Bank of America Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Commitments and Contingencies

Commitments and Contingencies

9 Months Ended

Sep. 30, 2018

Commitments and Contingencies Disclosure [Abstract]

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 2017 Annual Report on Form 10-K.

Credit Extension Commitments

The Corporation enters into commitments to extend credit such as loan commitments, SBLCs and commercial letters of credit to meet the financing needs of its customers. The following table includes the notional amount of unfunded legally binding lending commitments net of amounts distributed (i.e., syndicated or participated) to other financial institutions. The distributed amounts were $10.8 billion and $11.0 billion at September 30, 2018 and December 31, 2017. At September 30, 2018, the carrying value of these commitments, excluding commitments accounted for under the fair value option, was $808 million, including deferred revenue of $16 million and a reserve for unfunded lending commitments of $792 million. At December 31, 2017, the comparable amounts were $793 million, $16 million and $777 million, respectively. The carrying value of these commitments is classified in accrued expenses and other liabilities on the Consolidated Balance Sheet.

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.

The following table also includes the notional amount of commitments of $3.2 billion and $4.8 billion at September 30, 2018 and December 31, 2017 that are accounted for under the fair value option. However, the following table excludes cumulative net fair value of $70 million and $120 million at September 30, 2018 and December 31, 2017 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.




Credit Extension Commitments

	Expire in One Year or Less		Expire After One Year Through Three Years		Expire After Three Years Through Five Years		Expire After Five Years		Total
(Dollars in millions)	September 30, 2018
Notional amount of credit extension commitments
Loan commitments	$	86,501	$	142,327	$	154,991	$	22,724	$	406,543
Home equity lines of credit	3,203		2,494		3,115		34,411		43,223
Standby letters of credit and financial guarantees ⁽¹⁾	20,653		9,838		2,555		1,151		34,197
Letters of credit	1,262		223		74		73		1,632
Legally binding commitments	111,619		154,882		160,735		58,359		485,595
Credit card lines ⁽²⁾	373,295		—		—		—		373,295
Total credit extension commitments	$	484,914	$	154,882	$	160,735	$	58,359	$	858,890

	December 31, 2017
Notional amount of credit extension commitments
Loan commitments	$	85,804	$	140,942	$	147,043	$	21,342	$	395,131
Home equity lines of credit	6,172		4,457		2,288		31,250		44,167
Standby letters of credit and financial guarantees ⁽¹⁾	19,976		11,261		3,420		1,144		35,801
Letters of credit	1,291		117		129		87		1,624
Legally binding commitments	113,243		156,777		152,880		53,823		476,723
Credit card lines ⁽²⁾	362,030		—		—		—		362,030
Total credit extension commitments	$	475,273	$	156,777	$	152,880	$	53,823	$	838,753

⁽¹⁾

The notional amounts of SBLCs and financial guarantees classified as investment grade and non-investment grade based on the credit quality of the underlying reference name within the instrument were $26.9 billion and $6.9 billion at September 30, 2018, and $27.3 billion and $8.1 billion at December 31, 2017. Amounts in the table include consumer SBLCs of $402 million and $421 million at September 30, 2018 and December 31, 2017.


⁽²⁾	Includes business card unused lines of credit.

Other Commitments

At September 30, 2018 and December 31, 2017, the Corporation had commitments to purchase loans (e.g., residential mortgage and commercial real estate) of $341 million and $344 million, and commitments to purchase commercial loans of $764 million and $994 million, which upon settlement will be included in loans or LHFS.

At September 30, 2018 and December 31, 2017, the Corporation had commitments to purchase commodities, primarily liquefied natural gas, of $1.7 billion and $1.5 billion, which upon settlement will be included in trading account assets.

At September 30, 2018 and December 31, 2017, the Corporation had commitments to enter into resale and forward-dated resale and securities borrowing agreements of $80.2 billion and $56.8 billion, and commitments to enter into forward-dated repurchase and securities lending agreements of $40.3 billion and $34.3 billion. These commitments expire primarily within the next 15 months.

