10-K: Annual report pursuant to Section 13 and 15(d)
Published on February 22, 2018
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number:
1-6523
Exact name of registrant as specified in its charter:
Bank of America Corporation
State or other jurisdiction of incorporation or organization:
Delaware
IRS Employer Identification No.:
56-0906609
Address of principal executive offices:
Bank of America Corporate Center
100 N. Tryon Street
Charlotte, North Carolina 28255
Registrant’s telephone number, including area code:
(704) 386-5681
Securities registered pursuant to section 12(b) of the Act:
Title of each class |
Name of each exchange on which registered |
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Common Stock, par value $0.01 per share |
New York Stock Exchange |
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Warrants to purchase Common Stock (expiring October 28, 2018) |
New York Stock Exchange |
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Warrants to purchase Common Stock (expiring January 16, 2019) |
New York Stock Exchange |
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Depositary Shares, each representing a 1/1,000th interest in a share of 6.204% Non-Cumulative
Preferred Stock, Series D
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New York Stock Exchange |
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Depositary Shares, each representing a 1/1,000th interest in a share of Floating Rate Non-Cumulative
Preferred Stock, Series E
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New York Stock Exchange |
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Depositary Shares, each representing a 1/1,000th interest in a share of 6.625% Non-Cumulative
Preferred Stock, Series I
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New York Stock Exchange |
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Depositary Shares, each representing a 1/1,000th interest in a share of 6.625% Non-Cumulative
Preferred Stock, Series W
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New York Stock Exchange |
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Depositary Shares, each representing a 1/1,000th interest in a share of 6.500% Non-Cumulative
Preferred Stock, Series Y
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New York Stock Exchange |
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Depositary Shares, each representing a 1/1,000th interest in a share of 6.200% Non-Cumulative
Preferred Stock, Series CC
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New York Stock Exchange |
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Depositary Shares, each representing a 1/1,000th interest in a share of 6.000% Non-Cumulative Preferred Stock, Series EE |
New York Stock Exchange |
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Title of each class |
Name of each exchange on which registered |
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7.25% Non-Cumulative Perpetual Convertible Preferred Stock, Series L |
New York Stock Exchange |
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Depositary Shares, each representing a 1/1,200th interest in a share of Bank of America Corporation Floating Rate Non-Cumulative Preferred Stock, Series 1 |
New York Stock Exchange |
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Depositary Shares, each representing a 1/1,200th interest in a share of Bank of America Corporation Floating Rate Non-Cumulative Preferred Stock, Series 2 |
New York Stock Exchange |
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Depositary Shares, each representing a 1/1,200th interest in a share of Bank of America Corporation 6.375% Non-Cumulative Preferred Stock, Series 3 |
New York Stock Exchange |
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Depositary Shares, each representing a 1/1,200th interest in a share of Bank of America Corporation Floating Rate Non-Cumulative Preferred Stock, Series 4 |
New York Stock Exchange |
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Depositary Shares, each representing a 1/1,200th interest in a share of Bank of America Corporation Floating Rate Non-Cumulative Preferred Stock, Series 5 |
New York Stock Exchange |
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7.00% Capital Securities of Countrywide Capital V (and the guarantees related thereto) |
New York Stock Exchange |
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Floating Rate Preferred Hybrid Income Term Securities of BAC Capital Trust XIII (and the guarantee related thereto) |
New York Stock Exchange |
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5.63% Fixed to Floating Rate Preferred Hybrid Income Term Securities of BAC Capital Trust XIV (and the guarantee related thereto) |
New York Stock Exchange |
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MBNA Capital B Floating Rate Capital Securities, Series B (and the guarantee related thereto) |
New York Stock Exchange |
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Trust Preferred Securities of Merrill Lynch Capital Trust I (and the guarantee of the Registrant with respect thereto) |
New York Stock Exchange |
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Trust Preferred Securities of Merrill Lynch Capital Trust III (and the guarantee of the Registrant with respect thereto) |
New York Stock Exchange |
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Senior Medium-Term Notes, Series A, Step Up Callable Notes, due November 28, 2031 of BofA Finance LLC (and the guarantee of the Registrant with respect thereto) |
New York Stock Exchange |
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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 o 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 o 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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☑
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. (Check one):
Large accelerated filer ☑
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o
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Emerging growth company o
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(do not check if a smaller reporting company) |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ☑
The aggregate market value of the registrant’s common stock (“Common Stock”) held on June 30, 2017 by non-affiliates was approximately $239,643,149,085 (based on the June 30, 2017 closing price of Common Stock of $24.26 per share as reported on the New York Stock Exchange). At February 21, 2018, there were 10,243,688,896 shares of Common Stock outstanding.
Documents incorporated by reference: Portions of the definitive proxy statement relating to the registrant’s annual meeting of stockholders scheduled to be held on April 25, 2018 are incorporated by reference in this Form 10-K in response to Items 10, 11, 12, 13 and 14 of Part III.
Table of Contents
Bank of America Corporation and Subsidiaries
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Item 16. |
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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” 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 regarding us on our website. Accordingly, investors should monitor the Investor Relations portion of our website, in addition to following our press releases, 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 under the heading
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Financial Information SEC Filings as soon as reasonably practicable after we electronically file such reports with, or furnish them to, the U.S. Securities and Exchange Commission (SEC). 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 under the heading Corporate Governance: (i) our Code of Conduct (including our insider trading policy); (ii) our Corporate Governance Guidelines (accessible by clicking on the Governance Highlights link); and (iii) the charter of each active committee of our Board of Directors (the Board) (accessible by clicking on the committee names under the Committee Composition link). We also intend to disclose any amendments to our Code of Conduct, or waivers of our Code of Conduct on behalf of our Chief Executive Officer, Chief Financial Officer or Chief Accounting Officer, on the Investor Relations portion of 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, Hearst Tower, 214 North Tryon Street, NC1-027-18-05, Charlotte, North Carolina 28255.
Segments
Through our banking and various nonbank subsidiaries throughout the U.S. and in international markets, we provide a diversified range of banking and nonbank financial services and products through four business segments: Consumer Banking, Global Wealth & Investment Management (GWIM), Global Banking and Global Markets, with the remaining operations recorded in All Other. Additional information related to our business segments and the products and services they provide is included in the information set forth on pages 30 through 39 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 in Item 8. Financial Statements and Supplementary Data (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, and e-commerce and other internet-based companies. We compete with some of these competitors globally and with others on a regional or product 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 motivate our existing employees, while managing compensation and other costs.
Employees
At December 31, 2017, we had approximately 209,000 employees. None of our domestic employees are subject to a collective bargaining agreement. Management considers our employee relations to be good.
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.
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. 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. Unless otherwise limited by the Federal Reserve, a financial holding company may engage directly or indirectly in activities considered financial in nature provided the financial holding company gives the Federal Reserve after-the-fact notice of the new activities. The Gramm-Leach-Bliley Act also permits national banks to engage in activities considered financial in nature through a financial subsidiary, subject to certain conditions and limitations and with the approval of the OCC.
The scope of the laws and regulations and the intensity of the supervision to which we are subject have increased in recent years in 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 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 operations 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, the New York Stock Exchange and the Financial Industry Regulatory Authority, among others; our commodities businesses in the U.S. are subject to regulation by and supervision of the U.S. Commodity Futures Trading Commission (CFTC); our U.S. derivatives activity is subject to regulation and supervision of the CFTC and National Futures Association or the SEC, 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 operations in the United Kingdom (U.K.) are subject to regulation
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by and supervision of the Prudential Regulatory Authority for prudential matters, and the Financial Conduct Authority (FCA) for the conduct of business matters.
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 its 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 (U.S. 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 Financial Reform Act requires the FDIC to assess insured depository institutions to achieve a DIF ratio of at least 1.35 percent by September 30, 2020. The FDIC has adopted regulations that establish a long-term target DIF ratio of greater than two percent. The DIF ratio is currently below the required targets and the FDIC has adopted a restoration plan that may result in increased deposit insurance assessments. In 2016, the FDIC implemented a surcharge to accelerate compliance with the 1.35 percentage requirement. 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 12.
Capital, Liquidity and Operational Requirements
As a financial holding company, we and our bank subsidiaries are subject to the regulatory capital and liquidity guidelines issued by the Federal Reserve and other U.S. banking regulators, including the FDIC and the OCC. These rules are complex and are evolving as U.S. and international regulatory authorities propose and enact enhanced capital and liquidity rules. The Corporation seeks to manage its capital position to maintain sufficient capital to meet these regulatory guidelines and to support our business activities. These evolving rules are likely to influence our planning processes for, and may require additional regulatory capital and liquidity, as well as impose additional operational and compliance costs on the Corporation. 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. The Federal Reserve has also issued a final rule requiring us to maintain minimum amounts of long-term debt meeting specified eligibility requirements.
For more information on regulatory capital rules, capital composition and pending or proposed regulatory capital changes, see Capital Management – Regulatory Capital in the MD&A on page 45, 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). The purpose of the CCAR for the Federal Reserve is to assess the capital planning process of the BHC, including any planned capital actions, such as payment of dividends and common stock repurchases.
Our ability to pay dividends is also affected by the various minimum capital requirements and the capital and non-capital standards established under the FDICIA. The right 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.
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.
Resolution Planning
As a BHC with greater than $50 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 a BHC and material entities pursuant to the U.S. Bankruptcy Code and other applicable resolution regimes 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 description of our plan is available on the Federal Reserve and FDIC websites.
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The FDIC also requires the submission of a resolution plan for Bank of America, N.A. (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.
Similarly, in the U.K., rules have been issued requiring the submission of significant information about certain U.K.-incorporated subsidiaries and other financial institutions, as well as branches of non-U.K. banks located in the U.K. (including information on intra-group dependencies, legal entity separation and barriers to resolution) to allow the Bank of England to develop resolution plans. As a result of the Bank of England’s review of the submitted information, we could be required to take certain actions over the next several years which 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 6.
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 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 Board has finalized regulations regarding the minimum levels of long-term debt required for BHCs 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 6.
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, 2017, 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, 2017, 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 EU Markets in Financial Instruments Directive and Regulation, the European Market Infrastructure Regulation 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; imposing derivatives trading transparency requirements; and requiring registration as swap dealers, major swap participants or analogous regulated entities. Most regulations of derivatives markets in which we operate are already in effect.
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 global systemically important banks (G-SIBs), and additional jurisdictions are expected to follow suit. We and 24 other G-SIBs have adhered to a protocol amending 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 U.S. bankruptcy proceedings. As resolution stay regulations of a particular jurisdiction go into effect, we amend financial contracts in compliance with such regulations.
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, but not limited to, the Equal Credit Opportunity Act, the Home Mortgage Disclosure
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Act, the Electronic Fund Transfer Act, the Fair Credit Reporting Act, the Real Estate Settlement Procedures Act, the 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 to protect 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. 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 to contact customers with marketing offers. The Gramm-Leach-Bliley Act also requires 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. These security and privacy policies and procedures for the protection of personal and confidential information are in effect across all businesses and geographic locations. The European Union (EU) has adopted the General Data Protection Regulation (GDPR) which replaces the Data Protection Directive and related implementing national laws in the Member States. The compliance date for the GDPR is May 25, 2018. It will have impacts across the enterprise and impact assessments are underway. Meanwhile other legislation, regulatory activity (the proposed e-Privacy Regulation, elements of the Fourth Money Laundering Directive) and court proceedings, and any impact of bilateral U.S. and EU political developments on the validity of cross-border data transfer mechanisms from the EU continue to lend uncertainty to privacy compliance in the EU.
Item 1A. Risk Factors
In the course of conducting our business operations, we are exposed to a variety of risks, some of which are inherent in the financial services industry and others of which are more specific to our own businesses. The discussion below addresses the most significant factors, of which we are currently aware, that could affect our businesses, results of operations and financial condition. Additional factors that could affect our businesses, results of operations and financial condition are discussed in Forward-looking Statements in the MD&A on page 19. However, other factors not discussed below or elsewhere in this Annual Report on Form 10-K could also adversely affect our businesses, results of operations and financial condition. Therefore, the risk factors below should not be considered a complete list of potential risks that we may face. For more information on how we manage risks, see Managing Risk in the MD&A on page 41.
Any risk factor described in this Annual Report on Form 10-K or in any of our other SEC filings could by itself, or together with other factors, materially adversely affect our liquidity, competitive position, business, reputation, results of operations, capital position or financial condition, including by materially increasing our expenses or decreasing our revenues, which could result in material losses.
Market
Our business and results of operations may be adversely affected by the U.S. and international financial markets, U.S. and non-U.S. fiscal and monetary policies and economic conditions generally.
Financial markets and general economic, political and social conditions in the U.S. and abroad, including the level and volatility of interest rates, unexpected changes in market financing conditions, gross domestic product (GDP) growth, inflation, consumer spending, employment levels, energy prices, home prices, bankruptcies, 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, investor sentiment and confidence, and the sustainability of economic growth all affect our business.
In the U.S. and abroad, uncertainties surrounding fiscal and monetary policies present economic challenges. Actions taken by the Federal Reserve, including the planned reduction in its balance sheet, and other central banks are beyond our control and difficult to predict and can affect interest rates and the value of financial instruments and other assets, such as debt securities and mortgage servicing rights (MSRs), and impact our borrowers, potentially increasing delinquency rates.
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 us. For example, significant fiscal policy initiatives, may 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 to certain trade policies or measures could upset financial markets, and disrupt world trade and commerce.
Any of these developments could adversely affect our consumer and commercial businesses, our securities and derivatives portfolios, our level of charge-offs and provision for credit losses, the carrying value of our deferred tax assets, our capital levels and liquidity and the costs of running our business, and our results of operations.
For more information about economic conditions and challenges discussed above, see Executive Summary – 2017 Economic and Business Environment in the MD&A on page 19.
Increased market volatility and adverse changes in other 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, equity and futures prices, the implied volatility of interest rates, credit spreads and other economic and business factors. These market risks may adversely affect, among other things, (i) the value of our on- and off-balance sheet securities, trading assets, other financial instruments and MSRs, (ii) the cost of debt capital and our access to credit markets, (iii) the value of assets under management (AUM), (iv) fee income relating to AUM, (v) customer allocation of capital among investment alternatives, (vi) the volume of client activity in our trading operations, (vii) investment banking fees, (viii) the general profitability and risk level of the transactions in which we engage and (ix) 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
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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. In addition, the ongoing low interest rate environment and recent flattening of the yield curve could negatively impact our liquidity, financial condition or results of operations, including 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. For more information regarding models and strategies, see Item 1A. Risk Factors – Other on page 15. 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 assumption or algorithms that are 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. In addition, challenging market conditions may also adversely affect our investment banking fees.
For more information about market risk and our market risk management policies and procedures, see Market Risk Management in the MD&A on page 76.
We may incur losses if the value of certain assets declines, including due to changes in interest rates and prepayment speeds.
We have a large portfolio of financial instruments, including, among others, certain loans and loan commitments, loans held-for-sale, securities financing agreements, asset-backed secured financings, long-term deposits, long-term debt, trading account assets and liabilities, derivative assets and liabilities, available-for-sale (AFS) debt and marketable equity securities, other debt securities, certain MSRs and certain other assets and liabilities that we measure at fair value. We determine the fair values of these instruments based on applicable accounting guidance which 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, including higher or lower mortgage banking income and earnings, unless we have effectively hedged our exposures. For example, decreases in interest rates and increases in mortgage prepayment speeds, which are influenced by interest rates and other factors such as reductions in mortgage insurance premiums and origination costs, could adversely impact the value of our MSR asset, causing a significant acceleration of purchase premium amortization on our mortgage portfolio, because a decline in long-term interest rates shortens the expected lives of the securities, and adversely affects our net interest margin. Conversely, 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 AFS, may adversely affect accumulated other comprehensive income and, thus, capital levels.
Fair values may be impacted by declining values of the underlying assets or the prices at which observable market transactions occur and the continued availability of these transactions. 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, which requires us to maintain additional capital and increases our funding costs. Asset values also directly impact revenues in our wealth management and related advisory businesses. We receive asset-based management fees based on the value of our clients’ portfolios or investments in funds managed by us and, in some cases, we also receive performance fees based on increases in the value of such investments. Declines in asset values can reduce the value of our clients’ portfolios or fund assets, which in turn can result in lower fees earned for managing such assets.
For more information on fair value measurements, see Note 20 – Fair Value Measurements to the Consolidated Financial Statements. For more information on our asset management businesses, see GWIM in the MD&A on page 33. For more information on interest rate risk management, see Interest Rate Risk Management for the Banking Book in the MD&A on page 81.
Liquidity
If we are unable to access the capital markets, 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; changes to our relationships with our funding providers based on real or perceived changes in our risk profile; changes in regulations or guidance that impact our funding avenues or ability to access certain funding sources; the refusal or inability of the Federal Reserve to act as lender of last resort; increased regulatory liquidity, capital and margin requirements for our U.S. or international banks and their nonbank subsidiaries; significant failure by a third party, such as a clearing agent or custodian; reputational issues; or negative perceptions about our short- or long-term business prospects, including downgrades of our credit ratings. Several of these factors may arise due to circumstances beyond our control, such as a general market disruption or shock, negative views about the financial services industry generally or a specific news event, changes in the regulatory environment, 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, redeem investments or unforeseen outflows of cash, including customer deposits, additional funding for commitments and contingencies, as well as unexpected collateral calls, among other things.
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Our cost of obtaining funding is directly related to prevailing market interest rates and to 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. 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. Additionally, concentrations within our funding profile, such as maturities, currencies or counterparties, can reduce our funding efficiency.
For more information about our liquidity position and other liquidity matters, including credit ratings and outlooks and the policies and procedures we use to manage our liquidity risks, see Liquidity Risk in the MD&A on page 49.
Adverse changes to our credit ratings from the major credit rating agencies could significantly limit our access to funding or the capital markets, increase our 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 when we 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 own financial strength, performance, prospects and operations as well as factors not under our control such as the likelihood of the U.S. government providing meaningful support to us or our subsidiaries in a crisis.
Rating agencies could make adjustments to our credit ratings at any time, and there can be no assurance that downgrades will not occur.
A reduction in certain of our credit ratings could 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, 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 increased cost of funds. 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.
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.
For more information on the amount of additional collateral required and derivative liabilities that would be subject to unilateral termination at December 31, 2017 if the rating agencies had downgraded their long-term senior debt ratings for the Corporation or certain subsidiaries by each of two incremental notches, see Credit-related Contingent Features and Collateral in Note 2 – Derivatives to the Consolidated Financial Statements.
For more information about our credit ratings and their potential effects to our liquidity, see Liquidity Risk – Credit Ratings in the MD&A on page 52 and Note 2 – Derivatives to the Consolidated Financial Statements.
Bank of America Corporation is a holding company and we depend upon our subsidiaries for liquidity, including the ability to pay dividends to shareholders and to fund payments on other obligations. Applicable laws and regulations, including capital and liquidity requirements, and actions taken pursuant to our resolution plan could restrict our ability to transfer funds from subsidiaries to Bank of America Corporation or other subsidiaries.
Bank of America Corporation, as the parent company, is a separate and distinct legal entity from our banking and nonbank subsidiaries. We evaluate and manage liquidity on a legal entity basis. Legal entity liquidity is an important consideration as there are legal, 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. The parent company depends on dividends, distributions, loans, advances and other payments from our banking 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. 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 Corporation 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. For more information regarding our ability to pay dividends, see Capital Management in the MD&A on page 45 and Note 13 – Shareholders’ Equity to the Consolidated Financial Statements.
In the event of our resolution under the single point of entry resolution strategy, such resolution could materially adversely affect our liquidity and financial condition and the ability to pay dividends to shareholders and to pay obligations.
Bank of America Corporation, our parent holding company, is required periodically to 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
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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 ability to meet our payment obligations.
In addition, 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. Further, we could be required to take certain actions that could impose operating costs and could potentially result in the divestiture or restructuring of certain businesses and subsidiaries.
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, insufficient credit loss reserves or concentration of credit risk may result in an increase in the provision for credit losses, which could have an adverse effect on our financial condition and results of operations.
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. The financial condition of our consumer and commercial borrowers, counterparties and underlying collateral could adversely affect our financial condition and results of operations.
Global and U.S. economic conditions may impact our credit portfolios. Economic or market disruptions would likely increase the risk that borrowers or counterparties would default or become delinquent in their obligations to us. Increases in delinquencies and default rates could adversely affect our consumer credit card, home equity, residential mortgage and purchased credit-impaired portfolios through increased charge-offs and provision for credit losses. Additionally, a deteriorating economic environment could also adversely affect our commercial loan portfolios with weakened client and collateral positions.
We estimate and establish an allowance for credit losses for losses inherent in our lending activities (including unfunded lending commitments), excluding those measured at fair value, through a charge to earnings. The process for determining the amount of the allowance requires us to make difficult and complex judgments, including loss forecasts on how borrowers will react to changing economic conditions. 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 estimate. There is also the possibility that we will fail to accurately identify the appropriate economic indicators or that we will fail to accurately estimate their impacts.
We may suffer unexpected losses if the models and assumptions we use to establish reserves and make judgments in extending credit to our borrowers or counterparties prove inaccurate in predicting future events. In addition, external factors, such as natural disasters, can influence recognition of credit losses in our portfolios and impact our allowance for credit losses. Although we believe that our allowance for credit losses was in compliance with applicable accounting standards at December 31, 2017, there is no guarantee that it will be sufficient to address credit losses, particularly if economic conditions deteriorate. In such an event, we may increase the size of our allowance which would reduce our earnings.
In the ordinary course of our business, we also may be subject to a concentration of credit risk in a particular industry, geographic location, counterparty, borrower or issuer. A deterioration in the financial condition or prospects of a particular industry or a failure or downgrade of, or default by, any particular entity or group of entities could negatively affect our businesses, and the processes by which we set limits and monitor the level of our credit exposure to individual entities, industries and countries may not function as we have 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, and other institutional clients. This has resulted 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, or even 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. 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.
In the ordinary course of business, we also enter into transactions with sovereign nations, U.S. states and U.S. municipalities. Unfavorable economic or political conditions, disruptions to capital markets, currency fluctuations, changes in oil prices, social instability and changes in government policies could impact the operating budgets or credit ratings of these government entities and expose us to credit risk.
We also have a concentration of credit risk with respect to our consumer real estate loans, including home equity lines of credit (HELOCs), auto loans, consumer credit card and commercial real estate portfolios, which represent a significant percentage of our overall credit portfolio. Our home equity portfolio includes HELOCs not yet in their amortization period. HELOCs that have entered the amortization period are characterized by a higher percentage of early stage delinquencies and nonperforming status relative to the HELOC portfolio as a whole. Loans in our HELOC portfolio generally have an initial draw period of 10 years and 10 percent of these
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loans will enter the amortization period during 2018. In addition, our home equity portfolio contains a significant percentage of loans in second-lien or more junior-lien positions which have elevated risk characteristics. As a result, delinquencies and defaults may increase in future periods. For more information, see Consumer Portfolio Credit Risk Management in the MD&A on page 54. Furthermore, our commercial portfolios include exposures to certain industries, including the energy sector. For more information, see Commercial Portfolio Credit Risk Management in the MD&A on page 63. Economic weaknesses, adverse business conditions, market disruptions, 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 higher credit losses in either our consumer or commercial portfolios or cause us to write-down the value of certain assets.
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 risk-weighted assets.
For more information about our credit risk and credit risk management policies and procedures, see Credit Risk Management in the MD&A on page 54, Note 1 – Summary of Significant Accounting Principles, Note 4 – Outstanding Loans and Leases and Note 5 – Allowance for Credit Losses to the Consolidated Financial Statements.
If the U.S. housing market weakens, or home prices decline, our consumer loan portfolios, credit quality, credit losses, representations and warranties exposures, and earnings may be adversely affected.
While U.S. home prices continued to improve during 2017, 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. Conditions in the U.S. housing market in prior years have also 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 negatively affect our exposure to representations and warranties and could have an adverse effect on 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, including credit derivatives. Our derivatives businesses 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 in the development, structuring or pricing of a derivative instrument. The terms of certain of our OTC derivative contracts and other trading agreements provide that upon the occurrence of certain specified events, such as a change in our credit ratings or that of certain of our subsidiaries, we may be required to provide additional collateral or other remedies, or our counterparties may have the right to terminate or otherwise diminish our rights under these contracts or agreements.
Many derivative instruments are individually negotiated and non-standardized, which can make exiting, transferring or settling some positions difficult. Many derivatives require that we deliver
to the counterparty the underlying security, loan or other obligation in order to receive payment. In a number of cases, we do not hold, and may not be able to obtain, the underlying security, loan or other obligation.
In the event of a downgrade of our credit ratings, certain derivative and other counterparties may request we substitute BANA (which has generally had equal or higher credit ratings than the parent company) as counterparty for certain derivative contracts and other trading agreements. Our ability to substitute or make changes to these agreements may be subject to certain limitations, including counterparty willingness, operational considerations, regulatory limitations on naming BANA as the new counterparty and the type or amount of collateral required. It is possible that such limitations on our ability to substitute or make changes to these agreements, including naming BANA as the new counterparty, could adversely affect our results of operations.
For more information on our derivatives exposure, see Note 2 – Derivatives to the Consolidated Financial Statements.
Geopolitical
We are subject to numerous political, economic, market, reputational, operational, legal, regulatory and other risks in the non-U.S. jurisdictions in which we operate.
We do business throughout the world, including in emerging markets. 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 governmental policies or policies of central banks, expropriation, nationalization and/or confiscation of assets, price controls, capital controls, redenomination risk, exchange controls, protectionist trade policies, and other restrictive actions, unfavorable political and diplomatic developments, oil price fluctuation and changes in legislation. These risks are especially elevated in emerging markets. A number of non-U.S. jurisdictions in which we do business have been negatively impacted by slow growth rates or recessionary conditions, market volatility and/or political unrest. The political and economic environment in Europe has improved but remains challenging and the current degree of political and economic uncertainty could increase. In the U.K., the ongoing negotiation of the terms of the exit of the U.K. from the EU continues to inject uncertainty.
Potential risks of default on sovereign debt in some non-U.S. jurisdictions could expose us to substantial losses. 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 have an adverse impact on our company.
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, 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
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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 have an adverse effect not only on our businesses in that market but also on our reputation in general.
In addition to non-U.S. legislation, our international operations are also subject to U.S. legal requirements. For example, our international operations are subject to U.S. laws on foreign corrupt practices, the Office of Foreign Assets Control, know-your-customer requirements and anti-money laundering regulations. Emerging technologies, such as cryptocurrencies, could limit our ability to track the movement of funds. Our ability to comply with these laws is dependent on our ability to improve detection and reporting capabilities and reduce variation in control processes and oversight accountability.
We are subject to geopolitical risks, including acts or threats of terrorism, and actions taken by the U.S. or other governments in response thereto and/or military conflicts, which could adversely affect business and economic conditions abroad as well as in the U.S.
For more information on our non-U.S. credit and trading portfolios, see Non-U.S. Portfolio in the MD&A on page 70.
The U.K. Referendum, and the potential exit of the U.K. from the EU, could adversely affect us.
We conduct business in Europe primarily through our U.K. subsidiaries. For the year ended December 31, 2017, our operations in Europe, Middle East and Africa, including the U.K., represented approximately nine percent of our total revenue, net of interest expense.
A referendum was held in the U.K. on June 23, 2016, which resulted in a majority vote in favor of exiting the EU. Negotiations between the EU and U.K. regarding this exit are ongoing and consist of three phases: a divorce agreement, a new trade deal and an arrangement for a transition period. There has been progress on the agreement of divorce bill, which is expected to be finalized in the next 12 months. A high degree of uncertainty remains on the timing and the details of a future trade agreement and transition phase. In this context, the ultimate impact of the U.K.’s exit remains unclear and episodes of economic and market volatility may occur. If uncertainty resulting from the U.K.’s exit negatively impacts economic conditions, financial markets and consumer confidence, our business, results of operations, financial position and/or operational model could be adversely affected. In addition, if the terms of the U.K.’s exit limit the ability of our U.K. entities to conduct business in the EU or otherwise result in a significant increase in economic barriers between the U.K. and the EU, it is possible these changes could impose additional costs on us, cause us to be subject to different laws, regulations and/or regulatory authorities, cause adverse tax consequences to us, and could adversely impact our business, financial condition and operational model.
Business Operations
A failure in or breach of our operational or security systems or infrastructure, or those of third parties, could disrupt our businesses, and adversely impact our results of operations, liquidity and financial condition, as well as 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, is not limited to our own internal operational functions. Our operational and security systems infrastructure and including our computer systems, data management and internal processes, as well as those of third parties, are integral to our performance. We rely on our employees
and third parties in our day-to-day and ongoing operations, who may, as a result of human error, misconduct, malfeasance or failure, or breach of systems or infrastructure, expose us to risk. We have taken measures to implement backup systems and other safeguards to support our operations, but our ability to conduct business may be adversely affected by any significant disruptions to us or to third parties with whom we interact or upon whom we rely. For example, technology project implementation challenges may cause business interruptions. In addition, our ability to implement backup systems and other safeguards with respect to third-party systems is more limited than with respect to our own systems. Our financial, accounting, data processing, 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. There could be sudden increases in customer transaction volume; electrical, telecommunications or other major physical infrastructure outages; newly identified vulnerabilities in key hardware or software; natural disasters such as earthquakes, tornadoes, hurricanes and floods; disease pandemics; and events arising from local or larger scale political or social matters, including terrorist acts. In the event that backup systems are utilized, they may not process data as quickly as our primary systems and some data might not have been backed up. We continuously 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. Operational risk exposures could adversely impact our results of operations, liquidity and financial condition, as well as cause 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, increase our costs to maintain and update our operational and security systems and infrastructure, and adversely impact our results of operations, liquidity and financial condition, as well as cause legal or reputational harm.
Our businesses are highly dependent on the security and efficacy of our infrastructure, computer and data management systems, as well as those of third parties with whom we interact or on whom we rely. Our businesses rely on the secure processing, transmission, storage and retrieval of confidential, proprietary 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 customers and other third parties may use personal mobile devices or computing devices that are outside of our network environment and are subject to their own cybersecurity risks.
We, our customers, regulators and other third parties have been subject to, and are likely to continue to be the target of, cyber attacks. These cyber attacks include computer viruses, malicious or destructive code, phishing attacks, denial of service or information or other security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information of ours, our employees, our customers or of third parties, damages to systems, or otherwise material disruption to our or our customers’ or other third parties’ network access or business
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operations. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities or incidents. Despite efforts to protect the integrity of our systems and implement controls, processes, policies and other protective measures, we may not be able to anticipate all security breaches, nor may we be able to implement guaranteed preventive measures against such security breaches. Cyber threats are rapidly evolving and we may not be able to anticipate or prevent all such attacks.
Cybersecurity risks for banking organizations have significantly increased in recent years in part because of the proliferation of new technologies, and the use of the Internet and telecommunications technologies to conduct financial transactions. For example, cybersecurity risks may increase in the future as we continue to increase our mobile-payment and other internet-based product offerings and expand our internal usage of web-based products and applications. In addition, cybersecurity risks have significantly increased in recent years in part due to the increased sophistication and activities of organized crime groups, hackers, terrorist organizations, hostile foreign governments, disgruntled employees or vendors, activists and other external parties, including those involved in corporate espionage. Even the most advanced internal control environment may be vulnerable to compromise. Targeted social engineering attacks are becoming more sophisticated and are extremely difficult to prevent. The techniques used by bad actors change frequently, may not be recognized until launched and may not be recognized until well after a breach has occurred. Additionally, the existence of cyber attacks or security breaches at third parties with access to our data, such as vendors, 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 we will not suffer such losses or other consequences in the future. Our risk and exposure to these matters remain heightened because of, among other things, the evolving nature of these threats, our prominent size and scale, and our role in the financial services industry and the broader economy, our plans to continue to implement our internet banking and mobile banking channel strategies and develop additional remote connectivity solutions to serve our customers when and how they want to be served, our continuous transmission of sensitive information to, and storage of such information by, third parties, including our vendors and regulators, our geographic footprint and international presence, the outsourcing of some of our business operations, threats of cyber terrorism, external extremist parties, including foreign state actors, in some circumstances as a means to promote political ends, and system and customer account updates and conversions. As a result, cybersecurity and the continued development and enhancement of our controls, processes and practices designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority.
We also face indirect technology, cybersecurity and operational risks relating to the customers, clients and other third parties with whom we do business or upon whom we rely to facilitate or enable our business activities, including financial counterparties; 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 could have a material impact on counterparties or other market participants, including us. 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 third-party technology failure, cyber attack or other information or security breach, termination or constraint could, among other things, adversely affect our ability to effect transactions, service our clients, manage our exposure to risk or expand our businesses.
Cyber attacks or other information or security breaches, whether directed at us or third parties, may result in a material loss or have material 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. A successful penetration or circumvention of system security could cause us negative consequences, including loss of customers and business opportunities, disruption to our operations and business, misappropriation or destruction of our confidential information and/or that of our customers, or damage to our customers’ and/or third parties’ computers or systems, and could result in a violation of applicable privacy laws and other laws, 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 could adversely impact our results of operations, liquidity and financial condition.
Our mortgage loan repurchase obligations or claims from third parties could result in additional losses.
We and our legacy companies have sold significant amounts of residential mortgage loans. In connection with these sales, we or certain of our subsidiaries or legacy companies made various representations and warranties, breaches of which may result in a requirement that we repurchase the mortgage loans, or otherwise make whole or provide other remedies to counterparties. At December 31, 2017, we had $17.6 billion of unresolved repurchase claims, net of duplicate claims and excluding claims where the statute of limitations has expired without litigation being commenced. We have also received notifications pertaining to loans for which we have not received a repurchase request from sponsors of third-party securitizations with whom we engaged in whole-loan transactions and for which we may owe indemnity obligations.
We have recorded a liability of $1.9 billion for obligations under representations and warranties exposures. We also have an estimated range of possible loss of up to $1 billion over our recorded liability. The recorded liability and estimated range of possible loss are based on currently available information, significant judgment and a number of assumptions that are subject to change. Future representations and warranties losses may occur in excess of our recorded liability and estimated range of possible loss and such losses could have an adverse effect on our liquidity, financial condition and results of operations.
Additionally, our recorded liability for representations and warranties exposures and the corresponding estimated range of possible loss do not consider certain losses related to servicing, including foreclosure and related costs, fraud, indemnity or claims (including for residential mortgage-backed securities ) related to securities law. Losses with respect to one or more of these matters could be material to our results of operations or liquidity.
For more information about our representations and warranties exposure, including the estimated range of possible loss, see Off-
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Balance Sheet Arrangements and Contractual Obligations – Representations and Warranties in the MD&A on page 40, Consumer Portfolio Credit Risk Management in the MD&A on page 54 and Note 7 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements.
Failure to satisfy our obligations as servicer for residential mortgage securitizations, along with other losses we could incur in our capacity as servicer, and foreclosure delays and/or investigations into our residential mortgage foreclosure practices could cause losses.
We and our legacy companies have securitized a significant portion of the residential mortgage loans that we originated or acquired. We service a portion of the loans we have securitized and also service 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, for loans principally held in private-label securitization trusts, 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 were found to have occurred, it may harm our reputation, increase our servicing costs 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 the GSEs and the relationship among the GSEs, the government and the private markets, or the conversion of the current conservatorship of Fannie Mae or Freddie Mac into receivership, could result in significant changes to our business operations and may adversely impact our business.
During 2017, we sold approximately $7.9 billion of loans to Fannie Mae and Freddie Mac. Each is currently in a conservatorship with its primary regulator, the Federal Housing Finance Agency, acting as conservator. We cannot predict whether the conservatorships will end, any associated changes to their business structure that could result or whether the conservatorships will end in receivership, privatization or other change in business structure. There are several proposed approaches to reform that, if enacted, could change the structure and the relationship among the GSEs, the government and the private markets, including the trading markets for agency conforming mortgage loans and markets for mortgage-related securities in which we participate. We cannot predict the prospects for the enactment, timing or content of legislative or rulemaking proposals regarding the future status of any GSEs. Accordingly, uncertainty regarding their future continues to exist, including whether they will continue to exist in their current forms or continue to guarantee mortgages and provide funding for mortgage loans.
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 identify, measure, monitor, report and control our exposure to 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 risk monitoring and mitigation techniques, including hedging strategies and techniques that seek to balance our ability to profit from trading positions with our exposure to
potential losses, those techniques are inherently limited because they cannot anticipate the existence or development of currently unanticipated or unknown risks and rely upon our ability to manage and aggregate data. For instance, we use various models to assess and control risk, which are subject to inherent limitations.
Our risk management framework depends on a sound risk culture existing throughout the Corporation, and that we manage risks associated with third parties and vendors. Uncertain economic conditions, heightened legislative and regulatory scrutiny of the financial services industry and the overall complexity of our operations, among other developments, have resulted in a heightened level of risk for us. Accordingly, we could suffer losses as a result of our failure to properly anticipate and manage risks.
For more information about our risk management policies and procedures, see Managing Risk in the MD&A on page 41.
Regulatory, Compliance and Legal
We are subject to comprehensive government legislation and regulations, both domestically and internationally, which impact our operating costs, and could require us to make changes to our operations and result in an adverse impact on our results of operations. Additionally, these regulations and uncertainty surrounding the scope and requirements of the final rules implementing recently enacted and proposed legislation, as well as certain settlements and consent orders we have entered into, have increased and could continue to increase our compliance and operational risks and costs.
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. 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 or make our products and services more expensive for clients and customers.
In response to the financial crisis as well as other factors such as technological and market changes, the U.S. adopted the Financial Reform Act, which has resulted in significant rulemaking and proposed rulemaking by the U.S. Department of the Treasury, the Federal Reserve, the OCC, the CFPB, Financial Stability Oversight Council, the FDIC, the Department of Labor, the SEC and CFTC. Under the provisions of the Financial Reform Act known as the “Volcker Rule,” we are prohibited from proprietary trading and limited in our sponsorship of, and investment in, hedge funds, private equity funds and certain other covered private funds. Non-U.S. regulators, such as the U.K. financial regulators and the European Parliament and Commission, have adopted or proposed laws and regulations regarding financial institutions located in their jurisdictions, which have required and could require us to make significant modifications to our non-U.S. businesses, operations and legal entity structure in order to comply with these requirements.
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 these laws and regulations, as well as final rulemaking, guidance and interpretation by regulatory authorities. Further, we could become subject to regulatory requirements beyond those currently proposed, adopted or contemplated. Accordingly, 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 the proposed rules. If these assumptions prove incorrect, we could be subject to increased regulatory and compliance risks and costs
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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. Regulatory focus is not limited to laws and regulations applicable to the financial services industry specifically, but also extends to other significant regulations such as the Foreign Corrupt Practices Act and U.S. and international anti-money laundering regulations. As part of their enforcement authority, our regulators have the authority to, among other things, assess significant civil or criminal monetary penalties, fines or restitution, issue cease and desist or removal orders and initiate injunctive actions. The amounts paid by us and other financial institutions to settle proceedings or investigations have been substantial and may continue to increase. In some cases, governmental authorities have required criminal pleas or other extraordinary terms as part of such settlements, which could have significant consequences for a financial institution, 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 complexity of the federal and state regulatory and enforcement regimes in the U.S., coupled with the global scope of our operations and the aggressiveness of 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 large 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. Responding to inquiries, investigations, lawsuits and proceedings, regardless of the ultimate outcome of the matter, is time-consuming and expensive and can divert the attention of our senior management from our business. The outcome of such proceedings may be difficult to predict or estimate until late in the proceedings, which may last a number of years.
