | 0.24 | % | $ | 701 | 6.74 | % | 0.34 | % | ||||||||
Home equity | 658 | 6.76 | 1.28 | 1,019 | 9.80 | 1.76 | ||||||||||||||
U.S. credit card | 3,530 | 36.26 | 3.72 | 3,368 | 32.41 | 3.50 | ||||||||||||||
Direct/Indirect consumer | 262 | 2.69 | 0.29 | 264 | 2.54 | 0.27 | ||||||||||||||
Other consumer | 30 | 0.31 | n/m | 31 | 0.30 | n/m | ||||||||||||||
Total consumer | 4,980 | 51.16 | 1.12 | 5,383 | 51.79 | 1.18 | ||||||||||||||
U.S. commercial (2) | 2,974 | 30.55 | 0.99 | 3,113 | 29.95 | 1.04 | ||||||||||||||
Non-U.S. commercial | 687 | 7.06 | 0.72 | 803 | 7.73 | 0.82 | ||||||||||||||
Commercial real estate | 946 | 9.72 | 1.56 | 935 | 9.00 | 1.60 | ||||||||||||||
Commercial lease financing | 147 | 1.51 | 0.68 | 159 | 1.53 | 0.72 | ||||||||||||||
Total commercial | 4,754 | 48.84 | 0.99 | 5,010 | 48.21 | 1.05 | ||||||||||||||
Allowance for loan and lease losses (3) | 9,734 | 100.00 | % | 1.05 | 10,393 | 100.00 | % | 1.12 | ||||||||||||
Reserve for unfunded lending commitments | 792 | 777 | ||||||||||||||||||
Allowance for credit losses | $ | 10,526 | $ | 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 $407 million and $567 million and home equity loans of $348 million and $361 million at September 30, 2018 and December 31, 2017. Commercial loans accounted for under the fair value option included U.S. commercial loans of $3.6 billion and $2.6 billion and non-U.S. commercial loans of $1.4 billion and $2.2 billion at September 30, 2018 and December 31, 2017. |
(2) | Includes allowance for loan and lease losses for U.S. small business commercial loans of $472 million and $439 million at September 30, 2018 and December 31, 2017. |
(3) | Includes $150 million and $289 million of valuation allowance presented with the allowance for loan and lease losses related to PCI loans at September 30, 2018 and December 31, 2017. |
n/m = not meaningful
Bank of America 46 |
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 Management in the MD&A of the Corporation’s 2017 Annual Report on Form 10-K.
Table 44 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 44 include market risk, excluding credit valuation adjustment (CVA), DVA and related hedges, to which we are exposed from all business segments. The majority of this portfolio is within the Global Markets segment. Table 44 presents period-end, average, high and low daily trading VaR for the three months ended September 30, 2018, June 30, 2018 and September 30, 2017, as well as average daily trading VaR for the nine months ended September 30, 2018 and 2017, using a 99 percent confidence level. The amounts disclosed in Table 44 and Table 45 align to the view of covered positions used in the Basel 3 capital calculations. Foreign exchange and commodity positions are always considered covered positions, regardless of trading or banking treatment for the trade, except for structural foreign currency positions that are excluded with prior regulatory approval.
The average total covered positions and less liquid trading positions portfolio VaR decreased for the three months ended September 30, 2018 compared to the same period in 2017 primarily due to an increase in portfolio diversification.
