10-K: Annual report pursuant to Section 13 and 15(d)
Published on February 22, 2022
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31 , 2021
or
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number:
Exact name of registrant as specified in its charter:
Bank of America Corporation
State or other jurisdiction of incorporation or organization:
IRS Employer Identification No.:
Address of principal executive offices:
Bank of America Corporate Center
Registrant’s telephone number, including area code:
(704 ) 386-5681
Securities registered pursuant to section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| of Floating Rate Non-Cumulative Preferred Stock, Series E | ||||||||
| of 6.000% Non-Cumulative Preferred Stock, Series GG | ||||||||
| of 5.875% Non-Cumulative Preferred Stock, Series HH | ||||||||
| of Bank of America Corporation Floating Rate | ||||||||
| Non-Cumulative Preferred Stock, Series 1 | ||||||||
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| of Bank of America Corporation Floating Rate | ||||||||
| Non-Cumulative Preferred Stock, Series 2 | ||||||||
| of Bank of America Corporation Floating Rate | ||||||||
| Non-Cumulative Preferred Stock, Series 4 | ||||||||
| of Bank of America Corporation Floating Rate | ||||||||
| Non-Cumulative Preferred Stock, Series 5 | ||||||||
| Trust XIII (and the guarantee related thereto) | ||||||||
| of BAC Capital Trust XIV (and the guarantee related thereto) | ||||||||
| Bank of America Corporation | ||||||||
| November 28, 2031 of BofA Finance LLC (and the guarantee | ||||||||
| of the Registrant with respect thereto) | ||||||||
| of 5.375% Non-Cumulative Preferred Stock, Series KK | ||||||||
| of 5.000% Non-Cumulative Preferred Stock, Series LL | ||||||||
| of 4.375% Non-Cumulative Preferred Stock, Series NN | ||||||||
| of 4.125% Non-Cumulative Preferred Stock, Series PP | ||||||||
| of 4.250% Non-Cumulative Preferred Stock, Series QQ | ||||||||
| of 4.750% Non-Cumulative Preferred Stock, Series SS | ||||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | |||||||||||||||||||||||||||
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
As of June 30, 2021, the aggregate market value of the registrant’s common stock (“Common Stock”) held by non-affiliates was approximately $349,925,254,902 . At February 18, 2022, there were 8,069,801,301 shares of Common Stock outstanding.
Documents incorporated by reference: Portions of the definitive proxy statement relating to the registrant’s 2022 annual meeting of shareholders 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
| Page | ||||||||
| [Reserved] | ||||||||
| Item 9C. | ||||||||
1 Bank of America
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Part I
Bank of America Corporation and Subsidiaries
Item 1. Business
Bank of America Corporation is a Delaware corporation, a bank holding company (BHC) and a financial holding company. When used in this report, “the Corporation,” “we,” “us” and “our” may refer to Bank of America Corporation individually, Bank of America Corporation and its subsidiaries, or certain of Bank of America Corporation’s subsidiaries or affiliates. As part of our efforts to streamline the Corporation’s organizational structure and reduce complexity and costs, the Corporation has reduced and intends to continue to reduce the number of its corporate subsidiaries, including through intercompany mergers.
Bank of America is one of the world’s largest financial institutions, serving individual consumers, small- and middle-market businesses, institutional investors, large corporations and governments with a full range of banking, investing, asset management and other financial and risk management products and services. Our principal executive offices are located in the Bank of America Corporate Center, 100 North Tryon Street, Charlotte, North Carolina 28255.
Bank of America’s website is www.bankofamerica.com, and the Investor Relations portion of our website is http://investor.bankofamerica.com. We use our website to distribute company information, including as a means of disclosing material, non-public information and for complying with our disclosure obligations under Regulation FD. We routinely post and make accessible financial and other information, including environmental, social and governance (ESG) information, regarding the Corporation on our website. Investors should monitor the Investor Relations portion of our website, in addition to our press releases, U.S. Securities and Exchange Commission (SEC) filings, public conference calls and webcasts. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) are available on the Investor Relations portion of our website as soon as reasonably practicable after we electronically file such reports with, or furnish them to, the SEC and at the SEC’s website, www.sec.gov. Notwithstanding the foregoing, the information contained on our website as referenced in this paragraph, or otherwise in this Annual Report on Form 10-K, is not incorporated by reference into this Annual Report on Form 10-K. Also, we make available on the Investor Relations portion of our website: (i) our Code of Conduct; (ii) our Corporate Governance Guidelines; and (iii) the charter of each active committee of our Board of Directors (the Board). Our Code of Conduct constitutes a “code of ethics” and a “code of business conduct and ethics” that applies to the required individuals associated with the Corporation for purposes of the respective rules of the SEC and the New York Stock Exchange. We also intend to disclose any amendments to our Code of Conduct and waivers of our Code of Conduct required to be disclosed by the rules of the SEC and the New York Stock Exchange on the Investor Relations portion of our website. All of these corporate governance materials are also available free of charge in print to shareholders who request them in writing to: Bank of America Corporation, Attention: Office of the Corporate Secretary, Bank of America Corporate Center, 100 North Tryon Street, NC1-007-56-06, Charlotte, North Carolina 28255.
Segments
Through our various bank and nonbank subsidiaries throughout the U.S. and in international markets, we provide a diversified range of banking and nonbank financial services and products through four business segments: Consumer Banking, Global Wealth & Investment Management (GWIM), Global Banking and Global Markets, with the remaining operations recorded in All Other. Additional information related to our business segments and the products and services they provide is included in the information set forth on pages 36 through 46 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and Note 23 – Business Segment Information to the Consolidated Financial Statements.
Competition
We operate in a highly competitive environment. Our competitors include banks, thrifts, credit unions, investment banking firms, investment advisory firms, brokerage firms, investment companies, insurance companies, mortgage banking companies, credit card issuers, mutual fund companies, hedge funds, private equity firms, and e-commerce and other internet-based companies. We compete with some of these competitors globally and with others on a regional or product-specific basis.
Competition is based on a number of factors including, among others, customer service, quality and range of products and services offered, technology, price, fees, reputation, interest rates on loans and deposits, lending limits, customer convenience and experience and relationships in relevant markets. 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.
Human Capital Resources
We strive to make Bank of America a great place to work for our employees. We value our employees and seek to establish and maintain human resource policies that are consistent with our core values and that help realize the power of our people. Our Board and its Compensation and Human Capital Committee provide oversight of our human capital management strategies, programs and practices. The Corporation’s senior management provides regular briefings on human capital matters to the Board and its Committees to facilitate the Board’s oversight.
At December 31, 2021 and 2020, the Corporation employed approximately 208,000 and 213,000 employees, of which 80 percent and 82 percent were located in the U.S., respectively. None of our U.S. employees are subject to a collective bargaining agreement. Additionally, in 2021 and 2020, the Corporation’s compensation and benefits expense was $36.1 billion and $32.7 billion, or 61 percent and 59 percent, of total noninterest expense.
Diversity and Inclusion
The Corporation’s commitment to diversity and inclusion starts at the top with oversight from our Board and CEO. The Corporation’s senior management sets the diversity and inclusion goals, and the Chief Human Resources Officer and Chief Diversity & Inclusion Officer partner with our CEO and senior management to drive our diversity and inclusion strategy, programs, initiatives and policies. The Global Diversity and Inclusion Council, which consists of senior executives from every line of business and region, is chaired by our CEO and has
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been in place for over 20 years. The Council sponsors and supports business, operating unit and regional diversity and inclusion councils to ensure alignment with enterprise diversity strategies and goals.
Our practices and policies have resulted in strong representation across the Corporation where our broad employee population mirrors the clients and communities we serve. We have a Board and senior management team that are 50 percent and 55 percent racially, ethnically and gender diverse. As of December 31, 2021, of global employees who self-identified, 50 percent of employees were women, and, among U.S.-based employees who self-identified, 49 percent were people of color, including 13 percent who were Asian, 14 percent who were Black/African American and 19 percent who were Hispanic/Latino. As of December 31, 2021, the Corporation’s top three management levels in relation to the CEO were composed of more than 42 percent women globally and 24 percent people of color in the U.S., including eight percent who were Asian, nine percent who were Black/African American and six percent who were Hispanic/Latino. Additionally, as of December 31, 2021, the Corporation’s managers at all levels were composed of 42 percent women globally and 41 percent people of color in the U.S., including 13 percent who were Asian, 10 percent who were Black/African American and 16 percent who were Hispanic/Latino. These workforce diversity metrics are reported regularly to the senior management team and to the Board.
We invest in our talent by offering a range of development programs and resources that allow employees to develop and progress in their careers. We reinforce our commitment to diversity and inclusion by investing internally in our employee networks and by facilitating enterprise-wide learning and conversations about various diversity and inclusion topics and issues. Further, we partner with various external organizations, which focus on advancing diverse talent. We also have practices in place for attracting and retaining diverse talent, including campus recruitment. For example, in 2021, 46 percent of our global campus hires were women, and, in the U.S., 53 percent were people of color.
Employee Engagement and Talent Retention
As part of our ongoing efforts to make the Corporation a great place to work, we have conducted a confidential annual Employee Engagement Survey (Survey) for nearly two decades. The Survey results are reviewed by the Board and senior management and used to assist in reviewing the Corporation’s human capital strategies, programs and practices. In 2021, 89 percent of the Corporation’s employees participated in the Survey, and our Employee Engagement Index, an overall measure of employee satisfaction with the Corporation, was 88 percent. Our turnover among employees was 12 percent in 2021 and seven percent in 2020. Our pre-pandemic levels of turnover in 2019 and 2018 were 11 percent and 12 percent.
Additionally, the Corporation provides a variety of resources to help employees grow in their current roles and build new skills, including resources to help employees find new opportunities, re-skill and seek leadership positions. The learning and development strategy is grounded in the development of horizontal skills delivered throughout the organization. Senior leaders, managers and teammates are onboarded and build horizontal skills, as well as role-specific skills, to drive high performance. This approach also facilitates internal mobility and promotion of talent to build a bench of qualified managers and leaders. In 2021, more than 26,000 employees found new roles within the Corporation and we
delivered more than 10 million hours of training and development to our teammates through the Corporation’s training academy.
Fair and Equitable Compensation
The Corporation is committed to racial and gender pay equity by striving to compensate all of our employees fairly and equitably. We maintain robust policies and practices that reinforce our commitment, including reviews conducted by a third-party consultant with oversight from our Board and senior management. In 2021, our review covered our regional hubs (U.S., U.K., France, Ireland, Hong Kong and Singapore) and India and showed that compensation received by women, on average, was greater than 99 percent of that received by men in comparable positions and, in the U.S., compensation received by people of color was, on average, greater than 99 percent of that received by teammates who are not people of color in comparable positions.
We also strive to pay our employees fairly based on market rates for their roles, experience and how they perform. We regularly benchmark against other companies both within and outside our industry to help ensure our pay is competitive. In the fourth quarter of 2021, we raised our minimum hourly wage for U.S. employees to $21 per hour, which is above all governmental minimum wage levels in all jurisdictions in which we operate in the U.S., and announced plans to increase to $25 per hour by 2025.
Health and Wellness – 2021 Focus
The Corporation also is committed to supporting employees’ physical, emotional and financial wellness by offering flexible and competitive benefits, including comprehensive health and insurance benefits and wellness resources. In 2021, we continued efforts to support our employees through the ongoing health crisis resulting from the Coronavirus Disease 2019 (COVID-19) pandemic (the pandemic). We continued to monitor guidance from the U.S. Centers for Disease Control and Prevention, medical boards and health authorities and prioritized sharing such guidance with our teammates. Other benefits and resources related to the pandemic included offering no-cost COVID-19 testing, paid time off to allow teammates to get vaccinated for COVID-19, providing teammates with incentives for getting the vaccine and booster, hosting a medical expert education series and providing on-site COVID-19 vaccine and booster clinics.
We continued our efforts around providing affordable access to healthcare, including offering no-cost, 24/7 access to virtual general medical and behavioral health resources to help our enrolled U.S. teammates stay healthy, both physically and emotionally. We kept U.S. health insurance premiums unchanged for teammates earning less than $50,000 for the ninth year in a row, and had nominal premium increases for teammates earning from $50,000 to $100,000 for the fifth year in a row. We also provided preventative care medications at no cost for U.S. teammates enrolled in the Bank’s medical plan.
We have expanded our child and adult care solutions for eligible U.S. teammates to help better support their families and dependents, including providing up to 50 days of backup care for both adults and children and expanding access to our reimbursement program to help employees manage child care expenses. Additional support to working parents includes parental leave and time off from work to care for and bond with a newborn or adopted child (16 weeks paid plus 10 weeks unpaid for a total of up to 26 weeks).
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For more information about our human capital management, see the Corporation’s website and 2021 Annual Report to shareholders that will be available on the Investor Relations portion of our website in March 2022 (the content of which is not incorporated by reference into this Annual Report on Form 10-K).
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. In addition, the Federal Reserve and the OCC have adopted guidelines that establish minimum standards for the design, implementation and board oversight of BHCs’ and national banks’ risk governance frameworks. U.S. financial holding companies, and the companies under their control, are permitted to engage in activities considered “financial in nature” as defined by the Gramm-Leach-Bliley Act and related Federal Reserve interpretations. The Corporation's status as a financial holding company is conditioned upon maintaining certain eligibility requirements for both the Corporation and its U.S. depository institution subsidiaries, including minimum capital ratios, supervisory ratings and, in the case of the depository institutions, at least satisfactory Community Reinvestment Act ratings. Failure to be an eligible financial holding company could result in the Federal Reserve limiting Bank of America's activities, including potential acquisitions.
The scope of the laws and regulations and the intensity of the supervision to which we are subject have increased over the past several years, beginning with the response to the financial crisis, as well as other factors such as technological and market changes. In addition, the banking and financial services sector is subject to substantial regulatory enforcement and fines. Many of these changes have occurred as a result of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the Financial Reform Act). We cannot assess whether there will be any additional major changes in the regulatory environment and expect that our business will remain subject to continuing and extensive regulation and supervision.
We are also subject to various other laws and regulations, as well as supervision and examination by other regulatory agencies, all of which directly or indirectly affect our entities, management and ability to make distributions to shareholders. For instance, our broker-dealer subsidiaries are subject to both U.S. and international regulation, including supervision by the SEC, Financial Industry Regulatory Authority and New York Stock Exchange, among others; our futures commission merchant subsidiaries supporting commodities and derivatives businesses in the U.S. are subject to regulation by and
supervision of the U.S. Commodity Futures Trading Commission (CFTC), National Futures Association, the Chicago Mercantile Exchange, and in the case of the Banks, certain banking regulators; our insurance activities are subject to licensing and regulation by state insurance regulatory agencies; and our consumer financial products and services are regulated by the Consumer Financial Protection Bureau (CFPB).
Our non-U.S. businesses are also subject to extensive regulation by various non-U.S. regulators, including governments, securities exchanges, prudential regulators, central banks and other regulatory bodies, in the jurisdictions in which those businesses operate. For example, our financial services entities in the United Kingdom (U.K.), Ireland and France are subject to regulation by the Prudential Regulatory Authority and Financial Conduct Authority, the European Central Bank and Central Bank of Ireland, and the Autorité de Contrôle Prudentiel et de Résolution and Autorité des Marchés Financiers, respectively.
Source of Strength
Under the Financial Reform Act and Federal Reserve policy, BHCs are expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each such subsidiary. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), in the event of a loss suffered or anticipated by the FDIC, either as a result of default of a bank subsidiary or related to FDIC assistance provided to such a subsidiary in danger of default, the affiliate banks of such a subsidiary may be assessed for the FDIC’s loss, subject to certain exceptions.
Transactions with Affiliates
Pursuant to Section 23A and 23B of the Federal Reserve Act, as implemented by the Federal Reserve’s Regulation W, the Banks are subject to restrictions that limit certain types of transactions between the Banks and their nonbank affiliates. In general, U.S. banks are subject to quantitative and qualitative limits on extensions of credit, purchases of assets and certain other transactions involving their nonbank affiliates. Additionally, transactions between U.S. banks and their nonbank affiliates are required to be on arm’s length terms and must be consistent with standards of safety and soundness.
Deposit Insurance
Deposits placed at U.S. domiciled banks are insured by the FDIC, subject to limits and conditions of applicable law and the FDIC’s regulations. Pursuant to the Financial Reform Act, FDIC insurance coverage limits are $250,000 per depositor, per insured bank for each account ownership category. All insured depository institutions are required to pay assessments to the FDIC in order to fund the DIF.
The FDIC is required to maintain at least a designated minimum ratio of the DIF to insured deposits in the U.S. The FDIC adopted regulations that establish a long-term target DIF ratio of greater than two percent. As of the date of this report, the DIF ratio is below this required target, and the FDIC has adopted a restoration plan that may result in increased deposit insurance assessments. Deposit insurance assessment rates are subject to change by the FDIC and will be impacted by the overall economy and the stability of the banking industry as a whole. For more information regarding deposit insurance, see Item 1A. Risk Factors – Regulatory, Compliance and Legal on page 18.
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Capital, Liquidity and Operational Requirements
As a financial holding company, we and our bank subsidiaries are subject to the regulatory capital and liquidity rules issued by the Federal Reserve and other U.S. banking regulators, including the OCC and the FDIC. These rules are complex and are evolving as U.S. and international regulatory authorities propose and enact amendments to these rules. The Corporation seeks to manage its capital position to maintain sufficient capital to satisfy these regulatory rules and to support our business activities. These continually evolving rules are likely to influence our planning processes and may require additional regulatory capital and liquidity, as well as impose additional operational and compliance costs on the Corporation.
For more information on regulatory capital rules, capital composition and pending or proposed regulatory capital changes, see Capital Management on page 49, and Note 16 – Regulatory Requirements and Restrictions to the Consolidated Financial Statements, which are incorporated by reference in this Item 1.
Distributions
We are subject to various regulatory policies and requirements relating to capital actions, including payment of dividends and common stock repurchases. For instance, Federal Reserve regulations require major U.S. BHCs to submit a capital plan as part of an annual Comprehensive Capital Analysis and Review (CCAR).
Our ability to pay dividends and make common stock repurchases depends in part on our ability to maintain regulatory capital levels above minimum requirements plus buffers and non-capital standards established under the FDICIA. To the extent that the Federal Reserve increases our stress capital buffer (SCB), global systemically important bank (G-SIB) surcharge or countercyclical capital buffer, our returns of capital to shareholders could decrease. As part of its CCAR, the Federal Reserve conducts stress testing on parts of our business using hypothetical economic scenarios prepared by the Federal Reserve. Those scenarios may affect our CCAR stress test results, which may impact the level of our SCB. Additionally, the Federal Reserve may impose limitations or prohibitions on taking capital actions such as paying or increasing common stock dividends or repurchasing common stock. For example, as a result of the economic uncertainty resulting from the pandemic, in the second half of 2020 the Federal Reserve introduced certain limitations to capital distributions for all large banks, including the Corporation, which were removed effective July 1, 2021.
If the Federal Reserve finds that any of our Banks are not “well-capitalized” or “well-managed,” we would be required to enter into an agreement with the Federal Reserve to comply with all applicable capital and management requirements, which may contain additional limitations or conditions relating to our activities. Additionally, the applicable federal regulatory authority is authorized to determine, under certain circumstances relating to the financial condition of a bank or BHC, that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof.
For more information regarding the requirements relating to the payment of dividends, including the minimum capital requirements, see Note 13 – Shareholders’ Equity and Note 16 – Regulatory Requirements and Restrictions to the Consolidated Financial Statements.