We are currently subject to the terms of settlements and consent orders that we have entered into with government agencies and may become subject to additional settlements or orders in the future. Such settlements and consent orders 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 and orders to which we are subject, or more generally, to maintain risk and control procedures and processes that meet the heightened standards established by our regulators and other government agencies, we could be required to enter into further settlements and orders, 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, compliance risks will continue to exist, particularly as we adapt to new rules and regulations. 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 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, 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 face significant legal risks in our business, and the volume of claims and amount of damages, penalties and fines claimed in litigation, and regulatory and government proceedings against us and other financial institutions remain high. Greater than expected litigation and investigation costs, substantial legal liability or significant regulatory or government action against us could have adverse effects on our financial condition and results of operations or cause significant reputational harm to us, which in turn could adversely impact our liquidity, financial condition and results of operations. We continue to experience a significant volume of litigation and other disputes, including claims for contractual indemnification with counterparties regarding relative rights and responsibilities. Consumers, clients and other counterparties continue to be litigious. Among other things, 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. In addition, regulatory authorities have had a supervisory focus on enforcement, including in connection with alleged violations of law and customer harm. For example, regulators and government agencies have pursued claims against financial institutions under FIRREA, the False Claims Act, and under the antitrust laws. Such claims may carry significant and, in certain cases, treble damages. The ongoing environment of extensive regulation, regulatory compliance burdens, litigation, and regulatory and government enforcement, combined with uncertainty related to the evolving regulatory environment, have resulted in operational and compliance costs and risks, which may limit our ability to continue providing certain products and services.
For more information on litigation risks, see Note 12 – Commitments and Contingencies to the Consolidated Financial Statements.
U.S. federal banking agencies may require us to increase our regulatory capital, total loss absorbing capacity, long-term debt or liquidity requirements, which could result in the need to issue additional qualifying securities or to take other actions, such as to sell company assets.
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 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.
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In the current regulatory environment, capital and liquidity requirements are frequently introduced and amended. It is possible that regulators may increase regulatory capital requirements, change how regulatory capital is calculated or increase liquidity requirements. Our risk-based capital surcharge (G-SIB surcharge) may increase from current estimates, and we are also subject to a countercyclical capital buffer which, while currently set at zero, may be increased by regulators. A significant component of regulatory capital ratios is calculating our risk-weighted assets, including operational risk, and our leverage exposure which may increase. Additionally, in April 2016, the U.S. banking regulators proposed Net Stable Funding Ratio requirements which target longer term liquidity risk and would apply to us and our subsidiary insured depository institutions. The Basel Committee on Banking Supervision has also revised several key methodologies for measuring risk-weighted assets, including a standardized approach for credit risk, standardized approach for operational risk, 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.
As part of its annual CCAR review, 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 have an effect on our projected regulatory capital amounts in the annual CCAR submission, including the CCAR capital plan affecting our dividends and stock repurchases.
We are also subject to the Federal Reserve’s rule effective January 1, 2019 requiring U.S. G-SIBs to maintain minimum amounts of external total loss-absorbing capacity (TLAC) to improve the resolvability and resiliency of large, interconnected BHCs, with minimum requirements for TLAC and long-term debt based on our risk-weighted assets, supplementary leverage exposure and G-SIB surcharge. Increases to these measures may impact our minimum external TLAC and long-term debt requirements.
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, sell company assets, or hold highly liquid assets, which may adversely affect our results of operations. We may be prohibited from taking capital actions such as paying or increasing dividends, or repurchasing securities if the Federal Reserve objects to our CCAR capital plan. For more information, see Capital Management – Regulatory Capital in the MD&A on page 45.
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.
In June 2016, the Financial Accounting Standards Board issued a new accounting standard that will require the earlier recognition of credit losses on loans and other financial instruments based on an expected loss model, replacing the incurred loss model that is currently in use. The new guidance is effective on January 1, 2020, with early adoption permitted on January 1, 2019. This new accounting standard is expected, on the date of adoption, to increase the allowance for credit losses with a resulting negative adjustment to retained earnings. For more information on some of our critical accounting policies and recent accounting changes, see Complex Accounting Estimates in the MD&A on page 84 and Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
We may be adversely affected by changes in U.S. and non-U.S. tax laws and regulations.
On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act (the Tax Act) which made significant changes to federal income tax law including, among other things, reducing the statutory corporate income tax rate to 21 percent from 35 percent and changing the taxation of our non-U.S. business activities. We have accounted for the effects of the Tax Act using reasonable estimates based on currently available information and our interpretations thereof. This accounting may change due to, among other things, changes in interpretations we have made and the issuance of new tax or accounting guidance.
In addition, we have U.K. net deferred tax assets 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 deferred tax assets.
It is possible that governmental authorities in the U.S. and/or other countries could further amend tax laws that would adversely affect us.
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 employee misconduct, security breaches, unethical behavior, litigation or regulatory outcomes, compensation practices, the suitability or reasonableness of recommending particular trading or investment strategies, prohibiting clients from engaging in certain transactions, sales practices, failing to deliver products, standards of service and quality expected by our customers, clients and the community, compliance failures, inadequacy of responsiveness to internal controls, unintended disclosure of confidential information, perception of our environmental, social and governance practices and disclosures, and the activities of our clients, customers and counterparties, including vendors. 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 websites, whether or not factually 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 EU General Data Protection Regulation
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(GDPR), 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 is mishandled or misused, we may face regulatory, reputational and operational risks which could have an adverse effect on 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 interests 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 deal with us, or give rise to litigation or enforcement actions, which could adversely affect our businesses.
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
We face significant and increasing competition in the financial services industry.
We operate in a highly competitive environment and will continue to experience intense competition from local and global financial institutions as well as new entrants, in both domestic and foreign markets. Additionally, the changing regulatory environment may create competitive disadvantages for certain financial institutions given geography-driven capital and liquidity requirements. For example, U.S. regulators have in certain instances adopted stricter capital and liquidity requirements than those applicable to non-U.S. institutions. To the extent we expand into new business areas and new geographic regions, we may face competitors with more experience and more established relationships with clients, regulators and industry participants in the relevant market, which could adversely affect our ability to compete. In addition, technological advances and the growth of e-commerce have made it easier for non-depository institutions to offer products and services that traditionally were banking products, and for financial institutions to compete with technology companies in providing electronic and internet-based financial solutions including electronic securities trading, marketplace lending and payment processing. 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 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 to evolving industry standards and consumer preferences 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 ability to adapt our products and services to evolving industry standards. There is increasing pressure by competitors to provide products and services at lower prices and this may impact our ability to grow revenue and/or effectively compete, in part, due to legislative and regulatory developments that affect the competitive landscape. Additionally, the competitive landscape may be impacted by the growth of non-depository institutions that offer products that were traditionally banking products as well as new innovative products. This can reduce our net interest margin and revenues from our fee-based products and services. In addition, the widespread adoption of new technologies, including internet services, cryptocurrencies and payment systems, could require substantial expenditures to modify or adapt our existing products and services as we grow and develop our internet banking and mobile banking channel strategies in addition to remote connectivity solutions. We might not be 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.
Our ability to attract and retain qualified employees is critical to the success of our business and failure to do so could hurt our 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 may be subject to limitations on compensation practices (which may or may not affect our competitors) by the Federal Reserve, the OCC, the FDIC or other regulators around the world. Recent EU and U.K. rules limit and subject to clawback certain forms of variable compensation for senior employees. Current and potential future limitations on executive compensation imposed by legislation or regulation could adversely affect our ability to attract and maintain qualified employees. Furthermore, a substantial portion of our annual incentive compensation paid to our senior employees has in recent years taken the form of long-term equity awards. Therefore, the ultimate value of this compensation depends on the price of our common stock when the awards vest. If we are unable to continue to attract and retain qualified individuals, our business prospects and competitive position could be adversely affected.
We could suffer losses if our models and strategies fail to properly anticipate and manage risk.
We use proprietary models and strategies extensively to measure and assess capital requirements for credit, country, market, operational and strategic risks and to assess and control
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our operations. These models require oversight and periodic re-validation and are subject to inherent limitations due to the use of historical trends and simplifying assumptions, and uncertainty regarding economic and financial outcomes. Our models may not be sufficiently predictive of future results due to limited historical patterns, extreme or unanticipated market movements and illiquidity, especially during severe market downturns or stress events. 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. Market conditions in recent years have involved unprecedented dislocations and highlight the limitations inherent in using historical data to manage risk. We could suffer losses if our models and strategies fail to properly anticipate and manage risks.
Failure to properly manage and aggregate data may result in inaccurate financial, regulatory and operational reporting.
We rely on our ability to manage data and our ability to aggregate data in an accurate and timely manner for effective risk reporting and management which may be limited by the effectiveness of our policies, programs, processes and practices that govern how data is acquired, validated, stored, protected and processed. While we continuously update our policies, programs, processes and practices, many of our data management and aggregation processes are manual and subject to human error or system failure. Failure to manage data effectively and to aggregate data in an accurate and timely manner may 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.
Reforms to and uncertainty regarding LIBOR and certain other indices may adversely affect our business.
The U.K. FCA announced in July 2017 that it will no longer persuade or require banks to submit rates for LIBOR after 2021. This announcement, in conjunction with financial benchmark reforms more generally and changes in the interbank lending markets have resulted in uncertainty about the future of LIBOR and certain other rates or indices which are used as interest rate “benchmarks.” These actions and uncertainties may have the effect of triggering future changes in the rules or methodologies used to calculate benchmarks or lead to the discontinuance or unavailability of benchmarks. ICE Benchmark Administration is the administrator of LIBOR and maintains a reference panel of contributor banks, which includes Bank of America, N.A., London branch for certain LIBOR rates. Uncertainty as to the nature and effect of such reforms and actions, and the potential or actual discontinuance of benchmark quotes, may adversely affect the value of, return on and trading market for our financial assets and liabilities that are based on or are linked to benchmarks, including any LIBOR-based securities, loans and derivatives, or our financial condition or results of operations. Furthermore, there can be no assurances that we and other market participants will be adequately prepared for an actual discontinuation of benchmarks, including LIBOR, that may have an unpredictable impact on contractual mechanics (including, but not limited to, interest rates to be paid to or by us) and cause significant disruption to financial markets that are relevant to our business segments, particularly Global Banking and Global Markets, among other adverse consequences, which may also result in adversely affecting our financial condition or results of operations.
Item 2. Properties
As of December 31, 2017, our 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 Merrill Lynch Financial Centre |
London, UK |
4 Building Campus |
Global Banking and Global Markets
|
Leased |
562,595 |
|||||
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 79.1 million square feet in 20,000 facility and ATM locations globally, including approximately 74.1 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 5.0 million square feet in more than 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 are evaluating the sale or sale/leaseback of certain properties and we may incur costs in connection with any such transactions.
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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. As of February 21, 2018, there were 174,913 registered shareholders of common stock. The table below sets forth the high and low closing sales prices of the common stock on the New York Stock Exchange for the periods indicated during 2016 and 2017, as well as the dividends we paid on a quarterly basis:
Quarter |
High |
Low |
Dividend |
||||||||||
2016 |
First |
$ |
16.43 |
$ |
11.16 |
$ |
0.05 |
||||||
Second |
15.11 |
12.18 |
0.05 |
||||||||||
Third |
16.19 |
12.74 |
0.075 |
||||||||||
Fourth |
23.16 |
15.63 |
0.075 |
||||||||||
2017 |
First |
25.50 |
22.05 |
0.075 |
|||||||||
Second |
24.32 |
22.23 |
0.075 |
||||||||||
Third |
25.45 |
22.89 |
0.12 |
||||||||||
Fourth |
29.88 |
25.45 |
0.12 |
||||||||||
For more information regarding our ability to pay dividends, see Note 13 – Shareholders’ Equity and Note 16 – Regulatory Requirements and Restrictions to the Consolidated Financial Statements, which are incorporated herein by reference.
For more information on our equity compensation plans, see Note 18 – Stock-based Compensation Plans to the Consolidated Financial Statements and Item 12 on page 193 of this report, which are incorporated herein by reference.
The table below presents share repurchase activity for the three months ended December 31, 2017. 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) |
Common Shares Repurchased (1)
|
Weighted-Average Per Share Price |
Shares
Purchased as
Part of Publicly Announced Programs |
Remaining Buyback
Authority Amounts (2)
|
|||||||||
October 1 - 31, 2017 |
32,986 |
$ |
26.92 |
32,982 |
$ |
9,040 |
|||||||
November 1 - 30, 2017 |
68,951 |
27.23 |
68,951 |
7,162 |
|||||||||
December 1 - 31, 2017 |
72,075 |
29.18 |
72,073 |
10,059 |
|||||||||
Three months ended December 31, 2017 |
174,012 |
27.98 |
|||||||||||
(1) |
Includes 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 under equity incentive plans. |
(2) |
On June 28, 2017, following the Federal Reserve’s non-objection to our 2017 CCAR capital plan, the Board authorized the repurchase of $12.0 billion in common stock from July 1, 2017 through June 30, 2018, plus approximately $900 million to offset the effect of equity-based compensation plans during the same period. On December 5, 2017, the Corporation announced that the Board authorized the repurchase of an additional $5.0 billion of common stock by June 30, 2018. During the three months ended December 31, 2017, pursuant to the Board’s authorizations, the Corporation repurchased approximately $4.9 billion of common stock, which included common stock to offset equity-based compensation awards. For more information, see Capital Management -- CCAR and Capital Planning on page 45 and Note 13 – Shareholders’ Equity to the Consolidated Financial Statements.
|
On August 24, 2017, the holders of the Corporation’s Series T preferred stock exercised warrants to acquire 700 million shares of the Corporation’s common stock. To purchase the Corporation’s common stock upon exercise of the warrants, the holders submitted as consideration $5 billion of Series T preferred stock. On August 29, 2017, the Corporation issued 700 million shares of common stock to the holders. The terms of the warrants were previously disclosed in the Corporation’s Current Report on Form 8-K filed on August 25, 2011. The sale of the Corporation’s
common stock pursuant to exercise of the warrants has not been registered with the Securities and Exchange Commission. Such sale is exempt from registration pursuant to Section 4(2) and Section 3(a)(9) of the Securities Act of 1933, as amended. The Corporation did not receive any proceeds from the sale of the common stock upon exercise of the warrants; the cash proceeds the Corporation received in connection with the sale of the Series T preferred stock in August 2011 were used for general corporate purposes.
Item 6. Selected Financial Data
See Tables 7 and 8 in the MD&A beginning on page 25, which are incorporated herein by reference.
17 Bank of America 2017
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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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Page |
||
Interest Rate Risk Management for the Banking Book |
||
2016 Compared to 2015
|
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Non-GAAP Reconciliations |
||
Bank of America 2017 18
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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, 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 claims, damages, penalties, fines and reputational damage resulting from pending or future litigation, regulatory proceedings and enforcement actions, including inquiries into our retail sales practices, and the possibility that amounts may be in excess of the Corporation’s recorded liability and estimated range of possible loss for litigation exposures; the possibility that the Corporation could face increased servicing, securities, fraud, indemnity, contribution or other claims from one or more counterparties, including trustees, purchasers of loans, underwriters, issuers, other parties involved in securitizations, monolines or private-label and other investors; the possibility that future representations and warranties losses may occur in excess of the Corporation’s recorded liability and estimated range of possible loss for its representations and warranties exposures; the Corporation’s ability to resolve representations and warranties repurchase and related claims, including claims brought by investors or trustees seeking to avoid the statute of limitations for repurchase claims; uncertainties about the financial stability and growth rates of non-U.S. jurisdictions, the risk that those jurisdictions may face difficulties servicing their sovereign debt, and related stresses on financial markets, currencies and trade, and the Corporation’s exposures to such risks, including direct, indirect and operational; the impact of U.S. and global interest rates, currency exchange rates, economic conditions, and potential geopolitical instability; the impact on the Corporation’s business, financial condition and results of operations of a potential higher interest rate environment; the possibility that future credit losses may be higher than currently expected due to changes in economic assumptions, customer behavior, adverse developments with respect to U.S. or global economic conditions and other uncertainties; the Corporation’s ability to achieve its expense targets, net interest income expectations, or other projections; adverse changes to the Corporation’s credit ratings from the major credit rating agencies; estimates of the fair value of certain of the Corporation’s assets and liabilities; uncertainty regarding the content, timing and impact of regulatory capital and liquidity requirements; the potential impact of total loss-absorbing capacity requirements; potential adverse changes to our global systemically important bank surcharge; the potential impact of Federal Reserve actions on the Corporation’s capital plans; the possible impact of the Corporation’s failure to
remediate a shortcoming identified by banking regulators in the Corporation’s Resolution Plan; the effect of regulations, other guidance or additional information on our estimated impact of the Tax 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 (FDIC) assessments, the Volcker Rule, fiduciary standards and derivatives regulations; a failure in or breach of the Corporation’s operational or security systems or infrastructure, or those of third parties, including as a result of cyber attacks; the impact on the Corporation’s business, financial condition and results of operations from the planned exit of the United Kingdom from the European Union; and other similar matters.
Forward-looking statements speak only as of the date they are made, and the Corporation undertakes no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.
Notes to the Consolidated Financial Statements referred to in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) are incorporated by reference into the MD&A. Certain prior-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” may refer to Bank of America Corporation individually, Bank of America Corporation and its subsidiaries, or certain of Bank of America Corporation’s subsidiaries or affiliates. Our principal executive offices are located in Charlotte, North Carolina. Through our banking and various nonbank subsidiaries throughout the U.S. and in international markets, we provide a diversified range of banking and nonbank financial services and products through four business segments: Consumer Banking, Global Wealth & Investment Management (GWIM), Global Banking and Global Markets, with the remaining operations recorded in All Other. We operate our banking activities primarily under the Bank of America, National Association (Bank of America, N.A. or BANA) charter. At December 31, 2017, the Corporation had approximately $2.3 trillion in assets and a headcount of approximately 209,000 employees. Headcount remained relatively unchanged since December 31, 2016.
As of December 31, 2017, we operated in all 50 states, the District of Columbia, the U.S. Virgin Islands, Puerto Rico and more than 35 countries. Our retail banking footprint covers approximately 85 percent of the U.S. population, and we serve approximately 47 million consumer and small business relationships with approximately 4,500 retail financial centers, approximately 16,000 ATMs, and leading digital banking platforms (www.bankofamerica.com) with approximately 35 million active users, including approximately 24 million mobile active users. We offer industry-leading support to approximately three million small business owners. Our wealth management businesses, with client balances of nearly $2.8 trillion, provide tailored solutions to meet client needs through a full set of investment management, brokerage, banking, trust and retirement products. We are a global leader in corporate and investment banking and trading across a
19 Bank of America 2017
|
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broad range of asset classes serving corporations, governments, institutions and individuals around the world.
2017 Economic and Business Environment
The U.S. economy gained momentum in 2017, as it grew for the eighth consecutive year. Following a soft start, partly driven by sharp inventory liquidation and adverse weather effects, GDP growth accelerated over the remainder of the year. Economic growth was supported by a noticeable pickup in business investment in high-tech equipment, a recovery in oil exploration and solid consumer demand growth. A revitalization in U.S. export growth, on the back of a weakening dollar and stronger global growth, also had beneficial impacts. GDP growth was limited by a mid-year softening in residential investment and a flat period for government consumption and investment. The housing market finished the year strongly. A lean supply of unsold inventory and solid demand was supportive of steady home price appreciation through much of the year.
The labor market continued to tighten as job creation exceeded the growth in the labor force. The unemployment rate fell to a 17-year low. Wage growth, however, remained relatively muted.
Inflation also remained low. The headline rate edged somewhat higher on recovering energy prices. But core inflation, excluding volatile food and energy components, slowed unexpectedly over much of the year, as goods’ prices and health care inflation softened, and the acceleration in rents leveled off. Core inflation once again finished the year below the Federal Reserve’s two percent target level.
Equity markets advanced strongly in 2017, with the S&P 500 increasing by approximately 20 percent. The anticipation of corporate tax reform and strong global earnings growth appeared to fuel the stock market’s strong performance. Following a mid-year decline, long-term Treasury yields recovered towards the end of 2017, but finished little changed from the start of the year. With short-end rates rising over the course of the year, the yield curve flattened considerably. After a brief surge following the 2016 election, the trade-weighted dollar declined over most of 2017.
The Federal Open Market Committee (FOMC) raised its target range for the Federal funds rate three times in 2017, bringing the total rise in the funds rate during the current cycle to 125 basis points (bps). The Federal Reserve also began allowing a small portion of its Treasury and mortgage-backed securities (MBS) to roll off as monetary policy normalization continued. Current Federal Reserve baseline forecasts suggest gradual rate increases will continue into 2018 against a backdrop of solid economic expansion and a tightening labor market.
The improved economic momentum in 2017 was not confined to the U.S. The eurozone posted its strongest GDP growth in 10 years, despite heightened political uncertainty and fragmentation.
In this context, the European Central Bank decided to taper its quantitative easing program even if domestic inflationary pressures remained historically weak. The impact of the 2016 U.K. referendum vote in favor of leaving the European Union (EU) started to materialize within the U.K. economy which, despite the robust global momentum, showed its weakest GDP growth in five years.
Supported by a very accommodative monetary policy stance and sustained growth in external demand, the Japanese economy expanded at the strongest pace since 2010 with headline inflation remaining positive throughout the year. Across emerging nations, economic activity was supported by China’s continued transition towards a more consumption-based growth model, as well as by the recovery in Brazil and Russia following the 2016 recession.
Recent Events
Capital Management
During 2017, we repurchased approximately $12.8 billion of common stock pursuant to the Board’s repurchase authorizations under our 2017 and 2016 Comprehensive Capital Analysis and Review (CCAR) capital plans, including repurchases to offset equity-based compensation awards, and pursuant to an additional $5 billion share repurchase authorization approved by the Board and the Federal Reserve in December 2017. For more information, see Capital Management on page 45.
Change in Tax Law
On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act (the Tax Act) which made significant changes to federal income tax law including, among other things, reducing the statutory corporate income tax rate to 21 percent from 35 percent and changing the taxation of our non-U.S. business activities. Results for 2017 included an estimated reduction in net income of $2.9 billion due to the Tax Act, driven largely by a lower valuation of certain U.S. deferred tax assets and liabilities. We have accounted for the effects of the Tax Act using reasonable estimates based on currently available information and our interpretations thereof. This accounting may change due to, among other things, changes in interpretations we have made and the issuance of new tax or accounting guidance.
Long-term Debt Exchange
In December 2017, pursuant to a private offering, we exchanged $11.0 billion of outstanding long-term debt for new fixed/floating-rate senior notes, subject to certain terms and conditions. The impact on our results of operations related to this exchange was not significant. For more information on this exchange, see Liquidity Risk on page 49.
Bank of America 2017 20
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Selected Financial Data
Table 1 provides selected consolidated financial data for 2017 and 2016.
Table 1 |
Selected Financial Data |
|||||||
(Dollars in millions, except per share information) |
2017 |
2016 |
||||||
Income statement |
||||||||
Revenue, net of interest expense |
$ |
87,352 |
$ |
83,701 |
||||
Net income |
18,232 |
17,822 |
||||||
Diluted earnings per common share |
1.56 |
1.49 |
||||||
Dividends paid per common share |
0.39 |
0.25 |
||||||
Performance ratios |
||||||||
Return on average assets |
0.80 |
% |
0.81 |
% |
||||
Return on average common shareholders’ equity |
6.72 |
6.69 |
||||||
Return on average tangible common shareholders’ equity (1)
|
9.41 |
9.51 |
||||||
Efficiency ratio |
62.67 |
65.81 |
||||||
Balance sheet at year end |
||||||||
Total loans and leases |
$ |
936,749 |
$ |
906,683 |
||||
Total assets |
2,281,234 |
2,188,067 |
||||||
Total deposits |
1,309,545 |
1,260,934 |
||||||
Total common shareholders’ equity |
244,823 |
240,975 |
||||||
Total shareholders’ equity |
267,146 |
266,195 |
||||||
(1) |
Return on average tangible common shareholders’ equity is a non-GAAP financial measure. For more information and a corresponding reconciliation to accounting principles generally accepted in the United States of America (GAAP) financial measures, see Non-GAAP Reconciliations on page 88.
|
Financial Highlights
Net income was $18.2 billion, or $1.56 per diluted share in 2017 compared to $17.8 billion, or $1.49 per diluted share in 2016. The results for 2017 include an estimated charge of $2.9 billion related to the Tax Act. The pre-tax results for 2017 compared to 2016 were driven by higher revenue, largely the result of an increase in net interest income, lower provision for credit losses and a decline in noninterest expense.
Effective October 1, 2017, we changed our accounting method for determining when certain stock-based compensation awards granted to retirement-eligible employees are deemed authorized, changing from the grant date to the beginning of the year preceding the grant date when the incentive award plans are generally approved. As a result, the estimated value of the awards is now expensed ratably over the year preceding the grant date. All prior periods presented herein have been restated for this change in accounting method. The change affected consolidated financial information and All Other; it did not affect the business segments. Under the applicable bank regulatory rules, we are not required to and, accordingly, did not restate previously-filed capital metrics and ratios. The cumulative impact of the change in accounting
method resulted in an insignificant pro forma change to our capital metrics and ratios. For more information, see Note 1 - Summary of Significant Accounting Principles to the Consolidated Financial Statements.
Table 2 |
Summary Income Statement |
|||||||
(Dollars in millions) |
2017 |
2016 |
||||||
Net interest income |
$ |
44,667 |
$ |
41,096 |
||||
Noninterest income |
42,685 |
42,605 |
||||||
Total revenue, net of interest expense |
87,352 |
83,701 |
||||||
Provision for credit losses |
3,396 |
3,597 |
||||||
Noninterest expense |
54,743 |
55,083 |
||||||
Income before income taxes |
29,213 |
25,021 |
||||||
Income tax expense |
10,981 |
7,199 |
||||||
Net income |
18,232 |
17,822 |
||||||
Preferred stock dividends |
1,614 |
1,682 |
||||||
Net income applicable to common shareholders |
$ |
16,618 |
$ |
16,140 |
||||
Per common share information |
||||||||
Earnings |
$ |
1.63 |
$ |
1.57 |
||||
Diluted earnings |
1.56 |
1.49 |
||||||
21 Bank of America 2017
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Net Interest Income
Net interest income increased $3.6 billion to $44.7 billion in 2017 compared to 2016. The net interest yield increased 11 bps to 2.32 percent for 2017. These increases were primarily driven by the benefits from higher interest rates and loan and deposit growth, partially offset by the sale of the non-U.S. consumer credit card business in the second quarter of 2017. For more information regarding interest rate risk management, see Interest Rate Risk Management for the Banking Book on page 81.
Noninterest Income
Table 3 |
Noninterest Income |
|||||||
(Dollars in millions) |
2017 |
2016 |
||||||
Card income |
$ |
5,902 |
$ |
5,851 |
||||
Service charges |
7,818 |
7,638 |
||||||
Investment and brokerage services |
13,281 |
12,745 |
||||||
Investment banking income |
6,011 |
5,241 |
||||||
Trading account profits |
7,277 |
6,902 |
||||||
Mortgage banking income |
224 |
1,853 |
||||||
Gains on sales of debt securities |
255 |
490 |
||||||
Other income |
1,917 |
1,885 |
||||||
Total noninterest income |
$ |
42,685 |
$ |
42,605 |
||||
Noninterest income increased $80 million to $42.7 billion for 2017 compared to 2016. The following highlights the significant changes.
● |
Service charges increased $180 million primarily driven by the impact of pricing strategies and higher treasury services-related revenue.
|
● |
Investment and brokerage services income increased $536 million primarily driven by the impact of assets under management (AUM) flows and higher market valuations, partially offset by the impact of changing market dynamics on transactional revenue and AUM pricing.
|
● |
Investment banking income increased $770 million primarily due to higher advisory fees and higher debt and equity issuance fees.
|
● |
Trading account profits increased $375 million primarily due to increased client financing activity in equities, partially offset by weaker performance across most fixed-income products.
|
● |
Mortgage banking income decreased $1.6 billion primarily driven by lower net servicing income due to lower net mortgage servicing rights (MSR) results, and lower production income primarily due to lower volume.
|
● |
Gains on sales of debt securities decreased $235 million primarily driven by lower activity.
|
● |
Other income remained relatively unchanged. Included was a $793 million pre-tax gain recognized in connection with the sale of the non-U.S. consumer credit card business and a downward valuation adjustment of $946 million on tax-advantaged energy investments in connection with the Tax Act. |
Provision for Credit Losses
The provision for credit losses decreased $201 million to $3.4 billion for 2017 compared to 2016 primarily due to reductions in
energy exposures in the commercial portfolio and credit quality improvements in the consumer real estate portfolio. This was partially offset by portfolio seasoning and loan growth in the U.S. credit card portfolio and a single-name non-U.S. commercial charge-off. For more information on the provision for credit losses, see Provision for Credit Losses on page 72.
Noninterest Expense
Table 4 |
Noninterest Expense |
|||||||
(Dollars in millions) |
2017 |
2016 |
||||||
Personnel |
$ |
31,642 |
$ |
31,748 |
||||
Occupancy |
4,009 |
4,038 |
||||||
Equipment |
1,692 |
1,804 |
||||||
Marketing |
1,746 |
1,703 |
||||||
Professional fees |
1,888 |
1,971 |
||||||
Data processing |
3,139 |
3,007 |
||||||
Telecommunications |
699 |
746 |
||||||
Other general operating |
9,928 |
10,066 |
||||||
Total noninterest expense |
$ |
54,743 |
$ |
55,083 |
||||
Noninterest expense decreased $340 million to $54.7 billion for 2017 compared to 2016. The decrease was primarily due to lower operating costs, a reduction from the sale of the non-U.S. consumer credit card business and lower litigation expense, partially offset by a $316 million impairment charge related to certain data centers in the process of being sold and $145 million for the shared success discretionary year-end bonus awarded to certain employees.
Income Tax Expense
Table 5 |
Income Tax Expense |
|||||||
(Dollars in millions) |
2017 |
2016 |
||||||
Income before income taxes |
$ |
29,213 |
$ |
25,021 |
||||
Income tax expense |
10,981 |
7,199 |
||||||
Effective tax rate |
37.6 |
% |
28.8 |
% |
||||
Tax expense for 2017 included a charge of $1.9 billion reflecting the impact of the Tax Act discussed below. Included in the tax charge was $2.3 billion related primarily to a lower valuation of certain deferred tax assets and liabilities and a $347 million tax benefit on the pre-tax loss from the lower valuation of our tax-advantaged energy investments. Other than the impact of the Tax Act, the effective tax rate for 2017 was driven by our recurring tax preference benefits as well as an expense recognized in connection with the sale of the non-U.S. consumer credit card business, largely offset by benefits related to the adoption of the new accounting standard for the tax impact associated with share-based compensation and the restructuring of certain subsidiaries. The effective tax rate for 2016 was driven by our recurring tax preferences and net tax benefits related to various tax audit matters, partially offset by a charge for the impact of U.K. tax law changes enacted in 2016.
Bank of America 2017 22
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On December 22, 2017, the President signed into law the Tax Act which made significant changes to federal income tax law including, among other things, reducing the statutory corporate income tax rate to 21 percent from 35 percent and changing the taxation of our non-U.S. business activities. Results for 2017 included an estimated reduction in net income of $2.9 billion due to the Tax Act, driven largely by a lower valuation of certain U.S. deferred tax assets and liabilities. Additionally, the change in the corporate income tax rate impacted our tax-advantaged energy investments, resulting in a downward valuation adjustment of $946 million recorded in other income that was fully offset by tax benefits arising from lower deferred tax liabilities on these investments. We have accounted for the effects of the Tax Act using reasonable estimates based on currently available
information and our interpretations thereof. This accounting may change due to, among other things, changes in interpretations we have made and the issuance of new tax or accounting guidance.
We expect the effective tax rate for 2018 to be approximately 20 percent, absent unusual items.
Our U.K. deferred tax assets, which consist primarily of net operating losses, are expected to be realized by certain subsidiaries over a number of years. Significant changes to management’s earnings forecasts for those subsidiaries, changes in applicable laws, further changes in tax laws or changes in the ability of our U.K. subsidiaries to conduct business in the EU, could lead management to reassess our ability to realize the U.K. deferred tax assets.
Balance Sheet Overview
Table 6 |
Selected Balance Sheet Data |
||||||||||
December 31 |
|||||||||||
(Dollars in millions) |
2017 |
2016 |
% Change |
||||||||
Assets |
|||||||||||
Cash and cash equivalents |
$ |
157,434 |
$ |
147,738 |
7 |
% |
|||||
Federal funds sold and securities borrowed or purchased under agreements to resell |
212,747 |
198,224 |
7 |
||||||||
Trading account assets |
209,358 |
180,209 |
16 |
||||||||
Debt securities |
440,130 |
430,731 |
2 |
||||||||
Loans and leases |
936,749 |
906,683 |
3 |
||||||||
Allowance for loan and lease losses |
(10,393 |
) |
(11,237 |
) |
(8 |
) |
|||||
All other assets |
335,209 |
335,719 |
— |
||||||||
Total assets |
$ |
2,281,234 |
$ |
2,188,067 |
4 |
||||||
Liabilities |
|||||||||||
Deposits |
$ |
1,309,545 |
$ |
1,260,934 |
4 |
||||||
Federal funds purchased and securities loaned or sold under agreements to repurchase |
176,865 |
170,291 |
4 |
||||||||
Trading account liabilities |
81,187 |
63,031 |
29 |
||||||||
Short-term borrowings |
32,666 |
23,944 |
36 |
||||||||
Long-term debt |
227,402 |
216,823 |
5 |
||||||||
All other liabilities |
186,423 |
186,849 |
— |
||||||||
Total liabilities |
2,014,088 |
1,921,872 |
5 |
||||||||
Shareholders’ equity |
267,146 |
266,195 |
— |
||||||||
Total liabilities and shareholders’ equity |
$ |
2,281,234 |
$ |
2,188,067 |
4 |
||||||
Assets
At December 31, 2017, total assets were approximately $2.3 trillion, up $93.2 billion from December 31, 2016. The increase in assets was primarily due to higher loans and leases driven by client demand for commercial loans, higher trading assets and securities borrowed or purchased under agreements to resell due to increased customer activity, and higher cash and cash equivalents and debt securities driven by the deployment of deposit inflows.
Cash and Cash Equivalents
Cash and cash equivalents increased $9.7 billion primarily driven by deposit growth and net debt issuances, partially offset by loan growth and net securities purchases.
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 $14.5 billion due to a higher level of customer financing activity.
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 increased $29.1 billion primarily driven by additional inventory in fixed-income, currencies and commodities (FICC) to meet expected client demand and increased client financing activities in equities within Global Markets.
Debt Securities
Debt securities primarily include U.S. Treasury and agency 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 $9.4 billion primarily driven by the deployment of deposit inflows. For more information on debt securities, see Note 3 – Securities to the Consolidated Financial Statements.
Loans and Leases
Loans and leases increased $30.1 billion compared to December 31, 2016. The increase was primarily due to net loan growth driven by strong client demand for commercial loans and increases in
23 Bank of America 2017
|
||
residential mortgage. For more information on the loan portfolio, see Credit Risk Management on page 54.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses decreased $844 million primarily due to the impact of improvements in credit quality from a stronger economy. For more information, see Allowance for Credit Losses on page 72.
Liabilities
At December 31, 2017, total liabilities were approximately $2.0 trillion, up $92.2 billion from December 31, 2016, primarily due to an increase in deposits, higher trading account liabilities due to an increase in short positions, and higher long-term debt due to net issuances.
Deposits
Deposits increased $48.6 billion primarily due to an increase in retail 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 $6.6 billion primarily due to an increase in repurchase agreements.
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 increased $18.2 billion primarily due to higher equity short positions and higher levels of short
government bonds driven by expected client demand 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 increased $8.7 billion primarily due to an increase in short-term bank notes and short-term FHLB Advances. For more information on short-term borrowings, see Note 10 – Federal Funds Sold or Purchased, Securities Financing Agreements and Short-term Borrowings to the Consolidated Financial Statements.
Long-term Debt
Long-term debt increased $10.6 billion primarily driven by issuances outpacing 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 $1.0 billion driven by earnings, largely offset by returns of capital to shareholders of $18.4 billion through common and preferred stock dividends and share repurchases.
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 49.