Table 44 | Market Risk VaR for Trading Activities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended | Nine Months Ended September 30 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2018 | June 30, 2018 | September 30, 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) | 2018 Average | 2017 Average | ||||||||||||||||||||||||||||||||||||||||||
Foreign exchange | $ | 3 | $ | 7 | $ | 12 | $ | 2 | $ | 8 | $ | 10 | $ | 15 | $ | 7 | $ | 6 | $ | 10 | $ | 15 | $ | 5 | $ | 8 | $ | 12 | ||||||||||||||||||||||||||||
Interest rate | 22 | 26 | 36 | 16 | 27 | 23 | 32 | 15 | 15 | 21 | 41 | 14 | 24 | 20 | ||||||||||||||||||||||||||||||||||||||||||
Credit | 24 | 24 | 30 | 20 | 30 | 25 | 30 | 20 | 24 | 25 | 29 | 23 | 25 | 25 | ||||||||||||||||||||||||||||||||||||||||||
Equity | 17 | 18 | 27 | 13 | 24 | 16 | 26 | 11 | 17 | 17 | 33 | 12 | 18 | 18 | ||||||||||||||||||||||||||||||||||||||||||
Commodities | 7 | 6 | 8 | 5 | 7 | 9 | 14 | 4 | 4 | 5 | 7 | 4 | 7 | 5 | ||||||||||||||||||||||||||||||||||||||||||
Portfolio diversification | (47 | ) | (52 | ) | — | — | (65 | ) | (55 | ) | — | — | (40 | ) | (44 | ) | — | — | (52 | ) | (45 | ) | ||||||||||||||||||||||||||||||||||
Total covered positions portfolio | 26 | 29 | 36 | 21 | 31 | 28 | 38 | 20 | 26 | 34 | 51 | 24 | 30 | 35 | ||||||||||||||||||||||||||||||||||||||||||
Impact from less liquid exposures | 2 | 2 | — | — | 2 | 2 | — | — | 3 | 7 | — | — | 4 | 6 | ||||||||||||||||||||||||||||||||||||||||||
Total covered positions and less liquid trading positions portfolio | 28 | 31 | 38 | 23 | 33 | 30 | 42 | 24 | 29 | 41 | 63 | 26 | 34 | 41 | ||||||||||||||||||||||||||||||||||||||||||
Fair value option loans | 10 | 13 | 15 | 10 | 12 | 13 | 18 | 8 | 10 | 10 | 12 | 9 | 12 | 11 | ||||||||||||||||||||||||||||||||||||||||||
Fair value option hedges | 6 | 9 | 11 | 6 | 8 | 11 | 17 | 5 | 8 | 8 | 9 | 6 | 9 | 6 | ||||||||||||||||||||||||||||||||||||||||||
Fair value option portfolio diversification | (8 | ) | (13 | ) | — | — | (12 | ) | (13 | ) | — | — | (11 | ) | (9 | ) | — | — | (11 | ) | (8 | ) | ||||||||||||||||||||||||||||||||||
Total fair value option portfolio | 8 | 9 | 11 | 8 | 8 | 11 | 16 | 5 | 7 | 9 | 10 | 7 | 10 | 9 | ||||||||||||||||||||||||||||||||||||||||||
Portfolio diversification | (6 | ) | (6 | ) | — | — | (5 | ) | (7 | ) | — | — | (4 | ) | (3 | ) | — | — | (6 | ) | (4 | ) | ||||||||||||||||||||||||||||||||||
Total market-based portfolio | $ | 30 | $ | 34 | 44 | 26 | $ | 36 | $ | 34 | 47 | 28 | $ | 32 | $ | 47 | 69 | 29 | $ | 38 | $ | 46 |
(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. |
47 Bank of America |
The graph below presents the daily covered positions and less liquid trading positions portfolio VaR for the previous five quarters, corresponding to the data in Table 44.

Additional VaR statistics produced within our single VaR model are provided in Table 45 at the same level of detail as in Table 44. 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 45 presents average trading VaR statistics at 99 percent and 95 percent confidence levels for the three months ended September 30, 2018, June 30, 2018 and September 30, 2017.