Many of our subsidiaries, including our bank and broker-dealer subsidiaries, are subject to laws that restrict dividend payments, or authorize regulatory bodies to block or reduce the
flow of funds from those subsidiaries to the parent company or other subsidiaries. The rights of the Corporation, our shareholders and our creditors to participate in any distribution of the assets or earnings of our subsidiaries are further subject to the prior claims of creditors of the respective subsidiaries.
Resolution Planning
As a BHC with greater than $250 billion of assets, the Corporation is required by the Federal Reserve and the FDIC to periodically submit a plan for a rapid and orderly resolution in the event of material financial distress or failure.
Such resolution plan is intended to be a detailed roadmap for the orderly resolution of the BHC, including the continued operations or solvent wind down of its material entities, pursuant to the U.S. Bankruptcy Code under one or more hypothetical scenarios assuming no extraordinary government assistance.
If both the Federal Reserve and the FDIC determine that the BHC’s plan is not credible, the Federal Reserve and the FDIC may jointly impose more stringent capital, leverage or liquidity requirements or restrictions on growth, activities or operations. A summary of our plan is available on the Federal Reserve and FDIC websites.
The FDIC also requires the submission of a resolution plan for Bank of America, National Association (BANA), which must describe how the insured depository institution would be resolved under the bank resolution provisions of the Federal Deposit Insurance Act. A description of this plan is available on the FDIC’s website.
We continue to make substantial progress to enhance our resolvability, which includes continued improvements to our preparedness capabilities to implement our resolution plan, both from a financial and operational standpoint.
Across international jurisdictions, resolution planning is the responsibility of national resolution authorities (RA). Among those, the jurisdictions with the greatest impact to the Corporation’s subsidiaries are the U.K., Ireland and France, where rules have been issued requiring the submission of significant information about locally incorporated subsidiaries as well as the Corporation’s banking branches located in those jurisdictions that are deemed to be material for resolution planning purposes. As a result of the RA's review of the submitted information, we could be required to take certain actions over the next several years that could increase operating costs and potentially result in the restructuring of certain businesses and subsidiaries.
For more information regarding our resolution plan, see Item 1A. Risk Factors – Liquidity on page 10.
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.
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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 requires that BHCs maintain minimum levels of long-term debt required to provide adequate loss absorbing capacity in the event of a resolution.
For more information regarding our resolution, see Item 1A. Risk Factors – Liquidity on page 10.
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, 2021, 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, 2021, our liabilities did not exceed 10 percent of the total liabilities of all financial institutions in the U.S.
The Volcker Rule
The Volcker Rule prohibits insured depository institutions and companies affiliated with insured depository institutions (collectively, banking entities) from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options for their own account. The Volcker Rule also imposes limits on banking entities’ investments in, and other relationships with, hedge funds and private equity funds. The Volcker Rule provides exemptions for certain activities, including market making, underwriting, hedging, trading in government obligations, insurance company activities and organizing and offering hedge funds and private equity funds. The Volcker Rule also clarifies that certain activities are not prohibited, including acting as agent, broker or custodian. A banking entity with significant trading operations, such as the Corporation, is required to maintain a detailed compliance program to comply with the restrictions of the Volcker Rule.
Derivatives
Our derivatives operations are subject to extensive regulation globally. These operations are subject to regulation under the Financial Reform Act, the European Union (EU) Markets in Financial Instruments Directive and Regulation, the European Market Infrastructure Regulation, analogous U.K. regulatory regimes and similar regulatory regimes in other jurisdictions that regulate or will regulate the derivatives markets in which we
operate by, among other things: requiring clearing and exchange trading of certain derivatives; enforcing existing or imposing new capital, margin, reporting, registration and business conduct requirements for certain market participants; imposing position limits on certain over-the-counter (OTC) derivatives; and imposing derivatives trading transparency requirements. These regulations are already in effect in many markets in which we operate.
In addition, many G-20 jurisdictions, including the U.S., U.K., and Japan, have adopted resolution stay regulations to address concerns that the close-out of derivatives and other financial contracts in resolution could impede orderly resolution of G-SIBs, and additional jurisdictions are expected to follow suit. In addition, the EU has implemented EU-wide resolution stay requirements. Generally, these resolution stay regulations require amendment of certain financial contracts to provide for contractual recognition of stays of termination rights under various statutory resolution regimes and a stay on the exercise of cross-default rights based on an affiliate’s entry into insolvency proceedings. As resolution stay regulations of a particular jurisdiction applicable to us go into effect, we amend impacted financial contracts in compliance with such regulations either as a regulated entity or as a counterparty facing a regulated entity in such jurisdiction.
Consumer Regulations
Our consumer businesses are subject to extensive regulation and oversight by federal and state regulators. Certain federal consumer finance laws to which we are subject, including the Equal Credit Opportunity Act, Home Mortgage Disclosure Act, Electronic Fund Transfer Act, Fair Credit Reporting Act, Real Estate Settlement Procedures Act, unfair, deceptive, or abusive acts or practices (UDAAP), Truth in Lending Act and Truth in Savings Act, are enforced by the CFPB. Other federal consumer finance laws, such as the Servicemembers Civil Relief Act, are enforced by the OCC.
Privacy and Information Security
We are subject to many U.S. federal, state and international laws and regulations governing requirements for maintaining policies and procedures regarding the disclosure, use and protection of the non-public confidential information of our customers and employees. The Gramm-Leach-Bliley Act requires us to periodically disclose Bank of America’s privacy policies and practices relating to sharing such information and enables retail customers to opt out of our ability to share information with unaffiliated third parties, under certain circumstances. The Gramm-Leach-Bliley Act and other laws also require us to implement a comprehensive information security program that includes administrative, technical and physical safeguards to provide the security and confidentiality of customer records and information. Security and privacy policies and procedures for the protection of personal and confidential information are in effect across all businesses and geographic locations.
Other laws and regulations, at the international, federal and state level, impact our ability to share certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes, or contact customers with marketing offers and establish certain rights of consumers in connection with their personal information. For example, California’s Consumer Privacy Act (CCPA), which went into effect in January 2020, as modified by the California Privacy Rights Act (CPRA), provides consumers with the right to know what personal data is being collected, know whether their personal data is sold or disclosed and to whom and opt out of the sale of their personal data,
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among other rights. In addition, in the EU, the General Data Protection Regulation (GDPR) replaced the Data Protection Directive and related implementing national laws in its member states. The CCPA's, CPRA's and GDPR’s impact on the Corporation was assessed and addressed through comprehensive compliance implementation programs. These existing and evolving legal requirements in the U.S. and abroad, as well as court proceedings and changing guidance from regulatory bodies with respect to the validity of cross-border data transfer mechanisms from the EU, continue to lend uncertainty to privacy compliance globally.
Item 1A. Risk Factors
The discussion below addresses the Corporation’s material risk factors of which we are aware. Any risk factor, either by itself or together with other risk factors, could materially and adversely affect our businesses, results of operations, cash flows and/or financial condition. The considerations and risks that follow are organized within relevant headings but may be relevant to other headings as well. Other factors not currently known to us or that we currently deem immaterial could also adversely affect our businesses, results of operations, cash flows and/or financial condition. Therefore, the risk factors below should not be considered all of the potential risks that we may face. For more information on how we manage risks, see Managing Risk in the MD&A on page 46. For more information about the risks contained in the Risk Factors section, see Item 1. Business on page 2, MD&A on page 26 and Notes to Consolidated Financial Statements on page 94.
Summary of Risk Factors
Coronavirus Disease
● The impacts of the pandemic have adversely affected, and may continue to adversely affect us, and the pandemic’s duration and future impacts remain uncertain.
Market
● Our business and results of operations may be adversely affected by the financial markets, fiscal, monetary, and regulatory policies, and economic conditions generally.
● Increased market volatility and adverse changes in financial or capital market conditions may increase our market risk.
● We may incur losses if asset values decline, including due to changes in interest rates and prepayment speeds.
Liquidity
● If we are unable to access the capital markets or continue to maintain deposits, or our borrowing costs increase, our liquidity and competitive position will be negatively affected.
● Reduction in our credit ratings could significantly limit our access to funding or the capital markets, increase borrowing costs or trigger additional collateral or funding requirements.
● Bank of America Corporation is a holding company, is dependent on its subsidiaries for liquidity and may be restricted from transferring funds from subsidiaries.
● Our liquidity and financial condition, and the ability to pay dividends to shareholders and to pay obligations could be materially adversely affected in the event of a resolution.
Credit
● Economic or market disruptions and insufficient credit loss reserves may result in a higher provision for credit losses.
● Our concentrations of credit risk could adversely affect our credit losses, results of operations and financial condition.
● We may be adversely affected if the U.S. housing market weakens or home prices decline.
● Our derivatives businesses may expose us to unexpected risks and potential losses.
Geopolitical
● We are subject to numerous political, economic, market, reputational, operational, compliance, legal, regulatory and other risks in the jurisdictions in which we operate.
Business Operations
● A failure in or breach of our operational or security systems or infrastructure or business continuity plans, or those of third parties or the financial services industry, could disrupt our critical business operations and customer services, result in additional risk exposures, and adversely impact our results of operations and financial condition, and cause legal or reputational harm.
● A cyberattack, 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, result in the disclosure and/or misuse of information and/or fraudulent activity, and increase our operational and security systems and critical infrastructure costs.
● Failure to satisfy our obligations as servicer for residential mortgage securitizations, loans owned by other entities and other losses we could incur as servicer, could adversely impact our reputation, servicing costs or results of operations.
● Changes in the structure of and relationship among the government-sponsored enterprises (GSEs) could adversely impact our business.
● Our risk management framework may not be effective in mitigating risk and reducing the potential for losses.
Regulatory, Compliance and Legal
● We are subject to comprehensive government legislation and regulations and certain settlements, orders and agreements with government authorities from time to time.
● We are subject to significant financial and reputational risks from potential liability arising from lawsuits and regulatory and government action.
● U.S. federal banking agencies may require us to increase our regulatory capital, total loss-absorbing capacity (TLAC), long-term debt or liquidity requirements.
● Changes in accounting standards or assumptions in applying accounting policies could adversely affect us.
● We may be adversely affected by changes in U.S. and non-U.S. tax laws and regulations.
Reputation
● Damage to our reputation could harm our businesses, including our competitive position and business prospects.
Other
● Reforms to and replacement of Interbank Offered Rates (IBORs) and certain other rates or indices may adversely affect our reputation, business, financial condition and results of operations.
● We face significant and increasing competition in the financial services industry.
● Our inability to adapt our business strategies, products and services could harm our business.
● We could suffer operational, reputational and financial harm if our models and strategies fail to properly anticipate and
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manage risk.
● Failure to properly manage data may result in our inability to manage risk and business needs, errors in our day-to-day operations, critical reporting and strategic decision-making, inaccurate reporting and non-compliance with laws, rules and regulations.
● Our operations, businesses and customers could be materially adversely affected by the impacts related to climate change.
● Our ability to attract and retain qualified employees is critical to our success, business prospects and competitive position.
The above summary is qualified in its entirety to the more detailed discussion of the Corporation’s material risk factors set forth below.
Coronavirus Disease
The impacts of the pandemic have adversely affected, and may continue to adversely affect us, and the pandemic’s duration and future impacts remain uncertain.
The impacts of the pandemic have adversely affected, and may continue to adversely affect us, and the pandemic’s duration and future impacts remain uncertain.
Since the onset of the pandemic, the negative economic conditions and disruptions arising from it have adversely impacted our financial results to varying degrees and in various respects, including as a result of periods of increased allowance for credit losses followed by subsequent declines, and continued elevated noninterest expense. The pandemic’s impact on economic conditions and activity remains uncertain and will continue to evolve by region, country and state, and it is possible that new or evolving variants of COVID-19 could result in increased business disruptions and contribute to a potential economic downturn. In recent months, the U.S. and other regions of the world have experienced supply chain disruptions and labor shortages, and the global economy and supply chains remain vulnerable. Pandemic developments and certain responses have also resulted in inflationary pressure and ultimately may contribute to the development of a prolonged, disruptive period of high inflation in the U.S. and globally.
The economic impact of the pandemic may continue to adversely affect certain of our businesses and our results of operations, including decreased demand for and use of our products and services; lower fees, including asset management fees; lower sales and trading revenue due to decreased market liquidity resulting from heightened volatility; higher levels of uncollectible reversed charges in our merchant services business; increased noninterest expense, including operational losses; and increased credit losses due to a deterioration in the financial condition of our consumer and commercial borrowers, which could result in their inability to fulfill contractual obligations, may vary by region, sector or industry and could be exacerbated by the expiration of government assistance. Additionally, our liquidity and/or regulatory capital could be adversely impacted by customers’ withdrawal of deposits, inability to repay loans and reduced usage of banking products, volatility and disruptions in the capital and credit markets, changes in the value of securities, derivatives and other financial instruments resulting in increased margin requirements, volatility in foreign exchange rates and customer draws on lines of credit. Adverse macroeconomic conditions could also result in potential downgrades to our credit ratings, negative impacts to regulatory capital and liquidity and reinstated restrictions on dividends and/or common stock repurchases.
We continue to execute business continuity plans in connection with the pandemic. If we become unable to operate
our businesses from remote locations including, for example, because of an internal or external failure of our information technology infrastructure, we experience increased rates of employee illness or unavailability, or governmental restrictions are placed on our employees or operations, our business continuity plans could be adversely affected and result in disruption to our businesses. Additionally, we continue to rely on third parties who could experience business interruptions as a result of the pandemic, which could increase our risks and adversely impact our businesses.
In connection with the pandemic, various governmental fiscal and monetary relief programs were implemented in an effort to stimulate the global economy and avert negative economic or market conditions. Our participation in such programs could result in reputational harm and government actions and proceedings, and has resulted in, and may continue to result in, litigation, including class actions. Such actions may result in judgments, orders, settlements, penalties, and fines. Our participation in such programs has also resulted and will continue to result in losses, including from the Paycheck Protection Program (PPP) and the processing of unemployment benefits for California and certain other states.
We continue to closely monitor the pandemic and related risks as they evolve globally and in the U.S. The magnitude and duration of the pandemic and its future direct and indirect effects on global health, the global economy and our businesses, results of operations and financial condition are uncertain and depend on future developments that cannot be predicted, including the likelihood of future surges of COVID-19 cases and the spread of more easily communicable and/or dangerous variants of COVID-19, the availability, usage and acceptance of effective medical treatments and vaccines (including additional doses of vaccines) in the U.S. and globally and future public response and government actions, including travel bans and restrictions, limitations on business activity, vaccine mandates and additional stimulus legislation. The pandemic may cause setbacks to the global or national economic recovery or longer lasting effects on economic conditions than are currently anticipated, changes in financial markets, changes in fiscal, monetary and tax regulatory environments, and changes in client preferences and behavior, which could have a material adverse effect on our businesses, results of operations and financial condition.
Market
Our business and results of operations may be adversely affected by the financial markets, fiscal, monetary, and regulatory policies, and economic conditions generally.
General economic, political, social and health conditions in the U.S. and in one or more countries abroad affect markets in the U.S. and abroad and our business. In particular, markets in the U.S. or abroad may be affected by the level and volatility of interest rates, availability and market conditions of financing, unexpected changes in gross domestic product (GDP), economic growth or its sustainability, inflation, supply chain disruptions, consumer spending, employment levels, labor shortages, wage stagnation, federal government shutdowns, developments related to the U.S. federal debt ceiling, energy prices, home prices, commercial property values, bankruptcies, a default by a significant market participant or class of counterparties, fluctuations or other significant changes in both debt and equity capital markets and currencies, liquidity of the global financial markets, the growth of global trade and commerce, trade policies, the availability and cost of capital and credit, disruption of communication, transportation or energy infrastructure and
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investor sentiment and confidence. Additionally, global markets, including energy and commodity markets, may be adversely affected by the current or anticipated impact of climate change, extreme weather events or natural disasters, the emergence or continuation of widespread health emergencies or pandemics, cyberattacks or campaigns, military conflict, including escalating military tension between Russia and Ukraine, terrorism or other geopolitical events. Market fluctuations may impact our margin requirements and affect our business liquidity. Also, any sudden or prolonged market downturn in the U.S. or abroad, as a result of the above factors or otherwise, could result in a decline in net interest income and noninterest income and adversely affect our results of operations and financial condition, including capital and liquidity levels. For example, global developments in connection with the ongoing pandemic, including supply chain disruptions, high inflation, changes to industries such as commercial real estate, the emergence of new variants and significant restrictions on households and businesses in certain countries, have adversely impacted and may continue to adversely impact financial markets and macroeconomic conditions and could result in additional market volatility and disruptions globally.
Actions taken by the Federal Reserve, including changes in its target funds rate, balance sheet management, and lending facilities, and other central banks are beyond our control and difficult to predict. These actions can affect interest rates and the value of financial instruments and other assets and liabilities and can impact our borrowers. Sudden changes in monetary policy, for example in response to high inflation, could lead to financial market volatility, increases in market interest rates, and a flattening or inversion of the yield curve. The continued protracted period of lower interest rates has resulted in lower revenue through lower net interest income, which has adversely affected our results of operations. Continued low U.S. interest rates, potentially resulting from a further extended period of accommodative monetary policy and/or an economic downturn could have a further adverse impact on us, including our net interest income and results of operations.
Changes to existing U.S. laws and regulatory policies and evolving priorities, including those related to financial regulation, taxation, international trade, fiscal policy, climate change (including required reduction of greenhouse gas emissions) and healthcare, may adversely impact U.S. or global economic activity and our customers', our counterparties' and our earnings and operations. For example, the expiration of pandemic-related government assistance in the U.S. could result in a reduction in economic activity and lead to a deterioration in households’ finances, particularly if consumers also continue to face high inflation. A slowdown in consumer demand could limit the ability of firms to pass on fast-rising costs for labor and other inputs, weighing on earnings and potentially leading to an equity market downturn. Significant fiscal policy changes and/or initiatives may also raise the federal debt, affect businesses and household after-tax incomes and increase uncertainty surrounding the formulation and direction of U.S. monetary policy and volatility of interest rates. A rise in U.S. interest rates could increase the likelihood of a more volatile and appreciating U.S. dollar. Changes, or proposed changes, to certain U.S. trade and international investment policies, particularly with important trading partners (including China and the EU) have in recent years negatively impacted financial markets. An escalation of tensions could lead to further measures that adversely affect financial markets, disrupt world trade and commerce and lead to trade retaliation, including through the use of tariffs, foreign exchange measures
or the large-scale sale of U.S. Treasury Bonds. Actions taken by other countries, particularly China, to restrict the activities of businesses, could also negatively affect financial markets.
Any of these developments could adversely affect our consumer and commercial businesses, our customers, our securities and derivatives portfolios, including the risk of lower re-investment rates within those portfolios, our level of charge-offs and provision for credit losses, the carrying value of our deferred tax assets, our capital levels, our liquidity and our results of operations. Additionally, the transition from IBORs and other benchmark rates to alternative reference rates (ARRs) could negatively impact markets globally and our business, and/or magnify any negative impact of the above referenced factors on our business, customers and results of operations.
Increased market volatility and adverse changes in financial or capital market conditions may increase our market risk.