Bank of America 2017 24
|
||
Table 7 |
Five-year Summary of Selected Financial Data |
|||||||||||||||||||
(In millions, except per share information) |
2017 |
2016 |
2015 |
2014 |
2013 |
|||||||||||||||
Income statement |
||||||||||||||||||||
Net interest income |
$ |
44,667 |
$ |
41,096 |
$ |
38,958 |
$ |
40,779 |
$ |
40,719 |
||||||||||
Noninterest income |
42,685 |
42,605 |
44,007 |
45,115 |
46,783 |
|||||||||||||||
Total revenue, net of interest expense |
87,352 |
83,701 |
82,965 |
85,894 |
87,502 |
|||||||||||||||
Provision for credit losses |
3,396 |
3,597 |
3,161 |
2,275 |
3,556 |
|||||||||||||||
Noninterest expense |
54,743 |
55,083 |
57,617 |
75,656 |
69,213 |
|||||||||||||||
Income before income taxes |
29,213 |
25,021 |
22,187 |
7,963 |
14,733 |
|||||||||||||||
Income tax expense |
10,981 |
7,199 |
6,277 |
2,443 |
4,194 |
|||||||||||||||
Net income |
18,232 |
17,822 |
15,910 |
5,520 |
10,539 |
|||||||||||||||
Net income applicable to common shareholders |
16,618 |
16,140 |
14,427 |
4,476 |
9,190 |
|||||||||||||||
Average common shares issued and outstanding |
10,196 |
10,284 |
10,462 |
10,528 |
10,731 |
|||||||||||||||
Average diluted common shares issued and outstanding |
10,778 |
11,047 |
11,236 |
10,585 |
11,491 |
|||||||||||||||
Performance ratios |
||||||||||||||||||||
Return on average assets |
0.80 |
% |
0.81 |
% |
0.74 |
% |
0.26 |
% |
0.49 |
% |
||||||||||
Return on average common shareholders’ equity |
6.72 |
6.69 |
6.28 |
2.01 |
4.21 |
|||||||||||||||
Return on average tangible common shareholders’ equity (1)
|
9.41 |
9.51 |
9.16 |
2.98 |
6.35 |
|||||||||||||||
Return on average shareholders’ equity |
6.72 |
6.70 |
6.33 |
2.32 |
4.51 |
|||||||||||||||
Return on average tangible shareholders’ equity (1)
|
9.08 |
9.17 |
8.88 |
3.34 |
6.58 |
|||||||||||||||
Total ending equity to total ending assets |
11.71 |
12.17 |
11.92 |
11.57 |
11.06 |
|||||||||||||||
Total average equity to total average assets |
11.96 |
12.14 |
11.64 |
11.11 |
10.81 |
|||||||||||||||
Dividend payout |
24.24 |
15.94 |
14.49 |
28.20 |
4.66 |
|||||||||||||||
Per common share data |
||||||||||||||||||||
Earnings |
$ |
1.63 |
$ |
1.57 |
$ |
1.38 |
$ |
0.43 |
$ |
0.86 |
||||||||||
Diluted earnings |
1.56 |
1.49 |
1.31 |
0.42 |
0.83 |
|||||||||||||||
Dividends paid |
0.39 |
0.25 |
0.20 |
0.12 |
0.04 |
|||||||||||||||
Book value |
23.80 |
23.97 |
22.48 |
21.32 |
20.69 |
|||||||||||||||
Tangible book value (1)
|
16.96 |
16.89 |
15.56 |
14.43 |
13.77 |
|||||||||||||||
Market price per share of common stock |
||||||||||||||||||||
Closing |
$ |
29.52 |
$ |
22.10 |
$ |
16.83 |
$ |
17.89 |
$ |
15.57 |
||||||||||
High closing |
29.88 |
23.16 |
18.45 |
18.13 |
15.88 |
|||||||||||||||
Low closing |
22.05 |
11.16 |
15.15 |
14.51 |
11.03 |
|||||||||||||||
Market capitalization |
$ |
303,681 |
$ |
222,163 |
$ |
174,700 |
$ |
188,141 |
$ |
164,914 |
||||||||||
Average balance sheet |
||||||||||||||||||||
Total loans and leases |
$ |
918,731 |
$ |
900,433 |
$ |
876,787 |
$ |
898,703 |
$ |
918,641 |
||||||||||
Total assets |
2,268,633 |
2,190,218 |
2,160,536 |
2,145,393 |
2,163,296 |
|||||||||||||||
Total deposits |
1,269,796 |
1,222,561 |
1,155,860 |
1,124,207 |
1,089,735 |
|||||||||||||||
Long-term debt |
225,133 |
228,617 |
240,059 |
253,607 |
263,417 |
|||||||||||||||
Common shareholders’ equity |
247,101 |
241,187 |
229,576 |
222,907 |
218,340 |
|||||||||||||||
Total shareholders’ equity |
271,289 |
265,843 |
251,384 |
238,317 |
233,819 |
|||||||||||||||
Asset quality (2)
|
||||||||||||||||||||
Allowance for credit losses (3)
|
$ |
11,170 |
$ |
11,999 |
$ |
12,880 |
$ |
14,947 |
$ |
17,912 |
||||||||||
Nonperforming loans, leases and foreclosed properties (4)
|
6,758 |
8,084 |
9,836 |
12,629 |
17,772 |
|||||||||||||||
Allowance for loan and lease losses as a percentage of total loans and leases outstanding (4, 5)
|
1.12 |
% |
1.26 |
% |
1.37 |
% |
1.66 |
% |
1.90 |
% |
||||||||||
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (4, 5)
|
161 |
149 |
130 |
121 |
102 |
|||||||||||||||
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases, excluding the PCI loan portfolio (4, 5)
|
156 |
144 |
122 |
107 |
87 |
|||||||||||||||
Net charge-offs (6, 7)
|
$ |
3,979 |
$ |
3,821 |
$ |
4,338 |
$ |
4,383 |
$ |
7,897 |
||||||||||
Net charge-offs as a percentage of average loans and leases outstanding (4, 6)
|
0.44 |
% |
0.43 |
% |
0.50 |
% |
0.49 |
% |
0.87 |
% |
||||||||||
Net charge-offs as a percentage of average loans and leases outstanding, excluding the PCI loan portfolio (4)
|
0.44 |
0.44 |
0.51 |
0.50 |
0.90 |
|||||||||||||||
Capital ratios at year end (8)
|
||||||||||||||||||||
Common equity tier 1 capital |
11.8 |
% |
11.0 |
% |
10.2 |
% |
12.3 |
% |
n/a |
|||||||||||
Tier 1 common capital |
n/a |
n/a |
n/a |
n/a |
10.9 |
% |
||||||||||||||
Tier 1 capital |
13.2 |
12.4 |
11.3 |
13.4 |
12.2 |
|||||||||||||||
Total capital |
15.1 |
14.3 |
13.2 |
16.5 |
15.1 |
|||||||||||||||
Tier 1 leverage |
8.6 |
8.9 |
8.6 |
8.2 |
7.7 |
|||||||||||||||
Tangible equity (1)
|
8.9 |
9.2 |
8.9 |
8.4 |
7.8 |
|||||||||||||||
Tangible common equity (1)
|
7.9 |
8.0 |
7.8 |
7.5 |
7.2 |
|||||||||||||||
(1) |
Tangible equity ratios and tangible book value per share of common stock are non-GAAP financial measures. For more information on these ratios, see Supplemental Financial Data on page 27, and for corresponding reconciliations to GAAP financial measures, see Non-GAAP Reconciliations on page 88.
|
(2) |
For more information on the impact of the purchased credit-impaired (PCI) loan portfolio on asset quality, see Consumer Portfolio Credit Risk Management on page 54.
|
(3) |
Includes the allowance for loan and lease losses and the reserve for unfunded lending commitments. |
(4) |
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 62 and corresponding Table 31, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 67 and corresponding Table 38.
|
(5) |
Asset quality metrics for 2016 include $243 million of non-U.S. credit card allowance for loan and lease losses and $9.2 billion of non-U.S. credit card loans, which were included in assets of business held for sale on the Consolidated Balance Sheet at December 31, 2016. In 2017, the Corporation sold its non-U.S. consumer credit card business. |
(6) |
Net charge-offs exclude $207 million, $340 million, $808 million, $810 million and $2.3 billion of write-offs in the PCI loan portfolio for 2017, 2016, 2015, 2014 and 2013, respectively. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 60.
|
(7) |
Includes net charge-offs of $75 million and $175 million on non-U.S. credit card loans in 2017 and 2016, which were included in assets of business held for sale on the Consolidated Balance Sheet at December 31, 2016. |
(8) |
Risk-based capital ratios are reported under Basel 3 Advanced - Transition at December 31, 2017, 2016 and 2015. We reported risk-based capital ratios under Basel 3 Standardized - Transition at December 31, 2014 and under the general risk-based approach at December 31, 2013. For more information, see Capital Management on page 45.
|
n/a = not applicable
25 Bank of America 2017
|
||
Table 8 |
Selected Quarterly Financial Data |
|||||||||||||||||||||||||||||||
2017 Quarters |
2016 Quarters |
|||||||||||||||||||||||||||||||
(In millions, except per share information) |
Fourth |
Third |
Second |
First |
Fourth |
Third |
Second |
First |
||||||||||||||||||||||||
Income statement |
||||||||||||||||||||||||||||||||
Net interest income |
$ |
11,462 |
$ |
11,161 |
$ |
10,986 |
$ |
11,058 |
$ |
10,292 |
$ |
10,201 |
$ |
10,118 |
$ |
10,485 |
||||||||||||||||
Noninterest income (1)
|
8,974 |
10,678 |
11,843 |
11,190 |
9,698 |
11,434 |
11,168 |
10,305 |
||||||||||||||||||||||||
Total revenue, net of interest expense |
20,436 |
21,839 |
22,829 |
22,248 |
19,990 |
21,635 |
21,286 |
20,790 |
||||||||||||||||||||||||
Provision for credit losses |
1,001 |
834 |
726 |
835 |
774 |
850 |
976 |
997 |
||||||||||||||||||||||||
Noninterest expense |
13,274 |
13,394 |
13,982 |
14,093 |
13,413 |
13,734 |
13,746 |
14,190 |
||||||||||||||||||||||||
Income before income taxes |
6,161 |
7,611 |
8,121 |
7,320 |
5,803 |
7,051 |
6,564 |
5,603 |
||||||||||||||||||||||||
Income tax expense (1)
|
3,796 |
2,187 |
3,015 |
1,983 |
1,268 |
2,257 |
1,943 |
1,731 |
||||||||||||||||||||||||
Net income (1)
|
2,365 |
5,424 |
5,106 |
5,337 |
4,535 |
4,794 |
4,621 |
3,872 |
||||||||||||||||||||||||
Net income applicable to common shareholders |
2,079 |
4,959 |
4,745 |
4,835 |
4,174 |
4,291 |
4,260 |
3,415 |
||||||||||||||||||||||||
Average common shares issued and outstanding |
10,471 |
10,198 |
10,014 |
10,100 |
10,170 |
10,250 |
10,328 |
10,370 |
||||||||||||||||||||||||
Average diluted common shares issued and outstanding |
10,622 |
10,747 |
10,835 |
10,920 |
10,992 |
11,034 |
11,086 |
11,108 |
||||||||||||||||||||||||
Performance ratios |
||||||||||||||||||||||||||||||||
Return on average assets |
0.41 |
% |
0.95 |
% |
0.90 |
% |
0.97 |
% |
0.82 |
% |
0.87 |
% |
0.85 |
% |
0.72 |
% |
||||||||||||||||
Four quarter trailing return on average assets (2)
|
0.80 |
0.91 |
0.89 |
0.88 |
0.81 |
0.76 |
0.75 |
0.76 |
||||||||||||||||||||||||
Return on average common shareholders’ equity |
3.29 |
7.89 |
7.75 |
8.09 |
6.79 |
7.02 |
7.14 |
5.80 |
||||||||||||||||||||||||
Return on average tangible common shareholders’ equity (3)
|
4.56 |
10.98 |
10.87 |
11.44 |
9.58 |
9.94 |
10.17 |
8.32 |
||||||||||||||||||||||||
Return on average shareholders’ equity |
3.43 |
7.88 |
7.56 |
8.09 |
6.69 |
7.10 |
7.01 |
5.99 |
||||||||||||||||||||||||
Return on average tangible shareholders’ equity (3)
|
4.62 |
10.59 |
10.23 |
11.01 |
9.09 |
9.68 |
9.61 |
8.27 |
||||||||||||||||||||||||
Total ending equity to total ending assets |
11.71 |
11.91 |
12.00 |
11.92 |
12.17 |
12.28 |
12.21 |
12.02 |
||||||||||||||||||||||||
Total average equity to total average assets |
11.87 |
12.03 |
11.94 |
12.00 |
12.21 |
12.26 |
12.11 |
11.96 |
||||||||||||||||||||||||
Dividend payout |
60.35 |
25.59 |
15.78 |
15.64 |
18.37 |
17.97 |
12.17 |
15.12 |
||||||||||||||||||||||||
Per common share data |
||||||||||||||||||||||||||||||||
Earnings |
$ |
0.20 |
$ |
0.49 |
$ |
0.47 |
$ |
0.48 |
$ |
0.41 |
$ |
0.42 |
$ |
0.41 |
$ |
0.33 |
||||||||||||||||
Diluted earnings |
0.20 |
0.46 |
0.44 |
0.45 |
0.39 |
0.40 |
0.39 |
0.31 |
||||||||||||||||||||||||
Dividends paid |
0.12 |
0.12 |
0.075 |
0.075 |
0.075 |
0.075 |
0.05 |
0.05 |
||||||||||||||||||||||||
Book value |
23.80 |
23.87 |
24.85 |
24.34 |
23.97 |
24.14 |
23.68 |
23.13 |
||||||||||||||||||||||||
Tangible book value (3)
|
16.96 |
17.18 |
17.75 |
17.22 |
16.89 |
17.09 |
16.68 |
16.18 |
||||||||||||||||||||||||
Market price per share of common stock |
||||||||||||||||||||||||||||||||
Closing |
$ |
29.52 |
$ |
25.34 |
$ |
24.26 |
$ |
23.59 |
$ |
22.10 |
$ |
15.65 |
$ |
13.27 |
$ |
13.52 |
||||||||||||||||
High closing |
29.88 |
25.45 |
24.32 |
25.50 |
23.16 |
16.19 |
15.11 |
16.43 |
||||||||||||||||||||||||
Low closing |
25.45 |
22.89 |
22.23 |
22.05 |
15.63 |
12.74 |
12.18 |
11.16 |
||||||||||||||||||||||||
Market capitalization |
$ |
303,681 |
$ |
264,992 |
$ |
239,643 |
$ |
235,291 |
$ |
222,163 |
$ |
158,438 |
$ |
135,577 |
$ |
139,427 |
||||||||||||||||
Average balance sheet |
||||||||||||||||||||||||||||||||
Total loans and leases |
$ |
927,790 |
$ |
918,129 |
$ |
914,717 |
$ |
914,144 |
$ |
908,396 |
$ |
900,594 |
$ |
899,670 |
$ |
892,984 |
||||||||||||||||
Total assets |
2,301,687 |
2,271,104 |
2,269,293 |
2,231,649 |
2,208,391 |
2,189,750 |
2,188,410 |
2,174,126 |
||||||||||||||||||||||||
Total deposits |
1,293,572 |
1,271,711 |
1,256,838 |
1,256,632 |
1,250,948 |
1,227,186 |
1,213,291 |
1,198,455 |
||||||||||||||||||||||||
Long-term debt |
227,644 |
227,309 |
224,019 |
221,468 |
220,587 |
227,269 |
233,061 |
233,654 |
||||||||||||||||||||||||
Common shareholders’ equity |
250,838 |
249,214 |
245,756 |
242,480 |
244,519 |
243,220 |
240,078 |
236,871 |
||||||||||||||||||||||||
Total shareholders’ equity |
273,162 |
273,238 |
270,977 |
267,700 |
269,739 |
268,440 |
265,056 |
260,065 |
||||||||||||||||||||||||
Asset quality (4)
|
||||||||||||||||||||||||||||||||
Allowance for credit losses (5)
|
$ |
11,170 |
$ |
11,455 |
$ |
11,632 |
$ |
11,869 |
$ |
11,999 |
$ |
12,459 |
$ |
12,587 |
$ |
12,696 |
||||||||||||||||
Nonperforming loans, leases and foreclosed properties (6)
|
6,758 |
6,869 |
7,127 |
7,637 |
8,084 |
8,737 |
8,799 |
9,281 |
||||||||||||||||||||||||
Allowance for loan and lease losses as a percentage of total loans and leases outstanding (6, 7)
|
1.12 |
% |
1.16 |
% |
1.20 |
% |
1.25 |
% |
1.26 |
% |
1.30 |
% |
1.32 |
% |
1.35 |
% |
||||||||||||||||
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (6, 7)
|
161 |
163 |
160 |
156 |
149 |
140 |
142 |
136 |
||||||||||||||||||||||||
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases, excluding the PCI loan portfolio (6, 7)
|
156 |
158 |
154 |
150 |
144 |
135 |
135 |
129 |
||||||||||||||||||||||||
Net charge-offs (8, 9)
|
$ |
1,237 |
$ |
900 |
$ |
908 |
$ |
934 |
$ |
880 |
$ |
888 |
$ |
985 |
$ |
1,068 |
||||||||||||||||
Annualized net charge-offs as a percentage of average loans and leases outstanding (6, 8)
|
0.53 |
% |
0.39 |
% |
0.40 |
% |
0.42 |
% |
0.39 |
% |
0.40 |
% |
0.44 |
% |
0.48 |
% |
||||||||||||||||
Annualized net charge-offs as a percentage of average loans and leases outstanding, excluding the PCI loan portfolio (6)
|
0.54 |
0.40 |
0.41 |
0.42 |
0.39 |
0.40 |
0.45 |
0.49 |
||||||||||||||||||||||||
Capital ratios at period end (10)
|
||||||||||||||||||||||||||||||||
Common equity tier 1 capital |
11.8 |
% |
11.9 |
% |
11.6 |
% |
11.0 |
% |
11.0 |
% |
11.0 |
% |
10.6 |
% |
10.3 |
% |
||||||||||||||||
Tier 1 capital |
13.2 |
13.3 |
13.2 |
12.5 |
12.4 |
12.4 |
12.0 |
11.5 |
||||||||||||||||||||||||
Total capital |
15.1 |
15.1 |
15.1 |
14.4 |
14.3 |
14.2 |
13.9 |
13.4 |
||||||||||||||||||||||||
Tier 1 leverage |
8.6 |
9.0 |
8.9 |
8.8 |
8.9 |
9.1 |
8.9 |
8.7 |
||||||||||||||||||||||||
Tangible equity (3)
|
8.9 |
9.1 |
9.2 |
9.0 |
9.2 |
9.3 |
9.2 |
9.0 |
||||||||||||||||||||||||
Tangible common equity (3)
|
7.9 |
8.1 |
8.0 |
7.9 |
8.0 |
8.1 |
8.1 |
7.9 |
||||||||||||||||||||||||
(1) |
Net income for the fourth quarter of 2017 included an estimated charge of $2.9 billion from enactment of the Tax Act which consisted of $946 million in noninterest income and $1.9 billion in income tax expense. For more information on Tax Act impacts, see Income Tax Expense on page 22. |
(2) |
Calculated as total net income for four consecutive quarters divided by annualized average assets for four consecutive quarters. |
(3) |
Tangible equity ratios and tangible book value per share of common stock are non-GAAP financial measures. For more information on these ratios, see Supplemental Financial Data on page 27, and for corresponding reconciliations to GAAP financial measures, see Non-GAAP Reconciliations on page 88.
|
(4) |
For more information on the impact of the PCI loan portfolio on asset quality, see Consumer Portfolio Credit Risk Management on page 54.
|
(5) |
Includes the allowance for loan and lease losses and the reserve for unfunded lending commitments. |
(6) |
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 62 and corresponding Table 31, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 67 and corresponding Table 38.
|
(7) |
Asset quality metrics for the first quarter of 2017 and the fourth quarter of 2016 include $242 million and $243 million of non-U.S. credit card allowance for loan and lease losses and $9.5 billion and $9.2 billion of non-U.S. credit card loans, which were included in assets of business held for sale on the Consolidated Balance Sheet at March 31, 2017 and December 31, 2016. In 2017, the Corporation sold its non-U.S. consumer credit card business. |
(8) |
Net charge-offs exclude $46 million, $73 million, $55 million and $33 million of write-offs in the PCI loan portfolio in the fourth, third, second and first quarters of 2017, respectively, and $70 million, $83 million, $82 million and $105 million in the fourth, third, second and first quarters of 2016, respectively. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 60.
|
(9) |
Includes net charge-offs of $31 million, $44 million and $41 million on non-U.S. credit card loans in the second and first quarters of 2017, and in the fourth quarter of 2016, which were included in assets of business held for sale on the Consolidated Balance Sheet at March 31, 2017 and December 31, 2016. |
(10) |
Risk-based capital ratios are reported under Basel 3 Advanced - Transition. For more information, see Capital Management on page 45.
|
Bank of America 2017 26
|
||
Supplemental Financial Data
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 a fully taxable-equivalent (FTE) basis, which when presented on a consolidated basis, are non-GAAP financial measures. To derive the FTE basis, net interest income is adjusted to reflect tax-exempt income on an equivalent before-tax basis with a corresponding increase in income tax expense. For purposes of this calculation, we use the federal statutory tax rate of 35 percent and a representative state tax rate. In addition, certain performance measures including the efficiency ratio and net interest yield utilize net interest income (and thus total revenue) on an FTE basis. The efficiency ratio measures the costs expended to generate a dollar of revenue, and net interest yield measures the bps we earn over the cost of funds. We believe that presentation of these items on an FTE basis allows for comparison of amounts from both taxable and tax-exempt sources and is consistent with industry practices.
We may present certain key performance indicators and ratios excluding certain items (e.g., debit valuation adjustment (DVA)) which result in non-GAAP financial measures. We believe that the presentation of measures that exclude these items are useful because they provide additional information to assess the underlying operational performance and trends of our businesses and to allow better comparison of period-to-period operating performance.
We also evaluate our business based on certain ratios that utilize tangible equity, a non-GAAP financial measure. Tangible
equity represents an adjusted shareholders’ equity or common shareholders’ equity amount which has been reduced by goodwill and certain acquired intangible assets (excluding MSRs), net of related deferred tax liabilities. These measures are used to evaluate our use of equity. In addition, profitability, relationship and investment models use both return on average tangible common shareholders’ equity and return on average tangible shareholders’ equity as key measures to support our overall growth goals. These ratios are as follows:
● |
Return on average tangible common shareholders’ equity measures our earnings contribution as a percentage of adjusted common shareholders’ equity. The tangible common equity ratio represents adjusted ending common shareholders’ equity divided by total assets less goodwill and certain acquired intangible assets (excluding MSRs), net of related deferred tax liabilities. |
● |
Return on average tangible shareholders’ equity measures our earnings contribution as a percentage of adjusted average total shareholders’ equity. The tangible equity ratio represents adjusted ending shareholders’ equity divided by total assets less goodwill and certain acquired intangible assets (excluding MSRs), net of related deferred tax liabilities. |
● |
Tangible book value per common share represents adjusted ending common shareholders’ equity divided by ending common shares outstanding. |
We believe that the use of ratios that utilize tangible equity provides additional useful information because they present measures of those assets that can generate income. Tangible book value per share provides additional useful information about the level of tangible assets in relation to outstanding shares of common stock.
The aforementioned supplemental data and performance measures are presented in Tables 7 and 8.
For more information on the reconciliation of these non-GAAP financial measures to GAAP financial measures, see Non-GAAP Reconciliations on page 88.
27 Bank of America 2017
|
||
Table 9 |
Average Balances and Interest Rates - FTE Basis |
||||||||||||||||||||||||||||||||
Average Balance |
Interest Income/ Expense |
Yield/ Rate |
Average Balance |
Interest Income/ Expense |
Yield/ Rate |
Average Balance |
Interest Income/ Expense |
Yield/ Rate |
|||||||||||||||||||||||||
(Dollars in millions) |
2017 |
2016 |
2015 |
||||||||||||||||||||||||||||||
Earning assets |
|||||||||||||||||||||||||||||||||
Interest-bearing deposits with the Federal Reserve, non-U.S. central banks and other banks
|
$ |
127,431 |
$ |
1,122 |
0.88 |
% |
$ |
133,374 |
$ |
605 |
0.45 |
% |
$ |
136,391 |
$ |
369 |
0.27 |
% |
|||||||||||||||
Time deposits placed and other short-term investments |
12,112 |
241 |
1.99 |
9,026 |
140 |
1.55 |
9,556 |
146 |
1.53 |
||||||||||||||||||||||||
Federal funds sold and securities borrowed or purchased under agreements to resell |
222,818 |
2,390 |
1.07 |
216,161 |
1,118 |
0.52 |
211,471 |
988 |
0.47 |
||||||||||||||||||||||||
Trading account assets |
129,007 |
4,618 |
3.58 |
129,766 |
4,563 |
3.52 |
137,837 |
4,547 |
3.30 |
||||||||||||||||||||||||
Debt securities |
435,005 |
10,626 |
2.44 |
418,289 |
9,263 |
2.23 |
390,849 |
9,233 |
2.38 |
||||||||||||||||||||||||
Loans and leases (1):
|
|||||||||||||||||||||||||||||||||
Residential mortgage |
197,766 |
6,831 |
3.45 |
188,250 |
6,488 |
3.45 |
201,366 |
6,967 |
3.46 |
||||||||||||||||||||||||
Home equity |
62,260 |
2,608 |
4.19 |
71,760 |
2,713 |
3.78 |
81,070 |
2,984 |
3.68 |
||||||||||||||||||||||||
U.S. credit card |
91,068 |
8,791 |
9.65 |
87,905 |
8,170 |
9.29 |
88,244 |
8,085 |
9.16 |
||||||||||||||||||||||||
Non-U.S. credit card (2)
|
3,929 |
358 |
9.12 |
9,527 |
926 |
9.72 |
10,104 |
1,051 |
10.40 |
||||||||||||||||||||||||
Direct/Indirect consumer (3)
|
93,374 |
2,622 |
2.81 |
91,853 |
2,296 |
2.50 |
84,585 |
2,040 |
2.41 |
||||||||||||||||||||||||
Other consumer (4)
|
2,628 |
112 |
4.23 |
2,295 |
75 |
3.26 |
1,938 |
56 |
2.86 |
||||||||||||||||||||||||
Total consumer |
451,025 |
21,322 |
4.73 |
451,590 |
20,668 |
4.58 |
467,307 |
21,183 |
4.53 |
||||||||||||||||||||||||
U.S. commercial |
292,452 |
9,765 |
3.34 |
276,887 |
8,101 |
2.93 |
248,354 |
6,883 |
2.77 |
||||||||||||||||||||||||
Commercial real estate (5)
|
58,502 |
2,116 |
3.62 |
57,547 |
1,773 |
3.08 |
52,136 |
1,521 |
2.92 |
||||||||||||||||||||||||
Commercial lease financing |
21,747 |
706 |
3.25 |
21,146 |
627 |
2.97 |
19,802 |
628 |
3.17 |
||||||||||||||||||||||||
Non-U.S. commercial |
95,005 |
2,566 |
2.70 |
93,263 |
2,337 |
2.51 |
89,188 |
2,008 |
2.25 |
||||||||||||||||||||||||
Total commercial |
467,706 |
15,153 |
3.24 |
448,843 |
12,838 |
2.86 |
409,480 |
11,040 |
2.70 |
||||||||||||||||||||||||
Total loans and leases (2)
|
918,731 |
36,475 |
3.97 |
900,433 |
33,506 |
3.72 |
876,787 |
32,223 |
3.68 |
||||||||||||||||||||||||
Other earning assets |
76,957 |
3,032 |
3.94 |
59,775 |
2,762 |
4.62 |
62,040 |
2,890 |
4.66 |
||||||||||||||||||||||||
Total earning assets (6)
|
1,922,061 |
58,504 |
3.04 |
1,866,824 |
51,957 |
2.78 |
1,824,931 |
50,396 |
2.76 |
||||||||||||||||||||||||
Cash and due from banks |
27,995 |
27,893 |
28,921 |
||||||||||||||||||||||||||||||
Other assets, less allowance for loan and lease losses |
318,577 |
295,501 |
306,684 |
||||||||||||||||||||||||||||||
Total assets |
$ |
2,268,633 |
$ |
2,190,218 |
$ |
2,160,536 |
|||||||||||||||||||||||||||
Interest-bearing liabilities |
|||||||||||||||||||||||||||||||||
U.S. interest-bearing deposits: |
|||||||||||||||||||||||||||||||||
Savings |
$ |
53,783 |
$ |
5 |
0.01 |
% |
$ |
49,495 |
$ |
5 |
0.01 |
% |
$ |
46,498 |
$ |
7 |
0.01 |
% |
|||||||||||||||
NOW and money market deposit accounts |
628,647 |
873 |
0.14 |
589,737 |
294 |
0.05 |
543,133 |
273 |
0.05 |
||||||||||||||||||||||||
Consumer CDs and IRAs |
44,794 |
121 |
0.27 |
48,594 |
133 |
0.27 |
54,679 |
162 |
0.30 |
||||||||||||||||||||||||
Negotiable CDs, public funds and other deposits |
36,782 |
354 |
0.96 |
32,889 |
160 |
0.49 |
29,976 |
95 |
0.32 |
||||||||||||||||||||||||
Total U.S. interest-bearing deposits |
764,006 |
1,353 |
0.18 |
720,715 |
592 |
0.08 |
674,286 |
537 |
0.08 |
||||||||||||||||||||||||
Non-U.S. interest-bearing deposits: |
|||||||||||||||||||||||||||||||||
Banks located in non-U.S. countries |
2,442 |
21 |
0.85 |
3,891 |
32 |
0.82 |
4,473 |
31 |
0.70 |
||||||||||||||||||||||||
Governments and official institutions |
1,006 |
10 |
0.95 |
1,437 |
9 |
0.64 |
1,492 |
5 |
0.33 |
||||||||||||||||||||||||
Time, savings and other |
62,386 |
547 |
0.88 |
59,183 |
382 |
0.65 |
54,767 |
288 |
0.53 |
||||||||||||||||||||||||
Total non-U.S. interest-bearing deposits |
65,834 |
578 |
0.88 |
64,511 |
423 |
0.66 |
60,732 |
324 |
0.53 |
||||||||||||||||||||||||
Total interest-bearing deposits |
829,840 |
1,931 |
0.23 |
785,226 |
1,015 |
0.13 |
735,018 |
861 |
0.12 |
||||||||||||||||||||||||
Federal funds purchased, securities loaned or sold under agreements to repurchase, short-term borrowings and other interest-bearing liabilities |
273,097 |
3,538 |
1.30 |
251,236 |
2,350 |
0.94 |
275,785 |
2,387 |
0.87 |
||||||||||||||||||||||||
Trading account liabilities |
45,518 |
1,204 |
2.64 |
37,897 |
1,018 |
2.69 |
46,206 |
1,343 |
2.91 |
||||||||||||||||||||||||
Long-term debt |
225,133 |
6,239 |
2.77 |
228,617 |
5,578 |
2.44 |
240,059 |
5,958 |
2.48 |
||||||||||||||||||||||||
Total interest-bearing liabilities (6)
|
1,373,588 |
12,912 |
0.94 |
1,302,976 |
9,961 |
0.76 |
1,297,068 |
10,549 |
0.81 |
||||||||||||||||||||||||
Noninterest-bearing sources: |
|||||||||||||||||||||||||||||||||
Noninterest-bearing deposits |
439,956 |
437,335 |
420,842 |
||||||||||||||||||||||||||||||
Other liabilities |
183,800 |
184,064 |
191,242 |
||||||||||||||||||||||||||||||
Shareholders’ equity |
271,289 |
265,843 |
251,384 |
||||||||||||||||||||||||||||||
Total liabilities and shareholders’ equity |
$ |
2,268,633 |
$ |
2,190,218 |
$ |
2,160,536 |
|||||||||||||||||||||||||||
Net interest spread |
2.10 |
% |
2.02 |
% |
1.95 |
% |
|||||||||||||||||||||||||||
Impact of noninterest-bearing sources |
0.27 |
0.23 |
0.24 |
||||||||||||||||||||||||||||||
Net interest income/yield on earning assets |
$ |
45,592 |
2.37 |
% |
$ |
41,996 |
2.25 |
% |
$ |
39,847 |
2.19 |
% |
|||||||||||||||||||||
(1) |
Nonperforming loans are included in the respective average loan balances. Income on these nonperforming loans is generally recognized on a cost recovery basis. PCI loans are recorded at fair value upon acquisition and accrete interest income over the estimated life of the loan. |
(2) |
Includes assets of the Corporation’s non-U.S. consumer credit card business, which was sold during the second quarter of 2017. |
(3) |
Includes non-U.S. consumer loans of $2.9 billion, $3.4 billion and $4.0 billion in 2017, 2016 and 2015, respectively.
|
(4) |
Includes consumer finance loans of $321 million, $514 million and $619 million; consumer leases of $2.1 billion, $1.6 billion and $1.2 billion, and consumer overdrafts of $179 million, $173 million and $156 million in 2017, 2016 and 2015, respectively.
|
(5) |
Includes U.S. commercial real estate loans of $55.0 billion, $54.2 billion and $49.0 billion, and non-U.S. commercial real estate loans of $3.5 billion, $3.4 billion and $3.1 billion in 2017, 2016 and 2015, respectively.
|
(6) |
Interest income includes the impact of interest rate risk management contracts, which decreased interest income on the underlying assets by $44 million, $176 million and $59 million in 2017, 2016 and 2015, respectively. Interest expense includes the impact of interest rate risk management contracts, which decreased interest expense on the underlying liabilities by $1.4 billion, $2.1 billion and $2.4 billion in 2017, 2016 and 2015, respectively. For more information, see Interest Rate Risk Management for the Banking Book on page 81.
|
Bank of America 2017 28
|
||
Table 10 |
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 2016 to 2017 |
From 2015 to 2016 |
||||||||||||||||||||||
Increase (decrease) in interest income |
||||||||||||||||||||||||
Interest-bearing deposits with the Federal Reserve, non-U.S. central banks and other banks |
$ |
(32 |
) |
$ |
549 |
$ |
517 |
$ |
(9 |
) |
$ |
245 |
$ |
236 |
||||||||||
Time deposits placed and other short-term investments |
48 |
53 |
101 |
(8 |
) |
2 |
(6 |
) |
||||||||||||||||
Federal funds sold and securities borrowed or purchased under agreements to resell |
41 |
1,231 |
1,272 |
28 |
102 |
130 |
||||||||||||||||||
Trading account assets |
(22 |
) |
77 |
55 |
(265 |
) |
281 |
16 |
||||||||||||||||
Debt securities |
438 |
925 |
1,363 |
722 |
(692 |
) |
30 |
|||||||||||||||||
Loans and leases: |
||||||||||||||||||||||||
Residential mortgage |
335 |
8 |
343 |
(454 |
) |
(25 |
) |
(479 |
) |
|||||||||||||||
Home equity |
(360 |
) |
255 |
(105 |
) |
(343 |
) |
72 |
(271 |
) |
||||||||||||||
U.S. credit card |
290 |
331 |
621 |
(33 |
) |
118 |
85 |
|||||||||||||||||
Non-U.S. credit card |
(544 |
) |
(24 |
) |
(568 |
) |
(60 |
) |
(65 |
) |
(125 |
) |
||||||||||||
Direct/Indirect consumer |
38 |
288 |
326 |
174 |
82 |
256 |
||||||||||||||||||
Other consumer |
11 |
26 |
37 |
10 |
9 |
19 |
||||||||||||||||||
Total consumer |
654 |
(515 |
) |
|||||||||||||||||||||
U.S. commercial |
468 |
1,196 |
1,664 |
787 |
431 |
1,218 |
||||||||||||||||||
Commercial real estate |
29 |
314 |
343 |
159 |
93 |
252 |
||||||||||||||||||
Commercial lease financing |
19 |
60 |
79 |
42 |
(43 |
) |
(1 |
) |
||||||||||||||||
Non-U.S. commercial |
48 |
181 |
229 |
90 |
239 |
329 |
||||||||||||||||||
Total commercial |
2,315 |
1,798 |
||||||||||||||||||||||
Total loans and leases |
2,969 |
1,283 |
||||||||||||||||||||||
Other earning assets |
793 |
(523 |
) |
270 |
(104 |
) |
(24 |
) |
(128 |
) |
||||||||||||||
Total interest income |
$ |
6,547 |
$ |
1,561 |
||||||||||||||||||||
Increase (decrease) in interest expense |
||||||||||||||||||||||||
U.S. interest-bearing deposits: |
||||||||||||||||||||||||
Savings |
$ |
— |
$ |
— |
$ |
— |
$ |
(2 |
) |
$ |
— |
$ |
(2 |
) |
||||||||||
NOW and money market deposit accounts |
20 |
559 |
579 |
22 |
(1 |
) |
21 |
|||||||||||||||||
Consumer CDs and IRAs |
(12 |
) |
— |
(12 |
) |
(16 |
) |
(13 |
) |
(29 |
) |
|||||||||||||
Negotiable CDs, public funds and other deposits |
20 |
174 |
194 |
10 |
55 |
65 |
||||||||||||||||||
Total U.S. interest-bearing deposits |
761 |
55 |
||||||||||||||||||||||
Non-U.S. interest-bearing deposits: |
||||||||||||||||||||||||
Banks located in non-U.S. countries |
(12 |
) |
1 |
(11 |
) |
(4 |
) |
5 |
1 |
|||||||||||||||
Governments and official institutions |
(3 |
) |
4 |
1 |
— |
4 |
4 |
|||||||||||||||||
Time, savings and other |
24 |
141 |
165 |
26 |
68 |
94 |
||||||||||||||||||
Total non-U.S. interest-bearing deposits |
155 |
99 |
||||||||||||||||||||||
Total interest-bearing deposits |
916 |
154 |
||||||||||||||||||||||
Federal funds purchased, securities loaned or sold under agreements to repurchase, short-term borrowings and other interest-bearing liabilities |
217 |
971 |
1,188 |
(201 |
) |
164 |
(37 |
) |
||||||||||||||||
Trading account liabilities |
206 |
(20 |
) |
186 |
(240 |
) |
(85 |
) |
(325 |
) |
||||||||||||||
Long-term debt |
(85 |
) |
746 |
661 |
(288 |
) |
(92 |
) |
(380 |
) |
||||||||||||||
Total interest expense |
2,951 |
(588 |
) |
|||||||||||||||||||||
Net increase in net interest income |
$ |
3,596 |
$ |
2,149 |
||||||||||||||||||||
(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. |
29 Bank of America 2017
|
||
Business Segment Operations
Segment Description and Basis of Presentation
We report our results of operations through the following four business segments: Consumer Banking, GWIM, Global Banking and Global Markets, with the remaining operations recorded in All Other. 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 41. The capital allocated to the business segments
is referred to as allocated capital. Allocated equity in the reporting units is comprised of allocated capital plus capital for the portion of goodwill and intangibles specifically assigned to the reporting unit. For more information, see Note 8 – Goodwill and Intangible Assets to the Consolidated Financial Statements.
For more information on the basis of presentation for business segments and reconciliations to consolidated total revenue, net income and year-end total assets, see Note 23 – Business Segment Information to the Consolidated Financial Statements.
Bank of America 2017 30
|
||
Consumer Banking
Deposits |
Consumer Lending |
Total Consumer Banking |
||||||||||||||||||||||
(Dollars in millions) |
2017 |
2016 |
2017 |
2016 |
2017 |
2016 |
% Change |
|||||||||||||||||
Net interest income (FTE basis) |
$ |
13,353 |
$ |
10,701 |
$ |
10,954 |
$ |
10,589 |
$ |
24,307 |
$ |
21,290 |
14 |
% |
||||||||||
Noninterest income: |
||||||||||||||||||||||||
Card income |
8 |
9 |
5,062 |
4,926 |
5,070 |
4,935 |
3 |
|||||||||||||||||
Service charges |
4,265 |
4,141 |
1 |
1 |
4,266 |
4,142 |
3 |
|||||||||||||||||
Mortgage banking income (1)
|
— |
— |
481 |
960 |
481 |
960 |
(50 |
) |
||||||||||||||||
All other income |
391 |
403 |
6 |
1 |
397 |
404 |
(2 |
) |
||||||||||||||||
Total noninterest income |
4,664 |
4,553 |
5,550 |
5,888 |
10,214 |
10,441 |
(2 |
) |
||||||||||||||||
Total revenue, net of interest expense (FTE basis) |
18,017 |
15,254 |
16,504 |
16,477 |
34,521 |
31,731 |
9 |
|||||||||||||||||
Provision for credit losses |
201 |
174 |
3,324 |
2,541 |
3,525 |
2,715 |
30 |
|||||||||||||||||
Noninterest expense |
10,380 |
9,677 |
7,407 |
7,977 |
17,787 |
17,654 |
1 |
|||||||||||||||||
Income before income taxes (FTE basis) |
7,436 |
5,403 |
5,773 |
5,959 |
13,209 |
11,362 |
16 |
|||||||||||||||||
Income tax expense (FTE basis) |
2,816 |
1,993 |
2,186 |
2,197 |
5,002 |
4,190 |
19 |
|||||||||||||||||
Net income |
$ |
4,620 |
$ |
3,410 |
$ |
3,587 |
$ |
3,762 |
$ |
8,207 |
$ |
7,172 |
14 |
|||||||||||
Net interest yield (FTE basis) |
2.05 |
% |
1.79 |
% |
4.18 |
% |
4.37 |
% |
3.54 |
% |
3.38 |
% |
||||||||||||
Return on average allocated capital |
39 |
28 |
14 |
17 |
22 |
21 |
||||||||||||||||||
Efficiency ratio (FTE basis) |
57.61 |
63.44 |
44.88 |
48.41 |
51.53 |
55.64 |
||||||||||||||||||
Balance Sheet |
||||||||||||||||||||||||
Average |
||||||||||||||||||||||||
Total loans and leases |
$ |
5,084 |
$ |
4,809 |
$ |
260,974 |
$ |
240,999 |
$ |
266,058 |
$ |
245,808 |
8 |
% |
||||||||||
Total earning assets (2)
|
651,963 |
598,043 |
261,802 |
242,445 |
686,612 |
629,984 |
9 |
|||||||||||||||||
Total assets (2)
|
679,306 |
624,592 |
273,253 |
254,287 |
725,406 |
668,375 |
9 |
|||||||||||||||||
Total deposits |
646,930 |
592,417 |
6,390 |
7,234 |
653,320 |
599,651 |
9 |
|||||||||||||||||
Allocated capital |
12,000 |
12,000 |
25,000 |
22,000 |
37,000 |
34,000 |
9 |
|||||||||||||||||
Year end |
||||||||||||||||||||||||
Total loans and leases |
$ |
5,143 |
$ |
4,938 |
$ |
275,330 |
$ |
254,053 |
$ |
280,473 |
$ |
258,991 |
8 |
% |
||||||||||
Total earning assets (2)
|
675,485 |
631,172 |
275,742 |
255,511 |
709,832 |
662,698 |
7 |
|||||||||||||||||
Total assets (2)
|
703,330 |
658,316 |
287,390 |
268,002 |
749,325 |
702,333 |
7 |
|||||||||||||||||
Total deposits |
670,802 |
625,727 |
5,728 |
7,059 |
676,530 |
632,786 |
7 |
|||||||||||||||||
(1) |
Total consolidated mortgage banking income of $224 million for 2017 was recorded primarily in Consumer Lending and All Other compared to $1.9 billion for 2016.
|
(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. Our customers and clients have access to a coast to coast network including financial centers in 34 states and the District of Columbia. Our network includes approximately 4,500 financial centers, 16,000 ATMs, nationwide call centers, and leading digital banking platforms with approximately 35 million active users, including approximately 24 million mobile active users.
