Commitments and Contingencies
|3 Months Ended
Mar. 31, 2017
|Commitments and Contingencies Disclosure [Abstract]
|Commitments and Contingencies
Commitments and Contingencies
In the normal course of business, the Corporation enters into a number of off-balance sheet commitments. These commitments expose the Corporation to varying degrees of credit and market risk and are subject to the same credit and market risk limitation reviews as those instruments recorded on the Consolidated Balance Sheet. For more information on commitments and contingencies, see Note 12 – Commitments and Contingencies to the Consolidated Financial Statements of the Corporation's 2016 Annual Report on Form 10-K.
Credit Extension Commitments
The Corporation enters 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 its customers. The table below includes the notional amount of unfunded legally binding lending commitments net of amounts distributed (e.g., syndicated or participated) to other financial institutions. The distributed amounts were $11.9 billion and $12.1 billion at March 31, 2017 and December 31, 2016. At March 31, 2017, the carrying value of these commitments, excluding commitments accounted for under the fair value option, was $776 million, including deferred revenue of $19 million and a reserve for unfunded lending commitments of $757 million. At December 31, 2016, the comparable amounts were $779 million, $17 million and $762 million, respectively. The carrying value of these commitments is classified in accrued expenses and other liabilities on the Consolidated Balance Sheet.
The table below also includes the notional amount of commitments of $5.9 billion and $7.0 billion at March 31, 2017 and December 31, 2016 that are accounted for under the fair value option. However, the table below excludes cumulative net fair value of $135 million and $173 million on these commitments, which is classified in accrued expenses and other liabilities. For more information regarding the Corporation’s loan commitments accounted for under the fair value option, see Note 15 – Fair Value Option.
Legally binding commitments to extend credit generally have specified rates and maturities. Certain of these commitments have adverse change clauses that help to protect the Corporation against deterioration in the borrower’s ability to pay.
At March 31, 2017 and December 31, 2016, the Corporation had commitments to purchase loans (e.g., residential mortgage and commercial real estate) of $537 million and $767 million, and commitments to purchase commercial loans of $564 million and $636 million, which upon settlement will be included in loans or LHFS.
At March 31, 2017 and December 31, 2016, the Corporation had commitments to purchase commodities, primarily liquefied natural gas of $1.5 billion and $1.9 billion, which upon settlement will be included in trading account assets.
At March 31, 2017 and December 31, 2016, the Corporation had commitments to enter into resale and forward-dated resale and securities borrowing agreements of $61.5 billion and $48.9 billion, and commitments to enter into forward-dated repurchase and securities lending agreements of $36.6 billion and $24.4 billion. These commitments expire within the next 12 months.
The Corporation has entered into agreements to purchase retail automotive loans from certain auto loan originators. These agreements provide for stated purchase amounts and contain cancellation provisions that allow the Corporation to terminate its commitment to purchase at any time, with a minimum notification period. At March 31, 2017 and December 31, 2016, the Corporation’s maximum purchase commitment was $175 million and $475 million. In addition, the Corporation has a commitment to originate or purchase auto loans and leases from a strategic partner up to $1.9 billion for the remainder of 2017, with this commitment expiring on December 31, 2017.
The Corporation is a party to operating leases for certain of its premises and equipment. Commitments under these leases are approximately $1.7 billion, $2.2 billion, $1.9 billion, $1.7 billion and $1.4 billion for the remainder of 2017 and the years through 2021, respectively, and $5.1 billion in the aggregate for all years thereafter.
Bank-owned Life Insurance Book Value Protection
The Corporation sells products that offer book value protection to insurance carriers who offer group life insurance policies to corporations, primarily banks. At March 31, 2017 and December 31, 2016, the notional amount of these guarantees, which are recorded as derivatives totaled $14.0 billion and $13.9 billion. At both March 31, 2017 and December 31, 2016, the Corporation’s maximum exposure related to these guarantees totaled $3.2 billion, with estimated maturity dates between 2031 and 2039. The net fair value including the fee receivable associated with these guarantees was $3 million and $4 million at March 31, 2017 and December 31, 2016, and reflects the probability of surrender as well as the multiple structural protection features in the contracts.