Our liquidity, competitive position, business, results of operations and financial condition are affected by market risks such as changes in interest and currency exchange rates, fluctuations (significant or otherwise) in equity and futures prices, lower trading volumes and prices of securitized products, the implied volatility of interest rates and credit spreads and other economic and business factors. These market risks may adversely affect, among other things, the value of our securities, trading assets and other financial instruments, the cost of debt capital and our access to credit markets, the value of assets under management (AUM), fee income relating to AUM, customer allocation of capital among investment alternatives, the volume of client activity in our trading operations, investment banking fees, the general profitability and risk level of the transactions in which we engage and our competitiveness with respect to deposit pricing. For example, the value of certain of our assets is sensitive to changes in market interest rates. If the Federal Reserve or a non-U.S. central bank changes or signals a change in monetary policy, market interest rates or credit spreads could be affected, which could adversely impact the value of such assets. Changes to fiscal policy, including expansion of U.S. federal deficit spending and resultant debt issuance, could also affect market interest rates. In addition, although some interest rates have begun to rise and elevated inflation could lead to further increases, the continued low interest rate environment has had and could continue to have a negative impact on our results of operations, including on future revenue and earnings growth. A flattening or inversion of the yield curve could also negatively impact our results of operations, including revenue and earnings.
We use various models and strategies to assess and control our market risk exposures, but those are subject to inherent limitations. In times of market stress or other unforeseen circumstances, previously uncorrelated indicators may become correlated and vice versa. These types of market movements may limit the effectiveness of our hedging strategies and cause us to incur significant losses. These changes in correlation can be exacerbated where other market participants are using risk or trading models with assumptions or algorithms similar to ours. In these and other cases, it may be difficult to reduce our risk positions due to activity of other market participants or widespread market dislocations, including circumstances where asset values are declining significantly or no market exists for certain assets. To the extent that we own securities that do not have an established liquid trading market or are otherwise subject to restrictions on sale or hedging, we may not be able to reduce our positions and therefore reduce our risk associated with such positions.
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We may incur losses if asset values decline, including due to changes in interest rates and prepayment speeds.
We have a large portfolio of financial instruments, including loans and loan commitments, securities financing agreements, asset-backed secured financings, derivative assets and liabilities, debt securities, marketable equity securities and certain other assets and liabilities that we measure at fair value that are subject to valuation and impairment assessments. We determine these values based on applicable accounting guidance, which, for financial instruments measured at fair value, requires an entity to base fair value on exit price and to maximize the use of observable inputs and minimize the use of unobservable inputs in fair value measurements. The fair values of these financial instruments include adjustments for market liquidity, credit quality, funding impact on certain derivatives and other transaction-specific factors, where appropriate.
Gains or losses on these instruments can have a direct impact on our results of operations, unless we have effectively hedged our exposures. Increases in interest rates may result in a decrease in residential mortgage loan originations and could impact the origination of corporate debt. In addition, increases in interest rates or changes in spreads may adversely impact the fair value of debt securities and, accordingly, for debt securities classified as available for sale, may adversely affect accumulated other comprehensive income and, thus, capital levels. These market moves also may adversely impact the value of debt securities we hold to meet regulatory liquidity requirements. Decreases in interest rates may increase prepayment speeds of certain assets, and, therefore, may adversely affect net interest income.
Fair values may be impacted by declining values of the underlying assets or the prices at which observable market transactions occur and the continued availability of these transactions or indices. The financial strength of counterparties, with whom we have economically hedged some of our exposure to these assets, also will affect the fair value of these assets. Sudden declines and volatility in the prices of assets may curtail or eliminate trading activities in these assets, which may make it difficult to sell, hedge or value these assets. The inability to sell or effectively hedge assets reduces our ability to limit losses in such positions, and the difficulty in valuing assets may increase our risk-weighted assets (RWA), which requires us to maintain additional capital and increases our funding costs. Values of AUM also impact revenues in our wealth management and related advisory businesses for asset-based management and performance fees. Declines in values of AUM can result in lower fees earned for managing such assets.
Liquidity
If we are unable to access the capital markets or continue to maintain deposits, or our borrowing costs increase, our liquidity and competitive position will be negatively affected.
Liquidity is essential to our businesses. We fund our assets primarily with globally sourced deposits in our bank entities, as well as secured and unsecured liabilities transacted in the capital markets. We rely on certain secured funding sources, such as repo markets, which are typically short-term and credit-sensitive. We also engage in asset securitization transactions, including with the GSEs, to fund consumer lending activities. Our liquidity could be adversely affected by any inability to access the capital markets, illiquidity or volatility in the capital markets, the decrease in value of eligible collateral or increased collateral requirements (including as a result of credit concerns for short-term borrowing), changes to our relationships with our funding providers based on real or perceived changes in our risk
profile, prolonged federal government shutdowns, or changes in regulations, guidance or GSE status that impact our funding avenues or ability to access certain funding sources. Additionally, our liquidity may be negatively impacted by the unwillingness or inability of the Federal Reserve to act as lender of last resort, unexpected simultaneous draws on lines of credit, slower customer payment rates, restricted access to the assets of prime brokerage clients, the withdrawal of or failure to attract customer deposits or invested funds (which could result from customer attrition for higher yields, the desire for more conservative alternatives, changes in customer behavior or our customers’ increased need for cash), increased regulatory liquidity, capital and margin requirements for our U.S. or international banks and their nonbank subsidiaries, which could result in the inability to transfer liquidity internally and inefficient funding, changes in patterns of intraday liquidity usage resulting from a counterparty or technology failure or other idiosyncratic event or failure or default by a significant market participant or third party (including clearing agents, custodians, central banks or central counterparties (CCPs)). These factors also have the potential to increase our borrowing costs and negatively impact our liquidity.
Several of these factors may arise due to circumstances beyond our control, such as general market volatility, disruption, shock or stress, the emergence or continuation of widespread health emergencies or pandemics, Federal Reserve policy decisions (including fluctuations in interest rates or Federal Reserve balance sheet composition), negative views or loss of confidence about the Corporation (including short- and long-term business prospects) or the financial services industry generally or due to a specific news event, changes in the regulatory environment or governmental fiscal or monetary policies, actions by credit rating agencies or an operational problem that affects third parties or us. The impact of these events, whether within our control or not, could include an inability to sell assets or redeem investments, unforeseen outflows of cash, the need to draw on liquidity facilities, the reduction of financing balances and the loss of equity secured funding, debt repurchases to support the secondary market or meet client requests, the need for additional funding for commitments and contingencies and unexpected collateral calls, among other things, the result of which could be increased costs, a liquidity shortfall and/or impact on our liquidity coverage ratio.
Our liquidity and cost of obtaining funding is directly related to prevailing market conditions, including changes in interest and currency exchange rates, significant fluctuations in equity and futures prices, lower trading volumes and prices of securitized products and our credit spreads. Credit spreads reflect the published credit ratings, or other assessments of credit risk and relative value by market participants, of the Corporation and represent the risk premiums that our funding providers demand in excess of a benchmark interest rate, for example, U.S. Treasury securities rates. Increases in interest rates and our credit spreads can increase the cost of our funding and result in mark-to-market or credit valuation adjustment exposures. Changes in our credit spreads are market-driven and may be influenced by market perceptions of our creditworthiness, including changes in our credit ratings. Changes to interest rates and our credit spreads occur continuously and may be unpredictable and highly volatile. We may also experience spread compression as a result of offering higher than expected deposit rates in order to attract and maintain deposits due to increased marketplace rate competition. Additionally, concentrations within our funding
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profile, such as maturities, currencies or counterparties, can reduce our funding efficiency.
Reduction in our credit ratings could significantly limit our access to funding or the capital markets, increase borrowing costs or trigger additional collateral or funding requirements.
Our borrowing costs and ability to raise funds are directly impacted by our credit ratings. In addition, credit ratings may be important to customers or counterparties when we compete in certain markets and seek to engage in certain transactions, including OTC derivatives. Credit ratings and outlooks are opinions expressed by rating agencies on our creditworthiness and that of our obligations or securities, including long-term debt, short-term borrowings, preferred stock and asset securitizations. Our credit ratings are subject to ongoing review by rating agencies, which consider a number of factors, including our financial strength, performance, prospects and operations and factors not under our control, such as the macroeconomic and geopolitical environment, including any continued macroeconomic stress caused by the pandemic, or changes the rating agencies may make to the methodologies they use to determine our ratings.
Rating agencies could make adjustments to our credit ratings at any time, and there can be no assurance as to whether or when any downgrades could occur. A reduction in certain of our credit ratings could result in a wider credit spread and negatively affect our liquidity, access to credit markets, the related cost of funds, our businesses and certain trading revenues, particularly in those businesses where counterparty creditworthiness is critical. If the short-term credit ratings of our parent company, or bank or broker-dealer subsidiaries, were downgraded by one or more levels, we may experience loss of access to short-term funding sources such as repo financing, and/or incur increased cost of funds and increased collateral requirements. Under the terms of certain OTC derivative contracts and other trading agreements, if our or our subsidiaries’ credit ratings are downgraded, the counterparties may require additional collateral or terminate these contracts or agreements.
While certain potential impacts are contractual and quantifiable, the full consequences of a credit rating downgrade to a financial institution are inherently uncertain, as they depend upon numerous dynamic, complex and inter-related factors and assumptions, including whether any downgrade of a firm’s long-term credit ratings precipitates downgrades to its short-term credit ratings, and assumptions about the potential behaviors of various customers, investors and counterparties.
Bank of America Corporation is a holding company, is dependent on its subsidiaries for liquidity and may be restricted from transferring funds from subsidiaries.
Bank of America Corporation, as the parent company, is a separate and distinct legal entity from our bank and nonbank subsidiaries. We evaluate and manage liquidity on a legal entity basis. Legal entity liquidity is an important consideration as there are legal, regulatory, contractual and other limitations on our ability to utilize liquidity from one legal entity to satisfy the liquidity requirements of another, including the parent company, which could result in adverse liquidity events. The parent company depends on dividends, distributions, loans and other payments from our bank and nonbank subsidiaries to fund dividend payments on our common stock and preferred stock and to fund all payments on our other obligations, including debt obligations. Any inability of our subsidiaries to pay dividends or make payments to us may adversely affect our cash flow and financial condition.
Many of our subsidiaries, including our bank and broker-dealer subsidiaries, are subject to laws that restrict dividend payments, or authorize regulatory bodies to block or reduce the flow of funds from those subsidiaries to the parent company or other subsidiaries. Our bank and broker-dealer subsidiaries are subject to restrictions on their ability to lend or transact with affiliates, minimum regulatory capital and liquidity requirements and restrictions on their ability to use funds deposited with them in bank or brokerage accounts to fund their businesses. Intercompany arrangements we entered into in connection with our resolution planning submissions could restrict the amount of funding available to the parent company from our subsidiaries under certain adverse conditions.
Additional restrictions on related party transactions, increased capital and liquidity requirements and additional limitations on the use of funds on deposit in bank or brokerage accounts, as well as lower earnings, can reduce the amount of funds available to meet the obligations of the parent company and even require the parent company to provide additional funding to such subsidiaries. Also, regulatory action that requires additional liquidity at each of our subsidiaries could impede access to funds we need to pay our obligations or pay dividends. In addition, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to prior claims of the subsidiary’s creditors.
Our liquidity and financial condition, and the ability to pay dividends to shareholders and to pay obligations could be materially adversely affected in the event of a resolution.
Bank of America Corporation, our parent holding company, is required to periodically submit a plan to the FDIC and Federal Reserve describing its resolution strategy under the U.S. Bankruptcy Code in the event of material financial distress or failure. In the current plan, Bank of America Corporation’s preferred resolution strategy is a “single point of entry” strategy. This strategy provides that only the parent holding company would file for bankruptcy under the U.S. Bankruptcy Code and contemplates providing certain key operating subsidiaries with sufficient capital and liquidity to operate through severe stress and to enable such subsidiaries to continue operating or be wound down in a solvent manner following a bankruptcy of the parent holding company. Bank of America Corporation has entered into intercompany arrangements resulting in the contribution of most of its capital and liquidity to key subsidiaries. Pursuant to these arrangements, if Bank of America Corporation’s liquidity resources deteriorate so severely that resolution becomes imminent, Bank of America Corporation will no longer be able to draw liquidity from its key subsidiaries, and will be required to contribute its remaining financial assets to a wholly-owned holding company subsidiary, which could materially and adversely affect our liquidity and financial condition and the ability to return capital to shareholders, including through the payment of dividends and repurchase of the Corporation’s common stock, and meet our payment obligations.
If the FDIC and Federal Reserve jointly determine that Bank of America Corporation’s resolution plan is not credible, they could impose more stringent capital, leverage or liquidity requirements or restrictions on our growth, activities or operations. We could also be required to take certain actions that could impose operating costs and could potentially result in the divestiture of certain assets or restructuring of businesses and subsidiaries.
Additionally, under the Financial Reform Act, when a G-SIB such as Bank of America Corporation is in default or danger of default, the FDIC may be appointed receiver in order to conduct
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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.
To the extent that the Corporation is resolved under the U.S. Bankruptcy Code or the FDIC’s orderly liquidation authority, third-party creditors of the Corporation’s subsidiaries may receive significant or full recoveries on their claims while security holders of Bank of America Corporation could face significant or complete losses.
Credit
Economic or market disruptions and insufficient credit loss reserves may result in a higher provision for credit losses.
A number of our products expose us to credit risk, including loans, letters of credit, derivatives, debt securities, trading account assets and assets held-for-sale. Deterioration in the financial condition of our consumer and commercial borrowers, counterparties or underlying collateral could adversely affect our financial condition and results of operations.
Our credit portfolios may be impacted by global and U.S. macroeconomic and market conditions, events and disruptions, including declines in GDP, consumer spending or property values, asset price corrections, increasing consumer and corporate leverage, increases in corporate bond spreads, rising or elevated unemployment levels, rising or elevated inflation, fluctuations in foreign exchange or interest rates, as well as widespread health emergencies or pandemics, extreme weather events and the impacts of climate change and domestic and global efforts to transition to a low-carbon economy. Significant economic or market stresses and disruptions typically have a negative impact on the business environment and financial markets, which could impact the underlying credit quality of our borrowers, counterparties and assets. Property value declines or asset price corrections could increase the risk of borrowers or counterparties defaulting or becoming delinquent in their obligations to us, and could decrease the value of the collateral we hold, which could increase credit losses. Credit risk could also be magnified by lending to leveraged borrowers or declining asset prices, including property or collateral values, unrelated to macroeconomic stress. Simultaneous drawdowns on lines of credit and/or an increase in a borrower’s leverage in a weakening economic environment could result in deterioration in our credit portfolio, should borrowers be unable to fulfill competing financial obligations. Increased delinquency and default rates could adversely affect our credit portfolios, including consumer credit card, home equity and residential mortgage portfolios through increased charge-offs and provisions for credit losses.
Although macroeconomic conditions have improved during 2021 in comparison to 2020, the pandemic and the related impacts of inflationary conditions, high input costs and supply chain disruptions, unemployment or labor shortages and the expiration of pandemic-related government benefits and programs could negatively impact the ability of consumer and
commercial borrowers or counterparties to meet their financial obligations. Additionally, the pandemic continues to impact the economy and certain sectors remain at risk (e.g., travel and entertainment, as well as commercial real estate office exposure). To the extent the pandemic worsens, as a result of new variants or otherwise, resulting in restrictions on economic activity or other negative impacts on the macroeconomic environment, our credit portfolio and allowance for credit losses could be adversely impacted.
We establish an allowance for credit losses, which includes the allowance for loan and lease losses and the reserve for unfunded lending commitments, based on management's best estimate of lifetime expected credit losses inherent in our relevant financial assets. The process to determine the allowance for credit losses uses models and assumptions that require us to make difficult and complex judgments that are often interrelated. This includes forecasting how borrowers or counterparties will perform in changing and unprecedented economic conditions, such as predicting developments in public health and fiscal policy related to the pandemic. The ability of our borrowers or counterparties to repay their obligations will likely be impacted by changes in future economic conditions, which in turn could impact the accuracy of our loss forecasts and allowance estimates. There is also the possibility that we have failed or will fail to accurately identify the appropriate economic indicators or accurately estimate their impacts to our borrowers or counterparties, which similarly could impact the accuracy of our loss forecasts and allowance estimates.
If the models, estimates and assumptions we use to establish reserves or the judgments we make in extending credit to our borrowers or counterparties, which are more sensitive due to the current macroeconomic environment, including as a result of the uncertainty regarding the magnitude and duration of the pandemic, prove inaccurate in predicting future events, we may suffer unexpected losses. In addition, changes to external factors can negatively impact our recognition of credit losses in our portfolios and allowance for credit losses.
The allowance for credit losses is our best estimate of expected credit losses; however, there is no guarantee that it will be sufficient to address credit losses, particularly if the economic outlook deteriorates significantly and quickly. In such an event, we may increase our allowance which would reduce our earnings. Additionally, to the extent that economic conditions worsen as a result of COVID-19 or otherwise, impacting our consumer and commercial borrowers, counterparties or underlying collateral, and credit losses are worse than expected, we may increase our provision for credit losses, which could have an adverse effect on our results of operations and could negatively impact our financial condition.
Our concentrations of credit risk could adversely affect our credit losses, results of operations and financial condition.
In the ordinary course of our business, we may be subject to concentrations of credit risk because of a common characteristic or common sensitivity to economic, financial, public health or business developments. For example, concentrations of credit risk may reside in a particular industry, geography, product, asset class, counterparty or within any pool of exposures with a common risk characteristic. A deterioration in the financial condition or prospects of a particular industry, geographic location, product or asset class, or a failure or downgrade of, or default by, any particular entity or group of entities could negatively affect our businesses, and it is possible our limits and credit monitoring exposure controls will not function as anticipated.
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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, predominantly comprised of broker-dealers, commercial banks, investment banks, insurers, mutual funds, hedge funds, central clearing counterparties and other institutional clients, resulting in significant credit concentration with respect to these industries. Financial services institutions and other counterparties are inter-related because of trading, funding, clearing or other relationships. As a result, defaults by one or more counterparties, or market uncertainty about the financial stability of one or more financial services institutions, or the financial services industry generally, could lead to market-wide liquidity disruptions, losses and defaults.
Many of these transactions expose us to credit risk and, in some cases, disputes and litigation in the event of default of a counterparty. In addition, our credit risk may be heightened by market risk when the collateral held by us cannot be liquidated or is liquidated at prices not sufficient to recover the full amount of the loan or derivatives exposure due to us, which may occur as a result of events that impact the value of the collateral, such as an asset price correction or fraud. Further, disputes with obligors as to the valuation of collateral could increase in times of significant market stress, volatility or illiquidity, and we could suffer losses during such periods if we are unable to realize the fair value of the collateral or manage declines in the value of collateral.
Our commercial portfolios include exposures to certain industries, including asset managers and funds, real estate, finance companies and capital goods. Economic weaknesses, sustained elevated inflation, adverse business conditions, market disruptions, rising interest or capitalization rates, the collapse of speculative bubbles, greater volatility in areas where we have concentrated credit risk or deterioration in real estate values or household incomes may cause us to experience a decrease in cash flow and higher credit losses in either our consumer or commercial portfolios or cause us to write down the value of certain assets. Additionally, we could experience continued and long-term negative impacts to our commercial credit exposure and an increase in credit losses within those industries that continue to be disproportionately impacted by COVID-19 or are permanently impacted by a change in consumer preferences resulting from COVID-19 (e.g., travel and entertainment, as well as commercial real estate office exposure) or other industry disruptions.