Consumer Banking Results
Net income for Consumer Banking increased $1.0 billion to $8.2 billion in 2017 compared to 2016 primarily driven by higher net interest income, partially offset by higher provision for credit losses and lower mortgage banking income. Net interest income increased $3.0 billion to $24.3 billion primarily due to the beneficial impact of an increase in investable assets as a result of higher deposits, as well as pricing discipline and loan growth. Noninterest income decreased $227 million to $10.2 billion driven by lower mortgage banking income, partially offset by higher card income and service charges.
The provision for credit losses increased $810 million to $3.5 billion due to portfolio seasoning and loan growth in the U.S. credit
card portfolio. Noninterest expense increased $133 million to $17.8 billion driven by higher personnel expense, including the shared success discretionary year-end bonus, and increased FDIC
expense, as well as investments in digital capabilities and business growth, including increased primary sales professionals, combined with investments in new financial centers and renovations. These increases were partially offset by improved operating efficiencies.
The return on average allocated capital was 22 percent, up from 21 percent, as higher net income was partially offset by an increased capital allocation. For more information on capital allocations, see Business Segment Operations on page 30.
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, 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
31 Bank of America 2017
|
||
capabilities including access to the Corporation’s network of financial centers and ATMs.
Deposits includes the net impact of migrating customers and their related deposit and brokerage asset balances between Deposits and GWIM as well as other client-managed businesses. For more information on the migration of customer balances to or from GWIM, see GWIM – Net Migration Summary on page 35.
Net income for Deposits increased $1.2 billion to $4.6 billion in 2017 driven by higher revenue, partially offset by higher noninterest expense. Net interest income increased $2.7 billion to $13.4 billion primarily due to the beneficial impact of an increase in investable assets as a result of higher deposits, and pricing discipline. Noninterest income increased $111 million to $4.7 billion driven by higher service charges.
The provision for credit losses increased $27 million to $201 million in 2017. Noninterest expense increased $703 million to $10.4 billion primarily driven by investments in digital capabilities and business growth, including increased primary sales professionals, combined with investments in new financial centers and renovations, higher personnel expense, including the shared success discretionary year-end bonus, and increased FDIC expense.
Average deposits increased $54.5 billion to $646.9 billion in 2017 driven by strong organic growth. Growth in checking, money market savings and traditional savings of $57.9 billion was partially offset by a decline in time deposits of $3.5 billion.
Key Statistics – Deposits
|
|||||||
2017 |
2016 |
||||||
Total deposit spreads (excludes noninterest costs) (1)
|
1.84 |
% |
1.65 |
% |
|||
Year end |
|||||||
Client brokerage assets (in millions) |
$ |
177,045 |
$ |
144,696 |
|||
Digital banking active users (units in thousands) (2)
|
34,855 |
32,942 |
|||||
Mobile banking active users (units in thousands) |
24,238 |
21,648 |
|||||
Financial centers |
4,470 |
4,579 |
|||||
ATMs |
16,039 |
15,928 |
|||||
(1) |
Includes deposits held in Consumer Lending. |
(2) |
Digital users represents mobile and/or online users across consumer businesses; historical information has been reclassified primarily due to the sale of the Corporation’s non-U.S. consumer credit card business in 2017. |
Client brokerage assets increased $32.3 billion driven by strong client flows and market performance. Mobile banking active users increased 2.6 million reflecting continuing changes in our customers’ banking preferences. The number of financial centers
declined 109 driven by changes in customer preferences to self-service options as we continue to optimize our consumer banking network and improve our cost-to-serve.
Consumer Lending
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.
We classify consumer real estate loans as core or non-core based on loan and customer characteristics such as origination date, product type, loan-to-value (LTV), Fair Isaac Corporation (FICO) score and delinquency status. For more information on the core and non-core portfolios, see Consumer Portfolio Credit Risk Management on page 54. Total owned loans in the core portfolio held in Consumer Lending increased $14.7 billion to $115.9 billion in 2017, primarily driven by higher residential mortgage balances, partially offset by a decline in home equity balances.
Consumer Lending includes the net impact of migrating customers and their related loan balances between Consumer Lending and GWIM. For more information on the migration of customer balances to or from GWIM, see GWIM – Net Migration Summary on page 35.
Net income for Consumer Lending decreased $175 million to $3.6 billion in 2017 driven by higher provision for credit losses and lower noninterest income, partially offset by lower noninterest expense and higher net interest income. Net interest income increased $365 million to $11.0 billion primarily driven by the impact of an increase in loan balances. Noninterest income decreased $338 million to $5.6 billion driven by lower mortgage banking income, partially offset by higher card income.
The provision for credit losses increased $783 million to $3.3 billion in 2017 due to portfolio seasoning and loan growth in the U.S. credit card portfolio. Noninterest expense decreased $570 million to $7.4 billion primarily driven by improved operating efficiencies.
Average loans increased $20.0 billion to $261.0 billion in 2017 driven by increases in residential mortgages as well as consumer vehicle and U.S credit card loans, partially offset by lower home equity loan balances.
Key Statistics – Consumer Lending
| |||||||
(Dollars in millions) |
2017 |
2016 |
|||||
Total U.S. credit card (1)
|
|||||||
Gross interest yield |
9.65 |
% |
9.29 |
% |
|||
Risk-adjusted margin |
8.67 |
9.04 |
|||||
New accounts (in thousands) |
4,939 |
4,979 |
|||||
Purchase volumes |
$ |
244,753 |
$ |
226,432 |
|||
Debit card purchase volumes |
$ |
298,641 |
$ |
285,612 |
|||
(1) |
In addition to the U.S. credit card portfolio in Consumer Banking, the remaining U.S. credit card portfolio is in GWIM.
|
During 2017, the total U.S. credit card risk-adjusted margin decreased 37 bps compared to 2016, primarily driven by compressed margins, increased net charge-offs and higher credit card rewards costs. Total U.S. credit card purchase volumes increased $18.3 billion to $244.8 billion, and debit card purchase volumes increased $13.0 billion to $298.6 billion, reflecting higher levels of consumer spending.
Bank of America 2017 32
|
||
Mortgage Banking Income
Mortgage banking income in Consumer Banking includes production income and net servicing income. Production income is comprised primarily of revenue from the fair value gains and losses recognized on our interest rate lock commitments (IRLCs) and loans held-for-sale (LHFS), the related secondary market execution, and costs related to representations and warranties made in the sales transactions along with other obligations incurred in the sales of mortgage loans. Production income decreased $461 million to $202 million in 2017 due to a decision to retain a higher percentage of residential mortgage production in Consumer Banking, as well as the impact of a higher interest rate environment driving lower refinances.
Net servicing income within Consumer Banking includes income earned in connection with servicing activities and MSR valuation adjustments for the core portfolio, net of results from risk management activities used to hedge certain market risks of the MSRs. Net servicing income decreased $18 million to $279 million in 2017 reflecting the decline in the size of the servicing portfolio.
Mortgage Servicing Rights
At December 31, 2017, the core MSR portfolio, held within Consumer Lending, was $1.7 billion compared to $2.1 billion at December 31, 2016. The decrease was primarily driven by the amortization of expected cash flows, which exceeded additions to
the MSR portfolio, partially offset by the impact of changes in fair value from rising interest rates. For more information on MSRs, see Note 20 – Fair Value Measurements to the Consolidated Financial Statements.
Key Statistics - Mortgage Banking |
|||||||
(Dollars in millions) |
2017 |
2016 |
|||||
Loan production (1):
|
|||||||
Total (2):
|
|||||||
First mortgage |
$ |
50,581 |
$ |
64,153 |
|||
Home equity |
16,924 |
15,214 |
|||||
Consumer Banking: |
|||||||
First mortgage |
$ |
34,065 |
$ |
44,510 |
|||
Home equity |
15,199 |
13,675 |
|||||
(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 $10.4 billion and $13.6 billion in 2017, primarily driven by a higher interest rate environment driving lower first-lien mortgage refinances.
Home equity production in Consumer Banking and for the total Corporation increased $1.5 billion and $1.7 billion in 2017 due to a higher demand based on improving housing trends, and improved engagement with customers.
Global Wealth & Investment Management
(Dollars in millions) |
2017 |
2016 |
% Change |
||||||||
Net interest income (FTE basis) |
$ |
6,173 |
$ |
5,759 |
7 |
% |
|||||
Noninterest income: |
|||||||||||
Investment and brokerage services |
10,883 |
10,316 |
5 |
||||||||
All other income |
1,534 |
1,575 |
(3 |
) |
|||||||
Total noninterest income |
12,417 |
11,891 |
4 |
||||||||
Total revenue, net of interest expense (FTE basis) |
18,590 |
17,650 |
5 |
||||||||
Provision for credit losses |
56 |
68 |
(18 |
) |
|||||||
Noninterest expense |
13,564 |
13,175 |
3 |
||||||||
Income before income taxes (FTE basis) |
4,970 |
4,407 |
13 |
||||||||
Income tax expense (FTE basis) |
1,882 |
1,632 |
15 |
||||||||
Net income |
$ |
3,088 |
$ |
2,775 |
11 |
||||||
Net interest yield (FTE basis) |
2.32 |
% |
2.09 |
% |
|||||||
Return on average allocated capital |
22 |
21 |
|||||||||
Efficiency ratio (FTE basis) |
72.96 |
74.65 |
|||||||||
Balance Sheet |
|||||||||||
Average |
|||||||||||
Total loans and leases |
$ |
152,682 |
$ |
142,429 |
7 |
% |
|||||
Total earning assets |
265,670 |
275,799 |
(4 |
) |
|||||||
Total assets |
281,517 |
291,478 |
(3 |
) |
|||||||
Total deposits |
245,559 |
256,425 |
(4 |
) |
|||||||
Allocated capital |
14,000 |
13,000 |
8 |
||||||||
Year end |
|||||||||||
Total loans and leases |
$ |
159,378 |
$ |
148,179 |
8 |
% |
|||||
Total earning assets |
267,026 |
283,151 |
(6 |
) |
|||||||
Total assets |
284,321 |
298,931 |
(5 |
) |
|||||||
Total deposits |
246,994 |
262,530 |
(6 |
) |
|||||||
33 Bank of America 2017
|
||
GWIM consists of two primary businesses: Merrill Lynch Global Wealth Management (MLGWM) and U.S. Trust, Bank of America Private Wealth Management (U.S. Trust).
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 our clients’ needs through a full set of investment management, brokerage, banking and retirement products.
U.S. Trust, together with MLGWM’s Private Banking & Investments Group, 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 increased $313 million to $3.1 billion in 2017 compared to 2016 due to higher revenue, partially offset by an increase in noninterest expense. The operating margin was 27 percent compared to 25 percent a year ago.
Net interest income increased $414 million to $6.2 billion driven by higher short-term interest rates. Noninterest income, which primarily includes investment and brokerage services income, increased $526 million to $12.4 billion. The increase in noninterest income was driven by the impact of AUM flows and higher market valuations, partially offset by the impact of changing market dynamics on transactional revenue and AUM pricing. Noninterest expense increased $389 million to $13.6 billion primarily driven by higher revenue-related incentive costs.
Return on average allocated capital was 22 percent in 2017, up from 21 percent a year ago, as higher net income was partially offset by an increased capital allocation.
Revenue from MLGWM of $15.3 billion increased six percent in 2017 compared to 2016 due to higher net interest income and asset management fees driven by AUM flows and higher market valuations, partially offset by lower transactional revenue and AUM pricing. U.S. Trust revenue of $3.3 billion increased seven percent in 2017 compared to 2016 reflecting higher net interest income and asset management fees driven by higher market valuations and AUM flows.
Key Indicators and Metrics |
|||||||
(Dollars in millions, except as noted) |
2017 |
2016 |
|||||
Revenue by Business |
|||||||
Merrill Lynch Global Wealth Management |
$ |
15,288 |
$ |
14,486 |
|||
U.S. Trust |
3,295 |
3,075 |
|||||
Other (1)
|
7 |
89 |
|||||
Total revenue, net of interest expense (FTE basis) |
$ |
18,590 |
$ |
17,650 |
|||
Client Balances by Business, at year end |
|||||||
Merrill Lynch Global Wealth Management |
$ |
2,305,664 |
$ |
2,102,175 |
|||
U.S. Trust |
446,199 |
406,392 |
|||||
Total client balances |
$ |
2,751,863 |
$ |
2,508,567 |
|||
Client Balances by Type, at year end |
|||||||
Assets under management |
$ |
1,080,747 |
$ |
886,148 |
|||
Brokerage assets |
1,125,282 |
1,085,826 |
|||||
Assets in custody |
136,708 |
123,066 |
|||||
Deposits |
246,994 |
262,530 |
|||||
Loans and leases (2)
|
162,132 |
150,997 |
|||||
Total client balances |
$ |
2,751,863 |
$ |
2,508,567 |
|||
Assets Under Management Rollforward |
|||||||
Assets under management, beginning of year |
$ |
886,148 |
$ |
900,863 |
|||
Net client flows (3)
|
95,707 |
30,582 |
|||||
Market valuation/other (1)
|
98,892 |
(45,297 |
) |
||||
Total assets under management, end of year |
$ |
1,080,747 |
$ |
886,148 |
|||
Associates, at year end (4, 5)
|
|||||||
Number of financial advisors |
17,355 |
16,820 |
|||||
Total wealth advisors, including financial advisors |
19,238 |
18,678 |
|||||
Total primary sales professionals, including financial advisors and wealth advisors |
20,341 |
19,629 |
|||||
Merrill Lynch Global Wealth Management Metric (5)
|
|||||||
Financial advisor productivity (6) (in thousands)
|
$ |
1,005 |
$ |
974 |
|||
U.S. Trust Metric, at year end (5)
|
|||||||
Primary sales professionals |
1,714 |
1,677 |
|||||
(1) |
Amounts for 2016 include the results of BofA Global Capital Management, the cash management division of Bank of America, and certain administrative items. Amounts also reflect the sale to a third party of approximately $80 billion of BofA Global Capital Management’s AUM in 2016. |
(2)
|
Includes margin receivables which are classified in customer and other receivables on the Consolidated Balance Sheet. |
(3)
|
For 2016, net client flows included $8.0 billion of net outflows related to BofA Global Capital Management’s AUM that were sold in 2016. |
(4)
|
Includes financial advisors in the Consumer Banking segment of 2,402 and 2,200 at December 31, 2017 and 2016.
|
(5)
|
Associate computation is based on headcount. |
(6)
|
Financial advisor productivity is defined as MLGWM total revenue, excluding the allocation of certain asset and liability management (ALM) activities, divided by the total average number of financial advisors (excluding financial advisors in the Consumer Banking segment).
|
Bank of America 2017 34
|
||
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 and generally range from 50 to 150 bps on their total AUM. 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 $243.3 billion, or 10 percent, in 2017 to nearly $2.8 trillion at December 31, 2017, primarily due to AUM which increased $194.6 billion, or 22 percent, due to positive net flows and higher market valuations.
Net Migration Summary
GWIM results are impacted by the net migration of clients and their corresponding deposit, loan and brokerage balances primarily from Consumer Banking, as presented in the table below. Migrations result from the movement of clients between business segments to better align with client needs.
Net Migration Summary (1)
|
|||||||
(Dollars in millions) |
2017 |
2016 |
|||||
Total deposits, net – from GWIM
|
$ |
356 |
$ |
1,319 |
|||
Total loans, net – from GWIM
|
154 |
7 |
|||||
Total brokerage, net – from GWIM
|
266 |
1,972 |
|||||
(1) |
Migration occurs primarily between GWIM and Consumer Banking.
|
Global Banking
(Dollars in millions) |
2017 |
2016 |
% Change |
||||||||
Net interest income (FTE basis) |
$ |
10,504 |
$ |
9,471 |
11 |
% |
|||||
Noninterest income: |
|||||||||||
Service charges |
3,125 |
3,094 |
1 |
||||||||
Investment banking fees |
3,471 |
2,884 |
20 |
||||||||
All other income |
2,899 |
2,996 |
(3 |
) |
|||||||
Total noninterest income |
9,495 |
8,974 |
6 |
||||||||
Total revenue, net of interest expense (FTE basis) |
19,999 |
18,445 |
8 |
||||||||
Provision for credit losses |
212 |
883 |
(76 |
) |
|||||||
Noninterest expense |
8,596 |
8,486 |
1 |
||||||||
Income before income taxes (FTE basis) |
11,191 |
9,076 |
23 |
||||||||
Income tax expense (FTE basis) |
4,238 |
3,347 |
27 |
||||||||
Net income |
$ |
6,953 |
$ |
5,729 |
21 |
||||||
Net interest yield (FTE basis) |
2.93 |
% |
2.76 |
% |
|||||||
Return on average allocated capital |
17 |
15 |
|||||||||
Efficiency ratio (FTE basis) |
42.98 |
46.01 |
|||||||||
Balance Sheet |
|||||||||||
Average |
|||||||||||
Total loans and leases |
$ |
346,089 |
$ |
333,820 |
4 |
% |
|||||
Total earning assets |
358,302 |
342,859 |
5 |
||||||||
Total assets |
416,038 |
396,737 |
5 |
||||||||
Total deposits |
312,859 |
304,741 |
3 |
||||||||
Allocated capital |
40,000 |
37,000 |
8 |
||||||||
Year end |
|||||||||||
Total loans and leases |
$ |
350,668 |
$ |
339,271 |
3 |
% |
|||||
Total earning assets |
365,560 |
350,110 |
4 |
||||||||
Total assets |
424,533 |
408,330 |
4 |
||||||||
Total deposits |
329,273 |
307,630 |
7 |
||||||||
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 and short-term investing options. 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 Commercial Banking clients generally include middle-market companies, commercial real estate firms and not-for-profit companies. Global Corporate Banking clients generally include large global corporations, financial institutions and leasing clients. Business Banking clients include mid-sized U.S.-based businesses requiring customized and integrated financial advice and solutions.
Net income for Global Banking increased $1.2 billion to $7.0 billion in 2017 compared to 2016 driven by higher revenue and lower provision for credit losses.
Revenue increased $1.6 billion to $20.0 billion in 2017 compared to 2016 driven by higher net interest income and noninterest income. Net interest income increased $1.0 billion to $10.5 billion due to loan and deposit-related growth, higher short-
35 Bank of America 2017
|
||
term rates on an increased deposit base and the impact of the allocation of ALM activities, partially offset by credit spread compression. Noninterest income increased $521 million to $9.5 billion largely due to higher investment banking fees.
The provision for credit losses decreased $671 million to $212 million in 2017 primarily driven by reductions in energy exposures and continued portfolio improvement, partially offset by Global Banking’s portion of a single-name non-U.S. commercial charge-off. Noninterest expense increased $110 million to $8.6 billion in 2017 primarily driven by higher investments in technology and higher deposit insurance, partially offset by lower litigation costs.
The return on average allocated capital was 17 percent, up from 15 percent, as higher net income was partially offset by an increased capital allocation. For more information on capital allocated to the business segments, see Business Segment Operations on page 30.
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.
The table below and following discussion present a summary of the results, which exclude certain investment banking activities in Global Banking.
Global Corporate, Global Commercial and Business Banking |
||||||||||||||||||||||||||||||||
Global Corporate Banking |
Global Commercial Banking |
Business Banking |
Total |
|||||||||||||||||||||||||||||
(Dollars in millions) |
2017 |
2016 |
2017 |
2016 |
2017 |
2016 |
2017 |
2016 |
||||||||||||||||||||||||
Revenue |
||||||||||||||||||||||||||||||||
Business Lending |
$ |
4,387 |
$ |
4,285 |
$ |
4,280 |
$ |
4,139 |
$ |
404 |
$ |
376 |
$ |
9,071 |
$ |
8,800 |
||||||||||||||||
Global Transaction Services |
3,322 |
2,996 |
3,017 |
2,718 |
849 |
740 |
7,188 |
6,454 |
||||||||||||||||||||||||
Total revenue, net of interest expense |
$ |
7,709 |
$ |
7,281 |
$ |
7,297 |
$ |
6,857 |
$ |
1,253 |
$ |
1,116 |
$ |
16,259 |
$ |
15,254 |
||||||||||||||||
Balance Sheet |
||||||||||||||||||||||||||||||||
Average |
||||||||||||||||||||||||||||||||
Total loans and leases |
$ |
158,292 |
$ |
152,944 |
$ |
170,101 |
$ |
163,309 |
$ |
17,682 |
$ |
17,537 |
$ |
346,075 |
$ |
333,790 |
||||||||||||||||
Total deposits |
148,704 |
143,233 |
127,720 |
126,253 |
36,435 |
35,256 |
312,859 |
304,742 |
||||||||||||||||||||||||
Year end |
||||||||||||||||||||||||||||||||
Total loans and leases |
$ |
163,184 |
$ |
152,589 |
$ |
169,997 |
$ |
168,828 |
$ |
17,500 |
$ |
17,882 |
$ |
350,681 |
$ |
339,299 |
||||||||||||||||
Total deposits |
155,614 |
144,016 |
137,538 |
128,210 |
36,120 |
35,409 |
329,272 |
307,635 |
||||||||||||||||||||||||
Business Lending revenue increased $271 million in 2017 compared to 2016 driven by the impact of loan and lease-related growth and the allocation of ALM activities, partially offset by credit spread compression.
Global Transaction Services revenue increased $734 million in 2017 compared to 2016 driven by the impact of higher short-term rates on an increased deposit base, as well as the allocation of ALM activities.
Average loans and leases increased four percent in 2017 compared to 2016 driven by growth in the commercial and industrial, and leasing portfolios. Average deposits increased three percent due to growth with new and existing clients.
Global Investment Banking
Client teams and product specialists underwrite and distribute debt, equity and loan products, and provide advisory services and tailored risk management solutions. The economics of certain investment banking and underwriting activities are shared primarily between Global Banking and Global Markets under an internal revenue-sharing arrangement. 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) |
2017 |
2016 |
2017 |
2016 |
|||||||||||
Products |
|||||||||||||||
Advisory |
$ |
1,557 |
$ |
1,156 |
$ |
1,691 |
$ |
1,269 |
|||||||
Debt issuance |
1,506 |
1,407 |
3,635 |
3,276 |
|||||||||||
Equity issuance |
408 |
321 |
940 |
864 |
|||||||||||
Gross investment banking fees |
3,471 |
2,884 |
6,266 |
5,409 |
|||||||||||
Self-led deals |
(113 |
) |
(49 |
) |
(255 |
) |
(168 |
) |
|||||||
Total investment banking fees |
$ |
3,358 |
$ |
2,835 |
$ |
6,011 |
$ |
5,241 |
|||||||
Total Corporation investment banking fees, excluding self-led deals, of $6.0 billion, which are primarily included within Global Banking and Global Markets, increased 15 percent in 2017 compared to 2016 driven by higher advisory fees and higher debt and equity issuance fees due to an increase in overall client activity and market fee pools.
Bank of America 2017 36
|
||
Global Markets
(Dollars in millions) |
2017 |
2016 |
% Change |
||||||||
Net interest income (FTE basis) |
$ |
3,744 |
$ |
4,558 |
(18 |
)% |
|||||
Noninterest income: |
|||||||||||
Investment and brokerage services |
2,049 |
2,102 |
(3 |
) |
|||||||
Investment banking fees |
2,476 |
2,296 |
8 |
||||||||
Trading account profits |
6,710 |
6,550 |
2 |
||||||||
All other income |
972 |
584 |
66 |
||||||||
Total noninterest income |
12,207 |
11,532 |
6 |
||||||||
Total revenue, net of interest expense (FTE basis) |
15,951 |
16,090 |
(1 |
) |
|||||||
Provision for credit losses |
164 |
31 |
n/m |
||||||||
Noninterest expense |
10,731 |
10,169 |
6 |
||||||||
Income before income taxes (FTE basis) |
5,056 |
5,890 |
(14 |
) |
|||||||
Income tax expense (FTE basis) |
1,763 |
2,072 |
(15 |
) |
|||||||
Net income |
$ |
3,293 |
$ |
3,818 |
(14 |
) |
|||||
Return on average allocated capital |
9 |
% |
10 |
% |
|||||||
Efficiency ratio (FTE basis) |
67.28 |
63.21 |
|||||||||
Balance Sheet |
|||||||||||
Average |
|||||||||||
Trading-related assets: |
|||||||||||
Trading account securities |
$ |
216,996 |
$ |
185,135 |
17 |
% |
|||||
Reverse repurchases |
101,795 |
89,715 |
13 |
||||||||
Securities borrowed |
82,210 |
87,286 |
(6 |
) |
|||||||
Derivative assets |
40,811 |
50,769 |
(20 |
) |
|||||||
Total trading-related assets (1)
|
441,812 |
412,905 |
7 |
||||||||
Total loans and leases |
71,413 |
69,641 |
3 |
||||||||
Total earning assets (1)
|
449,441 |
423,579 |
6 |
||||||||
Total assets |
638,674 |
585,341 |
9 |
||||||||
Total deposits |
32,864 |
34,250 |
(4 |
) |
|||||||
Allocated capital |
35,000 |
37,000 |
(5 |
) |
|||||||
Year end |
|||||||||||
Total trading-related assets (1)
|
$ |
419,375 |
$ |
380,562 |
10 |
% |
|||||
Total loans and leases |
76,778 |
72,743 |
6 |
||||||||
Total earning assets (1)
|
449,314 |
397,022 |
13 |
||||||||
Total assets |
629,007 |
566,060 |
11 |
||||||||
Total deposits |
34,029 |
34,927 |
(3 |
) |
|||||||
(1) |
Trading-related assets include derivative assets, which are considered non-earning assets. |
n/m = not meaningful
Global Markets offers sales and trading services, including research, 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 36.
Net income for Global Markets decreased $525 million to $3.3 billion in 2017 compared to 2016. Net DVA losses were $428 million compared to losses of $238 million in 2016. Excluding net DVA, net income decreased $408 million to $3.6 billion primarily driven by higher noninterest expense, lower sales and trading revenue and an increase in the provision for credit losses, partially offset by higher investment banking fees.
Sales and trading revenue, excluding net DVA, decreased $423 million primarily due to weaker performance in rates products and emerging markets. The provision for credit losses increased $133 million to $164 million, reflecting Global Markets’ portion of a single-name non-U.S. commercial charge-off. Noninterest expense increased $562 million to $10.7 billion primarily due to higher litigation expense and continued investments in technology.
Average trading-related assets increased $28.9 billion to $441.8 billion in 2017 primarily driven by targeted growth in client financing activities in the global equities business. Year-end
37 Bank of America 2017
|
||
trading-related assets increased $38.8 billion to $419.4 billion at December 31, 2017 driven by additional inventory in FICC to meet expected client demand as well as targeted growth in client financing activities in the global equities business.
The return on average allocated capital decreased to nine percent, reflecting lower net income, partially offset by a decrease in average allocated capital.
Sales and Trading Revenue
Sales and trading revenue includes unrealized and realized gains and losses on trading and other assets, 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 the impact of net DVA, which is a non-GAAP financial measure. We believe the use of this non-GAAP financial measure provides additional useful information to assess the underlying performance of these businesses and to allow better comparison of year-over-year operating performance.
Sales and Trading Revenue (1, 2)
|
|||||||
(Dollars in millions) |
2017 |
2016 |
|||||
Sales and trading revenue |
|||||||
Fixed-income, currencies and commodities |
$ |
8,665 |
$ |
9,373 |
|||
Equities |
4,112 |
4,017 |
|||||
Total sales and trading revenue |
$ |
12,777 |
$ |
13,390 |
|||
Sales and trading revenue, excluding net DVA (3)
|
|||||||
Fixed-income, currencies and commodities |
$ |
9,059 |
$ |
9,611 |
|||
Equities |
4,146 |
4,017 |
|||||
Total sales and trading revenue, excluding net DVA |
$ |
13,205 |
$ |
13,628 |
|||
(1) |
Includes FTE adjustments of $236 million and $186 million for 2017 and 2016. For more information on sales and trading revenue, see Note 2 – Derivatives to the Consolidated Financial Statements.
|
(2) |
Includes Global Banking sales and trading revenue of $236 million and $406 million for 2017 and 2016.
|
(3) |
FICC and Equities sales and trading revenue, excluding net DVA, is a non-GAAP financial measure. FICC net DVA losses were $394 million and $238 million for 2017 and 2016. Equities net DVA losses were $34 million and $0 for 2017 and 2016.
|
The following explanations for year-over-year changes in sales and trading, FICC and Equities revenue, would be the same if net DVA was included. FICC revenue, excluding net DVA, decreased $552 million from 2016 primarily due to lower revenue in rates products and emerging markets as lower volatility led to reduced client flow. The decline in FICC revenue was also impacted by higher funding costs which were driven by increases in market interest rates. Equities revenue, excluding net DVA, increased $129 million from 2016 due to higher revenue from the growth in client financing activities which was partially offset by lower revenue in cash and derivative trading due to lower levels of volatility and client activity.
All Other
(Dollars in millions) |
2017 |
2016 |
% Change |
||||||||
Net interest income (FTE basis) |
$ |
864 |
$ |
918 |
(6 |
)% |
|||||
Noninterest income: |
|||||||||||
Card income |
69 |
189 |
(63 |
) |
|||||||
Mortgage banking income (loss) |
(263 |
) |
889 |
(130 |
) |
||||||
Gains on sales of debt securities |
255 |
490 |
(48 |
) |
|||||||
All other loss |
(1,709 |
) |
(1,801 |
) |
(5 |
) |
|||||
Total noninterest income (loss) |
(1,648 |
) |
(233 |
) |
n/m |
||||||
Total revenue, net of interest expense (FTE basis) |
(784 |
) |
685 |
n/m |
|||||||
Provision for credit losses |
(561 |
) |
(100 |
) |
n/m |
||||||
Noninterest expense |
4,065 |
5,599 |
(27 |
) |
|||||||
Loss before income taxes (FTE basis) |
(4,288 |
) |
(4,814 |
) |
(11 |
) |
|||||
Income tax expense (benefit) (FTE basis) |
(979 |
) |
(3,142 |
) |
(69 |
) |
|||||
Net loss |
$ |
(3,309 |
) |
$ |
(1,672 |
) |
98 |
||||
Balance Sheet (1)
|
|||||||||||
Average |
|||||||||||
Total loans and leases |
$ |
82,489 |
$ |
108,735 |
(24 |
)% |
|||||
Total assets (1)
|
206,998 |
248,287 |
(17 |
) |
|||||||
Total deposits |
25,194 |
27,494 |
(8 |
) |
|||||||
Year end |
|||||||||||
Total loans and leases (2)
|
$ |
69,452 |
$ |
96,713 |
(28 |
)% |
|||||
Total assets (1)
|
194,048 |
212,413 |
(9 |
) |
|||||||
Total deposits |
22,719 |
23,061 |
(1 |
) |
|||||||
(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. Allocated assets were $515.6 billion and $500.0 billion for 2017 and 2016, and $520.4 billion and $518.7 billion at December 31, 2017 and 2016.
|
(2) |
Included $9.2 billion of non-U.S. credit card loans at December 31, 2016, which were included in assets of business held for sale on the Consolidated Balance Sheet. In 2017, the Corporation sold its non-U.S. consumer credit card business.
|
n/m = not meaningful
Bank of America 2017 38
|
||
All Other consists of ALM activities, equity investments, non-core mortgage loans and servicing activities, the net impact of periodic revisions to the MSR valuation model for both core and non-core MSRs and the related economic hedge results and ineffectiveness, liquidating businesses, and residual expense allocations. ALM activities encompass certain residential mortgages, debt securities, interest rate and foreign currency risk management activities, the impact of certain allocation methodologies and accounting hedge ineffectiveness. The results of certain 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. Equity investments include our merchant services joint venture as well as Global Principal Investments which is comprised of a portfolio of equity, real estate and other alternative investments. For more information on our merchant services joint venture, see Note 12 – Commitments and Contingencies to the Consolidated Financial Statements. Income tax is generally recorded in the business segments at the statutory rate; the initial impact of the Tax Act was recorded in All Other.
In 2017, the Corporation sold its non-U.S. consumer credit card business. For more information on the sale, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
The Corporation classifies consumer real estate loans as core or non-core based on loan and customer characteristics such as origination date, product type, LTV, FICO score and delinquency status. For more information on the core and non-core portfolios, see Consumer Portfolio Credit Risk Management on page 54. Residential mortgage loans that are held for ALM purposes, including interest rate or liquidity risk management, are classified as core and are presented on the balance sheet of All Other. For more information on our interest rate and liquidity risk management activities, see Liquidity Risk on page 49 and Interest Rate Risk Management for the Banking Book on page 81. During 2017, residential mortgage loans held for ALM activities decreased $6.1 billion to $28.5 billion at December 31, 2017 primarily as a result of payoffs and paydowns outpacing new originations. Non-core residential mortgage and home equity loans, which are principally run-off portfolios, including certain loans accounted for under the fair value option and MSRs pertaining to non-core loans serviced for others, are also held in All Other. During 2017, total non-core loans decreased $11.8 billion to $41.3 billion at December 31, 2017 due primarily to payoffs and paydowns, as well as loan sales.
The net loss for All Other increased $1.6 billion to a net loss of $3.3 billion, driven by an estimated charge of $2.9 billion due to enactment of the Tax Act. For more information, see Financial Highlights on page 21. The pre-tax loss for 2017 compared to 2016 decreased $526 million reflecting lower noninterest expense and a larger benefit in the provision for credit losses, partially offset by a decline in revenue.
Revenue declined $1.5 billion primarily due to lower mortgage banking income. Mortgage banking income declined $1.2 billion primarily due to less favorable valuations on MSRs, net of related hedges, and an increase in the provision for representations and warranties. All other noninterest loss decreased marginally and included a pre-tax gain of $793 million on the sale of the non-
U.S. credit card business and a downward valuation adjustment of $946 million on tax-advantaged energy investments in connection with the Tax Act. Gains on sales of loans included in all other loss, including nonperforming and other delinquent loans, were $134 million compared to gains of $232 million in the same period in 2016.
The benefit in the provision for credit losses increased $461 million to a benefit of $561 million primarily driven by continued runoff of the non-core portfolio, loan sale recoveries and the sale of the non-U.S. consumer credit card business.
Noninterest expense decreased $1.5 billion to $4.1 billion driven by lower litigation expense, lower personnel expense and a decline in non-core mortgage servicing costs, partially offset by a $316 million impairment charge related to certain data centers in the process of being sold.
The income tax benefit was $1.0 billion in 2017 compared to a benefit of $3.1 billion in 2016. The decrease in the tax benefit was driven by the impacts of the Tax Act, including an estimated income tax expense of $1.9 billion related primarily to a lower valuation of certain deferred tax assets and liabilities. Both periods include income tax benefit adjustments to eliminate the FTE treatment of certain tax credits recorded in Global Banking.
Off-Balance Sheet Arrangements and Contractual Obligations
We have contractual obligations to make future payments on debt and lease agreements. Additionally, in the normal course of business, we enter into contractual arrangements whereby we commit to future purchases of products or services from unaffiliated parties. 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 Qualified Pension Plan, Non-U.S. Pension Plans, Nonqualified and Other Pension Plans, and Postretirement Health and Life Plans (collectively, 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 2017 and 2016, we contributed $514 million and $256 million to the Plans, and we expect to make $128 million of contributions during 2018. 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.
39 Bank of America 2017
|
||
Table 11 includes certain contractual obligations at December 31, 2017 and 2016.
Table 11 |
Contractual Obligations |
|||||||||||||||||||||||
December 31, 2017 |
December 31 2016 |
|||||||||||||||||||||||
(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 |
$ |
42,057 |
$ |
42,145 |
$ |
30,879 |
$ |
112,321 |
$ |
227,402 |
$ |
216,823 |
||||||||||||
Operating lease obligations |
2,256 |
4,072 |
3,023 |
5,169 |
14,520 |
13,620 |
||||||||||||||||||
Purchase obligations |
1,317 |
1,426 |
458 |
1,018 |
4,219 |
5,742 |
||||||||||||||||||
Time deposits |
61,038 |
4,990 |
1,543 |
273 |
67,844 |
74,944 |
||||||||||||||||||
Other long-term liabilities |
1,681 |
1,234 |
862 |
1,195 |
4,972 |
4,567 |
||||||||||||||||||
Estimated interest expense on long-term debt and time deposits (1)
|
5,590 |
8,796 |
6,909 |
27,828 |
49,123 |
39,447 |
||||||||||||||||||
Total contractual obligations |
$ |
113,939 |
$ |
62,663 |
$ |
43,674 |
$ |
147,804 |
$ |
368,080 |
$ |
355,143 |
||||||||||||
(1) |
Represents forecasted net interest expense on long-term debt and time deposits based on interest rates at December 31, 2017. Forecasts are based on the contractual maturity dates of each liability, and are net of derivative hedges, where applicable.
|
Representations and Warranties
For background information on representations and warranties, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements. Breaches of representations and warranties made in connection with the sale of mortgage loans have resulted in and may continue to result in the requirement to repurchase mortgage loans or to otherwise make whole or provide other remedies to investors, securitization trusts, guarantors, insurers or other parties (collectively, repurchases).
At December 31, 2017 and 2016, we had $17.6 billion and $18.3 billion of unresolved repurchase claims, predominately related to subprime and pay option first-lien loans and home equity loans originated primarily between 2004 and 2008.
In addition to unresolved repurchase claims, we have received notifications indicating that we may have indemnity obligations with respect to specific loans for which we have not received a repurchase request. These notifications were received prior to 2015, and totaled $1.3 billion at both December 31, 2017 and 2016. During 2017, we reached agreements with certain parties requesting indemnity. One such agreement is subject to acceptance by a securitization trustee. The impact of these agreements is included in the provision and reserve for representations and warranties.
The reserve for representations and warranties and corporate guarantees is included in accrued expenses and other liabilities on the Consolidated Balance Sheet and the related provision is included in mortgage banking income. At December 31, 2017 and 2016, the reserve for representations and warranties was $1.9 billion and $2.3 billion. The representations and warranties provision was $393 million for 2017 compared to $106 million for 2016 with the increase resulting from settlements or advanced negotiations with certain counterparties where we believe we will reach settlements on several outstanding legacy matters.
In addition, we currently estimate that the range of possible loss for representations and warranties exposures could be up to $1 billion over existing accruals at December 31, 2017. This estimate is lower than the estimate at December 31, 2016 due
to recent reductions in risk as we reach settlements with counterparties. The estimated range of possible loss represents
a reasonably possible loss, but does not represent a probable loss, and is based on currently available information, significant judgment and a number of assumptions that are subject to change.
Future provisions and/or ranges of possible loss associated with obligations under representations and warranties may be significantly impacted if future experiences are different from historical experience or our understandings, interpretations or assumptions. Adverse developments with respect to one or more of the assumptions underlying the reserve for representations and warranties and the corresponding estimated range of possible loss, such as counterparties successfully challenging or avoiding the application of the relevant statute of limitations, could result in significant increases to future provisions and/or the estimated range of possible loss. For more information on representations and warranties, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements and, for more information related to the sensitivity of the assumptions used to estimate our liability for representations and warranties, see Complex Accounting Estimates – Representations and Warranties Liability on page 86.
Other Mortgage-related Matters
We continue to be subject to mortgage-related litigation and disputes, as well as governmental and regulatory scrutiny and investigations, related to our past and current origination, servicing, transfer of servicing and servicing rights, servicing compliance obligations, foreclosure activities, indemnification obligations, and mortgage insurance and captive reinsurance practices with mortgage insurers. The ongoing environment of regulatory scrutiny, heightened regulatory compliance obligations, and enhanced regulatory enforcement, combined with ongoing uncertainty related to the continuing evolution of the regulatory environment, has resulted in increased operational and compliance costs and may limit our ability to continue providing certain products and services. For more information on management’s estimate of the aggregate range of possible loss for certain litigation matters and on regulatory investigations, see Note 12 – Commitments and Contingencies to the Consolidated Financial Statements.
Bank of America 2017 40
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Managing Risk
Overview
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 Enterprise Risk Committee (ERC) and the Board.
The seven key types of risk faced by the Corporation are strategic, credit, market, liquidity, compliance, operational and reputational risks.
● |
Strategic risk is the risk resulting 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. |
● |
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, regulations and related self-regulatory organizations’ standards and codes of conduct. |
● |
Operational risk is the risk of loss resulting from inadequate or failed internal 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 our values and operating principles. 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 30.
