UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31 , 2020
or
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number:
Exact name of registrant as specified in its charter:
State or other jurisdiction of incorporation or organization:
IRS Employer Identification No.:
Address of principal executive offices:
Bank of America Corporate Center
Registrant’s telephone number, including area code:
(704 ) 386-5681
Securities registered pursuant to section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| of Floating Rate Non-Cumulative Preferred Stock, Series E | ||||||||
| of 6.000% Non-Cumulative Preferred Stock, Series EE | ||||||||
| of 6.000% Non-Cumulative Preferred Stock, Series GG | ||||||||
| of 5.875% Non-Cumulative Preferred Stock, Series HH | ||||||||
| of Bank of America Corporation Floating Rate | ||||||||
| Non-Cumulative Preferred Stock, Series 1 | ||||||||
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| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| of Bank of America Corporation Floating Rate | ||||||||
| Non-Cumulative Preferred Stock, Series 2 | ||||||||
| of Bank of America Corporation Floating Rate | ||||||||
| Non-Cumulative Preferred Stock, Series 4 | ||||||||
| of Bank of America Corporation Floating Rate | ||||||||
| Non-Cumulative Preferred Stock, Series 5 | ||||||||
| Trust XIII (and the guarantee related thereto) | ||||||||
| of BAC Capital Trust XIV (and the guarantee related thereto) | ||||||||
| Bank of America Corporation | ||||||||
| November 28, 2031 of BofA Finance LLC (and the guarantee | ||||||||
| of the Registrant with respect thereto) | ||||||||
| of 5.375% Non-Cumulative Preferred Stock, Series KK | ||||||||
| of 5.000% Non-Cumulative Preferred Stock, Series LL | ||||||||
| of 4.375% Non-Cumulative Preferred Stock, Series NN | ||||||||
| of 4.125% Non-Cumulative Preferred Stock, Series PP | ||||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
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 ☐
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 ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
| ☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | |||||||||||||||||||||||||||
Emerging growth company ☐
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. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
As of June 30, 2020, the aggregate market value of the registrant’s common stock (“Common Stock”) held by non-affiliates was approximately $205,771,938,594 . At February 23, 2021, there were 8,633,185,862 shares of Common Stock outstanding.
Documents incorporated by reference: Portions of the definitive proxy statement relating to the registrant’s 2021 annual meeting of stockholders are incorporated by reference in this Form 10-K in response to Items 10, 11, 12, 13 and 14 of Part III.
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Table of Contents
Bank of America Corporation and Subsidiaries
| Page | ||||||||
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Part I
Bank of America Corporation and Subsidiaries
Item 1. Business
Bank of America Corporation is a Delaware corporation, a bank holding company (BHC) and a financial holding company. When used in this report, “the Corporation,” “we,” “us” and “our” 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. As part of our efforts to streamline the Corporation’s organizational structure and reduce complexity and costs, the Corporation has reduced and intends to continue to reduce the number of its corporate subsidiaries, including through intercompany mergers.
Bank of America is one of the world’s largest financial institutions, serving individual consumers, small- and middle-market businesses, institutional investors, large corporations and governments with a full range of banking, investing, asset management and other financial and risk management products and services. Our principal executive offices are located in the Bank of America Corporate Center, 100 North Tryon Street, Charlotte, North Carolina 28255.
Bank of America’s website is www.bankofamerica.com, and the Investor Relations portion of our website is http://investor.bankofamerica.com. We use our website to distribute company information, including as a means of disclosing material, non-public information and for complying with our disclosure obligations under Regulation FD. We routinely post and make accessible financial and other information, including environmental, social and governance (ESG) information, regarding the Corporation on our website. Investors should monitor the Investor Relations portion of our website, in addition to our press releases, U.S. Securities and Exchange Commission (SEC) filings, public conference calls and webcasts. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) are available on the Investor Relations portion of our website as soon as reasonably practicable after we electronically file such reports with, or furnish them to, the SEC and at the SEC’s website, www.sec.gov. Notwithstanding the foregoing, the information contained on our website as referenced in this paragraph is not incorporated by reference into this Annual Report on Form 10-K. Also, we make available on the Investor Relations portion of our website: (i) our Code of Conduct; (ii) our Corporate Governance Guidelines; and (iii) the charter of each active committee of our Board of Directors (the Board). We also intend to disclose any amendments to our Code of Conduct and waivers of our Code of Conduct required to be disclosed by the rules of the SEC and the New York Stock Exchange on the Investor Relations portion of our website. All of these corporate governance materials are also available free of charge in print to shareholders who request them in writing to: Bank of America Corporation, Attention: Office of the Corporate Secretary, Bank of America Corporate Center, 100 North Tryon Street, NC1-007-56-06, Charlotte, North Carolina 28255.
Coronavirus Disease
The Corporation has been, and continues to be, impacted by the Coronavirus Disease 2019 (COVID-19) pandemic (the pandemic). In an attempt to contain the spread and impact of the pandemic, travel bans and restrictions, quarantines, shelter-in-place orders and other limitations on business activity have
been implemented. Additionally, there has been a decline in global economic activity, reduced U.S. and global economic output and a deterioration in macroeconomic conditions in the U.S. and globally. This has resulted in, among other things, higher rates of unemployment and underemployment and caused volatility and disruptions in the global financial markets during 2020, including the energy and commodity markets.
In response to the pandemic, the Corporation has been taking a proactive role in addressing the impact of the pandemic on its employees, its operations, its clients and the community, including the implementation of protocols and processes to execute its business continuity plans and help protect its employees and support its clients. The Corporation is managing its response to the pandemic according to its Enterprise Response Framework, which invokes centralized management of the crisis event and the integration of the Corporation’s enterprise-wide response.
Although some restrictive measures have been eased in certain areas, many restrictive measures remain in place or have been reinstated, and in some cases additional restrictive measures are being or may need to be implemented in light of the increase in COVID-19 cases in recent months in the U.S. and in many other regions of the world. Businesses, market participants, our counterparties and clients, and the U.S. and global economies have been negatively impacted and are likely to remain so for an extended period of time, as there remains significant uncertainty about the magnitude and duration of the pandemic and the timing and strength of an economic recovery. For more information regarding COVID-19, see Item 1A. Risk Factors – Coronavirus Disease on page 7 and Executive Summary – Recent Developments – COVID-19 Pandemic in the MD&A on page 25.
Segments
Through our various bank and 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. Additional information related to our business segments and the products and services they provide is included in the information set forth on pages 36 through 46 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and Note 23 – Business Segment Information to the Consolidated Financial Statements.
Competition
We operate in a highly competitive environment. Our competitors include banks, thrifts, credit unions, investment banking firms, investment advisory firms, brokerage firms, investment companies, insurance companies, mortgage banking companies, credit card issuers, mutual fund companies, hedge funds, private equity firms, and e-commerce and other internet-based companies. We compete with some of these competitors globally and with others on a regional or product specific basis.
Competition is based on a number of factors including, among others, customer service, quality and range of products and services offered, price, reputation, interest rates on loans and deposits, lending limits and customer convenience. Our ability to continue to compete effectively also depends in large part on our ability to attract new employees and retain and
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motivate our existing employees, while managing compensation and other costs.
Human Capital Resources
We strive to make Bank of America a great place to work for our employees. We value our employees and seek to establish and maintain human resource policies that are consistent with our core values and that help realize the power of our people. Our Board and its committees, including the Compensation and Human Capital, Audit, Enterprise Risk, and Corporate Governance, ESG and Sustainability Committees, provide oversight of our human capital management strategies, programs and practices. The Corporation’s senior management provides regular briefings on human capital matters to the Board and its Committees to facilitate the Board’s oversight.
At December 31, 2020 and 2019, the Corporation employed approximately 213,000 and 208,000 employees, of which 82 percent were located in the U.S. at both dates. None of our U.S. employees are subject to a collective bargaining agreement. Additionally, in 2020 and 2019, the Corporation’s compensation and benefits expense was $32.7 billion and $32.0 billion, or 59 percent and 58 percent, of total noninterest expense.
Diversity and Inclusion
The Corporation’s commitment to diversity and inclusion starts at the top of the Corporation with oversight from our Board and CEO. The Corporation’s senior management sets the diversity and inclusion goals of the Corporation, and the Chief Human Resources Officer and Chief Diversity & Inclusion Officer partner with our CEO and senior management to drive our diversity and inclusion strategy, programs, initiatives and policies. The Global Diversity and Inclusion Council, which consists of senior executives from every line of business and is chaired by our CEO, has been in place for over 20 years. The Council sponsors and supports business, operating unit and regional diversity and inclusion councils to ensure alignment to enterprise diversity strategies and goals.
Our practices and policies have resulted in strong representation across the Corporation where our broad employee population mirrors the clients and communities we serve. We have a Board and senior management team that are 47 percent and 50 percent racially, ethnically and gender diverse. As of December 31, 2020, over 50 percent of employees were women, and, among U.S.-based employees, nearly 48 percent were people of color, 14 percent were Black/African American and 19 percent were Hispanic/Latino. As of December 31, 2020, the Corporation’s top three management levels in relation to the CEO were composed of more than 42 percent women and nearly 20 percent people of color. These workforce diversity metrics are reported regularly to the senior management team and to the Board and are publicly disclosed on our website.
We invest in our leadership by offering a range of development programs and resources that allow employees to develop and progress in their careers. We reinforce our commitment to diversity and inclusion by investing internally in our employee networks and by facilitating conversations with employees about racial, social and economic issues. Further, we partner with various external organizations, which focus on advancing diverse talent. We also have practices in place for attracting and retaining diverse talent, including campus recruitment. For example, in 2020, approximately 45 percent of our campus hires were women, and, in the U.S., approximately 54 percent were people of color.
Employee Engagement and Talent Retention
As part of our ongoing efforts to make the Corporation a great place to work, we have conducted a confidential annual Employee Engagement Survey (Survey) for nearly two decades. The Survey results are reviewed by the Board and senior management and used to assist in reviewing the Corporation’s human capital strategies, programs and practices. In 2020, more than 90 percent of the Corporation’s employees participated in the Survey, and our Employee Engagement Index, an overall measure of employee satisfaction with the Corporation, was 91 percent. In 2020, we also had historically low turnover among our employees of seven percent.
Fair and Equitable Compensation
The Corporation is committed to racial and gender pay equity by striving to fairly and equitably compensate all of our employees. We maintain robust policies and practices that reinforce our commitment, including reviews with oversight from our Board and senior management. In 2020, our review covered our regional hubs (U.S., U.K., France, Ireland, Hong Kong, and Singapore) and India and showed that compensation received by women, on average, was greater than 99 percent of that received by men in comparable positions and, in the U.S., compensation received by people of color was, on average, greater than 99 percent of that received by teammates who are not people of color in comparable positions.
We also strive to pay our employees fairly based on market rates for their roles, experience and how they perform, and we regularly benchmark against other companies both within and outside our industry to help ensure our pay is competitive. In the first quarter of 2020, we raised our minimum hourly wage for U.S. employees to $20 per hour, which is above all governmental minimum wage levels in all jurisdictions in which we operate in the U.S.
Health and Wellness – 2020 Focus
The Corporation also is committed to supporting employees’ physical, emotional and financial wellness by offering flexible and competitive benefits, including comprehensive health and insurance benefits and wellness resources. In 2020, we took steps to support our employees during the ongoing health crisis resulting from the pandemic, including monitoring guidance from the U.S. Centers for Disease Control and Prevention, medical boards and health authorities and sharing such guidance with our employees. In addition, as a result of the pandemic we transitioned to a work-from-home posture for the substantial majority of our employees and provided various benefits and resources related to the pandemic, including the implementation of child and adult care solutions, offering no-cost COVID-19 testing and mental health resources and additional support for teammates who work in the office, such as transportation and meal subsidies. We continue to engage with state and national governments to understand their vaccination plans for essential workers, including the extent to which that may include some of our employees, and with our employees to educate them about vaccines and the importance of being vaccinated. For more information on our response to the pandemic, including with respect to human capital measures, see Executive Summary – Recent Developments – COVID-19 Pandemic on page 25.
Government Supervision and Regulation
The following discussion describes, among other things, elements of an extensive regulatory framework applicable to BHCs, financial holding companies, banks and broker-dealers, including specific information about Bank of America.
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We are subject to an extensive regulatory framework applicable to BHCs, financial holding companies and banks and other financial services entities. U.S. federal regulation of banks, BHCs and financial holding companies is intended primarily for the protection of depositors and the Deposit Insurance Fund (DIF) rather than for the protection of shareholders and creditors.
As a registered financial holding company and BHC, the Corporation is subject to the supervision of, and regular inspection by, the Board of Governors of the Federal Reserve System (Federal Reserve). Our U.S. bank subsidiaries (the Banks), organized as national banking associations, are subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve. In addition, the Federal Reserve and the OCC have adopted guidelines that establish minimum standards for the design, implementation and board oversight of BHCs’ and national banks’ risk governance frameworks. U.S. financial holding companies, and the companies under their control, are permitted to engage in activities considered “financial in nature” as defined by the Gramm-Leach-Bliley Act and related Federal Reserve interpretations. The Corporation's status as a financial holding company is conditioned upon maintaining certain eligibility requirements for both the Corporation and its U.S. depository institution subsidiaries, including minimum capital ratios, supervisory ratings and, in the case of the depository institutions, at least satisfactory Community Reinvestment Act ratings. Failure to be an eligible financial holding company could result in the Federal Reserve limiting Bank of America's activities, including potential acquisitions.
The scope of the laws and regulations and the intensity of the supervision to which we are subject have increased over the past several years, beginning with the response to the financial crisis, as well as other factors such as technological and market changes. In addition, the banking and financial services sector is subject to substantial regulatory enforcement and fines. Many of these changes have occurred as a result of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the Financial Reform Act). We cannot assess whether there will be any additional major changes in the regulatory environment and expect that our business will remain subject to continuing and extensive regulation and supervision.
We are also subject to various other laws and regulations, as well as supervision and examination by other regulatory agencies, all of which directly or indirectly affect our entities and management and our ability to make distributions to shareholders. For instance, our broker-dealer subsidiaries are subject to both U.S. and international regulation, including supervision by the SEC, Financial Industry Regulatory Authority and New York Stock Exchange, among others; our futures commission merchant subsidiaries supporting commodities and derivatives businesses in the U.S. are subject to regulation by and supervision of the U.S. Commodity Futures Trading Commission (CFTC), National Futures Association, the Chicago Mercantile Exchange and in the case of the Banks, certain banking regulators; our insurance activities are subject to licensing and regulation by state insurance regulatory agencies; and our consumer financial products and services are regulated by the Consumer Financial Protection Bureau (CFPB).
Our non-U.S. businesses are also subject to extensive regulation by various non-U.S. regulators, including governments, securities exchanges, prudential regulators, central banks and other regulatory bodies, in the jurisdictions in which those businesses operate. For example, our financial
services entities in the United Kingdom (U.K.), Ireland and France are subject to regulation by the Prudential Regulatory Authority and Financial Conduct Authority, the European Central Bank and Central Bank of Ireland, and the Autorité de Contrôle Prudentiel et de Résolution and Autorité des Marchés Financiers, respectively.
Source of Strength
Under the Financial Reform Act and Federal Reserve policy, BHCs are expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each such subsidiary. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), in the event of a loss suffered or anticipated by the FDIC, either as a result of default of a bank subsidiary or related to FDIC assistance provided to such a subsidiary in danger of default, the affiliate banks of such a subsidiary may be assessed for the FDIC’s loss, subject to certain exceptions.
Transactions with Affiliates
Pursuant to Section 23A and 23B of the Federal Reserve Act, as implemented by the Federal Reserve’s Regulation W, the Banks are subject to restrictions that limit certain types of transactions between the Banks and their nonbank affiliates. In general, U.S. banks are subject to quantitative and qualitative limits on extensions of credit, purchases of assets and certain other transactions involving their nonbank affiliates. Additionally, transactions between U.S. banks and their nonbank affiliates are required to be on arm’s length terms and must be consistent with standards of safety and soundness.
Deposit Insurance
Deposits placed at U.S. domiciled banks are insured by the FDIC, subject to limits and conditions of applicable law and the FDIC’s regulations. Pursuant to the Financial Reform Act, FDIC insurance coverage limits are $250,000 per customer. All insured depository institutions are required to pay assessments to the FDIC in order to fund the DIF.
The FDIC is required to maintain at least a designated minimum ratio of the DIF to insured deposits in the U.S. The FDIC adopted regulations that establish a long-term target DIF ratio of greater than two percent. As of the date of this report, the DIF ratio is below this required target, and the FDIC has adopted a restoration plan that may result in increased deposit insurance assessments. Deposit insurance assessment rates are subject to change by the FDIC and will be impacted by the overall economy and the stability of the banking industry as a whole. For more information regarding deposit insurance, see Item 1A. Risk Factors – Regulatory, Compliance and Legal on page 16.
Capital, Liquidity and Operational Requirements
As a financial holding company, we and our bank subsidiaries are subject to the regulatory capital and liquidity rules issued by the Federal Reserve and other U.S. banking regulators, including the OCC and the FDIC. These rules are complex and are evolving as U.S. and international regulatory authorities propose and enact amendments to these rules. The Corporation seeks to manage its capital position to maintain sufficient capital to satisfy these regulatory rules and to support our business activities. These continually evolving rules are likely to influence our planning processes and may require additional regulatory capital and liquidity, as well as impose additional operational and compliance costs on the Corporation.
For more information on regulatory capital rules, capital composition and pending or proposed regulatory capital
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changes, see Capital Management on page 50, and Note 16 – Regulatory Requirements and Restrictions to the Consolidated Financial Statements, which are incorporated by reference in this Item 1.
Distributions
We are subject to various regulatory policies and requirements relating to capital actions, including payment of dividends and common stock repurchases. For instance, Federal Reserve regulations require major U.S. BHCs to submit a capital plan as part of an annual Comprehensive Capital Analysis and Review (CCAR).
Our ability to pay dividends and make common stock repurchases depends in part on our ability to maintain regulatory capital levels above minimum requirements plus buffers and non-capital standards established under the FDICIA. To the extent that the Federal Reserve increases our stress capital buffer (SCB), global systemically important bank (G-SIB) surcharge or countercyclical capital buffer, our returns of capital to shareholders could decrease. As part of its CCAR, the Federal Reserve conducts stress testing on parts of our business using hypothetical economic scenarios prepared by the Federal Reserve. Those scenarios may affect our CCAR stress test results, which may impact the level of our SCB. Additionally, the Federal Reserve may impose limitations or prohibitions on taking capital actions such as paying or increasing common stock dividends or repurchasing common stock. For example, as a result of the economic uncertainty resulting from the pandemic, the Federal Reserve required that during the second half of 2020, all large banks, including the Corporation, suspend share repurchase programs, except for repurchases to offset shares awarded under equity-based compensation plans, and limit common stock dividends to existing rates that did not exceed the average of the last four quarters' net income. In the first quarter of 2021, the Federal Reserve lifted the suspension of share repurchase programs and permitted large banks to pay common stock dividends and to repurchase shares in an amount that, when combined with dividends paid, does not exceed the average of net income over the last four quarters.
If the Federal Reserve finds that any of our Banks are not “well-capitalized” or “well-managed,” we would be required to enter into an agreement with the Federal Reserve to comply with all applicable capital and management requirements, which may contain additional limitations or conditions relating to our activities. Additionally, the applicable federal regulatory authority is authorized to determine, under certain circumstances relating to the financial condition of a bank or BHC, that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof.
For more information regarding the requirements relating to the payment of dividends, including the minimum capital requirements, see Note 13 – Shareholders’ Equity and Note 16 – Regulatory Requirements and Restrictions to the Consolidated Financial Statements.
Many of our subsidiaries, including our bank and broker-dealer subsidiaries, are subject to laws that restrict dividend payments, or authorize regulatory bodies to block or reduce the flow of funds from those subsidiaries to the parent company or other subsidiaries. The rights of the Corporation, our shareholders and our creditors to participate in any distribution of the assets or earnings of our subsidiaries is further subject to the prior claims of creditors of the respective subsidiaries.
Resolution Planning
As a BHC with greater than $250 billion of assets, the Corporation is required by the Federal Reserve and the FDIC to periodically submit a plan for a rapid and orderly resolution in the event of material financial distress or failure.
Such resolution plan is intended to be a detailed roadmap for the orderly resolution of the BHC, including the continued operations or solvent wind down of its material entities, pursuant to the U.S. Bankruptcy Code under one or more hypothetical scenarios assuming no extraordinary government assistance.
If both the Federal Reserve and the FDIC determine that the BHC’s plan is not credible, the Federal Reserve and the FDIC may jointly impose more stringent capital, leverage or liquidity requirements or restrictions on growth, activities or operations. A summary of our plan is available on the Federal Reserve and FDIC websites.
The FDIC also requires the submission of a resolution plan for Bank of America, National Association (BANA), which must describe how the insured depository institution would be resolved under the bank resolution provisions of the Federal Deposit Insurance Act. A description of this plan is available on the FDIC’s website.
We continue to make substantial progress to enhance our resolvability, including simplifying our legal entity structure and business operations, and increasing our preparedness to implement our resolution plan, both from a financial and operational standpoint.
Across international jurisdictions, resolution planning is the responsibility of national resolution authorities (RA). Among those, the jurisdictions of most impact to the Corporation are the requirements associated with subsidiaries in the U.K., Ireland and France, where rules have been issued requiring the submission of significant information about locally-incorporated subsidiaries (including information on intra-group dependencies, legal entity separation and barriers to resolution) as well as the Corporation’s banking branches located in those jurisdictions that are deemed to be material for resolution planning purposes. As a result of the RA's review of the submitted information, we could be required to take certain actions over the next several years that could increase operating costs and potentially result in the restructuring of certain businesses and subsidiaries.
For more information regarding our resolution plan, see Item 1A. Risk Factors – Liquidity on page 9.
Insolvency and the Orderly Liquidation Authority
Under the Federal Deposit Insurance Act, the FDIC may be appointed receiver of an insured depository institution if it is insolvent or in certain other circumstances. In addition, under the Financial Reform Act, when a systemically important financial institution (SIFI) such as the Corporation is in default or danger of default, the FDIC may be appointed receiver in order to conduct an orderly liquidation of such institution. In the event of such appointment, the FDIC could, among other things, invoke the orderly liquidation authority, instead of the U.S. Bankruptcy Code, if the Secretary of the Treasury makes certain financial distress and systemic risk determinations. The orderly liquidation authority is modeled in part on the Federal Deposit Insurance Act, but also adopts certain concepts from the U.S. Bankruptcy Code.
The orderly liquidation authority contains certain differences from the U.S. Bankruptcy Code. For example, in certain circumstances, the FDIC could permit payment of obligations it determines to be systemically significant (e.g., short-term
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creditors or operating creditors) in lieu of paying other obligations (e.g., long-term creditors) without the need to obtain creditors’ consent or prior court review. The insolvency and resolution process could also lead to a large reduction or total elimination of the value of a BHC’s outstanding equity, as well as impairment or elimination of certain debt.
Under the FDIC’s “single point of entry” strategy for resolving SIFIs, the FDIC could replace a distressed BHC with a bridge holding company, which could continue operations and result in an orderly resolution of the underlying bank, but whose equity is held solely for the benefit of creditors of the original BHC.
Furthermore, the Federal Reserve requires that BHCs maintain minimum levels of long-term debt required to provide adequate loss absorbing capacity in the event of a resolution.
For more information regarding our resolution, see Item 1A. Risk Factors – Liquidity on page 9.
Limitations on Acquisitions
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 permits a BHC to acquire banks located in states other than its home state without regard to state law, subject to certain conditions, including the condition that the BHC, after and as a result of the acquisition, controls no more than 10 percent of the total amount of deposits of insured depository institutions in the U.S. and no more than 30 percent or such lesser or greater amount set by state law of such deposits in that state. At June 30, 2020, we held greater than 10 percent of the total amount of deposits of insured depository institutions in the U.S.
In addition, the Financial Reform Act restricts acquisitions by a financial institution if, as a result of the acquisition, the total liabilities of the financial institution would exceed 10 percent of the total liabilities of all financial institutions in the U.S. At June 30, 2020, our liabilities did not exceed 10 percent of the total liabilities of all financial institutions in the U.S.
The Volcker Rule
The Volcker Rule prohibits insured depository institutions and companies affiliated with insured depository institutions (collectively, banking entities) from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options for their own account. The Volcker Rule also imposes limits on banking entities’ investments in, and other relationships with, hedge funds and private equity funds. The Volcker Rule provides exemptions for certain activities, including market making, underwriting, hedging, trading in government obligations, insurance company activities and organizing and offering hedge funds and private equity funds. The Volcker Rule also clarifies that certain activities are not prohibited, including acting as agent, broker or custodian. A banking entity with significant trading operations, such as the Corporation, is required to maintain a detailed compliance program to comply with the restrictions of the Volcker Rule.
Derivatives
Our derivatives operations are subject to extensive regulation globally. These operations are subject to regulation under the Financial Reform Act, the European Union (EU) Markets in Financial Instruments Directive and Regulation, the European Market Infrastructure Regulation, analogous U.K. regulatory regimes and similar regulatory regimes in other jurisdictions, that regulate or will regulate the derivatives markets in which we operate by, among other things: requiring clearing and exchange trading of certain derivatives; imposing new capital, margin, reporting, registration and business conduct requirements for certain market participants; imposing position limits on certain
over-the-counter (OTC) derivatives; and imposing derivatives trading transparency requirements. Regulations of derivatives are already in effect in many markets in which we operate.
In addition, many G-20 jurisdictions, including the U.S., U.K., Germany and Japan, have adopted resolution stay regulations to address concerns that the close-out of derivatives and other financial contracts in resolution could impede orderly resolution of G-SIBs, and additional jurisdictions are expected to follow suit. Generally, these resolution stay regulations require amendment of certain financial contracts to provide for contractual recognition of stays of termination rights under various statutory resolution regimes and a stay on the exercise of cross-default rights based on an affiliate’s entry into insolvency proceedings. As resolution stay regulations of a particular jurisdiction applicable to us go into effect, we amend impacted financial contracts in compliance with such regulations either as a regulated entity or as a counterparty facing a regulated entity in such jurisdiction.
Consumer Regulations
Our consumer businesses are subject to extensive regulation and oversight by federal and state regulators. Certain federal consumer finance laws to which we are subject, including the Equal Credit Opportunity Act, Home Mortgage Disclosure Act, Electronic Fund Transfer Act, Fair Credit Reporting Act, Real Estate Settlement Procedures Act, Truth in Lending Act and Truth in Savings Act, are enforced by the CFPB. Other federal consumer finance laws, such as the Servicemembers Civil Relief Act, are enforced by the OCC.
Privacy and Information Security
We are subject to many U.S. federal, state and international laws and regulations governing requirements for maintaining policies and procedures regarding the disclosure, use and protection of the non-public confidential information of our customers and employees. The Gramm-Leach-Bliley Act requires us to periodically disclose Bank of America’s privacy policies and practices relating to sharing such information and enables retail customers to opt out of our ability to share information with unaffiliated third parties, under certain circumstances. The Gramm-Leach-Bliley Act and other laws also require us to implement a comprehensive information security program that includes administrative, technical and physical safeguards to provide the security and confidentiality of customer records and information. Security and privacy policies and procedures for the protection of personal and confidential information are in effect across all businesses and geographic locations.
Other laws and regulations, at the international, federal and state level, impact our ability to share certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes, or contact customers with marketing offers and establish certain rights of consumers in connection with their personal information. For example, California’s Consumer Privacy Act (CCPA), which went into effect in January 2020, as modified by the California Privacy Rights Act (CPRA), provides consumers with the right to know what personal data is being collected, know whether their personal data is sold or disclosed and to whom and opt out of the sale of their personal data, among other rights. In addition, in the EU, the General Data Protection Regulation (GDPR) replaced the Data Protection Directive and related implementing national laws in its member states. The CCPA's, CPRA's and GDPR’s impact on the Corporation was assessed and addressed through comprehensive compliance implementation programs. These existing and evolving legal requirements in the U.S. and abroad,
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as well as court proceedings and changing guidance from regulatory bodies with respect to the validity of cross-border data transfer mechanisms from the EU, continue to lend uncertainty to privacy compliance globally.
Item 1A. Risk Factors
The discussion below addresses the material factors of which we are currently aware that could affect our businesses, results of operations and financial condition. However, other factors not currently known to us or that we currently deem immaterial could also adversely affect our businesses, results of operations and financial condition. Therefore, the risk factors below should not be considered all of the potential risks that we may face. For more information on how we manage risks, see Managing Risk in the MD&A on page 47. For more information about the risks contained in the Risk Factors section, see Item 1. Business on page 2, MD&A on page 24 and Notes to Consolidated Financial Statements on page 101.
Coronavirus Disease
The effects of the pandemic have adversely affected, and are expected to continue to adversely affect, our businesses and results of operations, and its duration and future impacts on the economy and our businesses, results of operations and financial condition remain uncertain.
The negative economic conditions arising from the pandemic negatively impacted our financial results during 2020 in various respects, including contributing to increases in our allowance and provision for credit losses and noninterest expense. These negative economic conditions may have a continued adverse effect on our businesses and results of operations, which could include: decreased demand for and use of our products and services; protracted periods of historically low interest rates; lower fees, including asset management fees; lower sales and trading revenue due to decreased market liquidity resulting from heightened volatility; higher levels of uncollectible reversed charges in our merchant services business; increased noninterest expense, including operational losses; and increased credit losses due to our customers' and clients' inability to fulfill contractual obligations and deterioration in the financial condition of our consumer and commercial borrowers, which may vary by region, sector or industry, that may increase our provision for credit losses and net charge-offs. Our provision for credit losses and net charge-offs may also continue to be impacted by volatility in the energy and commodity markets. Additionally, our liquidity and/or regulatory capital could be adversely impacted by customers’ withdrawal of deposits, volatility and disruptions in the capital and credit markets, volatility in foreign exchange rates and customer draws on lines of credit. Continued adverse macroeconomic conditions could also result in potential downgrades to our credit ratings, negative impacts to regulatory capital and liquidity and further restrictions on dividends and/or common stock repurchases.
If we become unable to operate our businesses from remote locations including, for example, because of an internal or external failure of our information technology infrastructure, we experience increased rates of employee illness or unavailability, or governmental restrictions are placed on our employees or operations, this could adversely affect our business continuity status and result in disruption to our businesses. Additionally, we rely on third parties who could experience adverse effects on their business continuity and business interruptions, which could increase our risks and adversely impact our businesses.
There can be no assurance that current or future governmental fiscal and monetary relief programs will stimulate
the global economy or avert negative economic or market conditions. Our participation in such programs could result in reputational harm and government actions and proceedings, and has resulted in, and may continue to result in, litigation, including class actions. Such actions may result in judgments, settlements, penalties, and fines. Our participation in such programs has also resulted and may continue to result in operational losses, including from the Paycheck Protection Program (PPP) and processing unemployment insurance.
We continue to closely monitor the pandemic and related risks as they evolve globally and in the U.S. The magnitude and duration of the pandemic and its future direct and indirect effects on the global economy and our businesses, results of operations and financial condition are highly uncertain and depend on future developments that cannot be predicted, including the likelihood of further surges of COVID-19 cases and the spread of more easily communicable variants of COVID-19, the timing and availability of effective medical treatments and vaccines, future actions taken by governmental authorities, including additional stimulus legislation, and/or other third parties in response to the pandemic. The pandemic may cause prolonged global or national negative economic conditions or longer lasting effects on economic conditions than currently exist, which could have a material adverse effect on our businesses, results of operations and financial condition.
Market
Our business and results of operations may be adversely affected by the financial markets, fiscal, monetary, and regulatory policies, and economic conditions generally.
General economic, political, social and health conditions in the U.S. and in one or more countries abroad affect markets in the U.S. and abroad and our business. In particular, markets in the U.S. or abroad may be affected by the level and volatility of interest rates, availability and market conditions of financing, unexpected changes in gross domestic product (GDP), economic growth or its sustainability, inflation, consumer spending, employment levels, wage stagnation, federal government shutdowns, developments related to the federal debt ceiling, energy prices, home prices, bankruptcies, a default by a significant market participant, fluctuations or other significant changes in both debt and equity capital markets and currencies, liquidity of the global financial markets, the growth of global trade and commerce, trade policies, the availability and cost of capital and credit, disruption of communication, transportation or energy infrastructure and investor sentiment and confidence. Additionally, global markets, including energy and commodity markets, may be adversely affected by the current or anticipated impact of climate change, extreme weather events or natural disasters, the emergence of widespread health emergencies or pandemics, cyber attacks or campaigns, military conflict, terrorism or other geopolitical events. Market fluctuations may impact our margin requirements and affect our business liquidity. Also, any sudden or prolonged market downturn in the U.S. or abroad, as a result of the above factors or otherwise, could result in a decline in net interest income and noninterest income and adversely affect our results of operations and financial condition, including capital and liquidity levels. For example, the global markets, including the energy and commodity markets, experienced significant volatility and disruption as a result of the uncertainty and economic impact of the pandemic. Further uncertainty and ongoing developments in connection with the pandemic, including its further spread, changing consumer and business behaviors, government restrictions in an effort to control the virus and timing and availability of effective medical treatments and vaccines, could
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result in further market volatility and disruptions globally and continue to adversely impact macroeconomic conditions.
Actions taken by the Federal Reserve, including changes in its target funds rate, balance sheet management, and lending facilities, and other central banks are beyond our control and difficult to predict. These actions can affect interest rates and the value of financial instruments and other assets and liabilities, and impact our borrowers. The continued protracted period of lower interest rates has resulted in lower revenue through lower net interest income, which has adversely affected our results of operations. Additional periods of lower interest rates or a move to negative interest rates in the U.S., could have a further adverse impact on our net interest income and results of operations. Uncertainty or ongoing developments in connection with the U.K.’s exit from the EU, and the resulting impact on the financial markets and regulations in relevant jurisdictions, could negatively impact our revenues and ongoing operations in Europe and other jurisdictions.
Changes to existing U.S. laws and regulatory policies, including those related to financial regulation, taxation, international trade, fiscal policy and healthcare, may adversely impact U.S. or global economic activity and our customers', our counterparties' and our earnings and operations. For example, additional fiscal stimulus and rising debt levels, in the U.S. and abroad, in response to the ongoing pandemic could affect macroeconomic conditions, market liquidity conditions, and interest rates. Significant fiscal policy changes and/or initiatives, including as a result of the change in the U.S. presidential administration and Congress, may also increase uncertainty surrounding the formulation and direction of U.S. monetary policy and volatility of interest rates. Higher U.S. interest rates relative to other major economies could increase the likelihood of a more volatile and appreciating U.S. dollar. Changes, or proposed changes, to certain U.S. trade and international investment policies, particularly with important trading partners (including China and the EU) have negatively impacted and may continue to negatively impact financial markets, disrupt world trade and commerce and lead to trade retaliation, including through the use of tariffs, foreign exchange measures or the large-scale sale of U.S. Treasury Bonds. Further, the use of tariffs among countries not directly involving the U.S. could spread and could damage our customers directly and indirectly.
Any of these developments could adversely affect our consumer and commercial businesses, our customers, our securities and derivatives portfolios, including the risk of lower re-investment rates within those portfolios, our level of charge-offs and provision for credit losses, the carrying value of our deferred tax assets, our capital levels, our liquidity and our results of operations. Additionally, the uncertainty related to the transition from Interbank Offered Rates (IBORs) and other benchmark rates to alternative reference rates (ARRs) could negatively impact markets globally and our business, and/or magnify any negative impact of the above referenced factors on our business, customers and results of operations.
Increased market volatility and adverse changes in financial or capital market conditions may increase our market risk.
Our liquidity, competitive position, business, results of operations and financial condition are affected by market risks such as changes in interest and currency exchange rates, fluctuations in equity and futures prices, lower trading volumes and prices of securitized products, the implied volatility of interest rates and credit spreads and other economic and business factors. These market risks may adversely affect, among other things, the value of our on- and off-balance sheet
securities, trading assets and other financial instruments, the cost of debt capital and our access to credit markets, the value of assets under management (AUM), fee income relating to AUM, customer allocation of capital among investment alternatives, the volume of client activity in our trading operations, investment banking fees, the general profitability and risk level of the transactions in which we engage and our competitiveness with respect to deposit pricing. For example, the value of certain of our assets is sensitive to changes in market interest rates. If the Federal Reserve or a non-U.S. central bank changes or signals a change in monetary policy, market interest rates could be affected, which could adversely impact the value of such assets. Changes to fiscal policy, including rapid expansion of U.S. federal deficit spending and resultant debt issuance, could also affect market interest rates. In addition, the low interest rate environment and a flat or inverted yield curve has had and could continue to have a negative impact on our results of operations, including on future revenue and earnings growth.
We use various models and strategies to assess and control our market risk exposures, but those are subject to inherent limitations. In times of market stress or other unforeseen circumstances, previously uncorrelated indicators may become correlated and vice versa. These types of market movements may limit the effectiveness of our hedging strategies and cause us to incur significant losses. These changes in correlation can be exacerbated where other market participants are using risk or trading models with assumptions or algorithms similar to ours. In these and other cases, it may be difficult to reduce our risk positions due to activity of other market participants or widespread market dislocations, including circumstances where asset values are declining significantly or no market exists for certain assets. To the extent that we own securities that do not have an established liquid trading market or are otherwise subject to restrictions on sale or hedging, we may not be able to reduce our positions and therefore reduce our risk associated with such positions.
We may incur losses if the value of assets decline, including due to changes in interest rates and prepayment speeds.
We have a large portfolio of financial instruments, including loans and loan commitments, securities financing agreements, asset-backed secured financings, derivative assets and liabilities, debt securities, marketable equity securities and certain other assets and liabilities that we measure at fair value that are subject to valuation and impairment assessments. We determine these values based on applicable accounting guidance, which for financial instruments measured at fair value, requires an entity to base fair value on exit price and to maximize the use of observable inputs and minimize the use of unobservable inputs in fair value measurements. The fair values of these financial instruments include adjustments for market liquidity, credit quality, funding impact on certain derivatives and other transaction-specific factors, where appropriate.
Gains or losses on these instruments can have a direct impact on our results of operations, unless we have effectively hedged our exposures. Increases in interest rates may result in a decrease in residential mortgage loan originations. In addition, increases in interest rates may adversely impact the fair value of debt securities and, accordingly, for debt securities classified as available for sale, may adversely affect accumulated other comprehensive income and, thus, capital levels. Decreases in interest rates may increase prepayment speeds of certain assets, and therefore may adversely affect net interest income.
Fair values may be impacted by declining values of the underlying assets or the prices at which observable market
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transactions occur and the continued availability of these transactions or indices. The financial strength of counterparties, with whom we have economically hedged some of our exposure to these assets, also will affect the fair value of these assets. Sudden declines and volatility in the prices of assets may curtail or eliminate trading activities in these assets, which may make it difficult to sell, hedge or value these assets. The inability to sell or effectively hedge assets reduces our ability to limit losses in such positions and the difficulty in valuing assets may increase our risk-weighted assets (RWA), which requires us to maintain additional capital and increases our funding costs. Values of AUM also impact revenues in our wealth management and related advisory businesses for asset-based management and performance fees. Declines in values of AUM can result in lower fees earned for managing such assets.
Liquidity
If we are unable to access the capital markets or continue to maintain deposits, or our borrowing costs increase, our liquidity and competitive position will be negatively affected.
Liquidity is essential to our businesses. We fund our assets primarily with globally sourced deposits in our bank entities, as well as secured and unsecured liabilities transacted in the capital markets. We rely on certain secured funding sources, such as repo markets, which are typically short-term and credit-sensitive in nature. We also engage in asset securitization transactions, including with the government-sponsored enterprises (GSEs), to fund consumer lending activities. Our liquidity could be adversely affected by any inability to access the capital markets, illiquidity or volatility in the capital markets, the decrease in value of eligible collateral or increased collateral requirements (including as a result of credit concerns for short-term borrowing), changes to our relationships with our funding providers based on real or perceived changes in our risk profile, prolonged federal government shutdowns, or changes in regulations, guidance or GSE status that impact our funding avenues or ability to access certain funding sources. Additionally, our liquidity may be negatively impacted by the unwillingness or inability of the Federal Reserve to act as lender of last resort, unexpected simultaneous draws on lines of credit, slower customer payment rates, restricted access to the assets of prime brokerage clients, the withdrawal of or failure to attract customer deposits or invested funds (which could result from customer attrition for higher yields, the desire for more conservative alternatives or our customers’ increased need for cash), increased regulatory liquidity, capital and margin requirements for our U.S. or international banks and their nonbank subsidiaries, changes in patterns of intraday liquidity usage resulting from a counterparty or technology failure or other idiosyncratic event or failure or default by a significant market participant or third party (including clearing agents, custodians or central counterparties (CCPs)). These factors also have the potential to increase our borrowing costs.
Several of these factors may arise due to circumstances beyond our control, such as general market volatility, disruption, shock or stress, the emergence of widespread health emergencies or pandemics, Federal Reserve policy decisions (including fluctuations in interest rates or Federal Reserve balance sheet composition), negative views about the Corporation (including short- and long-term business prospects) or the financial services industry generally or due to a specific news event, changes in the regulatory environment or governmental fiscal or monetary policies (including as a result of the change in the U.S. presidential administration and Congress), actions by credit rating agencies or an operational
problem that affects third parties or us. The impact of these events, whether within our control or not, could include an inability to sell assets or redeem investments, unforeseen outflows of cash, the need to draw on liquidity facilities, the reduction of financing balances and the loss of equity secured funding, debt repurchases to support the secondary market or meet client requests, the need for additional funding for commitments and contingencies and unexpected collateral calls, among other things, the result of which could be increased costs, a liquidity shortfall and/or impact on our liquidity coverage ratio.
Our liquidity and cost of obtaining funding is directly related to prevailing market conditions, including changes in interest and currency exchange rates, fluctuations in equity and futures prices, lower trading volumes and prices of securitized products and our credit spreads. Credit spreads are the amount in excess of the interest rate of U.S. Treasury securities, or other benchmark securities, of a similar maturity that we need to pay to our funding providers. Increases in interest rates and our credit spreads can increase the cost of our funding and result in mark-to-market or credit valuation adjustment exposures. Changes in our credit spreads are market-driven and may be influenced by market perceptions of our creditworthiness. Changes to interest rates and our credit spreads occur continuously and may be unpredictable and highly volatile. We may also experience spread compression as a result of offering higher than expected deposit rates in order to attract and maintain deposits due to increased marketplace rate competition. Additionally, concentrations within our funding profile, such as maturities, currencies or counterparties, can reduce our funding efficiency.
Reduction in our credit ratings could significantly limit our access to funding or the capital markets, increase borrowing costs or trigger additional collateral or funding requirements.
Our borrowing costs and ability to raise funds are directly impacted by our credit ratings. In addition, credit ratings may be important to customers or counterparties when we compete in certain markets and seek to engage in certain transactions, including OTC derivatives. 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 asset securitizations. Our credit ratings are subject to ongoing review by rating agencies, which consider a number of factors, including our financial strength, performance, prospects and operations and factors not under our control, such as the macroeconomic and geopolitical environment, including the macroeconomic stress caused by the pandemic.
Rating agencies could make adjustments to our credit ratings at any time, and there can be no assurance as to when and whether downgrades will occur. A reduction in certain of our credit ratings could result in a wider credit spread and negatively affect our liquidity, access to credit markets, the related cost of funds, our businesses and certain trading revenues, particularly in those businesses where counterparty creditworthiness is critical. If the short-term credit ratings of our parent company, or bank or broker-dealer subsidiaries, were downgraded by one or more levels, we may suffer the potential loss of access to short-term funding sources such as repo financing, and/or incur increased cost of funds and increased collateral requirements. Under the terms of certain OTC derivative contracts and other trading agreements, if our or our subsidiaries’ credit ratings are downgraded, the counterparties may require additional collateral or terminate these contracts or agreements.
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While certain potential impacts are contractual and quantifiable, the full consequences of a credit rating downgrade to a financial institution are inherently uncertain, as they depend upon numerous dynamic, complex and inter-related factors and assumptions, including whether any downgrade of a firm’s long-term credit ratings precipitates downgrades to its short-term credit ratings, and assumptions about the potential behaviors of various customers, investors and counterparties.
Bank of America Corporation is a holding company, is dependent on its subsidiaries for liquidity and may be restricted from transferring funds from subsidiaries.
Bank of America Corporation, as the parent company, is a separate and distinct legal entity from our bank and nonbank subsidiaries. We evaluate and manage liquidity on a legal entity basis. Legal entity liquidity is an important consideration as there are legal, regulatory, contractual and other limitations on our ability to utilize liquidity from one legal entity to satisfy the liquidity requirements of another, including the parent company, which could result in adverse liquidity events. The parent company depends on dividends, distributions, loans and other payments from our bank and nonbank subsidiaries to fund dividend payments on our common stock and preferred stock and to fund all payments on our other obligations, including debt obligations. Any inability of our subsidiaries to pay dividends or make payments to us may adversely affect our cash flow and financial condition.
Many of our subsidiaries, including our bank and broker-dealer subsidiaries, are subject to laws that restrict dividend payments, or authorize regulatory bodies to block or reduce the flow of funds from those subsidiaries to the parent company or other subsidiaries. Our bank and broker-dealer subsidiaries are subject to restrictions on their ability to lend or transact with affiliates and to minimum regulatory capital and liquidity requirements, as well as restrictions on their ability to use funds deposited with them in bank or brokerage accounts to fund their businesses. Intercompany arrangements we entered into in connection with our resolution planning submissions could restrict the amount of funding available to the parent company from our subsidiaries under certain adverse conditions.
Additional restrictions on related party transactions, increased capital and liquidity requirements and additional limitations on the use of funds on deposit in bank or brokerage accounts, as well as lower earnings, can reduce the amount of funds available to meet the obligations of the parent company and even require the parent company to provide additional funding to such subsidiaries. Also, regulatory action that requires additional liquidity at each of our subsidiaries could impede access to funds we need to pay our obligations or pay dividends. In addition, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to prior claims of the subsidiary’s creditors.
Our liquidity and financial condition, and the ability to pay dividends to shareholders and to pay obligations could be materially adversely affected in the event of a resolution.
Bank of America Corporation, our parent holding company, is required to periodically submit a plan to the FDIC and Federal Reserve describing its resolution strategy under the U.S. Bankruptcy Code in the event of material financial distress or failure. In the current plan, Bank of America Corporation’s preferred resolution strategy is a “single point of entry” strategy. This strategy provides that only the parent holding company files for resolution under the U.S. Bankruptcy Code and contemplates providing certain key operating subsidiaries with sufficient capital and liquidity to operate through severe stress and to enable such subsidiaries to continue operating or be wound
down in a solvent manner following a bankruptcy of the parent holding company. Bank of America Corporation has entered into intercompany arrangements resulting in the contribution of most of its capital and liquidity to key subsidiaries. Pursuant to these arrangements, if Bank of America Corporation’s liquidity resources deteriorate so severely that resolution becomes imminent, Bank of America Corporation will no longer be able to draw liquidity from its key subsidiaries, and will be required to contribute its remaining financial assets to a wholly-owned holding company subsidiary, which could materially and adversely affect our liquidity and financial condition and the ability to return capital to shareholders, including through the payment of dividends and repurchase of the Corporation’s common stock, and meet our payment obligations.
If the FDIC and Federal Reserve jointly determine that Bank of America Corporation’s resolution plan is not credible, they could impose more stringent capital, leverage or liquidity requirements or restrictions on our growth, activities or operations. We could also be required to take certain actions that could impose operating costs and could potentially result in the divestiture or restructuring of businesses and subsidiaries.
Additionally, under the Financial Reform Act, when a G-SIB such as Bank of America Corporation is in default or danger of default, the FDIC may be appointed receiver in order to conduct an orderly liquidation of such institution. In the event of such appointment, the FDIC could, among other things, invoke the orderly liquidation authority, instead of the U.S. Bankruptcy Code, if the Secretary of the Treasury makes certain financial distress and systemic risk determinations. In 2013, the FDIC issued a notice describing its preferred “single point of entry” strategy for resolving a G-SIB. Under this approach, the FDIC could replace Bank of America Corporation with a bridge holding company, which could continue operations and result in an orderly resolution of the underlying bank, but whose equity would be held solely for the benefit of our creditors. The FDIC’s “single point of entry” strategy may result in our security holders suffering greater losses than would have been the case under a bankruptcy proceeding or a different resolution strategy.
Credit
Economic or market disruptions and insufficient credit loss reserves may result in a higher provision for credit losses.