Table 45 | Average Market Risk VaR for Trading Activities – 99 percent and 95 percent VaR Statistics | ||||||||||||||||||||||||
Three Months Ended | |||||||||||||||||||||||||
September 30, 2018 | June 30, 2018 | September 30, 2017 | |||||||||||||||||||||||
(Dollars in millions) | 99 percent | 95 percent | 99 percent | 95 percent | 99 percent | 95 percent | |||||||||||||||||||
Foreign exchange | $ | 7 | $ | 4 | $ | 10 | $ | 6 | $ | 10 | $ | 6 | |||||||||||||
Interest rate | 26 | 16 | 23 | 14 | 21 | 14 | |||||||||||||||||||
Credit | 24 | 14 | 25 | 15 | 25 | 15 | |||||||||||||||||||
Equity | 18 | 10 | 16 | 9 | 17 | 9 | |||||||||||||||||||
Commodities | 6 | 3 | 9 | 5 | 5 | 3 | |||||||||||||||||||
Portfolio diversification | (52 | ) | (31 | ) | (55 | ) | (34 | ) | (44 | ) | (30 | ) | |||||||||||||
Total covered positions portfolio | 29 | 16 | 28 | 15 | 34 | 17 | |||||||||||||||||||
Impact from less liquid exposures | 2 | 1 | 2 | 2 | 7 | 2 | |||||||||||||||||||
Total covered positions and less liquid trading positions portfolio | 31 | 17 | 30 | 17 | 41 | 19 | |||||||||||||||||||
Fair value option loans | 13 | 7 | 13 | 7 | 10 | 6 | |||||||||||||||||||
Fair value option hedges | 9 | 6 | 11 | 8 | 8 | 6 | |||||||||||||||||||
Fair value option portfolio diversification | (13 | ) | (8 | ) | (13 | ) | (10 | ) | (9 | ) | (7 | ) | |||||||||||||
Total fair value option portfolio | 9 | 5 | 11 | 5 | 9 | 5 | |||||||||||||||||||
Portfolio diversification | (6 | ) | (4 | ) | (7 | ) | (3 | ) | (3 | ) | (3 | ) | |||||||||||||
Total market-based portfolio | $ | 34 | $ | 18 | $ | 34 | $ | 19 | $ | 47 | $ | 21 |
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 and nine months ended September 30, 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.
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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 September 30, 2018 compared to the three months ended June 30, 2018 and March 31, 2018. During the three months ended September 30, 2018, positive trading-related revenue was recorded for 100 percent of the trading days, of which 86 percent were daily trading gains of over $25 million. This compares to the three months ended June 30, 2018 where positive trading-related revenue was recorded for 98 percent of the trading days, of which 91 percent were daily trading gains of over $25 million. 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.

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.
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.
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Table 46 presents the spot and 12-month forward rates used in our baseline forecasts at September 30, 2018 and December 31, 2017.
Table 46 | Forward Rates | ||||||||
September 30, 2018 | |||||||||
Federal Funds | Three-month LIBOR | 10-Year Swap | |||||||
Spot rates | 2.25 | % | 2.40 | % | 3.12 | % | |||
12-month forward rates | 3.00 | 3.07 | 3.16 | ||||||
December 31, 2017 | |||||||||
Spot rates | 1.50 | % | 1.69 | % | 2.40 | % | |||
12-month forward rates | 2.00 | 2.14 | 2.48 |
Table 47 shows the pretax impact to forecasted net interest income over the next 12 months from September 30, 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 nine months ended September 30, 2018, the asset sensitivity of our balance sheet to rising rates has declined modestly primarily due to increases in long-end rates. 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 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 22.
Table 47 | Estimated Banking Book Net Interest Income Sensitivity to Curve Changes | |||||||||||||
Short Rate (bps) | Long Rate (bps) | |||||||||||||
September 30 2018 | December 31 2017 | |||||||||||||
(Dollars in millions) | ||||||||||||||
Parallel Shifts | ||||||||||||||
+100 bps instantaneous shift | +100 | +100 | $ | 2,927 | $ | 3,317 | ||||||||
-100 bps instantaneous shift | -100 | -100 | (4,256 | ) | (5,183 | ) | ||||||||
Flatteners | ||||||||||||||
Short-end instantaneous change | +100 | — | 2,316 | 2,182 | ||||||||||
Long-end instantaneous change | — | -100 | (1,421 | ) | (2,765 | ) | ||||||||
Steepeners | ||||||||||||||
Short-end instantaneous change | -100 | — | (2,798 | ) | (2,394 | ) | ||||||||
Long-end instantaneous change | — | +100 | 628 | 1,135 |
The sensitivity analysis in Table 47 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 47 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.
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 $1.7 billion and $1.3 billion, on a pretax basis, at September 30, 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 September 30, 2018, the pretax net losses are expected to be reclassified into earnings as follows: 21 percent within the next year, 63 percent in years two through five and nine percent in years six through 10, with the remaining seven 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 September 30, 2018.
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Table 48 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 September 30, 2018 and December 31, 2017. These amounts do not include derivative hedges on our MSRs.
Table 48 | Asset and Liability Management Interest Rate and Foreign Exchange Contracts | ||||||||||||||||||||||||||||||||||
September 30, 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) | $ < |