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.
For a more detailed discussion of our risk management activities, see the discussion below and pages 44 through 84.
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 are based on the amount of capital, earnings or liquidity we are willing to put at risk to achieve our strategic objectives and business plans. 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, oversees financial performance, execution of the strategic and financial operating plans, adherence to risk appetite limits and the adequacy of internal controls.
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.
41 Bank of America 2017
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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.
(1) This presentation does not include committees for other legal entities.
(2) Reports to the CEO and CFO with oversight by the Audit Committee.
Board of Directors and Board Committees
The Board is comprised of 15 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 Corporate General Auditor (CGA) 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. 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 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 Government (ESG) and stockholder engagement activities.
Our Compensation and Benefits 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, and reviewing and approving all of our executive officers’ compensation, as well as compensation for non-management directors.
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. The MRC provides 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.
Bank of America 2017 42
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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 described in more detail below.
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 include the lines of business as well as the Global Technology and Operations Group, and 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 the Chief Financial Officer (CFO) Group, Global Marketing and Corporate Affairs (GM&CA) and the Chief Administrative Officer (CAO) Group.
Independent Risk Management
IRM is part of our control functions and includes Global Risk Management and Global Compliance. 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 CAO Group, CFO Group and GM&CA. 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, FLU risk teams and control function risk teams that work collaboratively in executing their respective duties.
Within IRM, Global Compliance independently assesses compliance risk, and evaluates adherence to applicable laws, rules and regulations, including identifying compliance issues and risks, performing monitoring and testing, and reporting on the state of compliance activities across the Corporation. Additionally, Global Compliance works with FLUs and control functions so that day-to-day activities operate in a compliant manner.
Corporate Audit
Corporate Audit and the CGA maintain their independence from the FLUs, IRM and other control functions by reporting directly to the Audit Committee or the Board. The CGA 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 a 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.
43 Bank of America 2017
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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 are 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.
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, Contingency Funding Plan 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.
Bank of America 2017 44
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Capital Management
The Corporation manages its capital position so its capital is more than adequate to support its business activities and to maintain capital, risk and risk appetite commensurate with one another. Additionally, we seek to maintain safety and soundness at all times, even under adverse scenarios, take advantage of organic growth opportunities, meet obligations to creditors and counterparties, maintain ready access to financial markets, continue to serve as a credit intermediary, remain a source of strength for our subsidiaries, and satisfy current and future regulatory capital requirements. Capital management is integrated into our risk and governance processes, as capital is a key consideration in the development of our strategic plan, risk appetite and risk limits.
We 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 30.
CCAR and Capital Planning
The Federal Reserve requires BHCs to submit a capital plan and requests for capital actions on an annual basis, consistent with the rules governing the CCAR capital plan.
On June 28, 2017, following the Federal Reserve’s non-objection to our 2017 CCAR capital plan, the Board authorized the repurchase of $12.0 billion in common stock from July 1, 2017 through June 30, 2018, plus repurchases expected to be approximately $900 million to offset the effect of equity-based compensation plans during the same period. On December 5, 2017, following approval by the Federal Reserve, the Board authorized the repurchase of an additional $5.0 billion of common stock through June 30, 2018. The common stock repurchase authorizations include both common stock and warrants. During 2017, pursuant to the Board’s authorizations, including those related to our 2016 CCAR capital plan that expired June 30, 2017, we repurchased $12.8 billion of common stock, which includes common stock repurchases to offset equity-based compensation awards. At December 31, 2017, our remaining stock repurchase authorization was $10.1 billion.
The timing and amount of common stock repurchases will be subject to various factors, including the Corporation’s capital position, liquidity, financial performance and alternative uses of capital, stock trading price, and general market conditions, and may be suspended at any time. The common stock repurchases may be effected through open market purchases or privately negotiated transactions, including repurchase plans that satisfy the conditions of Rule 10b5-1 of the Securities Exchange Act of 1934. As a “well-capitalized” BHC, we may notify the Federal Reserve of our intention to make additional capital distributions not to exceed 0.25 percent of Tier 1 capital, and which were not
contemplated in our capital plan, subject to the Federal Reserve’s non-objection.
Regulatory Capital
As a financial services holding company, we are subject to regulatory capital rules issued by U.S. banking regulators including Basel 3, which includes certain transition provisions through January 1, 2019. The Corporation and its primary affiliated banking entity, BANA, are Basel 3 Advanced approaches institutions.
Basel 3 Overview
Basel 3 updated the composition of capital and established a Common equity tier 1 capital ratio. Common equity tier 1 capital primarily includes common stock, retained earnings and accumulated other comprehensive income (OCI), net of deductions and adjustments primarily related to goodwill, deferred tax assets, intangibles and defined benefit pension assets. Under the Basel 3 regulatory capital transition provisions, certain deductions and adjustments to Common equity tier 1 capital were phased in through January 1, 2018. In 2017, under the transition provisions, 80 percent of these deductions and adjustments was recognized. Basel 3 also revised minimum capital ratios and buffer requirements, added a supplementary leverage ratio (SLR), and addressed the adequately capitalized minimum requirements under the Prompt Corrective Action (PCA) framework. Finally, Basel 3 established two methods of calculating risk-weighted assets, 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. During the fourth quarter of 2017, we obtained approval from U.S. banking regulators to use our Internal Models Methodology (IMM) to calculate counterparty credit risk-weighted assets for derivatives under the Advanced approaches.
As an Advanced approaches institution, we are required to report regulatory risk-based capital ratios and risk-weighted assets under both the Standardized and Advanced approaches. The approach that yields the lower ratio is used to assess capital adequacy including under the PCA framework.
Minimum Capital Requirements
Minimum capital requirements and related buffers are being phased in from January 1, 2014 through January 1, 2019. The PCA framework establishes categories of capitalization including “well capitalized,” based on the Basel 3 regulatory ratio requirements. U.S. banking regulators are required to take certain mandatory actions depending on the category of capitalization, with no mandatory actions required for “well-capitalized” banking organizations, which included BANA at December 31, 2017.
We are subject to a capital conservation buffer, a countercyclical capital buffer and a global systemically important bank (G-SIB) surcharge that are being phased in over a three-year period ending January 1, 2019. Once fully phased in, the Corporation’s risk-based capital ratio requirements will include a capital conservation buffer greater than 2.5 percent, plus any applicable countercyclical capital buffer and a G-SIB surcharge in order to avoid restrictions on capital distributions and discretionary bonus payments. The buffers and surcharge must be comprised solely of Common equity tier 1 capital. Under the phase-in provisions, we were required to maintain a capital conservation buffer greater than 1.25 percent plus a G-SIB surcharge of 1.5 percent in 2017. The countercyclical capital buffer is currently set at zero. We estimate that our fully phased-in G-SIB surcharge will
45 Bank of America 2017
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be 2.5 percent. The G-SIB surcharge may differ from this estimate over time. For more information on the Corporation’s transition and fully phased-in capital ratios and regulatory requirements, see Table 12.
Supplementary Leverage Ratio
Basel 3 requires Advanced approaches institutions to disclose an SLR. The numerator of the SLR is quarter-end Basel 3 Tier 1 capital. The denominator is total leverage exposure based on the daily average of the sum of on-balance sheet exposures less permitted Tier 1 deductions, as well as the simple average of certain off-balance sheet exposures, as of the end of each month in a quarter. Effective January 1, 2018, the Corporation will be required to maintain a minimum SLR of 3.0 percent, plus a leverage buffer of 2.0 percent in order to avoid certain restrictions on capital distributions and discretionary bonus payments. Insured
depository institution subsidiaries of BHCs will be required to maintain a minimum 6.0 percent SLR to be considered “well capitalized” under the PCA framework.
Capital Composition and Ratios
Table 12 presents Bank of America Corporation’s transition and fully phased-in capital ratios and related information in accordance with Basel 3 Standardized and Advanced approaches as measured at December 31, 2017 and 2016. Fully phased-in estimates are non-GAAP financial measures that the Corporation considers to be useful measures in evaluating compliance with new regulatory capital requirements that are not yet effective. For reconciliations to GAAP financial measures, see Table 15. As of December 31, 2017 and 2016, the Corporation met the definition of “well capitalized” under current regulatory requirements.
Table 12 |
Bank of America Corporation Regulatory Capital under Basel 3 (1, 2)
|
|||||||||||||||||||||
Transition |
Fully Phased-in |
|||||||||||||||||||||
|
Standardized
Approach
|
Advanced
Approaches (3)
|
Regulatory Minimum (4)
|
Standardized
Approach
|
Advanced
Approaches (3)
|
Regulatory Minimum (5)
|
|||||||||||||||||
(Dollars in millions, except as noted) |
December 31, 2017 |
|||||||||||||||||||||
Risk-based capital metrics: |
||||||||||||||||||||||
Common equity tier 1 capital |
$ |
171,063 |
$ |
171,063 |
$ |
168,461 |
$ |
168,461 |
||||||||||||||
Tier 1 capital |
191,496 |
191,496 |
190,189 |
190,189 |
||||||||||||||||||
Total capital (6)
|
227,427 |
218,529 |
224,209 |
215,311 |
||||||||||||||||||
Risk-weighted assets (in billions) |
1,434 |
1,449 |
1,443 |
1,459 |
||||||||||||||||||
Common equity tier 1 capital ratio |
11.9 |
% |
11.8 |
% |
7.25 |
% |
11.7 |
% |
11.5 |
% |
9.5 |
% |
||||||||||
Tier 1 capital ratio |
13.4 |
13.2 |
8.75 |
13.2 |
13.0 |
11.0 |
||||||||||||||||
Total capital ratio |
15.9 |
15.1 |
10.75 |
15.5 |
14.8 |
13.0 |
||||||||||||||||
Leverage-based metrics: |
||||||||||||||||||||||
Adjusted quarterly average assets (in billions) (7)
|
$ |
2,224 |
$ |
2,224 |
$ |
2,223 |
$ |
2,223 |
||||||||||||||
Tier 1 leverage ratio |
8.6 |
% |
8.6 |
% |
4.0 |
8.6 |
% |
8.6 |
% |
4.0 |
||||||||||||
SLR leverage exposure (in billions) |
$ |
2,756 |
||||||||||||||||||||
SLR |
6.9 |
% |
5.0 |
|||||||||||||||||||
December 31, 2016 |
||||||||||||||||||||||
Risk-based capital metrics: |
||||||||||||||||||||||
Common equity tier 1 capital |
$ |
168,866 |
$ |
168,866 |
$ |
162,729 |
$ |
162,729 |
||||||||||||||
Tier 1 capital |
190,315 |
190,315 |
187,559 |
187,559 |
||||||||||||||||||
Total capital (6)
|
228,187 |
218,981 |
223,130 |
213,924 |
||||||||||||||||||
Risk-weighted assets (in billions) |
1,399 |
1,530 |
1,417 |
1,512 |
||||||||||||||||||
Common equity tier 1 capital ratio |
12.1 |
% |
11.0 |
% |
5.875 |
% |
11.5 |
% |
10.8 |
% |
9.5 |
% |
||||||||||
Tier 1 capital ratio |
13.6 |
12.4 |
7.375 |
13.2 |
12.4 |
11.0 |
||||||||||||||||
Total capital ratio |
16.3 |
14.3 |
9.375 |
15.8 |
14.2 |
13.0 |
||||||||||||||||
Leverage-based metrics: |
||||||||||||||||||||||
Adjusted quarterly average assets (in billions) (7)
|
$ |
2,131 |
$ |
2,131 |
$ |
2,131 |
$ |
2,131 |
||||||||||||||
Tier 1 leverage ratio |
8.9 |
% |
8.9 |
% |
4.0 |
8.8 |
% |
8.8 |
% |
4.0 |
||||||||||||
SLR leverage exposure (in billions) |
$ |
2,702 |
||||||||||||||||||||
SLR |
6.9 |
% |
5.0 |
|||||||||||||||||||
(1) |
As an Advanced approaches institution, we are required to report regulatory capital risk-weighted assets and ratios under both the Standardized and Advanced approaches. The approach that yields the lower ratio is to be used to assess capital adequacy and was the Advanced approaches method at December 31, 2017 and 2016.
|
(2) |
Under the applicable bank regulatory rules, we are not required to and, accordingly, will not restate previously-filed regulatory capital metrics and ratios in connection with the change in accounting method under GAAP for stock-based compensation awards granted to retirement-eligible employees. Therefore, the December 31, 2016 amounts in the table are as originally reported. The cumulative impact of the change in accounting method resulted in an insignificant pro forma change to our capital metrics and ratios. For more information, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
|
(3) |
During the fourth quarter of 2017, we obtained approval from U.S. banking regulators to use our IMM to calculate counterparty credit risk-weighted assets for derivatives under the Advanced approaches. Fully phased-in estimates for prior periods assumed approval. |
(4) |
The December 31, 2017 and 2016 amounts include a transition capital conservation buffer of 1.25 percent and 0.625 percent and a transition G-SIB surcharge of 1.5 percent and 0.75 percent. The countercyclical capital buffer for both periods is zero.
|
(5) |
Fully phased-in regulatory minimums assume a capital conservation buffer of 2.5 percent and estimated G-SIB surcharge of 2.5 percent. The estimated fully phased-in countercyclical capital buffer is zero. We will be subject to fully phased-in regulatory minimums on January 1, 2019. The fully phased-in SLR minimum assumes a leverage buffer of 2.0 percent and is applicable on January 1, 2018.
|
(6) |
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. |
(7) |
Reflects adjusted average total assets for the three months ended December 31, 2017 and 2016.
|
Bank of America 2017 46
|
||
Common equity tier 1 capital under Basel 3 Advanced – Transition was $171.1 billion at December 31, 2017, an increase of $2.2 billion compared to December 31, 2016 driven by earnings and the exercise of warrants associated with the Series T preferred stock, partially offset by common stock repurchases, dividends and the phase-in under Basel 3 transition provisions of deductions, primarily related to deferred tax assets. During 2017, total capital decreased $452 million primarily driven by common stock repurchases, dividends, lower eligible credit reserves and tier 2
capital instruments, in addition to the phase-in of Basel 3 transition provisions, partially offset by earnings.
Risk-weighted assets decreased $81 billion during 2017 to $1,449 billion primarily due to the implementation of Internal Models Methodology (IMM) for derivatives, improvements in credit risk capital models, the sale of the non-U.S. consumer credit card business and continued run-off of non-core assets.
Table 13 shows the capital composition as measured under Basel 3 – Transition at December 31, 2017 and 2016.
Table 13 |
Capital Composition under Basel 3 – Transition (1, 2)
|
|||||||
December 31 |
||||||||
(Dollars in millions) |
2017 |
2016 |
||||||
Total common shareholders’ equity |
$ |
244,823 |
$ |
241,620 |
||||
Goodwill |
(68,576 |
) |
(69,191 |
) |
||||
Deferred tax assets arising from net operating loss and tax credit carryforwards |
(5,244 |
) |
(4,976 |
) |
||||
Adjustments for amounts recorded in accumulated OCI attributed to AFS Securities and defined benefit postretirement plans |
879 |
1,899 |
||||||
Adjustments for amounts recorded in accumulated OCI attributed to certain cash flow hedges |
831 |
895 |
||||||
Intangibles, other than mortgage servicing rights and goodwill |
(1,395 |
) |
(1,198 |
) |
||||
Defined benefit pension fund assets |
(910 |
) |
(512 |
) |
||||
DVA related to liabilities and derivatives |
957 |
413 |
||||||
Other |
(302 |
) |
(84 |
) |
||||
Common equity tier 1 capital |
171,063 |
168,866 |
||||||
Qualifying preferred stock, net of issuance cost |
22,323 |
25,220 |
||||||
Deferred tax assets arising from net operating loss and tax credit carryforwards |
(1,311 |
) |
(3,318 |
) |
||||
Defined benefit pension fund assets |
(228 |
) |
(341 |
) |
||||
DVA related to liabilities and derivatives under transition |
239 |
276 |
||||||
Other |
(590 |
) |
(388 |
) |
||||
Total Tier 1 capital |
191,496 |
190,315 |
||||||
Long-term debt qualifying as Tier 2 capital |
22,938 |
23,365 |
||||||
Eligible credit reserves included in Tier 2 capital |
2,272 |
3,035 |
||||||
Nonqualifying capital instruments subject to phase out from Tier 2 capital |
1,893 |
2,271 |
||||||
Other |
(70 |
) |
(5 |
) |
||||
Total Basel 3 Capital |
$ |
218,529 |
$ |
218,981 |
||||
(1) |
See Table 12, footnotes 1 and 2.
|
(2) |
Deductions from and adjustments to regulatory capital subject to transition provisions under Basel 3 are generally recognized in 20 percent annual increments, and are fully recognized as of January 1, 2018. Any assets that are a direct deduction from the computation of capital are excluded from risk-weighted assets and adjusted average total assets. |
Table 14 shows the components of risk-weighted assets as measured under Basel 3 – Transition at December 31, 2017 and 2016.
Table 14 |
Risk-weighted Assets under Basel 3 – Transition |
|||||||||||||||
Standardized Approach |
Advanced Approaches |
Standardized Approach |
Advanced Approaches |
|||||||||||||
December 31 |
||||||||||||||||
|
(Dollars in billions)
|
2017 |
2016 |
||||||||||||||
Credit risk |
$ |
1,375 |
$ |
857 |
$ |
1,334 |
$ |
903 |
||||||||
Market risk |
59 |
58 |
65 |
63 |
||||||||||||
Operational risk |
n/a |
500 |
n/a |
500 |
||||||||||||
Risks related to CVA |
n/a |
34 |
n/a |
64 |
||||||||||||
Total risk-weighted assets |
$ |
1,434 |
$ |
1,449 |
$ |
1,399 |
$ |
1,530 |
||||||||
n/a = not applicable
47 Bank of America 2017
|
||
Table 15 presents a reconciliation of regulatory capital in accordance with Basel 3 Standardized – Transition to the Basel 3 Standardized approach fully phased-in estimates and Basel 3 Advanced approaches fully phased-in estimates at December 31, 2017 and 2016.
Table 15 |
Regulatory Capital Reconciliations between Basel 3 Transition to Fully Phased-in (1)
|
|||||||
December 31 |
||||||||
(Dollars in millions) |
2017 |
2016 |
||||||
Common equity tier 1 capital (transition) |
$ |
171,063 |
$ |
168,866 |
||||
Deferred tax assets arising from net operating loss and tax credit carryforwards phased in during transition |
(1,311 |
) |
(3,318 |
) |
||||
Accumulated OCI phased in during transition |
(879 |
) |
(1,899 |
) |
||||
Intangibles phased in during transition |
(348 |
) |
(798 |
) |
||||
Defined benefit pension fund assets phased in during transition |
(228 |
) |
(341 |
) |
||||
DVA related to liabilities and derivatives phased in during transition |
239 |
276 |
||||||
Other adjustments and deductions phased in during transition |
(75 |
) |
(57 |
) |
||||
Common equity tier 1 capital (fully phased-in) |
168,461 |
162,729 |
||||||
Additional Tier 1 capital (transition) |
20,433 |
21,449 |
||||||
Deferred tax assets arising from net operating loss and tax credit carryforwards phased out during transition |
1,311 |
3,318 |
||||||
Defined benefit pension fund assets phased out during transition |
228 |
341 |
||||||
DVA related to liabilities and derivatives phased out during transition |
(239 |
) |
(276 |
) |
||||
Other transition adjustments to additional Tier 1 capital |
(5 |
) |
(2 |
) |
||||
Additional Tier 1 capital (fully phased-in) |
21,728 |
24,830 |
||||||
Tier 1 capital (fully phased-in) |
190,189 |
187,559 |
||||||
Tier 2 capital (transition) |
27,033 |
28,666 |
||||||
Nonqualifying capital instruments phased out during transition |
(1,893 |
) |
(2,271 |
) |
||||
Other adjustments to Tier 2 capital |
8,880 |
9,176 |
||||||
Tier 2 capital (fully phased-in) |
34,020 |
35,571 |
||||||
Basel 3 Standardized approach Total capital (fully phased-in) |
224,209 |
223,130 |
||||||
Change in Tier 2 qualifying allowance for credit losses |
(8,898 |
) |
(9,206 |
) |
||||
Basel 3 Advanced approaches Total capital (fully phased-in) |
$ |
215,311 |
$ |
213,924 |
||||
Risk-weighted assets – As reported to Basel 3 (fully phased-in) |
||||||||
Basel 3 Standardized approach risk-weighted assets as reported |
$ |
1,433,517 |
$ |
1,399,477 |
||||
Changes in risk-weighted assets from reported to fully phased-in |
9,204 |
17,638 |
||||||
Basel 3 Standardized approach risk-weighted assets (fully phased-in) |
$ |
1,442,721 |
$ |
1,417,115 |
||||
Basel 3 Advanced approaches risk-weighted assets as reported |
$ |
1,449,222 |
$ |
1,529,903 |
||||
Changes in risk-weighted assets from reported to fully phased-in |
9,757 |
(18,113 |
) |
|||||
Basel 3 Advanced approaches risk-weighted assets (fully phased-in) |
$ |
1,458,979 |
$ |
1,511,790 |
||||
(1) |
See Table 12, footnotes 1, 2 and 4.
|
Bank of America, N.A. Regulatory Capital
Table 16 presents transition regulatory capital information for BANA in accordance with Basel 3 Standardized and Advanced approaches as measured at December 31, 2017 and 2016. As of December 31, 2017, BANA met the definition of “well capitalized” under the PCA framework.
Table 16 |
Bank of America, N.A. Regulatory Capital under Basel 3 |
|||||||||||||||||||
Standardized Approach |
Advanced Approaches |
|||||||||||||||||||
Ratio |
Amount |
Minimum Required (1) |
Ratio |
Amount |
Minimum Required (1) |
|||||||||||||||
|
(Dollars in millions)
|
December 31, 2017 |
|||||||||||||||||||
Common equity tier 1 capital |
12.5 |
% |
$ |
150,552 |
6.5 |
% |
14.9 |
% |
$ |
150,552 |
6.5 |
% |
||||||||
Tier 1 capital |
12.5 |
150,552 |
8.0 |
14.9 |
150,552 |
8.0 |
||||||||||||||
Total capital |
13.6 |
163,243 |
10.0 |
15.4 |
154,675 |
10.0 |
||||||||||||||
Tier 1 leverage |
9.0 |
150,552 |
5.0 |
9.0 |
150,552 |
5.0 |
||||||||||||||
December 31, 2016 |
||||||||||||||||||||
Common equity tier 1 capital |
12.7 |
% |
$ |
149,755 |
6.5 |
% |
14.3 |
% |
$ |
149,755 |
6.5 |
% |
||||||||
Tier 1 capital |
12.7 |
149,755 |
8.0 |
14.3 |
149,755 |
8.0 |
||||||||||||||
Total capital |
13.9 |
163,471 |
10.0 |
14.8 |
154,697 |
10.0 |
||||||||||||||
Tier 1 leverage |
9.3 |
149,755 |
5.0 |
9.3 |
149,755 |
5.0 |
||||||||||||||
(1) |
Percent required to meet guidelines to be considered “well capitalized” under the PCA framework. |
Bank of America 2017 48
|
||
Regulatory Developments
Minimum Total Loss-Absorbing Capacity
The Federal Reserve has established a final rule effective January 1, 2019, which includes minimum external total loss-absorbing capacity (TLAC) requirements to improve the resolvability and resiliency of large, interconnected BHCs. We estimate our minimum required external TLAC would be the greater of 22.5 percent of risk-weighted assets or 9.5 percent of SLR leverage exposure. In addition, U.S. G-SIBs must meet a minimum long-term debt requirement. Our minimum required long-term debt is estimated to be the greater of 8.5 percent of risk-weighted assets or 4.5 percent of SLR leverage exposure. As of December 31, 2017, the Corporation’s TLAC and long-term debt exceeded our estimated 2019 minimum requirements.
Revisions to Approaches for Measuring Risk-weighted Assets
On December 7, 2017, the Basel Committee on Banking Supervision (Basel Committee) finalized several key methodologies for measuring risk-weighted assets. The revisions include a standardized approach for credit risk, standardized approach for operational risk, revisions to the credit valuation adjustment (CVA) risk framework and constraints on the use of internal models. The Basel Committee had also previously finalized a revised standardized model for counterparty credit risk, revisions to the securitization framework and its fundamental review of the trading book, which updates both modeled and standardized approaches for market risk measurement. The revisions also include a capital floor set at 72.5 percent of total risk-weighted assets based on the revised standardized approaches to limit the extent to which banks can reduce risk-weighted asset levels through the use of internal models. U.S. banking regulators may update the U.S. Basel 3 rules to incorporate the Basel Committee revisions.
Revisions to the G-SIB Assessment Framework
On March 30, 2017, the Basel Committee issued a consultative document with proposed revisions to the G-SIB surcharge assessment framework. The proposed revisions would include removing the cap on the substitutability category, expanding the scope of consolidation to include insurance subsidiaries in three
categories (size, interconnectedness and complexity) and modifying the substitutability category weights with the introduction of a new trading volume indicator. The Basel Committee has also requested feedback on a new short-term wholesale funding indicator, which would be included in the interconnectedness category. The U.S. banking regulators may update the U.S. G-SIB surcharge rule to incorporate the Basel Committee revisions.
Broker-dealer Regulatory Capital and Securities Regulation
The Corporation’s principal U.S. broker-dealer subsidiaries are Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S) and Merrill Lynch Professional Clearing Corp (MLPCC). MLPCC is a fully-guaranteed subsidiary of MLPF&S and provides clearing and settlement services. Both entities are subject to the net capital requirements of Securities and Exchange Commission (SEC) Rule 15c3-1. Both entities are also registered as futures commission merchants and are subject to the Commodity Futures Trading Commission Regulation 1.17.
MLPF&S has elected to compute the minimum capital requirement in accordance with the Alternative Net Capital Requirement as permitted by SEC Rule 15c3-1. At December 31, 2017, MLPF&S’s regulatory net capital as defined by Rule 15c3-1 was $12.4 billion and exceeded the minimum requirement of $1.7 billion by $10.7 billion. MLPCC’s net capital of $3.4 billion exceeded the minimum requirement of $543 million by $2.9 billion.
In accordance with the Alternative Net Capital Requirements, MLPF&S is required to maintain tentative net capital in excess of $1.0 billion, net capital in excess of $500 million and notify the SEC in the event its tentative net capital is less than $5.0 billion. At December 31, 2017, MLPF&S had tentative net capital and net capital in excess of the minimum and notification requirements.
Merrill Lynch International (MLI), a U.K. investment firm, is regulated by the Prudential Regulation Authority and the Financial Conduct Authority, and is subject to certain regulatory capital requirements. At December 31, 2017, MLI’s capital resources were $35.1 billion which exceeded the minimum Pillar 1 requirement of $16.5 billion.
Liquidity Risk
Funding and Liquidity Risk Management
Our primary liquidity risk management objective is to meet expected or unexpected cash flow and collateral needs while continuing to support our businesses and customers under a range of economic conditions. To achieve that objective, we analyze and monitor our liquidity risk under expected and stressed conditions, maintain liquidity and access to diverse funding sources, including our stable deposit base, and seek to align liquidity-related incentives and risks.
We define liquidity as readily available assets, limited to cash and high-quality, liquid, unencumbered securities that we can use to meet our contractual and contingent financial obligations as those obligations arise. We manage our liquidity position through line of business and ALM activities, as well as through our legal entity funding strategy, on both a forward and current (including intraday) basis under both expected and stressed conditions. We believe that a centralized approach to funding and liquidity management enhances our ability to monitor liquidity requirements, maximizes access to funding sources, minimizes borrowing costs and facilitates timely responses to liquidity events.
The Board approves our liquidity policy and the ERC approves the contingency funding plan, including establishing liquidity risk tolerance levels. The MRC monitors our liquidity position and reviews the impact of strategic decisions on our liquidity. 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, stress testing scenarios and results, and reviews and approves certain liquidity risk limits. For more information, see Managing Risk on page 41. 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,
49 Bank of America 2017
|
||
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
In 2016, we entered into intercompany arrangements with certain key subsidiaries under which we transferred certain of our parent company assets, and agreed to transfer certain additional parent company assets not needed to satisfy anticipated near-term expenditures, to NB Holdings Corporation, a wholly-owned holding company subsidiary (NB Holdings). The parent company is expected to continue to have access to the same flow of dividends, interest and other amounts of cash necessary to service its debt, pay dividends and perform other obligations as it would have had if it had not entered into these arrangements and transferred any assets.
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 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.
For the three months ended December 31, 2017 and 2016, our average GLS were $522 billion and $515 billion, as shown in Table 17.
Table 17 |
Average Global Liquidity Sources |
|||||||
Three Months Ended December 31 |
||||||||
(Dollars in billions) |
2017 |
2016 |
||||||
Parent company and NB Holdings |
$ |
79 |
$ |
77 |
||||
Bank subsidiaries |
394 |
389 |
||||||
Other regulated entities |
49 |
49 |
||||||
Total Average Global Liquidity Sources |
$ |
522 |
$ |
515 |
||||
Parent company and NB Holdings average liquidity was $79 billion and $77 billion for the three months ended December 31, 2017 and 2016. The increase in parent company and NB Holdings average liquidity was primarily due to debt issuances outpacing maturities. Typically, parent company and NB Holdings liquidity is in the form of cash deposited with BANA.
Average liquidity held at our bank subsidiaries was $394 billion and $389 billion for the three months ended December 31, 2017 and 2016. Our bank subsidiaries’ liquidity is primarily driven by deposit and lending activity, as well as securities valuation and net debt activity. Liquidity at bank subsidiaries excludes the cash deposited by the parent company and NB Holdings. Our bank subsidiaries can also generate incremental liquidity by pledging a range of unencumbered loans and securities to certain FHLBs and the Federal Reserve Discount Window. The cash we could have obtained by borrowing against this pool of specifically-identified eligible assets was $308 billion and $310 billion at December 31, 2017 and 2016, with the decrease due to FHLB borrowings, which reduced available borrowing capacity, and adjustments to our valuation model. We have established operational procedures to enable us to borrow against these assets, including regularly monitoring our total pool of eligible loans and securities collateral. Eligibility is defined in guidelines from the FHLBs and the Federal Reserve and is subject to change at their discretion. Due to regulatory restrictions, liquidity generated by the bank subsidiaries can generally be used only to fund obligations within the bank subsidiaries, and transfers to the parent company or nonbank subsidiaries may be subject to prior regulatory approval.
Average liquidity held at our other regulated entities, comprised primarily of broker-dealer subsidiaries, was $49 billion for both the three months ended December 31, 2017 and 2016. Our other regulated entities also held unencumbered investment-grade securities and equities that we believe could be used to generate additional liquidity. Liquidity held in an other regulated entity is primarily available to meet the obligations of that entity and transfers to the parent company or to any other subsidiary may be subject to prior regulatory approval due to regulatory restrictions and minimum requirements.
Bank of America 2017 50
|
||
Table 18 presents the composition of average GLS for the three months ended December 31, 2017 and 2016.
Table 18 |
Average Global Liquidity Sources Composition |
|||||||
Three Months Ended December 31 |
||||||||
(Dollars in billions) |
2017 |
2016 |
||||||
Cash on deposit |
$ |
118 |
$ |
118 |
||||
U.S. Treasury securities |
62 |
58 |
||||||
U.S. agency securities and mortgage-backed securities |
330 |
322 |
||||||
Non-U.S. government securities |
12 |
17 |
||||||
Total Average Global Liquidity Sources |
$ |
522 |
$ |
515 |
||||
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. For the three months ended December 31, 2017, our average consolidated HQLA, on a net basis, was $439 billion and the average consolidated LCR was 125 percent. Our LCR will fluctuate due to normal business flows from customer activity.
Liquidity Stress Analysis and Time-to-required Funding
We utilize liquidity stress analysis to assist us in determining the appropriate amounts of liquidity to maintain at the parent company and our subsidiaries. The liquidity stress testing process is an integral part of analyzing our potential contractual and contingent cash outflows. We evaluate the liquidity requirements under a range of scenarios with varying levels of severity and time horizons. 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 issuance; 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.
We use a variety of metrics to determine the appropriate amounts of liquidity to maintain at the parent company and our subsidiaries. One metric we use to evaluate the appropriate level of liquidity at the parent company and NB Holdings is “time-to-required funding” (TTF). This debt coverage measure indicates the number of months the parent company can continue to meet its unsecured contractual obligations as they come due using only the parent company and NB Holdings’ liquidity sources without issuing any new debt or accessing any additional liquidity sources. We define unsecured contractual obligations for purposes of this metric as maturities of senior or subordinated debt issued or guaranteed by Bank of America Corporation. These include certain unsecured debt instruments, primarily structured liabilities, which we may be required to settle for cash prior to maturity. TTF was 49 months at December 31, 2017 compared to 35 months at December 31, 2016. The increase in TTF was driven by debt issuances outpacing maturities.
Net Stable Funding Ratio
U.S. banking regulators issued a proposal for a Net Stable Funding Ratio (NSFR) requirement applicable to U.S. financial institutions following the Basel Committee’s final standard. The proposed U.S. NSFR would apply to the Corporation on a consolidated basis and to our insured depository institutions. While the final requirement remains pending and is subject to change, if finalized as proposed, we expect to be in compliance within the regulatory timeline. The standard is intended to reduce funding risk over a longer time horizon. The NSFR is designed to provide an appropriate amount of stable funding, generally capital and liabilities maturing beyond one year, given the mix of assets and off-balance sheet items.
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 $1.31 trillion and $1.26 trillion at December 31, 2017 and 2016. 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, the Federal Housing Administration (FHA) and private-label investors, as well as FHLB loans.
51 Bank of America 2017
|
||
Our trading activities in other regulated entities are primarily funded on a secured basis through securities lending and repurchase agreements and these amounts will vary based on customer activity and market conditions. 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 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 and Short-term Borrowings to the Consolidated Financial Statements.
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.
During 2017, we issued $53.3 billion of long-term debt consisting of $37.7 billion for Bank of America Corporation, substantially all of which was TLAC compliant, $8.2 billion for Bank of America, N.A. and $7.4 billion of other debt.
In December 2017, pursuant to a private offering, we exchanged $11.0 billion of outstanding long-term debt for new fixed/floating-rate senior notes, subject to certain terms and conditions, to extend maturities and improve the structure of this debt for TLAC purposes. Based on the attributes of the exchange transactions, the newly issued securities are not considered substantially different, for accounting purposes, from the exchanged securities. Therefore, there was no impact to our results of operations as any amounts paid to debt holders were capitalized, and the premiums or discounts on the outstanding long-term debt were carried over to the new securities and will be amortized over their contractual lives using a revised effective interest rate.
Table 19 presents our long-term debt by major currency at December 31, 2017 and 2016.
Table 19 |
Long-term Debt by Major Currency |
|||||||
December 31 |
||||||||
(Dollars in millions) |
2017 |
2016 |
||||||
U.S. dollar |
$ |
175,623 |
$ |
172,082 |
||||
Euro |
35,481 |
28,236 |
||||||
British pound |
7,016 |
6,588 |
||||||
Australian dollar |
3,046 |
2,900 |
||||||
Japanese yen |
2,993 |
3,919 |
||||||
Canadian dollar |
1,966 |
1,049 |
||||||
Other |
1,277 |
2,049 |
||||||
Total long-term debt |
$ |
227,402 |
$ |
216,823 |
||||
Total long-term debt increased $10.6 billion, or five percent, in 2017, primarily due to issuances outpacing maturities. We may, from time to time, purchase outstanding debt instruments in various transactions, depending on prevailing market conditions, liquidity and other factors. In addition, our other regulated entities
may make markets in our debt instruments to provide liquidity for investors.
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 81.
We may also issue unsecured debt in the form of structured notes for client purposes, certain of which qualify as TLAC eligible debt. During 2017, we issued $5.4 billion of structured notes, which are debt obligations that pay investors returns linked to other debt or equity securities, indices, currencies or commodities. We typically hedge the returns we are obligated to pay on these liabilities with derivatives and/or investments in the underlying instruments, so that from a funding perspective, the cost is similar to our other unsecured long-term debt. We could be required to settle certain structured note obligations for cash or other securities prior to maturity under certain circumstances, which we consider for liquidity planning purposes. We believe, however, that a portion of such borrowings will remain outstanding beyond the earliest put or redemption date.
Substantially all of our senior and subordinated debt obligations contain no provisions that could trigger a requirement for an early repayment, require additional collateral support, result in changes to terms, accelerate maturity or create additional financial obligations upon an adverse change in our credit ratings, financial ratios, earnings, cash flows or stock price. For more information on long-term debt funding, see Note 11 – Long-term Debt to the Consolidated Financial Statements.
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
Bank of America 2017 52
|
||
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 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 December 6, 2017, Moody’s Investors Services, Inc. (Moody’s) upgraded the long-term ratings of Bank of America Corporation and certain subsidiaries, including BANA, by one notch, moving their senior debt ratings to A3 and Aa3, respectively. The upgrade was based on the agency’s expectations for continued improvement in the Corporation’s profitability and management’s continued commitment to a conservative risk profile. At the same time, Moody’s affirmed all the short-term ratings for Bank of America Corporation and its rated subsidiaries. Moody’s concurrently moved the outlook on the ratings to stable. This action
concluded the review for upgrade that Moody’s initiated on September 12, 2017.
On November 22, 2017, Standard & Poor’s Global Ratings (S&P) upgraded Bank of America Corporation’s long-term senior debt rating to A- from BBB+ following the agency’s periodic review of our ratings. S&P cited the improvement in the Corporation’s risk profile, while continuing to improve profitability metrics, as the driver for the upgrade, including tightening underwriting standards, reducing exposure to market risk, growing conservatively, and resolving legacy legal issues. S&P concurrently affirmed the ratings of the Corporation’s rated core operating subsidiaries, including BANA, MLPF&S, MLI and Bank of America Merrill Lynch International Limited. Those entities were affirmed rather than upgraded since their ratings had reached an inflection point under S&P’s methodology where the one notch S&P added to its assessment of our intrinsic creditworthiness (called an Unsupported Group Credit Profile, or UGCP) resulted in the subsidiaries receiving one less notch of support uplift under the agency’s Additional Loss Absorbing Capacity framework, thus leaving those entities’ ratings unchanged. S&P retained a stable outlook on the ratings of Bank of America Corporation and its core operating subsidiaries following the upgrade.
On September 28, 2017, Fitch Ratings (Fitch) completed its latest review of 12 large, complex securities trading and universal banks, including Bank of America. The agency affirmed the long-term and short-term senior debt ratings of Bank of America Corporation and its rated subsidiaries, including BANA, and maintained its stable outlook on those ratings.
Table 20 presents the Corporation’s current long-term/short-term senior debt ratings and outlooks expressed by the rating agencies.
Table 20 |
Senior Debt Ratings |
|||||||||||||||||
Moody’s Investors Service
|
Standard & Poor’s Global Ratings
|
Fitch Ratings |
||||||||||||||||
Long-term |
Short-term |
Outlook |
Long-term |
Short-term |
Outlook |
Long-term |
Short-term |
Outlook |
||||||||||
Bank of America Corporation |
A3 |
P-2 |
Stable |
A- |
A-2 |
Stable |
A |
F1 |
Stable |
|||||||||
Bank of America, N.A. |
Aa3 |
P-1 |
Stable |
A+ |
A-1 |
Stable |
A+ |
F1 |
Stable |
|||||||||
Merrill Lynch, Pierce, Fenner & Smith Incorporated |
NR |
NR |
NR |
A+ |
A-1 |
Stable |
A+ |
F1 |
Stable |
|||||||||
Merrill Lynch International |
NR |
NR |
NR |
A+ |
A-1 |
Stable |
A |
F1 |
Stable |
|||||||||
NR = not rated
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 trading 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 – Time-to-required Funding and Liquidity Stress Analysis on page 51.
For more information on the additional collateral and termination payments that could be required in connection with certain OTC derivative contracts and other trading agreements as a result of such a credit rating downgrade, see Note 2 – Derivatives to the Consolidated Financial Statements.