A number of our products expose us to credit risk, including loans, letters of credit, derivatives, debt securities, trading account assets and assets held-for-sale. Deterioration in the financial condition of our consumer and commercial borrowers, counterparties or underlying collateral could adversely affect our financial condition and results of operations.
Our credit portfolios may be impacted by global and U.S. macroeconomic and market conditions, events and disruptions, including sustained weakness in GDP, consumer-spending declines, property value declines or asset-price corrections, increasing consumer and corporate leverage, increases in corporate bond spreads, rising or elevated unemployment levels, fluctuations in foreign exchange or interest rates, widespread health emergencies or pandemics, extreme weather events and the impacts of climate change and domestic and global efforts to transition to a low-carbon economy. Significant economic or market stresses and disruptions typically have a negative impact on the business environment and financial markets. Property value declines or asset-price corrections could increase the risk of borrowers or counterparties defaulting or becoming delinquent in their obligations to us, which could increase credit losses. Simultaneous drawdowns on lines of credit and/or an increase in a borrower’s leverage in a
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weakening economic environment could result in deterioration in our credit portfolio, should borrowers be unable to fulfill competing financial obligations. Credit portfolio deterioration could also be magnified by lending to leveraged borrowers, elevated asset prices or declining property or collateral values unrelated to macroeconomic stress. Increased delinquency and default rates could adversely affect our consumer credit card, home equity and residential mortgage portfolios through increased charge-offs and provision for credit losses.
Beginning in the first quarter of 2020, the pandemic resulted in changes to consumer and business behaviors and restrictions on economic activity, which have negatively impacted the global economy and could continue to negatively impact our consumer and commercial credit portfolios. Accordingly, we increased our allowance for credit losses as a result of the expected macroeconomic impact of COVID-19, which has adversely affected our results of operations. Although the economy, including GDP, and unemployment have improved since the first half of 2020, certain sectors remain significantly impacted (e.g., hospitality, entertainment and travel). As COVID-19 cases have surged in the fourth quarter of 2020 and early 2021, compared to earlier levels, and restrictions on economic activity have been reintroduced in certain geographies, there remains significant uncertainty on what the ultimate impact the pandemic will have on the economy and our allowance for credit losses.
We establish an allowance for credit losses, which includes the allowance for loan and lease losses and the reserve for unfunded lending commitments, based on management's best estimate of lifetime expected credit losses inherent in the Corporation's relevant financial assets. The process to determine the allowance requires us to make difficult and complex judgments, including forecasting how borrowers will perform in changing and unprecedented economic conditions and predicting developments in public health and fiscal policy related to the pandemic. The ability of our borrowers or counterparties to repay their obligations will likely be impacted by changes in future economic conditions, which in turn could impact the accuracy of our loss forecasts and allowance estimates. There is also the possibility that we have failed or will fail to accurately identify the appropriate economic indicators or accurately estimate their impacts to our borrowers, which similarly could impact the accuracy of our loss forecasts and allowance estimates.
We may suffer unexpected losses if the models and assumptions we use to establish reserves or the judgments we make in extending credit to our borrowers or counterparties, which are more sensitive due to the uncertainty regarding the magnitude and duration of the pandemic and related macroeconomic impact, prove inaccurate in predicting future events. In addition, changes to external factors can negatively impact our recognition of credit losses in our portfolios and allowance for credit losses.
As of January 1, 2020, we implemented a new accounting standard to estimate our allowance for credit losses. Although we believe that the allowance for credit losses is in compliance with the new accounting standard, there is no guarantee that it will be sufficient to address credit losses, particularly if the economic outlook deteriorates significantly. In such an event, we may increase our allowance which would reduce our earnings. Additionally, to the extent that economic conditions worsen as a result of COVID-19 or otherwise, impacting our consumer and commercial borrowers, counterparties or underlying collateral, and credit losses are worse than expected, we may further increase our provision for credit losses, which
could have a further adverse effect on our results of operations and could negatively impact our financial condition.
Our concentrations of credit risk could adversely affect our credit losses, results of operations and financial condition.
In the ordinary course of our business, we may be subject to concentrations of credit risk because of a common characteristic or common sensitivity to economic, financial, public health or business developments. For example, concentrations in credit risk may result in a particular industry, geography, product, asset class, counterparty, individual exposure or within any pool of exposures with a common risk characteristic. A deterioration in the financial condition or prospects of a particular industry, geographic location, product or asset class, or a failure or downgrade of, or default by, any particular entity or group of entities could negatively affect our businesses, and it is possible our limits and credit monitoring exposure controls will not function as anticipated.
While our activities expose us to many different industries and counterparties, we routinely execute a high volume of transactions with counterparties in the financial services industry, including broker-dealers, commercial banks, investment banks, insurers, mutual funds and hedge funds, central counterparties and other institutional clients, resulting in significant credit concentration with respect to this industry. Financial services institutions and other counterparties are inter-related because of trading, funding, clearing or other relationships. As a result, defaults by one or more counterparties, or market uncertainty about the financial stability of one or more financial services institutions, or the financial services industry generally, could lead to market-wide liquidity disruptions, losses and defaults.
Many of these transactions expose us to credit risk and, in some cases, disputes and litigation in the event of default of a counterparty. In addition, our credit risk may be heightened by market risk when the collateral held by us cannot be liquidated or is liquidated at prices not sufficient to recover the full amount of the loan or derivatives exposure due to us, which may occur as a result of fraud or other events that impact the value of the collateral. Further, disputes with obligors as to the valuation of collateral could increase in times of significant market stress, volatility or illiquidity, and we could suffer losses during such periods if we are unable to realize the fair value of the collateral or manage declines in the value of collateral.
Our commercial portfolios include exposures to certain industries, including asset managers and funds, real estate, capital goods and finance companies. Economic weaknesses, adverse business conditions, market disruptions, rising interest or capitalization rates, the collapse of speculative bubbles, greater volatility in areas where we have concentrated credit risk or deterioration in real estate values or household incomes may cause us to experience a decrease in cash flow and higher credit losses in either our consumer or commercial portfolios or cause us to write down the value of certain assets. Additionally, we could experience continued and long-term negative impact to our commercial credit exposure and an increase in credit losses within those industries that continue to be disproportionately impacted by COVID-19 or are permanently impacted by a change in consumer preferences resulting from COVID-19 (including hospitality, entertainment and travel).
Furthermore, we have concentrations of credit risk with respect to our consumer real estate, auto, consumer credit card and commercial real estate portfolios, which represent a significant percentage of our overall credit portfolio. Decreases in home price valuations or commercial real estate valuations in certain markets where we have large concentrations, as well as
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more broadly within the U.S. or globally, could result in increased defaults, delinquencies or credit loss. In particular, the impact of climate change, such as rising average global temperatures and rising sea levels, and the increasing frequency and severity of extreme weather events and natural disasters such as droughts, floods, wildfires and hurricanes could negatively impact collateral, the valuations of home prices or commercial real estate or our customers’ ability and/or willingness to pay outstanding loans. This could also cause insurability risk and/or increased insurance costs to customers.
We also enter into transactions with sovereign nations, U.S. states and municipalities. Unfavorable economic or political conditions, disruptions to capital markets, currency fluctuations, changes in oil prices, social instability and changes in government or monetary policies could adversely impact the operating budgets or credit ratings of these government entities and expose us to credit risk.
Liquidity disruptions in the financial markets may result in our inability to sell, syndicate or realize the value of our positions, leading to increased concentrations, which could increase the credit and market risk associated with our positions, as well as increase our RWA.
We may be adversely affected if the U.S. housing market weakens or home prices decline.
U.S. home prices continued to generally remain stable or increase in 2020, supported by single-family housing demand and low interest rates. However, changes in business and household behaviors and restrictions on activity in response to the pandemic have had a negative impact on some property markets, particularly in high-density urban areas. We remain conscious of geographic markets where housing price growth has slowed or decreased, or is vulnerable to lasting shifts in demand due to the pandemic, as further declines in future periods may negatively impact the demand for many of our products. Additionally, our mortgage loan production volume is generally influenced by the rate of growth in residential mortgage debt outstanding and the size of the residential mortgage market, both of which may be adversely affected by rising interest rates. Conditions in the U.S. housing market during the 2008 financial crisis resulted in both significant write-downs of asset values in several asset classes, notably mortgage-backed securities, and exposure to monolines. If the U.S. housing market were to weaken, the value of real estate could decline, which could result in increased credit losses and delinquent servicing expenses and negatively affect our representations and warranties exposures, and adversely affect our financial condition and results of operations.
Our derivatives businesses may expose us to unexpected risks and potential losses.
We are party to a large number of derivatives transactions that may expose us to unexpected market, credit and operational risks that could cause us to suffer unexpected losses. Severe declines in asset values, unanticipated credit events or unforeseen circumstances that may cause previously uncorrelated factors to become correlated and vice versa, may create losses resulting from risks not appropriately taken into account or anticipated in the development, structuring or pricing of a derivative instrument. Certain OTC derivative contracts and other trading agreements provide that upon the occurrence of certain specified events, such as a change in the credit rating of the Corporation or one or more of its affiliates, we may be required to provide additional collateral or take other remedial actions and could experience increased difficulty obtaining funding or hedging risks. In some cases our counterparties may have the right to terminate or otherwise diminish our rights under these contracts or agreements.
We are also a member of various central counterparties (CCPs), in part due to regulatory requirements for mandatory clearing of derivative transactions, which potentially increases our credit risk exposures to CCPs. In the event that one or more members of the CCP defaults on its obligations, we may be required to pay a portion of any losses incurred by the CCP as a result of that default. A CCP may modify, in its discretion, the margin we are required to post, which could mean unexpected and increased exposure to the CCP. As a clearing member, we are exposed to the risk of non-performance by our clients for which we clear transactions, which may not be covered by available collateral. Additionally, default by a significant market participant may result in further risk and potential losses.
Geopolitical
We are subject to numerous political, economic, market, reputational, operational, legal, regulatory and other risks in the jurisdictions in which we operate.
We do business throughout the world, including in emerging markets. Economic or geopolitical stress in one or more countries could have a negative impact regionally or globally, resulting in, among other things, market volatility, reduced market value and economic output. Our businesses and revenues derived from non-U.S. jurisdictions are subject to risk of loss from currency fluctuations, financial, social or judicial instability, changes in government leadership, including as a result of electoral outcomes or otherwise, changes in governmental policies or policies of central banks, expropriation, nationalization and/or confiscation of assets, price controls, high inflation, natural disasters, the emergence of widespread health emergencies or pandemics, capital controls, currency redenomination risk, exchange controls, unfavorable political and diplomatic developments, oil price fluctuations and changes in legislation. These risks are especially elevated in emerging markets. Additionally, protectionist trade policies and continued trade tensions between the U.S. and important trading partners, particularly China and the EU, including the risk that tariffs continue to rise and other restrictive actions on cross-border trade, investment, and transfer of information technology are taken that weigh heavily on regional trade volumes and domestic demand through falling business sentiment and lower consumer confidence, could adversely affect our businesses and revenues, as well as our customers and counterparties. Elevated tensions between the U.S. and China also raise the risk that current or future U.S. sanctions against individuals or export controls targeting Chinese firms could prompt retaliatory responses, potentially impacting our operations and revenue.
Additionally, the realization of any significant geopolitical events, negative market conditions and/or change in market dynamics as a result of the U.K.’s exit from the EU could adversely impact our businesses. The short- and long-term impact of the U.K.’s exit from the EU on European and global macroeconomic conditions, our business operations and results of operations remain unknown.
A number of non-U.S. jurisdictions in which we do business have been or may be negatively impacted by slowing growth or recessionary conditions, market volatility and/or political or civil unrest. The ongoing pandemic has had a severe negative impact on global GDP, and the global economic environment remains challenging even as output has begun to improve. Economic weakness may prove persistent in many countries and regions, including Europe, Japan, and numerous emerging markets. Potential risks of default on or devaluation of sovereign debt in some non-U.S. jurisdictions could expose us to substantial losses. As a result of the pandemic and fiscal policy responses
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to it, government debt levels have increased significantly, raising the risk of volatility, significant valuation changes, or default in markets for sovereign debt. Risks in one nation can limit our opportunities for portfolio growth and negatively affect our operations in other nations, including our U.S. operations. Market and economic disruptions of all types may affect consumer confidence levels and spending, corporate investment and job creation, bankruptcy rates, levels of incurrence and default on consumer and corporate debt, economic growth rates and asset values, among other factors. Any such unfavorable conditions or developments could adversely impact us.
We also invest or trade in the securities of corporations and governments located in non-U.S. jurisdictions, including emerging markets. Revenues from the trading of non-U.S. securities may be subject to negative fluctuations as a result of the above factors. Furthermore, the impact of these fluctuations could be magnified because non-U.S. trading markets, particularly in emerging markets, are generally smaller, less liquid and more volatile than U.S. trading markets.
Our non-U.S. businesses are also subject to extensive regulation by governments, securities exchanges and regulators, central banks and other regulatory bodies. In many countries, the laws and regulations applicable to the financial services and securities industries are uncertain and evolving, and it may be difficult for us to determine the exact requirements of local laws in every market or manage our relationships with multiple regulators in various jurisdictions. Our potential inability to remain in compliance with local laws in a particular market and manage our relationships with regulators could result in increased expenses and changes to our organizational structure and adversely affect our businesses and results of operations in that market, as well as our reputation in general.
In connection with the U.K.’s exit from the EU, we are now subject to different laws, regulations and regulatory authorities and increased organizational and operational complexity. We may incur additional costs and/or experience negative tax consequences as a result of operating our principal EU banking and broker-dealer operations outside of the U.K., which could adversely impact our EU business, results of operations and operational model. Further, changes to the legal and regulatory framework under which our subsidiaries provide products and services in the U.K. and in the EU may result in additional compliance costs and have negative tax consequences or an adverse impact on our results of operations.
In addition to non-U.S. legislation, our international operations are also subject to U.S. legal requirements, which subjects us to operational and compliance costs and risks. For example, our operations are subject to U.S. and non-U.S. laws and regulations relating to bribery and corruption, anti-money laundering, and economic sanctions, which can vary by jurisdiction. The increasing speed and novel ways in which funds circulate could make it more challenging to track the movement of funds and heightens financial crimes risk. Our ability to comply with these legal requirements depends on our ability to continually improve surveillance, detection and reporting and analytic capabilities.
In the U.S., debt ceiling and budget deficit concerns, which have increased the possibility of U.S. government defaults on its debt and/or downgrades to its credit ratings, and prolonged government shutdowns could negatively impact the global economy and banking system and adversely affect our financial condition, including our liquidity. Additionally, changes in fiscal, monetary or regulatory policy, including as a result of the change in the U.S. presidential administration and Congress, could increase our compliance costs and adversely affect our
business operations, organizational structure and results of operations. We are also subject to geopolitical risks, including economic sanctions, acts or threats of international or domestic terrorism, actions taken by the U.S. or other governments in response thereto, state-sponsored cyber attacks or campaigns, civil unrest and/or military conflicts, which could adversely affect business and economic conditions abroad and in the U.S.
Business Operations
A failure in or breach of our operational or security systems or infrastructure or business continuity plans, or those of third parties or the financial services industry, could disrupt our critical business operations and customer services, result in regulatory, market, privacy, liquidity and operational risk exposures, and adversely impact our results of operations and financial condition, and cause legal or reputational harm.
The potential for operational risk exposure exists throughout our organization and as a result of our interactions with, and reliance on, third parties (including their downstream service providers) and the financial services industry infrastructure. Our operational and security systems infrastructure, including our computer systems, emerging technologies, data management and internal processes, as well as those of third parties, are integral to our performance. We also rely on our employees and third parties (including downstream service providers) in our day-to-day and ongoing operations, who may, as a result of human error, misconduct (including fraudulent activity), malfeasance or a failure or breach of systems or infrastructure cause disruptions to our organization and expose us to operational and regulatory risk.
Additionally, our financial, accounting, data processing and transmission, storage, backup or other operating or security systems and infrastructure, or those of third parties with whom we interact or upon whom we rely may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our or such third party’s control, which could adversely affect our ability to process transactions or provide services. We could also experience prolonged computer and network outages resulting in disruptions to our critical business operations and customer services, including abuse or failure of our electronic trading and algorithmic platforms. We may experience sudden increases in customer transaction volume or electrical, telecommunications or other major physical infrastructure outages, newly identified vulnerabilities in key hardware or software, failure of aging infrastructure and technology project implementation challenges, which could result in prolonged operational outages. Climate change is increasing the frequency and severity of natural disasters, such as earthquakes, wildfires, tornadoes, hurricanes and floods, which could result in increased exposure to operational risks, including outages. Additionally, events arising from local or larger scale political or social matters, including civil unrest and terrorist acts, could result in operational disruptions and prolonged operational outages.
Additionally, the Corporation and the third parties on which it relies have been and will likely continue to be subject to additional operational risks while operating in a work-from-home posture (which places greater reliance on remote access tools and technology and employees’ personal systems), while executing business continuity plans due to COVID-19. We are increasingly dependent upon our information technology infrastructure to operate our businesses remotely due to our work-from-home posture and evolving customer preferences, including increased reliance on digital banking and other digital
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services provided by our businesses. Effective management of our work-from-home posture depends on the security, reliability and adequacy of such systems. We are also at greater risk of business disruptions due to illness and unavailability.
Regardless of the measures we have taken to implement training, procedures, backup systems and other safeguards to support our operations and bolster our operational resilience, our ability to conduct business may be adversely affected by any significant disruptions to us or to third parties (including their downstream service providers) with whom we interact or upon whom we rely, including systemic cyber events that result in system outages and unavailability of part or all of the financial services industry infrastructure. Our ability to implement backup systems and other safeguards with respect to third-party systems and the financial services industry infrastructure is more limited than with respect to our own systems.
Furthermore, to the extent that backup systems are available and utilized, they may not process data as quickly as our primary systems and some data might not have been backed up. We regularly update the systems on which we rely to support our operations and growth and to remain compliant with all applicable laws, rules and regulations globally. This updating entails significant costs and creates risks associated with implementing new systems and integrating them with existing ones, including business interruptions. A failure or breach of our operational or security systems or infrastructure or business continuity plans resulting in disruption to our critical business operations and customer services could expose us to regulatory, market, privacy and liquidity risk, and adversely impact our results of operations and financial condition, as well as cause legal or reputational harm.
A cyber attack, information or security breach, or a technology failure of ours or of a third party could adversely affect our ability to conduct our business, manage our exposure to risk or expand our businesses, result in the disclosure or misuse of confidential or proprietary information, and/or fraudulent activity, and increase our costs to maintain and update our operational and security systems and infrastructure.
Our business is highly dependent on the security, controls and efficacy of our infrastructure, computer and data management systems, as well as those of our customers, suppliers, counterparties and other third parties (including their downstream service providers) the financial services industry and financial data aggregators, with whom we interact, on whom we rely or who have access to our customers' personal or account information. Our business relies on effective access management and the secure collection, processing, transmission, storage and retrieval of confidential, proprietary, personal and other information in our computer and data management systems and networks, and in the computer and data management systems and networks of third parties. In addition, to access our network, products and services, our employees, customers, suppliers, counterparties and other third parties increasingly use personal mobile devices or computing devices that are outside of our network and control environments and are subject to their own cybersecurity risks.
We, our employees and customers, regulators and other third parties (including contractors and vendors) are regularly the target of cyber attacks and are likely to continue to be the target of cyber attacks. These cyber attacks are pervasive, sophisticated, evolving, difficult to prevent and include computer viruses, malicious or destructive code (such as ransomware), social engineering (including phishing, vishing and smithing), denial of service or information or other security breach tactics that could result in the unauthorized release, gathering,
monitoring, misuse, loss or destruction or theft of confidential, proprietary and other information, including intellectual property, of ours, our employees, our customers or of third parties. These cyber attacks could also result in damages to systems, financial risk or otherwise material disruption to our or our customers’ or other third parties’ network access or business operations, both domestically and internationally.
Our cybersecurity risk and exposure remains heightened because of, among other things, the evolving nature and pervasiveness of cyber threats, our prominent size and scale, our geographic footprint and international presence and our role in the financial services industry and the broader economy. Additionally, our risk and exposure to cyber attacks and security breaches is magnified due to our work-from-home posture which places greater reliance on remote access tools and technology, resulting in a larger number of access points to our networks that must be secured. This increased risk of unauthorized access to our networks results in greater amounts of information being available for access from employees’ personal devices over which we do not have the same controls as we do in a non-work-from-home posture. Additionally, our customers’ increasing reliance on digital banking and other digital services provided by our businesses in response to COVID-19, has resulted in more demand on our information technology infrastructure and security tools and processes.
The financial services industry is particularly at risk because of the proliferation of new and emerging technologies, including third-party financial data aggregators, and the use of the internet and telecommunications technologies to conduct financial transactions. Additionally, our use of automation, artificial intelligence (AI) and robotics, increased use of internet and mobile banking products, including mobile payment and other web- and cloud-based products and applications and plans to use or develop additional remote connectivity solutions increase our cybersecurity risks and exposure.
Additionally, we have exposure to cyber threats as a result of our continuous transmission of sensitive information to, and storage of such information by, third parties, including our vendors and regulators, the outsourcing of some of our business operations, and system and customer account updates and conversions. Cybersecurity risks have also significantly increased in recent years in part due to the increasingly sophisticated activities of organized crime groups, hackers, terrorist organizations, extremist parties, hostile foreign governments and state-sponsored actors, in some instances acting to promote political ends. We could also be the target of disgruntled employees or vendors, activists and other parties, including those involved in corporate espionage.
Cyber threats and the techniques used in cyber attacks change rapidly and frequently. Despite substantial efforts to protect the integrity and resilience of our systems and implement controls, processes, policies and other protective measures, we may not be able to anticipate cyber attacks or information or security breaches and implement effective preventive or defensive measures to address or mitigate such attacks or breaches. Even the most advanced internal control environment is vulnerable to compromise. Internal access management failures could result in the compromise or unauthorized exposure of confidential data.
Cyber attacks or security breaches could persist for an extended period of time before being detected. It could take considerable additional time for us to determine the scope, extent, amount, and type of information compromised, at which time the impact on the Corporation and measures to recover and restore to a business-as-usual state may be difficult to
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assess. As cyber threats continue to evolve, we may be required to expend significant additional resources to modify or enhance our protective measures, investigate and remediate any information security vulnerabilities or incidents and develop our capabilities to respond and recover. As a result, increasing resources to develop and enhance our controls, processes and practices designed to protect our systems, workstations, intellectual property and proprietary information, software, data and networks from attack, damage or unauthorized access, remains a critical priority.
We also face indirect technology, cybersecurity and operational risks relating to the customers, clients and other third parties (including their downstream service providers) and the financial services industry, with whom we do business, upon whom we rely to facilitate or enable our business activities or upon whom our customers rely. Such third parties also include financial counterparties, financial data aggregators, financial intermediaries, such as clearing agents, exchanges and clearing houses, vendors, regulators, providers of critical infrastructure, such as internet access and electrical power, and retailers for whom we process transactions. As a result of increasing consolidation, interdependence and complexity of financial entities and technology systems, a technology failure, cyber attack or other information or security breach that significantly degrades, deletes or compromises the systems or data of one or more financial entities or third parties (or their downstream service providers) could have a material impact on counterparties or other market participants, including us. Similarly, any failure, cyber attack or other information or security breach that significantly degrades, deletes or compromises our systems or data could adversely impact third parties, counterparties and the financial services industry infrastructure, which in turn could harm our reputation and damage our business. This consolidation, interconnectivity and complexity increases the risk of operational failure, on both individual and industry-wide bases, as disparate systems need to be integrated, often on an accelerated basis. Any technology failure, cyber attack or other information or security breach, termination or constraint of any third party (including their downstream service providers) the financial services industry infrastructure or financial data aggregators, could, among other things, adversely affect our ability to conduct day-to-day business activities, effect transactions, service our clients, manage our exposure to risk or expand our businesses, result in the misappropriation or destruction of the personal, proprietary or confidential information of our employees, customers, suppliers, counterparties and other third parties or result in fraudulent or unauthorized transactions. Further, any such event may not be disclosed to us in a timely manner.
Although to date we have not experienced any material losses or other material consequences relating to technology failure, cyber attacks or other information or security breaches, whether directed at us or third parties, there can be no assurance that our controls and procedures in place to monitor and mitigate the risks of cyber threats will be sufficient and that we will not suffer material losses or consequences in the future. Cyber attacks or other information or security breaches, whether directed at us or third parties, may result in significant lost revenue, give rise to losses and claims brought by third parties, government penalties and other negative consequences. Furthermore, the public perception that a cyber attack on our systems has been successful, whether or not this perception is correct, may damage our reputation with customers and third parties with whom we do business. Although we maintain cyber insurance, there can be no assurance that liabilities or losses
we may incur will be covered under such policies or that the amount of insurance will be adequate.
Also, successful penetration or circumvention of system security could result in negative consequences, including loss of customers and business opportunities, the withdrawal of customer deposits, prolonged computer and network outages resulting in disruptions to our critical business operations and customer services, misappropriation or destruction of our intellectual property, proprietary information or confidential information and/or the confidential, proprietary or personal information of certain parties, such as our employees, customers, suppliers, counterparties and other third parties, or damage to their computers or systems. This could result in a violation of applicable privacy and other laws in the U.S. and abroad, litigation exposure, regulatory fines, penalties or intervention, loss of confidence in our security measures, reputational damage, reimbursement or other compensatory costs, additional compliance costs, and our internal controls or disclosure controls being rendered ineffective. The occurrence of any of these events could adversely impact our results of operations, liquidity and financial condition.
Failure to satisfy our obligations as servicer for residential mortgage securitizations, loans owned by other entities and other losses we could incur as servicer, could adversely impact our reputation, servicing costs or results of operations.
We and our legacy companies service mortgage loans on behalf of third-party securitization vehicles and other investors. If we commit a material breach of our obligations as servicer or master servicer, we may be subject to termination if the breach is not cured within a specified period of time following notice, which could cause us to lose servicing income. In addition, we may have liability for any failure by us, as a servicer or master servicer, for any act or omission on our part that involves willful misfeasance, bad faith, gross negligence or reckless disregard of our duties. If any such breach was found to have occurred, it may harm our reputation, increase our servicing costs, result in litigation or regulatory action or adversely impact our results of operations. Additionally, with respect to foreclosures, we may incur costs or losses due to irregularities in the underlying documentation, or if the validity of a foreclosure action is challenged by a borrower or overturned by a court because of errors or deficiencies in the foreclosure process. We may also incur costs or losses relating to delays or alleged deficiencies in processing documents necessary to comply with state law governing foreclosure.
Changes in the structure of and relationship among the GSEs could adversely impact our business.
During 2020, we sold approximately $3.6 billion of loans to GSEs, primarily Freddie Mac (FHLMC). FHLMC and Fannie Mae (FNMA) are currently in conservatorship with their primary regulator, the Federal Housing Finance Agency (FHFA) acting as conservator. In September 2019, the Treasury Department published a proposal to recapitalize FHLMC and FNMA and remove them from conservatorship as well as reduce their role in the marketplace. Consistent with this proposal, in January 2021, the Treasury Department further amended the agreement that governs the conservatorship of FHLMC and FNMA to allow them to retain their earnings until they reach certain previously determined capital requirements, among other policy actions, potentially putting them on a long-term path to emergence from conservatorship. However, we cannot predict the future prospects of the GSEs, timing of the recapitalization or release from conservatorship, or content of legislative or rulemaking proposals regarding the future status of the GSEs in the housing market. Additionally, if the GSEs were to take a reduced role in
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the marketplace, including by limiting the mortgage products they offer, we could be required to seek alternative funding sources, retain additional loans on our balance sheet, secure funding through the Federal Home Loan Bank system, or securitize the loans through Private Label Securitization. Accordingly, uncertainty regarding their future and the mortgage-backed securities they guarantee continues to exist for the foreseeable future.
Any of these developments could adversely affect the value of our securities portfolios, capital levels, liquidity and results of operations.
Our risk management framework may not be effective in mitigating risk and reducing the potential for losses.
Our risk management framework is designed to minimize risk and loss to us. We seek to effectively and consistently identify, measure, monitor, report and control the types of risk to which we are subject, including strategic, credit, market, liquidity, compliance, operational and reputational risks. While we employ a broad and diversified set of controls and risk mitigation techniques, including modeling and forecasting, hedging strategies and techniques that seek to balance our ability to profit from trading positions with our exposure to potential losses, our ability to control and mitigate risks that result in losses is inherently limited by our ability to identify all risks, including emerging and unknown risks, anticipate the timing of risks, apply effective hedging strategies, make correct assumptions, manage and aggregate data correctly and efficiently, and develop risk management models to assess and control risk.
Our ability to manage risk is dependent on our ability to consistently execute all elements of our risk management program and develop and maintain a culture of managing risk well throughout the Corporation and manage risks associated with third parties (including their downstream service providers) and vendors, to enable effective risk management and ensure that risks are appropriately considered, evaluated and responded to in a timely manner. Uncertain economic conditions, heightened legislative and regulatory scrutiny of and change within the financial services industry, the pace of technological changes, accounting and market developments, the failure of employees to comply with policies, values and our risk framework and the overall complexity of our operations, among other developments, may result in a heightened level of risk for us. We have experienced increased operational, reputational and compliance risk as a result of the need to rapidly implement multiple and varying pandemic relief programs, including consumer and commercial assistance programs and the PPP, coupled with the concurrent transition of the Corporation’s workforce to a work-from-home posture. Accordingly, we could suffer losses as a result of our failure to manage evolving risks or properly anticipate, manage, control or mitigate risks.
Regulatory, Compliance and Legal
We are subject to comprehensive government legislation and regulations and certain settlements, orders and agreements with government authorities from time to time.
We are subject to comprehensive regulation under federal and state laws in the U.S. and the laws of the various jurisdictions in which we operate, including increasing and complex economic sanctions regimes. These laws and regulations significantly affect and have the potential to restrict the scope of our existing businesses, limit our ability to pursue certain business opportunities, including the products and
services we offer, reduce certain fees and rates or make our products and services more expensive for our clients.
We continue to make adjustments to our business and operations, legal entity structure and capital and liquidity management policies, procedures and controls to comply with currently effective laws and regulations, as well as final rulemaking, guidance and interpretation by regulatory authorities, including the Department of Treasury, Federal Reserve, OCC, CFPB, Financial Stability Oversight Council, FDIC, Department of Labor, SEC and CFTC in the U.S. and foreign regulators and other government authorities. Further, we could become subject to future legislation and regulatory requirements beyond those currently proposed, adopted or contemplated in the U.S. or abroad, including policies and rulemaking related to the Financial Reform Act, the pandemic and climate change. The cumulative effect of all of the legislation and regulations on our business, operations and profitability remains uncertain. This uncertainty necessitates that in our business planning we make certain assumptions with respect to the scope and requirements of prospective and proposed rules. If these assumptions prove incorrect, we could be subject to increased regulatory and compliance risks and costs as well as potential reputational harm. In addition, U.S. and international regulatory initiatives may overlap, and non-U.S. regulations and initiatives may be inconsistent or may conflict with current or proposed U.S. regulations, which could lead to compliance risks and increased costs.
Our regulators’ prudential and supervisory authority gives them broad power and discretion to direct our actions, and they have assumed an active oversight, inspection and investigatory role across the financial services industry. However, regulatory focus is not limited to laws and regulations applicable to the financial services industry, but extends to other significant laws and regulations that apply across industries and jurisdictions, including those related to data management and privacy, anti-money laundering, anti-corruption and economic sanctions.
We are also subject to laws, rules and regulations in the U.S. and abroad, including GDPR, CCPA and CPRA, regarding compliance with our privacy policies and the disclosure, collection, use, sharing and safeguarding of personal identifiable information of certain parties, such as our employees, customers, suppliers, counterparties and other third parties, the violation of which could result in litigation, regulatory fines and enforcement actions. Additionally, we will likely be subject to new and evolving data privacy laws in the U.S. and abroad, which could result in additional costs of compliance, litigation, regulatory fines and enforcement actions. In particular, there is increased complexity and uncertainty, including potential suspension or prohibition, regarding the standards used by the Corporation for cross-border flows and transfers of personal data from the European Economic Area (EEA) to the U.S. and other jurisdictions outside of the EEA resulting from a decision of the Court of Justice of the EU and guidance from the European Data Protection Board. Additionally, the European Commission has proposed new standards of personal data transfer. If our personal data transfers are suspended or prohibited or we are required to implement new standards, this could result in operational disruptions to our businesses, additional costs, increased enforcement activity, new contract negotiations with third parties, and/or modification of our cross-border data management.
As part of their enforcement authority, our regulators and other government authorities have the authority to, among other things, assess significant civil or criminal monetary penalties or restitution and issue cease and desist or removal orders and
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initiate injunctive actions. The amounts paid by us and other financial institutions to settle proceedings or investigations have, in some instances, been substantial and may increase. In some cases, governmental authorities have required criminal pleas or other extraordinary terms as part of such resolutions, which could have significant consequences, including reputational harm, loss of customers, restrictions on the ability to access capital markets, and the inability to operate certain businesses or offer certain products for a period of time.
The Corporation and the conduct of its employees and representatives are subject to regulatory scrutiny across jurisdictions. The complexity of the federal and state regulatory and enforcement regimes in the U.S., coupled with the global scope of our operations and the regulatory environment worldwide also means that a single event or practice or a series of related events or practices may give rise to a significant number of overlapping investigations and regulatory proceedings, either by multiple federal and state agencies in the U.S. or by multiple regulators and other governmental entities in different jurisdictions. Additionally, actions by other members of the financial services industry related to business activities in which we participate may result in investigations by regulators or other government authorities. Responding to inquiries, investigations, lawsuits and proceedings is time-consuming and expensive and can divert senior management attention from our business. The outcome of such proceedings, which may last a number of years, may be difficult to predict or estimate.
We are and may become subject to the terms of settlements, orders and agreements that we have entered into with government entities and regulatory authorities, which impose, or could impose, significant operational and compliance costs on us as they typically require us to enhance our procedures and controls, expand our risk and control functions within our lines of business, invest in technology and hire significant numbers of additional risk, control and compliance personnel. Moreover, if we fail to meet the requirements of the regulatory settlements, orders or agreements to which we are subject, or, more generally, fail to maintain risk and control procedures and processes that meet the heightened standards established by our regulators and other government authorities, we could be required to enter into further settlements, orders or agreements and pay additional fines, penalties or judgments, or accept material regulatory restrictions on our businesses.
While we believe that we have adopted appropriate risk management and compliance programs to identify, assess, monitor and report on applicable laws, policies and procedures, compliance risks will continue to exist, particularly as we adapt to new and evolving laws, rules and regulations. Additionally, changing U.S. fiscal, monetary and regulatory policies arising from changes to the U.S. presidential administration and Congress result in ongoing regulatory uncertainties. There is no guarantee that our risk management and compliance programs will be consistently executed to successfully manage compliance risk. We also rely upon third parties who may expose us to compliance and legal risk. Future legislative or regulatory actions, and any required changes to our business or operations, or those of third parties (including their downstream providers) upon whom we rely, resulting from such developments and actions could result in a significant loss of revenue, impose additional compliance and other costs or otherwise reduce our profitability, limit the products and services that we offer or our ability to pursue certain business opportunities, require us to dispose of or curtail certain businesses, affect the value of assets that we hold, require us to increase our prices and therefore reduce demand for our
products, or otherwise adversely affect our businesses. In addition, legal and regulatory proceedings and other contingencies will arise from time to time that may result in fines, regulatory sanctions, penalties, equitable relief and changes to our business practices. As a result, we are and will continue to be subject to heightened compliance and operating costs that could adversely affect our results of operations.
We are subject to significant financial and reputational risks from potential liability arising from lawsuits and regulatory and government action.
We continue to face significant legal risks in our business, with a high volume of claims against us and other financial institutions. The damages, penalties and fines that litigants and regulators seek from us and other financial institutions continue to be high. This includes disputes with consumers, customers and other counterparties.
Financial institutions, including us, continue to be the subject of claims alleging anti-competitive conduct with respect to various products and markets, including U.S. antitrust class actions claiming joint and several liability for treble damages. As disclosed in Note 12 — Commitments and Contingencies to the Consolidated Financial Statements, we also face contractual indemnification and loan-repurchase claims arising from alleged breaches of representations and warranties in the sale of residential mortgages by legacy companies, which may result in a requirement that we repurchase the mortgage loans, or otherwise make whole or provide other remedies to counterparties.
In addition, regulatory authorities have had a supervisory focus on enforcement, including in connection with alleged violations of law and customer harm. For example, U.S. regulators and government agencies have pursued claims against financial institutions under the Financial Institutions Reform, Recovery, and Enforcement Act, False Claims Act, Equal Credit Opportunity Act, Fair Housing Act and antitrust laws. Such claims may carry significant and, in certain cases, treble damages. There is also an increased focus on compliance with global laws, rules and regulations related to the collection, use, sharing and safeguarding of personally identifiable information and corporate data. Additionally, misconduct by employees, including unethical, fraudulent, improper or illegal conduct, or other unfair, deceptive, abusive or discriminatory business practices, can result in litigation and/or government investigations and enforcement actions, and cause significant reputational harm.
The global environment of extensive regulation, regulatory compliance burdens, litigation and regulatory enforcement, combined with uncertainty related to the continually evolving regulatory environment, may affect operational and compliance costs and risks, which may limit or cease our ability to continue providing certain products and services. This is magnified by the Corporation's implementation of government relief measures related to the pandemic. Lawsuits and regulatory actions may result in judgments, settlements, penalties and fines adverse to the Corporation. Litigation and investigation costs, substantial legal liability or significant regulatory or government action against us could have adverse effects on our business, financial condition, including liquidity, and results of operations, and/or cause significant reputational harm to us.
U.S. federal banking agencies may require us to increase our regulatory capital, total loss-absorbing capacity (TLAC), long-term debt or liquidity requirements.
We are subject to U.S. regulatory capital and liquidity rules. These rules, among other things, establish minimum requirements to qualify as a well-capitalized institution. If any of
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our subsidiary insured depository institutions fails to maintain its status as well capitalized under the applicable regulatory capital rules, the Federal Reserve will require us to agree to bring the insured depository institution back to well-capitalized status. For the duration of such an agreement, the Federal Reserve may impose restrictions on our activities. If we were to fail to enter into or comply with such an agreement, or fail to comply with the terms of such agreement, the Federal Reserve may impose more severe restrictions on our activities, including requiring us to cease and desist activities permitted under the Bank Holding Company Act of 1956.
Capital and liquidity requirements are frequently introduced and amended. It is possible that regulators may increase regulatory capital requirements including TLAC and long-term debt requirements, change how regulatory capital is calculated or increase liquidity requirements. Our ability to return capital to our shareholders depends in part on our ability to maintain regulatory capital levels above minimum requirements plus buffers. To the extent that increases occur in our SCB, G-SIB surcharge or countercyclical capital buffer, our returns of capital to shareholders could decrease.
As part of its CCAR, the Federal Reserve conducts stress testing on parts of our business using hypothetical economic scenarios prepared by the Federal Reserve. Those scenarios may affect our CCAR stress test results, which may impact the level of our SCB. Additionally, the Federal Reserve may impose limitations or prohibitions on taking capital actions, such as paying or increasing dividends or repurchasing common stock. For example, as a result of the economic uncertainty resulting from the pandemic, the Federal Reserve applied certain restrictions on our common stock dividends and repurchase program during the second half of 2020, and the first quarter of 2021, as disclosed in Item 1. Business – Distributions on page 5 and MD&A – Executive Summary – Recent Developments – Capital Management on page 25.
A significant component of regulatory capital ratios is calculating our RWA and our leverage exposure, which may increase. The Basel Committee on Banking Supervision has also revised several key methodologies for measuring RWA that have not yet been implemented in the U.S., including a standardized approach for operational risk, revised market risk requirements and constraints on the use of internal models, as well as a capital floor based on the revised standardized approaches. U.S. banking regulators may update the U.S. Basel 3 rules to incorporate the Basel Committee revisions.
Changes to and compliance with the regulatory capital and liquidity requirements may impact our operations by requiring us to liquidate assets, increase borrowings, issue additional equity or other securities, cease or alter certain operations or hold highly liquid assets, which may adversely affect our results of operations.
Changes in accounting standards or assumptions in applying accounting policies could adversely affect us.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Some of these policies require use of estimates and assumptions that may affect the reported value of our assets or liabilities and results of operations and are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain. If those assumptions, estimates or judgments were incorrectly made, we could be required to correct and restate prior-period financial statements. Accounting standard-setters and those who interpret the accounting standards, the SEC, banking regulators and our independent registered public accounting firm may also
amend or even reverse their previous interpretations or positions on how various standards should be applied. These changes may be difficult to predict and could impact how we prepare and report our financial statements. In some cases, we could be required to apply a new or revised standard retrospectively, resulting in us revising prior-period financial statements.
We may be adversely affected by changes in U.S. and non-U.S. tax laws and regulations.
In December 2017, the Tax Cuts and Jobs Act (the Tax Act) was enacted, which made significant changes to federal income tax law including, among other things, reducing the statutory corporate income tax rate to 21 percent from 35 percent and changing the taxation of our non-U.S. business activities.
In addition, we have U.K. net deferred tax assets (DTA) which consist primarily of net operating losses that are expected to be realized by certain subsidiaries over an extended number of years. Adverse developments with respect to tax laws or to other material factors, such as prolonged worsening of Europe’s capital markets or changes in the ability of our U.K. subsidiaries to conduct business in the EU, could lead our management to reassess and/or change its current conclusion that no valuation allowance is necessary with respect to our U.K. net DTA.
It is possible that governmental authorities in the U.S. and/or other countries could further amend or repeal tax laws in a way that would adversely affect us, including the possibility that aspects of the Tax Act could be amended in the future. Any future change in tax laws and regulations or interpretations of current or future tax laws and regulations could adversely affect our results of operations.
Reputation
Damage to our reputation could harm our businesses, including our competitive position and business prospects.
Our ability to attract and retain customers, clients, investors and employees is impacted by our reputation. Harm to our reputation can arise from various sources, including officer, director or employee fraud, misconduct and unethical behavior, security breaches, litigation or regulatory outcomes, compensation practices, lending practices, the suitability or reasonableness of recommending particular trading or investment strategies, including the reliability of our research and models, prohibiting clients from engaging in certain transactions and employee sales practices. Additionally, our reputation may be harmed by failing to deliver products, subpar standards of service and quality expected by our customers, clients and the community, compliance failures, the inability to manage technology change or maintain effective data management, cyber incidents, internal and external fraud, inadequacy of responsiveness to internal controls, unintended disclosure of personal, proprietary or confidential information, conflicts of interest and breach of fiduciary obligations, the handling of health emergencies or pandemics, and the activities of our clients, customers, counterparties and third parties, including vendors. For example, our reputation may be harmed in connection with our implementation of government programs to provide relief to address the economic impact of the pandemic. Our reputation may also be negatively impacted by our ESG practices and disclosures, our businesses and our customers, including practices and disclosures related to climate change. Actions by the financial services industry generally or by certain members or individuals in the industry also can adversely affect our reputation. In addition, adverse publicity or negative information posted on social media by employees, the media or otherwise, whether or not factually
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correct, may adversely impact our business prospects or financial results.
We are subject to complex and evolving laws and regulations regarding privacy, know-your-customer requirements, data protection, including the GDPR, CCPA and CPRA, cross-border data movement and other matters. Principles concerning the appropriate scope of consumer and commercial privacy vary considerably in different jurisdictions, and regulatory and public expectations regarding the definition and scope of consumer and commercial privacy may remain fluid. It is possible that these laws may be interpreted and applied by various jurisdictions in a manner inconsistent with our current or future practices, or that is inconsistent with one another. If personal, confidential or proprietary information of customers or clients in our possession, or in the possession of third parties (including their downstream service providers) or financial data aggregators, is mishandled, misused or mismanaged, or if we do not timely or adequately address such information, we may face regulatory, reputational and operational risks which could adversely affect our financial condition and results of operations.
We could suffer reputational harm if we fail to properly identify and manage potential conflicts of interest. Management of potential conflicts of interest has become increasingly complex as we expand our business activities through more numerous transactions, obligations and interests with and among our clients. The failure to adequately address, or the perceived failure to adequately address, conflicts of interest could affect the willingness of clients to use our products and services, or give rise to litigation or enforcement actions, which could adversely affect our business.
Our actual or perceived failure to address these and other issues, such as operational risks, gives rise to reputational risk that could harm us and our business prospects. Failure to appropriately address any of these issues could also give rise to additional regulatory restrictions, legal risks and reputational harm, which could, among other consequences, increase the size and number of litigation claims and damages asserted or subject us to enforcement actions, fines and penalties, and cause us to incur related costs and expenses.
Other
Reforms to and replacement of IBORs and certain other rates or indices may adversely affect our reputation, business, financial condition and results of operations.
There is a major transition in progress in global financial markets with respect to the replacement of IBORs, including the London Interbank Offered Rate (LIBOR), and certain other rates or indices that serve as “benchmarks.” Such benchmarks are used extensively across global financial markets and in our business. In particular, LIBOR is used in many of our products and contracts, including derivatives, consumer and commercial loans, mortgages, floating-rate notes and other adjustable-rate products and financial instruments. The aggregate notional amount of these products and contracts is material to our business, and there are significant risks and challenges associated with the transition that may result in significant uncertainty, or have other consequences that cannot be fully anticipated, which expose us to various financial, operational, supervisory, conduct and legal risks.
Although certain ARRs have been proposed to replace LIBOR and other IBORs, market and client adoption of ARRs may vary across or within categories of contracts, products and services, resulting in market fragmentation, decreased trading volumes and liquidity, increased complexity and modeling and
operational risks. ARRs have compositions and characteristics that differ significantly from the benchmarks they may replace, in some cases have limited history, and may demonstrate less predictable performance over time than the benchmarks they replace. Additionally, most ARRs are calculated on a compounded or weighted-average basis, involve complex billing and reconciliation and, unlike IBORs, do not reflect bank credit risk and therefore may require a spread adjustment. The market transition from IBORs to ARRs is complex and there are important differences between the fallbacks, triggers and calculation methodologies being implemented in cash and derivatives markets (including within cash markets). Any mismatch between the adoption of ARRs in loans, securities and derivatives markets may impact hedging or other financial arrangements we have implemented, and as a result we may experience unanticipated market exposures. There can be no assurance that ARRs will be comparable or adequate alternatives to IBORs or perform in the same way, that existing assets and liabilities based on or linked to IBORs will transition successfully to ARRs, of the timing of adoption and degree of integration and acceptance of ARRs in the financial markets, or of the future availability or representativeness of such ARRs.
The discontinuation of IBORs, including LIBOR, requires us to transition a significant number of IBOR-based products and contracts, including related hedging arrangements (IBOR Products). Although, a significant majority of the aggregate notional amount of our LIBOR-based products and contracts maturing after 2021 include or have been updated to include fallbacks to ARRs, the transitioning of certain contracts, products and clients will be more complex. While some of these outstanding IBOR Products include fallback provisions to ARRs, some of these products and contracts do not include fallback provisions or adequate fallback mechanisms and require remediation to modify their terms. Additionally, some outstanding IBOR Products are particularly challenging to modify due to the requirement that all impacted parties consent to such modification. Legislation has been adopted in the EU and proposed in the U.S. and the U.K. to address such challenges in IBOR Products, including the use of a statutory replacement or “synthetic” rate to replace the existing benchmark rate in certain of our IBOR Products. Litigation, disputes or other action may occur as a result of the interpretation or application of legislation, in particular, if there is an overlap between legislation introduced in different jurisdictions. There is no guarantee that the legislative proposals will become law and no assurance that we and other market participants will be able to successfully modify all outstanding IBOR Products or be adequately prepared for a discontinuation of an IBOR at the time such IBOR may cease to be published or otherwise discontinued. Also, there can be no assurance that existing or new provisions for successor rates in our IBOR Products will include adequate methodologies for adjustments or that the characteristics of the successor rates will be similar to or produce the economic equivalent of the benchmarks they seek to replace. These changes may adversely affect the yield on loans or securities held by us, amounts paid on securities we have issued, amounts received and paid on derivatives we have entered into, the value of such loans, securities or derivative instruments, the trading market for such products and contracts, and our ability to effectively use hedging instruments to manage risk. Certain impacted clients, counterparties and other market participants may refuse, delay, or lack operational readiness to transition to ARRs, resulting in the risk that some contracts and products may not transition to an ARR before discontinuation of the relevant IBOR, exposing us to financial, operational, supervisory, conduct and legal risks.