Furthermore, we have concentrations of credit risk with respect to our consumer real estate, auto, consumer credit card and commercial real estate portfolios, which represent a significant percentage of our overall credit portfolio. The U.S. has experienced a meaningful increase in property prices over the past year and a decrease in home price valuations or commercial real estate valuations in certain markets where we have large concentrations, as well as more broadly within the U.S. or globally, could result in increased servicing expenses, defaults, delinquencies or credit losses. In particular, the impact of climate change, such as rising average global temperatures and rising sea levels, and the increasing frequency and severity of extreme weather events and natural disasters such as droughts, floods, wildfires and hurricanes could negatively impact collateral, the valuations of home prices or commercial real estate or our customers’ ability and/or willingness to pay fees, outstanding loans or afford new products. This could also cause insurability risk and/or increased insurance costs to customers.
We also enter into transactions with sovereign nations, U.S. states and municipalities. Unfavorable economic or political conditions, disruptions to capital markets, currency fluctuations, changes in oil prices, social instability and changes in government or monetary policies could adversely impact the operating budgets or credit ratings of these government entities and expose us to credit and liquidity risk.
Liquidity disruptions in the financial markets may result in our inability to sell, syndicate or realize the value of our positions, leading to increased concentrations, which could increase the credit and market risk associated with our positions, as well as increase our RWA.
We may be adversely affected if the U.S. housing market weakens or home prices decline.
Although the U.S. has experienced a meaningful increase in home prices in 2021, we remain conscious of geographic markets where housing price growth has increased significantly that could be vulnerable to declines in future periods and may negatively impact the demand and underlying collateral for many of our products. Additionally, our mortgage loan production volume is generally influenced by the rate of growth in residential mortgage debt outstanding and the size of the residential mortgage market, both of which may be adversely affected by rising interest rates. Any downturn in the condition of the U.S. housing market, similar to the 2008 financial crisis or otherwise, could result in both significant write-downs of asset values in several asset classes, notably mortgage-backed securities, and exposure to monolines. If the U.S. housing market were to weaken, the value of real estate could decline, which could result in increased credit losses and delinquent servicing expenses, negatively affect our representations and warranties exposures, and adversely affect our financial condition and results of operations.
Our derivatives businesses may expose us to unexpected risks and potential losses.
We are party to a large number of derivatives transactions that may expose us to unexpected market, credit and operational risks that could cause us to suffer unexpected losses. Severe declines in asset values, unanticipated credit events or unforeseen circumstances that may cause previously uncorrelated factors to become correlated and vice versa, may create losses resulting from risks not appropriately taken into account or anticipated in the development, structuring or pricing of a derivative instrument. Certain OTC derivative contracts and other trading agreements provide that upon the occurrence of certain specified events, such as a change in the credit rating of the Corporation or one or more of its affiliates, we may be required to provide additional collateral or take other remedial actions and could experience increased difficulty obtaining funding or hedging risks. In some cases our counterparties may have the right to terminate or otherwise diminish our rights under these contracts or agreements.
We are also a member of various central counterparties (CCPs), in part due to regulatory requirements for mandatory clearing of derivative transactions, which potentially increases our credit risk exposures to CCPs. In the event that one or more members of the CCP defaults on its obligations, we may be required to pay a portion of any losses incurred by the CCP as a result of that default. A CCP may modify, in its discretion, the margin we are required to post, which could mean unexpected and increased exposure to the CCP. As a clearing member, we are exposed to the risk of non-performance by our clients for which we clear transactions, which may not be covered by
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available collateral. Additionally, default by a significant market participant may result in further risk and potential losses.
Geopolitical
We are subject to numerous political, economic, market, reputational, operational, compliance, legal, regulatory and other risks in the jurisdictions in which we operate.
We do business throughout the world, including in emerging markets. Economic or geopolitical stress in one or more countries could have a negative impact regionally or globally, resulting in, among other things, market volatility, reduced market value and economic output. Our liquidity and credit risk could be adversely impacted by and our businesses and revenues derived from non-U.S. jurisdictions are subject to risk of loss from financial, social or judicial instability, changes in government leadership, including as a result of electoral outcomes or otherwise, changes in governmental policies or policies of central banks, expropriation, nationalization and/or confiscation of assets, price controls, high inflation, natural disasters, the emergence or continuation of widespread health emergencies or pandemics, capital controls, currency re-denomination risk from a country exiting the EU or otherwise, currency fluctuations, foreign exchange controls or movements (caused by devaluation or de-pegging), unfavorable political and diplomatic developments, oil price fluctuations and changes in legislation. These risks are especially elevated in emerging markets. Additionally, continued tensions between the U.S. and important trading partners, particularly China, may result in sanctions, further tariff increases or other restrictive actions on cross-border trade, investment, and transfer of information technology that weigh on trade volumes, raise costs for producers, and adversely affect our businesses and revenues, as well as our customers and counterparties.
A number of non-U.S. jurisdictions in which we do business have been or may be negatively impacted by slowing growth or recessionary conditions, market volatility and/or political or civil unrest. The ongoing pandemic had a severe negative impact on global GDP, and despite significant progress in 2021, it appears that the global economy faces an uncertain and uneven recovery ahead. While the U.S. and numerous other countries have recovered to pre-pandemic levels of output, many countries and areas within countries are recovering more slowly. Economic weakness may prove persistent in many countries and regions, including certain regions of Europe, Japan and numerous emerging markets. Moreover, economic activity remains vulnerable to ongoing public health uncertainties with respect to the pandemic, and a number of countries are still imposing significant restrictions on residents and businesses. Global supply chain disruptions, labor shortages, wage pressures and elevated inflation in many countries pose further challenges, especially in the form of volatility in financial markets. Additionally, foreign exchange rates against the U.S. dollar are at risk of significant depreciation as the Federal Reserve raises interest rates.
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. Risks in one nation can limit our opportunities for portfolio growth and negatively affect our operations in other nations, including our U.S. operations. Market and economic disruptions of all types
may affect consumer confidence levels and spending, corporate investment and job creation, bankruptcy rates, levels of incurrence and default on consumer and corporate debt, economic growth rates and asset values, among other factors. Any such unfavorable conditions or developments could adversely impact us.
As a result of the pandemic and fiscal policy responses to it, including the increased purchase of government bonds and other financial assets by central banks, government debt levels have increased significantly raising the risk of volatility, significant valuation changes, political tensions among EU members regarding fiscal policy or defaults on or devaluation of sovereign debt, which could expose us to substantial losses.
Our non-U.S. businesses are also subject to extensive regulation by governments, securities exchanges and regulators, central banks and other regulatory bodies. In many countries, the laws and regulations applicable to the financial services and securities industries are uncertain and evolving, and it may be difficult for us to determine the exact requirements of local laws in every market or manage our relationships with multiple regulators in various jurisdictions. Our potential inability to remain in compliance with local laws in a particular market and manage our relationships with regulators could result in increased expenses and changes to our organizational structure and adversely affect our businesses and results of operations in that market, as well as our reputation in general.
In connection with the U.K.’s exit from the EU, we are now subject to different laws and regulations, which are expected to diverge further over time, and are subject to the oversight of additional regulatory authorities. As political and regulatory environments evolve, further changes to the legal and regulatory framework under which our subsidiaries provide products and services in the U.K. and in the EU may result in additional compliance costs and have negative tax consequences or an adverse impact on our results of operations.
In addition to non-U.S. legislation, our international operations are also subject to U.S. legal requirements, which subjects us to operational and compliance costs and risks. For example, our operations are subject to U.S. and non-U.S. laws and regulations relating to bribery and corruption, anti-money laundering, and economic sanctions, which can vary by jurisdiction. The increasing speed and novel ways in which funds circulate could make it more challenging to track the movement of funds and heighten financial crimes risk. Our ability to comply with these legal requirements depends on our ability to continually improve surveillance, detection and reporting and analytic capabilities.
In the U.S., debt ceiling and budget deficit concerns, which have increased the possibility of U.S. government defaults on its debt and/or downgrades to its credit ratings, and prolonged government shutdowns could weaken the U.S. dollar, cause market volatility, negatively impact the global economy and banking system and adversely affect our financial condition, including our liquidity. Additionally, changes in fiscal, monetary or regulatory policy, including as a result of labor shortages, wage pressures, supply chain disruptions and higher inflation, could increase our compliance costs and adversely affect our business operations, organizational structure and results of operations. We are also subject to geopolitical risks, including economic sanctions, acts or threats of international or domestic terrorism, actions taken by the U.S. or other governments in response thereto, state-sponsored cyberattacks or campaigns, civil unrest and/or military conflicts, which could adversely affect business and economic conditions abroad and in the U.S. For example, escalating military tensions between Russia and Ukraine could result in regional instability and adversely impact
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commodity and other financial markets as well as economic conditions, especially in Europe. Additionally, this could magnify inflationary pressure resulting from the pandemic and extend any prolonged period of higher inflation.
Business Operations
A failure in or breach of our operational or security systems or infrastructure or business continuity plans, or those of third parties or the financial services industry, could disrupt our critical business operations and customer services, result in additional risk exposures, and adversely impact our results of operations and financial condition, and cause legal or reputational harm.
The potential for operational risk exposure exists throughout our organization and as a result of our interactions with, and reliance on, third parties (including their downstream service providers) and the financial services industry infrastructure. Our operational and security systems infrastructure, including our computer systems, emerging technologies, data management and internal processes, as well as those of third parties, are integral to our performance. We also rely on our employees and third parties (including downstream service providers) in our day-to-day and ongoing operations, who may, as a result of human error, misconduct (including errors in judgment, malice, fraudulent activity and/or engaging in violations of applicable policies, laws, rules or procedures), malfeasance or a failure or breach of systems or infrastructure cause disruptions to our organization and expose us to operational losses, regulatory risk and reputational harm. The Corporation’s and third parties’ inability to properly introduce, deploy and manage changes to internal financial and governance processes, existing products, services and technology, as well as new product innovations and technology could also result in additional operational and regulatory risk.
Additionally, our financial, accounting, data processing and transmission, storage, backup or other operating or security systems and infrastructure, or those of third parties with whom we interact or upon whom we rely, may be ineffective or fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our or such third party’s control, which could adversely affect our ability to process transactions or provide services. We could also experience prolonged computer and network outages resulting in disruptions to our critical business operations and customer services, including abuse or failure of our electronic trading and algorithmic platforms. We may experience sudden increases in customer transaction volume or electrical, telecommunications or other major physical infrastructure outages, newly identified vulnerabilities in key hardware or software, failure of aging infrastructure and technology project implementation challenges, which could result in prolonged operational outages. Climate change is increasing the frequency and severity of natural disasters, such as earthquakes, wildfires, tornadoes, hurricanes and floods, which could result in increased exposure to operational risks, including outages. Additionally, events arising from local or larger scale political or social matters, including civil unrest and terrorist acts, could result in operational disruptions and prolonged operational outages.
We continue to execute our business continuity plans due to the pandemic and will likely continue to be subject to heightened operational risks to the extent that the pandemic persists. We also continue to have greater reliance on remote access tools and technology and employees’ personal systems and increased data utilization and be increasingly dependent upon our information technology infrastructure to operate our
businesses remotely due to the increased number of employees who work from home and evolving customer preferences, including increased reliance on digital banking and other digital
services provided by our businesses. Effective management of our business continuity depends on the security, reliability and adequacy of such systems. We also continue to be at risk of business disruptions due to illness and unavailability as the pandemic persists, including from the emergence of new variants, particularly if they are more transmissible and/or severe.
Regardless of the measures we have taken to implement training, procedures, backup systems and other safeguards to support our operations and bolster our operational resilience, our ability to conduct business may be adversely affected by any significant disruptions to us or to third parties (including their downstream service providers) with whom we interact or upon whom we rely, including systemic cyber events that result in system outages and unavailability of part or all of the internet, cloud services and/or the financial services industry infrastructure (including critical banking activities). Our ability to implement backup systems and other safeguards with respect to third-party systems and the financial services industry infrastructure is more limited than with respect to our own systems.
Furthermore, to the extent that backup systems are available and utilized, they may not process data as quickly as our primary systems and some data might not have been backed up. We regularly update the systems on which we rely to support our operations and growth and to remain compliant with all applicable laws, rules and regulations globally. This updating entails significant costs and creates risks associated with implementing new systems and integrating them with existing ones, including business interruptions.
A failure or breach of our operational or security systems or infrastructure or business continuity plans resulting in disruption to our critical business operations and customer services and/or failure to identify and effectively respond to operational risks in a timely manner could expose us to market abuse, regulatory, market, privacy and liquidity risk, and adversely impact our results of operations and financial condition, as well as cause legal or reputational harm.
A cyberattack, 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, result in the disclosure and/or misuse of information and/or fraudulent activity and increase our operational and security systems and critical infrastructure costs.
Our business is highly dependent on the security, controls and efficacy of our infrastructure, computer and data management systems, as well as those of our customers, suppliers, counterparties and other third parties (including their downstream service providers) the financial services industry and financial data aggregators, with whom we interact, on whom we rely or who have access to our customers' personal or account information. Our business relies on effective access management and the secure collection, processing, transmission, storage and retrieval of confidential, proprietary, personally identifiable 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 remotely access our network, products and services, our employees, customers, suppliers, counterparties and other third parties increasingly use personal mobile devices or computing devices that are outside of our
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network and control environments and are subject to their own cybersecurity risks.
We, our employees, customers, regulators and third parties (including providers of products and services) are regularly the target of an increasing number of cyber threats and attacks and will continue to be. Cyber threats and techniques used in cyberattacks are pervasive, sophisticated, rapidly evolving, difficult to prevent and include computer viruses, malicious or destructive code (such as ransomware), social engineering (including phishing, vishing and smishing), denial of service or information or other security breach tactics that could result in disruptions to our businesses and operations, the loss of funds of the Corporation and/or its clients and the unauthorized release, gathering, monitoring, misuse, loss or destruction or theft of confidential, proprietary and other information, including intellectual property, of ours, our employees, our customers or of third parties. Cybersecurity risks have also significantly increased in recent years in part due to the growing number and increasingly sophisticated activities of malicious cyber actors, including organized crime groups, hackers, terrorist organizations, extremist parties, hostile foreign governments and state-sponsored actors, in some instances acting to promote political ends responding to policies and/or actions of the U.S. government. We are also subject to cyberattacks by disgruntled employees, activists and other third parties, including those involved in corporate espionage.
Our cybersecurity risk and exposure remains heightened because of, among other things, the evolving nature and pervasiveness of cyber threats, our prominent size and scale, our high-profile brand, our geographic footprint and international presence and our role in the financial services industry and the broader economy. The financial services industry, including the Corporation, is particularly at risk because of the use of and reliance on digital banking and other digital services, including mobile banking products, such as mobile payments, and other web- and cloud-based products and applications and the development of additional remote connectivity solutions, which increase cybersecurity risks and exposure. Acceptance and use of such digital banking products and services has substantially increased since the onset of the pandemic. Additionally, the proliferation of third-party financial data aggregators and emerging technologies, including our use of automation, artificial intelligence (AI) and robotics, increase our cybersecurity risks and exposure.
We continue to execute our business continuity plans due to the pandemic. Accordingly, our risk and exposure to cyberattacks and security breaches remain magnified due to our continued reliance on remote access tools and technology, resulting in increased reliance on virtual/digital interactions and a larger number of access points to our networks that must be secured. This increased risk of unauthorized access to our networks results in greater amounts of information being available for access, including from employees’ personal devices over which we do not have the same controls as we do when a larger employee population is working from our offices. Greater demand on our information technology infrastructure and security tools and processes will likely continue as the pandemic persists and may be experienced permanently.
We also face indirect technology, cybersecurity and operational risks relating to the customers, clients and other third parties (including their downstream service providers) and the financial services industry with whom we do business, upon whom we rely to facilitate or enable our business activities or upon whom our customers rely. Other indirect risks relate to providers of products and/or services, financial counterparties,
financial data aggregators, financial intermediaries, such as clearing agents, exchanges and clearing houses, regulators, providers of critical infrastructure, such as internet access and electrical power, and retailers for whom we process transactions. We are also at additional risk resulting from critical third-party information security and open-source software vulnerabilities.
Additionally, we have exposure to cyber threats as a result of our continuous transmission of sensitive information to, and storage of such information by, third parties, including providers of products and/or services, and regulators, the outsourcing of some of our business operations, and system and customer account updates and conversions. Further, any such event may not be disclosed to us in a timely manner. Similarly, any failure, cyberattack or other information or security breach that significantly degrades, deletes or compromises our systems or data could adversely impact third parties, counterparties and the critical infrastructure of the financial services industry.
As a result of increasing consolidation, interdependence and complexity of financial entities and technology systems, a technology failure, cyberattack or other information or security vulnerability, failure or breach that significantly exposes, degrades, deletes or compromises the systems or data of one or more financial entities or third parties (or their downstream service providers) could have a material impact on us, our counterparties or other market participants and ultimately have an adverse impact on financial stability in the U.S. and/or globally. 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.
Cyber threats and the techniques used in cyberattacks change rapidly. Despite substantial efforts to protect the integrity and resilience of our systems and implement controls, processes, policies and other protective measures, we may not be able to anticipate or detect cyberattacks or information or security breaches and implement effective preventive or defensive measures to address or mitigate such attacks or breaches. Even the most advanced internal control environment is vulnerable to compromise. Internal access management failures could result in the compromise or unauthorized exposure of confidential data.
Cyberattacks or security breaches could persist for an extended period of time before being detected. It could take considerable additional time for us to determine the scope, extent, amount, and type of information compromised, at which time the impact on the Corporation and measures to recover and restore to a business-as-usual state may be difficult to assess. As cyber threats continue to evolve, we may be required to expend significant additional money and resources to modify or enhance our protective measures, investigate and remediate any information security, software or network vulnerabilities or incidents whether specific to us, a third party, the industry or businesses in general, and develop our capabilities to respond and recover. As a result, increasing resources to develop and enhance our controls, processes and practices designed to protect our systems, workstations, intellectual property and proprietary information, software, data and networks from attack, damage or unauthorized access, remains a critical priority.
Although to date we have not experienced any material losses or other material consequences relating to technology failure, cyberattacks or other information or security breaches, whether directed at us or third parties, there can be no assurance that our controls and procedures in place to monitor
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and mitigate the risks of cyber threats, including the remediation of critical information security and software vulnerabilities, will be sufficient and/or timely and that we will not suffer material losses or consequences in the future. Successful penetration or circumvention of system security could result in negative consequences, including loss of customers and business opportunities, the withdrawal of customer deposits, misappropriation or destruction of our intellectual property, proprietary information or confidential information and/or the confidential, proprietary or personally identifiable information of certain parties, such as our employees, customers, providers of products and services, counterparties and other third parties, or damage to their computers or systems. Also, any technology failure, cyberattack, successful penetration or circumvention of our networks and systems or other information or security breach, termination or constraint of any third party (including their downstream service providers), the financial services industry infrastructure or financial data aggregators, could, among other things, adversely affect our ability to conduct day-to-day business activities, effect transactions, service our clients, manage our exposure to risk or expand our businesses, result in fraudulent or unauthorized transactions or cause prolonged computer and network outages resulting in material disruptions to our or our customers’ or other third parties’ network access or critical business operations and customer services, in the U.S. and/or globally.