Common Stock Dividends
For a summary of our declared quarterly cash dividends on common stock during 2017 and through February 22, 2018, see Note 13 – Shareholders’ Equity to the Consolidated Financial Statements.
53 Bank of America 2017
|
||
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 2 – 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 more information on our credit risk management activities, see Consumer Portfolio Credit Risk Management below, Commercial Portfolio Credit Risk Management on page 63, Non-U.S. Portfolio on page 70, Provision for Credit Losses on page 72, Allowance for Credit Losses on page 72, and Note 4 – Outstanding Loans and Leases and Note 5 – Allowance for Credit Losses to the Consolidated Financial Statements.
During the third quarter of 2017, hurricanes impacted the southern United States and the Caribbean, bringing widespread flooding and wind damage to communities across the region. In the weeks after these storms, we supported our customers and clients in these communities by providing mobile financial centers and ATMs. In addition, we provided support for the recovery efforts including proactive fee refunds in affected areas, as well as home loan and other credit assistance, including payment deferrals, for impacted individuals and businesses. We do not believe that these storms will have a material financial impact on the Corporation.
Consumer Portfolio Credit Risk Management
Credit risk management for the consumer portfolio begins with initial underwriting and continues throughout a borrower’s credit cycle. Statistical techniques in conjunction with experiential judgment are used in all aspects of portfolio management including underwriting, product pricing, risk appetite, setting credit limits, and establishing operating processes and metrics to quantify and balance risks and returns. Statistical models are built using detailed behavioral information from external sources such as credit bureaus and/or internal historical experience and are a component of our consumer credit risk management process. These models are used in part to assist in making both new and ongoing credit decisions, as well as portfolio management strategies, including authorizations and line management, collection practices and strategies, and determination of the allowance for loan and lease losses and allocated capital for credit risk.
Consumer Credit Portfolio
Improvement in the U.S. unemployment rate and home prices continued during 2017 resulting in improved credit quality and lower credit losses in the consumer real estate portfolio, partially offset by seasoning and loan growth in the U.S. credit card portfolio compared to 2016.
Improved credit quality, the sale of the non-U.S. consumer credit card business in 2017, continued loan balance run-off and sales in the consumer real estate portfolio drove a $839 million decrease in the consumer allowance for loan and lease losses in 2017 to $5.4 billion at December 31, 2017. For more information, see Allowance for Credit Losses on page 72.
For more information on our accounting policies regarding delinquencies, nonperforming status, charge-offs and troubled debt restructurings (TDRs) for the consumer portfolio, including those related to bankruptcy and repossession, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
Table 21 presents our outstanding consumer loans and leases, consumer nonperforming loans and accruing consumer loans past due 90 days or more. Nonperforming loans do not include past due consumer credit card loans, other unsecured loans and in general, consumer loans not secured by real estate (bankruptcy loans are included) as these loans are typically charged off no later than the end of the month in which the loan becomes 180 days past due. Real estate-secured past due consumer loans that are insured by the FHA or individually insured under long-term standby agreements with Fannie Mae (FNMA) and Freddie Mac (FHLMC) (collectively, the fully-insured loan portfolio) are reported as accruing as opposed to nonperforming since the principal repayment is insured. Fully-insured loans included in accruing past due 90 days or more are primarily from our repurchases of delinquent FHA loans pursuant to our servicing agreements with the Government National Mortgage Association (GNMA). Additionally, nonperforming loans and accruing balances past due 90 days or more do not include the PCI loan portfolio or loans accounted for under the fair value option even though the customer may be contractually past due.
For more information on PCI loans, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 60 and Note 4 – Outstanding Loans and Leases to the Consolidated Financial Statements.
Bank of America 2017 54
|
||
Table 21 |
Consumer Credit Quality |
|||||||||||||||||||||||
Outstandings |
Nonperforming |
Accruing Past Due
90 Days or More
|
||||||||||||||||||||||
December 31 |
||||||||||||||||||||||||
(Dollars in millions) |
2017 |
2016 |
2017 |
2016 |
2017 |
2016 |
||||||||||||||||||
Residential mortgage (1)
|
$ |
203,811 |
$ |
191,797 |
$ |
2,476 |
$ |
3,056 |
$ |
3,230 |
$ |
4,793 |
||||||||||||
Home equity |
57,744 |
66,443 |
2,644 |
2,918 |
— |
— |
||||||||||||||||||
U.S. credit card |
96,285 |
92,278 |
n/a |
n/a |
900 |
782 |
||||||||||||||||||
Non-U.S. credit card |
— |
9,214 |
n/a |
n/a |
— |
66 |
||||||||||||||||||
Direct/Indirect consumer (2)
|
93,830 |
94,089 |
46 |
28 |
40 |
34 |
||||||||||||||||||
Other consumer (3)
|
2,678 |
2,499 |
— |
2 |
— |
4 |
||||||||||||||||||
Consumer loans excluding loans accounted for under the fair value option |
$ |
454,348 |
$ |
456,320 |
$ |
5,166 |
$ |
6,004 |
$ |
4,170 |
$ |
5,679 |
||||||||||||
Loans accounted for under the fair value option (4)
|
928 |
1,051 |
||||||||||||||||||||||
Total consumer loans and leases (5)
|
$ |
455,276 |
$ |
457,371 |
||||||||||||||||||||
Percentage of outstanding consumer loans and leases (6)
|
n/a |
n/a |
1.14 |
% |
1.32 |
% |
0.92 |
% |
1.24 |
% |
||||||||||||||
Percentage of outstanding consumer loans and leases, excluding PCI and fully-insured loan portfolios (6)
|
n/a |
n/a |
1.23 |
1.45 |
0.22 |
0.21 |
||||||||||||||||||
(1) |
Residential mortgage loans accruing past due 90 days or more are fully-insured loans. At December 31, 2017 and 2016, residential mortgage includes $2.2 billion and $3.0 billion of loans on which interest had been curtailed by the FHA, and therefore were no longer accruing interest, although principal was still insured, and $1.0 billion and $1.8 billion of loans on which interest was still accruing.
|
(2) |
Outstandings include auto and specialty lending loans of $49.9 billion and $48.9 billion, unsecured consumer lending loans of $469 million and $585 million, U.S. securities-based lending loans of $39.8 billion and $40.1 billion, non-U.S. consumer loans of $3.0 billion for both periods, student loans of $0 and $497 million and other consumer loans of $684 million and $1.1 billion at December 31, 2017 and 2016.
|
(3) |
Outstandings include consumer leases of $2.5 billion and $1.9 billion, consumer overdrafts of $163 million and $157 million and consumer finance loans of $0 and $465 million at December 31, 2017 and 2016.
|
(4) |
Consumer loans accounted for under the fair value option include residential mortgage loans of $567 million and $710 million and home equity loans of $361 million and $341 million at December 31, 2017 and 2016. For more information on the fair value option, see Note 21 – Fair Value Option to the Consolidated Financial Statements.
|
(5) |
Includes $9.2 billion of non-U.S. credit card loans, which were included in assets of business held for sale on the Consolidated Balance Sheet at December 31, 2016. In 2017, the Corporation sold its non-U.S. consumer credit card business.
|
(6) Balances exclude consumer loans accounted for under the fair value option. At December 31, 2017 and 2016, $26 million and $48 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 22 presents net charge-offs and related ratios for consumer loans and leases.
Table 22 |
Consumer Net Charge-offs and Related Ratios |
|||||||||||||
Net Charge-offs (1)
|
Net Charge-off Ratios (1, 2)
|
|||||||||||||
(Dollars in millions) |
2017 |
2016 |
2017 |
2016 |
||||||||||
Residential mortgage |
$ |
(100 |
) |
$ |
131 |
(0.05 |
)% |
0.07 |
% |
|||||
Home equity |
213 |
405 |
0.34 |
0.57 |
||||||||||
U.S. credit card |
2,513 |
2,269 |
2.76 |
2.58 |
||||||||||
Non-U.S. credit card |
75 |
175 |
1.91 |
1.83 |
||||||||||
Direct/Indirect consumer |
211 |
134 |
0.23 |
0.15 |
||||||||||
Other consumer |
166 |
205 |
6.35 |
8.95 |
||||||||||
Total |
$ |
3,078 |
$ |
3,319 |
0.68 |
0.74 |
||||||||
(1) |
Net charge-offs exclude write-offs in the PCI loan portfolio. For more information, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 60.
|
(2) |
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. |
Net charge-offs, as shown in Tables 22 and 23, exclude write-offs in the PCI loan portfolio of $131 million and $144 million in residential mortgage and $76 million and $196 million in home equity for 2017 and 2016. Net charge-off ratios including the PCI write-offs were 0.02 percent and 0.15 percent for residential mortgage and 0.47 percent and 0.84 percent for home equity in 2017 and 2016. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 60.
Table 23 presents outstandings, nonperforming balances, net charge-offs, allowance for loan and lease losses and provision for loan and lease losses for the core and non-core portfolios within the consumer real estate portfolio. We categorize consumer real
estate loans as core and non-core based on loan and customer characteristics such as origination date, product type, LTV, FICO score and delinquency status consistent with our current consumer and mortgage servicing strategy. Generally, loans that were originated after January 1, 2010, qualified under government-sponsored enterprise underwriting guidelines, or otherwise met our underwriting guidelines in place in 2015 are characterized as core loans. All other loans are generally characterized as non-core loans and represent run-off portfolios. Core loans as reported in Table 23 include loans held in the Consumer Banking and GWIM segments, as well as loans held for ALM activities in All Other. For more information, see Note 4 – Outstanding Loans and Leases to the Consolidated Financial Statements.
55 Bank of America 2017
|
||
As shown in Table 23, outstanding core consumer real estate loans increased $15.0 billion during 2017 driven by an increase of $20.1 billion in residential mortgage, partially offset by a $5.1 billion decrease in home equity.
Table 23 |
Consumer Real Estate Portfolio (1)
|
|||||||||||||||||||||||
Outstandings |
Nonperforming |
Net Charge-offs (2)
|
||||||||||||||||||||||
December 31 |
||||||||||||||||||||||||
(Dollars in millions) |
2017 |
2016 |
2017 |
2016 |
2017 |
2016 |
||||||||||||||||||
Core portfolio |
||||||||||||||||||||||||
Residential mortgage |
$ |
176,618 |
$ |
156,497 |
$ |
1,087 |
$ |
1,274 |
$ |
(45 |
) |
$ |
(29 |
) |
||||||||||
Home equity |
44,245 |
49,373 |
1,079 |
969 |
100 |
113 |
||||||||||||||||||
Total core portfolio |
220,863 |
205,870 |
2,166 |
2,243 |
55 |
84 |
||||||||||||||||||
Non-core portfolio |
||||||||||||||||||||||||
Residential mortgage |
27,193 |
35,300 |
1,389 |
1,782 |
(55 |
) |
160 |
|||||||||||||||||
Home equity |
13,499 |
17,070 |
1,565 |
1,949 |
113 |
292 |
||||||||||||||||||
Total non-core portfolio |
40,692 |
52,370 |
2,954 |
3,731 |
58 |
452 |
||||||||||||||||||
Consumer real estate portfolio |
||||||||||||||||||||||||
Residential mortgage |
203,811 |
191,797 |
2,476 |
3,056 |
(100 |
) |
131 |
|||||||||||||||||
Home equity |
57,744 |
66,443 |
2,644 |
2,918 |
213 |
405 |
||||||||||||||||||
Total consumer real estate portfolio |
$ |
261,555 |
$ |
258,240 |
$ |
5,120 |
$ |
5,974 |
$ |
113 |
$ |
536 |
||||||||||||
|
Allowance for Loan
and Lease Losses
|
Provision for Loan
and Lease Losses
|
|||||||||||||||||||||||
December 31 |
||||||||||||||||||||||||
2017 |
2016 |
2017 |
2016 |
|||||||||||||||||||||
Core portfolio |
||||||||||||||||||||||||
Residential mortgage |
$ |
218 |
$ |
252 |
$ |
(79 |
) |
$ |
(98 |
) |
||||||||||||||
Home equity |
367 |
560 |
(91 |
) |
10 |
|||||||||||||||||||
Total core portfolio |
585 |
812 |
(170 |
) |
(88 |
) |
||||||||||||||||||
Non-core portfolio |
||||||||||||||||||||||||
Residential mortgage |
483 |
760 |
(201 |
) |
(86 |
) |
||||||||||||||||||
Home equity |
652 |
1,178 |
(339 |
) |
(84 |
) |
||||||||||||||||||
Total non-core portfolio |
1,135 |
1,938 |
(540 |
) |
(170 |
) |
||||||||||||||||||
Consumer real estate portfolio |
||||||||||||||||||||||||
Residential mortgage |
701 |
1,012 |
(280 |
) |
(184 |
) |
||||||||||||||||||
Home equity |
1,019 |
1,738 |
(430 |
) |
(74 |
) |
||||||||||||||||||
Total consumer real estate portfolio |
$ |
1,720 |
$ |
2,750 |
$ |
(710 |
) |
$ |
(258 |
) |
||||||||||||||
(1) |
Outstandings and nonperforming loans exclude loans accounted for under the fair value option. Consumer loans accounted for under the fair value option included residential mortgage loans of $567 million and $710 million and home equity loans of $361 million and $341 million at December 31, 2017 and 2016. For more information, see Note 21 – Fair Value Option to the Consolidated Financial Statements.
|
(2) |
Net charge-offs exclude write-offs in the PCI loan portfolio. For more information, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 60.
|
We believe that the presentation of information adjusted to exclude the impact of the PCI loan portfolio, the fully-insured loan portfolio and loans accounted for under the fair value option is more representative of the ongoing operations and credit quality of the business. As a result, in the following discussions of the residential mortgage and home equity portfolios, we provide information that excludes the impact of the PCI loan portfolio, the fully-insured loan portfolio and loans accounted for under the fair value option in certain credit quality statistics. We separately disclose information on the PCI loan portfolio on page 60.
Residential Mortgage
The residential mortgage portfolio makes up the largest percentage of our consumer loan portfolio at 45 percent of consumer loans and leases at December 31, 2017. Approximately 37 percent of the residential mortgage portfolio is in Consumer Banking and approximately 35 percent is in GWIM. The remaining portion is in All Other and is comprised of originated loans, purchased loans used in our overall ALM activities, delinquent FHA loans repurchased pursuant to our servicing agreements with GNMA as well as loans repurchased related to our representations and warranties.
Outstanding balances in the residential mortgage portfolio, excluding loans accounted for under the fair value option, increased $12.0 billion in 2017 as retention of new originations was partially offset by loan sales of $3.9 billion, and run-off.
At December 31, 2017 and 2016, the residential mortgage portfolio included $23.7 billion and $28.7 billion of outstanding fully-insured loans. On this portion of the residential mortgage portfolio, we are protected against principal loss as a result of either FHA insurance or long-term standby agreements that provide for the transfer of credit risk to FNMA and FHLMC. At December 31, 2017 and 2016, $17.4 billion and $22.3 billion had FHA insurance with the remainder protected by long-term standby agreements. At December 31, 2017 and 2016, $5.2 billion and $7.4 billion of the FHA-insured loan population were repurchases of delinquent FHA loans pursuant to our servicing agreements with GNMA.
Table 24 presents certain residential mortgage key credit statistics on both a reported basis excluding loans accounted for under the fair value option, and excluding the PCI loan portfolio, the fully-insured loan portfolio and loans accounted for under the fair value option. Additionally, in the “Reported Basis” columns in the following table, accruing balances past due and nonperforming loans do not include the PCI loan portfolio, in accordance with our accounting policies, even though the customer may be contractually past due. As such, the following discussion presents the residential mortgage portfolio excluding the PCI loan portfolio, the fully-insured loan portfolio and loans accounted for under the fair value option. For more information on the PCI loan portfolio, see page 60.
Bank of America 2017 56
|
||
Table 24 |
Residential Mortgage – Key Credit Statistics |
||||||||||||||||
Reported Basis (1)
|
Excluding Purchased Credit-impaired and Fully-insured Loans |
||||||||||||||||
December 31 |
|||||||||||||||||
(Dollars in millions) |
2017 |
2016 |
2017 |
2016 |
|||||||||||||
Outstandings |
$ |
203,811 |
$ |
191,797 |
$ |
172,069 |
$ |
152,941 |
|||||||||
Accruing past due 30 days or more |
5,987 |
8,232 |
1,521 |
1,835 |
|||||||||||||
Accruing past due 90 days or more |
3,230 |
4,793 |
— |
— |
|||||||||||||
Nonperforming loans |
2,476 |
3,056 |
2,476 |
3,056 |
|||||||||||||
Percent of portfolio |
|||||||||||||||||
Refreshed LTV greater than 90 but less than or equal to 100 |
3 |
% |
5 |
% |
2 |
% |
3 |
% |
|||||||||
Refreshed LTV greater than 100 |
2 |
4 |
1 |
3 |
|||||||||||||
Refreshed FICO below 620 |
6 |
9 |
3 |
4 |
|||||||||||||
2006 and 2007 vintages (2)
|
10 |
13 |
8 |
12 |
|||||||||||||
2017 |
2016 |
2017 |
2016 |
||||||||||||||
Net charge-off ratio (3)
|
(0.05 |
)% |
0.07 |
% |
(0.06 |
)% |
0.09 |
% |
|||||||||
(1) |
Outstandings, accruing past due, nonperforming loans and percentages of portfolio exclude loans accounted for under the fair value option. |
(2) |
These vintages of loans accounted for $825 million, or 33 percent, and $931 million, or 31 percent, of nonperforming residential mortgage loans at December 31, 2017 and 2016.
|
(3) |
Net charge-off ratios are calculated as net charge-offs divided by average outstanding loans excluding loans accounted for under the fair value option. |
Nonperforming residential mortgage loans decreased $580 million in 2017 as outflows, including sales of $460 million and net transfers to held-for-sale of $132 million, outpaced new inflows which included the addition of $140 million of nonperforming loans as a result of clarifying regulatory guidance related to bankruptcy loans. Of the nonperforming residential mortgage loans at December 31, 2017, $860 million, or 35 percent, were current on contractual payments. Loans accruing past due 30 days or more decreased $314 million due in part to the timing impact of a consumer real estate servicer conversion that occurred during the fourth quarter of 2016.
Net charge-offs decreased $231 million to $100 million of net recoveries in 2017 compared to $131 million of net charge-offs in 2016. This decrease in net charge-offs was primarily driven by net recoveries of $105 million related to loan sales in 2017, compared to loan sale-related net charge-offs of $26 million in 2016. Additionally, net charge-offs declined due to favorable portfolio trends and decreased write-downs on loans greater than 180 days past due driven by improvement in home prices and the U.S. economy.
Loans with a refreshed LTV greater than 100 percent represented one percent and three percent of the residential mortgage loan portfolio at December 31, 2017 and 2016. Of the loans with a refreshed LTV greater than 100 percent, 98 percent were performing at both December 31, 2017 and 2016. Loans with a refreshed LTV greater than 100 percent reflect loans where the outstanding carrying value of the loan is greater than the most recent valuation of the property securing the loan. The majority of these loans have a refreshed LTV greater than 100 percent primarily due to home price deterioration since 2006, partially offset by subsequent appreciation.
Of the $172.1 billion in total residential mortgage loans outstanding at December 31, 2017, as shown in Table 25, 33
percent were originated as interest-only loans. The outstanding balance of interest-only residential mortgage loans that have entered the amortization period was $10.4 billion, or 18 percent, at December 31, 2017. 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, 2017, $283 million, or three percent of outstanding interest-only residential mortgages that had entered the amortization period were accruing past due 30 days or more compared to $1.5 billion, or one percent for the entire residential mortgage portfolio. In addition, at December 31, 2017, $509 million, or five percent of outstanding interest-only residential mortgage loans that had entered the amortization period were nonperforming, of which $253 million were contractually current, compared to $2.5 billion, or one percent for the entire residential mortgage portfolio, of which $860 million were contractually current. Loans that have yet to enter the amortization period in our interest-only residential mortgage portfolio are primarily well-collateralized loans to our wealth management clients and have an interest-only period of three to ten years. More than 80 percent of these loans that have yet to enter the amortization period will not be required to make a fully-amortizing payment until 2020 or later.
Table 25 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 and 15 percent of outstandings at December 31, 2017 and 2016. In the New York area, the New York-Northern New Jersey-Long Island MSA made up 13 percent and 12 percent of outstandings at December 31, 2017 and 2016.
57 Bank of America 2017
|
||
Table 25 |
Residential Mortgage State Concentrations |
|||||||||||||||||||||||
Outstandings (1)
|
Nonperforming (1)
|
Net Charge-offs (2)
|
||||||||||||||||||||||
December 31 |
||||||||||||||||||||||||
(Dollars in millions) |
2017 |
2016 |
2017 |
2016 |
2017 |
2016 |
||||||||||||||||||
California |
$ |
68,455 |
$ |
58,295 |
$ |
433 |
$ |
554 |
$ |
(103 |
) |
$ |
(70 |
) |
||||||||||
New York (3)
|
17,239 |
14,476 |
227 |
290 |
(2 |
) |
18 |
|||||||||||||||||
Florida (3)
|
10,880 |
10,213 |
280 |
322 |
(13 |
) |
20 |
|||||||||||||||||
Texas |
7,237 |
6,607 |
126 |
132 |
1 |
9 |
||||||||||||||||||
New Jersey (3)
|
6,099 |
5,307 |
130 |
174 |
— |
25 |
||||||||||||||||||
Other U.S./Non-U.S. |
62,159 |
58,043 |
1,280 |
1,584 |
17 |
129 |
||||||||||||||||||
Residential mortgage loans (4)
|
$ |
172,069 |
$ |
152,941 |
$ |
2,476 |
$ |
3,056 |
$ |
(100 |
) |
$ |
131 |
|||||||||||
Fully-insured loan portfolio |
23,741 |
28,729 |
||||||||||||||||||||||
Purchased credit-impaired residential mortgage loan portfolio (5)
|
8,001 |
10,127 |
||||||||||||||||||||||
Total residential mortgage loan portfolio |
$ |
203,811 |
$ |
191,797 |
||||||||||||||||||||
(1) |
Outstandings and nonperforming loans exclude loans accounted for under the fair value option. |
(2) |
Net charge-offs excluded $131 million and $144 million of write-offs in the residential mortgage PCI loan portfolio in 2017 and 2016. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 60.
|
(3) |
In these states, foreclosure requires a court order following a legal proceeding (judicial states). |
(4) |
Amounts exclude the PCI residential mortgage and fully-insured loan portfolios. |
(5) |
At December 31, 2017 and 2016, 47 percent and 48 percent of PCI residential mortgage loans were in California. There were no other significant single state concentrations.
|
Home Equity
At December 31, 2017, the home equity portfolio made up 13 percent of the consumer portfolio and is comprised of home equity lines of credit (HELOCs), home equity loans and reverse mortgages.
At December 31, 2017, our HELOC portfolio had an outstanding balance of $51.2 billion, or 89 percent of the total home equity portfolio compared to $58.6 billion, or 88 percent, at December 31, 2016. HELOCs generally have an initial draw period of 10 years and after the initial draw period ends, the loans generally convert to 15-year amortizing loans.
At December 31, 2017, our home equity loan portfolio had an outstanding balance of $4.4 billion, or seven percent of the total home equity portfolio compared to $5.9 billion, or nine percent, at December 31, 2016. Home equity loans are almost all fixed-rate loans with amortizing payment terms of 10 to 30 years and of the $4.4 billion at December 31, 2017, 57 percent have 25- to 30-year terms. At December 31, 2017, our reverse mortgage portfolio had an outstanding balance, excluding loans accounted for under the fair value option, of $2.1 billion, or four percent of the total home equity portfolio compared to $1.9 billion, or three percent, at December 31, 2016. We no longer originate reverse mortgages.
At December 31, 2017, approximately 69 percent of the home equity portfolio was in Consumer Banking, 23 percent was in All Other and the remainder of the portfolio was primarily in GWIM. Outstanding balances in the home equity portfolio, excluding loans accounted for under the fair value option, decreased $8.7 billion in 2017 primarily due to paydowns and charge-offs outpacing new
originations and draws on existing lines. Of the total home equity portfolio at December 31, 2017 and 2016, $18.7 billion and $19.6 billion, or 32 percent and 29 percent, were in first-lien positions (34 percent and 31 percent excluding the PCI home equity portfolio). At December 31, 2017, 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 $9.4 billion, or 17 percent of our total home equity portfolio excluding the PCI loan portfolio.
Unused HELOCs totaled $44.2 billion and $47.2 billion at December 31, 2017 and 2016. The decrease was primarily due to accounts reaching the end of their draw period, which automatically eliminates open line exposure, and customers choosing to close accounts. Both of these more than offset the impact of new production. The HELOC utilization rate was 54 percent and 55 percent at December 31, 2017 and 2016.
Table 26 presents certain home equity portfolio key credit statistics on both a reported basis excluding loans accounted for under the fair value option, and excluding the PCI loan portfolio and loans accounted for under the fair value option. Additionally, in the “Reported Basis” columns in the following table, accruing balances past due 30 days or more and nonperforming loans do not include the PCI loan portfolio, in accordance with our accounting policies, even though the customer may be contractually past due. As such, the following discussion presents the home equity portfolio excluding the PCI loan portfolio and loans accounted for under the fair value option. For more information on the PCI loan portfolio, see page 60.
Bank of America 2017 58
|
||
Table 26 |
Home Equity – Key Credit Statistics |
||||||||||||||||
Reported Basis (1)
|
Excluding Purchased Credit-impaired Loans |
||||||||||||||||
December 31 |
|||||||||||||||||
(Dollars in millions) |
2017 |
2016 |
2017 |
2016 |
|||||||||||||
Outstandings |
$ |
57,744 |
$ |
66,443 |
$ |
55,028 |
$ |
62,832 |
|||||||||
Accruing past due 30 days or more (2)
|
502 |
566 |
502 |
566 |
|||||||||||||
Nonperforming loans (2)
|
2,644 |
2,918 |
2,644 |
2,918 |
|||||||||||||
Percent of portfolio |
|||||||||||||||||
Refreshed CLTV greater than 90 but less than or equal to 100 |
3 |
% |
5 |
% |
3 |
% |
4 |
% |
|||||||||
Refreshed CLTV greater than 100 |
5 |
8 |
4 |
7 |
|||||||||||||
Refreshed FICO below 620 |
6 |
7 |
6 |
6 |
|||||||||||||
2006 and 2007 vintages (3)
|
29 |
37 |
27 |
34 |
|||||||||||||
2017 |
2016 |
2017 |
2016 |
||||||||||||||
Net charge-off ratio (4)
|
0.34 |
% |
0.57 |
% |
0.36 |
% |
0.60 |
% |
|||||||||
(1) |
Outstandings, accruing past due, nonperforming loans and percentages of the portfolio exclude loans accounted for under the fair value option. |
(2) |
Accruing past due 30 days or more included $67 million and $81 million and nonperforming loans included $344 million and $340 million of loans where we serviced the underlying first-lien at December 31, 2017 and 2016.
|
(3) |
These vintages of loans have higher refreshed combined loan-to-value (CLTV) ratios and accounted for 52 percent and 50 percent of nonperforming home equity loans at December 31, 2017 and 2016, and 91 percent and 54 percent of net charge-offs in 2017 and 2016.
|
(4) |
Net charge-off ratios are calculated as net charge-offs divided by average outstanding loans excluding loans accounted for under the fair value option. |
Nonperforming outstanding balances in the home equity portfolio decreased $274 million in 2017 as outflows, including $66 million of net transfers to held-for-sale and $51 million of sales, outpaced new inflows, which included the addition of $135 million of nonperforming loans as a result of clarifying regulatory guidance related to bankruptcy loans. Of the nonperforming home equity portfolio at December 31, 2017, $1.4 billion, or 54 percent, were current on contractual payments. Nonperforming loans that are contractually current primarily consist of collateral-dependent TDRs, including those that have been discharged in Chapter 7 bankruptcy, junior-lien loans where the underlying first-lien is 90 days or more past due, as well as loans that have not yet demonstrated a sustained period of payment performance following a TDR. In addition, $693 million, or 26 percent, of nonperforming home equity loans were 180 days or more past due and had been written down to the estimated fair value of the collateral, less costs to sell. Accruing loans that were 30 days or more past due decreased $64 million in 2017.
In some cases, the junior-lien home equity outstanding balance that we hold is performing, but the underlying first-lien is not. For outstanding balances in the home equity portfolio on which we service the first-lien loan, we are able to track whether the first-lien loan is in default. For loans where the first-lien is serviced by a third party, we utilize credit bureau data to estimate the delinquency status of the first-lien. Given that the credit bureau database we use does not include a property address for the mortgages, we are unable to identify with certainty whether a reported delinquent first-lien mortgage pertains to the same property for which we hold a junior-lien loan. For certain loans, we
utilize a third-party vendor to combine credit bureau and public record data to better link a junior-lien loan with the underlying first-lien mortgage. At December 31, 2017, we estimate that $814 million of current and $141 million of 30 to 89 days past due junior-lien loans were behind a delinquent first-lien loan. We service the first-lien loans on $184 million of these combined amounts, with the remaining $771 million serviced by third parties. Of the $955 million of current to 89 days past due junior-lien loans, based on available credit bureau data and our own internal servicing data, we estimate that approximately $330 million had first-lien loans that were 90 days or more past due.
Net charge-offs decreased $192 million to $213 million in 2017 compared to $405 million in 2016 driven by favorable portfolio trends due in part to improvement in home prices and the U.S. economy, partially offset by $32 million of charge-offs as a result of clarifying regulatory guidance related to bankruptcy loans.
Outstanding balances with a refreshed CLTV greater than 100 percent comprised four percent and seven percent of the home equity portfolio at December 31, 2017 and 2016. Outstanding balances with a refreshed CLTV greater than 100 percent reflect loans where our loan and available line of credit combined with any outstanding senior liens against the property are equal to or greater than the most recent valuation of the property securing the loan. Depending on the value of the property, there may be collateral in excess of the first-lien that is available to reduce the severity of loss on the second-lien. Of those outstanding balances with a refreshed CLTV greater than 100 percent, 95 percent of the customers were current on their home equity loan and 91 percent of second-lien loans with a refreshed CLTV greater than 100 percent were current on both their second-lien and underlying first-lien loans at December 31, 2017.
Of the $55.0 billion in total home equity portfolio outstandings at December 31, 2017, as shown in Table 27, 30 percent require interest-only payments. The outstanding balance of HELOCs that have reached the end of their draw period and have entered the amortization period was $18.4 billion at December 31, 2017. 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, 2017, $343 million, or two percent, of outstanding HELOCs that had entered the amortization period were accruing past due 30 days or more. In addition, at December 31, 2017, $2.1 billion, or 11 percent, of outstanding HELOCs that had entered the amortization period were nonperforming, of which $1.1 billion were contractually current. Loans in our HELOC portfolio generally have an initial draw period of 10 years and 10 percent of these loans will enter the amortization period during 2018 and will be required to make fully-amortizing payments. We communicate to contractually current customers more than a year
59 Bank of America 2017
|
||
prior to the end of their draw period to inform them of the potential change to the payment structure before entering the amortization period, and provide payment options to customers prior to the end of the draw period.
Although we do not actively track how many of our home equity customers pay only the minimum amount due on their home equity loans and lines, we can infer some of this information through a review of our HELOC portfolio that we service and that is still in its revolving period (i.e., customers may draw on and repay their line of credit, but are generally only required to pay interest on a monthly basis). During 2017, approximately 19 percent of these customers with an outstanding balance did not pay any principal on their HELOCs.
Table 27 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, 2017 and 2016. Loans within this MSA contributed 27 percent and 17 percent of net charge-offs in 2017 and 2016 within the home equity portfolio. The Los Angeles-Long Beach-Santa Ana MSA within California made up 11 percent of the outstanding home equity portfolio at both December 31, 2017 and 2016. Loans within this MSA contributed net recoveries of $20 million and $2 million within the home equity portfolio in 2017 and 2016.
Table 27 |
Home Equity State Concentrations |
|||||||||||||||||||||||
Outstandings (1)
|
Nonperforming (1)
|
Net Charge-offs (2)
|
||||||||||||||||||||||
December 31 |
||||||||||||||||||||||||
(Dollars in millions) |
2017 |
2016 |
2017 |
2016 |
2017 |
2016 |
||||||||||||||||||
California |
$ |
15,145 |
$ |
17,563 |
$ |
766 |
$ |
829 |
$ |
(37 |
) |
$ |
7 |
|||||||||||
Florida (3)
|
6,308 |
7,319 |
411 |
442 |
38 |
76 |
||||||||||||||||||
New Jersey (3)
|
4,546 |
5,102 |
191 |
201 |
44 |
50 |
||||||||||||||||||
New York (3)
|
4,195 |
4,720 |
252 |
271 |
35 |
45 |
||||||||||||||||||
Massachusetts |
2,751 |
3,078 |
92 |
100 |
9 |
12 |
||||||||||||||||||
Other U.S./Non-U.S. |
22,083 |
25,050 |
932 |
1,075 |
124 |
215 |
||||||||||||||||||
Home equity loans (4)
|
$ |
55,028 |
$ |
62,832 |
$ |
2,644 |
$ |
2,918 |
$ |
213 |
$ |
405 |
||||||||||||
Purchased credit-impaired home equity portfolio (5)
|
2,716 |
3,611 |
||||||||||||||||||||||
Total home equity loan portfolio |
$ |
57,744 |
$ |
66,443 |
||||||||||||||||||||
(1) |
Outstandings and nonperforming loans exclude loans accounted for under the fair value option. |
(2) |
Net charge-offs excluded $76 million and $196 million of write-offs in the home equity PCI loan portfolio in 2017 and 2016. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio.
|
(3) |
In these states, foreclosure requires a court order following a legal proceeding (judicial states). |
(4) |
Amount excludes the PCI home equity portfolio. |
(5) |
At December 31, 2017 and 2016, 28 percent and 29 percent of PCI home equity loans were in California. There were no other significant single state concentrations.
|
Purchased Credit-impaired Loan Portfolio
Loans acquired with evidence of credit quality deterioration since origination and for which it is probable at purchase that we will be unable to collect all contractually required payments are accounted for under the accounting standards for PCI loans. For more information, see Note 1 – Summary of Significant Accounting
Principles and Note 4 – Outstanding Loans and Leases to the Consolidated Financial Statements.
Table 28 presents the unpaid principal balance, carrying value, related valuation allowance and the net carrying value as a percentage of the unpaid principal balance for the PCI loan portfolio.
Table 28 |
Purchased Credit-impaired Loan Portfolio |
||||||||||||||||||
Unpaid Principal Balance |
Gross Carrying Value |
Related Valuation Allowance |
Carrying Value Net of Valuation Allowance |
Percent of Unpaid Principal Balance |
|||||||||||||||
(Dollars in millions) |
December 31, 2017 |
||||||||||||||||||
Residential mortgage (1)
|
$ |
8,117 |
$ |
8,001 |
$ |
117 |
$ |
7,884 |
97.13 |
% |
|||||||||
Home equity |
2,787 |
2,716 |
172 |
2,544 |
91.28 |
||||||||||||||
Total purchased credit-impaired loan portfolio |
$ |
10,904 |
$ |
10,717 |
$ |
289 |
$ |
10,428 |
95.63 |
||||||||||
December 31, 2016 |
|||||||||||||||||||
Residential mortgage (1)
|
$ |
10,330 |
$ |
10,127 |
$ |
169 |
$ |
9,958 |
96.40 |
% |
|||||||||
Home equity |
3,689 |
3,611 |
250 |
3,361 |
91.11 |
||||||||||||||
Total purchased credit-impaired loan portfolio |
$ |
14,019 |
$ |
13,738 |
$ |
419 |
$ |
13,319 |
95.01 |
||||||||||
(1) |
At December 31, 2017 and 2016, pay option loans had an unpaid principal balance of $1.4 billion and $1.9 billion and a carrying value of $1.4 billion and $1.8 billion. This includes $1.2 billion and $1.6 billion of loans that were credit-impaired upon acquisition and $141 million and $226 million of loans that were 90 days or more past due at December 31, 2017 and 2016. The total unpaid principal balance of pay option loans with accumulated negative amortization was $160 million and $303 million, including $9 million and $16 million of negative amortization at December 31, 2017 and 2016.
|
Bank of America 2017 60
|
||
The total PCI unpaid principal balance decreased $3.1 billion, or 22 percent, in 2017 primarily driven by payoffs, paydowns, write-offs and PCI loan sales with a carrying value of $803 million compared to $549 million in 2016.
Of the unpaid principal balance of $10.9 billion at December 31, 2017, $9.6 billion, or 88 percent, was current based on the contractual terms, $752 million, or seven percent, was in early stage delinquency, and $364 million was 180 days or more past due, including $302 million of first-lien mortgages and $62 million of home equity loans.
The PCI residential mortgage loan and home equity portfolios represented 75 percent and 25 percent of the total PCI loan portfolio at December 31, 2017. Those loans to borrowers with a refreshed FICO score below 620 represented 24 percent and 17 percent of the PCI residential mortgage loan and home equity portfolios at December 31, 2017. Residential mortgage and home equity loans with a refreshed LTV or CLTV greater than 90 percent, after consideration of purchase accounting adjustments and the related valuation allowance, represented 14 percent and 34 percent of their respective PCI loan portfolios and 16 percent and
37 percent based on the unpaid principal balance at December 31, 2017.
U.S. Credit Card
At December 31, 2017, 97 percent of the U.S. credit card portfolio was managed in Consumer Banking with the remainder in GWIM.
Outstandings in the U.S. credit card portfolio increased $4.0 billion to $96.3 billion in 2017 as retail volumes outpaced payments. Net charge-offs increased $244 million to $2.5 billion in 2017 due to portfolio seasoning and loan growth. U.S. credit card loans 30 days or more past due and still accruing interest increased $252 million and loans 90 days or more past due and still accruing interest increased $118 million in 2017, driven by portfolio seasoning and loan growth.
Unused lines of credit for U.S. credit card totaled $326.3 billion and $321.6 billion at December 31, 2017 and 2016. The increase was driven by account growth and lines of credit increases.
Table 29 presents certain state concentrations for the U.S. credit card portfolio.
Table 29 |
U.S. Credit Card State Concentrations |
|||||||||||||||||||||||
Outstandings |
Accruing Past Due 90 Days or More |
Net Charge-offs |
||||||||||||||||||||||
December 31 |
||||||||||||||||||||||||
(Dollars in millions) |
2017 |
2016 |
2017 |
2016 |
2017 |
2016 |
||||||||||||||||||
California |
$ |
15,254 |
$ |
14,251 |
$ |
136 |
$ |
115 |
$ |
412 |
$ |
360 |
||||||||||||
Florida |
8,359 |
7,864 |
94 |
85 |
259 |
245 |
||||||||||||||||||
Texas |
7,451 |
7,037 |
76 |
65 |
194 |
164 |
||||||||||||||||||
New York |
5,977 |
5,683 |
91 |
60 |
218 |
161 |
||||||||||||||||||
Washington |
4,350 |
4,128 |
20 |
18 |
56 |
56 |
||||||||||||||||||
Other U.S. |
54,894 |
53,315 |
483 |
439 |
1,374 |
1,283 |
||||||||||||||||||
Total U.S. credit card portfolio |
$ |
96,285 |
$ |
92,278 |
$ |
900 |
$ |
782 |
$ |
2,513 |
$ |
2,269 |
||||||||||||
Direct/Indirect and Other Consumer
At December 31, 2017, approximately 54 percent of the direct/indirect portfolio was included in Consumer Banking (consumer auto and specialty lending – automotive, marine, aircraft, recreational vehicle loans and consumer personal loans) and 46 percent was included in GWIM (principally securities-based lending loans). At December 31, 2017, approximately 94 percent of the $2.7 billion other consumer portfolio was consumer auto leases included in Consumer Banking.