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Our products and contracts that reference IBORs, in particular LIBOR, may contain language that determines when a successor rate including the ARR and/or the applicable spread adjustment to the designated rate (including IBORs) would be selected or determined. If a trigger is satisfied, our products and contracts may give the calculation agent (which may be us) discretion over the successor rate to be selected. We may face a risk of litigation, disputes or other actions from clients, counterparties, customers, investors or others regarding the interpretation or enforcement of IBOR-based contract provisions or if we fail to appropriately communicate the effect that the transition to ARRs will have on existing and future products.
The Corporation has launched, and expects to continue to develop, launch and support, ARR-based products and services. The transition to ARR-based products is complex and involves client and financial contract changes, internal and external communication, technology and operations modifications, industry and regulatory engagement, migration of existing clients, execution of business strategy and governance. New financial products linked to ARRs may be less liquid, result in mispricing and additional legal, financial, tax, operational, market, compliance, reputational, competitive or other risks to us, our clients and other market participants. There is no guarantee that liquidity in ARR-based products will develop, and it is possible that ARR-based products will perform differently to IBOR Products during times of economic stress, adverse or volatile market conditions and across the credit and economic cycle, which may impact the value, return on and profitability of our ARR-based assets.
Failure to meet industry-wide IBOR transition milestones and to cease issuance of IBOR Products by relevant cessation dates may, subject to certain regulatory exceptions, result in supervisory enforcement by applicable regulators, increase our cost of, and access to, capital and other consequences. In addition, IBOR Products held by us may become less liquid as the transition process develops, and other unforeseen consequences may arise if such products are held beyond relevant cessation dates.
Changes or uncertainty resulting from the market transition from IBORs to ARRs could adversely affect the return on and pricing, liquidity and value of outstanding IBOR Products, cause significant market dislocations and disruptions, potentially increase the cost of and access to capital, increase the risk of litigation or other disputes, including in connection with the interpretation and enforceability of, or our historical marketing practices or disclosures with respect to outstanding IBOR products with counterparties, and/or increase expenses related to the transition to ARRs, among other adverse consequences.
The market transition may also alter our risk profile and risk management strategies, including derivatives and hedging strategies, modeling and analytics, valuation tools, product design and systems, controls, procedures and operational infrastructure. This may prove challenging given the limited history of many of the proposed ARRs and may increase the costs and risks related to potential regulatory compliance, requirements or inquiries. Among other risks, various products and contracts may transition to ARRs at different times or in different manners, with the result that we may face significant unexpected interest rate, pricing or other exposures across business or product lines. Reforms to and uncertainty regarding market transition and other factors may adversely affect our business, including the ability to serve customers and maintain market share, financial condition or results of operations and could result in reputational harm to the Corporation.
We face significant and increasing competition in the financial services industry.
We operate in a highly competitive environment and experience intense competition from local and global financial institutions as well as new entrants, in both domestic and foreign markets, in which we compete on the basis of a number of factors, including customer service, quality and range of products and services offered, technology, price, fees, reputation, interest rates on loans and deposits, lending limits and customer convenience. Additionally, the changing regulatory environment may create competitive disadvantages for us given geography-driven capital and liquidity requirements. Additionally, we may face competitors with more experience and established relationships in the relevant market, which could adversely affect our ability to compete.
In addition, emerging technologies and advances and the growth of e-commerce have lowered geographic and monetary barriers of other financial institutions, made it easier for non-depository institutions to offer products and services that traditionally were banking products and allowed non-traditional financial service providers and technology companies to compete with traditional financial service companies in providing electronic and internet-based financial solutions and services, including electronic securities trading with low or no fees and commissions, marketplace lending, financial data aggregation and payment processing, including real-time payment platforms. Further, clients may choose to conduct business with other market participants who engage in business or offer products in areas we deem speculative or risky, such as cryptocurrencies. Increased competition may negatively affect our earnings by creating pressure to lower prices, fees, commissions or credit standards on our products and services requiring additional investment to improve the quality and delivery of our technology and/or reducing our market share, or affecting the willingness of our clients to do business with us.
Our inability to adapt our products and services could harm our business.
Our business model is based on a diversified mix of businesses that provide a broad range of financial products and services, delivered through multiple distribution channels. Our success depends on our, and our third-party vendors', ability to adapt and develop products, services and technology to rapidly evolving industry standards and consumer preferences. In particular, the emergence of the pandemic has resulted in increased reliance on digital banking and other digital services provided by the Corporation’s businesses. There is increasing pressure by competitors to provide products and services on more attractive terms, including higher interest rates on deposits, and offer lower cost investment strategies, which may impact our ability to grow revenue and/or effectively compete. Additionally, legislative and regulatory developments may affect the competitive landscape. Further, the competitive landscape may be impacted by the growth of non-depository institutions that offer traditional banking products at higher rates or with low or no fees, or otherwise offer alternative products. This can reduce our net interest margin and revenues from our fee-based products and services, either from a decrease in the volume of transactions or through a compression of spreads.
In addition, the widespread adoption and rapid evolution of new technologies, including analytic capabilities, self-service digital trading platforms, internet services, distributed ledgers, such as the blockchain system, cryptocurrencies and payment systems, could require substantial expenditures to modify or adapt our existing products and services as we grow and develop our online and mobile banking channel strategies in
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addition to remote connectivity solutions. We may not be as timely or successful in developing or introducing new products and services, integrating new products or services into our existing offerings, responding or adapting to changes in consumer behavior, preferences, spending, investing and/or saving habits, achieving market acceptance of our products and services, reducing costs in response to pressures to deliver products and services at lower prices or sufficiently developing and maintaining loyal customers. The Corporation’s or its third-party vendors' inability to adapt products and services to evolving industry standards and consumer preferences could result in service disruptions and harm our business and adversely affect our results of operations and reputation.
We could suffer operational, reputational and financial harm if our models and strategies fail to properly anticipate and manage risk.
We use proprietary models and strategies extensively to forecast losses, project revenue, measure and assess capital requirements for credit, country, market, operational and strategic risks and assess and control our operations and financial condition. Model risk management is a dedicated and independent risk function that defines model risk governance, policy and guidelines for the Corporation based on laws, rules and regulations, as well as internal requirements. Under the Corporation's Enterprise Model Risk Policy, model risk management is required to perform model oversight, including independent validation before initial use, ongoing monitoring through outcomes analysis and benchmarking, and periodic revalidation. Models are subject to inherent limitations due to the use of historical trends and simplifying assumptions, uncertainty regarding economic and financial outcomes, and emerging risks from the use of applications that rely on AI.
Our models and strategies may not be sufficiently predictive of future results due to limited historical patterns, extreme or unanticipated market movements or customer behavior and liquidity, especially during severe market downturns or stress events, which could limit their effectiveness. The models that we use to assess and control our market risk exposures also reflect assumptions about the degree of correlation among prices of various asset classes or other market indicators, which may not be representative of the next downturn and would magnify the limitations inherent in using historical data to manage risk. Our models may not be effective if we fail to properly oversee them and detect their flaws during our review and monitoring processes, they contain erroneous data, assumptions, valuations, formulas or algorithms or our applications running the models do not perform as expected. Regardless of the steps we take to ensure effective controls, governance, monitoring and testing, and implement new
technology and automated processes, we could suffer operational, reputational and financial harm if models and strategies fail to properly anticipate and manage current and evolving risks.
Failure to properly manage and aggregate data may result in our inability to manage risk and business needs, errors in our day-to-day operations, critical reporting and strategic decision-making and inaccurate reporting.
We rely on our ability to manage, surveil, aggregate, interpret and use data in an accurate, timely and complete manner for effective risk reporting and management. Our policies, programs, processes and practices govern how data is surveilled, managed, aggregated, interpreted and used. While we continuously update our policies, programs, processes and practices and implement emerging technologies, such as
automation, AI and robotics, our data management and aggregation processes are subject to failure, including human error, system failure or failed controls. Failure to surveil, maintain and manage data and information effectively and to aggregate data and information in an accurate, timely and complete manner may impact its quality and reliability and limit our ability to manage current and emerging risk, to produce accurate financial, regulatory and operational reporting, as well as to manage changing business needs, strategic decision-making and day-to-day operations. The failure to establish and maintain effective, efficient and controlled data management could adversely impact our ability to develop our products and relationships with our customers and damage our reputation.
Our operations, businesses and customers could be materially adversely affected by the impacts related to climate change.
There is an increasing concern over the risks of climate change and related environmental sustainability matters. The physical risks of climate change include rising average global temperatures, rising sea levels and an increase in the frequency and severity of extreme weather events and natural disasters, including floods, wildfires, hurricanes and tornados. Such disasters could disrupt our operations or the operations of customers or third parties on which we rely. Such disasters could result in market volatility or negatively impact our customers’ ability to pay outstanding loans, damage collateral or result in the deterioration of the value of collateral or insurance shortfalls. Additionally, climate change concerns could result in transition risk. Changes in consumer preferences and additional legislation and regulatory requirements, including those associated with the transition to a low-carbon economy, could increase expenses or otherwise adversely impact the Corporation, its businesses or its customers. We could also experience increased expenses resulting from strategic planning, litigation and technology and market changes, and reputational harm as a result of negative public sentiment, regulatory scrutiny and reduced investor and stakeholder confidence due to our response to climate change and our climate change strategy.
Our ability to attract and retain qualified employees is critical to our success, business prospects and competitive position.
Our performance is heavily dependent on the talents and efforts of highly skilled individuals. Competition for qualified personnel within the financial services industry and from businesses outside the financial services industry is intense.
Our competitors include non-U.S. based institutions and institutions subject to different compensation and hiring regulations than those imposed on U.S. institutions and financial institutions.
In order to attract and retain qualified personnel, we must provide market-level compensation. As a large financial and banking institution, we are and may become subject to additional limitations on compensation practices, which may or may not affect our competitors, by the Federal Reserve, the OCC, the FDIC and other regulators around the world. EU and U.K. rules limit and subject to clawback certain forms of variable
compensation for senior employees. Furthermore, a substantial portion of our annual incentive compensation paid to our senior employees consists of long-term equity-based awards, the value of which is based on the price of our common stock when the awards vest. Our business prospects and competitive position could be adversely affected if we cannot attract and retain qualified individuals.
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Item 1B. Unresolved Staff Comments
None
Item 2. Properties
As of December 31, 2020, certain principal offices and other materially important properties consisted of the following:
| Facility Name | Location | General Character of the Physical Property | Primary Business Segment | Property Status | Property Square Feet (1) | |||||||||||||||||||||||||||
| Bank of America Corporate Center | Charlotte, NC | 60 Story Building | Principal Executive Offices | Owned | 1,212,177 | |||||||||||||||||||||||||||
| Bank of America Tower at One Bryant Park | New York, NY | 55 Story Building | GWIM, Global Banking and Global Markets | Leased (2) | 1,836,575 | |||||||||||||||||||||||||||
| Bank of America Financial Centre | London, UK | 4 Building Campus | Global Banking and Global Markets | Leased | 565,362 | |||||||||||||||||||||||||||
| Cheung Kong Center | Hong Kong | 62 Story Building | Global Banking and Global Markets | Leased | 149,790 | |||||||||||||||||||||||||||
(1)For leased properties, property square feet represents the square footage occupied by the Corporation.
(2)The Corporation has a 49.9 percent joint venture interest in this property.
We own or lease approximately 74.6 million square feet in over 20,000 facilities and ATM locations globally, including approximately 69.2 million square feet in the U.S. (all 50 states and the District of Columbia, the U.S. Virgin Islands, Puerto Rico and Guam) and approximately 5.4 million square feet in approximately 35 countries.
We believe our owned and leased properties are adequate for our business needs and are well maintained. We continue to evaluate our owned and leased real estate and may determine from time to time that certain of our premises and facilities, or ownership structures, are no longer necessary for our
operations. In connection therewith, we regularly evaluate the sale or sale/leaseback of certain properties and we may incur costs in connection with any such transactions.
Item 3. Legal Proceedings
See Litigation and Regulatory Matters in Note 12 – Commitments and Contingencies to the Consolidated Financial Statements, which is incorporated herein by reference.
Item 4. Mine Safety Disclosures
None
Part II
Bank of America Corporation and Subsidiaries
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The principal market on which our common stock is traded is the New York Stock Exchange under the symbol “BAC.” As of February 23, 2021, there were 156,206 registered shareholders of common stock.
The table below presents share repurchase activity for the three months ended December 31, 2020. The primary source of funds for cash distributions by the Corporation to its shareholders is dividends received from its bank subsidiaries.
Each of the bank subsidiaries is subject to various regulatory policies and requirements relating to the payment of dividends, including requirements to maintain capital above regulatory minimums. All of the Corporation’s preferred stock outstanding has preference over the Corporation’s common stock with respect to payment of dividends.
| (Dollars in millions, except per share information; shares in thousands) | Total Common Shares Purchased (1,2) | Weighted-Average Per Share Price | Total Shares Purchased as Part of Publicly Announced Programs | Remaining Buyback Authority Amounts (3) | |||||||||||||||||||
| October 1 - 31, 2020 | 10,762 | $ | 24.44 | — | $ | — | |||||||||||||||||
| November 1 - 30, 2020 | 1 | 24.81 | — | — | |||||||||||||||||||
| December 1 - 31, 2020 | 1 | 27.39 | — | — | |||||||||||||||||||
| Three months ended December 31, 2020 | 10,764 | 24.44 | — | — | |||||||||||||||||||
(1)Includes two thousand shares of the Corporation’s common stock acquired by the Corporation in connection with satisfaction of tax withholding obligations on vested restricted stock or restricted stock units and certain forfeitures and terminations of employment-related awards and for potential re-issuance to certain employees under equity incentive plans.
(2)During the three months ended December 31, 2020, pursuant to the Corporation's Board's authorization, the Corporation repurchased approximately 11 million shares, or $263 million, of its common stock solely to offset shares awarded under equity-based compensation plans.
(3)On January 19, 2021, the Board authorized the repurchase of $2.9 billion in common stock through March 31, 2021, plus approximately $300 million to offset shares awarded under equity-based compensation plans during the same period. For more information, see Capital Management - CCAR and Capital Planning in the MD&A on page 50 and Note 13 – Shareholders’ Equity to the Consolidated Financial Statements.
The Corporation did not have any unregistered sales of equity securities during the three months ended December 31, 2020.
Item 6. Selected Financial Data
See Tables 6 and 7 in the MD&A beginning on page 32, which are incorporated herein by reference.
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Item 7. Bank of America Corporation and Subsidiaries | ||||||||||||||
| Management's Discussion and Analysis of Financial Condition and Results of Operations | ||||||||||||||
Table of Contents | ||||||||||||||
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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, provision for credit losses, 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 this Annual Report on Form 10-K: the Corporation’s potential judgments, damages, penalties, fines and reputational damage resulting from pending or future litigation, regulatory proceedings and enforcement actions; the possibility that the Corporation's future liabilities may be in excess of its recorded liability and estimated range of possible loss for litigation, and regulatory and government actions, including as a result of our participation in and execution of government programs related to the Coronavirus Disease 2019 (COVID-19) pandemic; the possibility that the Corporation could face increased claims from one or more parties involved in mortgage securitizations; the Corporation’s ability to resolve representations and warranties repurchase and related claims; the risks related to the discontinuation of the London Interbank Offered Rate and other reference rates, including increased expenses and litigation and the effectiveness of hedging strategies; 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, inflation, currency exchange rates, economic conditions, trade policies and tensions, including tariffs, and potential geopolitical instability; the impact of the interest rate environment on the Corporation’s business, financial condition and results of operations; 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 concentration of credit risk; the Corporation’s ability to achieve its expense targets and expectations regarding revenue, net interest income, provision for credit losses, net charge-offs, effective tax rate, loan growth or other projections; adverse changes to the Corporation’s credit ratings from the major credit rating agencies; an inability to access capital markets or maintain deposits or borrowing costs; estimates of the fair value and other accounting values, subject to impairment assessments, of certain of the Corporation’s assets
and liabilities; the estimated or actual impact of changes in accounting standards or assumptions in applying those standards; uncertainty regarding the content, timing and impact of regulatory capital and liquidity requirements; the impact of adverse changes to total loss-absorbing capacity requirements, stress capital buffer requirements and/or global systemically important bank surcharges; the potential impact of actions of the Board of Governors of the Federal Reserve System on the Corporation’s capital plans; the effect of regulations, other guidance or additional information on the impact from 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, derivatives regulations and the Coronavirus Aid, Relief, and Economic Security Act and any similar or related rules and regulations; a failure or disruption 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 or campaigns; the impact on the Corporation’s business, financial condition and results of operations from the United Kingdom's exit from the European Union; the impact of climate change; the impact of any future federal government shutdown and uncertainty regarding the federal government’s debt limit or changes to the U.S. presidential administration and Congress; the emergence of widespread health emergencies or pandemics, including the magnitude and duration of the COVID-19 pandemic and its impact on the U.S. and/or global, financial market conditions and our business, results of operations, financial condition and prospects; the impact of natural disasters, extreme weather events, military conflict, terrorism or other geopolitical events; and other matters.
Forward-looking statements speak only as of the date they are made, and the Corporation undertakes no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.
Notes to the Consolidated Financial Statements referred to in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) are incorporated by reference into the MD&A. Certain prior-year amounts have been reclassified to conform to current-year presentation. Throughout the MD&A, the Corporation uses certain acronyms and abbreviations which are defined in the Glossary.
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,” “we,” “us” and “our” 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 various bank and 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
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America, National Association (Bank of America, N.A. or BANA) charter. At December 31, 2020, the Corporation had $2.8 trillion in assets and a headcount of approximately 213,000 employees.
As of December 31, 2020, we served clients through operations across the U.S., its territories and approximately 35 countries. Our retail banking footprint covers all major markets in the U.S., and we serve approximately 66 million consumer and small business clients with approximately 4,300 retail financial centers, approximately 17,000 ATMs, and leading digital banking platforms (www.bankofamerica.com) with more than 39 million active users, including approximately 31 million active mobile users. We offer industry-leading support to approximately three million small business households. Our GWIM businesses, with client balances of $3.3 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 Developments
Capital Management
In June 2020, the Board of Governors of the Federal Reserve System (Federal Reserve) notified BHCs of their 2020 Comprehensive Capital Analysis and Review (CCAR) supervisory stress test results. Due to economic uncertainty resulting from the Coronavirus Disease 2019 (COVID-19) pandemic (the pandemic), the Federal Reserve required all large banks to update and resubmit their capital plans in November 2020 based on the Federal Reserve’s updated supervisory stress test scenarios. The results of the additional supervisory stress tests were published in December 2020.
The Federal Reserve also required large banks to suspend share repurchase programs during the second half of 2020, except for repurchases to offset shares awarded under equity-based compensation plans, and to limit common stock dividends to existing rates that did not exceed the average of the last four quarters’ net income. In December 2020, the Federal Reserve announced that beginning in the first quarter of 2021, large banks would be permitted to pay common stock dividends at existing rates and to repurchase shares in an amount that, when combined with dividends paid, does not exceed the average of net income over the last four quarters.
On January 19, 2021, we announced that the Board of Directors (the Board) declared a quarterly common stock dividend of $0.18 per share, payable on March 26, 2021 to shareholders of record as of March 5, 2021. We also announced that the Board authorized the repurchase of $2.9 billion in common stock through March 31, 2021, plus repurchases to offset shares awarded under equity-based compensation plans during the same period, estimated to be approximately $300 million. This authorization equals the maximum amount allowed by the Federal Reserve for the period. For more information, see Capital Management on page 50.
COVID-19 Pandemic
In the first quarter of 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. In an attempt to contain the spread and impact of the pandemic, travel bans and restrictions, quarantines, shelter-in-place orders and other limitations on business activity were implemented. Additionally, there has been a decline in global economic activity, reduced U.S. and global economic output and a deterioration in macroeconomic conditions in the U.S. and globally. This has
resulted in, among other things, higher rates of unemployment and underemployment and caused volatility and disruptions in the global financial markets, including the energy and commodity markets. Although vaccines have been approved for immunization against COVID-19 in certain countries and restrictive measures have been eased in certain areas, COVID-19 cases have significantly increased in recent months in the U.S. and many regions of the world compared to earlier levels. Businesses, market participants, our counterparties and clients, and the U.S. and global economies have been negatively impacted and are likely to be so for an extended period of time, as there remains significant uncertainty about the timing and strength of an economic recovery.
To address the economic impact in the U.S., in March and April 2020, four economic stimulus packages were enacted to provide relief to businesses and individuals, including the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Among other measures, the CARES Act established the Small Business Administration (SBA) Paycheck Protection Program (PPP), which provides loans to small businesses to keep their employees on payroll and make other eligible payments. The original funding for the PPP under the CARES Act was fully allocated by mid-April 2020, with additional funding made available on April 24, 2020 under the Paycheck Protection Program and Health Care Enhancement Act. In December 2020, an additional economic stimulus package was included as part of the Consolidated Appropriations Act of 2021 (the Consolidated Appropriations Act), which provides relief to individuals and businesses. This relief included additional funding for the PPP under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the Economic Aid Act).
In response to the pandemic, the Corporation has implemented protocols and processes to execute its business continuity plans and help protect its employees and support its clients. The Corporation is managing its response to the pandemic according to its Enterprise Response Framework, which invokes centralized management of the crisis event and the integration of its response. The CEO and key members of the Corporation’s management team meet regularly with co-leaders of the Executive Response Team, which is composed of senior executives across the Corporation, to help drive decisions, communications and consistency of response across all businesses and functions. We are also coordinating with global, regional and local authorities and health experts, including the U.S. Centers for Disease Control and Prevention (CDC) and the World Health Organization.
Additionally, we have implemented a number of measures to assist our employees, clients and the communities we serve as discussed below.
Employees
We are providing support to our teammates to help promote the health and safety of our employees and help to ensure our protocols remain aligned to current guidance by monitoring guidance from the CDC, medical boards and health authorities and sharing such guidance with our employees. We are also operating our businesses from remote locations and leveraging our business continuity plans and capabilities.
The Corporation has globally implemented a work-from-home posture, which has resulted in the substantial majority of our employees working from home, and pre-planned contingency strategies for site-based operations for our remaining employees. We continue to evaluate our continuity plans and work-from-home strategy in an effort to best protect the health and safety of our employees.
25 Bank of America | ||||||||
Clients
We continue to leverage our business continuity plans and capabilities to service our clients and meet our clients’ financial needs by offering assistance to clients affected by the pandemic, including providing access to credit and the important financial services on which our clients rely. We are also participating in the programs created by the CARES Act and Federal Reserve lending programs for businesses, including originating PPP loans. We have also participated in the Main Street Lending Program, which ended on January 8, 2021. While most of our deferral programs expired in the third quarter of 2020, we continue to offer assistance on a case-by-case basis when requested by clients affected by the pandemic.
As of December 31, 2020, we had approximately 332,000 PPP loans outstanding with a carrying value of $22.7 billion, which were recorded in the Consumer, GWIM and Global Banking segments. Since the PPP's inception through February 17, 2021, borrowers have submitted applications for forgiveness to us for approximately 113,000 PPP loans with balances totaling $10.9 billion. We have submitted approximately 72,000 PPP loans with balances totaling $8.5 billion to the SBA for repayment, of which we have received to date $5.4 billion in repayment from the SBA. Additionally, as of February 17, 2021, we have originated $4.1 billion in PPP loans under the Economic Aid Act. For more information on PPP loans, see Credit Risk Management on page 61, and for more information on accounting for PPP loans and loan modifications under the CARES Act, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
Community Partners
We continue to support the communities where we live and work by engaging in various initiatives to help those affected by COVID-19. These initiatives include committing resources to provide medical supplies, food and other necessities for those in need. We are also supporting racial equality, economic opportunity and environmental sustainability through direct equity investments in minority-owned depository institutions, equity investments in minority entrepreneurs, businesses and funds, as well as other initiatives.
Risk Management
We continue to manage the increased operational risk related to the execution of our business continuity plans in accordance with our Enterprise Response Framework, Risk Framework and Operational Risk Management Program. For more information, see Managing Risk on page 47.
Loan Modifications
The Corporation has implemented various consumer and commercial loan modification programs to provide its borrowers relief from the economic impacts of COVID-19. Based on guidance in the CARES Act that the Corporation adopted, COVID-19 related modifications to consumer and commercial loans that were current as of December 31, 2019 are exempt from troubled debt restructuring (TDR) classification under accounting principles generally accepted in the United States of America (GAAP). In addition, the bank regulatory agencies issued interagency guidance stating that COVID-19 related short-term modifications (i.e., six months or less) granted to consumer or commercial loans that were current as of the loan modification program implementation date are not TDRs. In December 2020, the Consolidated Appropriations Act amended the CARES Act by extending the exemption from TDR classification for COVID-19 related modifications from December 31, 2020 to the earlier of January 1, 2022 or 60 days after the national emergency has ended. For more information, see Note
1 – Summary of Significant Accounting Principles and Note 5 – Outstanding Loans and Leases and Allowance for Credit Losses to the Consolidated Financial Statements.
We have provided borrowers with relief from the economic impacts of COVID-19 through payment deferral and forbearance programs. A significant portion of deferrals expired during the second half of 2020, reflecting a decline in customer requests for assistance. As of February 17, 2021, deferred consumer and small business loans recorded on the Consolidated Balance Sheet totaled $6.8 billion, predominantly consisting of $6.4 billion of residential mortgage and home equity loans, including loans serviced by others, that are well-collateralized.
Other Related Matters
Although the macroeconomic outlook improved modestly during the second half of 2020, the future direct and indirect impact of COVID-19 on our businesses, results of operations and financial condition of the Corporation remains highly uncertain. Should current economic conditions persist or deteriorate, this macroeconomic environment will have a continued adverse effect on our businesses and results of operations and could have an adverse effect on our financial condition. For more information on how the risks related to the pandemic may adversely affect our businesses, results of operations and financial condition, see Part I. Item 1A. Risk Factors on page 7.
LIBOR and Other Benchmark Rates
Following the 2017 announcement by the U.K.’s Financial Conduct Authority (FCA) that it would no longer compel participating banks to submit rates for the London Interbank Offered Rate (LIBOR) after 2021, regulators, trade associations and financial industry working groups have identified recommended replacement rates for LIBOR, as well as other Interbank Offered Rates (IBORs), and have published recommended conventions to allow new and existing products to incorporate fallbacks or that reference these Alternative Reference Rates (ARRs). The continuation of all British Pound Sterling, Euro, Swiss Franc and Japanese Yen LIBOR settings and one-week and two-month U.S. dollar LIBOR settings on the current basis are expected to terminate at the end of December 2021, and the remaining U.S. dollar LIBOR settings (i.e., overnight, one month, three month, six month and 12 month) are expected to terminate at the end of June 2023.
As a result of this and other announcements, financial benchmark reforms, regulatory guidance and changes in short-term interbank lending markets more generally, a major transition is in progress in global financial markets with respect to the replacement of IBORs and certain benchmarks. The transition of IBORs to ARRs is a complex process impacting a variety of global financial markets and our business and operations.
IBORs are used in many of the Corporation’s products and contracts, including derivatives, consumer and commercial loans, mortgages, floating-rate notes and other adjustable-rate products and financial instruments. The discontinuation of IBORs requires us to transition a significant number of IBOR-based products and contracts, including related hedging arrangements. In response, the Corporation established an enterprise-wide IBOR transition program led by senior management in early 2018. This program, which is led by the Corporation's Chief Operating Officer, includes active involvement of senior management and regular reports to the Enterprise Risk Committee (ERC). The program is intended to address the Corporation's industry and regulatory engagement, client and financial contract changes, internal and external communications, technology and operations modifications,
Bank of America 26 | ||||||||
introduction of new products, migration of existing clients, and program strategy and governance. In addition, the program is designed to monitor a variety of scenarios, including operational risks associated with insufficient preparation by individual market participants or the overall market ecosystem, volatility along the Secured Overnight Financing Rate (SOFR) curve, development and adoption of credit-sensitive and other rates, regulatory and legal uncertainty with respect to various matters including contract continuity, access by market participants to liquidity in certain products, and IBOR continuity beyond December 2021.
As of February 1, 2021, a significant majority of the aggregate notional amount of our LIBOR-based products and contracts maturing after 2021 include or have been updated to include fallbacks to ARRs based on market driven protocols, regulatory guidance and industry-recommended fallback provisions and related mechanisms. For certain of the remaining products and contracts, the transition will be more complex, particularly where there is no industry-wide protocol or similar mechanism. The Corporation is executing transition plans that are intended to be in line with applicable major industry-wide IBOR product cessation and launch milestones recommended by the Alternative Reference Rates Committee, a group of private market participants and official sector entities convened by the Federal Reserve and the Federal Reserve Bank of New York, and the Bank of England Sterling Risk Free Rate Working Group, other than the cessation of LIBOR-based adjustable-rate consumer mortgages. The Corporation plans to no longer offer these mortgages and launch SOFR-based adjustable-rate consumer mortgages by the end of the first quarter of 2021.
The Corporation is executing product and client roadmaps that it believes align with industry-recommended and regulatory milestones, and the Corporation has developed employee training programs as well as other internal and external sources of information on the various challenges and opportunities that the replacement of IBORs presents. As the transition to ARRs evolves, the Corporation continues to monitor and participate in the development and usage of certain ARRs, including SOFR, the Euro Short Term Rate and the Sterling Overnight Index Average (SONIA). The Corporation’s key transition efforts to date include issuances of debt and deposits linked to SOFR and SONIA by the Corporation, facilitating debt issuances linked to ARRs by clients and secondary market liquidity for products linked to ARRs, originating and arranging loans linked to ARRs, including hedging arrangements, executing, trading, market making and clearing ARR-based derivatives, and launching capabilities and services to support the issuance and trading in products indexed to certain ARRs. The Corporation updated its operational models, systems, procedures and internal infrastructure in connection with the transition to ARRs by the central clearing counterparties. In October 2020, the Corporation and certain of its subsidiaries adhered to the International Swaps and Derivatives Association, Inc. 2020 IBOR Fallbacks Protocol, effective January 25, 2021, which provides a mechanism to enable market participants to incorporate fallbacks for certain legacy non-cleared derivatives linked to certain IBORs.
Additionally, the Corporation is continuing to evaluate potential regulatory, tax and accounting impacts of the transition, including guidance published and/or proposed by the Internal Revenue Service and Financial Accounting Standards Board, engage impacted clients in connection with the transition to ARRs and work actively with global regulators, industry working groups and trade associations to develop strategies for an effective transition to ARRs. For more information on the
expected replacement of LIBOR and other benchmark rates, see Item 1A. Risk Factors – Other on page 19.
U.K. Exit from the EU
On January 31, 2020, the U.K. formally exited the European Union (EU), and a transition period began during which time the U.K. and the EU negotiated a trade agreement and other terms associated with their future relationship. The transition period ended on December 31, 2020.
We conduct business in Europe, the Middle East and Africa primarily through our subsidiaries in the U.K., Ireland and France and implemented changes to enable us to continue to operate in the region, including establishing a bank and broker-dealer in the EU, as well as minimize the potential for any operational disruption. As the global economic impact of the U.K.’s withdrawal from the EU remains uncertain and could result in regional and global financial market disruptions, we continue to assess potential operational, regulatory and legal risks. For more information, see Item 1A. Risk Factors – Geopolitical on page 12.
Financial Highlights
Effective January 1, 2020, we adopted the new accounting standard on current expected credit losses (CECL), under which the allowance is measured based on management’s best estimate of lifetime expected credit losses (ECL). Prior-year periods presented reflect measurement of the allowance based on management’s estimate of probable incurred credit losses. For more information, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
| Table 1 | Summary Income Statement and Selected Financial Data | |||||||||||||
| (Dollars in millions, except per share information) | 2020 | 2019 | ||||||||||||
| Income statement | ||||||||||||||
| Net interest income | $ | 43,360 | $ | 48,891 | ||||||||||
| Noninterest income | 42,168 | 42,353 | ||||||||||||
| Total revenue, net of interest expense | 85,528 | 91,244 | ||||||||||||
| Provision for credit losses | 11,320 | 3,590 | ||||||||||||
| Noninterest expense | 55,213 | 54,900 | ||||||||||||
| Income before income taxes | 18,995 | 32,754 | ||||||||||||
| Income tax expense | 1,101 | 5,324 | ||||||||||||
| Net income | 17,894 | 27,430 | ||||||||||||
| Preferred stock dividends | 1,421 | 1,432 | ||||||||||||
Net income applicable to common shareholders | $ | 16,473 | $ | 25,998 | ||||||||||
| Per common share information | ||||||||||||||
| Earnings | $ | 1.88 | $ | 2.77 | ||||||||||
| Diluted earnings | 1.87 | 2.75 | ||||||||||||
| Dividends paid | 0.72 | 0.66 | ||||||||||||
| Performance ratios | ||||||||||||||
Return on average assets (1) | 0.67 | % | 1.14 | % | ||||||||||
Return on average common shareholders’ equity (1) | 6.76 | 10.62 | ||||||||||||
Return on average tangible common shareholders’ equity (2) | 9.48 | 14.86 | ||||||||||||
Efficiency ratio (1) | 64.55 | 60.17 | ||||||||||||
| Balance sheet at year end | ||||||||||||||
| Total loans and leases | $ | 927,861 | $ | 983,426 | ||||||||||
| Total assets | 2,819,627 | 2,434,079 | ||||||||||||
| Total deposits | 1,795,480 | 1,434,803 | ||||||||||||
| Total liabilities | 2,546,703 | 2,169,269 | ||||||||||||
| Total common shareholders’ equity | 248,414 | 241,409 | ||||||||||||
| Total shareholders’ equity | 272,924 | 264,810 | ||||||||||||
(1)For definitions, see Key Metrics on page 173.
(2)Return on average tangible common shareholders’ equity is a non-GAAP financial measure. For more information and a corresponding reconciliation to the most closely related financial measures defined by accounting principles generally accepted in the United States of America, see Non-GAAP Reconciliations on page 88.
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Net income was $17.9 billion or $1.87 per diluted share in 2020 compared to $27.4 billion or $2.75 per diluted share in 2019. The decline in net income was primarily due to higher provision for credit losses driven by the weaker economic outlook related to COVID-19 and lower net interest income.
For discussion and analysis of our consolidated and business segment results of operations for 2019 compared to 2018, see the Financial Highlights and Business Segment Operations sections in the MD&A of the Corporation's 2019 Annual Report on Form 10-K.
Net Interest Income
Net interest income decreased $5.5 billion to $43.4 billion in 2020 compared to 2019. Net interest yield on a fully taxable-equivalent (FTE) basis decreased 53 basis points (bps) to 1.90 percent for 2020. The decrease in net interest income was primarily driven by lower interest rates, partially offset by reduced deposit and funding costs, the deployment of excess deposits into securities and an additional day of interest accrual. Assuming continued economic improvement and based on the forward interest rate curve as of January 19, 2021, when we announced quarterly and annual results for the periods ended December 31, 2020, we expect net interest income to be higher in the second half of 2021 as compared to both the second half of 2020 and the first half of 2021. For more information on net interest yield and the FTE basis, see Supplemental Financial Data on page 31, and for more information on interest rate risk management, see Interest Rate Risk Management for the Banking Book on page 82.
Noninterest Income
| Table 2 | Noninterest Income | |||||||||||||
| (Dollars in millions) | 2020 | 2019 | ||||||||||||
| Fees and commissions: | ||||||||||||||
| Card income | $ | 5,656 | $ | 5,797 | ||||||||||
| Service charges | 7,141 | 7,674 | ||||||||||||
| Investment and brokerage services | 14,574 | 13,902 | ||||||||||||
| Investment banking fees | 7,180 | 5,642 | ||||||||||||
| Total fees and commissions | 34,551 | 33,015 | ||||||||||||
| Market making and similar activities | 8,355 | 9,034 | ||||||||||||
| Other income | (738) | 304 | ||||||||||||
| Total noninterest income | $ | 42,168 | $ | 42,353 | ||||||||||
Noninterest income decreased $185 million to $42.2 billion in 2020 compared to 2019. The following highlights the significant changes.
● Card income decreased $141 million primarily due to lower levels of consumer spending driven by the impact of COVID-19, partially offset by higher income related to the processing of unemployment insurance.
● Service charges decreased $533 million primarily due to higher deposit balances and lower client activity due to the impact of COVID-19.
● Investment and brokerage services income increased $672 million primarily due to higher client transactional activity, higher market valuations and assets under management (AUM) flows, partially offset by declines in AUM pricing.
● Investment banking fees increased $1.5 billion primarily driven by higher equity issuance fees.
● Market making and similar activities decreased $679 million primarily due to the impact of lower U.S. interest rates on certain risk management derivatives, partially offset by increased client activity and strong trading performance in fixed income, currencies and commodities (FICC).
● Other income decreased $1.0 billion primarily due to lower equity investment income, higher partnership losses on tax credit investments, primarily affordable housing and renewable energy, partially offset by higher gains on loan sales and sales of debt securities.
Provision for Credit Losses
The provision for credit losses increased $7.7 billion to $11.3 billion in 2020 compared to 2019 primarily driven by higher ECL due to a weaker economic outlook related to COVID-19. For more information on the provision for credit losses, see Allowance for Credit Losses on page 76.
Noninterest Expense
| Table 3 | Noninterest Expense | |||||||||||||
| (Dollars in millions) | 2020 | 2019 | ||||||||||||
| Compensation and benefits | $ | 32,725 | $ | 31,977 | ||||||||||
| Occupancy and equipment | 7,141 | 6,588 | ||||||||||||
| Information processing and communications | 5,222 | 4,646 | ||||||||||||
| Product delivery and transaction related | 3,433 | 2,762 | ||||||||||||
| Marketing | 1,701 | 1,934 | ||||||||||||
| Professional fees | 1,694 | 1,597 | ||||||||||||
| Other general operating | 3,297 | 5,396 | ||||||||||||
| Total noninterest expense | $ | 55,213 | $ | 54,900 | ||||||||||
Noninterest expense increased $313 million to $55.2 billion in 2020 compared to 2019. The increase was primarily due to higher operating costs related to COVID-19, merchant services expenses, which were previously recorded in other income as part of joint venture net earnings, and higher activity-based expenses due to increased client activity, partially offset by a $2.1 billion pretax impairment charge related to the notice of termination of the merchant services joint venture in 2019.
Income Tax Expense
| Table 4 | Income Tax Expense | |||||||||||||
| (Dollars in millions) | 2020 | 2019 | ||||||||||||
| Income before income taxes | $ | 18,995 | $ | 32,754 | ||||||||||
| Income tax expense | 1,101 | 5,324 | ||||||||||||
| Effective tax rate | 5.8 | % | 16.3 | % | ||||||||||
Income tax expense was $1.1 billion for 2020 compared to $5.3 billion in 2019, resulting in an effective tax rate of 5.8 percent compared to 16.3 percent.
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The change in the effective tax rate for 2020 was driven by the impact of our recurring tax preference benefits on lower levels of pretax income. These benefits primarily consist of tax credits from environmental, social and governance (ESG) investments in affordable housing and renewable energy, aligning with our responsible growth strategy to address global sustainability challenges. Excluding tax credits related to our ESG investment activity, the effective tax rate for 2020 would have been 21 percent.
The 2020 rate also included the impact of the U.K. tax law change, whereby on July 22, 2020, the U.K. enacted a repeal of the final two percent of scheduled decreases in the U.K. corporation tax rate, which had been previously enacted. This change will unfavorably affect income tax expense on future U.K.
earnings, and requires a reversal of the adjustment to the U.K. net deferred tax assets recognized at the time the tax rate decreases were originally enacted. Accordingly, during the third quarter of 2020, the Corporation recorded an income tax benefit of approximately $700 million along with a corresponding increase to the U.K. net deferred tax assets.
The effective tax rate for 2019 included net tax benefits primarily related to the resolution of various tax controversy matters.
Absent unusual items, we expect the effective tax rate for 2021 to be in the range of 10 – 12 percent, reflecting tax credits related to our ESG investment activity.
Balance Sheet Overview
| Table 5 | Selected Balance Sheet Data | |||||||||||||||||||
| December 31 | ||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | % Change | |||||||||||||||||
| Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 380,463 | $ | 161,560 | 135 | % | ||||||||||||||
Federal funds sold and securities borrowed or purchased under agreements to resell | 304,058 | 274,597 | 11 | |||||||||||||||||
| Trading account assets | 198,854 | 229,826 | (13) | |||||||||||||||||
| Debt securities | 684,850 | 472,197 | 45 | |||||||||||||||||
| Loans and leases | 927,861 | 983,426 | (6) | |||||||||||||||||
| Allowance for loan and lease losses | (18,802) | (9,416) | 100 | |||||||||||||||||
| All other assets | 342,343 | 321,889 | 6 | |||||||||||||||||
| Total assets | $ | 2,819,627 | $ | 2,434,079 | 16 | |||||||||||||||
| Liabilities | ||||||||||||||||||||
| Deposits | $ | 1,795,480 | $ | 1,434,803 | 25 | |||||||||||||||
Federal funds purchased and securities loaned or sold under agreements to repurchase | 170,323 | 165,109 | 3 | |||||||||||||||||
| Trading account liabilities | 71,320 | 83,270 | (14) | |||||||||||||||||
| Short-term borrowings | 19,321 | 24,204 | (20) | |||||||||||||||||
| Long-term debt | 262,934 | 240,856 | 9 | |||||||||||||||||
| All other liabilities | 227,325 | 221,027 | 3 | |||||||||||||||||
| Total liabilities | 2,546,703 | 2,169,269 | 17 | |||||||||||||||||
| Shareholders’ equity | 272,924 | 264,810 | 3 | |||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 2,819,627 | $ | 2,434,079 | 16 | |||||||||||||||
Assets
At December 31, 2020, total assets were approximately $2.8 trillion, up $385.5 billion from December 31, 2019. The increase in assets was primarily due to higher cash held at central banks that was primarily funded by deposit growth and debt securities, partially offset by a decline in loans and leases.
Cash and Cash Equivalents
Cash and cash equivalents increased $218.9 billion driven by deposit growth.
Federal Funds Sold and Securities Borrowed or Purchased Under Agreements to Resell
Federal funds transactions involve lending reserve balances on a short-term basis. Securities borrowed or purchased under agreements to resell are collateralized lending transactions utilized to accommodate customer transactions, earn interest rate spreads, and obtain securities for settlement and for collateral. Federal funds sold and securities borrowed or purchased under agreements to resell increased $29.5 billion primarily due to deployment of deposit inflows.
Trading Account Assets
Trading account assets consist primarily of long positions in equity and fixed-income securities including U.S. government and agency securities, corporate securities and non-U.S. sovereign debt. Trading account assets decreased $31.0 billion due to a decline in inventory within Global Markets.
Debt Securities
Debt securities primarily include U.S. Treasury and agency securities, mortgage-backed securities (MBS), principally agency MBS, non-U.S. bonds, corporate bonds and municipal debt. We use the debt securities portfolio primarily to manage interest rate and liquidity risk and to take advantage of market conditions that create economically attractive returns on these investments. Debt securities increased $212.7 billion primarily driven by the deployment of deposit inflows. For more information on debt securities, see Note 4 – Securities to the Consolidated Financial Statements.
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Loans and Leases
Loans and leases decreased $55.6 billion primarily driven by commercial loan paydowns, lower credit card spending and lower residential mortgages due to higher paydowns and a decline in originations. For more information on the loan portfolio, see Credit Risk Management on page 61.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses increased $9.4 billion primarily due to the weaker economic outlook related to COVID-19 and the impact of the adoption of the new credit loss accounting standard. For more information, see Allowance for Credit Losses on page 76.
Liabilities
At December 31, 2020, total liabilities were approximately $2.5 trillion, up $377.4 billion from December 31, 2019, primarily due to deposit growth.
Deposits
Deposits increased $360.7 billion primarily due to an increase in retail and wholesale deposits.
Federal Funds Purchased and Securities Loaned or Sold Under Agreements to Repurchase
Federal funds transactions involve borrowing reserve balances on a short-term basis. Securities loaned or sold under agreements to repurchase are collateralized borrowing transactions utilized to accommodate customer transactions, earn interest rate spreads and finance assets on the balance sheet. Federal funds purchased and securities loaned or sold under agreements to repurchase increased $5.2 billion primarily driven by client activity within Global Markets.
Trading Account Liabilities
Trading account liabilities consist primarily of short positions in equity and fixed-income securities including U.S. Treasury and agency securities, corporate securities and non-U.S. sovereign debt. Trading account liabilities decreased $12.0 billion primarily due to lower levels of short positions within Global Markets.
Short-term Borrowings
Short-term borrowings provide an additional funding source and primarily consist of Federal Home Loan Bank (FHLB) short-term borrowings, notes payable and various other borrowings that generally have maturities of one year or less. Short-term borrowings decreased $4.9 billion due to higher deposit levels. For more information on short-term borrowings, see Note 10 – Federal Funds Sold or Purchased, Securities Financing Agreements, Short-term Borrowings and Restricted Cash to the Consolidated Financial Statements.
Long-term Debt
Long-term debt increased $22.1 billion primarily due to debt issuances and valuation adjustments, partially offset by maturities and redemptions. For more information on long-term debt, see Note 11 – Long-term Debt to the Consolidated Financial Statements.
Shareholders’ Equity
Shareholders’ equity increased $8.1 billion driven by net income, market value increases on debt securities and issuances of preferred and common stock, partially offset by the return of capital to shareholders totaling $14.7 billion through share repurchases and common and preferred stock dividends, as well as the impact of the adoption of the new credit loss accounting standard and the redemption of preferred stock.
Cash Flows Overview
The Corporation’s operating assets and liabilities support our global markets and lending activities. We believe that cash flows from operations, available cash balances and our ability to generate cash through short- and long-term debt are sufficient to fund our operating liquidity needs. Our investing activities primarily include the debt securities portfolio and loans and leases. Our financing activities reflect cash flows primarily related to customer deposits, securities financing agreements and long-term debt. For more information on liquidity, see Liquidity Risk on page 57.
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Supplemental Financial Data
Non-GAAP Financial Measures
In this Form 10-K, we present certain non-GAAP financial measures. Non-GAAP financial measures exclude certain items or otherwise include components that differ from the most directly comparable measures calculated in accordance with GAAP. Non-GAAP financial measures are provided as additional useful information to assess our financial condition, results of operations (including period-to-period operating performance) or compliance with prospective regulatory requirements. These non-GAAP financial measures are not intended as a substitute for GAAP financial measures and may not be defined or calculated the same way as non-GAAP financial measures used by other companies.
We view net interest income and related ratios and analyses on an 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 and a representative state tax rate. Net interest yield, which measures the basis points we earn over the cost of funds, utilizes net interest income on an FTE basis. 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 shareholders’ equity or common shareholders’ equity reduced by goodwill and intangible assets (excluding mortgage servicing rights (MSRs)), net of related deferred tax liabilities ("adjusted" shareholders' equity or common shareholders' equity). 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 objectives. These ratios are as follows:
● Return on average tangible common shareholders’ equity measures our net income applicable to common shareholders as a percentage of adjusted average common shareholders’ equity. The tangible common equity ratio represents adjusted ending common shareholders’ equity divided by total tangible assets.
● Return on average tangible shareholders' equity measures our net income as a percentage of adjusted average total shareholders’ equity. The tangible equity ratio represents adjusted ending shareholders’ equity divided by total tangible assets.
● Tangible book value per common share represents adjusted ending common shareholders’ equity divided by ending common shares outstanding.
We believe ratios utilizing tangible equity provide additional useful information because they present measures of those assets that can generate income. Tangible book value per common 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 6 and 7.
For more information on the reconciliation of these non-GAAP financial measures to the corresponding GAAP financial measures, see Non-GAAP Reconciliations on page 88.
Key Performance Indicators
We present certain key financial and nonfinancial performance indicators (key performance indicators) that management uses when assessing our consolidated and/or segment results. We believe they are useful to investors because they provide additional information about our underlying operational performance and trends. These key performance indicators (KPIs) may not be defined or calculated in the same way as similar KPIs used by other companies. For information on how these metrics are defined, see Key Metrics on page 173.
Our consolidated key performance indicators, which include various equity and credit metrics, are presented in Table 1 on page 27 and/or Tables 6 and 7 on pages 32 and 33.
For information on key segment performance metrics, see Business Segment Operations on page 36.