Cyberattacks or other information or security breaches, whether directed at us or third parties, may result in significant lost revenue, give rise to losses and claims brought by third parties, litigation exposure, government fines, penalties or intervention and other negative consequences. Furthermore, the public perception that a cyberattack 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 and/or result in the loss of confidence in our security measures. Additionally, our failure to communicate cyber incidents appropriately to relevant parties could result in regulatory, privacy, operational and reputational risk. Although we maintain cyber insurance, there can be no assurance that liabilities or losses we may incur will be covered under such policies or that the amount of insurance will be adequate. Cyberattacks or other information or security breaches could also result in a violation of applicable privacy and other laws in the U.S. and abroad, reimbursement or other compensatory costs, additional compliance costs, and our internal controls or disclosure controls being rendered ineffective. The occurrence of any of these events could adversely impact our results of operations, liquidity and financial condition.
Failure to satisfy our obligations as servicer for residential mortgage securitizations, loans owned by other entities and other losses we could incur as servicer, could adversely impact our reputation, servicing costs or results of operations.
We and our legacy companies service mortgage loans on behalf of third-party securitization vehicles and other investors. If we commit a material breach of our obligations as servicer or master servicer, we may be subject to termination if the breach is not cured within a specified period of time following notice, which could cause us to lose servicing income. In addition, we may have liability for any failure by us, as a servicer or master servicer, for any act or omission on our part that involves willful misfeasance, bad faith, gross negligence or reckless disregard of our duties. If any such breach was found to have occurred, it may harm our reputation, increase our servicing costs, result in litigation or regulatory action or adversely impact our results of
operations. Additionally, with respect to foreclosures, we may incur costs or losses due to irregularities in the underlying documentation, or if the validity of a foreclosure action is challenged by a borrower or overturned by a court because of errors or deficiencies in the foreclosure process. We may also incur costs or losses relating to delays or alleged deficiencies in processing documents necessary to comply with state law governing foreclosure.
Changes in the structure of and relationship among the GSEs could adversely impact our business.
During 2021, we sold approximately $3.2 billion of loans to GSEs, primarily Freddie Mac (FHLMC). FHLMC and Fannie Mae (FNMA) are currently in conservatorship with their primary regulator, the Federal Housing Finance Agency (FHFA) acting as conservator. In September 2019, the Treasury Department published a proposal to recapitalize FHLMC and FNMA and remove them from conservatorship as well as reduce their role in the marketplace. Consistent with this proposal, in January 2021, the Treasury Department further amended the agreement that governs the conservatorship of FHLMC and FNMA and delineated the continued objective to remove the GSEs from conservatorship. However, we cannot predict the future prospects of the GSEs, timing of the recapitalization or release from conservatorship, or content of legislative or rulemaking proposals regarding the future status of the GSEs in the housing market. Additionally, if the GSEs were to take a reduced role in the marketplace, including by limiting the mortgage products they offer, we could be required to seek alternative funding sources, retain additional loans on our balance sheet, secure funding through the Federal Home Loan Bank system, or securitize the loans through Private Label Securitization. Accordingly, uncertainty regarding their future and the mortgage-backed securities they guarantee continues to exist for the foreseeable future.
Any of these developments could adversely affect the value of our securities portfolios, capital levels, liquidity and results of operations.
Our risk management framework may not be effective in mitigating risk and reducing the potential for losses.
Our risk management framework is designed to minimize risk and loss to us. We seek to effectively and consistently identify, measure, monitor, report and control the types of risk to which we are subject, including strategic, credit, legal, climate, market, liquidity, compliance, operational and reputational risks. While we employ a broad and diversified set of controls and risk mitigation techniques, including modeling and forecasting, hedging strategies and techniques that seek to balance our ability to profit from trading positions with our exposure to potential losses, our ability to control and mitigate risks that result in losses is inherently limited by our ability to identify all risks, including emerging and unknown risks, anticipate the timing of risks, apply effective hedging strategies, make correct assumptions, manage and aggregate data correctly and efficiently, and develop risk management models to assess and control risk.
Our ability to manage risk is dependent on our ability to consistently execute all elements of our risk management program and develop and maintain a culture of managing risk well throughout the Corporation and manage risks associated with third parties (including their downstream service providers), including providers of products and/or services, to enable effective risk management and ensure that risks are appropriately considered, evaluated and responded to in a timely manner. Uncertain economic conditions, heightened
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legislative and regulatory scrutiny of and change within the financial services industry, the pace of technological changes, accounting and market developments, the failure of employees to comply with our policies and Risk Framework and the overall complexity of our operations, among other developments, may result in a heightened level of risk for us. We have experienced increased operational, reputational and compliance risk as a result of the need to rapidly implement multiple and varying pandemic relief programs, such as PPP and the processing of unemployment benefits for California and certain other states, which have resulted and will continue to result in losses, in addition to the continued execution of our business continuity plans due to the pandemic. Our failure to manage evolving risks or properly anticipate, manage, control or mitigate risks could result in additional losses.
Regulatory, Compliance and Legal
We are subject to comprehensive government legislation and regulations and certain settlements, orders and agreements with government authorities from time to time.
We are subject to comprehensive regulation under federal and state laws in the U.S. and the laws of the various jurisdictions in which we operate, including increasing and complex economic sanctions regimes. These laws and regulations significantly affect and have the potential to restrict the scope of our existing businesses, limit our ability to pursue certain business opportunities, including the products and services we offer, reduce certain fees and rates or make our products and services more expensive for our clients. Additionally, we are required to file various financial and non-financial regulatory reports to comply with laws and rules in the jurisdictions in which we operate.
We continue to adjust our business and operations, legal entity structure and our policies, processes, procedures and controls, including with regard to capital and liquidity management, risk management and data management, to comply with currently effective laws and regulations, as well as final rulemaking, guidance and interpretation by regulatory authorities, including the Department of Treasury (including the Internal Revenue Service (IRS)), Federal Reserve, OCC, CFPB, Financial Stability Oversight Council, FDIC, Department of Labor, SEC and CFTC in the U.S. and foreign regulators and other government authorities. Further, we could become subject to future legislation and regulatory requirements beyond those currently proposed, adopted or contemplated in the U.S. or abroad, including policies and rulemaking related to the Financial Reform Act, the pandemic, emerging technologies and climate change. The cumulative effect of all of the legislation and regulations on our business, operations and profitability remains uncertain. This uncertainty necessitates that in our business planning we make certain assumptions with respect to the scope and requirements of prospective and proposed rules. If these assumptions prove incorrect, we could be subject to increased regulatory and compliance risks and costs as well as potential reputational harm. In addition, U.S. and international regulatory initiatives may overlap, and non-U.S. regulations and initiatives may be inconsistent or may conflict with current or proposed U.S. regulations, which could lead to compliance risks and increased costs.
Our regulators’ prudential and supervisory authority gives them broad power and discretion to direct our actions, and they have assumed an active oversight, inspection and investigatory role across the financial services industry. Regulatory focus is not limited to laws and regulations applicable to the financial services industry, but extends to other significant laws and
regulations that apply across industries and jurisdictions, including those related to data management and privacy, anti-money laundering, anti-corruption and economic sanctions.
We are also subject to laws, rules and regulations in the U.S. and abroad, including GDPR, CCPA and CPRA, and a number of additional jurisdictions enacting or considering similar laws, regarding compliance with our privacy policies and the disclosure, collection, use, sharing and safeguarding of personally identifiable information of certain parties, such as our employees, customers, suppliers, counterparties and other third parties, the violation of which could result in litigation, regulatory fines and enforcement actions. The complexity and risk of compliance has been magnified by the collection of employee health information in response to the pandemic. Additionally, we will likely be subject to new and evolving data privacy laws in the U.S. and abroad, which could result in additional costs of compliance, litigation, regulatory fines and enforcement actions. In particular, there is increased complexity and uncertainty, including potential suspension or prohibition, regarding the standards used by the Corporation for cross-border flows and transfers of personal data from the European Economic Area (EEA) to the U.S. and other jurisdictions outside of the EEA resulting from a decision of the Court of Justice of the EU and guidance from the European Data Protection Board. Additionally, the European Commission has published new standards of personal data transfer, and China and the U.K. have commenced consultation efforts to establish standards for personal data transfers. If cross-border personal data transfers are suspended or restricted or we are required to implement distinct processes for each jurisdiction’s standards, this could result in operational disruptions to our businesses, additional costs, increased enforcement activity, new contract negotiations with third parties, and/or modification of our cross-border data management.
As part of their enforcement authority, our regulators and other government authorities have the authority to, among other things, conduct investigations and assess significant civil or criminal monetary penalties or restitution and issue cease and desist orders and initiate injunctive actions. The amounts paid by us and other financial institutions to settle proceedings or investigations have, in some instances, been substantial and may increase. In some cases, governmental authorities have required criminal pleas or other extraordinary terms as part of such resolutions, which could have significant consequences, including reputational harm, loss of customers, restrictions on the ability to access capital markets, and the inability to operate certain businesses or offer certain products for a period of time.
The Corporation and the conduct of its employees and representatives, including conduct that could harm clients, customers, employees or the integrity of the markets, are subject to regulatory scrutiny across jurisdictions. The complexity of the federal and state regulatory and enforcement regimes in the U.S., coupled with the global scope of our operations and the regulatory environment worldwide, also means that a single event or practice or a series of related events or practices may give rise to a significant number of overlapping investigations and regulatory proceedings, either by multiple federal and state agencies in the U.S. or by multiple regulators and other governmental entities in different jurisdictions. Additionally, actions by other members of the financial services industry related to business activities in which we participate may result in investigations by regulators or other government authorities. Responding to inquiries, investigations, lawsuits and proceedings is time-consuming and expensive and can divert senior management attention from our business. The
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outcome of such proceedings, which may last a number of years, may be difficult to predict or estimate.
We are and may become subject to the terms of settlements, orders and agreements that we have entered into with government entities and regulatory authorities, which impose, or could impose, significant operational and compliance costs on us as they typically require us to enhance our procedures and controls, expand our risk and control functions within our lines of business, invest in technology and hire significant numbers of additional risk, control and compliance personnel. Moreover, if we fail to meet the requirements of the regulatory settlements, orders or agreements to which we are subject, or, more generally, fail to maintain risk and control procedures and processes that meet the heightened standards established by our regulators and other government authorities, we could be required to enter into further settlements, orders or agreements and pay additional fines, penalties or judgments, or accept material regulatory restrictions on our businesses.
While we believe that we have adopted appropriate risk management and compliance programs to identify, assess, monitor and report on employees conduct, applicable laws, policies and procedures, compliance risks will continue to exist, particularly as we adapt to new and evolving laws, rules and regulations. Additionally, changing U.S. fiscal, monetary and regulatory policies, and evolving priorities, may result in ongoing regulatory uncertainties. There is no guarantee that our risk management and compliance programs will be consistently executed to successfully manage compliance risk. We also rely upon third parties who may expose us to compliance and legal risk. Future legislative or regulatory actions, and any required changes to our business or operations, or those of third parties (including their downstream providers) upon whom we rely, resulting from such developments and actions could result in a significant loss of revenue, impose additional compliance and other costs or otherwise reduce our profitability, limit the products and services that we offer or our ability to pursue certain business opportunities, require us to dispose of or curtail certain businesses, affect the value of assets that we hold, require us to increase our prices and therefore reduce demand for our products, or otherwise adversely affect our businesses. In addition, investigations, legal and regulatory proceedings and other contingencies will arise from time to time that may result in fines, regulatory sanctions, penalties, equitable relief and changes to our business practices. As a result, we are and will continue to be subject to heightened compliance and operating costs that could adversely affect our results of operations.
We are subject to significant financial and reputational risks from potential liability arising from lawsuits and regulatory and government action.
We continue to face significant legal risks in our business, with a high volume of claims against us and other financial institutions. The amount of damages, penalties and fines that litigants and regulators seek from us and other financial institutions continues to be high. This includes disputes with consumers, customers and other counterparties.
Financial institutions, including us, continue to be the subject of claims alleging anti-competitive conduct with respect to various products and markets, including U.S. antitrust class actions claiming joint and several liability for treble damages. As disclosed in Note 12 — Commitments and Contingencies to the Consolidated Financial Statements, we also face contractual indemnification and loan-repurchase claims arising from alleged breaches of representations and warranties in the sale of
residential mortgages by legacy companies, which may result in a requirement that we repurchase the mortgage loans, or otherwise make whole or provide other remedies to counterparties.
In addition, regulatory authorities have had a supervisory focus on enforcement, including in connection with customer complaints, alleged violations of law and customer harm. For example, U.S. regulators and government agencies have pursued claims against financial institutions under the Financial Institutions Reform, Recovery, and Enforcement Act, the False Claims Act, fair lending laws and regulations (including the Equal Credit Opportunity Act and the Fair Housing Act), antitrust laws, and consumer protection laws and regulations, including prohibitions on unfair, deceptive, and/or abusive acts and practices under the Consumer Financial Protection Act and the Federal Trade Commission Act. Such claims may carry significant and, in certain cases, treble damages. There is also an increased focus on compliance with global laws, rules and regulations related to the collection, use, sharing and safeguarding of personally identifiable information and corporate data. Additionally, misconduct by the Corporation’s employees and representatives, including unethical, fraudulent, improper or illegal conduct, or other unfair, deceptive, abusive or discriminatory business practices, can result in litigation and/or government investigations and enforcement actions, and cause significant reputational harm. There is also increased scrutiny of climate change-related policies, goals and disclosure, which could result in litigation and regulatory investigations and actions.
The global environment of extensive investigations, regulation, regulatory compliance burdens, litigation and regulatory enforcement, combined with uncertainty related to the continually evolving regulatory environment, have affected and will likely continue to affect operational and compliance costs and risks, including the limitation or cessation of our ability or feasibility to continue providing certain products and services. Lawsuits and regulatory actions have resulted in and will likely continue to result in judgments, orders settlements, penalties and fines adverse to us. Further, the Corporation's participation in implementing government relief measures related to the pandemic and other federal and state government assistance programs, including the processing of unemployment benefits for California and certain other states, may lead to additional such judgments, orders, settlements, penalties and fines. Litigation and investigation costs, substantial legal liability or significant regulatory or government action against us could have material adverse effects on our business, financial condition, including liquidity, and results of operations, and/or cause significant reputational harm to us.
U.S. federal banking agencies may require us to increase our regulatory capital, total loss-absorbing capacity (TLAC), long-term debt or liquidity requirements.
We are subject to U.S. regulatory capital and liquidity rules. These rules, among other things, establish minimum requirements to qualify as a well-capitalized institution. If any of 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
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requiring us to cease and desist activities permitted under the Bank Holding Company Act of 1956.
Capital and liquidity requirements are frequently introduced and amended. It is possible that regulators may increase regulatory capital requirements including TLAC and long-term debt requirements, change how regulatory capital is calculated or increase liquidity requirements. Our ability to return capital to our shareholders depends in part on our ability to maintain regulatory capital levels above minimum requirements plus buffers. To the extent that increases occur in our SCB, G-SIB surcharge or countercyclical capital buffer, our returns of capital to shareholders could decrease. For example, our G-SIB surcharge is expected to increase by 50 basis points to 3.0 percent on January 1, 2024.
As part of its CCAR, the Federal Reserve conducts stress testing on parts of our business using hypothetical economic scenarios prepared by the Federal Reserve. Those scenarios may affect our CCAR stress test results, which may impact the level of our SCB requiring us to hold additional capital. Additionally, the Federal Reserve could reinstitute limitations or prohibitions on taking capital actions, such as paying or increasing dividends or repurchasing common stock as a result of the economic impact of the ongoing pandemic or otherwise impose such limitations in connection with other economic disruptions or events.
A significant component of regulatory capital ratios is calculating our RWA and our leverage exposure, which may increase. The Basel Committee on Banking Supervision has also revised several key methodologies for measuring RWA that have not yet been implemented in the U.S., including a standardized approach for operational risk, revised market risk requirements and constraints on the use of internal models, as well as a capital floor based on the revised standardized approaches. U.S. banking regulators may update the U.S. Basel 3 rules to incorporate the Basel Committee revisions. Banks have experienced an increase in balance sheets, increasing leverage exposures and causing leverage-based ratios to overtake risk-based capital ratios.
Changes to and compliance with the regulatory capital and liquidity requirements may impact our operations by requiring us to liquidate assets, increase borrowings, issue additional equity or other securities, cease or alter certain operations or hold highly liquid assets, which may adversely affect our results of operations.
Changes in accounting standards or assumptions in applying accounting policies could adversely affect us.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Some of these policies require use of estimates and assumptions that may affect the reported value of our assets or liabilities and results of operations and are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain. If those assumptions, estimates or judgments were misapplied, we could be required to correct and restate prior-period financial statements. Accounting standard-setters and those who interpret the accounting standards, including the SEC, banking regulators and our independent registered public accounting firm may also amend or even reverse their previous interpretations or positions on how various standards should be applied. These changes may be difficult to predict and could impact how we prepare and report our financial statements. In some cases, we could be required to apply a new or revised
standard retrospectively, resulting in us revising prior-period financial statements.
We may be adversely affected by changes in U.S. and non-U.S. tax laws and regulations.
It is possible that governmental authorities in the U.S. and/or other countries could further amend or repeal tax laws in a way that would materially adversely affect us, including the possibility that aspects of the 2017 Tax Cuts and Jobs Act could be amended in the future. Any future change in tax laws and regulations or interpretations of current or future tax laws and regulations could materially adversely affect our results of operations. Additionally, U.S. and foreign tax laws are complex and our judgments, interpretations or applications of such tax laws could differ from that of the relevant governmental authority. This could result in additional tax liabilities and interest, penalties, the reduction of certain tax benefits and/or the requirement to make adjustments to amounts recorded, which could be material.
In addition, we have U.K. net deferred tax assets (DTA) which consist primarily of net operating losses that are expected to be realized by certain subsidiaries over an extended number of years. Adverse developments with respect to tax laws or to other material factors, such as prolonged worsening of Europe’s capital markets or changes in the ability of our U.K. subsidiaries to conduct business in the EU, could lead our management to reassess and/or change its current conclusion that no valuation allowance is necessary with respect to our U.K. net DTA.
Reputation
Damage to our reputation could harm our businesses, including our competitive position and business prospects.
Our ability to attract and retain customers, clients, investors and employees is impacted by our reputation. Harm to our reputation can arise from various sources, including officer, director and/or employee activities, such as fraud, misconduct and unethical behavior (such as employees’ sales practices), security breaches, litigation or regulatory matters and their outcomes, compensation practices, lending practices, the suitability or reasonableness of recommending particular trading or investment strategies, including the reliability of our research and models and prohibiting clients from engaging in certain transactions.
Additionally, our reputation may be harmed by failing to deliver the products and standards of service and quality expected by our customers, clients and the community, the failure to recognize and address customer complaints, compliance failures, the inability to manage technology change or maintain effective data management, cyber incidents, prolonged or repeated system outages, internal and external fraud, inadequacy of responsiveness to internal controls, unintended disclosure of personal, proprietary or confidential information, conflicts of interest and breach of fiduciary obligations, the handling of health emergencies or pandemics, and the activities of our clients, customers, counterparties and third parties, including providers of products and/or services. For example, our reputation may be harmed in connection with our implementation of government programs to provide relief to address the economic impact of the pandemic and other federal and state government assistance programs, including the processing of unemployment benefits for California and certain other states, as well as how we handle employee matters related to the pandemic. Our reputation may also be negatively impacted by our ESG practices and disclosures, our businesses
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and our customers, including practices and disclosures related to climate change.