In accordance with credit and debit card association rules, the Corporation sponsors merchant processing servicers that process credit and debit card transactions on behalf of various merchants. In connection with these services, a liability may arise in the event of a billing dispute between the merchant and a cardholder that is ultimately resolved in the cardholder’s favor. If the merchant defaults on its obligation to reimburse the cardholder, the cardholder, through its issuing bank, generally has until six months after the date of the transaction to present a chargeback to the merchant processor, which is primarily liable for any losses on covered transactions. However, if the merchant processor fails to meet its obligation to reimburse the cardholder for disputed transactions, then the Corporation, as the sponsor, could be held liable for the disputed amount. For the three months ended March 31, 2017 and 2016, the sponsored entities processed and settled $186.8 billion and $159.4 billion of transactions and recorded losses of $7 million and $6 million. A significant portion of this activity was processed by a joint venture in which the Corporation holds a 49 percent ownership, and is recorded in other assets on the Consolidated Balance Sheet and in All Other. At both March 31, 2017 and December 31, 2016, the carrying value of the Corporation's investment in the merchant services joint venture was $2.9 billion. At March 31, 2017 and December 31, 2016, the sponsored merchant processing servicers held as collateral $210 million and $188 million of merchant escrow deposits which may be used to offset amounts due from the individual merchants.
The Corporation believes the maximum potential exposure for chargebacks would not exceed the total amount of merchant transactions processed through Visa and MasterCard for the last six months, which represents the claim period for the cardholder, plus any outstanding delayed-delivery transactions. As of March 31, 2017 and December 31, 2016, the maximum potential exposure for sponsored transactions totaled $322.8 billion and $325.7 billion. However, the Corporation believes that the maximum potential exposure is not representative of the actual potential loss exposure and does not expect to make material payments in connection with these guarantees.
The Corporation has entered into additional guarantee agreements and commitments, including sold risk participation swaps, liquidity facilities, lease-end obligation agreements, partial credit guarantees on certain leases, real estate joint venture guarantees, divested business commitments and sold put options that require gross settlement. The maximum potential future payment under these agreements was approximately $6.4 billion and $6.7 billion at March 31, 2017 and December 31, 2016. The estimated maturity dates of these obligations extend up to 2040. The Corporation has made no material payments under these guarantees.
In the normal course of business, the Corporation periodically guarantees the obligations of its affiliates in a variety of transactions including ISDA-related transactions and non-ISDA related transactions such as commodities trading, repurchase agreements, prime brokerage agreements and other transactions.
Payment Protection Insurance Claims Matter
In the U.K., the Corporation previously sold PPI through its international card services business to credit card customers and consumer loan customers. In response to customer complaints across the industry, media coverage and pressure from consumer advocacy groups, the Prudential Regulation Authority and the Financial Conduct Authority (FCA) investigated and raised concerns about the way some companies handled complaints related to the sale of these insurance policies. On March 2, 2017, the FCA issued its final rules and guidance on PPI complaints and included an August 29, 2019 deadline for customers to file a complaint.
On December 20, 2016, the Corporation entered into an agreement to sell its non-U.S. consumer credit card business to a third party. Subject to regulatory approval, this transaction is expected to close by mid-2017. After closing, the Corporation will retain substantially all PPI exposure above existing reserves. The Corporation has considered this exposure in its estimate of a small after-tax gain on the sale.
The reserve for PPI claims was $225 million and $252 million at March 31, 2017 and December 31, 2016. The Corporation recorded no expense for the three months ended March 31, 2017 and 2016.
Litigation and Regulatory Matters
The following supplements the disclosure in Note 12 – Commitments and Contingencies to the Consolidated Financial Statements of the Corporation's 2016 Annual Report on Form 10-K (the prior commitments and contingencies disclosure).
In the ordinary course of business, the Corporation and its subsidiaries are routinely defendants in or parties to many pending and threatened legal, regulatory and governmental actions and proceedings.