31 Bank of America | ||||||||
| Table 6 | Five-year Summary of Selected Financial Data | |||||||||||||||||||||||||||||||
| (In millions, except per share information) | 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||||
| Income statement | ||||||||||||||||||||||||||||||||
| Net interest income | $ | 43,360 | $ | 48,891 | $ | 48,162 | $ | 45,239 | $ | 41,486 | ||||||||||||||||||||||
| Noninterest income | 42,168 | 42,353 | 42,858 | 41,887 | 42,012 | |||||||||||||||||||||||||||
| Total revenue, net of interest expense | 85,528 | 91,244 | 91,020 | 87,126 | 83,498 | |||||||||||||||||||||||||||
| Provision for credit losses | 11,320 | 3,590 | 3,282 | 3,396 | 3,597 | |||||||||||||||||||||||||||
| Noninterest expense | 55,213 | 54,900 | 53,154 | 54,517 | 54,880 | |||||||||||||||||||||||||||
| Income before income taxes | 18,995 | 32,754 | 34,584 | 29,213 | 25,021 | |||||||||||||||||||||||||||
| Income tax expense | 1,101 | 5,324 | 6,437 | 10,981 | 7,199 | |||||||||||||||||||||||||||
| Net income | 17,894 | 27,430 | 28,147 | 18,232 | 17,822 | |||||||||||||||||||||||||||
| Net income applicable to common shareholders | 16,473 | 25,998 | 26,696 | 16,618 | 16,140 | |||||||||||||||||||||||||||
| Average common shares issued and outstanding | 8,753.2 | 9,390.5 | 10,096.5 | 10,195.6 | 10,248.1 | |||||||||||||||||||||||||||
| Average diluted common shares issued and outstanding | 8,796.9 | 9,442.9 | 10,236.9 | 10,778.4 | 11,046.8 | |||||||||||||||||||||||||||
| Performance ratios | ||||||||||||||||||||||||||||||||
Return on average assets (1) | 0.67 | % | 1.14 | % | 1.21 | % | 0.80 | % | 0.81 | % | ||||||||||||||||||||||
Return on average common shareholders’ equity (1) | 6.76 | 10.62 | 11.04 | 6.72 | 6.69 | |||||||||||||||||||||||||||
Return on average tangible common shareholders’ equity (2) | 9.48 | 14.86 | 15.55 | 9.41 | 9.51 | |||||||||||||||||||||||||||
Return on average shareholders’ equity (1) | 6.69 | 10.24 | 10.63 | 6.72 | 6.70 | |||||||||||||||||||||||||||
Return on average tangible shareholders’ equity (2) | 9.07 | 13.85 | 14.46 | 9.08 | 9.17 | |||||||||||||||||||||||||||
| Total ending equity to total ending assets | 9.68 | 10.88 | 11.27 | 11.71 | 12.17 | |||||||||||||||||||||||||||
| Total average equity to total average assets | 9.96 | 11.14 | 11.39 | 11.96 | 12.14 | |||||||||||||||||||||||||||
| Dividend payout | 38.18 | 23.65 | 20.31 | 24.24 | 15.94 | |||||||||||||||||||||||||||
| Per common share data | ||||||||||||||||||||||||||||||||
| Earnings | $ | 1.88 | $ | 2.77 | $ | 2.64 | $ | 1.63 | $ | 1.57 | ||||||||||||||||||||||
| Diluted earnings | 1.87 | 2.75 | 2.61 | 1.56 | 1.49 | |||||||||||||||||||||||||||
| Dividends paid | 0.72 | 0.66 | 0.54 | 0.39 | 0.25 | |||||||||||||||||||||||||||
Book value (1) | 28.72 | 27.32 | 25.13 | 23.80 | 23.97 | |||||||||||||||||||||||||||
Tangible book value (2) | 20.60 | 19.41 | 17.91 | 16.96 | 16.89 | |||||||||||||||||||||||||||
| Market capitalization | $ | 262,206 | $ | 311,209 | $ | 238,251 | $ | 303,681 | $ | 222,163 | ||||||||||||||||||||||
| Average balance sheet | ||||||||||||||||||||||||||||||||
| Total loans and leases | $ | 982,467 | $ | 958,416 | $ | 933,049 | $ | 918,731 | $ | 900,433 | ||||||||||||||||||||||
| Total assets | 2,683,122 | 2,405,830 | 2,325,246 | 2,268,633 | 2,190,218 | |||||||||||||||||||||||||||
| Total deposits | 1,632,998 | 1,380,326 | 1,314,941 | 1,269,796 | 1,222,561 | |||||||||||||||||||||||||||
| Long-term debt | 220,440 | 201,623 | 200,399 | 194,882 | 204,826 | |||||||||||||||||||||||||||
| Common shareholders’ equity | 243,685 | 244,853 | 241,799 | 247,101 | 241,187 | |||||||||||||||||||||||||||
| Total shareholders’ equity | 267,309 | 267,889 | 264,748 | 271,289 | 265,843 | |||||||||||||||||||||||||||
Asset quality (3) | ||||||||||||||||||||||||||||||||
Allowance for credit losses (4) | $ | 20,680 | $ | 10,229 | $ | 10,398 | $ | 11,170 | $ | 11,999 | ||||||||||||||||||||||
Nonperforming loans, leases and foreclosed properties (5) | 5,116 | 3,837 | 5,244 | 6,758 | 8,084 | |||||||||||||||||||||||||||
Allowance for loan and lease losses as a percentage of total loans and leases outstanding (5) | 2.04 | % | 0.97 | % | 1.02 | % | 1.12 | % | 1.26 | % | ||||||||||||||||||||||
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (5) | 380 | 265 | 194 | 161 | 149 | |||||||||||||||||||||||||||
| Net charge-offs | $ | 4,121 | $ | 3,648 | $ | 3,763 | $ | 3,979 | $ | 3,821 | ||||||||||||||||||||||
Net charge-offs as a percentage of average loans and leases outstanding (5) | 0.42 | % | 0.38 | % | 0.41 | % | 0.44 | % | 0.43 | % | ||||||||||||||||||||||
Capital ratios at year end (6) | ||||||||||||||||||||||||||||||||
| Common equity tier 1 capital | 11.9 | % | 11.2 | % | 11.6 | % | 11.5 | % | 10.8 | % | ||||||||||||||||||||||
| Tier 1 capital | 13.5 | 12.6 | 13.2 | 13.0 | 12.4 | |||||||||||||||||||||||||||
| Total capital | 16.1 | 14.7 | 15.1 | 14.8 | 14.2 | |||||||||||||||||||||||||||
| Tier 1 leverage | 7.4 | 7.9 | 8.4 | 8.6 | 8.8 | |||||||||||||||||||||||||||
| Supplementary leverage ratio | 7.2 | 6.4 | 6.8 | n/a | n/a | |||||||||||||||||||||||||||
Tangible equity (2) | 7.4 | 8.2 | 8.6 | 8.9 | 9.2 | |||||||||||||||||||||||||||
Tangible common equity (2) | 6.5 | 7.3 | 7.6 | 7.9 | 8.0 | |||||||||||||||||||||||||||
(1)For definitions, see Key Metrics on page 173
(2)Tangible equity ratios and tangible book value per share of common stock are non-GAAP financial measures. For more information on these ratios and corresponding reconciliations to GAAP financial measures, see Supplemental Financial Data on page 31 and Non-GAAP Reconciliations on page 88.
(3)Asset quality metrics include $75 million of non-U.S. consumer credit card net charge-offs in 2017 and $243 million of non-U.S. consumer credit card allowance for loan and lease losses, $9.2 billion of non-U.S. consumer credit card loans and $175 million of non-U.S. consumer credit card net charge-offs in 2016. The Corporation sold its non-U.S. consumer credit card business in 2017.
(4)Includes the allowance for loan and leases 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 67 and corresponding Table 28 and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 71 and corresponding Table 35.
(6)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 additional information, including which approach is used to assess capital adequacy, see Capital Management on page 50.
n/a = not applicable
Bank of America 32 | ||||||||
| Table 7 | Selected Quarterly Financial Data | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 Quarters | 2019 Quarters | |||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions, except per share information) | Fourth | Third | Second | First | Fourth | Third | Second | First | ||||||||||||||||||||||||||||||||||||||||||
| Income statement | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income | $ | 10,253 | $ | 10,129 | $ | 10,848 | $ | 12,130 | $ | 12,140 | $ | 12,187 | $ | 12,189 | $ | 12,375 | ||||||||||||||||||||||||||||||||||
| Noninterest income | 9,846 | 10,207 | 11,478 | 10,637 | 10,209 | 10,620 | 10,895 | 10,629 | ||||||||||||||||||||||||||||||||||||||||||
| Total revenue, net of interest expense | 20,099 | 20,336 | 22,326 | 22,767 | 22,349 | 22,807 | 23,084 | 23,004 | ||||||||||||||||||||||||||||||||||||||||||
| Provision for credit losses | 53 | 1,389 | 5,117 | 4,761 | 941 | 779 | 857 | 1,013 | ||||||||||||||||||||||||||||||||||||||||||
| Noninterest expense | 13,927 | 14,401 | 13,410 | 13,475 | 13,239 | 15,169 | 13,268 | 13,224 | ||||||||||||||||||||||||||||||||||||||||||
| Income before income taxes | 6,119 | 4,546 | 3,799 | 4,531 | 8,169 | 6,859 | 8,959 | 8,767 | ||||||||||||||||||||||||||||||||||||||||||
| Income tax expense | 649 | (335) | 266 | 521 | 1,175 | 1,082 | 1,611 | 1,456 | ||||||||||||||||||||||||||||||||||||||||||
| Net income | 5,470 | 4,881 | 3,533 | 4,010 | 6,994 | 5,777 | 7,348 | 7,311 | ||||||||||||||||||||||||||||||||||||||||||
| Net income applicable to common shareholders | 5,208 | 4,440 | 3,284 | 3,541 | 6,748 | 5,272 | 7,109 | 6,869 | ||||||||||||||||||||||||||||||||||||||||||
Average common shares issued and outstanding | 8,724.9 | 8,732.9 | 8,739.9 | 8,815.6 | 9,017.1 | 9,303.6 | 9,523.2 | 9,725.9 | ||||||||||||||||||||||||||||||||||||||||||
Average diluted common shares issued and outstanding | 8,785.0 | 8,777.5 | 8,768.1 | 8,862.7 | 9,079.5 | 9,353.0 | 9,559.6 | 9,787.3 | ||||||||||||||||||||||||||||||||||||||||||
| Performance ratios | ||||||||||||||||||||||||||||||||||||||||||||||||||
Return on average assets (1) | 0.78 | % | 0.71 | % | 0.53 | % | 0.65 | % | 1.13 | % | 0.95 | % | 1.23 | % | 1.26 | % | ||||||||||||||||||||||||||||||||||
Four-quarter trailing return on average assets (2) | 0.67 | 0.75 | 0.81 | 0.99 | 1.14 | 1.17 | 1.24 | 1.22 | ||||||||||||||||||||||||||||||||||||||||||
Return on average common shareholders’ equity (1) | 8.39 | 7.24 | 5.44 | 5.91 | 11.00 | 8.48 | 11.62 | 11.42 | ||||||||||||||||||||||||||||||||||||||||||
Return on average tangible common shareholders’ equity (3) | 11.73 | 10.16 | 7.63 | 8.32 | 15.43 | 11.84 | 16.24 | 16.01 | ||||||||||||||||||||||||||||||||||||||||||
Return on average shareholders’ equity (1) | 8.03 | 7.26 | 5.34 | 6.10 | 10.40 | 8.48 | 11.00 | 11.14 | ||||||||||||||||||||||||||||||||||||||||||
Return on average tangible shareholders’ equity (3) | 10.84 | 9.84 | 7.23 | 8.29 | 14.09 | 11.43 | 14.88 | 15.10 | ||||||||||||||||||||||||||||||||||||||||||
| Total ending equity to total ending assets | 9.68 | 9.82 | 9.69 | 10.11 | 10.88 | 11.06 | 11.33 | 11.23 | ||||||||||||||||||||||||||||||||||||||||||
| Total average equity to total average assets | 9.71 | 9.76 | 9.85 | 10.60 | 10.89 | 11.21 | 11.17 | 11.28 | ||||||||||||||||||||||||||||||||||||||||||
| Dividend payout | 30.11 | 35.36 | 47.87 | 44.57 | 23.90 | 31.48 | 19.95 | 21.20 | ||||||||||||||||||||||||||||||||||||||||||
| Per common share data | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Earnings | $ | 0.60 | $ | 0.51 | $ | 0.38 | $ | 0.40 | $ | 0.75 | $ | 0.57 | $ | 0.75 | $ | 0.71 | ||||||||||||||||||||||||||||||||||
| Diluted earnings | 0.59 | 0.51 | 0.37 | 0.40 | 0.74 | 0.56 | 0.74 | 0.70 | ||||||||||||||||||||||||||||||||||||||||||
| Dividends paid | 0.18 | 0.18 | 0.18 | 0.18 | 0.18 | 0.18 | 0.15 | 0.15 | ||||||||||||||||||||||||||||||||||||||||||
Book value (1) | 28.72 | 28.33 | 27.96 | 27.84 | 27.32 | 26.96 | 26.41 | 25.57 | ||||||||||||||||||||||||||||||||||||||||||
Tangible book value (3) | 20.60 | 20.23 | 19.90 | 19.79 | 19.41 | 19.26 | 18.92 | 18.26 | ||||||||||||||||||||||||||||||||||||||||||
| Market capitalization | $ | 262,206 | $ | 208,656 | $ | 205,772 | $ | 184,181 | $ | 311,209 | $ | 264,842 | $ | 270,935 | $ | 263,992 | ||||||||||||||||||||||||||||||||||
| Average balance sheet | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total loans and leases | $ | 934,798 | $ | 974,018 | $ | 1,031,387 | $ | 990,283 | $ | 973,986 | $ | 964,733 | $ | 950,525 | $ | 944,020 | ||||||||||||||||||||||||||||||||||
| Total assets | 2,791,874 | 2,739,684 | 2,704,186 | 2,494,928 | 2,450,005 | 2,412,223 | 2,399,051 | 2,360,992 | ||||||||||||||||||||||||||||||||||||||||||
| Total deposits | 1,737,139 | 1,695,488 | 1,658,197 | 1,439,336 | 1,410,439 | 1,375,052 | 1,375,450 | 1,359,864 | ||||||||||||||||||||||||||||||||||||||||||
| Long-term debt | 225,423 | 224,254 | 221,167 | 210,816 | 206,026 | 202,620 | 201,007 | 196,726 | ||||||||||||||||||||||||||||||||||||||||||
| Common shareholders’ equity | 246,840 | 243,896 | 242,889 | 241,078 | 243,439 | 246,630 | 245,438 | 243,891 | ||||||||||||||||||||||||||||||||||||||||||
| Total shareholders’ equity | 271,020 | 267,323 | 266,316 | 264,534 | 266,900 | 270,430 | 267,975 | 266,217 | ||||||||||||||||||||||||||||||||||||||||||
| Asset quality | ||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for credit losses (4) | $ | 20,680 | $ | 21,506 | $ | 21,091 | $ | 17,126 | $ | 10,229 | $ | 10,242 | $ | 10,333 | $ | 10,379 | ||||||||||||||||||||||||||||||||||
Nonperforming loans, leases and foreclosed properties (5) | 5,116 | 4,730 | 4,611 | 4,331 | 3,837 | 3,723 | 4,452 | 5,145 | ||||||||||||||||||||||||||||||||||||||||||
Allowance for loan and lease losses as a percentage of total loans and leases outstanding (5) | 2.04 | % | 2.07 | % | 1.96 | % | 1.51 | % | 0.97 | % | 0.98 | % | 1.00 | % | 1.02 | % | ||||||||||||||||||||||||||||||||||
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (5) | 380 | 431 | 441 | 389 | 265 | 271 | 228 | 197 | ||||||||||||||||||||||||||||||||||||||||||
| Net charge-offs | $ | 881 | $ | 972 | $ | 1,146 | $ | 1,122 | $ | 959 | $ | 811 | $ | 887 | $ | 991 | ||||||||||||||||||||||||||||||||||
Annualized net charge-offs as a percentage of average loans and leases outstanding (5) | 0.38 | % | 0.40 | % | 0.45 | % | 0.46 | % | 0.39 | % | 0.34 | % | 0.38 | % | 0.43 | % | ||||||||||||||||||||||||||||||||||
Capital ratios at period end (6) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Common equity tier 1 capital | 11.9 | % | 11.9 | % | 11.4 | % | 10.8 | % | 11.2 | % | 11.4 | % | 11.7 | % | 11.6 | % | ||||||||||||||||||||||||||||||||||
Tier 1 capital | 13.5 | 13.5 | 12.9 | 12.3 | 12.6 | 12.9 | 13.3 | 13.1 | ||||||||||||||||||||||||||||||||||||||||||
Total capital | 16.1 | 16.1 | 14.8 | 14.6 | 14.7 | 15.1 | 15.4 | 15.2 | ||||||||||||||||||||||||||||||||||||||||||
Tier 1 leverage | 7.4 | 7.4 | 7.4 | 7.9 | 7.9 | 8.2 | 8.4 | 8.4 | ||||||||||||||||||||||||||||||||||||||||||
Supplementary leverage ratio | 7.2 | 6.9 | 7.1 | 6.4 | 6.4 | 6.6 | 6.8 | 6.8 | ||||||||||||||||||||||||||||||||||||||||||
Tangible equity (3) | 7.4 | 7.4 | 7.3 | 7.7 | 8.2 | 8.4 | 8.7 | 8.5 | ||||||||||||||||||||||||||||||||||||||||||
Tangible common equity (3) | 6.5 | 6.6 | 6.5 | 6.7 | 7.3 | 7.4 | 7.6 | 7.6 | ||||||||||||||||||||||||||||||||||||||||||
| Total loss-absorbing capacity and long-term debt metrics | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total loss-absorbing capacity to risk-weighted assets | 27.4 | % | 26.9 | % | 26.0 | % | 24.6 | % | 24.6 | % | 24.8 | % | 25.5 | % | 24.8 | % | ||||||||||||||||||||||||||||||||||
| Total loss-absorbing capacity to supplementary leverage exposure | 14.5 | 13.7 | 14.2 | 12.8 | 12.5 | 12.7 | 13.0 | 12.8 | ||||||||||||||||||||||||||||||||||||||||||
| Eligible long-term debt to risk-weighted assets | 13.3 | 12.9 | 12.4 | 11.6 | 11.5 | 11.4 | 11.8 | 11.4 | ||||||||||||||||||||||||||||||||||||||||||
| Eligible long-term debt to supplementary leverage exposure | 7.1 | 6.6 | 6.7 | 6.1 | 5.8 | 5.8 | 6.0 | 5.9 | ||||||||||||||||||||||||||||||||||||||||||
(1)For definitions, see Key Metrics on page 173.
(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 and corresponding reconciliations to GAAP financial measures, see Supplemental Financial Data on page 31 and Non-GAAP Reconciliations on page 88.
(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 68 and corresponding Table 28 and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 72 and corresponding Table 35.
(6)For more information, including which approach is used to assess capital adequacy, see Capital Management on page 50.
33 Bank of America | ||||||||
| Table 8 | Average Balances and Interest Rates - FTE Basis | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Average Balance | Interest Income/ Expense (1) | Yield/ Rate | Average Balance | Interest Income/ Expense (1) | Yield/ Rate | Average Balance | Interest Income/ Expense (1) | Yield/ Rate | ||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Earning assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing deposits with the Federal Reserve, non- U.S. central banks and other banks | $ | 253,227 | $ | 359 | 0.14 | % | $ | 125,555 | $ | 1,823 | 1.45 | % | $ | 139,848 | $ | 1,926 | 1.38 | % | ||||||||||||||||||||||||||||||||||||||
| Time deposits placed and other short-term investments | 8,840 | 29 | 0.33 | 9,427 | 207 | 2.19 | 9,446 | 216 | 2.29 | |||||||||||||||||||||||||||||||||||||||||||||||
| Federal funds sold and securities borrowed or purchased under agreements to resell | 309,945 | 903 | 0.29 | 279,610 | 4,843 | 1.73 | 251,328 | 3,176 | 1.26 | |||||||||||||||||||||||||||||||||||||||||||||||
| Trading account assets | 148,076 | 4,185 | 2.83 | 148,076 | 5,269 | 3.56 | 132,724 | 4,901 | 3.69 | |||||||||||||||||||||||||||||||||||||||||||||||
| Debt securities | 532,266 | 9,868 | 1.87 | 450,090 | 11,917 | 2.65 | 437,312 | 11,837 | 2.66 | |||||||||||||||||||||||||||||||||||||||||||||||
Loans and leases (2) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 236,719 | 7,338 | 3.10 | 220,552 | 7,651 | 3.47 | 207,523 | 7,294 | 3.51 | |||||||||||||||||||||||||||||||||||||||||||||||
| Home equity | 38,251 | 1,290 | 3.37 | 44,600 | 2,194 | 4.92 | 53,886 | 2,573 | 4.77 | |||||||||||||||||||||||||||||||||||||||||||||||
| Credit card | 85,017 | 8,759 | 10.30 | 94,488 | 10,166 | 10.76 | 94,612 | 9,579 | 10.12 | |||||||||||||||||||||||||||||||||||||||||||||||
Direct/Indirect and other consumer (3) | 89,974 | 2,545 | 2.83 | 90,656 | 3,261 | 3.60 | 93,036 | 3,104 | 3.34 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total consumer | 449,961 | 19,932 | 4.43 | 450,296 | 23,272 | 5.17 | 449,057 | 22,550 | 5.02 | |||||||||||||||||||||||||||||||||||||||||||||||
U.S. commercial (4) | 344,095 | 9,712 | 2.82 | 321,467 | 13,161 | 4.09 | 304,387 | 11,937 | 3.92 | |||||||||||||||||||||||||||||||||||||||||||||||
Non-U.S. commercial (4) | 106,487 | 2,208 | 2.07 | 103,918 | 3,402 | 3.27 | 97,664 | 3,220 | 3.30 | |||||||||||||||||||||||||||||||||||||||||||||||
Commercial real estate (5) | 63,428 | 1,790 | 2.82 | 62,044 | 2,741 | 4.42 | 60,384 | 2,618 | 4.34 | |||||||||||||||||||||||||||||||||||||||||||||||
| Commercial lease financing | 18,496 | 559 | 3.02 | 20,691 | 718 | 3.47 | 21,557 | 698 | 3.24 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total commercial | 532,506 | 14,269 | 2.68 | 508,120 | 20,022 | 3.94 | 483,992 | 18,473 | 3.82 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total loans and leases | 982,467 | 34,201 | 3.48 | 958,416 | 43,294 | 4.52 | 933,049 | 41,023 | 4.40 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other earning assets | 83,078 | 2,539 | 3.06 | 69,089 | 4,478 | 6.48 | 76,524 | 4,300 | 5.62 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total earning assets | 2,317,899 | 52,084 | 2.25 | 2,040,263 | 71,831 | 3.52 | 1,980,231 | 67,379 | 3.40 | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash and due from banks | 31,885 | 26,193 | 25,830 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other assets, less allowance for loan and lease losses | 333,338 | 339,374 | 319,185 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 2,683,122 | $ | 2,405,830 | $ | 2,325,246 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. interest-bearing deposits | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Savings | $ | 58,113 | $ | 6 | 0.01 | % | $ | 52,020 | $ | 5 | 0.01 | % | $ | 54,226 | $ | 6 | 0.01 | % | ||||||||||||||||||||||||||||||||||||||
| Demand and money market deposit accounts | 829,719 | 977 | 0.12 | 741,126 | 4,471 | 0.60 | 676,382 | 2,636 | 0.39 | |||||||||||||||||||||||||||||||||||||||||||||||
| Consumer CDs and IRAs | 47,780 | 405 | 0.85 | 47,577 | 471 | 0.99 | 39,823 | 157 | 0.39 | |||||||||||||||||||||||||||||||||||||||||||||||
| Negotiable CDs, public funds and other deposits | 64,857 | 323 | 0.50 | 66,866 | 1,407 | 2.11 | 50,593 | 991 | 1.96 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total U.S. interest-bearing deposits | 1,000,469 | 1,711 | 0.17 | 907,589 | 6,354 | 0.70 | 821,024 | 3,790 | 0.46 | |||||||||||||||||||||||||||||||||||||||||||||||
| Non-U.S. interest-bearing deposits | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Banks located in non-U.S. countries | 1,476 | 4 | 0.27 | 1,936 | 20 | 1.04 | 2,312 | 39 | 1.69 | |||||||||||||||||||||||||||||||||||||||||||||||
| Governments and official institutions | 184 | — | 0.01 | 181 | — | 0.05 | 810 | — | 0.01 | |||||||||||||||||||||||||||||||||||||||||||||||
| Time, savings and other | 75,386 | 228 | 0.30 | 69,351 | 814 | 1.17 | 65,097 | 666 | 1.02 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total non-U.S. interest-bearing deposits | 77,046 | 232 | 0.30 | 71,468 | 834 | 1.17 | 68,219 | 705 | 1.03 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing deposits | 1,077,515 | 1,943 | 0.18 | 979,057 | 7,188 | 0.73 | 889,243 | 4,495 | 0.51 | |||||||||||||||||||||||||||||||||||||||||||||||
| Federal funds purchased, securities loaned or sold under agreements to repurchase, short-term borrowings and other interest-bearing liabilities | 293,466 | 987 | 0.34 | 276,432 | 7,208 | 2.61 | 269,748 | 5,839 | 2.17 | |||||||||||||||||||||||||||||||||||||||||||||||
| Trading account liabilities | 41,386 | 974 | 2.35 | 45,449 | 1,249 | 2.75 | 50,928 | 1,358 | 2.67 | |||||||||||||||||||||||||||||||||||||||||||||||
| Long-term debt | 220,440 | 4,321 | 1.96 | 201,623 | 6,700 | 3.32 | 200,399 | 6,915 | 3.45 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 1,632,807 | 8,225 | 0.50 | 1,502,561 | 22,345 | 1.49 | 1,410,318 | 18,607 | 1.32 | |||||||||||||||||||||||||||||||||||||||||||||||
| Noninterest-bearing sources | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noninterest-bearing deposits | 555,483 | 401,269 | 425,698 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Other liabilities (6) | 227,523 | 234,111 | 224,482 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shareholders’ equity | 267,309 | 267,889 | 264,748 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 2,683,122 | $ | 2,405,830 | $ | 2,325,246 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest spread | 1.75 | % | 2.03 | % | 2.08 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Impact of noninterest-bearing sources | 0.15 | 0.40 | 0.37 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income/yield on earning assets (7) | $ | 43,859 | 1.90 | % | $ | 49,486 | 2.43 | % | $ | 48,772 | 2.45 | % | ||||||||||||||||||||||||||||||||||||||||||||
(1)Includes the impact of interest rate risk management contracts. For more information, see Interest Rate Risk Management for the Banking Book on page 82.
(2)Nonperforming loans are included in the respective average loan balances. Income on these nonperforming loans is generally recognized on a cost recovery basis.
(3)Includes non-U.S. consumer loans of $2.9 billion, $2.9 billion and $2.8 billion for 2020, 2019 and 2018, respectively.
(4)Certain prior-period amounts for 2019 have been reclassified to conform to current-period presentation.
(5)Includes U.S. commercial real estate loans of $59.8 billion, $57.3 billion and $56.4 billion, and non-U.S. commercial real estate loans of $3.6 billion, $4.7 billion and $4.0 billion for 2020, 2019 and 2018, respectively.
(6)Includes $34.3 billion, $35.5 billion and $30.4 billion of structured notes and liabilities for 2020, 2019 and 2018, respectively.
(7)Net interest income includes FTE adjustments of $499 million, $595 million and $610 million for 2020, 2019 and 2018, respectively.
Bank of America 34 | ||||||||
| Table 9 | Analysis of Changes in Net Interest Income - FTE Basis | |||||||||||||||||||||||||||||||||||||
Due to Change in (1) | Net Change | Due to Change in (1) | Net Change | |||||||||||||||||||||||||||||||||||
| Volume | Rate | Volume | Rate | |||||||||||||||||||||||||||||||||||
| (Dollars in millions) | From 2019 to 2020 | From 2018 to 2019 | ||||||||||||||||||||||||||||||||||||
| Increase (decrease) in interest income | ||||||||||||||||||||||||||||||||||||||
Interest-bearing deposits with the Federal Reserve, non-U.S. central banks and other banks | $ | 1,849 | $ | (3,313) | $ | (1,464) | $ | (193) | $ | 90 | $ | (103) | ||||||||||||||||||||||||||
| Time deposits placed and other short-term investments | (13) | (165) | (178) | — | (9) | (9) | ||||||||||||||||||||||||||||||||
Federal funds sold and securities borrowed or purchased under agreements to resell | 519 | (4,459) | (3,940) | 347 | 1,320 | 1,667 | ||||||||||||||||||||||||||||||||
| Trading account assets | 3 | (1,087) | (1,084) | 563 | (195) | 368 | ||||||||||||||||||||||||||||||||
| Debt securities | 2,188 | (4,237) | (2,049) | 135 | (55) | 80 | ||||||||||||||||||||||||||||||||
| Loans and leases | ||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 563 | (876) | (313) | 447 | (90) | 357 | ||||||||||||||||||||||||||||||||
| Home equity | (312) | (592) | (904) | (446) | 67 | (379) | ||||||||||||||||||||||||||||||||
| Credit card | (1,018) | (389) | (1,407) | (17) | 604 | 587 | ||||||||||||||||||||||||||||||||
| Direct/Indirect and other consumer | (22) | (694) | (716) | (76) | 233 | 157 | ||||||||||||||||||||||||||||||||
| Total consumer | (3,340) | 722 | ||||||||||||||||||||||||||||||||||||
U.S. commercial (2) | 912 | (4,361) | (3,449) | 665 | 559 | 1,224 | ||||||||||||||||||||||||||||||||
Non-U.S. commercial (2) | 80 | (1,274) | (1,194) | 209 | (27) | 182 | ||||||||||||||||||||||||||||||||
| Commercial real estate | 63 | (1,014) | (951) | 75 | 48 | 123 | ||||||||||||||||||||||||||||||||
| Commercial lease financing | (76) | (83) | (159) | (28) | 48 | 20 | ||||||||||||||||||||||||||||||||
| Total commercial | (5,753) | 1,549 | ||||||||||||||||||||||||||||||||||||
| Total loans and leases | (9,093) | 2,271 | ||||||||||||||||||||||||||||||||||||
| Other earning assets | 905 | (2,844) | (1,939) | (417) | 595 | 178 | ||||||||||||||||||||||||||||||||
| Net increase (decrease) in interest income | $ | (19,747) | $ | 4,452 | ||||||||||||||||||||||||||||||||||
| Increase (decrease) in interest expense | ||||||||||||||||||||||||||||||||||||||
| U.S. interest-bearing deposits | ||||||||||||||||||||||||||||||||||||||
| Savings | $ | 1 | $ | — | $ | 1 | $ | (1) | $ | — | $ | (1) | ||||||||||||||||||||||||||
| Demand and money market deposit accounts | 507 | (4,001) | (3,494) | 254 | 1,581 | 1,835 | ||||||||||||||||||||||||||||||||
| Consumer CDs and IRAs | 2 | (68) | (66) | 29 | 285 | 314 | ||||||||||||||||||||||||||||||||
| Negotiable CDs, public funds and other deposits | (39) | (1,045) | (1,084) | 320 | 96 | 416 | ||||||||||||||||||||||||||||||||
| Total U.S. interest-bearing deposits | (4,643) | 2,564 | ||||||||||||||||||||||||||||||||||||
| Non-U.S. interest-bearing deposits | ||||||||||||||||||||||||||||||||||||||
| Banks located in non-U.S. countries | (5) | (11) | (16) | (6) | (13) | (19) | ||||||||||||||||||||||||||||||||
| Time, savings and other | 68 | (654) | (586) | 41 | 107 | 148 | ||||||||||||||||||||||||||||||||
| Total non-U.S. interest-bearing deposits | (602) | 129 | ||||||||||||||||||||||||||||||||||||
| Total interest-bearing deposits | (5,245) | 2,693 | ||||||||||||||||||||||||||||||||||||
Federal funds purchased, securities loaned or sold under agreements to repurchase, short-term borrowings and other interest-bearing liabilities | 451 | (6,672) | (6,221) | 160 | 1,209 | 1,369 | ||||||||||||||||||||||||||||||||
| Trading account liabilities | (111) | (164) | (275) | (145) | 36 | (109) | ||||||||||||||||||||||||||||||||
| Long-term debt | 619 | (2,998) | (2,379) | 41 | (256) | (215) | ||||||||||||||||||||||||||||||||
| Net increase (decrease) in interest expense | (14,120) | 3,738 | ||||||||||||||||||||||||||||||||||||
Net increase (decrease) in net interest income (3) | $ | (5,627) | $ | 714 | ||||||||||||||||||||||||||||||||||
(1)The changes for each category of interest income and expense are divided between the portion of change attributable to the variance in volume and the portion of change attributable to the variance in rate for that category. The unallocated change in rate or volume variance is allocated between the rate and volume variances.
(2)Certain prior-period amounts have been reclassified to conform to current-period presentation.
(3)Includes changes in FTE basis adjustments of a $96 million decrease from 2019 to 2020 and a $15 million decrease from 2018 to 2019.
35 Bank of America | ||||||||
Business Segment Operations
Segment Description and Basis of Presentation
We report our results of operations through four business segments: Consumer Banking, GWIM, Global Banking and Global Markets, with the remaining operations recorded in All Other. We manage our segments and report their results on an FTE basis. The primary activities, products and businesses of the business segments and All Other are shown below.
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 47. 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, including the definition of a reporting unit, see Note 7 – Goodwill and Intangible Assets to the Consolidated Financial Statements.
For more information on our presentation of financial information on an FTE basis, see Supplemental Financial Data on page 31, and for reconciliations to consolidated total revenue, net income and period-end total assets, see Note 23 – Business Segment Information to the Consolidated Financial Statements.
Key Performance Indicators
We present certain key financial and nonfinancial performance indicators that management uses when evaluating segment results. We believe they are useful to investors because they provide additional information about our segments’ operational performance, customer trends and business growth.
Bank of America 36 | ||||||||
Consumer Banking
| Deposits | Consumer Lending | Total Consumer Banking | |||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | % Change | ||||||||||||||||||||||||||||
| Net interest income | $ | 13,739 | $ | 16,904 | $ | 10,959 | $ | 11,254 | $ | 24,698 | $ | 28,158 | (12) | % | |||||||||||||||||||||
| Noninterest income: | |||||||||||||||||||||||||||||||||||
| Card income | (20) | (33) | 4,693 | 5,117 | 4,673 | 5,084 | (8) | ||||||||||||||||||||||||||||
| Service charges | 3,416 | 4,216 | 1 | 2 | 3,417 | 4,218 | (19) | ||||||||||||||||||||||||||||
| All other income | 310 | 833 | 164 | 294 | 474 | 1,127 | (58) | ||||||||||||||||||||||||||||
| Total noninterest income | 3,706 | 5,016 | 4,858 | 5,413 | 8,564 | 10,429 | (18) | ||||||||||||||||||||||||||||
Total revenue, net of interest expense | 17,445 | 21,920 | 15,817 | 16,667 | 33,262 | 38,587 | (14) | ||||||||||||||||||||||||||||
| Provision for credit losses | 379 | 269 | 5,386 | 3,503 | 5,765 | 3,772 | 53 | ||||||||||||||||||||||||||||
| Noninterest expense | 11,508 | 10,718 | 7,370 | 6,928 | 18,878 | 17,646 | 7 | ||||||||||||||||||||||||||||
| Income before income taxes | 5,558 | 10,933 | 3,061 | 6,236 | 8,619 | 17,169 | (50) | ||||||||||||||||||||||||||||
| Income tax expense | 1,362 | 2,679 | 750 | 1,528 | 2,112 | 4,207 | (50) | ||||||||||||||||||||||||||||
| Net income | $ | 4,196 | $ | 8,254 | $ | 2,311 | $ | 4,708 | $ | 6,507 | $ | 12,962 | (50) | ||||||||||||||||||||||
Effective tax rate (1) | 24.5 | % | 24.5 | % | |||||||||||||||||||||||||||||||
| Net interest yield | 1.69 | % | 2.40 | % | 3.53 | % | 3.80 | % | 2.88 | 3.81 | |||||||||||||||||||||||||
| Return on average allocated capital | 35 | 69 | 9 | 19 | 17 | 35 | |||||||||||||||||||||||||||||
| Efficiency ratio | 65.97 | 48.90 | 46.60 | 41.56 | 56.76 | 45.73 | |||||||||||||||||||||||||||||
| Balance Sheet | |||||||||||||||||||||||||||||||||||
| Average | |||||||||||||||||||||||||||||||||||
| Total loans and leases | $ | 5,144 | $ | 5,371 | $ | 310,436 | $ | 295,562 | $ | 315,580 | $ | 300,933 | 5 | % | |||||||||||||||||||||
Total earning assets (2) | 813,779 | 703,481 | 310,862 | 296,051 | 858,724 | 738,807 | 16 | ||||||||||||||||||||||||||||
Total assets (2) | 849,924 | 735,298 | 314,599 | 306,169 | 898,606 | 780,742 | 15 | ||||||||||||||||||||||||||||
| Total deposits | 816,968 | 702,972 | 6,698 | 5,368 | 823,666 | 708,340 | 16 | ||||||||||||||||||||||||||||
| Allocated capital | 12,000 | 12,000 | 26,500 | 25,000 | 38,500 | 37,000 | 4 | ||||||||||||||||||||||||||||
| Year end | |||||||||||||||||||||||||||||||||||
| Total loans and leases | $ | 4,673 | $ | 5,467 | $ | 295,261 | $ | 311,942 | $ | 299,934 | $ | 317,409 | (6) | % | |||||||||||||||||||||
Total earning assets (2) | 899,951 | 724,573 | 295,627 | 312,684 | 945,343 | 760,174 | 24 | ||||||||||||||||||||||||||||
Total assets (2) | 939,629 | 758,459 | 299,186 | 322,717 | 988,580 | 804,093 | 23 | ||||||||||||||||||||||||||||
| Total deposits | 906,092 | 725,665 | 6,560 | 5,080 | 912,652 | 730,745 | 25 | ||||||||||||||||||||||||||||
(1)Estimated at the segment level only.
(2)In segments and businesses where the total of liabilities and equity exceeds assets, we allocate assets from All Other to match the segments’ and businesses’ liabilities and allocated shareholders’ equity. As a result, total earning assets and total assets of the businesses may not equal total Consumer Banking.
Consumer Banking, which is comprised of Deposits and Consumer Lending, offers a diversified range of credit, banking and investment products and services to consumers and small businesses. 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 businesses. Our customers and clients have access to a coast to coast network including financial centers in 38 states and the District of Columbia. Our network includes approximately 4,300 financial centers, approximately 17,000 ATMS, nationwide call centers and leading digital banking platforms with more than 39 million active users, including approximately 31 million active mobile users.
Consumer Banking Results.
Net income for Consumer Banking decreased $6.5 billion to $6.5 billion in 2020 compared to 2019 primarily due to lower revenue, higher provision for credit losses and higher expenses. Net interest income decreased $3.5 billion to $24.7 billion
primarily due to lower rates, partially offset by the benefit of higher deposit and loan balances. Noninterest income decreased $1.9 billion to $8.6 billion driven by a decline in service charges primarily due to higher deposit balances and lower card income due to decreased client activity, as well as lower other income due to the allocation of asset and liability management (ALM) results.
The provision for credit losses increased $2.0 billion to $5.8 billion primarily due to the weaker economic outlook related to COVID-19. Noninterest expense increased $1.2 billion to $18.9 billion primarily driven by incremental expense to support customers and employees during the pandemic, as well as the cost of increased client activity and continued investments for business growth, including the merchant services platform.
The return on average allocated capital was 17 percent, down from 35 percent, driven by lower net income and, to a lesser extent, an increase in allocated capital. For information on capital allocated to the business segments, see Business Segment Operations on page 36.
37 Bank of America | ||||||||
Deposits
Deposits includes the results of consumer deposit activities which consist of a comprehensive range of products provided to consumers and small businesses. Our deposit products include traditional savings accounts, money market savings accounts, CDs and IRAs, and noninterest- and interest-bearing checking accounts, as well as investment accounts and products. Net interest income is allocated to the deposit products using our funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics. Deposits generates fees such as account service fees, non-sufficient funds fees, overdraft charges and ATM fees, as well as investment and brokerage fees from Merrill Edge accounts. Merrill Edge is an integrated investing and banking service targeted at customers with less than $250,000 in investable assets. Merrill Edge provides investment advice and guidance, client brokerage asset services, a self-directed online investing platform and key banking capabilities including access to the Corporation’s network of financial centers and ATMs.
Net income for Deposits decreased $4.1 billion to $4.2 billion primarily driven by lower revenue. Net interest income declined $3.2 billion to $13.7 billion primarily due to lower interest rates, partially offset by the benefit of growth in deposits. Noninterest income decreased $1.3 billion to $3.7 billion primarily driven by lower service charges due to higher deposit balances and lower client activity related to the impact of COVID-19, as well as lower other income due to the allocation of ALM results.
The provision for credit losses increased $110 million to $379 million in 2020 due to the weaker economic outlook related to COVID-19. Noninterest expense increased $790 million to $11.5 billion driven by continued investments in the business and incremental expense to support customers and employees during the pandemic.
Average deposits increased $114.0 billion to $817.0 billion in 2020 driven by strong organic growth of $79.3 billion in checking and time deposits and $34.4 billion in traditional savings and money market savings.
The following table provides key performance indicators for Deposits. Management uses these metrics, and we believe they are useful to investors because they provide additional information to evaluate our deposit profitability and digital/mobile trends.
| Key Statistics – Deposits | ||||||||||||||
| 2020 | 2019 | |||||||||||||
Total deposit spreads (excludes noninterest costs) (1) | 1.94% | 2.34% | ||||||||||||
| Year End | ||||||||||||||
Consumer investment assets (in millions) (2) | $ | 306,104 | $ | 240,132 | ||||||||||
Active digital banking users (units in thousands) (3) | 39,315 | 38,266 | ||||||||||||
Active mobile banking users (units in thousands) (4) | 30,783 | 29,174 | ||||||||||||
| Financial centers | 4,312 | 4,300 | ||||||||||||
| ATMs | 16,904 | 16,788 | ||||||||||||
(1)Includes deposits held in Consumer Lending.
(2)Includes client brokerage assets, deposit sweep balances and AUM in Consumer Banking.
(3)Active digital banking users represents mobile and/or online users at period end.
(4)Active mobile banking users represents mobile users at period end.
Consumer investment assets increased $66.0 billion in 2020 driven by market performance and client flows. Active mobile banking users increased approximately two million reflecting continuing changes in our customers’ banking preferences. We had a net increase of 12 financial centers as we continued to optimize our consumer banking network.
Consumer Lending
Consumer Lending offers products to consumers and small businesses across the U.S. The products offered include credit and debit cards, residential mortgages and home equity loans, and direct and indirect loans such as automotive, recreational vehicle and consumer personal loans. In addition to earning net interest spread revenue on its lending activities, Consumer Lending generates interchange revenue from credit and debit card transactions, late fees, cash advance fees, annual credit card fees, mortgage banking fee income and other miscellaneous fees. Consumer Lending products are available to our customers through our retail network, direct telephone, and online and mobile channels. Consumer Lending results also include the impact of servicing residential mortgages and home equity loans in the core portfolio, including loans held on the balance sheet of Consumer Lending and loans serviced for others.
Bank of America 38 | ||||||||
Net income for Consumer Lending was $2.3 billion, a decrease of $2.4 billion, primarily due to higher provision for credit losses. Net interest income declined $295 million to $11.0 billion primarily due to lower interest rates, partially offset by loan growth. Noninterest income decreased $555 million to $4.9 billion primarily driven by lower card income due to lower client activity, as well as lower other income due to the allocation of ALM results.
The provision for credit losses increased $1.9 billion to $5.4 billion primarily due to the weaker economic outlook related to COVID-19. Noninterest expense increased $442 million to $7.4 billion primarily driven by investments in the business and incremental expense to support customers and employees during the pandemic.
Average loans increased $14.9 billion to $310.4 billion primarily driven by an increase in residential mortgages and PPP loans, partially offset by a decline in credit cards.
The following table provides key performance indicators for Consumer Lending. Management uses these metrics, and we believe they are useful to investors because they provide additional information about loan growth and profitability.
| Key Statistics – Consumer Lending | |||||||||||
| (Dollars in millions) | 2020 | 2019 | |||||||||
Total credit card (1) | |||||||||||
Gross interest yield (2) | 10.27 | % | 10.76 | % | |||||||
Risk-adjusted margin (3) | 9.16 | 8.28 | |||||||||
| New accounts (in thousands) | 2,505 | 4,320 | |||||||||
| Purchase volumes | $ | 251,599 | $ | 277,852 | |||||||
Debit card purchase volumes | $ | 384,503 | $ | 360,672 | |||||||
(1)Includes GWIM's credit card portfolio.
(2)Calculated as the effective annual percentage rate divided by average loans.
(3)Calculated as the difference between total revenue, net of interest expense, and net credit losses divided by average loans.
During 2020, the total risk-adjusted margin increased 88 bps compared to 2019 driven by a lower mix of customer balances at promotional rates, the lower interest rate environment and lower net credit losses. Total credit card purchase volumes declined $26.3 billion to $251.6 billion. The decline in credit card purchase volumes was driven by the impact of COVID-19. While overall spending improved during the second half of 2020, spending for travel and entertainment remained lower compared to 2019. During 2020, debit card purchase volumes increased $23.8 billion to $384.5 billion, despite COVID-19 impacts. Debit card purchase volumes improved in the second half of 2020 as businesses reopened and spending improved.
Key Statistics – Residential Mortgage Loan Production (1) | |||||||||||
| (Dollars in millions) | 2020 | 2019 | |||||||||
| Consumer Banking: | |||||||||||
| First mortgage | $ | 43,197 | $ | 49,179 | |||||||
| Home equity | 6,930 | 9,755 | |||||||||
Total (2): | |||||||||||
| First mortgage | $ | 69,086 | $ | 72,467 | |||||||
| Home equity | 8,160 | 11,131 | |||||||||
(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 $6.0 billion and $3.4 billion in 2020 primarily driven by a decline in nonconforming applications.
Home equity production in Consumer Banking and for the total Corporation decreased $2.8 billion and $3.0 billion in 2020 primarily driven by a decline in applications.
39 Bank of America | ||||||||
Global Wealth & Investment Management
| (Dollars in millions) | 2020 | 2019 | % Change | |||||||||||||||||
| Net interest income | $ | 5,468 | $ | 6,504 | (16) | % | ||||||||||||||
| Noninterest income: | ||||||||||||||||||||
| Investment and brokerage services | 12,270 | 11,870 | 3 | |||||||||||||||||
| All other income | 846 | 1,164 | (27) | |||||||||||||||||
| Total noninterest income | 13,116 | 13,034 | 1 | |||||||||||||||||
| Total revenue, net of interest expense | 18,584 | 19,538 | (5) | |||||||||||||||||
| Provision for credit losses | 357 | 82 | n/m | |||||||||||||||||
| Noninterest expense | 14,154 | 13,825 | 2 | |||||||||||||||||
| Income before income taxes | 4,073 | 5,631 | (28) | |||||||||||||||||
| Income tax expense | 998 | 1,380 | (28) | |||||||||||||||||
| Net income | $ | 3,075 | $ | 4,251 | (28) | |||||||||||||||
| Effective tax rate | 24.5 | % | 24.5 | % | ||||||||||||||||
| Net interest yield | 1.73 | 2.33 | ||||||||||||||||||
| Return on average allocated capital | 21 | 29 | ||||||||||||||||||
| Efficiency ratio | 76.16 | 70.76 | ||||||||||||||||||
| Balance Sheet | ||||||||||||||||||||
| Average | ||||||||||||||||||||
| Total loans and leases | $ | 183,402 | $ | 168,910 | 9 | % | ||||||||||||||
| Total earning assets | 316,008 | 279,681 | 13 | |||||||||||||||||
| Total assets | 328,384 | 292,016 | 12 | |||||||||||||||||
| Total deposits | 287,123 | 256,516 | 12 | |||||||||||||||||
| Allocated capital | 15,000 | 14,500 | 3 | |||||||||||||||||
| Year end | ||||||||||||||||||||
| Total loans and leases | $ | 188,562 | $ | 176,600 | 7 | % | ||||||||||||||
| Total earning assets | 356,873 | 287,201 | 24 | |||||||||||||||||
| Total assets | 369,736 | 299,770 | 23 | |||||||||||||||||
| Total deposits | 322,157 | 263,113 | 22 | |||||||||||||||||
n/m = not meaningful
GWIM consists of two primary businesses: Merrill Lynch Global Wealth Management (MLGWM) and Bank of America Private Bank.
MLGWM's advisory business provides a high-touch client experience through a network of financial advisors focused on clients with over $250,000 in total investable assets. MLGWM provides tailored solutions to meet clients' needs through a full set of investment management, brokerage, banking and retirement products.