At both September 30, 2018 and December 31, 2017, the Corporation had a commitment to originate or purchase up to $3.0 billion, on a rolling 12-month basis, of auto loans and leases from a strategic partner. This commitment extends through November 2022 and can be terminated with 12 months prior notice. In addition, at December 31, 2017, the Corporation had a commitment to purchase a maximum of $345 million of retail automobile loans from certain auto loan originators, which was terminated in the first quarter of 2018.

The Corporation is a party to operating leases for certain of its premises and equipment. Commitments under these leases are approximately $600 million, $2.3 billion, $2.1 billion, $1.9 billion and $1.6 billion for the remainder of 2018 and the years through 2022, respectively, and $6.3 billion in the aggregate for all years thereafter.

Other Guarantees

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 both September 30, 2018 and December 31, 2017, the notional amount of these guarantees totaled $10.4 billion, and the Corporation’s maximum exposure related to these guarantees totaled $1.6 billion at both period ends, with estimated maturity dates between 2033 and 2039.

Merchant Services

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. 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 and nine months ended September 30, 2018 , the sponsored entities processed and settled $220.0 billion and $646.9 billion of transactions and recorded losses of $6 million and $23 million. For the same periods in 2017, the sponsored entities processed and settled $200.4 billion and $591.8 billion of transactions and recorded losses of $7 million and $22 million. A significant portion of this activity was processed by a joint venture in which the Corporation holds a 49 percent ownership. The carrying value of the Corporation’s investment in the merchant services joint venture was $2.8 billion and $2.9 billion at September 30, 2018 and December 31, 2017, and is recorded in other assets on the Consolidated Balance Sheet and in All Other.

At September 30, 2018 and December 31, 2017, the maximum potential exposure for sponsored transactions totaled $363.0 billion and $346.4 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.

Representations and Warranties Obligations and Corporate Guarantees

For information on representations and warranties obligations and corporate guarantees and the related reserve and estimated range of possible loss, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements of the Corporation’s 2017 Annual Report on Form 10-K.

The reserve for representations and warranties and corporate guarantees was $2.0 billion and $1.9 billion at September 30, 2018 and December 31, 2017 and is included in accrued expenses and other liabilities on the Consolidated Balance Sheet and the related provision is included in other income in the Consolidated Statement of Income. The representations and warranties reserve represents the Corporation’s best estimate of probable incurred losses. It is reasonably possible that future representations and warranties losses may occur in excess of the amounts recorded for these exposures.

Other 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 $6.0 billion and $5.9 billion at September 30, 2018 and December 31, 2017. 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

On June 1, 2017, the Corporation sold its non-U.S. consumer credit card business. Included in the calculation of the gain on sale, the Corporation recorded an obligation to indemnify the purchaser for substantially all payment protection insurance exposure above reserves assumed by the purchaser.

Guarantees of Certain Long-term Debt

The Corporation, as the parent company, fully and unconditionally guarantees the securities issued by BofA Finance LLC, a 100 percent owned finance subsidiary of the Corporation, and effectively provides for the full and unconditional guarantee of trust securities issued by certain statutory trust companies that are 100 percent owned finance subsidiaries of the Corporation.

Litigation and Regulatory Matters

The following supplements the disclosure in Note 12 – Commitments and Contingencies to the Consolidated Financial Statements of the Corporation’s 2017 Annual Report on Form 10-K and in Note 10 – Commitments and Contingencies to the Consolidated Financial Statements of the Corporation’s Quarterly Reports on Form 10-Q for the quarters ended June 30, 2018 and March 31, 2018 (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 pending or threatened 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 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. Excluding expenses of internal and external legal service providers, litigation-related expense of $90 million and $292 million was recognized for the three and nine months ended September 30, 2018 compared to $140 million and $606 million for the same periods in 2017.

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 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 reasonably possible, management currently estimates the aggregate range of possible loss is $0 to $1.2 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.

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.

LIBOR, Other Reference Rates, Foreign Exchange (FX) and Bond Trading Matters

In the LIBOR matters, in July 2018, the U.S. Court of Appeals for the Second Circuit denied plaintiffs’ petition for an interlocutory appeal of the district court’s denial of certification of a class of lending institution plaintiffs, and, in September 2018, denied defendants’ petition for an interlocutory appeal of the district court’s certification of antitrust claims brought by the over-the-counter class of plaintiffs.