Actions by the financial services industry generally or by certain members or individuals in the industry also can adversely affect our reputation. Also, adverse publicity or negative information posted on social media by employees, the media or otherwise, 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, fair lending activity, UDAAP, electronic funds transfers, know-your-customer requirements, data protection, including the GDPR, CCPA and CPRA, cross-border data movement and other matters. Principles concerning the appropriate scope of consumer and commercial privacy vary considerably in different jurisdictions, and regulatory and public expectations regarding the definition and scope of consumer and commercial privacy may remain fluid. It is possible that these laws may be interpreted and applied by various jurisdictions in a manner inconsistent with our current or future practices, or that is inconsistent with one another. If personal, confidential or proprietary information of customers or clients in our possession, or in the possession of third parties (including their downstream service providers) or financial data aggregators, is mishandled, misused or mismanaged, or if we do not timely or adequately address such information, we may face regulatory, reputational and operational risks which could adversely affect our financial condition and results of operations.
We could suffer reputational harm if we fail to properly identify and manage potential conflicts of interest. Management of potential conflicts of interest has become increasingly complex as we expand our business activities through more numerous transactions, obligations and interests with and among our clients. The failure to adequately address, or the perceived failure to adequately address, conflicts of interest could affect the willingness of clients to use our products and services, or give rise to litigation or enforcement actions, which could adversely affect our business.
Our actual or perceived failure to address these and other issues, such as operational risks, gives rise to reputational risk that could harm us and our business prospects. Failure to appropriately address any of these issues could also give rise to additional regulatory restrictions, legal risks and reputational harm, which could, among other consequences, increase the size and number of litigation claims and damages asserted or subject us to enforcement actions, fines and penalties, and cause us to incur related costs and expenses.
Other
Reforms to and replacement of IBORs and certain other rates or indices may adversely affect our reputation, business, financial condition and results of operations.
There continues to be a major transition in progress in the global financial markets with respect to the replacement of IBORs, including the London Interbank Offered Rate (LIBOR), and certain other rates or indices that serve as “benchmarks.” Such benchmarks have been used extensively across the global financial markets and in our business. In particular, LIBOR has historically been used in many of our products and contracts, including derivatives, consumer and commercial loans, mortgages, floating-rate notes and other adjustable-rate products and financial instruments. The aggregate notional amount of these products and contracts referencing LIBOR or other IBORs remains material to our business. At the end of 2021, the global financial markets generally transitioned away
from the use of all LIBOR settings (except for certain U.S. dollar (USD) LIBOR settings). However, there continue to be risks and challenges associated with the transition from IBORs that may result in consequences that cannot be fully anticipated, which expose us to various financial, operational, supervisory, conduct and legal risks, which we continue to monitor closely.
Through a multi-year effort by the industry and regulators, ARRs have been identified and/or developed and are being used to replace LIBOR and other IBORs. However, market and client adoption of ARRs, may vary across or within categories of contracts, products and services, resulting in market fragmentation, decreased trading volumes and liquidity, increased complexity and modeling and operational risks. ARRs have compositions and characteristics that differ from the benchmarks they replace, in some cases have limited history, and may demonstrate less predictable performance over time than the benchmarks they replace. For example, certain ARRs are calculated on a compounded or weighted-average basis and, unlike IBORs, do not reflect bank credit risk and therefore typically require a spread adjustment. There are important differences between the fallbacks, triggers and calculation methodologies being implemented in cash and derivatives markets (including within cash markets). Any mismatch between the adoption of ARRs in loans, securities and derivatives markets may impact hedging or other financial arrangements we have implemented, and as a result we may experience unanticipated market exposures. Changes resulting from transition to successor or alternative rates may adversely affect the yield on loans or securities held by us, amounts paid on securities we have issued, amounts received and paid on derivatives we have entered into, the value of such loans, securities or derivative instruments, the trading market for such products and contracts, and our ability to effectively use hedging instruments to manage risk. There can be no assurance that existing assets and liabilities based on or linked to IBORs that have not already transitioned to ARRs will successfully transition.
Given the continuation of certain USD LIBOR settings until June 30, 2023, IBOR-based products and contracts (IBOR Products) linked to these LIBOR settings will still have to be transitioned by such time. Although a significant majority of the aggregate notional amount of our IBOR-based products maturing after 2021 include or have been updated to include fallbacks to ARRs, the transitioning of certain IBOR Products that do not include fallback provisions or adequate fallback mechanisms will require additional efforts to modify their terms. Some outstanding IBOR Products are particularly challenging to modify due to the requirement that all impacted parties consent to such modification. To address such challenges in IBOR Products, legislation has been adopted in various jurisdictions, including the EU, U.K. and New York State, and federal legislation is pending in the U.S. Congress. Litigation, disputes or other action may occur as a result of the interpretation or application of legislation, in particular, if there is an overlap between laws in different jurisdictions.
Some of our IBOR Products, in particular LIBOR-based products and contracts, may contain language giving the calculation agent (which may be us) discretion to determine the successor rate (including the ARR and/or the applicable spread adjustment) to the existing benchmark. We may face a risk of litigation, disputes or other actions from clients, counterparties, customers, investors or others based on various claims, for example that the Corporation incorrectly interpreted or enforced IBOR-based contract provisions, failed to appropriately communicate the effect that the transition to ARRs will have on
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existing and future products, treated affected parties unfairly or made inappropriate product recommendations to or investments on behalf of its clients, or engaged in anti-competitive behavior or unlawfully manipulated markets or benchmarks.
We have launched, and expect to continue to develop, launch and support, ARR-based products and services. There is no guarantee that liquidity in ARR-based products will develop, and it is possible that ARR-based products, including products using credit sensitive rates, will perform differently to IBOR Products during times of economic stress, adverse or volatile market conditions and across the credit and economic cycle, which may impact the value, return on and profitability of our ARR-based assets. New financial products linked to ARRs may have additional legal, financial, tax, operational, market, compliance, reputational, competitive or other risks to us, our clients and other market participants. In particular, banking regulators in the U.S. and globally have increased regulatory scrutiny and intensified supervisory focus of financial institution LIBOR transition plans, preparations and readiness, including the Corporation’s use of credit-sensitive rates like the Bloomberg Short-Term Bank Yield Index, which could result in a regulatory action, litigation and/or the need to change the products offered by our businesses.
Failure to meet industry-wide IBOR transition milestones and to cease issuance of IBOR Products by relevant cessation dates may, subject to certain regulatory exceptions, result in supervisory enforcement by applicable regulators, increase our cost of, and access to, capital and other consequences.
The market transition may also alter our risk profile and risk management strategies, including derivatives and hedging strategies, modeling and analytics, valuation tools, product design and systems, controls, procedures and operational infrastructure. This may prove challenging given the limited history of many of the proposed ARRs and may increase the costs and risks related to potential regulatory compliance, requirements or inquiries. Among other risks, various IBOR Products transition to ARRs at different times or in different manners, with the result that we may face significant unexpected interest rate, pricing or other exposures across business or product lines. Continuing reforms to market transition and other factors may adversely affect our business, including the ability to serve customers and maintain market share, financial condition or results of operations and could result in reputational harm to us.
We face significant and increasing competition in the financial services industry.
We operate in a highly competitive environment and experience intense competition from local and global financial institutions as well as new entrants, in both domestic and foreign markets, in which we compete on the basis of a number of factors, including customer service, quality and range of products and services offered, technology, price, fees, reputation, interest rates on loans and deposits, lending limits, customer convenience and experience and relationships in relevant markets. Additionally, the changing regulatory environment may create competitive disadvantages for us given geography-driven capital and liquidity requirements.
In addition, emerging technologies and advances and the growth of e-commerce have lowered geographic and monetary barriers of other financial institutions, made it easier for non-depository institutions to offer products and services that traditionally were banking products and allowed non-traditional
financial service providers and technology companies to
compete with traditional financial service companies in providing electronic and internet-based financial solutions and services, including electronic securities trading with low or no fees and commissions, marketplace lending, financial data aggregation and payment processing, including real-time payment platforms. Further, clients may choose to conduct business with other market participants who engage in business or offer products in areas we deem speculative or risky. Increased competition may negatively affect our earnings by creating pressure to lower prices, fees, commissions or credit standards on our products and services, requiring additional investment to improve the quality and delivery of our technology and/or reducing our market share, or affecting the willingness of our clients to do business with us.
Our inability to adapt our business strategies, products and services could harm our business.
Our business model is based on a diversified mix of businesses that provide a broad range of financial products and services, delivered through multiple distribution channels. Our success depends on our, and our third-party providers of products and services’ ability to adapt and develop our business strategies, products, services and technology to rapidly evolving industry standards and consumer preferences. In particular, the emergence of the pandemic has resulted in increased reliance on digital banking and other digital services provided by the Corporation’s businesses. There is increasing pressure by competitors to provide products and services on more attractive terms, including lower fees and higher interest rates on deposits, and offer lower cost investment strategies, which may impact our ability to grow revenue and/or effectively compete. Additionally, legislative and regulatory developments may affect the competitive landscape and impact the products and services that we can offer. Further, we may be impacted by the growth of non-depository institutions that offer traditional banking products at higher rates or with low or no fees, or otherwise offer alternative products. This can reduce our net interest margin and revenues from our fee-based products and services, either from a decrease in the volume of transactions or through a compression of spreads.
The widespread adoption and rapid evolution of new technologies, including analytic capabilities, self-service digital trading platforms, internet services, distributed ledgers, such as the blockchain system, cryptocurrencies, Central Bank Digital Currencies (CBDCs) and payment systems, could require substantial expenditures to modify or adapt our existing products and services as we grow and develop our online and mobile banking channel strategies in addition to remote connectivity solutions. As CBDC initiatives evolve and mature, our businesses and results of operations could be adversely impacted, including as a result of the introduction of new competitors to the payment ecosystem and increased volatility in deposits and/or significant long-term reduction in deposits (i.e., financial disintermediation). Also, we may not be as timely or successful in developing or introducing new products and services, integrating new products or services into our existing offerings, responding, managing or adapting to changes in consumer behavior, preferences, spending, investing and/or saving habits, achieving market acceptance of our products and services, reducing costs in response to pressures to deliver products and services at lower prices or sufficiently developing and maintaining loyal customers. The Corporation’s or its third-party providers of products and services’ inability or resistance to timely innovate or adapt its operations, products and services
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to evolving industry standards and consumer preferences could result in service disruptions and harm our business and adversely affect our results of operations and reputation.
We could suffer operational, reputational and financial harm if our models and strategies fail to properly anticipate and manage risk.
We use models and strategies extensively to forecast losses, project revenue, measure and assess capital and liquidity requirements for credit, market, operational and strategic risks, assist in capital planning and assess and control our operations and financial condition. Model Risk Management is a dedicated and independent risk function that defines model risk governance, policy and guidelines for the Corporation based on laws, rules and regulations, as well as internal requirements. Under our Enterprise Model Risk Policy, Model Risk Management is required to perform model oversight, including independent validation before initial use, ongoing monitoring reviews through outcomes analysis and benchmarking, and periodic revalidation. Models are subject to inherent limitations due to the use of simplifying assumptions, uncertainty regarding economic and financial outcomes, and emerging risks from the use of applications that rely on AI.
Our models and strategies may not be sufficiently predictive of future results due to limited historical patterns, extreme or unanticipated market movements or customer behavior and liquidity, especially during severe market downturns or stress events, which could limit their effectiveness and require timely recalibration. The models that we use to assess and control our market risk exposures also reflect assumptions about the degree of correlation among prices of various asset classes or other market indicators, which may not be representative of the next downturn and would magnify the limitations inherent in using historical data to manage risk. Our models may be adversely impacted as a result of human error and may not be effective if we fail to properly oversee and review them at regular intervals and detect their flaws during our review and monitoring processes, they contain erroneous data, assumptions, valuations, formulas or algorithms or our applications running the models do not perform as expected. Regardless of the steps we take to ensure effective controls, governance, monitoring and testing, and implement new technology and automated processes, we could suffer operational, reputational and financial harm if models and strategies fail to properly anticipate and manage current and evolving risks.
Failure to properly manage data may result in our inability to manage risk and business needs, errors in our day-to-day operations, critical reporting and strategic decision-making, inaccurate reporting and non-compliance with laws, rules and regulations.
Our ability to obtain, create, report and maintain information, including the data associated with it, during our normal course of business is a foundational component of our business and of managing relationships with customers. Additionally, we rely on our ability to manage data in an accurate, timely and complete manner, including the capture, transport, aggregation, validation, processing, quality, interpretation, protection, maintenance, retention, external transmission and use. Our policies, programs, processes and practices govern how data risk is managed globally. While we continuously update our policies, programs, processes and practices and implement emerging technologies, such as automation, AI and robotics, our data management processes may not be effective and are subject to weaknesses and failures, including human error, data limitations, process delays, system failure or failed controls.
Failure to properly manage data effectively in an accurate, timely and complete manner may impact its quality and reliability and our ability to manage current and emerging risk, produce accurate financial, regulatory and operational reporting, detect or surveil potential misconduct or non-compliance with laws, rules and regulations, as well as to manage changing business needs, strategic decision-making and day-to-day operations. The failure to establish and maintain effective, efficient and controlled data management could adversely impact our ability to develop our products and relationships with our customers, increase regulatory risk and operational losses, and damage our reputation.
Our operations, businesses and customers could be materially adversely affected by the impacts related to climate change.
There is an increasing concern over the risks of climate change and related environmental sustainability matters, which present short-term and an increasing amount of long-term risks to us. The physical risks of climate change include rising average global temperatures, rising sea levels and an increase in the frequency and severity of extreme weather events and natural disasters, including floods, wildfires, hurricanes and tornados. Such disasters could disrupt our operations or the operations of customers or third parties on which we rely. Such disasters could result in market volatility or negatively impact our customers’ ability to repay outstanding loans, result in rapid deposit outflows, cause supply chain and/or distribution network disruptions, damage collateral or result in the deterioration of the value of collateral or insurance shortfalls.
Additionally, climate change concerns could result in transition risk. Changes in consumer preferences or technology and additional legislation, regulatory and legal requirements, including those associated with the transition to a low-carbon economy, could restrict the scope of our existing businesses, limit our ability to pursue certain business activities and offer certain products and services, amplify credit and market risks, negatively impact asset values, increase expenses, including as a result of strategic planning and technology and market changes, and/or otherwise adversely impact us, our businesses or our customers. Our response to climate change, our climate change strategies, policies, goals, commitments and disclosure, and/or our ability to achieve our climate-related goals and commitments (which are subject to risks and uncertainties, many of which are outside of our control) could result in reputational harm as a result of negative public sentiment, regulatory scrutiny, litigation and reduced investor and stakeholder confidence.
Our ability to attract and retain qualified employees is critical to our success, business prospects and competitive position.
Our performance and competitive position 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 global institutions and institutions subject to different compensation and hiring regulations than those imposed on U.S. institutions and financial institutions. Also, our ability to attract and retain employees could be impacted by the pandemic, including changing workforce concerns, expectations, practices and preferences (including remote work), and increasing labor shortages and competition for labor, which could increase labor costs.
In order to attract and retain qualified personnel, we must provide market-level compensation. As a large financial and banking institution, we are and may become subject to
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additional limitations on compensation practices, which may or may not affect our competitors, by the Federal Reserve, the OCC, the FDIC and other regulators around the world. EU and U.K. rules limit and subject to clawback certain forms of variable compensation for senior employees. Furthermore, a substantial portion of our annual incentive compensation paid to our senior
employees, as well as certain periodic awards to both senior and broad-based groups of employees, consist of long-term equity-based awards, the value of which is based on the price of our common stock when the awards vest. Our business prospects and competitive position could be adversely affected if we cannot attract and retain qualified individuals.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
As of December 31, 2021, certain principal offices and other materially important properties consisted of the following:
| Facility Name | Location | General Character of the Physical Property | Primary Business Segment | Property Status |
Property Square Feet (1)
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| Bank of America Corporate Center | Charlotte, NC | 60 Story Building | Principal Executive Offices | Owned | 1,212,177 | |||||||||||||||||||||||||||
| Bank of America Tower at One Bryant Park | New York, NY | 55 Story Building |
GWIM, Global Banking and
Global Markets
|
Leased (2)
|
1,836,575 | |||||||||||||||||||||||||||
| Bank of America Financial Centre | London, UK | 4 Building Campus |
Global Banking and Global Markets
|
Leased | 566,920 | |||||||||||||||||||||||||||
| 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 71.8 million square feet in over 20,000 facilities and ATM locations globally, including approximately 66.8 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 approximately 35 countries.
We believe our owned and leased properties are adequate for our business needs and are well maintained. We continue to evaluate our owned and leased real estate and may determine from time to time that certain of our premises and facilities, or ownership structures, are no longer necessary for our
operations. In connection therewith, we regularly evaluate the sale or sale/leaseback of certain properties, and we may incur costs in connection with any such transactions.
Item 3. Legal Proceedings
See Litigation and Regulatory Matters in Note 12 – Commitments and Contingencies to the Consolidated Financial Statements, which is incorporated herein by reference.
Item 4. Mine Safety Disclosures
None
Part II
Bank of America Corporation and Subsidiaries
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The principal market on which our common stock is traded is the New York Stock Exchange under the symbol “BAC.” As of February 18, 2022, there were 148,551 registered shareholders of common stock.
The table below presents share repurchase activity for the three months ended December 31, 2021. The primary source of funds for cash distributions by the Corporation to its shareholders is dividends received from its bank subsidiaries.
Each of the bank subsidiaries is subject to various regulatory policies and requirements relating to the payment of dividends, including requirements to maintain capital above regulatory minimums. All of the Corporation’s preferred stock outstanding has preference over the Corporation’s common stock with respect to payment of dividends.
| (Dollars in millions, except per share information; shares in thousands) |
Total Common Shares Purchased (1,2)
|
Weighted-Average Per Share Price |
Total Shares
Purchased as
Part of Publicly
Announced Programs (2)
|
Remaining Buyback
Authority Amounts (3)
|
|||||||||||||||||||
| October 1 - 31, 2021 | 61,395 | $ | 45.53 | 61,390 | $ | 23,850 | |||||||||||||||||
| November 1 - 30, 2021 | 71,187 | 47.27 | 71,186 | 20,624 | |||||||||||||||||||
| December 1 - 31, 2021 | 30,895 | 44.45 | 30,894 | 19,311 | |||||||||||||||||||
| Three months ended December 31, 2021 | 163,477 | 46.08 | 163,470 | ||||||||||||||||||||
(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 and for potential re-issuance to certain employees under equity incentive plans.
(2)On October 20, 2021, the Corporation announced its Board of Directors (Board) authorized the repurchase of up to $25 billion of common stock over time (October Authorization). The Board also authorized repurchases to offset shares awarded under equity-based compensation plans. This October Authorization replaced the April 15, 2021 authorization for repurchases of up to $25 billion of common stock (April Authorization, and together with the October Authorization, the Board Authorizations). During the three months ended December 31, 2021, pursuant to the Board Authorizations, the Corporation repurchased approximately 163 million shares, or $7.5 billion, of its common stock, including to offset shares awarded under equity-based compensation plans. For more information, see Capital Management - CCAR and Capital Planning in the MD&A on page 49 and Note 13 – Shareholders’ Equity to the Consolidated Financial Statements.
(3)Remaining Buyback Authority Amounts represents the remaining buyback authority of the October Authorization. At the time the April Authorization was replaced with the October Authorization, the Corporation had $9.4 billion of remaining buyback authority available under the April Authorization. Such remaining buyback authority was canceled in the October Authorization. Excludes repurchases to offset shares awarded under equity-based compensation plans.
The Corporation did not have any unregistered sales of equity securities during the three months ended December 31, 2021.