Bank of America Private Bank, together with MLGWM's Private Wealth Management business, provides comprehensive wealth management solutions targeted to high net worth and ultra high net worth clients, as well as customized solutions to meet clients' wealth structuring, investment management, trust and banking needs, including specialty asset management services.
Net income for GWIM decreased $1.2 billion to $3.1 billion primarily due to lower net interest income, higher noninterest expense and higher provision for credit losses.
Net interest income decreased $1.0 billion to $5.5 billion due to the impact of lower interest rates, partially offset by the benefit of strong deposit and loan growth.
Noninterest income, which primarily includes investment and brokerage services income, increased $82 million to $13.1 billion primarily due to higher market valuations and positive AUM flows, largely offset by declines in AUM pricing as well as lower other income due to the allocation of ALM results.
The provision for credit losses increased $275 million to $357 million primarily due to the weaker economic outlook related to COVID-19. Noninterest expense increased $329 million to $14.2 billion primarily driven by higher investments in primary sales professionals and revenue-related incentives.
The return on average allocated capital was 21 percent, down from 29 percent, due to lower net income and, to a lesser extent, a small increase in allocated capital.
Average loans increased $14.5 billion to $183.4 billion primarily driven by residential mortgage and custom lending. Average deposits increased $30.6 billion to $287.1 billion primarily driven by inflows resulting from client responses to market volatility and lower spending.
MLGWM revenue of $15.3 billion decreased five percent primarily driven by the impact of lower interest rates, partially offset by the benefits of higher market valuations and positive AUM flows.
Bank of America Private Bank revenue of $3.3 billion decreased four percent primarily driven by the impact of lower interest rates.
Bank of America 40 | ||||||||
Key Indicators and Metrics | |||||||||||
| (Dollars in millions, except as noted) | 2020 | 2019 | |||||||||
| Revenue by Business | |||||||||||
| Merrill Lynch Global Wealth Management | $ | 15,292 | $ | 16,112 | |||||||
Bank of America Private Bank | 3,292 | 3,426 | |||||||||
| Total revenue, net of interest expense | $ | 18,584 | $ | 19,538 | |||||||
| Client Balances by Business, at year end | |||||||||||
| Merrill Lynch Global Wealth Management | $ | 2,808,340 | $ | 2,558,102 | |||||||
Bank of America Private Bank | 541,464 | 489,690 | |||||||||
| Total client balances | $ | 3,349,804 | $ | 3,047,792 | |||||||
| Client Balances by Type, at year end | |||||||||||
| Assets under management | $ | 1,408,465 | $ | 1,275,555 | |||||||
| Brokerage and other assets | 1,479,614 | 1,372,733 | |||||||||
| Deposits | 322,157 | 263,103 | |||||||||
Loans and leases (1) | 191,124 | 179,296 | |||||||||
| Less: Managed deposits in assets under management | (51,556) | (42,895) | |||||||||
| Total client balances | $ | 3,349,804 | $ | 3,047,792 | |||||||
| Assets Under Management Rollforward | |||||||||||
| Assets under management, beginning of year | $ | 1,275,555 | $ | 1,072,234 | |||||||
| Net client flows | 19,596 | 24,865 | |||||||||
Market valuation/other | 113,314 | 178,456 | |||||||||
| Total assets under management, end of year | $ | 1,408,465 | $ | 1,275,555 | |||||||
| Associates, at year end | |||||||||||
| Number of financial advisors | 17,331 | 17,458 | |||||||||
| Total wealth advisors, including financial advisors | 19,373 | 19,440 | |||||||||
| Total primary sales professionals, including financial advisors and wealth advisors | 21,213 | 20,586 | |||||||||
| Merrill Lynch Global Wealth Management Metric | |||||||||||
Financial advisor productivity (2) (in thousands) | $ | 1,126 | $ | 1,082 | |||||||
| Bank of America Private Bank Metric, at year end | |||||||||||
| Primary sales professionals | 1,759 | 1,766 | |||||||||
(1)Includes margin receivables which are classified in customer and other receivables on the Consolidated Balance Sheet.
(2)For a definition, see Key Metrics on page 173.
Client Balances
Client balances managed under advisory and/or discretion of GWIM are AUM and are typically held in diversified portfolios. Fees earned on AUM are calculated as a percentage of clients’ AUM balances. The asset management fees charged to clients per year depend on various factors, but are commonly driven by the breadth of the client’s relationship. The net client AUM flows
represent the net change in clients’ AUM balances over a specified period of time, excluding market appreciation/depreciation and other adjustments.
Client balances increased $302.0 billion, or 10 percent, to $3.3 trillion at December 31, 2020 compared to December 31, 2019. The increase in client balances was primarily due to higher market valuations and positive client flows.
41 Bank of America | ||||||||
Global Banking
| (Dollars in millions) | 2020 | 2019 | % Change | |||||||||||||||||
| Net interest income | $ | 9,013 | $ | 10,675 | (16) | % | ||||||||||||||
| Noninterest income: | ||||||||||||||||||||
| Service charges | 3,238 | 3,015 | 7 | |||||||||||||||||
| Investment banking fees | 4,010 | 3,137 | 28 | |||||||||||||||||
| All other income | 2,726 | 3,656 | (25) | |||||||||||||||||
| Total noninterest income | 9,974 | 9,808 | 2 | |||||||||||||||||
| Total revenue, net of interest expense | 18,987 | 20,483 | (7) | |||||||||||||||||
| Provision for credit losses | 4,897 | 414 | n/m | |||||||||||||||||
| Noninterest expense | 9,337 | 9,011 | 4 | |||||||||||||||||
| Income before income taxes | 4,753 | 11,058 | (57) | |||||||||||||||||
| Income tax expense | 1,283 | 2,985 | (57) | |||||||||||||||||
| Net income | $ | 3,470 | $ | 8,073 | (57) | |||||||||||||||
| Effective tax rate | 27.0 | % | 27.0 | % | ||||||||||||||||
| Net interest yield | 1.86 | 2.75 | ||||||||||||||||||
| Return on average allocated capital | 8 | 20 | ||||||||||||||||||
| Efficiency ratio | 49.17 | 43.99 | ||||||||||||||||||
| Balance Sheet | ||||||||||||||||||||
| Average | ||||||||||||||||||||
Total loans and leases | $ | 382,264 | $ | 374,304 | 2 | % | ||||||||||||||
| Total earning assets | 485,688 | 388,152 | 25 | |||||||||||||||||
| Total assets | 542,302 | 443,083 | 22 | |||||||||||||||||
| Total deposits | 456,562 | 362,731 | 26 | |||||||||||||||||
| Allocated capital | 42,500 | 41,000 | 4 | |||||||||||||||||
| Year end | ||||||||||||||||||||
| Total loans and leases | $ | 339,649 | $ | 379,268 | (10) | % | ||||||||||||||
| Total earning assets | 522,650 | 407,180 | 28 | |||||||||||||||||
| Total assets | 580,561 | 464,032 | 25 | |||||||||||||||||
| Total deposits | 493,748 | 383,180 | 29 | |||||||||||||||||
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. Our lending products and services include commercial loans, leases, commitment facilities, trade finance, commercial real estate lending and asset-based lending. Our treasury solutions business includes treasury management, foreign exchange, short-term investing options and merchant services. We also provide investment banking products to our clients such as debt and equity underwriting and distribution, and merger-related and other advisory services. Underwriting debt and equity issuances, fixed-income and equity research, and certain market-based activities are executed through our global broker-dealer affiliates, which are our primary dealers in several countries. Within Global Banking, Global Corporate Banking clients generally include large global corporations, financial institutions and leasing clients. Global Commercial Banking clients generally include middle-market companies, commercial real estate firms and not-for-profit companies. Business Banking clients include mid-sized U.S.-based businesses requiring customized and integrated financial advice and solutions.
Net income for Global Banking decreased $4.6 billion to $3.5 billion primarily driven by higher provision for credit losses as well as lower revenue.
Revenue decreased $1.5 billion to $19.0 billion driven by lower net interest income. Net interest income decreased $1.7
billion to $9.0 billion primarily driven by lower interest rates, partially offset by higher loan and deposit balances.
Noninterest income of $10.0 billion increased $166 million driven by higher investment banking fees, partially offset by lower valuation driven adjustments on the fair value loan portfolio, debt securities and leveraged loans, as well as the allocation of ALM results.
The provision for credit losses increased $4.5 billion to $4.9 billion primarily due to the weaker economic outlook related to COVID-19. Noninterest expense increased $326 million primarily due to continued investments in the business, partially offset by lower revenue-related incentives.
The return on average allocated capital was eight percent in 2020 compared to 20 percent in 2019 due to lower net income and, to a lesser extent, an increase in allocated capital. For information on capital allocated to the business segments, see Business Segment Operations on page 36.
Global Corporate, Global Commercial and Business Banking
Global Corporate, Global Commercial and Business Banking each include Business Lending and Global Transaction Services activities. Business Lending includes various lending-related products and services, and related hedging activities, including commercial loans, leases, commitment facilities, trade finance, real estate lending and asset-based lending. Global Transaction Services includes deposits, treasury management, credit card, foreign exchange and short-term investment products.
Bank of America 42 | ||||||||
The table below and following discussion present a summary of the results, which exclude certain investment banking, merchant services and PPP activities in Global Banking.
| Global Corporate, Global Commercial and Business Banking | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Global Corporate Banking | Global Commercial Banking | Business Banking | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||
| Revenue | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Business Lending | $ | 3,552 | $ | 3,994 | $ | 3,743 | $ | 4,132 | $ | 261 | $ | 363 | $ | 7,556 | $ | 8,489 | ||||||||||||||||||||||||||||||||||
| Global Transaction Services | 2,986 | 3,994 | 3,169 | 3,499 | 893 | 1,064 | 7,048 | 8,557 | ||||||||||||||||||||||||||||||||||||||||||
Total revenue, net of interest expense | $ | 6,538 | $ | 7,988 | $ | 6,912 | $ | 7,631 | $ | 1,154 | $ | 1,427 | $ | 14,604 | $ | 17,046 | ||||||||||||||||||||||||||||||||||
| Balance Sheet | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Average | ||||||||||||||||||||||||||||||||||||||||||||||||||
Total loans and leases | $ | 179,393 | $ | 177,713 | $ | 182,212 | $ | 181,485 | $ | 14,410 | $ | 15,058 | $ | 376,015 | $ | 374,256 | ||||||||||||||||||||||||||||||||||
| Total deposits | 216,371 | 177,924 | 191,813 | 144,620 | 48,214 | 40,196 | 456,398 | 362,740 | ||||||||||||||||||||||||||||||||||||||||||
| Year end | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total loans and leases | $ | 153,126 | $ | 181,409 | $ | 164,641 | $ | 182,727 | $ | 13,242 | $ | 15,152 | $ | 331,009 | $ | 379,288 | ||||||||||||||||||||||||||||||||||
| Total deposits | 233,484 | 185,352 | 207,597 | 157,322 | 52,150 | 40,504 | 493,231 | 383,178 | ||||||||||||||||||||||||||||||||||||||||||
Business Lending revenue decreased $933 million in 2020 compared to 2019. The decrease was primarily driven by lower interest rates.
Global Transaction Services revenue decreased $1.5 billion in 2020 compared to 2019 driven by the allocation of ALM results, partially offset by the impact of higher deposit balances.
Average loans and leases were relatively flat in 2020 compared to 2019. Average deposits increased 26 percent primarily due to client responses to market volatility, government stimulus and placement of credit draws.
Global Investment Banking
Client teams and product specialists underwrite and distribute debt, equity and loan products, and provide advisory services and tailored risk management solutions. The economics of certain investment banking and underwriting activities are shared primarily between Global Banking and Global Markets under an internal revenue-sharing arrangement. Global Banking originates certain deal-related transactions with our corporate and commercial clients that are executed and distributed by Global Markets. To provide a complete discussion of our
consolidated investment banking fees, the following table presents total Corporation investment banking fees and the portion attributable to Global Banking.
| Investment Banking Fees | |||||||||||||||||||||||
| Global Banking | Total Corporation | ||||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Products | |||||||||||||||||||||||
| Advisory | $ | 1,458 | $ | 1,336 | $ | 1,621 | $ | 1,460 | |||||||||||||||
| Debt issuance | 1,555 | 1,348 | 3,443 | 3,107 | |||||||||||||||||||
| Equity issuance | 997 | 453 | 2,328 | 1,259 | |||||||||||||||||||
Gross investment banking fees | 4,010 | 3,137 | 7,392 | 5,826 | |||||||||||||||||||
| Self-led deals | (93) | (62) | (212) | (184) | |||||||||||||||||||
Total investment banking fees | $ | 3,917 | $ | 3,075 | $ | 7,180 | $ | 5,642 | |||||||||||||||
Total Corporation investment banking fees, excluding self-led deals, of $7.2 billion, which are primarily included within Global Banking and Global Markets, increased 27 percent primarily driven by higher equity issuance fees.
43 Bank of America | ||||||||
Global Markets
| (Dollars in millions) | 2020 | 2019 | % Change | |||||||||||||||||
| Net interest income | $ | 4,646 | $ | 3,915 | 19 | % | ||||||||||||||
| Noninterest income: | ||||||||||||||||||||
| Investment and brokerage services | 1,973 | 1,738 | 14 | |||||||||||||||||
| Investment banking fees | 2,991 | 2,288 | 31 | |||||||||||||||||
| Market making and similar activities | 8,471 | 7,065 | 20 | |||||||||||||||||
| All other income | 685 | 608 | 13 | |||||||||||||||||
| Total noninterest income | 14,120 | 11,699 | 21 | |||||||||||||||||
| Total revenue, net of interest expense | 18,766 | 15,614 | 20 | |||||||||||||||||
| Provision for credit losses | 251 | (9) | n/m | |||||||||||||||||
| Noninterest expense | 11,422 | 10,728 | 6 | |||||||||||||||||
| Income before income taxes | 7,093 | 4,895 | 45 | |||||||||||||||||
| Income tax expense | 1,844 | 1,395 | 32 | |||||||||||||||||
| Net income | $ | 5,249 | $ | 3,500 | 50 | |||||||||||||||
| Effective tax rate | 26.0 | % | 28.5 | % | ||||||||||||||||
| Return on average allocated capital | 15 | 10 | ||||||||||||||||||
| Efficiency ratio | 60.86 | 68.71 | ||||||||||||||||||
| Balance Sheet | ||||||||||||||||||||
| Average | ||||||||||||||||||||
| Trading-related assets: | ||||||||||||||||||||
| Trading account securities | $ | 243,519 | $ | 246,336 | (1) | % | ||||||||||||||
| Reverse repurchases | 104,697 | 116,883 | (10) | |||||||||||||||||
| Securities borrowed | 87,125 | 83,216 | 5 | |||||||||||||||||
| Derivative assets | 47,655 | 43,273 | 10 | |||||||||||||||||
| Total trading-related assets | 482,996 | 489,708 | (1) | |||||||||||||||||
| Total loans and leases | 73,062 | 71,334 | 2 | |||||||||||||||||
| Total earning assets | 482,171 | 476,225 | 1 | |||||||||||||||||
| Total assets | 685,047 | 679,300 | 1 | |||||||||||||||||
| Total deposits | 47,400 | 31,380 | 51 | |||||||||||||||||
| Allocated capital | 36,000 | 35,000 | 3 | |||||||||||||||||
| Year end | ||||||||||||||||||||
| Total trading-related assets | $ | 421,698 | $ | 452,499 | (7) | % | ||||||||||||||
| Total loans and leases | 78,415 | 72,993 | 7 | |||||||||||||||||
| Total earning assets | 447,350 | 471,701 | (5) | |||||||||||||||||
| Total assets | 616,609 | 641,809 | (4) | |||||||||||||||||
| Total deposits | 53,925 | 34,676 | 56 | |||||||||||||||||
n/m = not meaningful
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. Global Markets provides market-making, financing, securities clearing, settlement and custody services globally to our institutional investor clients in support of their investing and trading activities. We also work with our commercial and corporate clients to provide risk management products using interest rate, equity, credit, currency and commodity derivatives, foreign exchange, fixed-income and mortgage-related products. As a result of our market-making activities in these products, we may be required to manage risk in a broad range of financial products including government securities, equity and equity-linked securities, high-grade and high-yield corporate debt securities, syndicated loans, MBS, commodities and asset-backed securities. The economics of certain investment banking and underwriting activities are shared primarily between Global Markets and Global Banking under an internal revenue-sharing arrangement. Global Banking originates certain deal-related transactions with our corporate and commercial clients that are
executed and distributed by Global Markets. For information on investment banking fees on a consolidated basis, see page 43.
The following explanations for year-over-year changes for Global Markets, including those disclosed under Sales and Trading Revenue, are the same for amounts including and excluding net DVA. Amounts excluding net DVA are a non-GAAP financial measure. For more information on net DVA, see Supplemental Financial Data on page 31.
Net income for Global Markets increased $1.7 billion to $5.2 billion. Net DVA losses were $133 million compared to losses of $222 million in 2019. Excluding net DVA, net income increased $1.7 billion to $5.4 billion. These increases were primarily driven by higher revenue, partially offset by higher noninterest expense and provision for credit losses.
Revenue increased $3.2 billion to $18.8 billion primarily driven by higher sales and trading revenue and investment banking fees. Sales and trading revenue increased $2.3 billion, and excluding net DVA, increased $2.2 billion. These increases were driven by higher revenue across FICC and Equities.
The provision for credit losses increased $260 million primarily due to the weaker economic outlook related to COVID-19. Noninterest expense increased $694 million to
Bank of America 44 | ||||||||
$11.4 billion driven by higher activity-based expenses for both card and trading.
Average total assets increased $5.7 billion to $685.0 billion driven by higher client balances in Global Equities. Year-end total assets decreased $25.2 billion to $616.6 billion driven by lower levels of inventory in FICC and increased hedging of client activity in Equities with derivative transactions relative to stock positions.
The return on average allocated capital was 15 percent, up from 10 percent, reflecting higher net income, partially offset by an increase in allocated capital.
Sales and Trading Revenue
Sales and trading revenue includes unrealized and realized gains and losses on trading and other assets which are included in market making and similar activities, net interest income, and fees primarily from commissions on equity securities. Sales and trading revenue is segregated into fixed-income (government debt obligations, investment and non-investment grade corporate debt obligations, commercial MBS, residential mortgage-backed securities, collateralized loan obligations, interest rate and credit derivative contracts), currencies (interest rate and foreign exchange contracts), commodities (primarily futures, forwards, swaps and options) and equities (equity-linked derivatives and cash equity activity). The following table and related discussion present sales and trading revenue, substantially all of which is in Global Markets, with the remainder in Global Banking. In addition, the following table and related discussion present sales and trading revenue,
excluding net DVA, which is a non-GAAP financial measure. For more information on net DVA, see Supplemental Financial Data on page 31.
Sales and Trading Revenue (1, 2, 3) | |||||||||||
| (Dollars in millions) | 2020 | 2019 | |||||||||
| Sales and trading revenue | |||||||||||
Fixed income, currencies and commodities | $ | 9,595 | $ | 8,189 | |||||||
| Equities | 5,422 | 4,493 | |||||||||
| Total sales and trading revenue | $ | 15,017 | $ | 12,682 | |||||||
Sales and trading revenue, excluding net DVA (4) | |||||||||||
Fixed income, currencies and commodities | $ | 9,725 | $ | 8,397 | |||||||
| Equities | 5,425 | 4,507 | |||||||||
Total sales and trading revenue, excluding net DVA | $ | 15,150 | $ | 12,904 | |||||||
(1)For more information on sales and trading revenue, see Note 3 – Derivatives to the Consolidated Financial Statements.
(2)Includes FTE adjustments of $196 million and $187 million for 2020 and 2019.
(3) Includes Global Banking sales and trading revenue of $478 million and $538 million for 2020 and 2019.
(4) FICC and Equities sales and trading revenue, excluding net DVA, is a non-GAAP financial measure. FICC net DVA losses were $130 million and $208 million for 2020 and 2019. Equities net DVA losses were $3 million and $14 million for 2020 and 2019.
FICC revenue increased $1.3 billion driven by increased client activity and improved market-making conditions across macro products. Equities revenue increased $918 million driven by increased client activity and a strong trading performance in a more volatile market environment.
All Other
| (Dollars in millions) | 2020 | 2019 | % Change | |||||||||||||||||
| Net interest income | $ | 34 | $ | 234 | (85) | % | ||||||||||||||
| Noninterest income (loss) | (3,606) | (2,617) | 38 | |||||||||||||||||
| Total revenue, net of interest expense | (3,572) | (2,383) | 50 | |||||||||||||||||
| Provision for credit losses | 50 | (669) | (107) | |||||||||||||||||
| Noninterest expense | 1,422 | 3,690 | (61) | |||||||||||||||||
| Loss before income taxes | (5,044) | (5,404) | (7) | |||||||||||||||||
| Income tax benefit | (4,637) | (4,048) | 15 | |||||||||||||||||
| Net loss | $ | (407) | $ | (1,356) | (70) | |||||||||||||||
| Balance Sheet | ||||||||||||||||||||
| Average | ||||||||||||||||||||
| Total loans and leases | $ | 28,159 | $ | 42,935 | (34) | % | ||||||||||||||
Total assets (1) | 228,783 | 210,689 | 9 | |||||||||||||||||
| Total deposits | 18,247 | 21,359 | (15) | |||||||||||||||||
| Year end | ||||||||||||||||||||
| Total loans and leases | $ | 21,301 | $ | 37,156 | (43) | % | ||||||||||||||
Total assets (1) | 264,141 | 224,375 | 18 | |||||||||||||||||
| Total deposits | 12,998 | 23,089 | (44) | |||||||||||||||||
(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 $763.1 billion and $544.3 billion for 2020 and 2019, and year-end allocated assets were $977.7 billion and $565.4 billion at December 31, 2020 and 2019.
All Other consists of ALM activities, equity investments, non-core mortgage loans and servicing activities, liquidating businesses and certain expenses not otherwise allocated to a business segment. ALM activities encompass certain residential mortgages, debt securities, and interest rate and foreign currency risk management activities. Substantially all of the results of ALM activities are allocated to our business segments. For more information on our ALM activities, see Note
23 – Business Segment Information to the Consolidated Financial Statements.
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 2020, residential mortgage loans held for ALM activities decreased $12.7 billion to $9.0 billion due primarily to loan sales. Non-core residential mortgage and home equity loans, which are principally runoff portfolios, are also held in All
45 Bank of America | ||||||||
Other. During 2020, total non-core loans decreased $3.0 billion to $12.6 billion due primarily to payoffs and paydowns, as well as Federal Housing Administration (FHA) loan conveyances and sales, partially offset by repurchases. For more information on the composition of the core and non-core portfolios, see Consumer Portfolio Credit Risk Management on page 62.
The net loss for All Other decreased $949 million to a net loss of $407 million, primarily due to a $2.1 billion pretax impairment charge related to the notice of termination of the merchant services joint venture in 2019, partially offset by lower revenue and higher provision for credit losses.
Revenue decreased $1.2 billion primarily due to extinguishment losses on certain structured liabilities, higher client-driven ESG investment activity, resulting in higher partnership losses on these tax-advantaged investments, and lower net interest income, partially offset by a gain on sales of mortgage loans.
The provision for credit losses increased $719 million to $50 million from a provision benefit of $669 million in 2019, primarily due to recoveries from sales of previously charged-off non-core consumer real estate loans in 2019, as well as the weaker economic outlook related to COVID-19.
Noninterest expense decreased $2.3 billion to $1.4 billion primarily due to the $2.1 billion pretax impairment charge in 2019, partially offset by higher litigation expense.
The income tax benefit increased $589 million primarily driven by the impact of the U.K. tax law change and a higher level of income tax credits related to our ESG investment activity, partially offset by the positive impact from the resolution of various tax controversy matters in 2019. Both years 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. Purchase obligations are defined as obligations that are legally binding agreements whereby we agree to purchase products or services with a specific minimum quantity at a fixed, minimum or variable price over a specified period of time. Included in purchase obligations are vendor contracts, the most significant of which include communication services, processing services and software contracts. Debt, lease and other obligations are more fully discussed in Note 11 – Long-term Debt and Note 12 – Commitments and Contingencies to the Consolidated Financial Statements.
Other long-term liabilities include our contractual funding obligations related to the Non-U.S. Pension Plans and Nonqualified and Other Pension Plans (together, the Plans). Obligations to the Plans are based on the current and projected obligations of the Plans, performance of the Plans’ assets, and any participant contributions, if applicable. During 2020 and 2019, we contributed $115 million and $135 million to the Plans, and we expect to make $136 million of contributions during 2021. The Plans are more fully discussed in Note 17 – Employee Benefit Plans to the Consolidated Financial Statements.
We enter into commitments to extend credit such as loan commitments, standby letters of credit (SBLCs) and commercial letters of credit to meet the financing needs of our customers. For a summary of the total unfunded, or off-balance sheet, credit extension commitment amounts by expiration date, see Credit Extension Commitments in Note 12 – Commitments and Contingencies to the Consolidated Financial Statements.
We also utilize variable interest entities (VIEs) in the ordinary course of business to support our financing and investing needs as well as those of our customers. For more information on our involvement with unconsolidated VIEs, see Note 6 – Securitizations and Other Variable Interest Entities to the Consolidated Financial Statements.
Table 10 includes certain contractual obligations at December 31, 2020 and 2019.
| Table 10 | Contractual Obligations | |||||||||||||||||||||||||||||||||||||
| December 31, 2020 | December 31 2019 | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Due in One Year or Less | Due After One Year Through Three Years | Due After Three Years Through Five Years | Due After Five Years | Total | Total | ||||||||||||||||||||||||||||||||
| Long-term debt | $ | 20,352 | $ | 50,824 | $ | 48,568 | $ | 143,190 | $ | 262,934 | $ | 240,856 | ||||||||||||||||||||||||||
| Operating lease obligations | 1,927 | 3,169 | 2,395 | 4,609 | 12,100 | 11,794 | ||||||||||||||||||||||||||||||||
| Purchase obligations | 551 | 700 | 80 | 103 | 1,434 | 3,530 | ||||||||||||||||||||||||||||||||
| Time deposits | 50,661 | 3,206 | 426 | 1,563 | 55,856 | 74,673 | ||||||||||||||||||||||||||||||||
| Other long-term liabilities | 1,656 | 1,092 | 953 | 781 | 4,482 | 4,099 | ||||||||||||||||||||||||||||||||
Estimated interest expense on long-term debt and time deposits (1) | 4,542 | 8,123 | 6,958 | 30,924 | 50,547 | 44,385 | ||||||||||||||||||||||||||||||||
| Total contractual obligations | $ | 79,689 | $ | 67,114 | $ | 59,380 | $ | 181,170 | $ | 387,353 | $ | 379,337 | ||||||||||||||||||||||||||
(1)Represents forecasted net interest expense on long-term debt and time deposits based on interest rates at December 31, 2020 and 2019. Forecasts are based on the contractual maturity dates of each liability, and are net of derivative hedges, where applicable.
Representations and Warranties Obligations
For information on representations and warranties obligations in connection with the sale of mortgage loans, see Note 12 – Commitments and Contingencies to the Consolidated Financial Statements.
Bank of America 46 | ||||||||
Managing Risk
Risk is inherent in all our business activities. 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. We take a comprehensive approach to risk management with a defined Risk Framework and an articulated Risk Appetite Statement, which are approved annually by the ERC and the Board.
The seven key types of risk faced by the Corporation are strategic, credit, market, liquidity, compliance, operational and reputational.
● Strategic risk is the risk to current or projected financial condition arising from incorrect assumptions about external or internal factors, inappropriate business plans, ineffective business strategy execution, or failure to respond in a timely manner to changes in the regulatory, macroeconomic or competitive environments in the geographic locations in which we operate.
● Credit risk is the risk of loss arising from the inability or failure of a borrower or counterparty to meet its obligations.
● Market risk is the risk that changes in market conditions may adversely impact the value of assets or liabilities, or otherwise negatively impact earnings. Market risk is composed of price risk and interest rate risk.
● Liquidity risk is the inability to meet expected or unexpected cash flow and collateral needs while continuing to support our businesses and customers under a range of economic conditions.
● Compliance risk is the risk of legal or regulatory sanctions, material financial loss or damage to the reputation of the Corporation arising from the failure of the Corporation to comply with the requirements of applicable laws, rules and regulations and our internal policies and procedures.
● Operational risk is the risk of loss resulting from inadequate or failed processes, people and systems, or from external events.
● Reputational risk is the risk that negative perceptions of the Corporation’s conduct or business practices may adversely impact its profitability or operations.
The following sections address in more detail the specific procedures, measures and analyses of the major categories of risk. This discussion of managing risk focuses on the current Risk Framework that, as part of its annual review process, was approved by the ERC and the Board.
As set forth in our Risk Framework, a culture of managing risk well is fundamental to fulfilling our purpose and our values and delivering responsible growth. It requires us to focus on risk in all activities and encourages the necessary mindset and behavior to enable effective risk management, and promotes sound risk-taking within our risk appetite. Sustaining a culture of managing risk well throughout the organization is critical to our success and is a clear expectation of our executive management team and the Board.
Our Risk Framework serves as the foundation for the 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.
Executive management assesses, with Board oversight, the risk-adjusted returns of each business. Management reviews and approves the strategic and financial operating plans, as well as the capital plan and Risk Appetite Statement, and recommends them annually to the Board for approval. Our strategic plan takes into consideration return objectives and financial resources, which must align with risk capacity and risk appetite. Management sets financial objectives for each business by allocating capital and setting a target for return on capital for each business. Capital allocations and operating limits are regularly evaluated as part of our overall governance processes as the businesses and the economic environment in which we operate continue to evolve. For more information regarding capital allocations, see Business Segment Operations on page 36.
The Corporation’s risk appetite indicates the amount of capital, earnings or liquidity we are willing to put at risk to achieve our strategic objectives and business plans, consistent with applicable regulatory requirements. Our risk appetite provides a common and comparable set of measures for senior management and the Board to clearly indicate our aggregate level of risk and to monitor whether the Corporation’s risk profile remains in alignment with our strategic and capital plans. Our risk appetite is formally articulated in the Risk Appetite Statement, which includes both qualitative components and quantitative limits.
Our overall capacity to take risk is limited; therefore, we prioritize the risks we take in order to maintain a strong and flexible financial position so we can withstand challenging economic conditions and take advantage of organic growth opportunities. Therefore, we set objectives and targets for capital and liquidity that are intended to permit us to continue to operate in a safe and sound manner, including during periods of stress.
Our lines of business operate with risk limits (which may include credit, market and/or operational limits, as applicable) that align with the Corporation’s risk appetite. Executive management is responsible for tracking and reporting performance measurements as well as any exceptions to guidelines or limits. The Board, and its committees when appropriate, oversee financial performance, execution of the strategic and financial operating plans, adherence to risk appetite limits and the adequacy of internal controls.
For a more detailed discussion of our risk management activities, see the discussion below and pages 50 through 85.
For more information about the Corporation's risks related to the pandemic, see Part I. Item 1A. Risk Factors on page 7. These COVID-19 related risks are being managed within our Risk Framework and supporting risk management programs.
Risk Management Governance
The Risk Framework describes delegations of authority whereby the Board and its committees may delegate authority to management-level committees or executive officers. Such delegations may authorize certain decision-making and approval functions, which may be evidenced in, for example, committee charters, job descriptions, meeting minutes and resolutions.
The chart below illustrates the inter-relationship among the Board, Board committees and management committees that have the majority of risk oversight responsibilities for the Corporation.
47 Bank of America | ||||||||
The chart below illustrates the inter-relationship among the Board, Board committees and management committees that have the majority of risk oversight responsibilities for the Corporation.
Board of Directors and Board Committees
The Board is composed of 17 directors, all but one of whom are independent. The Board authorizes management to maintain an effective Risk Framework, and oversees compliance with safe and sound banking practices. In addition, the Board or its committees conduct inquiries of, and receive reports from management on risk-related matters to assess scope or resource limitations that could impede the ability of Independent Risk Management (IRM) and/or Corporate Audit to execute its responsibilities. The Board committees discussed below have the principal responsibility for enterprise-wide oversight of our risk management activities. Through these activities, the Board and applicable committees are provided with information on our risk profile and oversee executive management addressing key risks we face. Other Board committees, as described below, provide additional oversight of specific risks.
Each of the committees shown on the above chart regularly reports to the Board on risk-related matters within the committee’s responsibilities, which is intended to collectively provide the Board with integrated insight about our management of enterprise-wide risks.
Audit Committee
The Audit Committee oversees the qualifications, performance and independence of the Independent Registered Public Accounting Firm, the performance of our corporate audit function, the integrity of our consolidated financial statements, our compliance with legal and regulatory requirements, and makes inquiries of management or the Chief Audit Executive (CAE) to determine whether there are scope or resource limitations that impede the ability of Corporate Audit to execute its responsibilities. The Audit Committee is also responsible for overseeing compliance risk pursuant to the New York Stock Exchange listing standards.
Enterprise Risk Committee
The ERC has primary responsibility for oversight of the Risk Framework and key risks we face and of the Corporation’s overall risk appetite. It approves the Risk Framework and the Risk Appetite Statement and further recommends these documents to the Board for approval. The ERC oversees senior management’s responsibilities for the identification, measurement, monitoring and control of key risks we face. The
ERC may consult with other Board committees on risk-related matters.
Other Board Committees
Our Corporate Governance, ESG, and Sustainability Committee oversees our Board’s governance processes, identifies and reviews the qualifications of potential Board members, recommends nominees for election to our Board, recommends committee appointments for Board approval and reviews our Environmental, Social and Governance and stockholder engagement activities.
Our Compensation and Human Capital Committee oversees establishing, maintaining and administering our compensation programs and employee benefit plans, including approving and recommending our Chief Executive Officer’s (CEO) compensation to our Board for further approval by all independent directors; reviewing and approving all of our executive officers’ compensation, as well as compensation for non-management directors; and reviewing certain other human capital management topics.
Management Committees
Management committees may receive their authority from the Board, a Board committee, another management committee or from one or more executive officers. Our primary management level risk committee is the Management Risk Committee (MRC). Subject to Board oversight, the MRC is responsible for management oversight of key risks facing the Corporation. This includes providing management oversight of our compliance and operational risk programs, balance sheet and capital management, funding activities and other liquidity activities, stress testing, trading activities, recovery and resolution planning, model risk, subsidiary governance and activities between member banks and their nonbank affiliates pursuant to Federal Reserve rules and regulations, among other things.
Lines of Defense
We have clear ownership and accountability across three lines of defense: Front Line Units (FLUs), IRM and Corporate Audit. We also have control functions outside of FLUs and IRM (e.g., Legal and Global Human Resources). The three lines of defense are integrated into our management-level governance structure. Each of these functional roles is further described in this section.
Bank of America 48 | ||||||||
Executive Officers
Executive officers lead various functions representing the functional roles. Authority for functional roles may be delegated to executive officers from the Board, Board committees or management-level committees. Executive officers, in turn, may further delegate responsibilities, as appropriate, to management level committees, management routines or individuals. Executive officers review our activities for consistency with our Risk Framework, Risk Appetite Statement and applicable strategic, capital and financial operating plans, as well as applicable policies, standards, procedures and processes. Executive officers and other employees make decisions individually on a day-to-day basis, consistent with the authority they have been delegated. Executive officers and other employees may also serve on committees and participate in committee decisions.
Front Line Units
FLUs, which include the lines of business as well as the Global Technology and Operations Group, are responsible for appropriately assessing and effectively managing all of the risks
associated with their activities.
Three organizational units that include FLU activities and control function activities, but are not part of IRM are first, the Chief Financial Officer (CFO) Group; second, Environmental, Social and Governance (ESG), Capital Deployment (CD) and Public Policy (PP); and third, the Chief Administrative Officer (CAO) Group.
Independent Risk Management
IRM is part of our control functions and includes Global Risk Management. We have other control functions that are not part of IRM (other control functions may also provide oversight to FLU activities), including Legal, Global Human Resources and certain activities within the CFO Group; ESG, CD and PP; and CAO Group. IRM, led by the Chief Risk Officer (CRO), is responsible for independently assessing and overseeing risks within FLUs and other control functions. IRM establishes written enterprise policies and procedures that include concentration risk limits, where appropriate. Such policies and procedures outline how aggregate risks are identified, measured, monitored and controlled.
The CRO has the stature, authority and independence to develop and implement a meaningful risk management framework. The CRO has unrestricted access to the Board and reports directly to both the ERC and to the CEO. Global Risk Management is organized into horizontal risk teams that cover a specific risk area and vertical CRO teams that cover a particular front line unit or control function. These teams work collaboratively in executing their respective duties.
Corporate Audit
Corporate Audit and the CAE maintain their independence from the FLUs, IRM and other control functions by reporting directly to the Audit Committee or the Board. The CAE administratively reports to the CEO. Corporate Audit provides independent assessment and validation through testing of key processes and controls across the Corporation. Corporate Audit includes Credit Review which periodically tests and examines credit portfolios and processes.
Risk Management Processes
The Risk Framework requires that strong risk management practices are integrated in key strategic, capital and financial planning processes and in day-to-day business processes across the Corporation, with a goal of ensuring risks are
appropriately considered, evaluated and responded to in a timely manner. We employ our risk management process, referred to as Identify, Measure, Monitor and Control, as part of our daily activities.
Identify – To be effectively managed, risks must be clearly defined and proactively identified. Proper risk identification focuses on recognizing and understanding key risks inherent in our business activities or key risks that may arise from external factors. Each employee is expected to identify and escalate risks promptly. Risk identification is an ongoing process, incorporating input from FLUs and control functions, designed to be forward looking and capture relevant risk factors across all of our lines of business.
Measure – Once a risk is identified, it must be prioritized and accurately measured through a systematic risk quantification process including quantitative and qualitative components. Risk is measured at various levels including, but not limited to, risk type, FLU, legal entity and on an aggregate basis. This
risk quantification process helps to capture changes in our risk profile due to changes in strategic direction, concentrations, portfolio quality and the overall economic environment. Senior management considers how risk exposures might evolve under a variety of stress scenarios.
Monitor – We monitor risk levels regularly to track adherence to risk appetite, policies, standards, procedures and processes. We also regularly update risk assessments and review risk exposures. Through our monitoring, we can determine our level of risk relative to limits and can take action in a timely manner. We also can determine when risk limits are breached and have processes to appropriately report and escalate exceptions. This includes requests for approval to managers and alerts to executive management, management-level committees or the Board (directly or through an appropriate committee).
Control – We establish and communicate risk limits and controls through policies, standards, procedures and processes that define the responsibilities and authority for risk-taking. The limits and controls can be adjusted by the Board or management when conditions or risk tolerances warrant. These limits may be absolute (e.g., loan amount, trading volume) or relative (e.g., percentage of loan book in higher-risk categories). Our lines of business are held accountable to perform within the established limits.
The formal processes used to manage risk represent a part of our overall risk management process. We instill a strong and comprehensive culture of managing risk well through communications, training, policies, procedures and organizational roles and responsibilities. Establishing a culture reflective of our purpose to help make our customers’ financial lives better and delivering our responsible growth strategy is also critical to effective risk management. We understand that improper actions, behaviors or practices that are illegal, unethical or contrary to our core values could result in harm to the Corporation, our shareholders or our customers, damage the integrity of the financial markets, or negatively impact our reputation, and have established protocols and structures so that such conduct risk is governed and reported across the Corporation. Specifically, our Code of Conduct provides a framework for all of our employees to conduct themselves with the highest integrity. Additionally, we continue to strengthen the link between the employee performance management process and individual compensation to encourage employees to work toward enterprise-wide risk goals.
49 Bank of America | ||||||||
Corporation-wide Stress Testing
Integral to our Capital Planning, Financial Planning and Strategic Planning processes, we conduct capital scenario management and stress forecasting on a periodic basis to better understand balance sheet, earnings and capital sensitivities to certain economic and business scenarios, including economic and market conditions that are more severe than anticipated. These stress forecasts provide an understanding of the potential impacts from our risk profile on the balance sheet, earnings and capital, and serve as a key component of our capital and risk management practices. The intent of stress testing is to develop a comprehensive understanding of potential impacts of on- and off-balance sheet risks at the Corporation and how they impact financial resiliency, which provides confidence to management, regulators and our investors.
Contingency Planning
We have developed and maintain contingency plans that are designed to prepare us in advance to respond in the event of potential adverse economic, financial or market stress. These contingency plans include our Capital Contingency Plan and Financial Contingency and Recovery Plan, which provide monitoring, escalation, actions and routines designed to enable us to increase capital, access funding sources and reduce risk through consideration of potential options that include asset sales, business sales, capital or debt issuances, or other de-risking strategies. We also maintain a Resolution Plan to limit adverse systemic impacts that could be associated with a potential resolution of Bank of America.
Strategic Risk Management
Strategic risk is embedded in every business and is one of the major risk categories along with credit, market, liquidity, compliance, operational and reputational risks. This risk results from incorrect assumptions about external or internal factors, inappropriate business plans, ineffective business strategy execution, or failure to respond in a timely manner to changes in the regulatory, macroeconomic or competitive environments in the geographic locations in which we operate, such as competitor actions, changing customer preferences, product obsolescence and technology developments. Our strategic plan is consistent with our risk appetite, capital plan and liquidity requirements and specifically addresses strategic risks.
On an annual basis, the Board reviews and approves the strategic plan, capital plan, financial operating plan and Risk Appetite Statement. With oversight by the Board, executive management directs the lines of business to execute our strategic plan consistent with our core operating principles and risk appetite. The executive management team monitors business performance throughout the year and provides the Board with regular progress reports on whether strategic objectives and timelines are being met, including reports on strategic risks and if additional or alternative actions need to be considered or implemented. The regular executive reviews focus on assessing forecasted earnings and returns on capital, the current risk profile, current capital and liquidity requirements, staffing levels and changes required to support the strategic plan, stress testing results, and other qualitative factors such as market growth rates and peer analysis.
Significant strategic actions, such as capital actions, material acquisitions or divestitures, and resolution plans are reviewed and approved by the Board. At the business level, processes are in place to discuss the strategic risk implications of new, expanded or modified businesses, products or services and other strategic initiatives, and to provide formal review and
approval where required. With oversight by the Board and the ERC, executive management performs similar analyses throughout the year and evaluates changes to the financial forecast or the risk, capital or liquidity positions as deemed appropriate to balance and optimize achieving the targeted risk appetite, shareholder returns and maintaining the targeted financial strength. Proprietary models are used to measure the capital requirements for credit, country, market, operational and strategic risks. The allocated capital assigned to each business is based on its unique risk profile. With oversight by the Board, executive management assesses the risk-adjusted returns of each business in approving strategic and financial operating plans. The businesses use allocated capital to define business strategies and price products and transactions.
Capital Management
The Corporation manages its capital position so that its capital is more than adequate to support its business activities and aligns with risk, risk appetite and strategic planning. 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 conduct an Internal Capital Adequacy Assessment Process (ICAAP) on a periodic basis. The ICAAP is a forward-looking assessment of our projected capital needs and resources, incorporating earnings, balance sheet and risk forecasts under baseline and adverse economic and market conditions. We utilize periodic stress tests to assess the potential impacts to our balance sheet, earnings, regulatory capital and liquidity under a variety of stress scenarios. We perform qualitative risk assessments to identify and assess material risks not fully captured in our forecasts or stress tests. We assess the potential capital impacts of proposed changes to regulatory capital requirements. Management assesses ICAAP results and provides documented quarterly assessments of the adequacy of our capital guidelines and capital position to the Board or its committees.
We periodically review capital allocated to our businesses and allocate capital annually during the strategic and capital planning processes. For more information, see Business Segment Operations on page 36.
CCAR and Capital Planning
The Federal Reserve requires BHCs to submit a capital plan and planned capital actions on an annual basis, consistent with the rules governing the CCAR capital plan.
Based on the results of our 2020 CCAR supervisory stress test that was submitted to the Federal Reserve in the second quarter of 2020, we are subject to a 2.5 percent stress capital buffer (SCB) for the period beginning October 1, 2020 and ending on September 30, 2021. Our Common equity tier 1 (CET1) capital ratio under the Standardized approach must remain above 9.5 percent during this period (the sum of our CET1 capital ratio minimum of 4.5 percent, global systemically important bank (G-SIB) surcharge of 2.5 percent and our SCB of 2.5 percent) in order to avoid restrictions on capital distributions and discretionary bonus payments.
Bank of America 50 | ||||||||
Due to economic uncertainty resulting from the pandemic, the Federal Reserve required all large banks to update and resubmit their capital plans in November 2020 based on the Federal Reserve’s updated supervisory stress test scenarios. The results of the additional supervisory stress tests were published in December 2020.
The Federal Reserve also required large banks to suspend share repurchase programs during the second half of 2020, except for repurchases to offset shares awarded under equity-based compensation plans, and to limit common stock dividends to existing rates that did not exceed the average of the last four quarters’ net income. The Federal Reserve’s directives regarding share repurchases aligned with our decision to voluntarily suspend our general common stock repurchase program during the first half of 2020. The suspension of our repurchases did not include repurchases to offset shares awarded under our equity-based compensation plans. Pursuant to the Board’s authorization, we repurchased $7.0 billion of common stock during 2020.
In December 2020, the Federal Reserve announced that beginning in the first quarter of 2021, large banks would be permitted to pay common stock dividends at existing rates and to repurchase shares in an amount that, when combined with dividends paid, does not exceed the average of net income over the last four quarters.
On January 19, 2021, we announced that the Board declared a quarterly common stock dividend of $0.18 per share, payable on March 26, 2021 to shareholders of record as of March 5, 2021. We also announced that the Board authorized the repurchase of $2.9 billion in common stock through March 31, 2021, plus repurchases to offset shares awarded under equity-based compensation plans during the same period, estimated to be approximately $300 million. This authorization equals the maximum amount allowed by the Federal Reserve for the period.
Our stock repurchase program is 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. Such 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 (Exchange Act).
Regulatory Capital
As a financial services holding company, we are subject to regulatory capital rules, including Basel 3, issued by U.S. banking regulators. Basel 3 established minimum capital ratios and buffer requirements and outlined two methods of
calculating risk-weighted assets (RWA), the Standardized approach and the Advanced approaches. The Standardized approach relies primarily on supervisory risk weights based on exposure type, and the Advanced approaches determine risk weights based on internal models.
The Corporation's depository institution subsidiaries are also subject to the Prompt Corrective Action (PCA) framework. The Corporation and its primary affiliated banking entity, BANA, are Advanced approaches institutions under Basel 3 and are required to report regulatory risk-based capital ratios and RWA under both the Standardized and Advanced approaches. The approach that yields the lower ratio is used to assess capital adequacy including under the PCA framework. As of December 31, 2020, the CET1, Tier 1 capital and Total capital ratios for the Corporation were lower under the Standardized approach.
Minimum Capital Requirements
In order to avoid restrictions on capital distributions and discretionary bonus payments, the Corporation must meet risk-based capital ratio requirements that include a capital conservation buffer greater than 2.5 percent, plus any applicable countercyclical capital buffer and a G-SIB surcharge. On October 1, 2020, the capital conservation buffer was replaced by the SCB for the Corporation’s Standardized approach ratio requirements. The buffers and surcharge must be comprised solely of CET1 capital.
The Corporation is also 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. The numerator of the SLR is quarter-end Basel 3 Tier 1 capital. The denominator is total leverage exposure based on the daily average of the sum of on-balance sheet exposures less permitted deductions and applicable temporary exclusions, as well as the simple average of certain off-balance sheet exposures, as of the end of each month in a quarter. For more information, see Capital Management – Regulatory Developments on page 55.
Capital Composition and Ratios
Table 11 presents Bank of America Corporation’s capital ratios and related information in accordance with Basel 3 Standardized and Advanced approaches as measured at December 31, 2020 and 2019. For the periods presented herein, the Corporation met the definition of well capitalized under current regulatory requirements.