Outstandings in the direct/indirect portfolio remained relatively unchanged at $93.8 billion at December 31, 2017. Net charge-offs increased $77 million to $211 million in 2017 due largely to portfolio seasoning and clarifying regulatory guidance related to bankruptcy and repossession.
Table 30 presents certain state concentrations for the direct/indirect consumer loan portfolio.
Table 30 |
Direct/Indirect State Concentrations |
|||||||||||||||||||||||
Outstandings |
Accruing Past Due 90 Days or More |
Net Charge-offs |
||||||||||||||||||||||
December 31 |
||||||||||||||||||||||||
(Dollars in millions) |
2017 |
2016 |
2017 |
2016 |
2017 |
2016 |
||||||||||||||||||
California |
$ |
11,165 |
$ |
11,300 |
$ |
3 |
$ |
3 |
$ |
21 |
$ |
13 |
||||||||||||
Florida |
10,946 |
9,418 |
5 |
3 |
42 |
29 |
||||||||||||||||||
Texas |
10,623 |
9,406 |
5 |
5 |
38 |
21 |
||||||||||||||||||
New York |
6,058 |
5,253 |
2 |
1 |
6 |
3 |
||||||||||||||||||
Georgia |
3,502 |
3,255 |
4 |
4 |
15 |
9 |
||||||||||||||||||
Other U.S./Non-U.S. |
51,536 |
55,457 |
21 |
18 |
89 |
59 |
||||||||||||||||||
Total direct/indirect loan portfolio |
$ |
93,830 |
$ |
94,089 |
$ |
40 |
$ |
34 |
$ |
211 |
$ |
134 |
||||||||||||
61 Bank of America 2017
|
||
Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity
Table 31 presents nonperforming consumer loans, leases and foreclosed properties activity during 2017 and 2016. For more information on nonperforming loans, see Note 1 – Summary of Significant Accounting Principles and Note 4 – Outstanding Loans and Leases to the Consolidated Financial Statements. During 2017, nonperforming consumer loans declined $838 million to $5.2 billion driven in part by loan sales of $511 million and net transfers of loans to held-for-sale of $198 million. Additionally, nonperforming loans declined as outflows outpaced new inflows, which included the addition of $295 million of nonperforming loans as a result of clarifying regulatory guidance related to bankruptcy loans.
At December 31, 2017, $1.9 billion, or 34 percent of nonperforming consumer real estate loans and foreclosed properties had been written down to their estimated property value less costs to sell, including $1.6 billion of nonperforming loans 180 days or more past due and $236 million of foreclosed properties. In addition, at December 31, 2017, $2.3 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 $127 million in 2017 as liquidations outpaced additions. PCI loans are excluded from nonperforming loans as these loans were written down to fair value at the acquisition date; however, once we acquire the underlying real estate upon foreclosure of the delinquent PCI loan, it is included in foreclosed properties. Not included in foreclosed properties at December 31, 2017 was $801 million of real estate that was acquired upon foreclosure of certain delinquent government-guaranteed loans (principally FHA-insured loans). We exclude these amounts from our nonperforming loans and foreclosed properties activity as we expect we will be reimbursed once the property is conveyed to the guarantor for principal and, up to certain limits, costs incurred during the foreclosure process and interest accrued during the holding period.
We classify junior-lien home equity loans as nonperforming when the first-lien loan becomes 90 days past due even if the junior-lien loan is performing. At December 31, 2017 and 2016, $330 million and $428 million of such junior-lien home equity loans were included in nonperforming loans and leases.
Nonperforming loans also include certain loans that have been modified in TDRs where economic concessions have been granted to borrowers experiencing financial difficulties. Nonperforming TDRs, excluding those modified loans in the PCI loan portfolio, are included in Table 31.
Table 31 |
Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity (1)
|
|||||||
(Dollars in millions) |
2017 |
2016 |
||||||
Nonperforming loans and leases, January 1 |
$ |
6,004 |
$ |
8,165 |
||||
Additions |
3,254 |
3,492 |
||||||
Reductions: |
||||||||
Paydowns and payoffs |
(1,052 |
) |
(1,044 |
) |
||||
Sales |
(511 |
) |
(1,604 |
) |
||||
Returns to performing status (2)
|
(1,438 |
) |
(1,628 |
) |
||||
Charge-offs |
(676 |
) |
(1,028 |
) |
||||
Transfers to foreclosed properties |
(217 |
) |
(294 |
) |
||||
Transfers to loans held-for-sale |
(198 |
) |
(55 |
) |
||||
Total net reductions to nonperforming loans and leases |
(838 |
) |
(2,161 |
) |
||||
Total nonperforming loans and leases, December 31 (3)
|
5,166 |
6,004 |
||||||
Total foreclosed properties, December 31 (4)
|
236 |
363 |
||||||
Nonperforming consumer loans, leases and foreclosed properties, December 31 |
$ |
5,402 |
$ |
6,367 |
||||
Nonperforming consumer loans and leases as a percentage of outstanding consumer loans and leases (5)
|
1.14 |
% |
1.32 |
% |
||||
Nonperforming consumer loans, leases and foreclosed properties as a percentage of outstanding consumer loans, leases and foreclosed properties (5)
|
1.19 |
1.39 |
||||||
(1) |
Balances do not include nonperforming LHFS of $2 million and $69 million and nonaccruing TDRs removed from the PCI loan portfolio prior to January 1, 2010 of $26 million and $27 million at December 31, 2017 and 2016 as well as loans accruing past due 90 days or more as presented in Table 21 and Note 4 – Outstanding Loans and Leases to the Consolidated Financial Statements.
|
(2) |
Consumer loans may be returned to performing status when all principal and interest is current and full repayment of the remaining contractual principal and interest is expected, or when the loan otherwise becomes well-secured and is in the process of collection. |
(3) |
At December 31, 2017, 31 percent of nonperforming loans were 180 days or more past due.
|
(4) |
Foreclosed property balances do not include properties insured by certain government-guaranteed loans, principally FHA-insured, of $801 million and $1.2 billion at December 31, 2017 and 2016.
|
(5) |
Outstanding consumer loans and leases exclude loans accounted for under the fair value option. |
Bank of America 2017 62
|
||
Table 32 presents TDRs for the consumer real estate portfolio. Performing TDR balances are excluded from nonperforming loans and leases in Table 31.
Table 32 |
Consumer Real Estate Troubled Debt Restructurings |
|||||||||||||||||||||||
December 31, 2017 |
December 31, 2016 |
|||||||||||||||||||||||
(Dollars in millions) |
Nonperforming |
Performing |
Total |
Nonperforming |
Performing |
Total |
||||||||||||||||||
Residential mortgage (1, 2)
|
$ |
1,535 |
$ |
8,163 |
$ |
9,698 |
$ |
1,992 |
$ |
10,639 |
$ |
12,631 |
||||||||||||
Home equity (3)
|
1,457 |
1,399 |
2,856 |
1,566 |
1,211 |
2,777 |
||||||||||||||||||
Total consumer real estate troubled debt restructurings |
$ |
2,992 |
$ |
9,562 |
$ |
12,554 |
$ |
3,558 |
$ |
11,850 |
$ |
15,408 |
||||||||||||
(1) |
At December 31, 2017 and 2016, residential mortgage TDRs deemed collateral dependent totaled $2.8 billion and $3.5 billion, and included $1.2 billion and $1.6 billion of loans classified as nonperforming and $1.6 billion and $1.9 billion of loans classified as performing.
|
(2) |
Residential mortgage performing TDRs included $3.7 billion and $5.3 billion of loans that were fully-insured at December 31, 2017 and 2016.
|
(3) |
Home equity TDRs deemed collateral dependent totaled $1.6 billion for both periods and included $1.2 billion and $1.3 billion of loans classified as nonperforming, and $388 million and $301 million of loans classified as performing at December 31, 2017 and 2016.
|
In addition to modifying consumer real estate loans, we work with customers who are experiencing financial difficulty by modifying credit card and other consumer loans. Credit card and other consumer loan modifications generally involve a reduction in the customer’s interest rate on the account and placing the customer on a fixed payment plan not exceeding 60 months, all of which are considered TDRs (the renegotiated TDR portfolio).
Modifications of credit card and other consumer loans are made through renegotiation programs utilizing direct customer contact, but may also utilize external renegotiation programs. The renegotiated TDR portfolio is excluded in large part from Table 31 as substantially all of the loans remain on accrual status until either charged off or paid in full. At December 31, 2017 and 2016, our renegotiated TDR portfolio was $490 million and $610 million, of which $426 million and $493 million were current or less than 30 days past due under the modified terms. The decline in the renegotiated TDR portfolio was primarily driven by paydowns and charge-offs as well as lower program enrollments. For more information on the renegotiated TDR portfolio, see Note 4 – Outstanding Loans and Leases to the Consolidated Financial Statements.
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 do not result in undesirable levels of risk. We review, measure and manage concentrations of credit exposure by industry, product, geography, customer relationship and loan size. We also review, measure and manage commercial real estate loans by geographic location and property type. In addition, within our non-U.S. portfolio, we evaluate exposures by region and by country. Tables 37, 40, 45 and 46 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, including our utilized exposure to the energy sector which was three percent of total commercial utilized exposure at both December 31, 2017 and 2016, see Commercial Portfolio Credit Risk Management – Industry Concentrations on page 67 and Table 40.
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.
63 Bank of America 2017
|
||
Commercial Credit Portfolio
During 2017, credit quality among large corporate borrowers was strong, other than in the higher risk energy sub-sectors, where we saw improvement in 2017. Credit quality of commercial real estate borrowers continued to be strong with conservative LTV ratios, stable market rents in most sectors and vacancy rates remaining low.
Total commercial utilized credit exposure increased $25.9 billion during 2017 to $600.8 billion at December 31, 2017 primarily driven by increases in loans and leases. The utilization rate for loans and leases, SBLCs and financial guarantees, and
commercial letters of credit, in the aggregate, was 59 percent and 58 percent at December 31, 2017 and 2016.
Table 33 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 33 |
Commercial Credit Exposure by Type |
|||||||||||||||||||||||
Commercial Utilized (1)
|
Commercial Unfunded (2, 3, 4)
|
Total Commercial Committed |
||||||||||||||||||||||
December 31 |
||||||||||||||||||||||||
(Dollars in millions) |
2017 |
2016 |
2017 |
2016 |
2017 |
2016 |
||||||||||||||||||
Loans and leases (5)
|
$ |
487,748 |
$ |
464,260 |
$ |
364,743 |
$ |
356,911 |
$ |
852,491 |
$ |
821,171 |
||||||||||||
Derivative assets (6)
|
37,762 |
42,512 |
— |
— |
37,762 |
42,512 |
||||||||||||||||||
Standby letters of credit and financial guarantees |
34,517 |
33,135 |
863 |
660 |
35,380 |
33,795 |
||||||||||||||||||
Debt securities and other investments |
28,161 |
26,244 |
4,864 |
5,474 |
33,025 |
31,718 |
||||||||||||||||||
Loans held-for-sale |
10,257 |
6,510 |
9,742 |
13,019 |
19,999 |
19,529 |
||||||||||||||||||
Commercial letters of credit |
1,467 |
1,464 |
155 |
112 |
1,622 |
1,576 |
||||||||||||||||||
Other |
888 |
767 |
— |
13 |
888 |
780 |
||||||||||||||||||
Total |
$ |
600,800 |
$ |
574,892 |
$ |
380,367 |
$ |
376,189 |
$ |
981,167 |
$ |
951,081 |
||||||||||||
(1) |
Commercial utilized exposure includes loans of $4.8 billion and $6.0 billion and issued letters of credit with a notional amount of $232 million and $284 million accounted for under the fair value option at December 31, 2017 and 2016.
|
(2) |
Commercial unfunded exposure includes commitments accounted for under the fair value option with a notional amount of $4.6 billion and $6.7 billion at December 31, 2017 and 2016.
|
(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 (e.g., syndicated or participated) to other financial institutions. The distributed amounts were $11.0 billion and $12.1 billion at December 31, 2017 and 2016.
|
(5) |
Includes credit risk exposure associated with assets under operating lease arrangements of $6.3 billion and $5.7 billion at December 31, 2017 and 2016.
|
(6) |
Derivative assets are carried at fair value, reflect the effects of legally enforceable master netting agreements and have been reduced by cash collateral of $34.6 billion and $43.3 billion at December 31, 2017 and 2016. Not reflected in utilized and committed exposure is additional non-cash derivative collateral held of $26.2 billion and $25.3 billion at December 31, 2017 and 2016, which consists primarily of other marketable securities.
|
Outstanding commercial loans and leases increased $22.9 billion during 2017 to $481.5 billion at December 31, 2017 primarily due to growth in commercial and industrial loans. During 2017, nonperforming commercial loans and leases decreased $440 million to $1.3 billion and reservable criticized balances decreased $2.8 billion to $13.6 billion both driven by
improvements in the energy sector. The allowance for loan and lease losses for the commercial portfolio decreased $248 million during 2017 to $5.0 billion at December 31, 2017. For more information, see Allowance for Credit Losses on page 72. Table 34 presents our commercial loans and leases portfolio and related credit quality information at December 31, 2017 and 2016.
Table 34 |
Commercial Credit Quality |
|||||||||||||||||||||||
Outstandings |
Nonperforming |
Accruing Past Due
90 Days or More
|
||||||||||||||||||||||
December 31 |
||||||||||||||||||||||||
(Dollars in millions) |
2017 |
2016 |
2017 |
2016 |
2017 |
2016 |
||||||||||||||||||
Commercial and industrial: |
||||||||||||||||||||||||
U.S. commercial |
$ |
284,836 |
$ |
270,372 |
$ |
814 |
$ |
1,256 |
$ |
144 |
$ |
106 |
||||||||||||
Non-U.S. commercial |
97,792 |
89,397 |
299 |
279 |
3 |
5 |
||||||||||||||||||
Total commercial and industrial |
382,628 |
359,769 |
1,113 |
1,535 |
147 |
111 |
||||||||||||||||||
Commercial real estate (1)
|
58,298 |
57,355 |
112 |
72 |
4 |
7 |
||||||||||||||||||
Commercial lease financing |
22,116 |
22,375 |
24 |
36 |
19 |
19 |
||||||||||||||||||
463,042 |
439,499 |
1,249 |
1,643 |
170 |
137 |
|||||||||||||||||||
U.S. small business commercial (2)
|
13,649 |
12,993 |
55 |
60 |
75 |
71 |
||||||||||||||||||
Commercial loans excluding loans accounted for under the fair value option |
476,691 |
452,492 |
1,304 |
1,703 |
245 |
208 |
||||||||||||||||||
Loans accounted for under the fair value option (3)
|
4,782 |
6,034 |
43 |
84 |
— |
— |
||||||||||||||||||
Total commercial loans and leases |
$ |
481,473 |
$ |
458,526 |
$ |
1,347 |
$ |
1,787 |
$ |
245 |
$ |
208 |
||||||||||||
(1) |
Includes U.S. commercial real estate of $54.8 billion and $54.3 billion and non-U.S. commercial real estate of $3.5 billion and $3.1 billion at December 31, 2017 and 2016.
|
(2) |
Includes card-related products. |
(3) |
Commercial loans accounted for under the fair value option include U.S. commercial of $2.6 billion and $2.9 billion and non-U.S. commercial of $2.2 billion and $3.1 billion at December 31, 2017 and 2016. For more information on the fair value option, see Note 21 – Fair Value Option to the Consolidated Financial Statements.
|
Bank of America 2017 64
|
||
Table 35 presents net charge-offs and related ratios for our commercial loans and leases for 2017 and 2016. The increase in net charge-offs of $399 million for 2017 was primarily driven by a single-name non-U.S. commercial charge-off of $292 million in the fourth quarter of 2017.
Table 35 |
Commercial Net Charge-offs and Related Ratios |
|||||||||||||
Net Charge-offs |
Net Charge-off Ratios (1)
|
|||||||||||||
(Dollars in millions) |
2017 |
2016 |
2017 |
2016 |
||||||||||
Commercial and industrial: |
||||||||||||||
U.S. commercial |
$ |
232 |
$ |
184 |
0.08 |
% |
0.07 |
% |
||||||
Non-U.S. commercial |
440 |
120 |
0.48 |
0.13 |
||||||||||
Total commercial and industrial |
672 |
304 |
0.18 |
0.09 |
||||||||||
Commercial real estate |
9 |
(31 |
) |
0.02 |
(0.05 |
) |
||||||||
Commercial lease financing |
5 |
21 |
0.02 |
0.10 |
||||||||||
686 |
294 |
0.15 |
0.07 |
|||||||||||
U.S. small business commercial |
215 |
208 |
1.60 |
1.60 |
||||||||||
Total commercial |
$ |
901 |
$ |
502 |
0.20 |
0.11 |
||||||||
(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 36 presents commercial utilized reservable criticized exposure by loan type. Criticized exposure corresponds to the Special Mention, Substandard and Doubtful asset categories as defined by regulatory authorities. Total commercial utilized reservable criticized exposure decreased $2.8 billion, or 17 percent, during 2017 primarily driven by paydowns and upgrades in the energy portfolio. Approximately 84 percent and 76 percent of commercial utilized reservable criticized exposure was secured at December 31, 2017 and 2016.
Table 36 |
Commercial Utilized Reservable Criticized Exposure |
|||||||||||||
Amount (1)
|
Percent (2)
|
Amount (1)
|
Percent (2)
|
|||||||||||
December 31 |
||||||||||||||
(Dollars in millions) |
2017 |
2016 |
||||||||||||
Commercial and industrial: | ||||||||||||||
U.S. commercial |
$ |
9,891 |
3.15 |
% |
$ |
10,311 |
3.46 |
% |
||||||
Non-U.S. commercial |
1,766 |
1.70 |
3,974 |
4.17 |
||||||||||
Total commercial and industrial |
11,657 |
2.79 |
14,285 |
3.63 |
||||||||||
Commercial real estate |
566 |
0.95 |
399 |
0.68 |
||||||||||
Commercial lease financing |
581 |
2.63 |
810 |
3.62 |
||||||||||
12,804 |
2.57 |
15,494 |
3.27 |
|||||||||||
U.S. small business commercial |
759 |
5.56 |
826 |
6.36 |
||||||||||
Total commercial utilized reservable criticized exposure |
$ |
13,563 |
2.65 |
$ |
16,320 |
3.35 |
||||||||
(1) |
Total commercial utilized reservable criticized exposure includes loans and leases of $12.5 billion and $14.9 billion and commercial letters of credit of $1.1 billion and $1.4 billion at December 31, 2017 and 2016.
|
(2) |
Percentages are calculated as commercial utilized reservable criticized exposure divided by total commercial utilized reservable exposure for each exposure category. |
Commercial and Industrial
Commercial and industrial loans include U.S. commercial and non-U.S. commercial portfolios.
U.S. Commercial
At December 31, 2017, 70 percent of the U.S. commercial loan portfolio, excluding small business, was managed in Global Banking, 17 percent in Global Markets, 11 percent in GWIM (generally business-purpose loans for high net worth clients) and the remainder primarily in Consumer Banking. U.S. commercial loans, excluding loans accounted for under the fair value option, increased $14.5 billion, or five percent, during 2017 to $284.8 billion at December 31, 2017 due to growth across most of the commercial businesses. Reservable criticized balances decreased $420 million, or four percent, and nonperforming loans
and leases decreased $442 million, or 35 percent, in 2017 driven by improvements in the energy sector. Net charge-offs increased $48 million for 2017 compared to 2016.
Non-U.S. Commercial
At December 31, 2017, 79 percent of the non-U.S. commercial loan portfolio was managed in Global Banking and 21 percent in Global Markets. Outstanding loans, excluding loans accounted for under the fair value option, increased $8.4 billion in 2017. Reservable criticized balances decreased $2.2 billion, or 56 percent, due primarily to paydowns and upgrades in the energy portfolio. Net charge-offs increased $320 million in 2017 to $440 million due to a single-name non-U.S. commercial charge-off of $292 million in the fourth quarter of 2017. For more information on the non-U.S. commercial portfolio, see Non-U.S. Portfolio on page 70.
65 Bank of America 2017
|
||
Commercial Real Estate
Commercial real estate primarily includes commercial loans and leases secured by non-owner-occupied real estate and is dependent on the sale or lease of the real estate as the primary source of repayment. The portfolio remains diversified across property types and geographic regions. California represented the largest state concentration at 23 percent of the commercial real estate loans and leases portfolio at both December 31, 2017 and 2016. The commercial real estate portfolio is predominantly managed in Global Banking and consists of loans made primarily to public and private developers, and commercial real estate firms. Outstanding loans increased $943 million, or two percent, during 2017 to $58.3 billion at December 31, 2017 due to new originations outpacing paydowns.
During 2017, we continued to see low default rates and solid credit quality in both the residential and non-residential portfolios.
We use a number of proactive risk mitigation initiatives to reduce adversely rated exposure in the commercial real estate portfolio, including transfers of deteriorating exposures to management by independent special asset officers and the pursuit of loan restructurings or asset sales to achieve the best results for our customers and the Corporation.
Nonperforming commercial real estate loans and foreclosed properties increased $78 million, or 91 percent, during 2017 to $164 million at December 31, 2017 and reservable criticized balances increased $167 million, or 42 percent, to $566 million primarily due to loan downgrades. Net charge-offs were $9 million for 2017 compared to net recoveries of $31 million in 2016.
Table 37 presents outstanding commercial real estate loans by geographic region, based on the geographic location of the collateral, and by property type.
Table 37 |
Outstanding Commercial Real Estate Loans |
|||||||
December 31 |
||||||||
(Dollars in millions) |
2017 |
2016 |
||||||
By Geographic Region |
||||||||
California |
$ |
13,607 |
$ |
13,450 |
||||
Northeast |
10,072 |
10,329 |
||||||
Southwest |
6,970 |
7,567 |
||||||
Southeast |
5,487 |
5,630 |
||||||
Midwest |
3,769 |
4,380 |
||||||
Illinois |
3,263 |
2,408 |
||||||
Florida |
3,170 |
3,213 |
||||||
Midsouth |
2,962 |
2,346 |
||||||
Northwest |
2,657 |
2,430 |
||||||
Non-U.S. |
3,538 |
3,103 |
||||||
Other (1)
|
2,803 |
2,499 |
||||||
Total outstanding commercial real estate loans |
$ |
58,298 |
$ |
57,355 |
||||
By Property Type |
||||||||
Non-residential |
||||||||
Office |
$ |
16,718 |
$ |
16,643 |
||||
Shopping centers / Retail |
8,825 |
8,794 |
||||||
Multi-family rental |
8,280 |
8,817 |
||||||
Hotels / Motels |
6,344 |
5,550 |
||||||
Industrial / Warehouse |
6,070 |
5,357 |
||||||
Multi-use |
2,771 |
2,822 |
||||||
Unsecured |
2,187 |
1,730 |
||||||
Land and land development |
160 |
357 |
||||||
Other |
5,485 |
5,595 |
||||||
Total non-residential |
56,840 |
55,665 |
||||||
Residential |
1,458 |
1,690 |
||||||
Total outstanding commercial real estate loans |
$ |
58,298 |
$ |
57,355 |
||||
(1) |
Includes unsecured loans to real estate investment trusts and national home builders whose portfolios of properties span multiple geographic regions and properties in the states of Colorado, Utah, Hawaii, Wyoming and Montana. |
U.S. Small Business Commercial
The U.S. small business commercial loan portfolio is comprised of small business card loans and small business loans managed in Consumer Banking. Credit card-related products were 50 percent and 48 percent of the U.S. small business commercial portfolio at December 31, 2017 and 2016. Net charge-offs of $215 million during 2017 were relatively flat compared to $208 million during 2016. Of the U.S. small business commercial net charge-offs, 90 percent and 86 percent were credit card-related products in 2017 and 2016.
Bank of America 2017 66
|
||
Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity
Table 38 presents the nonperforming commercial loans, leases and foreclosed properties activity during 2017 and 2016. Nonperforming loans do not include loans accounted for under the fair value option. During 2017, nonperforming commercial loans and leases decreased $399 million to $1.3 billion. Approximately
77 percent of commercial nonperforming loans, leases and foreclosed properties were secured and approximately 59 percent were contractually current. Commercial nonperforming loans were carried at approximately 87 percent of their unpaid principal balance before consideration of the allowance for loan and lease losses as the carrying value of these loans has been reduced to the estimated property value less costs to sell.
Table 38 |
Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity (1, 2)
|
|||||||
(Dollars in millions) |
2017 |
2016 |
||||||
Nonperforming loans and leases, January 1 |
$ |
1,703 |
$ |
1,212 |
||||
Additions |
1,616 |
2,347 |
||||||
Reductions: |
||||||||
Paydowns |
(930 |
) |
(824 |
) |
||||
Sales |
(136 |
) |
(318 |
) |
||||
Returns to performing status (3)
|
(280 |
) |
(267 |
) |
||||
Charge-offs |
(455 |
) |
(434 |
) |
||||
Transfers to foreclosed properties |
(40 |
) |
(4 |
) |
||||
Transfers to loans held-for-sale |
(174 |
) |
(9 |
) |
||||
Total net additions/(reductions) to nonperforming loans and leases |
(399 |
) |
491 |
|||||
Total nonperforming loans and leases, December 31 |
1,304 |
1,703 |
||||||
Total foreclosed properties, December 31 |
52 |
14 |
||||||
Nonperforming commercial loans, leases and foreclosed properties, December 31 |
$ |
1,356 |
$ |
1,717 |
||||
Nonperforming commercial loans and leases as a percentage of outstanding commercial loans and leases (4)
|
0.27 |
% |
0.38 |
% |
||||
Nonperforming commercial loans, leases and foreclosed properties as a percentage of outstanding commercial loans, leases and foreclosed properties (4)
|
0.28 |
0.38 |
||||||
(1) |
Balances do not include nonperforming LHFS of $339 million and $195 million at December 31, 2017 and 2016.
|
(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 39 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 4 – Outstanding Loans and Leases to the Consolidated Financial Statements.
Table 39 |
Commercial Troubled Debt Restructurings |
|||||||||||||||||||||||
December 31, 2017 |
December 31, 2016 |
|||||||||||||||||||||||
(Dollars in millions) |
Nonperforming |
Performing |
Total |
Nonperforming |
Performing |
Total |
||||||||||||||||||
Commercial and industrial: | ||||||||||||||||||||||||
U.S. commercial |
$ |
370 |
$ |
866 |
$ |
1,236 |
$ |
720 |
$ |
1,140 |
$ |
1,860 |
||||||||||||
Non-U.S. commercial |
11 |
219 |
230 |
25 |
283 |
308 |
||||||||||||||||||
Total commercial and industrial |
381 |
1,085 |
1,466 |
745 |
1,423 |
2,168 |
||||||||||||||||||
Commercial real estate |
38 |
9 |
47 |
45 |
95 |
140 |
||||||||||||||||||
Commercial lease financing |
5 |
13 |
18 |
2 |
2 |
4 |
||||||||||||||||||
424 |
1,107 |
1,531 |
792 |
1,520 |
2,312 |
|||||||||||||||||||
U.S. small business commercial |
4 |
15 |
19 |
2 |
13 |
15 |
||||||||||||||||||
Total commercial troubled debt restructurings |
$ |
428 |
$ |
1,122 |
$ |
1,550 |
$ |
794 |
$ |
1,533 |
$ |
2,327 |
||||||||||||
Industry Concentrations
Table 40 presents commercial committed and utilized credit exposure by industry and the total net credit default protection purchased to cover the funded and unfunded portions of certain credit exposures. Our commercial credit exposure is diversified across a broad range of industries. Total commercial committed exposure increased $30.1 billion, or three percent, in 2017 to $981.2 billion at December 31, 2017. The increase in commercial committed exposure was concentrated in the Media, Food & Staples Retailing, Capital Goods, Food, Beverage and Tobacco and the Asset Managers and Funds sectors. Increases were partially offset by reduced exposure to the Healthcare Equipment and
Services, Telecommunications Services and the Technology Hardware and Equipment sectors.
Industry limits are used internally to manage industry concentrations and are based on committed exposure that is allocated on an industry-by-industry basis. A risk management framework is in place to set and approve industry limits as well as to provide ongoing monitoring. The MRC oversees industry limit governance.
Asset Managers and Funds, our largest industry concentration with committed exposure of $91.1 billion, increased $5.5 billion, or six percent, in 2017. The increase primarily reflected an increase in exposure to several counterparties.
67 Bank of America 2017
|
||
Real estate, our second largest industry concentration with committed exposure of $83.8 billion, increased $115 million, or less than one percent, in 2017. For more information on the commercial real estate and related portfolios, see Commercial Portfolio Credit Risk Management – Commercial Real Estate on page 66.
Capital Goods, our third largest industry concentration with committed exposure of $70.4 billion, increased $6.2 billion, or nearly 10 percent, in 2017. The increase in committed exposure
occurred primarily as a result of increases in large conglomerates and machinery manufacturers.
Our energy-related committed exposure decreased $2.5 billion, or six percent, in 2017 to $36.8 billion at December 31, 2017. Energy sector net charge-offs were $156 million in 2017 compared to $241 million in 2016. Energy sector reservable criticized exposure decreased $3.9 billion in 2017 to $1.6 billion at December 31, 2017, due to paydowns and upgrades in the energy portfolio. The energy allowance for credit losses decreased $365 million to $560 million at December 31, 2017.
Table 40 |
Commercial Credit Exposure by Industry (1)
|
|||||||||||||||
|
Commercial
Utilized
|
Total Commercial
Committed (2)
|
|||||||||||||||
December 31 |
||||||||||||||||
(Dollars in millions) |
2017 |
2016 |
2017 |
2016 |
||||||||||||
Asset managers and funds |
$ |
59,190 |
$ |
57,659 |
$ |
91,092 |
$ |
85,561 |
||||||||
Real estate (3)
|
61,940 |
61,203 |
83,773 |
83,658 |
||||||||||||
Capital goods |
36,705 |
34,278 |
70,417 |
64,202 |
||||||||||||
Government and public education |
48,684 |
45,694 |
58,067 |
54,626 |
||||||||||||
Healthcare equipment and services |
37,780 |
37,656 |
57,256 |
64,663 |
||||||||||||
Finance companies |
34,050 |
35,452 |
53,107 |
52,953 |
||||||||||||
Retailing |
26,117 |
25,577 |
48,796 |
49,082 |
||||||||||||
Materials |
24,001 |
22,578 |
47,386 |
44,357 |
||||||||||||
Consumer services |
27,191 |
27,413 |
43,605 |
42,523 |
||||||||||||
Food, beverage and tobacco |
23,252 |
19,669 |
42,815 |
37,145 |
||||||||||||
Energy |
16,345 |
19,686 |
36,765 |
39,231 |
||||||||||||
Commercial services and supplies |
22,100 |
21,241 |
35,496 |
35,360 |
||||||||||||
Media |
19,155 |
13,419 |
33,955 |
27,116 |
||||||||||||
Global commercial banks |
29,491 |
27,267 |
31,764 |
30,712 |
||||||||||||
Transportation |
21,704 |
19,805 |
29,946 |
27,483 |
||||||||||||
Utilities |
11,342 |
11,349 |
27,935 |
27,140 |
||||||||||||
Individuals and trusts |
18,549 |
16,364 |
25,097 |
21,764 |
||||||||||||
Technology hardware and equipment |
10,728 |
9,625 |
22,071 |
25,318 |
||||||||||||
Vehicle dealers |
16,896 |
16,053 |
20,361 |
19,425 |
||||||||||||
Pharmaceuticals and biotechnology |
5,653 |
5,539 |
18,623 |
18,910 |
||||||||||||
Software and services |
8,562 |
7,991 |
18,202 |
19,790 |
||||||||||||
Consumer durables and apparel |
8,859 |
8,112 |
17,296 |
15,794 |
||||||||||||
Food and staples retailing |
4,955 |
4,795 |
15,589 |
8,869 |
||||||||||||
Automobiles and components |
5,988 |
5,459 |
13,318 |
12,969 |
||||||||||||
Telecommunication services |
6,389 |
6,317 |
13,108 |
16,925 |
||||||||||||
Insurance |
6,411 |
7,406 |
12,990 |
13,936 |
||||||||||||
Religious and social organizations |
4,454 |
4,423 |
6,318 |
6,252 |
||||||||||||
Financial markets infrastructure (clearinghouses) |
688 |
656 |
2,403 |
3,107 |
||||||||||||
Other |
3,621 |
2,206 |
3,616 |
2,210 |
||||||||||||
Total commercial credit exposure by industry |
$ |
600,800 |
$ |
574,892 |
$ |
981,167 |
$ |
951,081 |
||||||||
Net credit default protection purchased on total commitments (4)
|
$ |
(2,129 |
) |
$ |
(3,477 |
) |
||||||||||
(1) |
Includes U.S. small business commercial exposure. |
(2) |
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 $11.0 billion and $12.1 billion at December 31, 2017 and 2016.
|
(3) |
Industries are viewed from a variety of perspectives to best isolate the perceived risks. For purposes of this table, the real estate industry is defined based on the borrowers’ or counterparties’ primary business activity using operating cash flows and primary source of repayment as key factors. |
(4) |
Represents net notional credit protection purchased. For more information, see Commercial Portfolio Credit Risk Management – Risk Mitigation.
|
Risk Mitigation
We purchase credit protection to cover the funded portion as well as the unfunded portion of certain credit exposures. To lower the cost of obtaining our desired credit protection levels, we may add credit exposure within an industry, borrower or counterparty group by selling protection.
At December 31, 2017 and 2016, net notional credit default protection purchased in our credit derivatives portfolio to hedge our funded and unfunded exposures for which we elected the fair
value option, as well as certain other credit exposures, was $2.1 billion and $3.5 billion. We recorded net losses of $66 million in 2017 compared to net losses of $438 million in 2016 on these positions. The gains and losses on these instruments were offset by gains and losses on the related exposures. The Value-at-Risk (VaR) results for these exposures are included in the fair value option portfolio information in Table 49. For more information, see Trading Risk Management on page 77.
Bank of America 2017 68
|
||
Tables 41 and 42 present the maturity profiles and the credit exposure debt ratings of the net credit default protection portfolio at December 31, 2017 and 2016.
Table 41 |
Net Credit Default Protection by Maturity |
|||||
December 31 |
||||||
2017 |
2016 |
|||||
Less than or equal to one year |
42 |
% |
56 |
% |
||
Greater than one year and less than or equal to five years |
58 |
41 |
||||
Greater than five years |
— |
3 |
||||
Total net credit default protection |
100 |
% |
100 |
% |
||
Table 42 |
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) |
2017 |
2016 |
||||||||||||
Ratings (2, 3)
|
||||||||||||||
A |
$ |
(280 |
) |
13.2 |
% |
$ |
(135 |
) |
3.9 |
% |
||||
BBB |
(459 |
) |
21.6 |
(1,884 |
) |
54.2 |
||||||||
BB |
(893 |
) |
41.9 |
(871 |
) |
25.1 |
||||||||
B |
(403 |
) |
18.9 |
(477 |
) |
13.7 |
||||||||
CCC and below |
(84 |
) |
3.9 |
(81 |
) |
2.3 |
||||||||
NR (4)
|
(10 |
) |
0.5 |
(29 |
) |
0.8 |
||||||||
Total net credit default protection |
$ |
(2,129 |
) |
100.0 |
% |
$ |
(3,477 |
) |
100.0 |
% |
||||
(1) |
Represents net credit default protection purchased. |
(2) |
Ratings are refreshed on a quarterly basis. |
(3) |
Ratings of BBB- or higher are considered to meet the definition of investment grade. |
(4) |
NR is comprised of index positions held and any names that have not been rated. |
In addition to our net notional credit default protection purchased to cover the funded and unfunded portion of certain credit exposures, credit derivatives are used for market-making activities for clients and establishing positions intended to profit from directional or relative value changes. We execute the majority of our credit derivative trades in the OTC market with large, multinational financial institutions, including broker-dealers and, to a lesser degree, with a variety of other investors. Because these transactions are executed in the OTC market, we are subject to settlement risk. We are also subject to credit risk in the event that these counterparties fail to perform under the terms of these contracts. In most cases, credit derivative transactions are executed on a daily margin basis. Therefore, events such as a credit downgrade, depending on the ultimate rating level, or a breach of credit covenants would typically require an increase in the amount of collateral required by the counterparty, where applicable, and/or allow us to take additional protective measures such as early termination of all trades.
Table 43 presents the total contract/notional amount of credit derivatives outstanding and includes both purchased and written credit derivatives. The credit risk amounts are measured as net asset exposure by counterparty, taking into consideration all contracts with the counterparty. For more information on our written credit derivatives, see Note 2 – Derivatives to the Consolidated Financial Statements.
The credit risk amounts discussed above and presented in Table 43 take into consideration the effects of legally enforceable master netting agreements while amounts disclosed in Note 2 – Derivatives to the Consolidated Financial Statements are shown on a gross basis. Credit risk reflects the potential benefit from offsetting exposure to non-credit derivative products with the same counterparties that may be netted upon the occurrence of certain events, thereby reducing our overall exposure.
Table 43 |
Credit Derivatives |
|||||||||||||||
Contract/ Notional |
Credit Risk |
Contract/ Notional |
Credit Risk |
|||||||||||||
December 31 |
||||||||||||||||
(Dollars in millions) |
2017 |
2016 |
||||||||||||||
Purchased credit derivatives: |
||||||||||||||||
Credit default swaps |
$ |
470,907 |
$ |
2,434 |
$ |
603,979 |
$ |
2,732 |
||||||||
Total return swaps/options |
54,135 |
277 |
21,165 |
433 |
||||||||||||
Total purchased credit derivatives |
$ |
525,042 |
$ |
2,711 |
$ |
625,144 |
$ |
3,165 |
||||||||
Written credit derivatives: |
||||||||||||||||
Credit default swaps |
$ |
448,201 |
n/a |
$ |
614,355 |
n/a |
||||||||||
Total return swaps/options |
55,223 |
n/a |
25,354 |
n/a |
||||||||||||
Total written credit derivatives |
$ |
503,424 |
n/a |
$ |
639,709 |
n/a |
||||||||||
n/a = not applicable
69 Bank of America 2017
|
||
Counterparty Credit Risk Valuation Adjustments
We record counterparty credit risk valuation adjustments on certain derivative assets, including our credit default protection purchased, in order to properly reflect the credit risk of the counterparty, as presented in Table 44. We calculate CVA based on a modeled expected exposure that incorporates current market risk factors including changes in market spreads and non-credit related market factors that affect the value of a derivative. The exposure also takes into consideration credit mitigants such as legally enforceable master netting agreements and collateral. For more information, see Note 2 – Derivatives to the Consolidated Financial Statements.
We enter into risk management activities to offset market driven exposures. We often hedge the counterparty spread risk in CVA with credit default swaps (CDS). We hedge other market risks in CVA primarily with currency and interest rate swaps. In certain instances, the net-of-hedge amounts in the following table move in the same direction as the gross amount or may move in the opposite direction. This movement is a consequence of the complex interaction of the risks being hedged, resulting in limitations in the ability to perfectly hedge all of the market exposures at all times.
Table 44 |
Credit Valuation Gains and Losses |
|||||||||||||||||||
(Dollars in millions) |
2017 |
2016 |
||||||||||||||||||
Gains (Losses) |
Gross |
Hedge |
Net |
Gross |
Hedge |
Net |
||||||||||||||
Credit valuation |
$ |
330 |
$ |
(232 |
) |
$ |
98 |
$ |
374 |
$ |
(160 |
) |
$ |
214 |
||||||
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 45 presents our 20 largest non-U.S. country exposures as of December 31, 2017. These exposures accounted for 86 percent and 88 percent of our total non-U.S. exposure at December 31, 2017 and 2016. Net country exposure for these 20 countries decreased $6.3 billion in 2017 primarily driven by reductions in the U.K., Japan, Switzerland and Brazil, partially offset by increases in China and Belgium. On a product basis, funded commitments decreased in the U.K., Japan and Brazil, partially offset by increases in China, Belgium and France. The decrease in the U.K. reflects the sale of the non-U.S. consumer credit card business in 2017. Unfunded commitments increased in the U.K., Germany and Belgium, which was partly offset by a decrease in Switzerland. Securities held decreased, driven by reduced holdings in France, the U.K. and Germany, while counterparty exposure decreased in Japan, Germany and the U.K.