Bank of America 24
|
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Item 6. [Reserved]
Item 7. Bank of America Corporation and Subsidiaries | ||||||||||||||
| Management's Discussion and Analysis of Financial Condition and Results of Operations | ||||||||||||||
| Table of Contents | ||||||||||||||
| Page | ||||||||
| Loan and Lease Contractual Maturities | ||||||||
25 Bank of America
|
||||||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Bank of America Corporation (the “Corporation”) and its management may make certain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often use words such as “anticipates,” “targets,” “expects,” “hopes,” “estimates,” “intends,” “plans,” “goals,” “believes,” “continue” and other similar expressions or future or conditional verbs such as “will,” “may,” “might,” “should,” “would” and “could.” Forward-looking statements represent the Corporation’s current expectations, plans or forecasts of its future results, revenues, provision for credit losses, expenses, efficiency ratio, capital measures, strategy and future business and economic conditions more generally, and other future matters. These statements are not guarantees of future results or performance and involve certain known and unknown risks, uncertainties and assumptions that are difficult to predict and are often beyond the Corporation’s control. Actual outcomes and results may differ materially from those expressed in, or implied by, any of these forward-looking statements.
You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties more fully discussed under Item 1A. Risk Factors of this Annual Report on Form 10-K: and in any of the Corporation’s subsequent Securities and Exchange Commission Filings: the Corporation’s potential judgments, orders, settlements, penalties, fines and reputational damage resulting from pending or future litigation and regulatory investigations, proceedings and enforcement actions, including as a result of our participation in and execution of government programs related to the Coronavirus Disease 2019 (COVID-19) pandemic, such as the processing of unemployment benefits for California and certain other states; the possibility that the Corporation’s future liabilities may be in excess of its recorded liability and estimated range of possible loss for litigation, and regulatory and government actions; the possibility that the Corporation could face increased claims from one or more parties involved in mortgage securitizations; the Corporation’s ability to resolve representations and warranties repurchase and related claims; the risks related to the discontinuation of the London Interbank Offered Rate and other reference rates, including increased expenses and litigation and the effectiveness of hedging strategies; uncertainties about the financial stability and growth rates of non-U.S. jurisdictions, the risk that those jurisdictions may face difficulties servicing their sovereign debt, and related stresses on financial markets, currencies and trade, and the Corporation’s exposures to such risks, including direct, indirect and operational; the impact of U.S. and global interest rates, inflation, currency exchange rates, economic conditions, trade policies and tensions, including tariffs, and potential geopolitical instability; the impact of the interest rate and inflationary environment on the Corporation’s business, financial condition and results of operations; the possibility that future credit losses may be higher than currently expected due to changes in economic assumptions, customer behavior, adverse developments with respect to U.S. or global economic conditions and other uncertainties, including the impact of supply chain disruptions, inflationary pressures and labor shortages on the economic recovery and our business; the Corporation's concentration of credit risk; the Corporation’s ability to achieve its expense targets and expectations regarding revenue, net interest income, provision for credit losses, net charge-offs, effective tax
rate, loan growth or other projections; adverse changes to the Corporation’s credit ratings from the major credit rating agencies; an inability to access capital markets or maintain deposits or borrowing costs; estimates of the fair value and other accounting values, subject to impairment assessments, of certain of the Corporation’s assets and liabilities; the estimated or actual impact of changes in accounting standards or assumptions in applying those standards; uncertainty regarding the content, timing and impact of regulatory capital and liquidity requirements; the impact of adverse changes to total loss-absorbing capacity requirements, stress capital buffer requirements and/or global systemically important bank surcharges; the potential impact of actions of the Board of Governors of the Federal Reserve System on the Corporation’s capital plans; the effect of changes in or interpretations of income tax laws and regulations; the impact of implementation and compliance with U.S. and international laws, regulations and regulatory interpretations, including, but not limited to, recovery and resolution planning requirements, Federal Deposit Insurance Corporation assessments, the Volcker Rule, fiduciary standards, derivatives regulations and the Coronavirus Aid, Relief, and Economic Security Act and any similar or related rules and regulations; a failure or disruption in or breach of the Corporation’s operational or security systems or infrastructure, or those of third parties, including as a result of cyberattacks or campaigns; the transition and physical impacts of climate change; our ability to achieve environmental, social and governance goals and commitments or the impact of any changes in the Corporation’s sustainability strategy or commitments generally; the impact of any future federal government shutdown and uncertainty regarding the federal government’s debt limit or changes in fiscal, monetary or regulatory policy; the emergence of widespread health emergencies or pandemics, including the magnitude and duration of the COVID-19 pandemic and its impact on the U.S. and/or global, financial market conditions and our business, results of operations, financial condition and prospects; the impact of natural disasters, extreme weather events, military conflict, terrorism or other geopolitical events; and other matters.
Forward-looking statements speak only as of the date they are made, and the Corporation undertakes no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.
Notes to the Consolidated Financial Statements referred to in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) are incorporated by reference into the MD&A. Certain prior-year amounts have been reclassified to conform to current-year presentation. Throughout the MD&A, the Corporation uses certain acronyms and abbreviations which are defined in the Glossary.
Executive Summary
Business Overview
The Corporation is a Delaware corporation, a bank holding company (BHC) and a financial holding company. When used in this report, “the Corporation,” “we,” “us” and “our” may refer to Bank of America Corporation individually, Bank of America Corporation and its subsidiaries, or certain of Bank of America Corporation’s subsidiaries or affiliates. Our principal executive offices are located in Charlotte, North Carolina. Through our various bank and nonbank subsidiaries throughout the U.S. and in international markets, we provide a diversified range of
Bank of America 26
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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, 2021, the Corporation had $3.2 trillion in assets and a headcount of approximately 208,000 employees.
As of December 31, 2021, we served clients through operations across the U.S., its territories and approximately 35 countries. Our retail banking footprint covers all major markets in the U.S., and we serve approximately 67 million consumer and small business clients with approximately 4,200 retail financial centers, approximately 16,000 ATMs, and leading digital banking platforms (www.bankofamerica.com) with approximately 41 million active users, including approximately 33 million active mobile users. We offer industry-leading support to approximately three million small business households. Our GWIM businesses, with client balances of $3.8 trillion, provide tailored solutions to meet client needs through a full set of investment management, brokerage, banking, trust and retirement products. We are a global leader in corporate and investment banking and trading across a broad range of asset classes serving corporations, governments, institutions and individuals around the world.
Recent Developments
Capital Management
On February 2, 2022, the Corporation announced that the Board of Directors declared a quarterly cash common stock dividend of $0.21 per share, payable on March 25, 2022 to shareholders of record as of March 4, 2022.
For more information on our capital resources and regulatory developments, see Capital Management on page 49.
COVID-19 Pandemic
The Coronavirus Disease 2019 (COVID-19) pandemic (the pandemic) has impacted the Corporation and may continue to do so, as uncertainty remains about the duration of the pandemic and the timing and strength of the global economic recovery. As the pandemic continues to evolve, we regularly evaluate protocols and processes in place to execute our business continuity plans. In conjunction with our efforts to support clients affected by the pandemic, we have cumulatively originated $35.4 billion in loans under the Paycheck Protection Program (PPP) with amounts outstanding of $4.7 billion and $22.7 billion at December 31, 2021 and 2020. For more information on PPP loans, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
The future direct and indirect impact of the pandemic on our businesses, results of operations and financial condition remains uncertain. Should current economic conditions deteriorate or if the pandemic worsens due to various factors,
including through the spread of more easily communicable variants of COVID-19, such conditions could have an adverse effect on our businesses and results of operations and could adversely affect our financial condition.
For more information on how the risks related to the pandemic adversely affect our businesses, results of operations and financial condition, see Part 1. Item 1A. Risk Factors on page 8.
LIBOR and Other Benchmark Rates
Subject to the continued publication of certain non-representative London Interbank Offered Rate (LIBOR) benchmark settings based on a modified calculation (i.e., on a “synthetic” basis), British Pound Sterling, Euro, Swiss Franc and Japanese Yen LIBOR settings and one-week and two-month U.S. dollar (USD) LIBOR settings ceased or became no longer representative of the underlying market the rates seek to measure (i.e., non-representative) immediately after December 31, 2021, and the remaining USD LIBOR settings (i.e., overnight, one month, three month, six month and 12 month) will cease or become non-representative immediately after June 30, 2023. Separately, the Federal Reserve, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) issued supervisory guidance encouraging banks to cease entering into new contracts that use USD LIBOR as a reference rate by December 31, 2021 subject to certain regulatory-approved exceptions (USD LIBOR Guidance).
As a result, a major transition has been and continues to be in progress in the global financial markets with respect to the replacement of Interbank Offered Rates (IBORs). This is a complex process impacting a variety of our businesses and operations. IBORs have historically been used in many of the Corporation’s products and contracts, including derivatives, consumer and commercial loans, mortgages, floating-rate notes and other adjustable-rate products and financial instruments. In response, the Corporation established an enterprise-wide IBOR transition program, with active involvement of senior management and regular reports to the Management Risk Committee (MRC) and Enterprise Risk Committee (ERC). The program continues to drive the Corporation's industry and regulatory engagement, client and financial contract changes, internal and external communications, technology and operations modifications, including updates to its operational models, systems and processes, introduction of new products, migration of existing clients, and program strategy and governance.
As of December 31, 2021, the Corporation has transitioned or otherwise addressed IBOR-based products and contracts referencing the rates that ceased or became non-representative after December 31, 2021, including LIBOR-linked commercial loans, LIBOR-based adjustable-rate consumer mortgages, LIBOR-linked derivatives and interdealer trading of certain USD LIBOR and other interest rate swaps, and related hedging
27 Bank of America
|
||||||||
arrangements. Additionally, in accordance with the USD LIBOR Guidance, the Corporation has ceased entering into new contracts that use USD LIBOR as a reference rate, subject to certain regulatory-approved exceptions.
The Corporation launched capabilities and services to support the issuance and trading in products indexed to various alternative reference rates (ARRs) and developed employee training programs as well as other internal and external sources of information on the various challenges and opportunities that the replacement of IBORs has presented and continues to present. The Corporation continues to monitor a variety of market scenarios as part of its transition efforts, including risks associated with insufficient preparation by individual market participants or the overall market ecosystem, ability of market participants to meet regulatory and industry-wide recommended milestones and access and demand by clients and market participants to liquidity in certain products, including LIBOR products.
With respect to the transition of LIBOR products referencing USD LIBOR settings ceasing or becoming non-representative as of June 30, 2023, a significant majority of the Corporation’s notional contractual exposure to such LIBOR currencies, of which the significant majority is derivatives contracts, have been remediated (i.e., updated to include fallback provisions to ARRs based on market driven protocols, regulatory guidance and industry-recommended fallback provisions and related mechanisms) and the Corporation is continuing to remediate the remaining USD LIBOR exposure. The remaining exposure, a majority of which is made up of derivatives and commercial loans and which represents a small minority of outstanding USD LIBOR notional contractual exposure of the Corporation, will require active dialogue with clients to modify the contracts. For any residual exposures after June 2023 that continue to have no fallback provisions, the Corporation is assessing and planning to leverage relevant contractual and statutory solutions, including relevant state legislation and any future federal legislation, to transition such exposure to ARRs.
The Corporation has implemented regulatory, tax and accounting changes and continues to monitor current and potential impacts of the transition, including Internal Revenue Service tax regulations and guidance and Financial Accounting Standards Board guidance. In addition, the Corporation has engaged impacted clients in connection with the transition by providing ARRs education and the timing of transition events. The Corporation is also working actively with global regulators, industry working groups and trade associations. For more information on the expected replacement of LIBOR and other benchmark rates, see Item 1A. Risk Factors – Other on page 21.
Changes to Overdraft Services
In January 2022, the Corporation announced changes to its overdraft services for consumer and small business clients, which include eliminating non-sufficient funds (NSF) fees beginning in February 2022 and reducing overdraft fees from $35 to $10 beginning in May 2022. Fees from overdraft services were approximately $1 billion in 2021 and recorded in Consumer Banking as service charges in the Consolidated Statement of Income. Due to the policy changes, in 2022 the Corporation expects a significant reduction in NSF and overdraft fees.
Financial Highlights
| Table 1 | Summary Income Statement and Selected Financial Data | |||||||||||||
| (Dollars in millions, except per share information) | 2021 | 2020 | ||||||||||||
| Income statement | ||||||||||||||
| Net interest income | $ | 42,934 | $ | 43,360 | ||||||||||
| Noninterest income | 46,179 | 42,168 | ||||||||||||
| Total revenue, net of interest expense | 89,113 | 85,528 | ||||||||||||
| Provision for credit losses | (4,594) | 11,320 | ||||||||||||
| Noninterest expense | 59,731 | 55,213 | ||||||||||||
| Income before income taxes | 33,976 | 18,995 | ||||||||||||
| Income tax expense | 1,998 | 1,101 | ||||||||||||
| Net income | 31,978 | 17,894 | ||||||||||||
| Preferred stock dividends | 1,421 | 1,421 | ||||||||||||
Net income applicable to common shareholders |
$ | 30,557 | $ | 16,473 | ||||||||||
| Per common share information | ||||||||||||||
| Earnings | $ | 3.60 | $ | 1.88 | ||||||||||
| Diluted earnings | 3.57 | 1.87 | ||||||||||||
| Dividends paid | 0.78 | 0.72 | ||||||||||||
| Performance ratios | ||||||||||||||
Return on average assets (1)
|
1.05 | % | 0.67 | % | ||||||||||
Return on average common shareholders’ equity (1)
|
12.23 | 6.76 | ||||||||||||
Return on average tangible common shareholders’ equity (2)
|
17.02 | 9.48 | ||||||||||||
Efficiency ratio (1)
|
67.03 | 64.55 | ||||||||||||
| Balance sheet at year end | ||||||||||||||
| Total loans and leases | $ | 979,124 | $ | 927,861 | ||||||||||
| Total assets | 3,169,495 | 2,819,627 | ||||||||||||
| Total deposits | 2,064,446 | 1,795,480 | ||||||||||||
| Total liabilities | 2,899,429 | 2,546,703 | ||||||||||||
| Total common shareholders’ equity | 245,358 | 248,414 | ||||||||||||
| Total shareholders’ equity | 270,066 | 272,924 | ||||||||||||
(1)For definitions, see Key Metrics on page 169.
(2)Return on average tangible common shareholders’ equity is a non-GAAP financial measure. For more information and a corresponding reconciliation to the most closely related financial measures defined by accounting principles generally accepted in the United States of America (GAAP), see Non-GAAP Reconciliations on page 85.
Net income was $32.0 billion or $3.57 per diluted share in 2021 compared to $17.9 billion or $1.87 per diluted share in 2020. The increase in net income was due to improvement in the provision for credit losses and higher revenue, partially offset by higher noninterest expense.
For discussion and analysis of our consolidated and business segment results of operations for 2020 compared to 2019, see the Financial Highlights and Business Segment Operations sections in the MD&A of the Corporation's 2020 Annual Report on Form 10-K.
Net Interest Income
Net interest income decreased $426 million to $42.9 billion in 2021 compared to 2020. Net interest yield on a fully taxable-equivalent (FTE) basis decreased 24 basis points (bps) to 1.66 percent for 2021. The decrease in net interest income was primarily driven by lower interest rates and average loan balances, partially offset by higher average balances of debt securities. For more information on net interest yield and the FTE basis, see Supplemental Financial Data on page 31, and for more information on interest rate risk management, see Interest Rate Risk Management for the Banking Book on page 79.
Bank of America 28
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Noninterest Income
| Table 2 | Noninterest Income | |||||||||||||
| (Dollars in millions) | 2021 | 2020 | ||||||||||||
| Fees and commissions: | ||||||||||||||
| Card income | $ | 6,218 | $ | 5,656 | ||||||||||
| Service charges | 7,504 | 7,141 | ||||||||||||
| Investment and brokerage services | 16,690 | 14,574 | ||||||||||||
| Investment banking fees | 8,887 | 7,180 | ||||||||||||
| Total fees and commissions | 39,299 | 34,551 | ||||||||||||
| Market making and similar activities | 8,691 | 8,355 | ||||||||||||
| Other income | (1,811) | (738) | ||||||||||||
| Total noninterest income | $ | 46,179 | $ | 42,168 | ||||||||||
Noninterest income increased $4.0 billion to $46.2 billion in 2021 compared to 2020. The following highlights the significant changes.
● Card income increased $562 million primarily driven by increased client activity and merchant services revenue.
● Service charges increased $363 million primarily due to higher treasury and credit service charges and increased client activity.
● Investment and brokerage services increased $2.1 billion primarily driven by higher market valuations and assets under management (AUM) flows, partially offset by declines in AUM pricing.
● Investment banking fees increased $1.7 billion primarily due to higher advisory fees as well as higher debt and equity issuance fees.
● Market making and similar activities increased $336 million primarily driven by strong sales and trading performance in Equities, partially offset by a weaker performance in Fixed Income, Currencies and Commodities (FICC), which benefited from a more favorable market environment in 2020.
● Other income decreased $1.1 billion primarily due to a $704 million gain on sales of certain mortgage loans in the prior year, as well as higher partnership losses on tax credit investments.
Provision for Credit Losses
The provision for credit losses improved $15.9 billion to a benefit of $4.6 billion in 2021 compared to 2020. The benefit was primarily due to improvements in the macroeconomic outlook and credit quality. For more information on the provision for credit losses, see Allowance for Credit Losses on page 73.
Noninterest Expense
| Table 3 | Noninterest Expense | |||||||||||||
| (Dollars in millions) | 2021 | 2020 | ||||||||||||
| Compensation and benefits | $ | 36,140 | $ | 32,725 | ||||||||||
| Occupancy and equipment | 7,138 | 7,141 | ||||||||||||
| Information processing and communications | 5,769 | 5,222 | ||||||||||||
| Product delivery and transaction related | 3,881 | 3,433 | ||||||||||||
| Marketing | 1,939 | 1,701 | ||||||||||||
| Professional fees | 1,775 | 1,694 | ||||||||||||
| Other general operating | 3,089 | 3,297 | ||||||||||||
| Total noninterest expense | $ | 59,731 | $ | 55,213 | ||||||||||
Noninterest expense increased $4.5 billion to $59.7 billion in 2021 compared to 2020. The increase was primarily due to higher compensation and benefits expense, higher costs associated with processing transactional card claims related to state unemployment benefits, a contribution to the Bank of America Foundation and an impairment charge for real estate rationalization.
Income Tax Expense
| Table 4 | Income Tax Expense | |||||||||||||
| (Dollars in millions) | 2021 | 2020 | ||||||||||||
| Income before income taxes | $ | 33,976 | $ | 18,995 | ||||||||||
| Income tax expense | 1,998 | 1,101 | ||||||||||||
| Effective tax rate | 5.9 | % | 5.8 | % | ||||||||||
Income tax expense was $2.0 billion for 2021 compared to $1.1 billion in 2020, resulting in an effective tax rate of 5.9 percent compared to 5.8 percent.
The effective tax rates for 2021 and 2020 were driven by the impact of our recurring tax preference benefits and positive income tax adjustments from the impact of U.K. tax law changes discussed below. Our recurring tax preference benefits primarily consist of tax credits from environmental, social and governance (ESG) investments in affordable housing and renewable energy, aligning with our responsible growth strategy to address global sustainability challenges. Absent these tax credits, the impact of the U.K. tax law changes and other discrete items, the effective tax rates would have been approximately 25 percent and 26 percent for 2021 and 2020.