51 Bank of America | ||||||||
| Table 11 | Bank of America Corporation Regulatory Capital under Basel 3 | |||||||||||||||||||
Standardized Approach (1, 2) | Advanced Approaches (1) | Regulatory Minimum (3) | ||||||||||||||||||
| (Dollars in millions, except as noted) | December 31, 2020 | |||||||||||||||||||
| Risk-based capital metrics: | ||||||||||||||||||||
| Common equity tier 1 capital | $ | 176,660 | $ | 176,660 | ||||||||||||||||
| Tier 1 capital | 200,096 | 200,096 | ||||||||||||||||||
Total capital (4) | 237,936 | 227,685 | ||||||||||||||||||
| Risk-weighted assets (in billions) | 1,480 | 1,371 | ||||||||||||||||||
| Common equity tier 1 capital ratio | 11.9 | % | 12.9 | % | 9.5 | % | ||||||||||||||
| Tier 1 capital ratio | 13.5 | 14.6 | 11.0 | |||||||||||||||||
| Total capital ratio | 16.1 | 16.6 | 13.0 | |||||||||||||||||
| Leverage-based metrics: | ||||||||||||||||||||
Adjusted quarterly average assets (in billions) (5) | $ | 2,719 | $ | 2,719 | ||||||||||||||||
| Tier 1 leverage ratio | 7.4 | % | 7.4 | % | 4.0 | |||||||||||||||
Supplementary leverage exposure (in billions) (6) | $ | 2,786 | ||||||||||||||||||
| Supplementary leverage ratio | 7.2 | % | 5.0 | |||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||
| Risk-based capital metrics: | ||||||||||||||||||||
| Common equity tier 1 capital | $ | 166,760 | $ | 166,760 | ||||||||||||||||
| Tier 1 capital | 188,492 | 188,492 | ||||||||||||||||||
Total capital (4) | 221,230 | 213,098 | ||||||||||||||||||
| Risk-weighted assets (in billions) | 1,493 | 1,447 | ||||||||||||||||||
| Common equity tier 1 capital ratio | 11.2 | % | 11.5 | % | 9.5 | % | ||||||||||||||
| Tier 1 capital ratio | 12.6 | 13.0 | 11.0 | |||||||||||||||||
| Total capital ratio | 14.8 | 14.7 | 13.0 | |||||||||||||||||
| Leverage-based metrics: | ||||||||||||||||||||
Adjusted quarterly average assets (in billions) (5) | $ | 2,374 | $ | 2,374 | ||||||||||||||||
| Tier 1 leverage ratio | 7.9 | % | 7.9 | % | 4.0 | |||||||||||||||
| Supplementary leverage exposure (in billions) | $ | 2,946 | ||||||||||||||||||
| Supplementary leverage ratio | 6.4 | % | 5.0 | |||||||||||||||||
(1)As of December 31, 2020, capital ratios are calculated using the regulatory capital rule that allows a five-year transition period related to the adoption of CECL.
(2)Derivative exposure amounts are calculated using the standardized approach for measuring counterparty credit risk at December 31, 2020 and the current exposure method at December 31, 2019.
(3)The capital conservation buffer and G-SIB surcharge were 2.5 percent at both December 31, 2020 and 2019. At December 31, 2020, the Corporation's SCB of 2.5 percent was applied in place of the capital conservation buffer under the Standardized approach. The countercyclical capital buffer for both periods was zero. The SLR minimum includes a leverage buffer of 2.0 percent.
(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 total average assets adjusted for certain Tier 1 capital deductions.
(6)Supplementary leverage exposure at December 31, 2020 reflects the temporary exclusion of U.S. Treasury securities and deposits at Federal Reserve Banks.
At December 31, 2020, CET1 capital was $176.7 billion, an increase of $9.9 billion from December 31, 2019, driven by earnings and net unrealized gains on available-for-sale (AFS) debt securities included in accumulated other comprehensive income (OCI), partially offset by common stock repurchases and dividends. Total capital under the Standardized approach increased $16.7 billion primarily driven by the same factors as CET1 capital, an increase in the adjusted allowance for credit
losses included in Tier 2 capital and the issuance of preferred stock. RWA under the Standardized approach, which yielded the lower CET1 capital ratio at December 31, 2020, decreased $13.7 billion during 2020 to $1,480 billion primarily due to lower commercial and consumer lending exposures, partially offset by investments of excess deposits in securities. Table 12 shows the capital composition at December 31, 2020 and 2019.
Bank of America 52 | ||||||||
| Table 12 | Capital Composition under Basel 3 | |||||||||||||
| December 31 | ||||||||||||||
| (Dollars in millions) | 2020 | 2019 | ||||||||||||
| Total common shareholders’ equity | $ | 248,414 | $ | 241,409 | ||||||||||
CECL transitional amount (1) | 4,213 | — | ||||||||||||
| Goodwill, net of related deferred tax liabilities | (68,565) | (68,570) | ||||||||||||
| Deferred tax assets arising from net operating loss and tax credit carryforwards | (5,773) | (5,193) | ||||||||||||
| Intangibles, other than mortgage servicing rights, net of related deferred tax liabilities | (1,617) | (1,328) | ||||||||||||
| Defined benefit pension plan net assets | (1,164) | (1,003) | ||||||||||||
| Cumulative unrealized net (gain) loss related to changes in fair value of financial liabilities attributable to own creditworthiness, net-of-tax | 1,753 | 1,278 | ||||||||||||
| Other | (601) | 167 | ||||||||||||
| Common equity tier 1 capital | 176,660 | 166,760 | ||||||||||||
| Qualifying preferred stock, net of issuance cost | 23,437 | 22,329 | ||||||||||||
| Other | (1) | (597) | ||||||||||||
| Tier 1 capital | 200,096 | 188,492 | ||||||||||||
| Tier 2 capital instruments | 22,213 | 22,538 | ||||||||||||
Qualifying allowance for credit losses (2) | 15,649 | 10,229 | ||||||||||||
| Other | (22) | (29) | ||||||||||||
| Total capital under the Standardized approach | 237,936 | 221,230 | ||||||||||||
Adjustment in qualifying allowance for credit losses under the Advanced approaches (2) | (10,251) | (8,132) | ||||||||||||
| Total capital under the Advanced approaches | $ | 227,685 | $ | 213,098 | ||||||||||
(1)The CECL transitional amount includes the impact of the Corporation's adoption of the new CECL accounting standard on January 1, 2020 plus 25 percent of the increase in the adjusted allowance for credit losses from January 1, 2020 through December 31, 2020.
(2)The balance at December 31, 2020 includes the impact of transition provisions related to the new CECL accounting standard.
Table 13 shows the components of RWA as measured under Basel 3 at December 31, 2020 and 2019.
| Table 13 | Risk-weighted Assets under Basel 3 | |||||||||||||||||||||||||
Standardized Approach (1) | Advanced Approaches | Standardized Approach (1) | Advanced Approaches | |||||||||||||||||||||||
| December 31 | ||||||||||||||||||||||||||
| (Dollars in billions) | 2020 | 2019 | ||||||||||||||||||||||||
| Credit risk | $ | 1,420 | $ | 896 | $ | 1,437 | $ | 858 | ||||||||||||||||||
| Market risk | 60 | 60 | 56 | 55 | ||||||||||||||||||||||
Operational risk (2) | n/a | 372 | n/a | 500 | ||||||||||||||||||||||
| Risks related to credit valuation adjustments | n/a | 43 | n/a | 34 | ||||||||||||||||||||||
| Total risk-weighted assets | $ | 1,480 | $ | 1,371 | $ | 1,493 | $ | 1,447 | ||||||||||||||||||
(1) Derivative exposure amounts are calculated using the standardized approach for measuring counterparty credit risk at December 31, 2020 and the current exposure method at December 31, 2019.
(2) December 31, 2020 includes the effects of an update made to our operational risk RWA model during the third quarter of 2020.
n/a = not applicable
53 Bank of America | ||||||||
Bank of America, N.A. Regulatory Capital
Table 14 presents regulatory capital information for BANA in accordance with Basel 3 Standardized and Advanced approaches as measured at December 31, 2020 and 2019. BANA met the definition of well capitalized under the PCA framework for both periods.
| Table 14 | Bank of America, N.A. Regulatory Capital under Basel 3 | |||||||||||||||||||
Standardized Approach (1, 2) | Advanced Approaches (1) | Regulatory Minimum (3) | ||||||||||||||||||
| (Dollars in millions, except as noted) | December 31, 2020 | |||||||||||||||||||
| Risk-based capital metrics: | ||||||||||||||||||||
Common equity tier 1 capital | $ | 164,593 | $ | 164,593 | ||||||||||||||||
| Tier 1 capital | 164,593 | 164,593 | ||||||||||||||||||
Total capital (4) | 181,370 | 170,922 | ||||||||||||||||||
| Risk-weighted assets (in billions) | 1,221 | 1,014 | ||||||||||||||||||
| Common equity tier 1 capital ratio | 13.5 | % | 16.2 | % | 7.0 | % | ||||||||||||||
| Tier 1 capital ratio | 13.5 | 16.2 | 8.5 | |||||||||||||||||
| Total capital ratio | 14.9 | 16.9 | 10.5 | |||||||||||||||||
| Leverage-based metrics: | ||||||||||||||||||||
Adjusted quarterly average assets (in billions) (5) | $ | 2,143 | $ | 2,143 | ||||||||||||||||
| Tier 1 leverage ratio | 7.7 | % | 7.7 | % | 5.0 | |||||||||||||||
| Supplementary leverage exposure (in billions) | $ | 2,525 | ||||||||||||||||||
| Supplementary leverage ratio | 6.5 | % | 6.0 | |||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||
| Risk-based capital metrics: | ||||||||||||||||||||
Common equity tier 1 capital | $ | 154,626 | $ | 154,626 | ||||||||||||||||
| Tier 1 capital | 154,626 | 154,626 | ||||||||||||||||||
Total capital (4) | 166,567 | 158,665 | ||||||||||||||||||
| Risk-weighted assets (in billions) | 1,241 | 991 | ||||||||||||||||||
| Common equity tier 1 capital ratio | 12.5 | % | 15.6 | % | 7.0 | % | ||||||||||||||
| Tier 1 capital ratio | 12.5 | 15.6 | 8.5 | |||||||||||||||||
| Total capital ratio | 13.4 | 16.0 | 10.5 | |||||||||||||||||
| Leverage-based metrics: | ||||||||||||||||||||
Adjusted quarterly average assets (in billions) (5) | $ | 1,780 | $ | 1,780 | ||||||||||||||||
| Tier 1 leverage ratio | 8.7 | % | 8.7 | % | 5.0 | |||||||||||||||
| Supplementary leverage exposure (in billions) | $ | 2,177 | ||||||||||||||||||
| Supplementary leverage ratio | 7.1 | % | 6.0 | |||||||||||||||||
(1)As of December 31, 2020, capital ratios are calculated using the regulatory capital rule that allows a five-year transition period related to the adoption of CECL.
(2)Derivative exposure amounts are calculated using the standardized approach for measuring counterparty credit risk at December 31, 2020 and the current exposure method at December 31, 2019.
(3)Risk-based capital regulatory minimums at both December 31, 2020 and 2019 are the minimum ratios under Basel 3 including a capital conservation buffer of 2.5 percent. The regulatory minimums for the leverage ratios as of both period ends are the percent required to be considered well capitalized under the PCA framework.
(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 total average assets adjusted for certain Tier 1 capital deductions.
Total Loss-Absorbing Capacity Requirements
Total loss-absorbing capacity (TLAC) consists of the Corporation’s Tier 1 capital and eligible long-term debt issued directly by the Corporation. Eligible long-term debt for TLAC ratios is comprised of unsecured debt that has a remaining maturity of at least one year and satisfies additional requirements as prescribed in the TLAC final rule. As with the
risk-based capital ratios and SLR, the Corporation is required to maintain TLAC ratios in excess of minimum requirements plus applicable buffers to avoid restrictions on capital distributions and discretionary bonus payments. Table 15 presents the Corporation's TLAC and long-term debt ratios and related information as of December 31, 2020 and 2019.
Bank of America 54 | ||||||||
| Table 15 | Bank of America Corporation Total Loss-Absorbing Capacity and Long-Term Debt | |||||||||||||||||||||||||
TLAC (1) | Regulatory Minimum (2) | Long-term Debt | Regulatory Minimum (3) | |||||||||||||||||||||||
| (Dollars in millions) | December 31, 2020 | |||||||||||||||||||||||||
| Total eligible balance | $ | 405,153 | $ | 196,997 | ||||||||||||||||||||||
Percentage of risk-weighted assets (4) | 27.4 | % | 22.0 | % | 13.3 | % | 8.5 | % | ||||||||||||||||||
Percentage of supplementary leverage exposure (5, 6) | 14.5 | 9.5 | 7.1 | 4.5 | ||||||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||
| Total eligible balance | $ | 367,449 | $ | 171,349 | ||||||||||||||||||||||
Percentage of risk-weighted assets (4) | 24.6 | % | 22.0 | % | 11.5 | % | 8.5 | % | ||||||||||||||||||
Percentage of supplementary leverage exposure (6) | 12.5 | 9.5 | 5.8 | 4.5 | ||||||||||||||||||||||
(1)As of December 31, 2020, TLAC ratios are calculated using the regulatory capital rule that allows a five-year transition period related to the adoption of CECL.
(2)The TLAC RWA regulatory minimum consists of 18.0 percent plus a TLAC RWA buffer comprised of 2.5 percent plus the Method 1 G-SIB surcharge of 1.5 percent. The countercyclical buffer is zero for both periods. The TLAC supplementary leverage exposure regulatory minimum consists of 7.5 percent plus a 2.0 percent TLAC leverage buffer. The TLAC RWA and leverage buffers must be comprised solely of CET1 capital and Tier 1 capital, respectively.
(3)The long-term debt RWA regulatory minimum is comprised of 6.0 percent plus an additional 2.5 percent requirement based on the Corporation’s Method 2 G-SIB surcharge. The long-term debt leverage exposure regulatory minimum is 4.5 percent.
(4)The approach that yields the higher RWA is used to calculate TLAC and long-term debt ratios, which was the Standardized approach as of both December 31, 2020 and 2019.
(5)Supplementary leverage exposure at December 31, 2020 reflects the temporary exclusion of U.S. Treasury Securities and deposits at Federal Reserve Banks.
(6)Derivative exposure amounts are calculated using the standardized approach for measuring counterparty credit risk at December 31, 2020 and the current exposure method at December 31, 2019.
Regulatory Developments
Revisions to Basel 3 to Address Current Expected Credit Loss Accounting
On January 1, 2020, the Corporation adopted the new accounting standard that requires the measurement of the allowance for credit losses to be based on management’s best estimate of lifetime ECL inherent in the Corporation's relevant financial assets. For more information, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements. During the first quarter of 2020, in accordance with an interim final rule issued by U.S. banking regulators that was finalized on August 26, 2020, the Corporation delayed for two years the initial adoption impact of CECL on regulatory capital, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during 2020 and 2021 (i.e., a five-year transition period). During the two-year delay, the Corporation will add back to CET1 capital 100 percent of the initial adoption impact of CECL plus 25 percent of the cumulative quarterly changes in the allowance for credit losses (i.e., quarterly transitional amounts). After two years, starting on January 1, 2022, the quarterly transitional amounts along with the initial adoption impact of CECL will be phased out of CET1 capital over the three-year period.
Stress Capital Buffer
On March 4, 2020, the Federal Reserve issued a final rule that integrates the annual quantitative assessment of the CCAR program with the buffer requirements in the U.S. Basel 3 Final Rule. The new approach replaced the static 2.5 percent capital conservation buffer for Basel 3 Standardized approach requirements with a SCB, calculated as the decline in the CET1 capital ratio under the supervisory severely adverse scenario plus four quarters of planned common stock dividends, floored at 2.5 percent. Based on the CCAR 2020 supervisory stress test results, the Corporation is subject to a 2.5 percent SCB for the period beginning October 1, 2020 and ending on September 30, 2021.
In conjunction with this new requirement, the Federal Reserve has removed the annual CCAR quantitative objection process beginning with CCAR 2020. While the final rule continues to require that the Corporation describe its planned capital distributions in its CCAR capital plan, the Corporation is no longer required to seek prior approval if it makes capital distributions in excess of those included in its CCAR capital
plan. The Corporation is instead subject to automatic distribution limitations if its capital ratios fall below its buffer requirements, which include the SCB.
Eligible Retained Income
On March 17, 2020, in response to the economic impact of the pandemic, the U.S. banking regulators issued an interim final rule that revises the definition of eligible retained income to be based on average net income over the prior four quarters. This change, which was finalized on August 26, 2020, more gradually phases in automatic distribution restrictions to the extent capital buffers are breached.
Supplementary Leverage Ratio
On April 1, 2020, in response to the economic impact of the pandemic, the Federal Reserve issued an interim final rule to temporarily exclude the on-balance sheet amounts of U.S. Treasury securities and deposits at Federal Reserve Banks from the calculation of supplementary leverage exposure for bank holding companies. The rule is effective for June 30, 2020 through March 31, 2021 reports. As of December 31, 2020, temporary exclusions improved the SLR by 1.0 percent to 7.2 percent.
On May 15, 2020, the U.S. banking regulators issued an interim final rule that provides a similar temporary exclusion to depository institutions, effective from the beginning of the second quarter of 2020 through March 31, 2021; however, institutions must elect the relief. Beginning in the third quarter of 2020, a depository institution electing to apply the exclusion must receive approval from its primary regulator prior to making any capital distributions as long as the exclusion is in effect. As of December 31, 2020, the Corporation’s insured depository institution subsidiaries have not elected the exclusion.
Paycheck Protection Program Loans
On April 9, 2020, in response to the economic impact of the pandemic, the U.S. banking regulators issued an interim final rule that, among other things, stipulates PPP loans, which are guaranteed by the SBA, will receive a zero percent risk weight under the Basel 3 Advanced and Standardized approaches. The rule was later finalized by the U.S. banking regulators on October 28, 2020. For more information on the PPP, see Executive Summary – Recent Developments – COVID-19 Pandemic on page 25 and Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
55 Bank of America | ||||||||
Standardized Approach for Measuring Counterparty Credit Risk
On June 30, 2020 the Corporation adopted the new standardized approach for measuring counterparty credit risk (SA-CCR), which replaces the current exposure method for calculating the exposure amount of derivative contracts for risk-weighted assets and supplementary leverage exposure. Adoption of SA-CCR resulted in a decrease of approximately $15 billion in the Corporation’s Standardized RWA, and a $66 billion decrease in supplementary leverage exposure.
Swap Dealer Capital Requirements
On July 22, 2020, the U.S. Commodity Futures Trading Commission (CFTC) issued a final rule to establish capital requirements for swap dealers and major swap participants that are not subject to existing U.S. prudential regulation. Under the rule, applicable subsidiaries of the Corporation would be permitted to elect one of two approaches to compute their regulatory capital. The first approach is a bank-based capital approach, which requires that firms maintain CET1 capital greater than or equal to 6.5 percent of the entity’s RWA as calculated under Basel 3, Total capital greater than or equal to 8.0 percent of the entity’s RWA as calculated under Basel 3 and Total capital greater than or equal to 8.0 percent of the entity’s uncleared swap margin. The second approach is based on net liquid assets and requires that a firm maintain net capital greater than or equal to 2.0 percent of its uncleared swap margin. The final rule also includes reporting requirements. The impact on the Corporation is not expected to be significant.
Deduction of Unsecured Debt of G-SIBs
On October 20, 2020, the Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (U.S. Agencies) finalized a rule requiring Advanced approaches institutions to deduct from regulatory capital certain investments in TLAC-eligible long-term debt and other pari passu or subordinated debt instruments issued by G-SIBs above a specified threshold. The final rule is intended to limit the interconnectedness between G-SIBs and is complementary to existing regulatory capital requirements that generally require banks to deduct investments in the regulatory capital of financial institutions. The final rule is effective April 1, 2021. The impact to the Corporation is not expected to be significant.
Volcker Rule
Effective January 1, 2020, we became subject to certain changes to the Volcker Rule, including removing the requirement for banking organizations to deduct from Tier 1 capital ownership interests of covered funds acquired or retained under the underwriting or market-making exemptions of the Volcker Rule, which the banking entity did not organize or offer.
Single-Counterparty Credit Limits
The Federal Reserve established 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.
Regulatory Capital and Securities Regulation
The Corporation’s principal U.S. broker-dealer subsidiaries are BofA Securities, Inc. (BofAS), Merrill Lynch Professional Clearing Corp. (MLPCC) and Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). The Corporation's principal European broker-dealer subsidiaries are Merrill Lynch International (MLI) and BofA Securities Europe SA (BofASE).
The U.S. broker-dealer subsidiaries are subject to the net capital requirements of Rule 15c3-1 under the Exchange Act. BofAS computes its minimum capital requirements as an alternative net capital broker-dealer under Rule 15c3-1e, and MLPCC and MLPF&S compute their minimum capital requirements in accordance with the alternative standard under Rule 15c3-1. BofAS and MLPCC are also registered as futures commission merchants and are subject to CFTC Regulation 1.17. The U.S. broker-dealer subsidiaries are also registered with the Financial Industry Regulatory Authority, Inc. (FINRA). Pursuant to FINRA Rule 4110, FINRA may impose higher net capital requirements than Rule 15c3-1 under the Exchange Act with respect to each of the broker-dealers.
BofAS provides institutional services, and in accordance with the alternative net capital requirements, is required to maintain tentative net capital in excess of $1.0 billion and net capital in excess of the greater of $500 million or a certain percentage of its reserve requirement. BofAS must also notify the Securities and Exchange Commission (SEC) in the event its tentative net capital is less than $5.0 billion. BofAS is also required to hold a certain percentage of its customers' and affiliates' risk-based margin in order to meet its CFTC minimum net capital requirement. At December 31, 2020, BofAS had tentative net capital of $16.8 billion. BofAS also had regulatory net capital of $14.1 billion, which exceeded the minimum requirement of $2.9 billion.
MLPCC is a fully-guaranteed subsidiary of BofAS and provides clearing and settlement services as well as prime brokerage and arranged financing services for institutional clients. At December 31, 2020, MLPCC’s regulatory net capital of $8.6 billion exceeded the minimum requirement of $1.4 billion.
MLPF&S provides retail services. At December 31, 2020, MLPF&S' regulatory net capital was $3.6 billion, which exceeded the minimum requirement of $180 million.
Our European broker-dealers are regulated by non-U.S. regulators. MLI, a U.K. investment firm, is regulated by the Prudential Regulation Authority and the FCA and is subject to certain regulatory capital requirements. At December 31, 2020, MLI’s capital resources were $34.1 billion, which exceeded the minimum Pillar 1 requirement of $14.7 billion. BofASE, a French investment firm, is regulated by the Autorité de Contrôle Prudentiel et de Résolution and the Autorité des Marchés Financiers, and is subject to certain regulatory capital requirements. At December 31, 2020, BofASE's capital resources were $6.2 billion, which exceeded the minimum Pillar 1 requirement of $1.9 billion.
Bank of America 56 | ||||||||
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. These liquidity risk management practices have allowed us to effectively manage the market stress from the pandemic that began in the first quarter of 2020. For more information on the effects of the pandemic, see Part I. Item 1A. Risk Factors – Coronavirus Disease on page 7 and Executive Summary – Recent Developments – COVID-19 Pandemic on page 25.
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.
The Board approves our liquidity risk policy and the Financial Contingency and Recovery Plan. The ERC establishes our liquidity risk tolerance levels. The MRC is responsible for overseeing liquidity risks and directing management to maintain exposures within the established tolerance levels. The MRC reviews and monitors our liquidity position and stress testing results, approves certain liquidity risk limits and reviews the impact of strategic decisions on our liquidity. For more information, see Managing Risk on page 47. Under this governance framework, we have developed certain funding and liquidity risk management practices which include: maintaining liquidity at the parent company and selected subsidiaries, including our bank subsidiaries and other regulated entities; determining what amounts of liquidity are appropriate for these entities based on analysis of debt maturities and other potential cash outflows, including those that we may experience during stressed market conditions; diversifying funding sources, considering our asset profile and legal entity structure; and performing contingency planning.
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 bank 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.
In consideration for the transfer of assets, NB Holdings issued a subordinated note to the parent company in a principal
amount equal to the value of the transferred assets. The aggregate principal amount of the note will increase by the amount of any future asset transfers. NB Holdings also provided the parent company with a committed line of credit that allows the parent company to draw funds necessary to service near-term cash needs. These arrangements support our preferred single point of entry resolution strategy, under which only the parent company would be resolved under the U.S. Bankruptcy Code. These arrangements include provisions to terminate the line of credit, forgive the subordinated note and require the parent company to transfer its remaining financial assets to NB Holdings if our projected liquidity resources deteriorate so severely that resolution of the parent company becomes imminent.
Global Liquidity Sources and Other Unencumbered Assets
We maintain liquidity available to the Corporation, including the parent company and selected subsidiaries, in the form of cash and high-quality, liquid, unencumbered securities. Our liquidity buffer, referred to as Global Liquidity Sources (GLS), is comprised of assets that are readily available to the parent company and selected subsidiaries, including holding company, bank and broker-dealer subsidiaries, even during stressed market conditions. Our cash is primarily on deposit with the Federal Reserve Bank and, to a lesser extent, central banks outside of the U.S. We limit the composition of high-quality, liquid, unencumbered securities to U.S. government securities, U.S. agency securities, U.S. agency MBS and a select group of non-U.S. government securities. We can quickly obtain cash for these securities, even in stressed conditions, through repurchase agreements or outright sales. We hold our GLS in legal entities that allow us to meet the liquidity requirements of our global businesses, and we consider the impact of potential regulatory, tax, legal and other restrictions that could limit the transferability of funds among entities.
Table 16 presents average GLS for the three months ended December 31, 2020 and 2019.
| Table 16 | Average Global Liquidity Sources | |||||||||||||
| Three Months Ended December 31 | ||||||||||||||
| (Dollars in billions) | 2020 | 2019 | ||||||||||||
| Bank entities | $ | 773 | $ | 454 | ||||||||||
Nonbank and other entities (1) | 170 | 122 | ||||||||||||
Total Average Global Liquidity Sources | $ | 943 | $ | 576 | ||||||||||
(1) Nonbank includes Parent, NB Holdings and other regulated entities.
Our bank subsidiaries’ liquidity is primarily driven by deposit and lending activity, as well as securities valuation and net debt activity. Bank subsidiaries can also generate incremental liquidity by pledging a range of unencumbered loans and securities to certain FHLBs and the Federal Reserve Discount Window. The cash we could have obtained by borrowing against this pool of specifically-identified eligible assets was $306 billion and $372 billion at December 31, 2020 and 2019. 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.
57 Bank of America | ||||||||
Liquidity is also held in nonbank entities, including the Parent, NB Holdings and other regulated entities. Parent company and NB Holdings liquidity is typically in the form of cash deposited at BANA and is excluded from the liquidity at bank subsidiaries. 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 17 presents the composition of average GLS for the three months ended December 31, 2020 and 2019.
| Table 17 | Average Global Liquidity Sources Composition | ||||||||||
| Three Months Ended December 31 | |||||||||||
| (Dollars in billions) | 2020 | 2019 | |||||||||
| Cash on deposit | $ | 322 | $ | 103 | |||||||
| U.S. Treasury securities | 141 | 98 | |||||||||
U.S. agency securities, mortgage-backed securities, and other investment-grade securities | 462 | 358 | |||||||||
Non-U.S. government securities | 18 | 17 | |||||||||
| Total Average Global Liquidity Sources | $ | 943 | $ | 576 | |||||||
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 $584 billion and $464 billion for the three months ended December 31, 2020 and 2019. For the same periods, the average consolidated LCR was 122 percent and 116 percent. Our LCR fluctuates due to normal business flows from customer activity.
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. The scenarios we consider and utilize incorporate market-wide and Corporation-specific events, including potential credit rating downgrades for the parent company and our subsidiaries, and more severe events including potential resolution scenarios. The scenarios are based on our historical experience, experience of distressed and failed financial institutions, regulatory guidance, and both expected and unexpected future events.
The types of potential contractual and contingent cash outflows we consider in our scenarios may include, but are not limited to, upcoming contractual maturities of unsecured debt and reductions in new debt issuances; diminished access to secured financing markets; potential deposit withdrawals; increased draws on loan commitments, liquidity facilities and letters of credit; additional collateral that counterparties could call if our credit ratings were downgraded; collateral and margin requirements arising from market value changes; and potential
liquidity required to maintain businesses and finance customer activities. Changes in certain market factors, including, but not limited to, credit rating downgrades, could negatively impact potential contractual and contingent outflows and the related financial instruments, and in some cases these impacts could be material to our financial results.
We consider all sources of funds that we could access during each stress scenario and focus particularly on matching available sources with corresponding liquidity requirements by legal entity. We also use the stress modeling results to manage our asset and liability profile and establish limits and guidelines on certain funding sources and businesses.
Net Stable Funding Ratio Final Rule
On October 20, 2020, the U.S. Agencies finalized the Net Stable Funding Ratio (NSFR), a rule requiring large banks to maintain a minimum level of stable funding over a one-year period. The final rule is intended to support the ability of banks to lend to households and businesses in both normal and adverse economic conditions and is complementary to the LCR rule, which focuses on short-term liquidity risks. The final rule is effective July 1, 2021. The U.S. NSFR would apply to the Corporation on a consolidated basis and to our insured depository institutions. The Corporation expects to be in compliance within the final NSFR rule in the regulatory timeline provided and does not expect any significant impacts to the Corporation.
Diversified Funding Sources
We fund our assets primarily with a mix of deposits, and secured and unsecured liabilities through a centralized, globally coordinated funding approach diversified across products, programs, markets, currencies and investor groups.
The primary benefits of our centralized funding approach include greater control, reduced funding costs, wider name recognition by investors and greater flexibility to meet the variable funding requirements of subsidiaries. Where regulations, time zone differences or other business considerations make parent company funding impractical, certain other subsidiaries may issue their own debt.
We fund a substantial portion of our lending activities through our deposits, which were $1.80 trillion and $1.43 trillion at December 31, 2020 and 2019. Deposits are primarily generated by our Consumer Banking, GWIM and Global Banking segments. These deposits are diversified by clients, product type and geography, and the majority of our U.S. deposits are insured by the FDIC. We consider a substantial portion of our deposits to be a stable, low-cost and consistent source of funding. We believe this deposit funding is generally less sensitive to interest rate changes, market volatility or changes in our credit ratings than wholesale funding sources. Our lending activities may also be financed through secured borrowings, including credit card securitizations and securitizations with government-sponsored enterprises (GSE), the FHA and private-label investors, as well as FHLB loans.
Our trading activities in other regulated entities are primarily funded on a secured basis through securities lending and repurchase agreements, and these amounts will vary based on customer activity and market conditions. We believe funding these activities in the secured financing markets is more cost-efficient and less sensitive to changes in our credit ratings than unsecured financing. Repurchase agreements are generally short-term and often overnight. Disruptions in secured financing markets for financial institutions have occurred in prior market cycles which resulted in adverse changes in terms or significant
Bank of America 58 | ||||||||
reductions in the availability of such financing. We manage the liquidity risks arising from secured funding by sourcing funding globally from a diverse group of counterparties, providing a range of securities collateral and pursuing longer durations, when appropriate. For more information on secured financing agreements, see Note 10 – Federal Funds Sold or Purchased, Securities Financing Agreements, Short-term Borrowings and Restricted Cash to the Consolidated Financial Statements.
Total long-term debt increased $22.1 billion to $262.9 billion during 2020, primarily due to debt issuances and valuation adjustments, partially offset by maturities and redemptions. We may, from time to time, purchase outstanding debt instruments in various transactions, depending on market conditions, liquidity and other factors. Our other regulated entities may also make markets in our debt instruments to provide liquidity for investors.
During 2020, we issued $56.9 billion of long-term debt consisting of $43.8 billion of notes issued by Bank of America Corporation, substantially all of which was TLAC compliant, $4.8 billion of notes issued by Bank of America, N.A. and $8.3 billion of other debt. During 2019, we issued $52.5 billion of long-term debt consisting of $29.3 billion of notes issued by Bank of America Corporation, substantially all of which was TLAC compliant, $10.9 billion of notes issued by Bank of America, N.A. and $12.3 billion of other debt.
During 2020, we had total long-term debt maturities and redemptions in the aggregate of $47.1 billion consisting of $22.6 billion for Bank of America Corporation, $11.5 billion for Bank of America, N.A. and $13.0 billion of other debt. During 2019, we had total long-term debt maturities and redemptions in the aggregate of $50.6 billion consisting of $21.1 billion for Bank of America Corporation, $19.9 billion for Bank of America, N.A. and $9.6 billion of other debt.
At December 31, 2020, Bank of America Corporation's senior notes of $191.2 billion included $146.6 billion of outstanding notes that are both TLAC eligible and callable at least one year before their stated maturities. Of these senior notes, $12.0 billion will be callable and become TLAC ineligible during 2021, and $15.3 billion, $14.6 billion, $11.7 billion and $13.2 billion will do so during each of 2022 through 2025, respectively, and $79.8 billion thereafter.
We issue long-term unsecured debt in a variety of maturities and currencies to achieve cost-efficient funding and to maintain an appropriate maturity profile. While the cost and availability of unsecured funding may be negatively impacted by general market conditions or by matters specific to the financial services industry or the Corporation, we seek to mitigate refinancing risk by actively managing the amount of our borrowings that we anticipate will mature within any month or quarter. We may issue unsecured debt in the form of structured notes for client purposes, certain of which qualify as TLAC-eligible debt. During 2020, we issued $7.3 billion of structured notes, which are unsecured debt obligations that pay investors returns linked to other debt or equity securities, indices, currencies or commodities. We typically hedge the returns we are obligated to pay on these liabilities with derivatives and/or investments in the underlying instruments, so that from a funding perspective, the cost is similar to our other unsecured long-term debt. We could be required to settle certain structured note obligations for cash or other securities prior to maturity under certain circumstances, which we consider for liquidity planning purposes. We believe, however, that a portion of such borrowings will remain outstanding beyond the earliest put or redemption date.
Substantially all of our senior and subordinated debt obligations contain no provisions that could trigger a requirement for an early repayment, require additional collateral support, result in changes to terms, accelerate maturity or create additional financial obligations upon an adverse change in our credit ratings, financial ratios, earnings, cash flows or stock price. For more information on long-term debt funding, including issuances and maturities and redemptions, see Note 11 – Long-term Debt to the Consolidated Financial Statements.
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 82.
Contingency Planning
We maintain contingency funding plans that outline our potential responses to liquidity stress events at various levels of severity. These policies and plans are based on stress scenarios and include potential funding strategies and communication and notification procedures that we would implement in the event we experienced stressed liquidity conditions. We periodically review and test the contingency funding plans to validate efficacy and assess readiness.
Our U.S. bank subsidiaries can access contingency funding through the Federal Reserve Discount Window. Certain non-U.S. subsidiaries have access to central bank facilities in the jurisdictions in which they operate. While we do not rely on these sources in our liquidity modeling, we maintain the policies, procedures and governance processes that would enable us to access these sources if necessary.
Credit Ratings
Our borrowing costs and ability to raise funds are impacted by our credit ratings. In addition, credit ratings may be important to customers or counterparties when we compete in certain markets and when we seek to engage in certain transactions, including over-the-counter (OTC) derivatives. Thus, it is our objective to maintain high-quality credit ratings, and management maintains an active dialogue with the major rating agencies.
Credit ratings and outlooks are opinions expressed by rating agencies on our creditworthiness and that of our obligations or securities, including long-term debt, short-term borrowings, preferred stock and other securities, including asset securitizations. Our credit ratings are subject to ongoing review by the rating agencies, and they consider a number of factors, including our own financial strength, performance, prospects and operations as well as factors not under our control. The rating agencies could make adjustments to our ratings at any time, and they provide no assurances that they will maintain our ratings at current levels.
Other factors that influence our credit ratings include changes to the rating agencies’ methodologies for our industry or certain security types; the rating agencies’ assessment of the general operating environment for financial services companies; our relative positions in the markets in which we compete; our various risk exposures and risk management policies and activities; pending litigation and other contingencies or potential tail risks; our reputation; our liquidity position, diversity of funding sources and funding costs; the current and expected level and volatility of our earnings; our capital position and capital management practices; our corporate governance; the sovereign credit ratings of the U.S. government; current or future regulatory and legislative
59 Bank of America | ||||||||
initiatives; and the agencies’ views on whether the U.S. government would provide meaningful support to the Corporation or its subsidiaries in a crisis.
On April 22, 2020, Fitch Ratings (Fitch) completed its review of large, complex securities trading and universal banks in the U.S., including Bank of America, in response to declining economic activity from the pandemic. The agency affirmed its long-term and short-term senior debt ratings for the Corporation and all of its rated subsidiaries, except for select issuer and instrument-level ratings that had previously been placed under criteria observation on March 4, 2020, following changes in the agency’s bank rating criteria on February 28, 2020.
Concurrently, Fitch reached a conclusion on select under-criteria-observation designations for the Corporation and upgraded its long-term and short-term senior debt ratings of MLI and BofASE by one notch to AA-/F1+. The agency also upgraded its preferred stock rating for the Corporation by one notch to BBB and downgraded its subordinated debt rating for the Corporation by one notch to A-. According to Fitch, rating
changes under criteria observation are the sole result of bank rating criteria changes and do not reflect a change in the underlying fundamentals of the institution. Fitch’s outlook for all of our long-term ratings is currently Stable.
On June 9, 2020, Fitch affirmed its rating for the subordinated debt of BANA at A. This rating had remained under criteria observation following Fitch’s broader rating actions.
On November 18, 2020, Moody’s Investors Service (Moody's) affirmed its long-term and short-term debt ratings for the Corporation and all of its rated subsidiaries, which did not change during 2020. Moody’s outlook for all of our long-term ratings is currently Stable.
The current ratings and Stable outlooks for the Corporation and its subsidiaries from Standard & Poor’s Global Ratings also did not change during 2020.
Table 18 presents the Corporation’s current long-term/short-term senior debt ratings and outlooks expressed by the rating agencies.
| Table 18 | 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 | A2 | P-1 | Stable | A- | A-2 | Stable | A+ | F1 | Stable | |||||||||||||||||||||||||||||||||||||||||||||||
| Bank of America, N.A. | Aa2 | P-1 | Stable | A+ | A-1 | Stable | AA- | F1+ | Stable | |||||||||||||||||||||||||||||||||||||||||||||||
| Bank of America Europe Designated Activity Company | NR | NR | NR | A+ | A-1 | Stable | AA- | F1+ | Stable | |||||||||||||||||||||||||||||||||||||||||||||||
Merrill Lynch, Pierce, Fenner & Smith Incorporated | NR | NR | NR | A+ | A-1 | Stable | AA- | F1+ | Stable | |||||||||||||||||||||||||||||||||||||||||||||||
| BofA Securities, Inc. | NR | NR | NR | A+ | A-1 | Stable | AA- | F1+ | Stable | |||||||||||||||||||||||||||||||||||||||||||||||
| Merrill Lynch International | NR | NR | NR | A+ | A-1 | Stable | AA- | F1+ | Stable | |||||||||||||||||||||||||||||||||||||||||||||||
| BofA Securities Europe SA | NR | NR | NR | A+ | A-1 | Stable | AA- | F1+ | Stable | |||||||||||||||||||||||||||||||||||||||||||||||
NR = not rated
A reduction in certain of our credit ratings or the ratings of certain asset-backed securitizations may have a material adverse effect on our liquidity, potential loss of access to credit markets, the related cost of funds, our businesses and on certain revenues, particularly in those businesses where counterparty creditworthiness is critical. In addition, under the terms of certain OTC derivative contracts and other trading agreements, in the event of downgrades of our or our rated subsidiaries’ credit ratings, the counterparties to those agreements may require us to provide additional collateral, or to terminate these contracts or agreements, which could cause us to sustain losses and/or adversely impact our liquidity. If the short-term credit ratings of our parent company, bank or broker-dealer subsidiaries were downgraded by one or more levels, the potential loss of access to short-term funding sources such as repo financing and the effect on our incremental cost of funds could be material.
While certain potential impacts are contractual and quantifiable, the full scope of the consequences of a credit rating downgrade to a financial institution is inherently uncertain, as it depends upon numerous dynamic, complex and inter-related factors and assumptions, including whether any downgrade of a company’s long-term credit ratings precipitates downgrades to its short-term credit ratings, and assumptions about the potential behaviors of various customers, investors and counterparties. For more information on potential impacts of credit rating downgrades, see Liquidity Risk – Liquidity Stress Analysis on page 58.
For more information on additional collateral and termination payments that could be required in connection with certain over-the-counter derivative contracts and other trading agreements in the event of a credit rating downgrade, see Note 3 – Derivatives to the Consolidated Financial Statements and Part I. Item 1A. Risk Factors.
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Common Stock Dividends
For a summary of our declared quarterly cash dividends on common stock during 2020 and through February 24, 2021, see Note 13 – Shareholders’ Equity to the Consolidated Financial Statements.
Finance Subsidiary Issuers and Parent Guarantor
BofA Finance LLC, a Delaware limited liability company (BofA Finance), is a consolidated finance subsidiary of the Corporation that has issued and sold, and is expected to continue to issue and sell, its senior unsecured debt securities (Guaranteed Notes), that are fully and unconditionally guaranteed by the Corporation. The Corporation guarantees the due and punctual payment, on demand, of amounts payable on the Guaranteed Notes if not paid by BofA Finance. In addition, each of BAC Capital Trust XIII and BAC Capital Trust XIV, Delaware statutory trusts (collectively, the Trusts), is a 100 percent owned finance subsidiary of the Corporation that has issued and sold trust preferred securities (the Trust Preferred Securities and, together with the Guaranteed Notes, the Guaranteed Securities) that remained outstanding at December 31, 2020. The Corporation guarantees the payment of amounts and distributions with respect to the Trust Preferred Securities if not paid by the Trusts, to the extent of funds held by the Trusts, and this guarantee, together with the Corporation’s other obligations with respect to the Trust Preferred Securities, effectively constitutes a full and unconditional guarantee of the Trusts’ payment obligations on the Trust Preferred Securities. No other subsidiary of the Corporation guarantees the Guaranteed Securities.
BofA Finance and each of the Trusts are finance subsidiaries, have no independent assets, revenues or operations and are dependent upon the Corporation and/or the Corporation’s other subsidiaries to meet their respective obligations under the Guaranteed Securities in the ordinary course. If holders of the Guaranteed Securities make claims on their Guaranteed Securities in a bankruptcy, resolution or similar proceeding, any recoveries on those claims will be limited to those available under the applicable guarantee by the Corporation, as described above.
The Corporation is a holding company and depends upon its subsidiaries for liquidity. Applicable laws and regulations and intercompany arrangements entered into in connection with the Corporation’s resolution plan could restrict the availability of funds from subsidiaries to the Corporation, which could adversely affect the Corporation’s ability to make payments under its guarantees. In addition, the obligations of the Corporation under the guarantees of the Guaranteed Securities will be structurally subordinated to all existing and future liabilities of its subsidiaries, and claimants should look only to assets of the Corporation for payments. If the Corporation, as guarantor of the Guaranteed Notes, transfers all or substantially all of its assets to one or more direct or indirect majority-owned subsidiaries, under the indenture governing the Guaranteed Notes, the subsidiary or subsidiaries will not be required to assume the Corporation’s obligations under its guarantee of the Guaranteed Notes.
For more information on factors that may affect payments to holders of the Guaranteed Securities, see Liquidity Risk – NB Holdings Corporation in this section, Item 1. Business – Insolvency and the Orderly Liquidation Authority on page 5 and Part I. Item 1A. Risk Factors – Liquidity on page 9.
Credit Risk Management
Credit risk is the risk of loss arising from the inability or failure of a borrower or counterparty to meet its obligations. Credit risk can also arise from operational failures that result in an erroneous advance, commitment or investment of funds. We define the credit exposure to a borrower or counterparty as the loss potential arising from all product classifications including loans and leases, deposit overdrafts, derivatives, assets held-for-sale and unfunded lending commitments which include loan commitments, letters of credit and financial guarantees. Derivative positions are recorded at fair value and assets held-for-sale are recorded at either fair value or the lower of cost or fair value. Certain loans and unfunded commitments are accounted for under the fair value option. Credit risk for categories of assets carried at fair value is not accounted for as part of the allowance for credit losses but as part of the fair value adjustments recorded in earnings. For derivative positions, our credit risk is measured as the net cost in the event the counterparties with contracts in which we are in a gain position fail to perform under the terms of those contracts. We use the current fair value to represent credit exposure without giving consideration to future mark-to-market changes. The credit risk amounts take into consideration the effects of legally enforceable master netting agreements and cash collateral. Our consumer and commercial credit extension and review procedures encompass funded and unfunded credit exposures. For more information on derivatives and credit extension commitments, see Note 3 – Derivatives and Note 12 – Commitments and Contingencies to the Consolidated Financial Statements.
We manage credit risk based on the risk profile of the borrower or counterparty, repayment sources, the nature of underlying collateral, and other support given current events, conditions and expectations. We classify our portfolios as either consumer or commercial and monitor credit risk in each as discussed below.
We refine our underwriting and credit risk management practices as well as credit standards to meet the changing economic environment. To mitigate losses and enhance customer support in our consumer businesses, we have in place collection programs and loan modification and customer assistance infrastructures. We utilize a number of actions to mitigate losses in the commercial businesses including increasing the frequency and intensity of portfolio monitoring, hedging activity and our practice of transferring management of deteriorating commercial exposures to independent special asset officers as credits enter criticized categories.
For information on our credit risk management activities, see Consumer Portfolio Credit Risk Management below, Commercial Portfolio Credit Risk Management on page 68, Non-U.S. Portfolio on page 74, Allowance for Credit Losses on page 76, and Note 5 – Outstanding Loans and Leases and Allowance for Credit Losses to the Consolidated Financial Statements.
During 2020, the pandemic negatively impacted economic activity in the U.S. and around the world. In particular, beginning in the latter portion of the first quarter of 2020, the pandemic resulted in changes to consumer and business behaviors and restrictions on economic activity. These restrictions gave rise to increased unemployment and underemployment, lower business profits, increased business closures and bankruptcies, fluctuations and disruptions to commercial and consumer spending and markets, and lower global GDP, all of which negatively impacted our consumer and commercial credit portfolio.
61 Bank of America | ||||||||
To provide relief to individuals and businesses in the U.S., economic stimulus packages were enacted throughout 2020, including the CARES Act, an executive order signed in August 2020 to establish the Lost Wage Assistance Program, and most recently, the Consolidated Appropriations Act enacted in December 2020. In addition, U.S. bank regulatory agencies issued interagency guidance to financial institutions that have worked with and continue to work with borrowers affected by COVID-19.
To support our customers, we implemented various loan modification programs and other forms of support beginning in March 2020, including offering loan payment deferrals, refunding certain fees, and pausing foreclosure sales, evictions and repossessions. Since June 2020, we have experienced a decline in the need for customer assistance as the number of customer accounts and balances on deferral decreased significantly. For information on the accounting for loan modifications related to the pandemic, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
Furthermore, as COVID-19 cases eased and initial restrictions lifted, the global economy began to improve. This improvement, coupled with the aforementioned relief, facilitated economic recovery, with unemployment dropping from double-digit highs in the second quarter of 2020 and GDP significantly rebounding in the third quarter of 2020.
However, economic recovery remains uneven, with certain sectors of the economy more significantly impacted from the pandemic (e.g., travel and entertainment). As a result, we have experienced increases in commercial reservable criticized utilized exposures driven by industries most heavily impacted by COVID-19. Also, we have seen modest increases in nonperforming loans driven by commercial loans and consumer real estate customer deferral activities, though consumer charge-offs remained low during 2020 due to payment deferrals and government stimulus benefits.
The pandemic and its full impact on the global economy continue to be highly uncertain. While COVID-19 cases have begun to ease from their January 2021 peak, the spread of new, more contagious variants could impact the magnitude and duration of this health crisis. However, ongoing virus containment efforts and vaccination progress, as well as the possibility of further government stimulus, could accelerate the macroeconomic recovery. For more information on how the pandemic may affect our operations, see Executive Summary – Recent Developments – COVID-19 Pandemic on page 25 and Part I. Item 1A. Risk Factors – Coronavirus Disease on page 7.
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
While COVID-19 is severely impacting economic activity, and is contributing to increasing nonperforming loans within certain consumer portfolios, it did not have a significant impact on consumer portfolio charge-offs during 2020 due to payment deferrals and government stimulus benefits. However, COVID-19 could lead to adverse impacts to credit quality metrics in future periods if negative economic conditions continue or worsen. During 2020, net charge-offs decreased $334 million to $2.7 billion primarily due to lower credit card losses.
The consumer allowance for loan and lease losses increased $5.5 billion in 2020 to $10.1 billion due to the adoption of the new CECL accounting standard and deterioration in the economic outlook resulting from the impact of COVID-19. For more information, see Allowance for Credit Losses on page 76.
For more information on our accounting policies regarding delinquencies, nonperforming status, charge-offs, TDRs for the consumer portfolio, as well as interest accrual policies and delinquency status for loan modifications related to the pandemic, see Note 1 – Summary of Significant Accounting Principles and Note 5 – Outstanding Loans and Leases and Allowance for Credit Losses to the Consolidated Financial Statements.