Non-U.S. exposure is presented on an internal risk management basis and includes sovereign and non-sovereign credit exposure, securities and other investments issued by or domiciled in countries other than the U.S.
Funded loans and loan equivalents include loans, leases, and other extensions of credit and funds, including letters of credit and due from placements. Unfunded commitments are the undrawn portion of legally binding commitments related to loans and loan equivalents. Net counterparty exposure includes the fair value of derivatives, including the counterparty risk associated with CDS, and secured financing transactions. Securities and other investments are carried at fair value and long securities exposures are netted against short exposures with the same underlying issuer to, but not below, zero. Net country exposure represents country exposure less hedges and credit default protection purchased, net of credit default protection sold.
Bank of America 2017 70
|
||
Table 45 |
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 2017 |
Hedges and Credit Default Protection |
Net Country Exposure at December 31 2017 |
Increase (Decrease) from December 31 2016 |
||||||||||||||||||||||||
United Kingdom |
$ |
20,089 |
$ |
14,906 |
$ |
5,278 |
$ |
1,962 |
$ |
42,235 |
$ |
(4,640 |
) |
$ |
37,595 |
$ |
(10,138 |
) |
||||||||||||||
Germany |
12,572 |
9,856 |
1,061 |
1,102 |
24,591 |
(3,088 |
) |
21,503 |
(875 |
) |
||||||||||||||||||||||
Canada |
7,037 |
7,645 |
2,016 |
2,579 |
19,277 |
(554 |
) |
18,723 |
(51 |
) |
||||||||||||||||||||||
China |
13,634 |
728 |
746 |
1,058 |
16,166 |
(241 |
) |
15,925 |
5,040 |
|||||||||||||||||||||||
Brazil |
7,688 |
501 |
342 |
2,726 |
11,257 |
(541 |
) |
10,716 |
(2,950 |
) |
||||||||||||||||||||||
Australia |
5,596 |
2,840 |
575 |
2,022 |
11,033 |
(444 |
) |
10,589 |
1,666 |
|||||||||||||||||||||||
France |
4,976 |
5,591 |
2,191 |
2,811 |
15,569 |
(5,026 |
) |
10,543 |
(151 |
) |
||||||||||||||||||||||
India |
7,229 |
316 |
375 |
3,328 |
11,248 |
(751 |
) |
10,497 |
1,269 |
|||||||||||||||||||||||
Japan |
7,399 |
631 |
923 |
1,669 |
10,622 |
(1,532 |
) |
9,090 |
(5,921 |
) |
||||||||||||||||||||||
Hong Kong |
6,925 |
187 |
585 |
1,056 |
8,753 |
(75 |
) |
8,678 |
1,199 |
|||||||||||||||||||||||
Netherlands |
5,357 |
3,212 |
650 |
930 |
10,149 |
(1,682 |
) |
8,467 |
1,069 |
|||||||||||||||||||||||
South Korea |
4,934 |
544 |
635 |
2,208 |
8,321 |
(420 |
) |
7,901 |
1,795 |
|||||||||||||||||||||||
Singapore |
3,571 |
312 |
504 |
1,953 |
6,340 |
(77 |
) |
6,263 |
845 |
|||||||||||||||||||||||
Switzerland |
3,792 |
2,810 |
274 |
184 |
7,060 |
(1,263 |
) |
5,797 |
(3,849 |
) |
||||||||||||||||||||||
Mexico |
2,883 |
2,446 |
226 |
385 |
5,940 |
(453 |
) |
5,487 |
1,003 |
|||||||||||||||||||||||
Italy |
2,791 |
1,490 |
512 |
600 |
5,393 |
(1,147 |
) |
4,246 |
159 |
|||||||||||||||||||||||
Belgium |
2,440 |
1,184 |
82 |
511 |
4,217 |
(252 |
) |
3,965 |
2,039 |
|||||||||||||||||||||||
United Arab Emirates |
2,843 |
351 |
247 |
43 |
3,484 |
(97 |
) |
3,387 |
644 |
|||||||||||||||||||||||
Spain |
2,041 |
820 |
260 |
1,232 |
4,353 |
(1,245 |
) |
3,108 |
562 |
|||||||||||||||||||||||
Turkey |
2,761 |
83 |
66 |
82 |
2,992 |
(3 |
) |
2,989 |
299 |
|||||||||||||||||||||||
Total top 20 non-U.S. countries exposure |
$ |
126,558 |
$ |
56,453 |
$ |
17,548 |
$ |
28,441 |
$ |
229,000 |
$ |
(23,531 |
) |
$ |
205,469 |
$ |
(6,346 |
) |
||||||||||||||
A number of economic conditions and geopolitical events have given rise to risk aversion in certain emerging markets. Our two largest emerging market country exposures at December 31, 2017 were China and Brazil. At December 31, 2017, net exposure to China was $15.9 billion, concentrated in large state-owned companies, subsidiaries of multinational corporations and commercial banks. At December 31, 2017, net exposure to Brazil was $10.7 billion, concentrated in sovereign securities, oil and gas companies and commercial banks.
The outlook for policy direction and therefore economic performance in the EU remains uncertain as a consequence of reduced political cohesion among EU countries. Additionally, we believe that the uncertainty in the U.K.’s ability to negotiate a favorable exit from the EU will further weigh on economic performance. Our largest EU country exposure at December 31, 2017 was the U.K. with net exposure of $37.6 billion, concentrated
in multinational corporations and sovereign clients. For more information, see Executive Summary – 2017 Economic and Business Environment on page 19.
Table 46 presents countries where total cross-border exposure exceeded one percent of our total assets. At December 31, 2017, the U.K. and France were the only countries where total cross-border exposure exceeded one percent of our total assets. At December 31, 2017, Germany had total cross-border exposure of $21.6 billion representing 0.95 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, 2017.
Cross-border exposure includes the components of Country Risk Exposure as detailed in Table 45 as well as the notional amount of cash loaned under secured financing agreements. Local exposure, defined as exposure booked in local offices of a respective country with clients in the same country, is excluded.
Table 46 |
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 |
2017 |
$ |
923 |
$ |
2,984 |
$ |
47,205 |
$ |
51,112 |
2.24 |
% |
||||||||||
2016 |
2,975 |
4,557 |
42,105 |
49,637 |
2.27 |
||||||||||||||||
2015 |
3,264 |
5,104 |
38,576 |
46,944 |
2.19 |
||||||||||||||||
France |
2017 |
2,964 |
1,521 |
27,903 |
32,388 |
1.42 |
|||||||||||||||
2016 |
4,956 |
1,205 |
23,193 |
29,354 |
1.34 |
||||||||||||||||
2015 |
3,343 |
1,766 |
17,099 |
22,208 |
1.04 |
||||||||||||||||
71 Bank of America 2017
|
||
Provision for Credit Losses
The provision for credit losses decreased $201 million to $3.4 billion in 2017 compared to 2016. The provision for credit losses was $583 million lower than net charge-offs for 2017, resulting in a reduction in the allowance for credit losses. This compared to a reduction of $224 million in the allowance in 2016.
The provision for credit losses for the consumer portfolio increased $159 million to $2.7 billion in 2017 compared to 2016. The increase was primarily driven by a provision increase of $672 million in the U.S. credit card portfolio due to portfolio seasoning and loan growth, largely offset by the consumer real estate portfolio due to continued portfolio improvement and increased home prices. Included in the provision is an expense of $76 million related to the PCI loan portfolio for 2017 compared to a benefit of $45 million in 2016.
The provision for credit losses for the commercial portfolio, including unfunded lending commitments, decreased $360 million to $669 million in 2017 compared to 2016 driven by reductions in energy exposures, partially offset by a single-name non-U.S. commercial charge-off.
Allowance for Credit Losses
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is comprised of two components. The first component covers nonperforming commercial loans and TDRs. The second component covers loans and leases on which there are incurred losses that are not yet individually identifiable, as well as incurred losses that may not be represented in the loss forecast models. We evaluate the adequacy of the allowance for loan and lease losses based on the total of these two components, each of which is described in more detail below. The allowance for loan and lease losses excludes LHFS and loans accounted for under the fair value option as the fair value reflects a credit risk component.
The first component of the allowance for loan and lease losses covers both nonperforming commercial loans and all TDRs within the consumer and commercial portfolios. These loans are subject to impairment measurement based on the present value of projected future cash flows discounted at the loan’s original effective interest rate, or in certain circumstances, impairment may also be based upon the collateral value or the loan’s observable market price if available. Impairment measurement for the renegotiated consumer credit card, small business credit card and unsecured consumer TDR portfolios is based on the present value of projected cash flows discounted using the average portfolio contractual interest rate, excluding promotionally priced loans, in effect prior to restructuring. For purposes of computing this specific loss component of the allowance, larger impaired loans are evaluated individually and smaller impaired loans are evaluated as a pool using historical experience for the respective product types and risk ratings of the loans.
The second component of the allowance for loan and lease losses covers the remaining consumer and commercial loans and leases that have incurred losses that are not yet individually identifiable. The allowance for consumer and certain homogeneous commercial loan and lease products is based on aggregated portfolio evaluations, generally by product type. Loss forecast models are utilized that consider a variety of factors
including, but not limited to, historical loss experience, estimated defaults or foreclosures based on portfolio trends, delinquencies, economic trends and credit scores. Our consumer real estate loss forecast model estimates the portion of loans that will default based on individual loan attributes, the most significant of which are refreshed LTV or CLTV, and borrower credit score as well as vintage and geography, all of which are further broken down into current delinquency status. Additionally, we incorporate the delinquency status of underlying first-lien loans on our junior-lien home equity portfolio in our allowance process. Incorporating refreshed LTV and CLTV into our probability of default allows us to factor the impact of changes in home prices into our allowance for loan and lease losses. These loss forecast models are updated on a quarterly basis to incorporate information reflecting the current economic environment. As of December 31, 2017, the loss forecast process resulted in reductions in the allowance related to the residential mortgage and home equity portfolios compared to December 31, 2016.
The allowance for commercial loan and lease losses is established by product type after analyzing historical loss experience, internal risk rating, current economic conditions, industry performance trends, geographic and obligor concentrations within each portfolio and any other pertinent information. The statistical models for commercial loans are generally updated annually and utilize our historical database of actual defaults and other data, including external default data. The loan risk ratings and composition of the commercial portfolios used to calculate the allowance are updated quarterly to incorporate the most recent data reflecting the current economic environment. For risk-rated commercial loans, we estimate the probability of default and the loss given default (LGD) based on our historical experience of defaults and credit losses. Factors considered when assessing the internal risk rating include the value of the underlying collateral, if applicable, the industry in which the obligor operates, the obligor’s liquidity and other financial indicators, and other quantitative and qualitative factors relevant to the obligor’s credit risk. As of December 31, 2017, the allowance decreased for the U.S. commercial and non-U.S. commercial portfolios compared to December 31, 2016.
Also included within the second component of the allowance for loan and lease losses are reserves to cover losses that are incurred but, in our assessment, may not be adequately represented in the historical loss data used in the loss forecast models. For example, factors that we consider include, among others, changes in lending policies and procedures, changes in economic and business conditions, changes in the nature and size of the portfolio, changes in portfolio concentrations, changes in the volume and severity of past due loans and nonaccrual loans, the effect of external factors such as competition, and legal and regulatory requirements. We also consider factors that are applicable to unique portfolio segments. For example, we consider the risk of uncertainty in our loss forecasting models related to junior-lien home equity loans that are current, but have first-lien loans that we do not service that are 30 days or more past due. In addition, we consider the increased risk of default associated with our interest-only loans that have yet to enter the amortization period. Further, we consider the inherent uncertainty in mathematical models that are built upon historical data.
Bank of America 2017 72
|
||
During 2017, the factors that impacted the allowance for loan and lease losses included improvements in the credit quality of the consumer real estate portfolios driven by continuing improvements in the U.S. economy and labor markets, proactive credit risk management initiatives and the impact of high credit quality originations. Evidencing the improvements in the U.S. economy and labor markets are downward unemployment trends and increases in home prices. In addition to these improvements, in the consumer portfolio, nonperforming consumer loans decreased $838 million in 2017 as returns to performing status, charge-offs, paydowns and loan sales continued to outpace new nonaccrual loans. During 2017, the allowance for loan and lease losses in the commercial portfolio reflected decreased energy reserves primarily driven by reductions in energy exposures including utilized reservable criticized exposures.
We monitor differences between estimated and actual incurred loan and lease losses. This monitoring process includes periodic assessments by senior management of loan and lease portfolios and the models used to estimate incurred losses in those portfolios.
The allowance for loan and lease losses for the consumer portfolio, as presented in Table 48, was $5.4 billion at December 31, 2017, a decrease of $839 million from December 31, 2016. The decrease was primarily in the consumer real estate portfolio and the non-U.S. card portfolio which was sold in 2017, partially offset by an increase in the U.S. credit card portfolio. The reduction in the consumer real estate portfolio was due to improved home prices, lower nonperforming loans and a decrease in loan balances in our non-core portfolio. The increase in the U.S. credit card portfolio was driven by portfolio seasoning and loan growth.
The allowance for loan and lease losses for the commercial portfolio, as presented in Table 48, was $5.0 billion at December 31, 2017, a decrease of $248 million from December 31, 2016 driven by decreased energy reserves due to reductions in the higher risk energy sub-sectors. Commercial utilized reservable criticized exposure decreased to $13.6 billion at December 31, 2017 from $16.3 billion (to 2.65 percent from 3.35 percent of total commercial utilized reservable exposure) at December 31, 2016, largely due to paydowns and net upgrades in the energy portfolio. Nonperforming commercial loans decreased to $1.3
billion at December 31, 2017 from $1.7 billion (to 0.27 percent from 0.38 percent of outstanding commercial loans excluding loans accounted for under the fair value option) at December 31, 2016 with the decrease primarily in the energy and metal and mining sectors. See Tables 34, 35 and 36 for more details on key commercial credit statistics.
The allowance for loan and lease losses as a percentage of total loans and leases outstanding was 1.12 percent at December 31, 2017 compared to 1.26 percent at December 31, 2016. The decrease in the ratio was primarily due to improved credit quality in the consumer real estate portfolio driven by improved economic conditions. The December 31, 2017 and 2016 ratios above include the PCI loan portfolio. Excluding the PCI loan portfolio, the allowance for loan and lease losses as a percentage of total loans and leases outstanding was 1.10 percent and 1.24 percent at December 31, 2017 and 2016.
Reserve for Unfunded Lending Commitments
In addition to the allowance for loan and lease losses, we also estimate probable losses related to unfunded lending commitments such as letters of credit, financial guarantees, unfunded bankers’ acceptances and binding loan commitments, excluding commitments accounted for under the fair value option. Unfunded lending commitments are subject to the same assessment as funded loans, including estimates of probability of default and LGD. Due to the nature of unfunded commitments, the estimate of probable losses must also consider utilization. To estimate the portion of these undrawn commitments that is likely to be drawn by a borrower at the time of estimated default, analyses of our historical experience are applied to the unfunded commitments to estimate the funded exposure at default (EAD). The expected loss for unfunded lending commitments is the product of the probability of default, the LGD and the EAD, adjusted for any qualitative factors including economic uncertainty and inherent imprecision in models.
The reserve for unfunded lending commitments was $777 million at December 31, 2017 compared to $762 million at December 31, 2016.
73 Bank of America 2017
|
||
Table 47 presents a rollforward of the allowance for credit losses, which includes the allowance for loan and lease losses and the reserve for unfunded lending commitments, for 2017 and 2016.
Table 47 |
Allowance for Credit Losses |
|||||||
(Dollars in millions) |
2017 |
2016 |
||||||
Allowance for loan and lease losses, January 1 |
$ |
11,237 |
$ |
12,234 |
||||
Loans and leases charged off |
||||||||
Residential mortgage |
(188 |
) |
(403 |
) |
||||
Home equity |
(582 |
) |
(752 |
) |
||||
U.S. credit card |
(2,968 |
) |
(2,691 |
) |
||||
Non-U.S. credit card (1)
|
(103 |
) |
(238 |
) |
||||
Direct/Indirect consumer |
(487 |
) |
(392 |
) |
||||
Other consumer |
(216 |
) |
(232 |
) |
||||
Total consumer charge-offs |
(4,544 |
) |
(4,708 |
) |
||||
U.S. commercial (2)
|
(589 |
) |
(567 |
) |
||||
Non-U.S. commercial |
(446 |
) |
(133 |
) |
||||
Commercial real estate |
(24 |
) |
(10 |
) |
||||
Commercial lease financing |
(16 |
) |
(30 |
) |
||||
Total commercial charge-offs |
(1,075 |
) |
(740 |
) |
||||
Total loans and leases charged off |
(5,619 |
) |
(5,448 |
) |
||||
Recoveries of loans and leases previously charged off |
||||||||
Residential mortgage |
288 |
272 |
||||||
Home equity |
369 |
347 |
||||||
U.S. credit card |
455 |
422 |
||||||
Non-U.S. credit card (1)
|
28 |
63 |
||||||
Direct/Indirect consumer |
276 |
258 |
||||||
Other consumer |
50 |
27 |
||||||
Total consumer recoveries |
1,466 |
1,389 |
||||||
U.S. commercial (3)
|
142 |
175 |
||||||
Non-U.S. commercial |
6 |
13 |
||||||
Commercial real estate |
15 |
41 |
||||||
Commercial lease financing |
11 |
9 |
||||||
Total commercial recoveries |
174 |
238 |
||||||
Total recoveries of loans and leases previously charged off |
1,640 |
1,627 |
||||||
Net charge-offs |
(3,979 |
) |
(3,821 |
) |
||||
Write-offs of PCI loans |
(207 |
) |
(340 |
) |
||||
Provision for loan and lease losses |
3,381 |
3,581 |
||||||
Other (4)
|
(39 |
) |
(174 |
) |
||||
Total allowance for loan and lease losses, December 31 |
10,393 |
11,480 |
||||||
Less: Allowance included in assets of business held for sale (5)
|
— |
(243 |
) |
|||||
Allowance for loan and lease losses, December 31 |
10,393 |
11,237 |
||||||
Reserve for unfunded lending commitments, January 1 |
762 |
646 |
||||||
Provision for unfunded lending commitments |
15 |
16 |
||||||
Other (4)
|
— |
100 |
||||||
Reserve for unfunded lending commitments, December 31 |
777 |
762 |
||||||
Allowance for credit losses, December 31 |
$ |
11,170 |
$ |
11,999 |
||||
(1) |
Represents net charge-offs related to the non-U.S. credit card loan portfolio, which was included in assets of business held for sale on the Consolidated Balance Sheet at December 31, 2016. In 2017, the Corporation sold its non-U.S. consumer credit card business. |
(2) |
Includes U.S. small business commercial charge-offs of $258 million and $253 million in 2017 and 2016.
|
(3) |
Includes U.S. small business commercial recoveries of $43 million and $45 million in 2017 and 2016.
|
(4) |
Primarily represents the net impact of portfolio sales, consolidations and deconsolidations, foreign currency translation adjustments, transfers to held-for-sale and certain other reclassifications. |
(5) |
Represents allowance related to the non-U.S. credit card loan portfolio, which was sold in 2017. |
Bank of America 2017 74
|
||
Table 47 |
Allowance for Credit Losses (continued) |
|||||||
(Dollars in millions) |
2017 |
2016 |
||||||
Loan and allowance ratios (6):
|
||||||||
Loans and leases outstanding at December 31 (7)
|
$ |
931,039 |
$ |
908,812 |
||||
Allowance for loan and lease losses as a percentage of total loans and leases outstanding at December 31 (7)
|
1.12 |
% |
1.26 |
% |
||||
Consumer allowance for loan and lease losses as a percentage of total consumer loans and leases outstanding at December 31 (8)
|
1.18 |
1.36 |
||||||
Commercial allowance for loan and lease losses as a percentage of total commercial loans and leases outstanding at December 31 (9)
|
1.05 |
1.16 |
||||||
Average loans and leases outstanding (7)
|
$ |
911,988 |
$ |
892,255 |
||||
Net charge-offs as a percentage of average loans and leases outstanding (7, 10)
|
0.44 |
% |
0.43 |
% |
||||
Net charge-offs and PCI write-offs as a percentage of average loans and leases outstanding (7)
|
0.46 |
0.47 |
||||||
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases at December 31 (7, 11)
|
161 |
149 |
||||||
Ratio of the allowance for loan and lease losses at December 31 to net charge-offs (10)
|
2.61 |
3.00 |
||||||
Ratio of the allowance for loan and lease losses at December 31 to net charge-offs and PCI write-offs |
2.48 |
2.76 |
||||||
Amounts included in allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases at December 31 (12)
|
$ |
3,971 |
$ |
3,951 |
||||
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 (7, 12)
|
99 |
% |
98 |
% |
||||
Loan and allowance ratios excluding PCI loans and the related valuation allowance (6, 13):
|
||||||||
Allowance for loan and lease losses as a percentage of total loans and leases outstanding at December 31 (7)
|
1.10 |
% |
1.24 |
% |
||||
Consumer allowance for loan and lease losses as a percentage of total consumer loans and leases outstanding at December 31 (8)
|
1.15 |
1.31 |
||||||
Net charge-offs as a percentage of average loans and leases outstanding (7)
|
0.44 |
0.44 |
||||||
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases at December 31 (7, 11)
|
156 |
144 |
||||||
Ratio of the allowance for loan and lease losses at December 31 to net charge-offs |
2.54 |
2.89 |
||||||
(6) |
Loan and allowance ratios for 2016 include $243 million of non-U.S. credit card allowance for loan and lease losses and $9.2 billion of ending non-U.S. credit card loans, which were included in assets of business held for sale on the Consolidated Balance Sheet at December 31, 2016. See footnote 1 for more information.
|
(7) |
Outstanding loan and lease balances and ratios do not include loans accounted for under the fair value option of $5.7 billion and $7.1 billion at December 31, 2017 and 2016. Average loans accounted for under the fair value option were $6.7 billion and $8.2 billion in 2017 and 2016.
|
(8) |
Excludes consumer loans accounted for under the fair value option of $928 million and $1.1 billion at December 31, 2017 and 2016.
|
(9) |
Excludes commercial loans accounted for under the fair value option of $4.8 billion and $6.0 billion at December 31, 2017 and 2016.
|
(10) |
Net charge-offs exclude $207 million and $340 million of write-offs in the PCI loan portfolio in 2017 and 2016. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 60.
|
(11) |
For more information on our definition of nonperforming loans, see page 62 and page 67.
|
(12) |
Primarily includes amounts allocated to U.S. credit card and unsecured consumer lending portfolios in Consumer Banking, PCI loans and the non-U.S. credit portfolio in All Other.
|
(13) |
For more information on the PCI loan portfolio and the valuation allowance for PCI loans, see Note 4 – Outstanding Loans and Leases and Note 5 – Allowance for Credit Losses to the Consolidated Financial Statements.
|
75 Bank of America 2017
|
||
For reporting purposes, we allocate the allowance for credit losses across products as presented in Table 48.
Table 48 |
Allocation of the Allowance for Credit Losses by Product Type |
|||||||||||||||||||
Amount |
Percent of
Total
|
Percent of
Loans and Leases
Outstanding (1)
|
Amount |
Percent of
Total
|
Percent of
Loans and Leases
Outstanding (1)
|
|||||||||||||||
(Dollars in millions) |
December 31, 2017 |
December 31, 2016 |
||||||||||||||||||
Allowance for loan and lease losses |
||||||||||||||||||||
Residential mortgage |
$ |
701 |
6.74 |
% |
0.34 |
% |
$ |
1,012 |
8.82 |
% |
0.53 |
% |
||||||||
Home equity |
1,019 |
9.80 |
1.76 |
1,738 |
15.14 |
2.62 |
||||||||||||||
U.S. credit card |
3,368 |
32.41 |
3.50 |
2,934 |
25.56 |
3.18 |
||||||||||||||
Non-U.S. credit card |
— |
— |
— |
243 |
2.12 |
2.64 |
||||||||||||||
Direct/Indirect consumer |
262 |
2.52 |
0.28 |
244 |
2.13 |
0.26 |
||||||||||||||
Other consumer |
33 |
0.32 |
1.22 |
51 |
0.44 |
2.01 |
||||||||||||||
Total consumer |
5,383 |
51.79 |
1.18 |
6,222 |
54.21 |
1.36 |
||||||||||||||
U.S. commercial (2)
|
3,113 |
29.95 |
1.04 |
3,326 |
28.97 |
1.17 |
||||||||||||||
Non-U.S. commercial |
803 |
7.73 |
0.82 |
874 |
7.61 |
0.98 |
||||||||||||||
Commercial real estate |
935 |
9.00 |
1.60 |
920 |
8.01 |
1.60 |
||||||||||||||
Commercial lease financing |
159 |
1.53 |
0.72 |
138 |
1.20 |
0.62 |
||||||||||||||
Total commercial |
5,010 |
48.21 |
1.05 |
5,258 |
45.79 |
1.16 |
||||||||||||||
Total allowance for loan and lease losses (3)
|
10,393 |
100.00 |
% |
1.12 |
11,480 |
100.00 |
% |
1.26 |
||||||||||||
Less: Allowance included in assets of business held for sale (4)
|
— |
(243 |
) |
|||||||||||||||||
Allowance for loan and lease losses |
10,393 |
11,237 |
||||||||||||||||||
Reserve for unfunded lending commitments |
777 |
762 |
||||||||||||||||||
Allowance for credit losses |
$ |
11,170 |
$ |
11,999 |
||||||||||||||||
(1) |
Ratios are calculated as allowance for loan and lease losses as a percentage of loans and leases outstanding excluding loans accounted for under the fair value option. Consumer loans accounted for under the fair value option included residential mortgage loans of $567 million and $710 million and home equity loans of $361 million and $341 million at December 31, 2017 and 2016. Commercial loans accounted for under the fair value option included U.S. commercial loans of $2.6 billion and $2.9 billion and non-U.S. commercial loans of $2.2 billion and $3.1 billion at December 31, 2017 and 2016.
|
(2) |
Includes allowance for loan and lease losses for U.S. small business commercial loans of $439 million and $416 million at December 31, 2017 and 2016.
|
(3) |
Includes $289 million and $419 million of valuation allowance presented with the allowance for loan and lease losses related to PCI loans at December 31, 2017 and 2016.
|
(4) |
Represents allowance for loan and lease losses related to the non-U.S. credit card loan portfolio, which was included in assets of business held for sale on the Consolidated Balance Sheet at December 31, 2016. In 2017, the Corporation sold its non-U.S. consumer credit card business. |
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 81.
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.
Quantitative risk models, such as VaR, are an essential component in evaluating the market risks within a portfolio. The Enterprise Model Risk Committee (EMRC), a subcommittee of the MRC, is responsible for providing management oversight and approval of model risk management and governance. The EMRC defines model risk standards, consistent with our risk framework and risk appetite, prevailing regulatory guidance and industry best practice. Models must meet certain validation criteria, including effective challenge of the model development process and a sufficient demonstration of developmental evidence incorporating a comparison of alternative theories and approaches. The EMRC oversees that model standards are consistent with model risk requirements and monitors the effective challenge in the model validation process across the Corporation. In addition, the relevant stakeholders must agree on any required actions or restrictions to the models and maintain a stringent monitoring process for continued compliance.
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.
Bank of America 2017 76
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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. First, 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. Second, we originate a variety of MBS which involves the accumulation of mortgage-related loans in anticipation of eventual securitization. Third, we may hold positions in mortgage securities and residential mortgage loans as part of the ALM portfolio. Fourth, we create MSRs as part of our mortgage origination activities. For more information on MSRs, see Note 1 – Summary of Significant Accounting Principles and Note 20 – Fair Value Measurements to the Consolidated Financial Statements. 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 83.
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 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 risk 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. This means that for a VaR with a one-day holding period, there should not be losses in excess of VaR, on average, 99 out of 100 trading days.
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.
77 Bank of America 2017
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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 45.
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 49 presents the total market-based trading portfolio VaR which is the combination of the covered positions trading portfolio and the impact from less liquid trading exposures. 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 49 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. The fair value option portfolio combined with the total market-based trading portfolio VaR represents our total market-based portfolio VaR. Additionally, market risk VaR for trading activities as presented in Table 49 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 49 include market risk to which we are exposed from all business segments, excluding CVA and DVA. The majority of this portfolio is within the Global Markets segment.
Table 49 presents year-end, average, high and low daily trading VaR for 2017 and 2016 using a 99 percent confidence level.
Table 49 |
Market Risk VaR for Trading Activities |
|||||||||||||||||||||||||||||||
2017 |
2016 |
|||||||||||||||||||||||||||||||
(Dollars in millions) |
Year End |
Average |
High (1)
|
Low (1)
|
Year End |
Average |
High (1)
|
Low (1)
|
||||||||||||||||||||||||
Foreign exchange |
$ |
7 |
$ |
11 |
$ |
25 |
$ |
3 |
$ |
8 |
$ |
9 |
$ |
16 |
$ |
5 |
||||||||||||||||
Interest rate |
22 |
21 |
41 |
11 |
11 |
19 |
30 |
10 |
||||||||||||||||||||||||
Credit |
29 |
26 |
33 |
21 |
25 |
30 |
37 |
25 |
||||||||||||||||||||||||
Equity |
19 |
18 |
33 |
12 |
19 |
18 |
30 |
11 |
||||||||||||||||||||||||
Commodity |
5 |
5 |
9 |
3 |
4 |
6 |
12 |
3 |
||||||||||||||||||||||||
Portfolio diversification |
(49 |
) |
(47 |
) |
— |
— |
(39 |
) |
(46 |
) |
— |
— |
||||||||||||||||||||
Total covered positions trading portfolio |
33 |
34 |
53 |
23 |
28 |
36 |
50 |
24 |
||||||||||||||||||||||||
Impact from less liquid exposures |
5 |
6 |
— |
— |
6 |
5 |
— |
— |
||||||||||||||||||||||||
Total market-based trading portfolio |
38 |
40 |
63 |
26 |
34 |
41 |
58 |
28 |
||||||||||||||||||||||||
Fair value option loans |
9 |
10 |
14 |
7 |
14 |
23 |
40 |
12 |
||||||||||||||||||||||||
Fair value option hedges |
7 |
7 |
11 |
4 |
6 |
11 |
22 |
5 |
||||||||||||||||||||||||
Fair value option portfolio diversification |
(7 |
) |
(8 |
) |
— |
— |
(10 |
) |
(21 |
) |
— |
— |
||||||||||||||||||||
Total fair value option portfolio |
9 |
9 |
11 |
6 |
10 |
13 |
20 |
8 |
||||||||||||||||||||||||
Portfolio diversification |
(4 |
) |
(4 |
) |
— |
— |
(4 |
) |
(6 |
) |
— |
— |
||||||||||||||||||||
Total market-based portfolio |
$ |
43 |
$ |
45 |
69 |
29 |
$ |
40 |
$ |
48 |
70 |
32 |
||||||||||||||||||||
(1) |
The high and low for each portfolio may have occurred on different trading days than the high and low for the components. Therefore the impact from less liquid exposures and the amount of portfolio diversification, which is the difference between the total portfolio and the sum of the individual components, is not relevant. |
Bank of America 2017 78
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The graph below presents the daily total market-based trading portfolio VaR for 2017, corresponding to the data in Table 49.
Additional VaR statistics produced within our single VaR model are provided in Table 50 at the same level of detail as in Table 49. 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 50 presents average trading VaR statistics at 99 percent and 95 percent confidence levels for 2017 and 2016.
Table 50 |
Average Market Risk VaR for Trading Activities – 99 percent and 95 percent VaR Statistics |
||||||||||||||||
2017 |
2016 |
||||||||||||||||
(Dollars in millions) |
99 percent |
95 percent |
99 percent |
95 percent |
|||||||||||||
Foreign exchange |
$ |
11 |
$ |
6 |
$ |
9 |
$ |
5 |
|||||||||
Interest rate |
21 |
14 |
19 |
12 |
|||||||||||||
Credit |
26 |
15 |
30 |
18 |
|||||||||||||
Equity |
18 |
10 |
18 |
11 |
|||||||||||||
Commodity |
5 |
3 |
6 |
3 |
|||||||||||||
Portfolio diversification |
(47 |
) |
(30 |
) |
(46 |
) |
(30 |
) |
|||||||||
Total covered positions trading portfolio |
34 |
18 |
36 |
19 |
|||||||||||||
Impact from less liquid exposures |
6 |
2 |
5 |
3 |
|||||||||||||
Total market-based trading portfolio |
40 |
20 |
41 |
22 |
|||||||||||||
Fair value option loans |
10 |
6 |
23 |
13 |
|||||||||||||
Fair value option hedges |
7 |
5 |
11 |
8 |
|||||||||||||
Fair value option portfolio diversification |
(8 |
) |
(6 |
) |
(21 |
) |
(13 |
) |
|||||||||
Total fair value option portfolio |
9 |
5 |
13 |
8 |
|||||||||||||
Portfolio diversification |
(4 |
) |
(3 |
) |
(6 |
) |
(4 |
) |
|||||||||
Total market-based portfolio |
$ |
45 |
$ |
22 |
$ |
48 |
$ |
26 |
|||||||||
Backtesting
The accuracy of the VaR methodology is evaluated by backtesting, which compares the daily VaR results, utilizing a one-day holding period, against a comparable subset of trading revenue. A backtesting excess occurs when a trading loss exceeds the VaR for the corresponding day. These excesses are evaluated to understand the positions and market moves that produced the trading loss and to assess whether 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 intraday trading revenues.
We conduct daily backtesting on our portfolios, ranging from the total market-based portfolio to individual trading areas. Additionally, 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 2017, there were no days in which there was a backtesting excess for our total market-based portfolio VaR, utilizing a one-day holding period.
79 Bank of America 2017
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Total Trading-related Revenue
Total trading-related revenue, excluding brokerage fees, and CVA, DVA and funding valuation adjustment gains (losses), represents the total amount earned from trading positions, including market-based net interest income, which are taken in a diverse range of financial instruments and markets. Trading account assets and liabilities are reported at fair value. For more information on fair value, see Note 20 – Fair Value Measurements to the Consolidated Financial Statements. 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 2017 and 2016. During 2017, positive trading-related revenue was recorded for 100 percent of the trading days, of which 77 percent were daily trading gains of over $25 million. This compares to 2016 where positive trading-related revenue was recorded for 99 percent of the trading days, of which 84 percent were daily trading gains of over $25 million and the largest loss was $24 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 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 41.
Bank of America 2017 80
|
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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 51 presents the spot and 12-month forward rates used in our baseline forecasts at December 31, 2017 and 2016.
Table 51 |
Forward Rates |
||||||||
December 31, 2017 |
|||||||||
|
Federal
Funds
|
Three-month
LIBOR
|
10-Year
Swap
|
|||||||
Spot rates |
1.50 |
% |
1.69 |
% |
2.40 |
% |
|||
12-month forward rates |
2.00 |
2.14 |
2.48 |
||||||
December 31, 2016 |
|||||||||
Spot rates |
0.75 |
% |
1.00 |
% |
2.34 |
% |
|||
12-month forward rates |
1.25 |
1.51 |
2.49 |
||||||
Table 52 shows the pre-tax dollar impact to forecasted net interest income over the next 12 months from December 31, 2017 and 2016, 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.
During 2017, the asset sensitivity of our balance sheet to rising rates was largely unchanged. We continue to be asset sensitive to a parallel move in interest rates with the majority of that benefit coming from the short end of the yield curve. Additionally, higher interest rates impact the fair value of debt securities and, accordingly, for debt securities classified as available for sale (AFS), may adversely affect accumulated OCI and thus capital levels under the Basel 3 capital rules. Under instantaneous upward parallel shifts, the near-term adverse impact to Basel 3 capital is reduced over time by offsetting positive impacts to net interest income. For more information on Basel 3, see Capital Management – Regulatory Capital on page 45.
Table 52 |
Estimated Banking Book Net Interest Income Sensitivity |
|||||||||||||
(Dollars in millions) |
Short
Rate (bps)
|
Long
Rate (bps)
|
December 31 |
|||||||||||
Curve Change |
2017 |
2016 |
||||||||||||
Parallel Shifts |
||||||||||||||
|
+100 bps
instantaneous shift
|
+100 |
+100 |
$ |
3,317 |
$ |
3,370 |
||||||||
|
-50 bps
instantaneous shift
|
-50 |
-50 |
(2,273 |
) |
(2,900 |
) |
||||||||
Flatteners |
||||||||||||||
|
Short-end
instantaneous change
|
+100 |
— |
2,182 |
2,473 |
||||||||||
|
Long-end
instantaneous change
|
— |
-50 |
(1,246 |
) |
(961 |
) |
||||||||
Steepeners |
||||||||||||||
|
Short-end
instantaneous change
|
-50 |
— |
(1,021 |
) |
(1,918 |
) |
||||||||
|
Long-end
instantaneous change
|
— |
+100 |
1,135 |
928 |
||||||||||
The sensitivity analysis in Table 52 assumes that we take no action in response to these rate shocks and does not assume any change in other macroeconomic variables normally correlated with changes in interest rates. As part of our ALM activities, we use securities, certain residential mortgages, and interest rate and foreign exchange derivatives in managing interest rate sensitivity.
The behavior of our deposit portfolio in the baseline forecast and in alternate interest rate scenarios is a key assumption in our projected estimates of net interest income. The sensitivity analysis in Table 52 assumes no change in deposit portfolio size or mix from the baseline forecast in alternate rate environments. In higher rate scenarios, any customer activity resulting in the replacement of low-cost or noninterest-bearing deposits with higher-yielding deposits or market-based funding would reduce our benefit in those scenarios.
Interest Rate and Foreign Exchange Derivative Contracts
Interest rate and foreign exchange derivative contracts are utilized in our ALM activities and serve as an efficient tool to manage our interest rate and foreign exchange risk. We use derivatives to hedge the variability in cash flows or changes in fair value on our balance sheet due to interest rate and foreign exchange components. For more information on our hedging activities, see Note 2 – 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 2017 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.
81 Bank of America 2017
|
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Table 53 presents derivatives utilized in our ALM activities including those designated as accounting and economic hedging instruments 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, 2017 and 2016. These amounts do not include derivative hedges on our MSRs.
Table 53 |
Asset and Liability Management Interest Rate and Foreign Exchange Contracts |
||||||||||||||||||||||||||||||||||
December 31, 2017 |
|||||||||||||||||||||||||||||||||||
Expected Maturity |
|||||||||||||||||||||||||||||||||||
(Dollars in millions, average estimated duration in years) |
Fair
Value
|
Total |
2018 |
2019 |
2020 |
2021 |
2022 |
Thereafter |
Average
Estimated Duration
|
||||||||||||||||||||||||||
Receive-fixed interest rate swaps (1)
|
$ |
2,330 |
5.38 |
||||||||||||||||||||||||||||||||
Notional amount |
$ |
176,390 |
$ |
21,850 |
$ |
27,176 |
$ |
16,347 |
$ |
6,498 |
$ |
19,120 |
$ |
85,399 |
|||||||||||||||||||||
Weighted-average fixed-rate |
2.42 |
% |
3.20 |
% |
1.87 |
% |
1.88 |
% |
2.99 |
% |
2.10 |
% |
2.52 |
% |
|||||||||||||||||||||
Pay-fixed interest rate swaps (1)
|
(37 |
) |
5.63 |
||||||||||||||||||||||||||||||||
Notional amount |
$ |
45,873 |
$ |
11,555 |
$ |
1,210 |
$ |
4,344 |
$ |
1,616 |
$ |
— |
$ |
27,148 |
|||||||||||||||||||||
Weighted-average fixed-rate |
2.15 |
% |
1.73 |
% |
2.07 |
% |
2.16 |
% |
2.22 |
% |
— |
% |
2.32 |
% |
|||||||||||||||||||||
Same-currency basis swaps (2)
|
(17 |
) |
|||||||||||||||||||||||||||||||||