In view of the inherent difficulty of predicting the outcome of such matters, particularly where the claimants seek very large or indeterminate damages or where the matters present novel legal theories or involve a large number of parties, the Corporation generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be.
In accordance with applicable accounting guidance, the Corporation establishes an accrued liability when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. As a matter develops, the Corporation, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. Once the loss contingency is deemed to be both probable and estimable, the Corporation will establish an accrued liability and record a corresponding amount of litigation-related expense. The Corporation continues to monitor the matter for further developments that could affect the amount of the accrued liability that has been previously established. Excluding expenses of internal and external legal service providers, litigation-related expense of $274 million and $388 million was recognized for the three months ended March 31, 2017 and 2016.
For a limited number of the matters disclosed in this Note, and in the prior commitments and contingencies disclosure, for which a loss, whether in excess of a related accrued liability or where there is no accrued liability, is reasonably possible in future periods, the Corporation is able to estimate a range of possible loss. In determining whether it is possible to estimate a range of possible loss, the Corporation reviews and evaluates its matters on an ongoing basis, in conjunction with any outside counsel handling the matter, in light of potentially relevant factual and legal developments. In cases in which the Corporation possesses sufficient appropriate information to estimate a range of possible loss, that estimate is aggregated and disclosed below. There may be other disclosed matters for which a loss is probable or reasonably possible but such an estimate of the range of possible loss may not be possible. For those matters where an estimate of the range of possible loss is possible, management currently estimates the aggregate range of possible loss is $0 to $1.5 billion in excess of the accrued liability (if any) related to those matters. This estimated range of possible loss is based upon currently available information and is subject to significant judgment and a variety of assumptions, and known and unknown uncertainties. The matters underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate. Therefore, this estimated range of possible loss represents what the Corporation believes to be an estimate of possible loss only for certain matters meeting these criteria. It does not represent the Corporation’s maximum loss exposure. Information is provided below, or in the prior commitments and contingencies disclosure, regarding the nature of all of these contingencies and, where specified, the amount of the claim associated with these loss contingencies. Based on current knowledge, management does not believe that loss contingencies arising from pending matters, including the matters described herein and in the prior commitments and contingencies disclosure, will have a material adverse effect on the consolidated financial position or liquidity of the Corporation. However, in light of the inherent uncertainties involved in these matters, some of which are beyond the Corporation’s control, and the very large or indeterminate damages sought in some of these matters, an adverse outcome in one or more of these matters could be material to the Corporation’s results of operations or liquidity for any particular reporting period.
Deposit Insurance Assessment
On February 24, 2017, BANA filed an answer to the complaint in which it disputed the Federal Deposit Insurance Corporation's (FDIC) claims and asserted a counterclaim against the FDIC challenging the validity of the 2011 and 2012 FDIC rules on which the FDIC's complaint is based. On March 9, 2017, the FDIC invoiced BANA for additional deposit insurance and interest in the amount of $583 million for the quarters ending March 31, 2012 through March 31, 2013. On April 7, 2017, the FDIC amended its complaint to add a claim for this additional amount. Pending final resolution, BANA has pledged security satisfactory to the FDIC related to the disputed additional assessment amounts reflected in the FDIC's December 15, 2016 and March 9, 2017 invoices.
Interchange and Related Litigation
On March 27, 2017, the United States Supreme Court denied the certiorari petition filed by counsel for the class seeking review of the Second Circuit decision.
U.S. Bank -- Harborview Mortgage Repurchase Litigation
On March 6, 2017, U.S. Bank, National Association (U.S. Bank), as trustee for the HarborView Mortgage Loan Trust 2005-10, filed a petition in the State of Minnesota, Hennepin County District Court, seeking instructions from that court regarding, among other things, the acceptance or rejection of the proposed settlement and the proposed allocation and distribution of any settlement proceeds received by U.S. Bank as trustee (the "Minnesota Action"). On March 23, 2017, the New York state court in the underlying action entered a stipulated order implementing a stay pending resolution of the Minnesota Action. Certain stakeholders have filed separate actions in New York federal court and Minnesota state court seeking, among other things, to enjoin U.S. Bank's acceptance of the proposed settlement.