Table 19 presents our outstanding consumer loans and leases, consumer nonperforming loans and accruing consumer loans past due 90 days or more.
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| Table 19 | Consumer Credit Quality | |||||||||||||||||||||||||||||||||||||
| Outstandings | Nonperforming | Accruing Past Due 90 Days or More | ||||||||||||||||||||||||||||||||||||
| December 31 | ||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
Residential mortgage (1) | $ | 223,555 | $ | 236,169 | $ | 2,005 | $ | 1,470 | $ | 762 | $ | 1,088 | ||||||||||||||||||||||||||
| Home equity | 34,311 | 40,208 | 649 | 536 | — | — | ||||||||||||||||||||||||||||||||
| Credit card | 78,708 | 97,608 | n/a | n/a | 903 | 1,042 | ||||||||||||||||||||||||||||||||
Direct/Indirect consumer (2) | 91,363 | 90,998 | 71 | 47 | 33 | 33 | ||||||||||||||||||||||||||||||||
| Other consumer | 124 | 192 | — | — | — | — | ||||||||||||||||||||||||||||||||
Consumer loans excluding loans accounted for under the fair value option | $ | 428,061 | $ | 465,175 | $ | 2,725 | $ | 2,053 | $ | 1,698 | $ | 2,163 | ||||||||||||||||||||||||||
Loans accounted for under the fair value option (3) | 735 | 594 | ||||||||||||||||||||||||||||||||||||
| Total consumer loans and leases | $ | 428,796 | $ | 465,769 | ||||||||||||||||||||||||||||||||||
Percentage of outstanding consumer loans and leases (4) | n/a | n/a | 0.64 | % | 0.44 | % | 0.40 | % | 0.47 | % | ||||||||||||||||||||||||||||
Percentage of outstanding consumer loans and leases, excluding fully-insured loan portfolios (4) | n/a | n/a | 0.65 | 0.46 | 0.22 | 0.24 | ||||||||||||||||||||||||||||||||
(1)Residential mortgage loans accruing past due 90 days or more are fully-insured loans. At December 31, 2020 and 2019, residential mortgage includes $537 million and $740 million of loans on which interest had been curtailed by the FHA, and therefore were no longer accruing interest, although principal was still insured, and $225 million and $348 million of loans on which interest was still accruing.
(2)Outstandings primarily include auto and specialty lending loans and leases of $46.4 billion and $50.4 billion, U.S. securities-based lending loans of $41.1 billion and $36.7 billion and non-U.S. consumer loans of $3.0 billion and $2.8 billion at December 31, 2020 and 2019.
(3)Consumer loans accounted for under the fair value option include residential mortgage loans of $298 million and $257 million and home equity loans of $437 million and $337 million at December 31, 2020 and 2019. For more information on the fair value option, see Note 21 – Fair Value Option to the Consolidated Financial Statements.
(4)Excludes consumer loans accounted for under the fair value option. At December 31, 2020 and 2019, $11 million and $6 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 20 presents net charge-offs and related ratios for consumer loans and leases.
| Table 20 | Consumer Net Charge-offs and Related Ratios | |||||||||||||||||||||||||||||||||||||
| Net Charge-offs | Net Charge-off Ratios (1) | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| Residential mortgage | $ | (30) | $ | (47) | (0.01) | % | (0.02) | % | ||||||||||||||||||||||||||||||
| Home equity | (73) | (358) | (0.19) | (0.81) | ||||||||||||||||||||||||||||||||||
| Credit card | 2,349 | 2,948 | 2.76 | 3.12 | ||||||||||||||||||||||||||||||||||
| Direct/Indirect consumer | 122 | 209 | 0.14 | 0.23 | ||||||||||||||||||||||||||||||||||
| Other consumer | 284 | 234 | n/m | n/m | ||||||||||||||||||||||||||||||||||
| Total | $ | 2,652 | $ | 2,986 | 0.59 | 0.66 | ||||||||||||||||||||||||||||||||
(1)Net charge-off ratios are calculated as net charge-offs divided by average outstanding loans and leases excluding loans accounted for under the fair value option.
n/m = not meaningful
Table 21 presents outstandings, nonperforming balances, net charge-offs, allowance for credit losses and provision for credit 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 GSE 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 runoff portfolios. Core loans as reported in Table 21 include loans held in the Consumer Banking and GWIM segments, as well as loans held for ALM activities in All Other.
As shown in Table 21, outstanding core consumer real estate loans decreased $15.4 billion during 2020 driven by a decrease of $10.5 billion in residential mortgage and a $4.9 billion decrease in home equity.
63 Bank of America | ||||||||
| Table 21 | Consumer Real Estate Portfolio (1) | |||||||||||||||||||||||||||||||||||||
| Outstandings | Nonperforming | |||||||||||||||||||||||||||||||||||||
| December 31 | Net Charge-offs | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
| Core portfolio | ||||||||||||||||||||||||||||||||||||||
| Residential mortgage | $ | 215,273 | $ | 225,770 | $ | 1,390 | $ | 883 | $ | (25) | $ | 7 | ||||||||||||||||||||||||||
| Home equity | 30,328 | 35,226 | 462 | 363 | (6) | 51 | ||||||||||||||||||||||||||||||||
| Total core portfolio | 245,601 | 260,996 | 1,852 | 1,246 | (31) | 58 | ||||||||||||||||||||||||||||||||
| Non-core portfolio | ||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 8,282 | 10,399 | 615 | 587 | (5) | (54) | ||||||||||||||||||||||||||||||||
| Home equity | 3,983 | 4,982 | 187 | 173 | (67) | (409) | ||||||||||||||||||||||||||||||||
| Total non-core portfolio | 12,265 | 15,381 | 802 | 760 | (72) | (463) | ||||||||||||||||||||||||||||||||
Consumer real estate portfolio | ||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 223,555 | 236,169 | 2,005 | 1,470 | (30) | (47) | ||||||||||||||||||||||||||||||||
| Home equity | 34,311 | 40,208 | 649 | 536 | (73) | (358) | ||||||||||||||||||||||||||||||||
Total consumer real estate portfolio | $ | 257,866 | $ | 276,377 | $ | 2,654 | $ | 2,006 | $ | (103) | $ | (405) | ||||||||||||||||||||||||||
| Allowance for Loan and Lease Losses | Provision for Loan and Lease Losses | |||||||||||||||||||||||||||||||||||||
| December 31 | ||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||
| Core portfolio | ||||||||||||||||||||||||||||||||||||||
| Residential mortgage | $ | 374 | $ | 229 | $ | 136 | $ | 22 | ||||||||||||||||||||||||||||||
| Home equity | 599 | 120 | 135 | (58) | ||||||||||||||||||||||||||||||||||
| Total core portfolio | 973 | 349 | 271 | (36) | ||||||||||||||||||||||||||||||||||
| Non-core portfolio | ||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 85 | 96 | 75 | (134) | ||||||||||||||||||||||||||||||||||
Home equity (2) | (63) | 101 | (21) | (510) | ||||||||||||||||||||||||||||||||||
| Total non-core portfolio | 22 | 197 | 54 | (644) | ||||||||||||||||||||||||||||||||||
Consumer real estate portfolio | ||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 459 | 325 | 211 | (112) | ||||||||||||||||||||||||||||||||||
Home equity (3) | 536 | 221 | 114 | (568) | ||||||||||||||||||||||||||||||||||
Total consumer real estate portfolio | $ | 995 | $ | 546 | $ | 325 | $ | (680) | ||||||||||||||||||||||||||||||
(1)Outstandings and nonperforming loans exclude loans accounted for under the fair value option. Consumer loans accounted for under the fair value option include residential mortgage loans of $298 million and $257 million and home equity loans of $437 million and $337 million at December 31, 2020 and 2019. For more information, see Note 21 – Fair Value Option to the Consolidated Financial Statements.
(2)The home equity non-core allowance is in a negative position at December 31, 2020 as it includes expected recoveries of amounts previously charged off.
(3)Home equity allowance includes a reserve for unfunded lending commitments of $137 million at December 31, 2020.
We believe that the presentation of information adjusted to exclude the impact of 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 fully-insured loan portfolio in certain credit quality statistics.
Residential Mortgage
The residential mortgage portfolio made up the largest percentage of our consumer loan portfolio at 52 percent of consumer loans and leases at December 31, 2020. Approximately 52 percent of the residential mortgage portfolio was in Consumer Banking and 40 percent was in GWIM. The remaining portion was in All Other and was comprised of loans used in our overall ALM activities, delinquent FHA loans
repurchased pursuant to our servicing agreements with the Government National Mortgage Association as well as loans repurchased related to our representations and warranties.
Outstanding balances in the residential mortgage portfolio decreased $12.6 billion in 2020 as both loan sales and paydowns were partially offset by originations.
At December 31, 2020 and 2019, the residential mortgage portfolio included $11.8 billion and $18.7 billion of outstanding fully-insured loans, of which $2.8 billion and $11.2 billion had FHA insurance, with the remainder protected by Fannie Mae long-term standby agreements. The decline was primarily driven by sales of loans with FHA insurance during 2020.
Table 22 presents certain residential mortgage key credit statistics on both a reported basis and excluding the fully-insured loan portfolio. The following discussion presents the residential mortgage portfolio excluding the fully-insured loan portfolio.
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| Table 22 | Residential Mortgage – Key Credit Statistics | |||||||||||||||||||||||||||||||||||||||||||
Reported Basis (1) | Excluding Fully-insured Loans (1) | |||||||||||||||||||||||||||||||||||||||||||
| December 31 | ||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||
| Outstandings | $ | 223,555 | $ | 236,169 | $ | 211,737 | $ | 217,479 | ||||||||||||||||||||||||||||||||||||
| Accruing past due 30 days or more | 2,314 | 3,108 | 1,224 | 1,296 | ||||||||||||||||||||||||||||||||||||||||
| Accruing past due 90 days or more | 762 | 1,088 | — | — | ||||||||||||||||||||||||||||||||||||||||
Nonperforming loans (2) | 2,005 | 1,470 | 2,005 | 1,470 | ||||||||||||||||||||||||||||||||||||||||
| Percent of portfolio | ||||||||||||||||||||||||||||||||||||||||||||
| Refreshed LTV greater than 90 but less than or equal to 100 | 2 | % | 2 | % | 1 | % | 2 | % | ||||||||||||||||||||||||||||||||||||
| Refreshed LTV greater than 100 | 1 | 1 | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||
| Refreshed FICO below 620 | 2 | 3 | 1 | 2 | ||||||||||||||||||||||||||||||||||||||||
2006 and 2007 vintages (3) | 3 | 4 | 3 | 4 | ||||||||||||||||||||||||||||||||||||||||
(1)Outstandings, accruing past due, nonperforming loans and percentages of portfolio exclude loans accounted for under the fair value option. For information on our interest accrual policies and delinquency status for loan modifications related to the pandemic, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
(2)Includes loans that are contractually current which primarily consist of collateral-dependent TDRs, including those that have been discharged in Chapter 7 bankruptcy and loans that have not yet demonstrated a sustained period of payment performance following a TDR.
(3)These vintages of loans accounted for $503 million and $365 million, or 25 percent, of nonperforming residential mortgage loans at both December 31, 2020 and 2019.
Nonperforming outstanding balances in the residential mortgage portfolio increased $535 million in 2020 primarily driven by COVID-19 deferral activity, as well as the inclusion of certain loans that, upon adoption of the new credit loss standard, became accounted for on an individual basis, which previously had been accounted for under a pool basis. Of the nonperforming residential mortgage loans at December 31, 2020, $892 million, or 45 percent, were current on contractual payments. Loans accruing past due 30 days or more decreased $72 million.
Net charge-offs increased $17 million to a net recovery of $30 million in 2020 compared to a net recovery of $47 million in 2019. This increase is due largely to lower recoveries from the sales of previously charged-off loans.
Of the $211.7 billion in total residential mortgage loans outstanding at December 31, 2020, as shown in Table 22, 27 percent were originated as interest-only loans. The outstanding balance of interest-only residential mortgage loans that have entered the amortization period was $5.9 billion, or 10 percent, at December 31, 2020. 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 December 31, 2020, $113 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 $1.2 billion, or less than one percent, for the entire residential mortgage portfolio. In addition, at December 31, 2020, $356 million, or six percent, of outstanding interest-only residential mortgage loans that had entered the amortization period were nonperforming, of which $96 million were contractually current, compared to $2.0 billion, or one percent, for the entire residential mortgage portfolio. 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. Approximately 98 percent of these loans that have yet to enter the amortization period will not be required to make a fully-amortizing payment until 2022 or later.
Table 23 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 December 31, 2020 and 2019. In the New York area, the New York-Northern New Jersey-Long Island MSA made up 14 percent and 13 percent of outstandings at December 31, 2020 and 2019.
| Table 23 | Residential Mortgage State Concentrations | |||||||||||||||||||||||||||||||||||||
Outstandings (1) | Nonperforming (1) | |||||||||||||||||||||||||||||||||||||
| December 31 | Net Charge-offs | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
| California | $ | 83,185 | $ | 88,998 | $ | 570 | $ | 274 | $ | (18) | $ | (22) | ||||||||||||||||||||||||||
| New York | 23,832 | 22,385 | 272 | 196 | 3 | 5 | ||||||||||||||||||||||||||||||||
| Florida | 13,017 | 12,833 | 175 | 143 | (5) | (12) | ||||||||||||||||||||||||||||||||
| Texas | 8,868 | 8,943 | 78 | 65 | — | 1 | ||||||||||||||||||||||||||||||||
| New Jersey | 8,806 | 8,734 | 98 | 77 | (1) | (4) | ||||||||||||||||||||||||||||||||
| Other | 74,029 | 75,586 | 812 | 715 | (9) | (15) | ||||||||||||||||||||||||||||||||
| Residential mortgage loans | $ | 211,737 | $ | 217,479 | $ | 2,005 | $ | 1,470 | $ | (30) | $ | (47) | ||||||||||||||||||||||||||
| Fully-insured loan portfolio | 11,818 | 18,690 | ||||||||||||||||||||||||||||||||||||
Total residential mortgage loan portfolio | $ | 223,555 | $ | 236,169 | ||||||||||||||||||||||||||||||||||
(1)Outstandings and nonperforming loans exclude loans accounted for under the fair value option.
Home Equity
At December 31, 2020, the home equity portfolio made up eight percent of the consumer portfolio and was comprised of home equity lines of credit (HELOCs), home equity loans and reverse mortgages. HELOCs generally have an initial draw period of 10 years, and after the initial draw period ends, the loans generally
convert to 15- or 20-year amortizing loans. We no longer originate home equity loans or reverse mortgages.
At December 31, 2020, 80 percent of the home equity portfolio was in Consumer Banking, 12 percent was in All Other and the remainder of the portfolio was primarily in GWIM. Outstanding balances in the home equity portfolio decreased
65 Bank of America | ||||||||
$5.9 billion in 2020 primarily due to paydowns outpacing new originations and draws on existing lines. Of the total home equity portfolio at December 31, 2020 and 2019, $13.8 billion, or 40 percent, and $15.0 billion, or 37 percent, were in first-lien positions. At December 31, 2020, 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
$5.9 billion, or 17 percent, of our total home equity portfolio.
Unused HELOCs totaled $42.3 billion and $43.6 billion at December 31, 2020 and 2019. The HELOC utilization rate was 43 percent and 46 percent at December 31, 2020 and 2019.
Table 24 presents certain home equity portfolio key credit statistics.
| Table 24 | Home Equity – Key Credit Statistics (1) | ||||||||||||||||
| December 31 | |||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | |||||||||||||||
| Outstandings | $ | 34,311 | $ | 40,208 | |||||||||||||
Accruing past due 30 days or more (2) | 186 | 218 | |||||||||||||||
Nonperforming loans (2, 3) | 649 | 536 | |||||||||||||||
| Percent of portfolio | |||||||||||||||||
| Refreshed CLTV greater than 90 but less than or equal to 100 | 1 | % | 1 | % | |||||||||||||
| Refreshed CLTV greater than 100 | 1 | 2 | |||||||||||||||
| Refreshed FICO below 620 | 3 | 3 | |||||||||||||||
2006 and 2007 vintages (4) | 16 | 18 | |||||||||||||||
(1)Outstandings, accruing past due, nonperforming loans and percentages of the portfolio exclude loans accounted for under the fair value option. For information on our interest accrual policies and delinquency status for loan modifications related to the pandemic, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
(2)Accruing past due 30 days or more include $25 million and $30 million and nonperforming loans include $88 million and $57 million of loans where we serviced the underlying first lien at December 31, 2020 and 2019.
(3)Includes loans that are contractually current which 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.
(4)These vintages of loans accounted for 36 percent and 34 percent of nonperforming home equity loans at December 31, 2020 and 2019.
Nonperforming outstanding balances in the home equity portfolio increased $113 million during 2020 primarily driven by COVID-19 deferral activity. Of the nonperforming home equity loans at December 31, 2020, $259 million, or 40 percent, were current on contractual payments. In addition, $237 million, or 36 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 $32 million in 2020.
Net charge-offs increased $285 million to a net recovery of $73 million in 2020 compared to a net recovery of $358 million in 2019 as the prior-year period included recoveries from non-core home equity loan sales.
Of the $34.3 billion in total home equity portfolio outstandings at December 31, 2020, as shown in Table 24, 15 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 $9.2 billion at December 31, 2020. 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 December 31, 2020, $121 million, or one percent of outstanding HELOCs that had entered the amortization period were accruing past due 30
days or more. In addition, at December 31, 2020, $477 million, or five percent, were nonperforming. Loans that have yet to enter the amortization period in our interest-only portfolio are primarily post-2008 vintages and generally have better credit quality than the previous vintages that had entered the amortization period. 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 2020, nine percent of these customers with an outstanding balance did not pay any principal on their HELOCs.
Table 25 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 December 31, 2020 and 2019. The Los Angeles-Long Beach-Santa Ana MSA within California made up 11 percent of the outstanding home equity portfolio at both December 31, 2020 and 2019.
| Table 25 | Home Equity State Concentrations | |||||||||||||||||||||||||||||||||||||
Outstandings (1) | Nonperforming (1) | |||||||||||||||||||||||||||||||||||||
| December 31 | Net Charge-offs | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
| California | $ | 9,488 | $ | 11,232 | $ | 143 | $ | 101 | $ | (26) | $ | (117) | ||||||||||||||||||||||||||
| Florida | 3,715 | 4,327 | 80 | 71 | (11) | (74) | ||||||||||||||||||||||||||||||||
| New Jersey | 2,749 | 3,216 | 67 | 56 | (3) | (8) | ||||||||||||||||||||||||||||||||
| New York | 2,495 | 2,899 | 103 | 85 | (1) | (1) | ||||||||||||||||||||||||||||||||
| Massachusetts | 1,719 | 2,023 | 32 | 29 | (1) | (5) | ||||||||||||||||||||||||||||||||
| Other | 14,145 | 16,511 | 224 | 194 | (31) | (153) | ||||||||||||||||||||||||||||||||
| Total home equity loan portfolio | $ | 34,311 | $ | 40,208 | $ | 649 | $ | 536 | $ | (73) | $ | (358) | ||||||||||||||||||||||||||
(1)Outstandings and nonperforming loans exclude loans accounted for under the fair value option.
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Credit Card
At December 31, 2020, 97 percent of the credit card portfolio was managed in Consumer Banking with the remainder in GWIM. Outstandings in the credit card portfolio decreased $18.9 billion in 2020 to $78.7 billion due to lower retail spending and higher payments. Net charge-offs decreased $599 million to $2.3 billion during 2020 compared to net charge-offs of $2.9 billion in 2019 due to government stimulus benefits and payment deferrals associated with COVID-19. Credit card loans 30 days
or more past due and still accruing interest decreased $346 million, and loans 90 days or more past due and still accruing interest decreased $139 million primarily due to government stimulus benefits and declines in loan balances.
Unused lines of credit for credit card increased to $342.4 billion at December 31, 2020 from $336.9 billion in 2019.
Table 26 presents certain state concentrations for the credit card portfolio.
| Table 26 | Credit Card State Concentrations | |||||||||||||||||||||||||||||||||||||
| Outstandings | Accruing Past Due 90 Days or More (1) | |||||||||||||||||||||||||||||||||||||
| December 31 | Net Charge-offs | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
| California | $ | 12,543 | $ | 16,135 | $ | 166 | $ | 178 | $ | 419 | $ | 526 | ||||||||||||||||||||||||||
| Florida | 7,666 | 9,075 | 135 | 135 | 306 | 363 | ||||||||||||||||||||||||||||||||
| Texas | 6,499 | 7,815 | 87 | 93 | 202 | 241 | ||||||||||||||||||||||||||||||||
| New York | 4,654 | 5,975 | 76 | 80 | 188 | 243 | ||||||||||||||||||||||||||||||||
| Washington | 3,685 | 4,639 | 21 | 26 | 56 | 71 | ||||||||||||||||||||||||||||||||
| Other | 43,661 | 53,969 | 418 | 530 | 1,178 | 1,504 | ||||||||||||||||||||||||||||||||
| Total credit card portfolio | $ | 78,708 | $ | 97,608 | $ | 903 | $ | 1,042 | $ | 2,349 | $ | 2,948 | ||||||||||||||||||||||||||
(1)For information on our interest accrual policies and delinquency status for loan modifications related to the pandemic, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
Direct/Indirect Consumer
At December 31, 2020, 51 percent of the direct/indirect portfolio was included in Consumer Banking (consumer auto and recreational vehicle lending) and 49 percent was included in GWIM (principally securities-based lending loans). Outstandings
in the direct/indirect portfolio increased $365 million in 2020 to $91.4 billion primarily due to increases in securities-based lending offset by lower originations in Auto.
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 (1) | |||||||||||||||||||||||||||||||||||||
| December 31 | Net Charge-offs | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
| California | $ | 12,248 | $ | 11,912 | $ | 6 | $ | 4 | $ | 20 | $ | 49 | ||||||||||||||||||||||||||
| Florida | 10,891 | 10,154 | 4 | 4 | 20 | 27 | ||||||||||||||||||||||||||||||||
| Texas | 8,981 | 9,516 | 6 | 5 | 20 | 29 | ||||||||||||||||||||||||||||||||
| New York | 6,609 | 6,394 | 2 | 1 | 9 | 12 | ||||||||||||||||||||||||||||||||
| New Jersey | 3,572 | 3,468 | — | 1 | 2 | 4 | ||||||||||||||||||||||||||||||||
| Other | 49,062 | 49,554 | 15 | 18 | 51 | 88 | ||||||||||||||||||||||||||||||||
| Total direct/indirect loan portfolio | $ | 91,363 | $ | 90,998 | $ | 33 | $ | 33 | $ | 122 | $ | 209 | ||||||||||||||||||||||||||
(1)For information on our interest accrual policies and delinquency status for loan modifications related to the pandemic, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity
Table 28 presents nonperforming consumer loans, leases and foreclosed properties activity during 2020 and 2019. During 2020, nonperforming consumer loans increased $672 million to $2.7 billion primarily driven by COVID-19 deferral activity, as well as the inclusion of $144 million of certain loans that were previously classified as purchased credit-impaired loans and accounted for under a pool basis.
At December 31, 2020, $892 million, or 33 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 December 31, 2020, $1.2 billion, or 45 percent of nonperforming consumer loans were modified and are now current after successful trial periods, or are current
loans classified as nonperforming loans in accordance with applicable policies.
Foreclosed properties decreased $106 million in 2020 to $123 million as the Corporation has paused formal loan foreclosure proceedings and foreclosure sales for occupied properties during 2020.
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 are included in Table 28. For more information on our loan modification programs offered in response to the pandemic, most of which are not TDRs, see Executive Summary – Recent Developments – COVID-19 Pandemic on page 25 and Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
67 Bank of America | ||||||||
| Table 28 | Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity | |||||||||||||
| (Dollars in millions) | 2020 | 2019 | ||||||||||||
Nonperforming loans and leases, January 1 | $ | 2,053 | $ | 3,842 | ||||||||||
| Additions | 2,278 | 1,407 | ||||||||||||
| Reductions: | ||||||||||||||
| Paydowns and payoffs | (440) | (701) | ||||||||||||
| Sales | (38) | (1,523) | ||||||||||||
Returns to performing status (1) | (1,014) | (766) | ||||||||||||
| Charge-offs | (78) | (111) | ||||||||||||
| Transfers to foreclosed properties | (36) | (95) | ||||||||||||
| Total net additions/(reductions) to nonperforming loans and leases | 672 | (1,789) | ||||||||||||
Total nonperforming loans and leases, December 31 | 2,725 | 2,053 | ||||||||||||
Foreclosed properties, December 31 (2) | 123 | 229 | ||||||||||||
Nonperforming consumer loans, leases and foreclosed properties, December 31 | $ | 2,848 | $ | 2,282 | ||||||||||
Nonperforming consumer loans and leases as a percentage of outstanding consumer loans and leases (3) | 0.64 | % | 0.44 | % | ||||||||||
Nonperforming consumer loans, leases and foreclosed properties as a percentage of outstanding consumer loans, leases and foreclosed properties (3) | 0.66 | 0.49 | ||||||||||||
(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 $119 million and $260 million at December 31, 2020 and 2019.
(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. For more information on our loan modification programs offered in response to the pandemic, most of which are not TDRs, see Executive Summary – Recent Developments – COVID-19 Pandemic on page 25 and Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
| Table 29 | Consumer Real Estate Troubled Debt Restructurings | |||||||||||||||||||||||||||||||||||||
| December 31, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Nonperforming | Performing | Total | Nonperforming | Performing | Total | ||||||||||||||||||||||||||||||||
Residential mortgage (1, 2) | $ | 1,195 | $ | 2,899 | $ | 4,094 | $ | 921 | $ | 3,832 | $ | 4,753 | ||||||||||||||||||||||||||
Home equity (3) | 248 | 836 | 1,084 | 252 | 977 | 1,229 | ||||||||||||||||||||||||||||||||
| Total consumer real estate troubled debt restructurings | $ | 1,443 | $ | 3,735 | $ | 5,178 | $ | 1,173 | $ | 4,809 | $ | 5,982 | ||||||||||||||||||||||||||
(1)At December 31, 2020 and 2019, residential mortgage TDRs deemed collateral dependent totaled $1.4 billion and $1.2 billion, and included $1.0 billion and $748 million of loans classified as nonperforming and $361 million and $468 million of loans classified as performing.
(2)At December 31, 2020 and 2019, residential mortgage performing TDRs include $1.5 billion and $2.1 billion of loans that were fully-insured.
(3)At December 31, 2020 and 2019, home equity TDRs deemed collateral dependent totaled $407 million and $442 million, and include $216 million and $209 million of loans classified as nonperforming and $191 million and $233 million of loans classified as performing.
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.
Modifications of credit card and other consumer loans are made through programs utilizing direct customer contact, but may also utilize external programs. At December 31, 2020 and 2019, our credit card and other consumer TDR portfolio was $701 million and $679 million, of which $614 million and $570 million were current or less than 30 days past due under the modified terms.
Commercial Portfolio Credit Risk Management
Credit risk management for the commercial portfolio begins with an assessment of the credit risk profile of the borrower or counterparty based on an analysis of its financial position. As part of the overall credit risk assessment, our commercial credit exposures are assigned a risk rating and are subject to approval based on defined credit approval standards. Subsequent to loan origination, risk ratings are monitored on an ongoing basis, and if necessary, adjusted to reflect changes in the financial condition, cash flow, risk profile or outlook of a borrower or counterparty. In making credit decisions, we consider risk rating, collateral, country, industry and single-name concentration limits while also balancing these considerations with the total
borrower or counterparty relationship. We use a variety of tools to continuously monitor the ability of a borrower or counterparty to perform under its obligations. We use risk rating aggregations to measure and evaluate concentrations within portfolios. In addition, risk ratings are a factor in determining the level of allocated capital and the allowance for credit losses.
As part of our ongoing risk mitigation initiatives, we attempt to work with clients experiencing financial difficulty to modify their loans to terms that better align with their current ability to pay. In situations where an economic concession has been granted to a borrower experiencing financial difficulty, we identify these loans as TDRs. For more information on our accounting policies regarding delinquencies, nonperforming status and net charge-offs for the commercial portfolio, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
Management of Commercial Credit Risk Concentrations
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
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non-U.S. portfolio, we evaluate exposures by region and by country. Tables 34, 37 and 40 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 72 and Table 37.
We account for certain large corporate loans and loan commitments, including issued but unfunded letters of credit which are considered utilized for credit risk management purposes, that exceed our single-name credit risk concentration guidelines under the fair value option. Lending commitments, both funded and unfunded, are actively managed and monitored, and as appropriate, credit risk for these lending relationships may be mitigated through the use of credit derivatives, with our credit view and market perspectives determining the size and timing of the hedging activity. In addition, we purchase credit protection to cover the funded portion as well as the unfunded portion of certain other credit exposures. To lessen the cost of obtaining our desired credit protection levels, credit exposure may be added within an industry, borrower or counterparty group by selling protection. These credit derivatives do not meet the requirements for treatment as accounting hedges. They are carried at fair value with changes in fair value recorded in other income.
In addition, we are a member of various securities and derivative exchanges and clearinghouses, both in the U.S. and other countries. As a member, we may be required to pay a pro-rata share of the losses incurred by some of these organizations as a result of another member default and under other loss scenarios. For more information, see Note 12 – Commitments and Contingencies to the Consolidated Financial Statements.
Commercial Credit Portfolio
During 2020, commercial asset quality weakened as a result of the economic impact from COVID-19. However, there were also positive signs during this period. The draws by large corporate
and commercial clients contributing to the $67.2 billion loan growth in the first quarter of 2020 have largely been repaid, as emergency or contingent funding was no longer needed or clients were able to access capital markets. Additionally, as part of the CARES Act, we had $22.7 billion of PPP loans outstanding with our small business clients at December 31, 2020, which are included in U.S. small business commercial in the tables in this section. For more information on PPP loans, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
Credit quality of commercial real estate borrowers has begun to stabilize in many sectors as certain economies have reopened. Certain sectors, including hospitality and retail, continue to be negatively impacted as a result of COVID-19. Moreover, many real estate markets, while improving, are still experiencing some disruptions in demand, supply chain challenges and tenant difficulties.
The commercial allowance for loan and lease losses increased $3.9 billion during 2020 to $8.7 billion due to the deterioration in the economic outlook resulting from the impact of COVID-19. For more information, see Allowance for Credit Losses on page 76.
Total commercial utilized credit exposure decreased $15.0 billion during 2020 to $620.3 billion driven by lower loans and leases. The utilization rate for loans and leases, SBLCs and financial guarantees, and commercial letters of credit, in the aggregate, was 57 percent at December 31, 2020 and 58 percent at December 31, 2019.
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 | ||||||||||||||||||||||||||||||||||||
| December 31 | ||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
| Loans and leases | $ | 499,065 | $ | 517,657 | $ | 404,740 | $ | 405,834 | $ | 903,805 | $ | 923,491 | ||||||||||||||||||||||||||
Derivative assets (5) | 47,179 | 40,485 | — | — | 47,179 | 40,485 | ||||||||||||||||||||||||||||||||
| Standby letters of credit and financial guarantees | 34,616 | 36,062 | 538 | 468 | 35,154 | 36,530 | ||||||||||||||||||||||||||||||||
| Debt securities and other investments | 22,618 | 25,546 | 4,827 | 5,101 | 27,445 | 30,647 | ||||||||||||||||||||||||||||||||
| Loans held-for-sale | 8,378 | 7,047 | 9,556 | 15,135 | 17,934 | 22,182 | ||||||||||||||||||||||||||||||||
| Operating leases | 6,424 | 6,660 | — | — | 6,424 | 6,660 | ||||||||||||||||||||||||||||||||
| Commercial letters of credit | 855 | 1,049 | 280 | 451 | 1,135 | 1,500 | ||||||||||||||||||||||||||||||||
| Other | 1,168 | 800 | — | — | 1,168 | 800 | ||||||||||||||||||||||||||||||||
| Total | $ | 620,303 | $ | 635,306 | $ | 419,941 | $ | 426,989 | $ | 1,040,244 | $ | 1,062,295 | ||||||||||||||||||||||||||
(1)Commercial utilized exposure includes loans of $5.9 billion and $7.7 billion and issued letters of credit with a notional amount of $89 million and $170 million accounted for under the fair value option at December 31, 2020 and 2019.
(2)Commercial unfunded exposure includes commitments accounted for under the fair value option with a notional amount of $3.9 billion and $4.2 billion at December 31, 2020 and 2019.
(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 $10.5 billion and $10.6 billion at December 31, 2020 and 2019.
(5)Derivative assets are carried at fair value, reflect the effects of legally enforceable master netting agreements and have been reduced by cash collateral of $42.5 billion and $33.9 billion at December 31, 2020 and 2019. Not reflected in utilized and committed exposure is additional non-cash derivative collateral held of $39.3 billion and $35.2 billion at December 31, 2020 and 2019, which consists primarily of other marketable securities.
69 Bank of America | ||||||||
Outstanding commercial loans and leases decreased $18.6 billion during 2020 primarily driven by repayments due in part to reduced working capital needs and a favorable capital markets environment, partially offset by $22.7 billion of PPP loans outstanding at December 31, 2020. Nonperforming commercial loans increased $728 million across industries, and commercial
reservable criticized utilized exposure increased $27.2 billion spread across several industries, including travel and entertainment, as a result of weaker economic conditions arising from COVID-19. Table 31 presents our commercial loans and leases portfolio and related credit quality information at December 31, 2020 and 2019.
| Table 31 | Commercial Credit Quality | |||||||||||||||||||||||||||||||||||||
| Outstandings | Nonperforming | Accruing Past Due 90 Days or More (3) | ||||||||||||||||||||||||||||||||||||
| December 31 | ||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
| Commercial and industrial: | ||||||||||||||||||||||||||||||||||||||
| U.S. commercial | $ | 288,728 | $ | 307,048 | $ | 1,243 | $ | 1,094 | $ | 228 | $ | 106 | ||||||||||||||||||||||||||
| Non-U.S. commercial | 90,460 | 104,966 | 418 | 43 | 10 | 8 | ||||||||||||||||||||||||||||||||
| Total commercial and industrial | 379,188 | 412,014 | 1,661 | 1,137 | 238 | 114 | ||||||||||||||||||||||||||||||||
| Commercial real estate | 60,364 | 62,689 | 404 | 280 | 6 | 19 | ||||||||||||||||||||||||||||||||
| Commercial lease financing | 17,098 | 19,880 | 87 | 32 | 25 | 20 | ||||||||||||||||||||||||||||||||
| 456,650 | 494,583 | 2,152 | 1,449 | 269 | 153 | |||||||||||||||||||||||||||||||||
U.S. small business commercial (1) | 36,469 | 15,333 | 75 | 50 | 115 | 97 | ||||||||||||||||||||||||||||||||
| Commercial loans excluding loans accounted for under the fair value option | 493,119 | 509,916 | 2,227 | 1,499 | 384 | 250 | ||||||||||||||||||||||||||||||||
Loans accounted for under the fair value option (2) | 5,946 | 7,741 | ||||||||||||||||||||||||||||||||||||
| Total commercial loans and leases | $ | 499,065 | $ | 517,657 | ||||||||||||||||||||||||||||||||||
(1)Includes card-related products.
(2)Commercial loans accounted for under the fair value option include U.S. commercial of $2.9 billion and $4.7 billion and non-U.S. commercial of $3.0 billion and $3.1 billion at December 31, 2020 and 2019. For more information on the fair value option, see Note 21 – Fair Value Option to the Consolidated Financial Statements.
(3)For information on our interest accrual policies and delinquency status for loan modifications related to the pandemic, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
Table 32 presents net charge-offs and related ratios for our commercial loans and leases for 2020 and 2019.
| Table 32 | Commercial Net Charge-offs and Related Ratios | |||||||||||||||||||||||||
| Net Charge-offs | Net Charge-off Ratios (1) | |||||||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||
| Commercial and industrial: | ||||||||||||||||||||||||||
| U.S. commercial | $ | 718 | $ | 256 | 0.23 | % | 0.08 | % | ||||||||||||||||||
| Non-U.S. commercial | 155 | 84 | 0.15 | 0.08 | ||||||||||||||||||||||
| Total commercial and industrial | 873 | 340 | 0.21 | 0.08 | ||||||||||||||||||||||
| Commercial real estate | 270 | 29 | 0.43 | 0.05 | ||||||||||||||||||||||
| Commercial lease financing | 59 | 21 | 0.32 | 0.10 | ||||||||||||||||||||||
| 1,202 | 390 | 0.24 | 0.08 | |||||||||||||||||||||||
| U.S. small business commercial | 267 | 272 | 0.86 | 1.83 | ||||||||||||||||||||||
| Total commercial | $ | 1,469 | $ | 662 | 0.28 | 0.13 | ||||||||||||||||||||
(1)Net charge-off ratios are calculated as net charge-offs divided by average outstanding loans and leases excluding loans accounted for under the fair value option.
Table 33 presents commercial 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 increased $27.2 billion during 2020, which was spread across several industries, including travel and entertainment, as a result of weaker economic conditions arising from COVID-19. At December 31, 2020 and 2019, 79 percent and 90 percent of commercial reservable criticized utilized exposure was secured.
| Table 33 | Commercial Reservable Criticized Utilized Exposure (1, 2) | |||||||||||||||||||||||||
| December 31 | ||||||||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | ||||||||||||||||||||||||
| Commercial and industrial: | ||||||||||||||||||||||||||
| U.S. commercial | $ | 21,388 | 6.83 | % | $ | 8,272 | 2.46 | % | ||||||||||||||||||
| Non-U.S. commercial | 5,051 | 5.03 | 989 | 0.89 | ||||||||||||||||||||||
| Total commercial and industrial | 26,439 | 6.40 | 9,261 | 2.07 | ||||||||||||||||||||||
| Commercial real estate | 10,213 | 16.42 | 1,129 | 1.75 | ||||||||||||||||||||||
| Commercial lease financing | 714 | 4.18 | 329 | 1.66 | ||||||||||||||||||||||
| 37,366 | 7.59 | 10,719 | 2.01 | |||||||||||||||||||||||
| U.S. small business commercial | 1,300 | 3.56 | 733 | 4.78 | ||||||||||||||||||||||
Total commercial reservable criticized utilized exposure (1) | $ | 38,666 | 7.31 | $ | 11,452 | 2.09 | ||||||||||||||||||||
(1)Total commercial reservable criticized utilized exposure includes loans and leases of $36.6 billion and $10.7 billion and commercial letters of credit of $2.1 billion and $715 million at December 31, 2020 and 2019.
(2)Percentages are calculated as commercial reservable criticized utilized exposure divided by total commercial reservable utilized exposure for each exposure category.
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Commercial and Industrial
Commercial and industrial loans include U.S. commercial and non-U.S. commercial portfolios.
U.S. Commercial
At December 31, 2020, 65 percent of the U.S. commercial loan portfolio, excluding small business, was managed in Global Banking, 18 percent in Global Markets, 15 percent in GWIM (generally business-purpose loans for high net worth clients) and the remainder primarily in Consumer Banking. U.S. commercial loans decreased $18.3 billion during 2020 driven by Global Banking. Reservable criticized utilized exposure increased $13.1 billion, which was spread across several industries, including travel and entertainment, as a result of weaker economic conditions arising from COVID-19.
Non-U.S. Commercial
At December 31, 2020, 79 percent of the non-U.S. commercial loan portfolio was managed in Global Banking and 21 percent in Global Markets. Non-U.S. commercial loans decreased $14.5 billion during 2020, primarily in Global Banking. For information on the non-U.S. commercial portfolio, see Non-U.S. Portfolio on page 74.
Commercial Real Estate
Commercial real estate primarily includes commercial loans 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. Outstanding loans declined by $2.3 billion during
2020 as paydowns exceeded new originations. Reservable criticized utilized exposure increased $9.1 billion to $10.2 billion from $1.1 billion, or 16.42 and 1.75 percent of the commercial real estate portfolio at December 31, 2020 and 2019, due to downgrades driven by the impact of COVID-19 across industries, primarily hotels. Although we have observed property-level improvements in a number of the most impacted sectors, the length of time for recovery has been slower than originally anticipated, which has prompted additional downgrades. The portfolio remains diversified across property types and geographic regions. California represented the largest state concentration at 23 percent and 24 percent of the commercial real estate portfolio at December 31, 2020 and 2019. 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.
During 2020, we continued to see low default rates and varying degrees of improvement in the portfolio. 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.
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 | |||||||||||||
| December 31 | ||||||||||||||
| (Dollars in millions) | 2020 | 2019 | ||||||||||||
| By Geographic Region | ||||||||||||||
| California | $ | 14,028 | $ | 14,910 | ||||||||||
| Northeast | 11,628 | 12,408 | ||||||||||||
| Southwest | 8,551 | 8,408 | ||||||||||||
| Southeast | 6,588 | 5,937 | ||||||||||||
| Florida | 4,294 | 3,984 | ||||||||||||
| Midwest | 3,483 | 3,203 | ||||||||||||
| Illinois | 2,594 | 3,349 | ||||||||||||
| Midsouth | 2,370 | 2,468 | ||||||||||||
| Northwest | 1,634 | 1,638 | ||||||||||||
| Non-U.S. | 3,187 | 3,724 | ||||||||||||
Other (1) | 2,007 | 2,660 | ||||||||||||
Total outstanding commercial real estate loans | $ | 60,364 | $ | 62,689 | ||||||||||
| By Property Type | ||||||||||||||
| Non-residential | ||||||||||||||
| Office | $ | 17,667 | $ | 17,902 | ||||||||||
| Industrial / Warehouse | 8,330 | 8,677 | ||||||||||||
| Shopping centers / Retail | 7,931 | 8,183 | ||||||||||||
| Hotels / Motels | 7,226 | 6,982 | ||||||||||||
| Multi-family rental | 7,051 | 7,250 | ||||||||||||
| Unsecured | 2,336 | 3,438 | ||||||||||||
| Multi-use | 1,460 | 1,788 | ||||||||||||
| Other | 7,146 | 6,958 | ||||||||||||
| Total non-residential | 59,147 | 61,178 | ||||||||||||
| Residential | 1,217 | 1,511 | ||||||||||||
Total outstanding commercial real estate loans | $ | 60,364 | $ | 62,689 | ||||||||||
(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 primarily managed in Consumer Banking, and includes $22.7 billion of PPP loans outstanding at December 31, 2020. Excluding PPP, credit card-related products were 50 percent and 52 percent of the U.S. small business commercial portfolio at December 31,
2020 and 2019. Of the U.S. small business commercial net charge-offs, 91 percent and 94 percent were credit card-related products in 2020 and 2019.
Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity
Table 35 presents the nonperforming commercial loans, leases and foreclosed properties activity during 2020 and 2019.
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Nonperforming loans do not include loans accounted for under the fair value option. During 2020, nonperforming commercial loans and leases increased $728 million to $2.2 billion, primarily driven by the impact of COVID-19. At December 31, 2020, 84 percent of commercial nonperforming loans, leases and foreclosed properties were secured and 66 percent were
contractually current. Commercial nonperforming loans were carried at 81 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) | |||||||||||||
| (Dollars in millions) | 2020 | 2019 | ||||||||||||
| Nonperforming loans and leases, January 1 | $ | 1,499 | $ | 1,102 | ||||||||||
| Additions | 3,518 | 2,048 | ||||||||||||
| Reductions: | ||||||||||||||
| Paydowns | (1,002) | (648) | ||||||||||||
| Sales | (350) | (215) | ||||||||||||
Returns to performing status (3) | (172) | (120) | ||||||||||||
| Charge-offs | (1,208) | (478) | ||||||||||||
| Transfers to foreclosed properties | (2) | (9) | ||||||||||||
| Transfers to loans held-for-sale | (56) | (181) | ||||||||||||
| Total net additions to nonperforming loans and leases | 728 | 397 | ||||||||||||
| Total nonperforming loans and leases, December 31 | 2,227 | 1,499 | ||||||||||||
| Foreclosed properties, December 31 | 41 | 56 | ||||||||||||
| Nonperforming commercial loans, leases and foreclosed properties, December 31 | 2,268 | 1,555 | ||||||||||||
Nonperforming commercial loans and leases as a percentage of outstanding commercial loans and leases (4) | 0.45 | % | 0.29 | % | ||||||||||
Nonperforming commercial loans, leases and foreclosed properties as a percentage of outstanding commercial loans, leases and foreclosed properties (4) | 0.46 | 0.30 | ||||||||||||
(1)Balances do not include nonperforming loans held-for-sale of $359 million and $239 million at December 31, 2020 and 2019.
(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 and Allowance for Credit Losses to the Consolidated Financial Statements. For more information on our loan modification programs offered in response to the pandemic, most of which are not TDRs, see Executive Summary – Recent Developments – COVID-19 Pandemic on page 25 and Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
| Table 36 | Commercial Troubled Debt Restructurings | |||||||||||||||||||||||||||||||||||||
| December 31, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Nonperforming | Performing | Total | Nonperforming | Performing | Total | ||||||||||||||||||||||||||||||||
| Commercial and industrial: | ||||||||||||||||||||||||||||||||||||||
| U.S. commercial | $ | 509 | $ | 850 | $ | 1,359 | $ | 617 | $ | 999 | $ | 1,616 | ||||||||||||||||||||||||||
| Non-U.S. commercial | 49 | 119 | 168 | 41 | 193 | 234 | ||||||||||||||||||||||||||||||||
| Total commercial and industrial | 558 | 969 | 1,527 | 658 | 1,192 | 1,850 | ||||||||||||||||||||||||||||||||
| Commercial real estate | 137 | — | 137 | 212 | 14 | 226 | ||||||||||||||||||||||||||||||||
| Commercial lease financing | 42 | 2 | 44 | 18 | 31 | 49 | ||||||||||||||||||||||||||||||||
| 737 | 971 | 1,708 | 888 | 1,237 | 2,125 | |||||||||||||||||||||||||||||||||
| U.S. small business commercial | — | 29 | 29 | — | 27 | 27 | ||||||||||||||||||||||||||||||||
Total commercial troubled debt restructurings | $ | 737 | $ | 1,000 | $ | 1,737 | $ | 888 | $ | 1,264 | $ | 2,152 | ||||||||||||||||||||||||||
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 decreased $22.1 billion, or two percent, during 2020 to $1.0 trillion. The decrease in commercial committed exposure was concentrated in the Global commercial banks, Asset managers and funds, Utilities, and Real estate industry sectors. Decreases were partially offset by increased exposure to the Finance companies and Automobiles and components industry sectors.
Industry limits are used internally to manage industry concentrations and are based on committed exposure that is
determined 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 MRC oversees industry limit governance.
Asset managers and funds, our largest industry concentration with committed exposure of $101.5 billion, decreased $8.5 billion, or eight percent, during 2020.
Real estate, our second largest industry concentration with committed exposure of $92.4 billion, decreased $4.0 billion, or four percent, during 2020. For more information on the commercial real estate and related portfolios, see Commercial Portfolio Credit Risk Management – Commercial Real Estate on page 71.
Capital goods, our third largest industry concentration with committed exposure of $81.0 billion, remained flat during 2020.
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Given the widespread impact of the pandemic on the U.S. and global economy, a number of industries have been and will likely continue to be adversely impacted. We continue to monitor all industries, particularly higher risk industries which are experiencing or could experience a more significant impact to their financial condition. The impact of the pandemic has also placed significant stress on global demand for oil. Our energy-
related committed exposure decreased $3.3 billion, or nine percent, during 2020 to $33.0 billion, driven by declines in exploration and production, refining and marketing exposure, energy equipment and services, partially offset by an increase in our integrated client exposure. For more information on COVID-19, see Executive Summary – Recent Developments – COVID-19 Pandemic on page 25.
| Table 37 | Commercial Credit Exposure by Industry (1) | |||||||||||||||||||||||||
| Commercial Utilized | Total Commercial Committed (2) | |||||||||||||||||||||||||
| December 31 | ||||||||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||
| Asset managers and funds | $ | 68,093 | $ | 71,386 | $ | 101,540 | $ | 110,069 | ||||||||||||||||||
Real estate (3) | 69,267 | 70,361 | 92,414 | 96,370 | ||||||||||||||||||||||
| Capital goods | 39,911 | 41,082 | 80,959 | 80,892 | ||||||||||||||||||||||
| Finance companies | 46,948 | 40,173 | 70,004 | 63,942 | ||||||||||||||||||||||
| Healthcare equipment and services | 33,759 | 34,353 | 57,880 | 55,918 | ||||||||||||||||||||||
| Government and public education | 41,669 | 41,889 | 56,212 | 53,566 | ||||||||||||||||||||||
| Materials | 24,548 | 26,663 | 50,792 | 52,129 | ||||||||||||||||||||||
| Retailing | 24,749 | 25,868 | 49,710 | 48,317 | ||||||||||||||||||||||
| Consumer services | 32,000 | 28,434 | 48,026 | 49,071 | ||||||||||||||||||||||
| Food, beverage and tobacco | 22,871 | 24,163 | 44,628 | 45,956 | ||||||||||||||||||||||
| Commercial services and supplies | 21,154 | 23,103 | 38,149 | 38,944 | ||||||||||||||||||||||
| Transportation | 23,426 | 23,449 | 33,444 | 33,028 | ||||||||||||||||||||||
| Energy | 13,936 | 16,406 | 32,983 | 36,326 | ||||||||||||||||||||||
| Utilities | 12,387 | 12,383 | 29,234 | 36,060 | ||||||||||||||||||||||
| Individuals and trusts | 18,784 | 18,927 | 25,881 | 27,817 | ||||||||||||||||||||||
| Technology hardware and equipment | 10,515 | 10,646 | 24,796 | 24,072 | ||||||||||||||||||||||
| Media | 13,144 | 12,445 | 24,677 | 23,645 | ||||||||||||||||||||||
| Software and services | 11,709 | 10,432 | 23,647 | 20,556 | ||||||||||||||||||||||
| Global commercial banks | 20,751 | 30,171 | 22,922 | 32,345 | ||||||||||||||||||||||
| Automobiles and components | 10,956 | 7,345 | 20,765 | 14,910 | ||||||||||||||||||||||
| Consumer durables and apparel | 9,232 | 10,193 | 20,223 | 21,245 | ||||||||||||||||||||||
| Vehicle dealers | 15,028 | 18,013 | 18,696 | 21,435 | ||||||||||||||||||||||
| Pharmaceuticals and biotechnology | 5,217 | 5,964 | 16,349 | 20,206 | ||||||||||||||||||||||
| Telecommunication services | 9,411 | 9,154 | 15,605 | 16,113 | ||||||||||||||||||||||
| Insurance | 5,921 | 6,673 | 13,491 | 15,218 | ||||||||||||||||||||||
| Food and staples retailing | 5,209 | 6,290 | 11,810 | 10,392 | ||||||||||||||||||||||
| Financial markets infrastructure (clearinghouses) | 4,939 | 5,496 | 8,648 | 7,997 | ||||||||||||||||||||||
| Religious and social organizations | 4,769 | 3,844 | 6,759 | 5,756 | ||||||||||||||||||||||
| Total commercial credit exposure by industry | $ | 620,303 | $ | 635,306 | $ | 1,040,244 | $ | 1,062,295 | ||||||||||||||||||
Net credit default protection purchased on total commitments (4) | $ | (4,170) | $ | (3,349) | ||||||||||||||||||||||
(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 $10.5 billion and $10.6 billion at December 31, 2020 and 2019.
(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 to hedge funded and unfunded exposures for which we elected the fair value option, as well as certain other credit exposures. For more information, see Commercial Portfolio Credit Risk Management – Risk Mitigation.
Risk Mitigation
We purchase credit protection to cover the funded portion as well as the unfunded portion of certain credit exposures. To lower the cost of obtaining our desired credit protection levels, we may add credit exposure within an industry, borrower or counterparty group by selling protection.
At December 31, 2020 and 2019, 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 $4.2 billion and $3.3 billion. We recorded net losses of $240 million in 2020 compared to net losses of $145 million in 2019 for these same 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 79.
73 Bank of America | ||||||||
Tables 38 and 39 present the maturity profiles and the credit exposure debt ratings of the net credit default protection portfolio at December 31, 2020 and 2019.
| Table 38 | Net Credit Default Protection by Maturity | |||||||||||||
| December 31 | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| Less than or equal to one year | 65 | % | 54 | % | ||||||||||
Greater than one year and less than or equal to five years | 34 | 45 | ||||||||||||
| Greater than five years | 1 | 1 | ||||||||||||
| 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 | |||||||||||||||||||||||
| December 31 | ||||||||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | ||||||||||||||||||||||||
Ratings (2, 3) | ||||||||||||||||||||||||||
| A | $ | (250) | 6.0 | % | $ | (697) | 20.8 | % | ||||||||||||||||||
| BBB | (1,856) | 44.5 | (1,089) | 32.5 | ||||||||||||||||||||||
| BB | (1,363) | 32.7 | (766) | 22.9 | ||||||||||||||||||||||
| B | (465) | 11.2 | (373) | 11.1 | ||||||||||||||||||||||
| CCC and below | (182) | 4.4 | (119) | 3.6 | ||||||||||||||||||||||
NR (4) | (54) | 1.2 | (305) | 9.1 | ||||||||||||||||||||||
Total net credit default protection | $ | (4,170) | 100.0 | % | $ | (3,349) | 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 order to properly reflect counterparty credit risk, we record counterparty credit risk valuation adjustments on certain derivative assets, including our
purchased credit default protection. 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. For more information on credit derivatives and counterparty credit risk valuation adjustments, see Note 3 – Derivatives to the Consolidated Financial Statements.
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 40 presents our 20 largest non-U.S. country exposures at December 31, 2020. These exposures accounted for 90 percent and 88 percent of our total non-U.S. exposure at December 31, 2020 and 2019. Net country exposure for these 20 countries increased $21.2 billion in 2020. The majority of the increase was due to higher deposits with central banks in Germany and Japan.
Non-U.S. exposure is presented on an internal risk management basis and includes sovereign and non-sovereign credit exposure, securities and other investments issued by or domiciled in countries other than the U.S.
Funded loans and loan equivalents include loans, leases, and other extensions of credit and funds, including letters of credit and due from placements. Unfunded commitments are the undrawn portion of legally binding commitments related to loans and loan equivalents. Net counterparty exposure includes the fair value of derivatives, including the counterparty risk associated with credit default swaps (CDS), and secured financing transactions. Securities and other investments are carried at fair value and long securities exposures are netted against short exposures with the same underlying issuer to, but not below, zero. Net country exposure represents country exposure less hedges and credit default protection purchased, net of credit default protection sold.
Bank of America 74 | ||||||||
| Table 40 | 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 December 31 2020 | Hedges and Credit Default Protection | Net Country Exposure at December 31 2020 | Increase (Decrease) from December 31 2019 | ||||||||||||||||||||||||||||||||||||||||||
| United Kingdom | $ | 31,817 | $ | 18,201 | $ | 6,601 | $ | 4,086 | $ | 60,705 | $ | (1,233) | $ | 59,472 | $ | 3,628 | ||||||||||||||||||||||||||||||||||
| Germany | 29,169 | 10,772 | 2,155 | 4,492 | 46,588 | (1,685) | 44,903 | 14,075 | ||||||||||||||||||||||||||||||||||||||||||
| Canada | 8,657 | 8,681 | 1,624 | 2,628 | 21,590 | (456) | 21,134 | 1,012 | ||||||||||||||||||||||||||||||||||||||||||
| France | 8,219 | 8,353 | 988 | 4,329 | 21,889 | (1,098) | 20,791 | 4,536 | ||||||||||||||||||||||||||||||||||||||||||
| Japan | 12,679 | 1,086 | 1,115 | 3,325 | 18,205 | (709) | 17,496 | 6,964 | ||||||||||||||||||||||||||||||||||||||||||
| China | 10,098 | 67 | 1,529 | 1,952 | 13,646 | (226) | 13,420 | (2,167) | ||||||||||||||||||||||||||||||||||||||||||
| Australia | 6,559 | 4,242 | 372 | 2,235 | 13,408 | (321) | 13,087 | 1,985 | ||||||||||||||||||||||||||||||||||||||||||
| Brazil | 5,854 | 696 | 708 | 3,288 | 10,546 | (253) | 10,293 | (1,479) | ||||||||||||||||||||||||||||||||||||||||||
| Netherlands | 4,654 | 4,109 | 486 | 997 | 10,246 | (562) | 9,684 | (643) | ||||||||||||||||||||||||||||||||||||||||||
| Singapore | 4,115 | 278 | 359 | 4,603 | 9,355 | (73) | 9,282 | 1,456 | ||||||||||||||||||||||||||||||||||||||||||
| South Korea | 5,161 | 856 | 488 | 2,214 | 8,719 | (168) | 8,551 | (154) | ||||||||||||||||||||||||||||||||||||||||||
| India | 5,428 | 221 | 353 | 1,989 | 7,991 | (180) | 7,811 | (4,206) | ||||||||||||||||||||||||||||||||||||||||||
| Switzerland | 3,811 | 2,817 | 412 | 130 | 7,170 | (275) | 6,895 | (490) | ||||||||||||||||||||||||||||||||||||||||||
| Hong Kong | 4,434 | 452 | 584 | 1,128 | 6,598 | (61) | 6,537 | (519) | ||||||||||||||||||||||||||||||||||||||||||
| Mexico | 3,712 | 1,379 | 205 | 1,112 | 6,408 | (121) | 6,287 | (1,524) | ||||||||||||||||||||||||||||||||||||||||||
| Italy | 2,456 | 1,784 | 553 | 1,568 | 6,361 | (669) | 5,692 | 315 | ||||||||||||||||||||||||||||||||||||||||||
| Belgium | 2,471 | 1,334 | 505 | 797 | 5,107 | (140) | 4,967 | (1,540) | ||||||||||||||||||||||||||||||||||||||||||
| Spain | 2,835 | 1,156 | 262 | 914 | 5,167 | (351) | 4,816 | 94 | ||||||||||||||||||||||||||||||||||||||||||
| Ireland | 2,785 | 1,050 | 100 | 253 | 4,188 | (23) | 4,165 | 798 | ||||||||||||||||||||||||||||||||||||||||||
| United Arab Emirates | 2,218 | 136 | 266 | 77 | 2,697 | (10) | 2,687 | (900) | ||||||||||||||||||||||||||||||||||||||||||
Total top 20 non-U.S. countries exposure | $ | 157,132 | $ | 67,670 | $ | 19,665 | $ | 42,117 | $ | 286,584 | $ | (8,614) | $ | 277,970 | $ | 21,241 | ||||||||||||||||||||||||||||||||||
Our largest non-U.S. country exposure at December 31, 2020 was the U.K. with net exposure of $59.5 billion, which represents a $3.6 billion increase from December 31, 2019. Our second largest non-U.S. country exposure was Germany with net exposure of $44.9 billion at December 31, 2020, a $14.1 billion increase from December 31, 2019. The increase in Germany was primarily driven by an increase in deposits with the central bank.
In light of the global pandemic, we are monitoring our non-U.S. exposure closely, particularly in countries where restrictions on certain activities, in an attempt to contain the spread and impact of the virus, have affected and will likely continue to adversely affect economic activity. We are managing the impact to our international business operations as part of our overall response framework and are taking actions to manage exposure carefully in impacted regions while supporting the needs of our clients. The magnitude and duration of the pandemic and its full impact on the global economy continue to be highly uncertain.
The impact of COVID-19 could have an adverse impact on the global economy for a prolonged period of time. For more information on how the pandemic may affect our operations, see Executive Summary – Recent Developments – COVID-19 Pandemic on page 25 and Part I. Item 1A. Risk Factors on page 7.
Table 41 presents countries that had total cross-border exposure, including the notional amount of cash loaned under secured financing agreements, exceeding one percent of our total assets at December 31, 2020. Local exposure, defined as exposure booked in local offices of a respective country with clients in the same country, is excluded. At December 31, 2020, the U.K. and France were the only countries where their respective total cross-border exposures exceeded one percent of our total assets. No other countries had total cross-border exposure that exceeded 0.75 percent of our total assets at December 31, 2020.
| Table 41 | Total Cross-border Exposure Exceeding One Percent of Total Assets | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | December 31 | Public Sector | Banks | Private Sector | Cross-border Exposure | Exposure as a Percent of Total Assets | ||||||||||||||||||||||||||||||||
| United Kingdom | 2020 | $ | 4,733 | $ | 2,269 | $ | 95,180 | $ | 102,182 | 3.62 | % | |||||||||||||||||||||||||||
| 2019 | 1,859 | 3,580 | 93,232 | 98,671 | 4.05 | |||||||||||||||||||||||||||||||||
| 2018 | 1,505 | 3,458 | 46,191 | 51,154 | 2.17 | |||||||||||||||||||||||||||||||||
| France | 2020 | 3,073 | 1,726 | 26,399 | 31,198 | 1.11 | ||||||||||||||||||||||||||||||||
| 2019 | 736 | 2,473 | 23,172 | 26,381 | 1.08 | |||||||||||||||||||||||||||||||||
| 2018 | 633 | 2,385 | 29,847 | 32,865 | 1.40 | |||||||||||||||||||||||||||||||||
75 Bank of America | ||||||||
Allowance for Credit Losses
On January 1, 2020, the Corporation adopted the new accounting standard that requires the measurement of the allowance for credit losses to be based on management’s best estimate of lifetime ECL inherent in the Corporation’s relevant financial assets. Upon adoption of the new accounting standard, the Corporation recorded a net increase of $3.3 billion in the allowance for credit losses which was comprised of a net increase of $2.9 billion in the allowance for loan and lease losses and an increase of $310 million in the reserve for unfunded lending commitments. The net increase was primarily driven by a $3.1 billion increase related to the credit card portfolio.
The allowance for credit losses further increased by $7.2 billion from January 1, 2020 to $20.7 billion at December 31, 2020, which included a $5.0 billion reserve increase related to the commercial portfolio and a $2.2 billion reserve increase related to the consumer portfolio. The increases were driven by deterioration in the economic outlook resulting from the impact of COVID-19.
The following table presents an allocation of the allowance for credit losses by product type for December 31, 2020, January 1, 2020 and December 31, 2019 (prior to the adoption of the CECL accounting standard).
| Table 42 | 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) | Amount | Percent of Total | Percent of Loans and Leases Outstanding (1) | ||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | December 31, 2020 | January 1, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan and lease losses | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage | $ | 459 | 2.44 | % | 0.21 | % | $ | 212 | 1.72 | % | 0.09 | % | $ | 325 | 3.45 | % | 0.14 | % | ||||||||||||||||||||||||||||||||||||||
| Home equity | 399 | 2.12 | 1.16 | 228 | 1.84 | 0.57 | 221 | 2.35 | 0.55 | |||||||||||||||||||||||||||||||||||||||||||||||
| Credit card | 8,420 | 44.79 | 10.70 | 6,809 | 55.10 | 6.98 | 3,710 | 39.39 | 3.80 | |||||||||||||||||||||||||||||||||||||||||||||||
| Direct/Indirect consumer | 752 | 4.00 | 0.82 | 566 | 4.58 | 0.62 | 234 | 2.49 | 0.26 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other consumer | 41 | 0.22 | n/m | 55 | 0.45 | n/m | 52 | 0.55 | n/m | |||||||||||||||||||||||||||||||||||||||||||||||
| Total consumer | 10,071 | 53.57 | 2.35 | 7,870 | 63.69 | 1.69 | 4,542 | 48.23 | 0.98 | |||||||||||||||||||||||||||||||||||||||||||||||
U.S. commercial (2) | 5,043 | 26.82 | 1.55 | 2,723 | 22.03 | 0.84 | 3,015 | 32.02 | 0.94 | |||||||||||||||||||||||||||||||||||||||||||||||
| Non-U.S. commercial | 1,241 | 6.60 | 1.37 | 668 | 5.41 | 0.64 | 658 | 6.99 | 0.63 | |||||||||||||||||||||||||||||||||||||||||||||||
| Commercial real estate | 2,285 | 12.15 | 3.79 | 1,036 | 8.38 | 1.65 | 1,042 | 11.07 | 1.66 | |||||||||||||||||||||||||||||||||||||||||||||||
| Commercial lease financing | 162 | 0.86 | 0.95 | 61 | 0.49 | 0.31 | 159 | 1.69 | 0.80 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total commercial | 8,731 | 46.43 | 1.77 | 4,488 | 36.31 | 0.88 | 4,874 | 51.77 | 0.96 | |||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan and lease losses | 18,802 | 100.00 | % | 2.04 | 12,358 | 100.00 | % | 1.27 | 9,416 | 100.00 | % | 0.97 | ||||||||||||||||||||||||||||||||||||||||||||
| Reserve for unfunded lending commitments | 1,878 | 1,123 | 813 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for credit losses | $ | 20,680 | $ | 13,481 | $ | 10,229 | ||||||||||||||||||||||||||||||||||||||||||||||||||
(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 include residential mortgage loans of $298 million at December 31, 2020 and $257 million at January 1, 2020 and December 31, 2019 and home equity loans of $437 million at December 31, 2020 and $337 million at January 1, 2020 and December 31, 2019. Commercial loans accounted for under the fair value option include U.S. commercial loans of $2.9 billion, $5.1 billion and $4.7 billion at December 31, 2020, January 1, 2020 and December 31, 2019, and non-U.S. commercial loans of $3.0 billion, $3.2 billion and $3.1 billion at December 31, 2020, January 1, 2020 and December 31, 2019.
(2)Includes allowance for loan and lease losses for U.S. small business commercial loans of $1.5 billion, $831 million and $523 million at December 31, 2020, January 1, 2020 and December 31, 2019.
n/m = not meaningful
Net charge-offs for 2020 were $4.1 billion compared to $3.6 billion in 2019 driven by increases in commercial losses. The provision for credit losses increased $7.7 billion to $11.3 billion during 2020 compared to 2019. The allowance for credit losses included a reserve build of $7.2 billion for 2020, excluding the impact of the new accounting standard, primarily due to the deterioration in the economic outlook resulting from the impact of COVID-19 on both the consumer and commercial portfolios. The provision for credit losses for the consumer portfolio, including unfunded lending commitments, increased $2.0 billion to $4.9 billion during 2020 compared to 2019. The provision for credit losses for the commercial portfolio, including unfunded
lending commitments, increased $5.7 billion to $6.5 billion during 2020 compared to 2019.
The following table presents a rollforward of the allowance for credit losses, including certain loan and allowance ratios for 2020, noting that measurement of the allowance for credit losses for 2019 was based on management’s estimate of probable incurred losses. For more information on the Corporation’s credit loss accounting policies and activity related to the allowance for credit losses, see Note 1 – Summary of Significant Accounting Principles and Note 5 – Outstanding Loans and Leases and Allowance for Credit Losses to the Consolidated Financial Statements.
Bank of America 76 | ||||||||
| Table 43 | Allowance for Credit Losses | |||||||||||||
| (Dollars in millions) | 2020 | 2019 | ||||||||||||
Allowance for loan and lease losses, January 1 | $ | 12,358 | $ | 9,601 | ||||||||||
| Loans and leases charged off | ||||||||||||||
| Residential mortgage | (40) | (93) | ||||||||||||
| Home equity | (58) | (429) | ||||||||||||
| Credit card | (2,967) | (3,535) | ||||||||||||
| Direct/Indirect consumer | (372) | (518) | ||||||||||||
| Other consumer | (307) | (249) | ||||||||||||
| Total consumer charge-offs | (3,744) | (4,824) | ||||||||||||
U.S. commercial (1) | (1,163) | (650) | ||||||||||||
| Non-U.S. commercial | (168) | (115) | ||||||||||||
| Commercial real estate | (275) | (31) | ||||||||||||
| Commercial lease financing | (69) | (26) | ||||||||||||
| Total commercial charge-offs | (1,675) | (822) | ||||||||||||
| Total loans and leases charged off | (5,419) | (5,646) | ||||||||||||
| Recoveries of loans and leases previously charged off | ||||||||||||||
| Residential mortgage | 70 | 140 | ||||||||||||
| Home equity | 131 | 787 | ||||||||||||
| Credit card | 618 | 587 | ||||||||||||
| Direct/Indirect consumer | 250 | 309 | ||||||||||||
| Other consumer | 23 | 15 | ||||||||||||
| Total consumer recoveries | 1,092 | 1,838 | ||||||||||||
U.S. commercial (2) | 178 | 122 | ||||||||||||
| Non-U.S. commercial | 13 | 31 | ||||||||||||
| Commercial real estate | 5 | 2 | ||||||||||||
| Commercial lease financing | 10 | 5 | ||||||||||||
| Total commercial recoveries | 206 | 160 | ||||||||||||
| Total recoveries of loans and leases previously charged off | 1,298 | 1,998 | ||||||||||||
| Net charge-offs | (4,121) | (3,648) | ||||||||||||
| Provision for loan and lease losses | 10,565 | 3,574 | ||||||||||||
| Other | — | (111) | ||||||||||||
Allowance for loan and lease losses, December 31 | 18,802 | 9,416 | ||||||||||||
Reserve for unfunded lending commitments, January 1 | 1,123 | 797 | ||||||||||||
| Provision for unfunded lending commitments | 755 | 16 | ||||||||||||
Reserve for unfunded lending commitments, December 31 | 1,878 | 813 | ||||||||||||
Allowance for credit losses, December 31 | $ | 20,680 | $ | 10,229 | ||||||||||
| Loan and allowance ratios: | ||||||||||||||
Loans and leases outstanding at December 31 (3) | $ | 921,180 | $ | 975,091 | ||||||||||
Allowance for loan and lease losses as a percentage of total loans and leases outstanding at December 31 (3) | 2.04 | % | 0.97 | % | ||||||||||
Consumer allowance for loan and lease losses as a percentage of total consumer loans and leases outstanding at December 31 (4) | 2.35 | 0.98 | ||||||||||||
Commercial allowance for loan and lease losses as a percentage of total commercial loans and leases outstanding at December 31 (5) | 1.77 | 0.96 | ||||||||||||
Average loans and leases outstanding (3) | $ | 974,281 | $ | 951,583 | ||||||||||
Annualized net charge-offs as a percentage of average loans and leases outstanding (3) | 0.42 | % | 0.38 | % | ||||||||||
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases at December 31 | 380 | 265 | ||||||||||||
Ratio of the allowance for loan and lease losses at December 31 to net charge-offs | 4.56 | 2.58 | ||||||||||||
Amounts included in allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases at December 31 (6) | $ | 9,854 | $ | 4,151 | ||||||||||
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 December 31 (6) | 181 | % | 148 | % | ||||||||||
(1)Includes U.S. small business commercial charge-offs of $321 million in 2020 compared to $320 million in 2019.
(2)Includes U.S. small business commercial recoveries of $54 million in 2020 compared to $48 million in 2019.
(3)Outstanding loan and lease balances and ratios do not include loans accounted for under the fair value option of $6.7 billion and $8.3 billion at December 31, 2020 and 2019. Average loans accounted for under the fair value option were $8.2 billion in 2020 compared to $6.8 billion in 2019.
(4)Excludes consumer loans accounted for under the fair value option of $735 million and $594 million at December 31, 2020 and 2019.
(5)Excludes commercial loans accounted for under the fair value option of $5.9 billion and $7.7 billion at December 31, 2020 and 2019.
(6)Primarily includes amounts related to credit card and unsecured consumer lending portfolios in Consumer Banking.
77 Bank of America | ||||||||
Market Risk Management
Market risk is the risk that changes in market conditions may adversely impact the value of assets or liabilities, or otherwise negatively impact earnings. This risk is inherent in the financial instruments associated with our operations, primarily within our Global Markets segment. We are also exposed to these risks in other areas of the Corporation (e.g., our ALM activities). In the event of market stress, these risks could have a material impact on our results. For more information, see Interest Rate Risk Management for the Banking Book on page 82.
We have been affected, and expect to continue to be affected, by market stress resulting from the pandemic that began in the first quarter of 2020. For more information on the effects of the pandemic, see Executive Summary – Recent Developments – COVID-19 Pandemic on page 25.
Our traditional banking loan and deposit products are non-trading positions and are generally reported at amortized cost for assets or the amount owed for liabilities (historical cost). However, these positions are still subject to changes in economic value based on varying market conditions, with one of the primary risks being changes in the levels of interest rates. The risk of adverse changes in the economic value of our non-trading positions arising from changes in interest rates is managed through our ALM activities. We have elected to account for certain assets and liabilities under the fair value option.
Our trading positions are reported at fair value with changes reflected in income. Trading positions are subject to various changes in market-based risk factors. The majority of this risk is generated by our activities in the interest rate, foreign exchange, credit, equity and commodities markets. In addition, the values of assets and liabilities could change due to market liquidity, correlations across markets and expectations of market volatility. We seek to manage these risk exposures by using a variety of techniques that encompass a broad range of financial instruments. The key risk management techniques are discussed in more detail in the Trading Risk Management section.
Global Risk Management is responsible for providing senior management with a clear and comprehensive understanding of the trading risks to which we are exposed. These responsibilities include ownership of market risk policy, developing and maintaining quantitative risk models, calculating aggregated risk measures, establishing and monitoring position limits consistent with risk appetite, conducting daily reviews and analysis of trading inventory, approving material risk exposures and fulfilling regulatory requirements. Market risks that impact businesses outside of Global Markets are monitored and governed by their respective governance functions.
Model risk is the potential for adverse consequences from decisions based on incorrect or misused model outputs and reports. Given that models are used across the Corporation, model risk impacts all risk types including credit, market and operational risks. The Enterprise Model Risk Policy defines model risk standards, consistent with our risk framework and risk appetite, prevailing regulatory guidance and industry best practice. All models, including risk management, valuation and regulatory capital models, must meet certain validation criteria, including effective challenge of the conceptual soundness of the model, independent model testing and ongoing monitoring through outcomes analysis and benchmarking. The Enterprise Model Risk Committee (EMRC), a subcommittee of the MRC, oversees that model standards are consistent with model risk requirements and monitors the effective challenge in the model validation process across the Corporation.
Interest Rate Risk
Interest rate risk represents exposures to instruments whose values vary with the level or volatility of interest rates. These instruments include, but are not limited to, loans, debt securities, certain trading-related assets and liabilities, deposits, borrowings and derivatives. Hedging instruments used to mitigate these risks include derivatives such as options, futures, forwards and swaps.
Foreign Exchange Risk
Foreign exchange risk represents exposures to changes in the values of current holdings and future cash flows denominated in currencies other than the U.S. dollar. The types of instruments exposed to this risk include investments in non-U.S. subsidiaries, foreign currency-denominated loans and securities, future cash flows in foreign currencies arising from foreign exchange transactions, foreign currency-denominated debt and various foreign exchange derivatives whose values fluctuate with changes in the level or volatility of currency exchange rates or non-U.S. interest rates. Hedging instruments used to mitigate this risk include foreign exchange options, currency swaps, futures, forwards, and foreign currency-denominated debt and deposits.
Mortgage Risk
Mortgage risk represents exposures to changes in the values of mortgage-related instruments. The values of these instruments are sensitive to prepayment rates, mortgage rates, agency debt ratings, default, market liquidity, government participation and interest rate volatility. Our exposure to these instruments takes several forms. For example, we trade and engage in market-making activities in a variety of mortgage securities including whole loans, pass-through certificates, commercial mortgages and collateralized mortgage obligations including collateralized debt obligations using mortgages as underlying collateral. In addition, we originate a variety of MBS, which involves the accumulation of mortgage-related loans in anticipation of eventual securitization, and we may hold positions in mortgage securities and residential mortgage loans as part of the ALM portfolio. We also record MSRs as part of our mortgage origination activities. Hedging instruments used to mitigate this risk include derivatives such as options, swaps, futures and forwards as well as securities including MBS and U.S. Treasury securities. For more information, see Mortgage Banking Risk Management on page 84.
Equity Market Risk
Equity market risk represents exposures to securities that represent an ownership interest in a corporation in the form of domestic and foreign common stock or other equity-linked instruments. Instruments that would lead to this exposure include, but are not limited to, the following: common stock, exchange-traded funds, American Depositary Receipts, convertible bonds, listed equity options (puts and calls), OTC equity options, equity total return swaps, equity index futures and other equity derivative products. Hedging instruments used to mitigate this risk include options, futures, swaps, convertible bonds and cash positions.
Commodity Risk
Commodity risk represents exposures to instruments traded in the petroleum, natural gas, power and metals markets. These instruments consist primarily of futures, forwards, swaps and options. Hedging instruments used to mitigate this risk include
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options, futures and swaps in the same or similar commodity product, as well as cash positions.
Issuer Credit Risk
Issuer credit risk represents exposures to changes in the creditworthiness of individual issuers or groups of issuers. Our portfolio is exposed to issuer credit risk where the value of an asset may be adversely impacted by changes in the levels of credit spreads, by credit migration or by defaults. Hedging instruments used to mitigate this risk include bonds, CDS and other credit fixed-income instruments.
Market Liquidity Risk
Market liquidity risk represents the risk that the level of expected market activity changes dramatically and, in certain cases, may even cease. This exposes us to the risk that we will not be able to transact business and execute trades in an orderly manner which may impact our results. This impact could be further exacerbated if expected hedging or pricing correlations are compromised by disproportionate demand or lack of demand for certain instruments. We utilize various risk mitigating techniques as discussed in more detail in Trading Risk Management.
Trading Risk Management
To evaluate risks in our trading activities, we focus on the actual and potential volatility of revenues generated by individual positions as well as portfolios of positions. Various techniques and procedures are utilized to enable the most complete understanding of these risks. Quantitative measures of market risk are evaluated on a daily basis from a single position to the portfolio of the Corporation. These measures include sensitivities of positions to various market risk factors, such as the potential impact on revenue from a one basis point change in interest rates, and statistical measures utilizing both actual and hypothetical market moves, such as VaR and stress testing. Periods of extreme market stress influence the reliability of these techniques to varying degrees. Qualitative evaluations of market risk utilize the suite of quantitative risk measures while understanding each of their respective limitations. Additionally, risk managers independently evaluate the risk of the portfolios under the current market environment and potential future environments.
VaR is a common statistic used to measure market risk as it allows the aggregation of market risk factors, including the effects of portfolio diversification. A VaR model simulates the value of a portfolio under a range of scenarios in order to generate a distribution of potential gains and losses. VaR represents the loss a portfolio is not expected to exceed more than a certain number of times per period, based on a specified holding period, confidence level and window of historical data. We use one VaR model consistently across the trading portfolios and it uses a historical simulation approach based on a three-year window of historical data. Our primary VaR statistic is equivalent to a 99 percent confidence level, which means that for a VaR with a one-day holding period, there should not be losses in excess of VaR, on average, 99 out of 100 trading days.
Within any VaR model, there are significant and numerous assumptions that will differ from company to company. The accuracy of a VaR model depends on the availability and quality of historical data for each of the risk factors in the portfolio. A VaR model may require additional modeling assumptions for new products that do not have the necessary historical market data or for less liquid positions for which accurate daily prices
are not consistently available. For positions with insufficient historical data for the VaR calculation, the process for establishing an appropriate proxy is based on fundamental and statistical analysis of the new product or less liquid position. This analysis identifies reasonable alternatives that replicate both the expected volatility and correlation to other market risk factors that the missing data would be expected to experience.
VaR may not be indicative of realized revenue volatility as changes in market conditions or in the composition of the portfolio can have a material impact on the results. In particular, the historical data used for the VaR calculation might indicate higher or lower levels of portfolio diversification than will be experienced. In order for the VaR model to reflect current market conditions, we update the historical data underlying our VaR model on a weekly basis, or more frequently during periods of market stress, and regularly review the assumptions underlying the model. A minor portion of risks related to our trading positions is not included in VaR. These risks are reviewed as part of our ICAAP. For more information regarding ICAAP, see Capital Management on page 50.
Global Risk Management continually reviews, evaluates and enhances our VaR model so that it reflects the material risks in our trading portfolio. Changes to the VaR model are reviewed and approved prior to implementation and any material changes are reported to management through the appropriate management committees.
Trading limits on quantitative risk measures, including VaR, are independently set by Global Markets Risk Management and reviewed on a regular basis so that trading limits remain relevant and within our overall risk appetite for market risks. Trading limits are reviewed in the context of market liquidity, volatility and strategic business priorities. Trading limits are set at both a granular level to allow for extensive coverage of risks as well as at aggregated portfolios to account for correlations among risk factors. All trading limits are approved at least annually. Approved trading limits are stored and tracked in a centralized limits management system. Trading limit excesses are communicated to management for review. Certain quantitative market risk measures and corresponding limits have been identified as critical in the Corporation’s Risk Appetite Statement. These risk appetite limits are reported on a daily basis and are approved at least annually by the ERC and the Board.
In periods of market stress, Global Markets senior leadership communicates daily to discuss losses, key risk positions and any limit excesses. As a result of this process, the businesses may selectively reduce risk.
Table 44 presents the total market-based portfolio VaR which is the combination of the total covered positions (and less liquid trading positions) portfolio and the fair value option portfolio. Covered positions are defined by regulatory standards as trading assets and liabilities, both on- and off-balance sheet, that meet a defined set of specifications. These specifications identify the most liquid trading positions which are intended to be held for a short-term horizon and where we are able to hedge the material risk elements in a two-way market. Positions in less liquid markets, or where there are restrictions on the ability to trade the positions, typically do not qualify as covered positions. Foreign exchange and commodity positions are always considered covered positions, except for structural foreign currency positions that are excluded with prior regulatory approval. In addition, Table 44 presents our fair value option portfolio, which includes substantially all of the funded and unfunded exposures for which we elect the fair value option, and their corresponding hedges. Additionally, market risk VaR for
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trading activities as presented in Table 44 differs from VaR used for regulatory capital calculations due to the holding period being used. The holding period for VaR used for regulatory capital calculations is 10 days, while for the market risk VaR presented below, it is one day. Both measures utilize the same process and methodology.
The total market-based portfolio VaR results in Table 44 include market risk to which we are exposed from all business segments, excluding credit valuation adjustment (CVA), DVA and
related hedges. The majority of this portfolio is within the Global Markets segment.
Table 44 presents year-end, average, high and low daily trading VaR for 2020 and 2019 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 annual average of total covered positions and less liquid trading positions portfolio VaR increased for 2020 compared to 2019 primarily due to the impact of market volatility related to the pandemic in the VaR look back period.
| Table 44 | Market Risk VaR for Trading Activities | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Year End | Average | High (1) | Low (1) | Year End | Average | High (1) | Low (1) | ||||||||||||||||||||||||||||||||||||||||||
| Foreign exchange | $ | 8 | $ | 7 | $ | 25 | $ | 2 | $ | 4 | $ | 6 | $ | 13 | $ | 2 | ||||||||||||||||||||||||||||||||||
| Interest rate | 30 | 19 | 39 | 7 | 25 | 24 | 49 | 14 | ||||||||||||||||||||||||||||||||||||||||||
| Credit | 79 | 58 | 91 | 25 | 26 | 23 | 32 | 16 | ||||||||||||||||||||||||||||||||||||||||||
| Equity | 20 | 24 | 162 | 12 | 29 | 22 | 33 | 14 | ||||||||||||||||||||||||||||||||||||||||||
| Commodities | 4 | 6 | 12 | 3 | 4 | 6 | 31 | 4 | ||||||||||||||||||||||||||||||||||||||||||
| Portfolio diversification | (72) | (61) | — | — | (47) | (49) | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total covered positions portfolio | 69 | 53 | 171 | 27 | 41 | 32 | 47 | 24 | ||||||||||||||||||||||||||||||||||||||||||
| Impact from less liquid exposures | 52 | 27 | — | — | — | 3 | — | — | ||||||||||||||||||||||||||||||||||||||||||
Total covered positions and less liquid trading positions portfolio | 121 | 80 | 169 | 30 | 41 | 35 | 53 | 27 | ||||||||||||||||||||||||||||||||||||||||||
| Fair value option loans | 52 | 52 | 84 | 7 | 8 | 10 | 13 | 7 | ||||||||||||||||||||||||||||||||||||||||||
| Fair value option hedges | 11 | 13 | 17 | 9 | 10 | 10 | 17 | 4 | ||||||||||||||||||||||||||||||||||||||||||
| Fair value option portfolio diversification | (17) | (24) | — | — | (9) | (10) | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total fair value option portfolio | 46 | 41 | 86 | 9 | 9 | 10 | 16 | 5 | ||||||||||||||||||||||||||||||||||||||||||
| Portfolio diversification | (4) | (15) | — | — | (5) | (7) | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total market-based portfolio | $ | 163 | $ | 106 | 171 | 32 | $ | 45 | $ | 38 | 56 | 28 | ||||||||||||||||||||||||||||||||||||||
(1)The high and low for each portfolio may have occurred on different trading days than the high and low for the components. Therefore the impact from less liquid exposures and the amount of portfolio diversification, which is the difference between the total portfolio and the sum of the individual components, is not relevant.
The graph below presents the daily covered positions and less liquid trading positions portfolio VaR for 2020, corresponding to the data in Table 44. Peak VaR in mid-March 2020 was driven by increased market realized volatility and higher implied volatilities.
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 2020 and 2019. The increase in VaR for the 99 percent confidence level for 2020 was primarily due to COVID-19 related market volatility, which impacted the 99 percent VaR average more severely than the 95 percent VaR average.
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| Table 45 | Average Market Risk VaR for Trading Activities – 99 percent and 95 percent VaR Statistics | |||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||||
| (Dollars in millions) | 99 percent | 95 percent | 99 percent | 95 percent | ||||||||||||||||||||||
| Foreign exchange | $ | 7 | $ | 4 | $ | 6 | $ | 3 | ||||||||||||||||||
| Interest rate | 19 | 9 | 24 | 15 | ||||||||||||||||||||||
| Credit | 58 | 18 | 23 | 15 | ||||||||||||||||||||||
| Equity | 24 | 13 | 22 | 11 | ||||||||||||||||||||||
| Commodities | 6 | 3 | 6 | 3 | ||||||||||||||||||||||
| Portfolio diversification | (61) | (26) | (49) | (29) | ||||||||||||||||||||||
| Total covered positions portfolio | 53 | 21 | 32 | 18 | ||||||||||||||||||||||
| Impact from less liquid exposures | 27 | 2 | 3 | 2 | ||||||||||||||||||||||
Total covered positions and less liquid trading positions portfolio | 80 | 23 | 35 | 20 | ||||||||||||||||||||||
| Fair value option loans | 52 | 13 | 10 | 5 | ||||||||||||||||||||||
| Fair value option hedges | 13 | 7 | 10 | 6 | ||||||||||||||||||||||
| Fair value option portfolio diversification | (24) | (8) | (10) | (5) | ||||||||||||||||||||||
| Total fair value option portfolio | 41 | 12 | 10 | 6 | ||||||||||||||||||||||
| Portfolio diversification | (15) | (6) | (7) | (5) | ||||||||||||||||||||||
| Total market-based portfolio | $ | 106 | $ | 29 | $ | 38 | $ | 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 with a goal to ensure that the VaR methodology accurately represents those losses. We expect the frequency of trading losses in excess of VaR to be in line with the confidence level of the VaR statistic being tested. For example, with a 99 percent confidence level, we expect one trading loss in excess of VaR every 100 days or between two to three trading losses in excess of VaR over the course of a year. The number of backtesting excesses observed can differ from the statistically expected number of excesses if the current level of market volatility is materially different than the level of market volatility that existed during the three years of historical data used in the VaR calculation.
The trading revenue used for backtesting is defined by regulatory agencies in order to most closely align with the VaR component of the regulatory capital calculation. This revenue differs from total trading-related revenue in that it excludes revenue from trading activities that either do not generate market risk or the market risk cannot be included in VaR. Some examples of the types of revenue excluded for backtesting are fees, commissions, reserves, net interest income and intra-day trading revenues.
We conduct daily backtesting on the VaR results used for regulatory capital calculations as well as the VaR results for key legal entities, regions and risk factors. These results are reported to senior market risk management. Senior management regularly reviews and evaluates the results of these tests.
During 2020, there were seven days where this subset of trading revenue had losses that exceeded our total covered portfolio VaR, utilizing a one-day holding period.
Total Trading-related Revenue
Total trading-related revenue, excluding brokerage fees, and CVA, DVA and funding valuation adjustment gains (losses), represents the total amount earned from trading positions, including market-based net interest income, which are taken in a diverse range of financial instruments and markets. For more information on fair value, see Note 20 – Fair Value Measurements to the Consolidated Financial Statements.
Trading-related revenue can be volatile and is largely driven by general market conditions and customer demand. Also, trading-related revenue is dependent on the volume and type of transactions, the level of risk assumed, and the volatility of price and rate movements at any given time within the ever-changing market environment. Significant daily revenue by business is monitored and the primary drivers of these are reviewed.
The following histogram is a graphic depiction of trading volatility and illustrates the daily level of trading-related revenue for 2020 and 2019. During 2020, positive trading-related revenue was recorded for 98 percent of the trading days, of which 87 percent were daily trading gains of over $25 million, and the largest loss was $90 million. This compares to 2019 where positive trading-related revenue was recorded for 98 percent of the trading days, of which 80 percent were daily trading gains of over $25 million, and the largest loss was $35 million.
Trading Portfolio Stress Testing
Because the very nature of a VaR model suggests results can exceed our estimates and it is dependent on a limited historical window, we also stress test our portfolio using scenario analysis. This analysis estimates the change in the value of our trading portfolio that may result from abnormal market movements.
A set of scenarios, categorized as either historical or hypothetical, are computed daily for the overall trading portfolio and individual businesses. These scenarios include shocks to underlying market risk factors that may be well beyond the shocks found in the historical data used to calculate VaR. Historical scenarios simulate the impact of the market moves that occurred during a period of extended historical market stress. Generally, a multi-week period representing the most
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severe point during a crisis is selected for each historical scenario. Hypothetical scenarios provide estimated portfolio impacts from potential future market stress events. Scenarios are reviewed and updated in response to changing positions and new economic or political information. In addition, new or ad hoc scenarios are developed to address specific potential market events or particular vulnerabilities in the portfolio. The stress tests are reviewed on a regular basis and the results are presented to senior management.
Stress testing for the trading portfolio is integrated with enterprise-wide stress testing and incorporated into the limits framework. The macroeconomic scenarios used for enterprise-wide stress testing purposes differ from the typical trading portfolio scenarios in that they have a longer time horizon and the results are forecasted over multiple periods for use in consolidated capital and liquidity planning. For more information, see Managing Risk on page 47.
Interest Rate Risk Management for the Banking Book
The following discussion presents net interest income for banking book activities.
Interest rate risk represents the most significant market risk exposure to our banking book balance sheet. Interest rate risk is measured as the potential change in net interest income caused by movements in market interest rates. Client-facing activities, primarily lending and deposit-taking, create interest rate sensitive positions on our balance sheet.
We prepare forward-looking forecasts of net interest income. The baseline forecast takes into consideration expected future business growth, ALM positioning -and the direction of interest rate movements as implied by the market-based forward curve.
We then measure and evaluate the impact that alternative interest rate scenarios have on the baseline forecast in order to assess interest rate sensitivity under varied conditions. The net interest income forecast is frequently updated for changing assumptions and differing outlooks based on economic trends, market conditions and business strategies. Thus, we continually monitor our balance sheet position in order to maintain an acceptable level of exposure to interest rate changes.
The interest rate scenarios that we analyze incorporate balance sheet assumptions such as loan and deposit growth and pricing, changes in funding mix, product repricing, maturity characteristics and investment securities premium amortization. Our overall goal is to manage interest rate risk so that movements in interest rates do not significantly adversely affect earnings and capital.
Table 46 presents the spot and 12-month forward rates used in our baseline forecasts at December 31, 2020 and 2019.
| Table 46 | Forward Rates | |||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||
| Federal Funds | Three-month LIBOR | 10-Year Swap | ||||||||||||||||||
| Spot rates | 0.25 | % | 0.24 | % | 0.93 | % | ||||||||||||||
| 12-month forward rates | 0.25 | 0.19 | 1.06 | |||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||
| Spot rates | 1.75 | % | 1.91 | % | 1.90 | % | ||||||||||||||
| 12-month forward rates | 1.50 | 1.62 | 1.92 | |||||||||||||||||
Table 47 shows the pretax impact to forecasted net interest income over the next 12 months from December 31, 2020 and 2019 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. The interest rate scenarios also assume U.S. dollar rates are floored at zero.
During 2020, the asset sensitivity of our balance sheet increased in both up-rate and down-rate scenarios primarily due to continued deposit growth invested in long-term securities. We continue to be asset sensitive to a parallel upward 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 51.
| Table 47 | Estimated Banking Book Net Interest Income Sensitivity to Curve Changes | |||||||||||||||||||||||||
| Short Rate (bps) | Long Rate (bps) | |||||||||||||||||||||||||
| December 31 | ||||||||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | ||||||||||||||||||||||||
| Parallel Shifts | ||||||||||||||||||||||||||
+100 bps instantaneous shift | +100 | +100 | $ | 10,468 | $ | 4,190 | ||||||||||||||||||||
-25 bps instantaneous shift | -25 | -25 | (2,766) | (1,500) | ||||||||||||||||||||||
| Flatteners | ||||||||||||||||||||||||||
Short-end instantaneous change | +100 | — | 6,321 | 2,641 | ||||||||||||||||||||||
Long-end instantaneous change | — | -25 | (1,686) | (653) | ||||||||||||||||||||||
| Steepeners | ||||||||||||||||||||||||||
Short-end instantaneous change | -25 | — | (1,084) | (844) | ||||||||||||||||||||||
Long-end instantaneous change | — | +100 | 4,333 | 1,561 | ||||||||||||||||||||||
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 deposits 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 non-interest-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
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activities, see Note 3 – Derivatives to the Consolidated Financial Statements.
Our interest rate contracts are generally non-leveraged generic interest rate and foreign exchange basis swaps, options, futures and forwards. In addition, we use foreign exchange contracts, including cross-currency interest rate swaps, foreign currency futures contracts, foreign currency forward contracts and options to mitigate the foreign exchange risk associated with foreign currency-denominated assets and liabilities.
Changes to the composition of our derivatives portfolio during 2020 reflect actions taken for interest rate and foreign exchange rate risk management. The decisions to reposition our derivatives portfolio are based on the current assessment of economic and financial conditions including the interest rate and foreign currency environments, balance sheet composition and trends, and the relative mix of our cash and derivative positions.
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 results on both open and terminated cash flow hedge derivative instruments recorded in accumulated OCI were a gain of $580 million and a loss of $496 million, on a pretax basis, at December 31, 2020 and 2019. These gains and 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 December 31, 2020, the after-tax net gains are expected to be reclassified into earnings as follows: a gain of $187 million within the next year, a gain of $358 million in years two through five, a loss of $59 million in years six through ten, with the remaining loss of $50 million 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 December 31, 2020.
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 December 31, 2020 and 2019. These amounts do not include derivative hedges on our MSRs. During 2020, the fair value of receive-fixed interest rate swaps increased while pay-fixed interest swaps decreased, primarily driven by lower swap rates on hedges of U.S. dollar long-term debt.
| Table 48 | Asset and Liability Management Interest Rate and Foreign Exchange Contracts | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Expected Maturity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in millions, average estimated duration in years) | Fair Value | Total | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Average Estimated Duration | |||||||||||||||||||||||||||||||||||||||||||||||
Receive-fixed interest rate swaps (1) | $ | 14,885 | 8.08 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notional amount | $ | 269,015 | $ | 11,050 | $ | 20,908 | $ | 30,654 | $ | 31,317 | $ | 32,898 | $ | 142,188 | ||||||||||||||||||||||||||||||||||||||||||
| Weighted-average fixed-rate | 1.54 | % | 3.25 | % | 0.91 | % | 1.48 | % | 1.17 | % | 1.07 | % | 1.69 | % | ||||||||||||||||||||||||||||||||||||||||||
Pay-fixed interest rate swaps (1) | (5,502) | 6.52 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notional amount | $ | 252,698 | $ | 7,562 | $ | 21,667 | $ | 24,671 | $ | 24,406 | $ | 32,052 | $ | 142,340 | ||||||||||||||||||||||||||||||||||||||||||
| Weighted-average fixed-rate | 0.89 | % | 0.57 | % | 0.10 | % | 1.28 | % | 0.86 | % | 0.68 | % | 1.00 | % | ||||||||||||||||||||||||||||||||||||||||||
Same-currency basis swaps (2) | (235) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notional amount | $ | 223,659 | $ | 18,769 | $ | 12,245 | $ | 9,747 | $ | 22,737 | $ | 28,222 | $ | 131,939 | ||||||||||||||||||||||||||||||||||||||||||
Foreign exchange basis swaps (1, 3, 4) | (1,014) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notional amount | 112,465 | 27,424 | 16,038 | 8,066 | 3,819 | 4,446 | 52,672 | |||||||||||||||||||||||||||||||||||||||||||||||||
Foreign exchange contracts (1, 4, 5) | 349 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Notional amount (6) | (42,490) | (69,299) | 2,841 | 2,505 | 4,735 | 4,369 | 12,359 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Futures and forward rate contracts | 47 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notional amount | 14,255 | 14,255 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Option products | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notional amount | 17 | — | — | 17 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net ALM contracts | $ | 8,530 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
83 Bank of America | ||||||||