In June 2021, the U.K. enacted the 2021 Finance Act, which included an increase in the U.K. corporation income tax rate to 25 percent from 19 percent. This change is effective April 1, 2023 and unfavorably affects income tax expense on future U.K. earnings. In addition, in July 2020, the U.K. enacted a repeal of the final two percent of scheduled decreases in the U.K. corporation income tax rate. As a result, in 2021 and 2020, the Corporation recorded write-ups of U.K. net deferred tax assets of approximately $2.0 billion and $700 million, with corresponding positive income tax adjustments. These write-ups were reversals of previously recorded write-downs of net deferred tax assets for prior changes in the U.K. corporation income tax rate.
29 Bank of America
|
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Balance Sheet Overview
| Table 5 | Selected Balance Sheet Data | |||||||||||||||||||||||||
| December 31 | ||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | $ Change | % Change | ||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||
Cash and cash equivalents |
$ | 348,221 | $ | 380,463 | $ | (32,242) | (8) | % | ||||||||||||||||||
Federal funds sold and securities borrowed or purchased under agreements to resell |
250,720 | 304,058 | (53,338) | (18) | ||||||||||||||||||||||
| Trading account assets | 247,080 | 198,854 | 48,226 | 24 | ||||||||||||||||||||||
| Debt securities | 982,627 | 684,850 | 297,777 | 43 | ||||||||||||||||||||||
| Loans and leases | 979,124 | 927,861 | 51,263 | 6 | ||||||||||||||||||||||
| Allowance for loan and lease losses | (12,387) | (18,802) | 6,415 | (34) | ||||||||||||||||||||||
| All other assets | 374,110 | 342,343 | 31,767 | 9 | ||||||||||||||||||||||
| Total assets | $ | 3,169,495 | $ | 2,819,627 | $ | 349,868 | 12 | |||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||
| Deposits | $ | 2,064,446 | $ | 1,795,480 | $ | 268,966 | 15 | |||||||||||||||||||
Federal funds purchased and securities loaned or sold under agreements to repurchase |
192,329 | 170,323 | 22,006 | 13 | ||||||||||||||||||||||
| Trading account liabilities | 100,690 | 71,320 | 29,370 | 41 | ||||||||||||||||||||||
| Short-term borrowings | 23,753 | 19,321 | 4,432 | 23 | ||||||||||||||||||||||
| Long-term debt | 280,117 | 262,934 | 17,183 | 7 | ||||||||||||||||||||||
| All other liabilities | 238,094 | 227,325 | 10,769 | 5 | ||||||||||||||||||||||
| Total liabilities | 2,899,429 | 2,546,703 | 352,726 | 14 | ||||||||||||||||||||||
| Shareholders’ equity | 270,066 | 272,924 | (2,858) | (1) | ||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 3,169,495 | $ | 2,819,627 | $ | 349,868 | 12 | |||||||||||||||||||
Assets
At December 31, 2021, total assets were approximately $3.2 trillion, up $349.9 billion from December 31, 2020. The increase in assets was primarily due to higher debt securities that were primarily funded by deposit growth, an increase in loans and leases and higher trading account assets, partially offset by lower federal funds sold and securities borrowed or purchased under agreements to resell and cash and cash equivalents.
Cash and Cash Equivalents
Cash and cash equivalents decreased $32.2 billion primarily driven by higher investments in debt securities.
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 decreased $53.3 billion primarily due to the investment of excess cash into debt securities.
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 $48.2 billion primarily due to an increase in inventory within Global Markets.
Debt Securities
Debt securities primarily include U.S. Treasury and agency securities, mortgage-backed securities (MBS), principally agency MBS, non-U.S. bonds, corporate bonds and municipal debt. We use the debt securities portfolio primarily to manage interest rate and liquidity risk and to leverage market conditions that create economically attractive returns on these investments. Debt securities increased $297.8 billion primarily driven by the deployment of deposit inflows. For more information on debt
securities, see Note 4 – Securities to the Consolidated Financial Statements.
Loans and Leases
Loans and leases increased $51.3 billion primarily driven by growth in commercial loans and higher securities-based lending within consumer loans. For more information on the loan portfolio, see Credit Risk Management on page 59.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses decreased $6.4 billion primarily due to improvements in the macroeconomic outlook and credit quality. For more information, see Allowance for Credit Losses on page 73.
All Other Assets
All other assets increased $31.8 billion primarily driven by higher margin loans and loans held-for-sale (LHFS).
Liabilities
At December 31, 2021, total liabilities were approximately $2.9 trillion, up $352.7 billion from December 31, 2020, primarily due to deposit growth.
Deposits
Deposits increased $269.0 billion primarily due to an increase in retail and wholesale deposits.
Federal Funds Purchased and Securities Loaned or Sold Under Agreements to Repurchase
Federal funds transactions involve borrowing reserve balances on a short-term basis. Securities loaned or sold under agreements to repurchase are collateralized borrowing transactions utilized to accommodate customer transactions, earn interest rate spreads and finance assets on the balance sheet. Federal funds purchased and securities loaned or sold under agreements to repurchase increased $22.0 billion primarily driven by client activity within Global Markets.
Trading Account Liabilities
Trading account liabilities consist primarily of short positions in equity and fixed-income securities including U.S. Treasury and agency securities, corporate securities and non-U.S. sovereign
Bank of America 30
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debt. Trading account liabilities increased $29.4 billion primarily due to higher levels of short positions within Global Markets.
Short-term Borrowings
Short-term borrowings provide an additional funding source and primarily consist of Federal Home Loan Bank (FHLB) short-term borrowings, notes payable and various other borrowings that generally have maturities of one year or less. Short-term borrowings increased $4.4 billion primarily due to an increase in short-term commercial paper issuances to manage liquidity needs. For more information on short-term borrowings, see Note 10 – Securities Financing Agreements, Short-term Borrowings and Restricted Cash to the Consolidated Financial Statements.
Long-term Debt
Long-term debt increased $17.2 billion primarily due to debt issuances, partially offset by maturities, redemptions and valuation adjustments. For more information on long-term debt, see Note 11 – Long-term Debt to the Consolidated Financial Statements.
Shareholders’ Equity
Shareholders’ equity decreased $2.9 billion primarily due to returns of capital to shareholders through common stock repurchases and common and preferred stock dividends, market value decreases on derivatives and debt securities and the redemption of preferred stock, partially offset by net income.
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, long-term debt and common and preferred stock. For more information on liquidity, see Liquidity Risk on page 54.
Supplemental Financial Data
Non-GAAP Financial Measures
In this Form 10-K, we present certain non-GAAP financial measures. Non-GAAP financial measures exclude certain items or otherwise include components that differ from the most directly comparable measures calculated in accordance with GAAP. Non-GAAP financial measures are provided as additional useful information to assess our financial condition, results of operations (including period-to-period operating performance) or compliance with prospective regulatory requirements. These non-GAAP financial measures are not intended as a substitute for GAAP financial measures and may not be defined or calculated the same way as non-GAAP financial measures used by other companies.
We view net interest income and related ratios and analyses on an FTE basis, which when presented on a consolidated basis are non-GAAP financial measures. To derive the FTE basis, net interest income is adjusted to reflect tax-exempt income on an equivalent before-tax basis with a corresponding increase in income tax expense. For purposes of this calculation, we use the federal statutory tax rate of 21 percent and a representative state tax rate. Net interest yield, which measures the basis points we earn over the cost of funds, utilizes net interest income on an FTE basis. We believe that presentation of these items on an FTE basis allows for comparison of amounts from
both taxable and tax-exempt sources and is consistent with industry practices.
We may present certain key performance indicators and ratios excluding certain items (e.g., debit valuation adjustment (DVA) gains (losses)) which result in non-GAAP financial measures. We believe that the presentation of measures that exclude these items is useful because such measures provide additional information to assess the underlying operational performance and trends of our businesses and to allow better comparison of period-to-period operating performance.
We also evaluate our business based on certain ratios that utilize tangible equity, a non-GAAP financial measure. Tangible equity represents shareholders’ equity or common shareholders’ equity reduced by goodwill and intangible assets (excluding mortgage servicing rights (MSRs)), net of related deferred tax liabilities (“adjusted” shareholders’ equity or common shareholders’ equity). These measures are used to evaluate our use of equity. In addition, profitability, relationship and investment models use both return on average tangible common shareholders’ equity and return on average tangible shareholders’ equity as key measures to support our overall growth objectives. These ratios are as follows:
● Return on average tangible common shareholders’ equity measures our net income applicable to common shareholders as a percentage of adjusted average common shareholders’ equity. The tangible common equity ratio represents adjusted ending common shareholders’ equity divided by total tangible assets.
● Return on average tangible shareholders’ equity measures our net income as a percentage of adjusted average total shareholders’ equity. The tangible equity ratio represents adjusted ending shareholders’ equity divided by total tangible assets.
● Tangible book value per common share represents adjusted ending common shareholders’ equity divided by ending common shares outstanding.
We believe ratios utilizing tangible equity provide additional useful information because they present measures of those assets that can generate income. Tangible book value per common share provides additional useful information about the level of tangible assets in relation to outstanding shares of common stock.
The aforementioned supplemental data and performance measures are presented in Tables 6 and 7.
For more information on the reconciliation of these non-GAAP financial measures to the corresponding GAAP financial measures, see Non-GAAP Reconciliations on page 85.
Key Performance Indicators
We present certain key financial and nonfinancial performance indicators (key performance indicators) that management uses when assessing our consolidated and/or segment results. We believe they are useful to investors because they provide additional information about our underlying operational performance and trends. These key performance indicators (KPIs) may not be defined or calculated in the same way as similar KPIs used by other companies. For information on how these metrics are defined, see Key Metrics on page 169.
Our consolidated key performance indicators, which include various equity and credit metrics, are presented in Table 1 on page 28, Table 6 on page 32 and Table 7 on page 33.
For information on key segment performance metrics, see Business Segment Operations on page 36.
31 Bank of America
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| Table 6 | Selected Annual Financial Data | |||||||||||||||||||
| (In millions, except per share information) | 2021 | 2020 | 2019 | |||||||||||||||||
| Income statement | ||||||||||||||||||||
| Net interest income | $ | 42,934 | $ | 43,360 | $ | 48,891 | ||||||||||||||
| Noninterest income | 46,179 | 42,168 | 42,353 | |||||||||||||||||
| Total revenue, net of interest expense | 89,113 | 85,528 | 91,244 | |||||||||||||||||
| Provision for credit losses | (4,594) | 11,320 | 3,590 | |||||||||||||||||
| Noninterest expense | 59,731 | 55,213 | 54,900 | |||||||||||||||||
| Income before income taxes | 33,976 | 18,995 | 32,754 | |||||||||||||||||
| Income tax expense | 1,998 | 1,101 | 5,324 | |||||||||||||||||
| Net income | 31,978 | 17,894 | 27,430 | |||||||||||||||||
| Net income applicable to common shareholders | 30,557 | 16,473 | 25,998 | |||||||||||||||||
| Average common shares issued and outstanding | 8,493.3 | 8,753.2 | 9,390.5 | |||||||||||||||||
| Average diluted common shares issued and outstanding | 8,558.4 | 8,796.9 | 9,442.9 | |||||||||||||||||
| Performance ratios | ||||||||||||||||||||
Return on average assets (1)
|
1.05 | % | 0.67 | % | 1.14 | % | ||||||||||||||
Return on average common shareholders’ equity (1)
|
12.23 | 6.76 | 10.62 | |||||||||||||||||
Return on average tangible common shareholders’ equity (1, 2)
|
17.02 | 9.48 | 14.86 | |||||||||||||||||
Return on average shareholders’ equity (1)
|
11.68 | 6.69 | 10.24 | |||||||||||||||||
Return on average tangible shareholders’ equity (1, 2)
|
15.71 | 9.07 | 13.85 | |||||||||||||||||
| Total ending equity to total ending assets | 8.52 | 9.68 | 10.88 | |||||||||||||||||
| Total average equity to total average assets | 9.02 | 9.96 | 11.14 | |||||||||||||||||
Dividend payout (1)
|
21.51 | 38.18 | 23.65 | |||||||||||||||||
| Per common share data | ||||||||||||||||||||
| Earnings | $ | 3.60 | $ | 1.88 | $ | 2.77 | ||||||||||||||
| Diluted earnings | 3.57 | 1.87 | 2.75 | |||||||||||||||||
| Dividends paid | 0.78 | 0.72 | 0.66 | |||||||||||||||||
Book value (1)
|
30.37 | 28.72 | 27.32 | |||||||||||||||||
Tangible book value (2)
|
21.68 | 20.60 | 19.41 | |||||||||||||||||
| Market capitalization | $ | 359,383 | $ | 262,206 | $ | 311,209 | ||||||||||||||
| Average balance sheet | ||||||||||||||||||||
| Total loans and leases | $ | 920,401 | $ | 982,467 | $ | 958,416 | ||||||||||||||
| Total assets | 3,034,623 | 2,683,122 | 2,405,830 | |||||||||||||||||
| Total deposits | 1,914,286 | 1,632,998 | 1,380,326 | |||||||||||||||||
| Long-term debt | 237,703 | 220,440 | 201,623 | |||||||||||||||||
| Common shareholders’ equity | 249,787 | 243,685 | 244,853 | |||||||||||||||||
| Total shareholders’ equity | 273,757 | 267,309 | 267,889 | |||||||||||||||||
| Asset quality | ||||||||||||||||||||
Allowance for credit losses (3)
|
$ | 13,843 | $ | 20,680 | $ | 10,229 | ||||||||||||||
Nonperforming loans, leases and foreclosed properties (4)
|
4,697 | 5,116 | 3,837 | |||||||||||||||||
Allowance for loan and lease losses as a percentage of total loans and leases outstanding (4)
|
1.28 | % | 2.04 | % | 0.97 | % | ||||||||||||||
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (4)
|
271 | 380 | 265 | |||||||||||||||||
| Net charge-offs | $ | 2,243 | $ | 4,121 | $ | 3,648 | ||||||||||||||
Net charge-offs as a percentage of average loans and leases outstanding (4)
|
0.25 | % | 0.42 | % | 0.38 | % | ||||||||||||||
Capital ratios at year end (5)
|
||||||||||||||||||||
| Common equity tier 1 capital | 10.6 | % | 11.9 | % | 11.2 | % | ||||||||||||||
| Tier 1 capital | 12.1 | 13.5 | 12.6 | |||||||||||||||||
| Total capital | 14.1 | 16.1 | 14.7 | |||||||||||||||||
| Tier 1 leverage | 6.4 | 7.4 | 7.9 | |||||||||||||||||
| Supplementary leverage ratio | 5.5 | 7.2 | 6.4 | |||||||||||||||||
Tangible equity (2)
|
6.4 | 7.4 | 8.2 | |||||||||||||||||
Tangible common equity (2)
|
5.7 | 6.5 | 7.3 | |||||||||||||||||
(1)For definition, see Key Metrics on page 169.
(2)Tangible equity ratios and tangible book value per share of common stock are non-GAAP financial measures. For more information on these ratios and corresponding reconciliations to GAAP financial measures, see Supplemental Financial Data on page 31 and Non-GAAP Reconciliations on page 85.
(3)Includes the allowance for loan and leases 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 64 and corresponding Table 27 and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 68 and corresponding Table 34.
(5)For more information, including which approach is used to assess capital adequacy, see Capital Management on page 49.
Bank of America 32
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| Table 7 | Selected Quarterly Financial Data | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 Quarters | 2020 Quarters | |||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions, except per share information) | Fourth | Third | Second | First | Fourth | Third | Second | First | ||||||||||||||||||||||||||||||||||||||||||
| Income statement | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income | $ | 11,410 | $ | 11,094 | $ | 10,233 | $ | 10,197 | $ | 10,253 | $ | 10,129 | $ | 10,848 | $ | 12,130 | ||||||||||||||||||||||||||||||||||
| Noninterest income | 10,650 | 11,672 | 11,233 | 12,624 | 9,846 | 10,207 | 11,478 | 10,637 | ||||||||||||||||||||||||||||||||||||||||||
| Total revenue, net of interest expense | 22,060 | 22,766 | 21,466 | 22,821 | 20,099 | 20,336 | 22,326 | 22,767 | ||||||||||||||||||||||||||||||||||||||||||
| Provision for credit losses | (489) | (624) | (1,621) | (1,860) | 53 | 1,389 | 5,117 | 4,761 | ||||||||||||||||||||||||||||||||||||||||||
| Noninterest expense | 14,731 | 14,440 | 15,045 | 15,515 | 13,927 | 14,401 | 13,410 | 13,475 | ||||||||||||||||||||||||||||||||||||||||||
| Income before income taxes | 7,818 | 8,950 | 8,042 | 9,166 | 6,119 | 4,546 | 3,799 | 4,531 | ||||||||||||||||||||||||||||||||||||||||||
| Income tax expense | 805 | 1,259 | (1,182) | 1,116 | 649 | (335) | 266 | 521 | ||||||||||||||||||||||||||||||||||||||||||
| Net income | 7,013 | 7,691 | 9,224 | 8,050 | 5,470 | 4,881 | 3,533 | 4,010 | ||||||||||||||||||||||||||||||||||||||||||
| Net income applicable to common shareholders | 6,773 | 7,260 | 8,964 | 7,560 | 5,208 | 4,440 | 3,284 | 3,541 | ||||||||||||||||||||||||||||||||||||||||||
Average common shares issued and outstanding |
8,226.5 | 8,430.7 | 8,620.8 | 8,700.1 | 8,724.9 | 8,732.9 | 8,739.9 | 8,815.6 | ||||||||||||||||||||||||||||||||||||||||||
Average diluted common shares issued and outstanding |
8,304.7 | 8,492.8 | 8,735.5 | 8,755.6 | 8,785.0 | 8,777.5 | 8,768.1 | 8,862.7 | ||||||||||||||||||||||||||||||||||||||||||
| Performance ratios | ||||||||||||||||||||||||||||||||||||||||||||||||||
Return on average assets (1)
|
0.88 | % | 0.99 | % | 1.23 | % | 1.13 | % | 0.78 | % | 0.71 | % | 0.53 | % | 0.65 | % | ||||||||||||||||||||||||||||||||||
Four-quarter trailing return on average assets (2)
|
1.05 | 1.04 | 0.97 | 0.79 | 0.67 | 0.75 | 0.81 | 0.99 | ||||||||||||||||||||||||||||||||||||||||||
Return on average common shareholders’ equity (1)
|
10.90 | 11.43 | 14.33 | 12.28 | 8.39 | 7.24 | 5.44 | 5.91 | ||||||||||||||||||||||||||||||||||||||||||
Return on average tangible common shareholders’ equity (3)
|
15.25 | 15.85 | 19.90 | 17.08 | 11.73 | 10.16 | 7.63 | 8.32 | ||||||||||||||||||||||||||||||||||||||||||
Return on average shareholders’ equity (1)
|
10.27 | 11.08 | 13.47 | 11.91 | 8.03 | 7.26 | 5.34 | 6.10 | ||||||||||||||||||||||||||||||||||||||||||
Return on average tangible shareholders’ equity (3)
|
13.87 | 14.87 | 18.11 | 16.01 | 10.84 | 9.84 | 7.23 | 8.29 | ||||||||||||||||||||||||||||||||||||||||||
| Total ending equity to total ending assets | 8.52 | 8.83 | 9.15 | 9.23 | 9.68 | 9.82 | 9.69 | 10.11 | ||||||||||||||||||||||||||||||||||||||||||
| Total average equity to total average assets | 8.56 | 8.95 | 9.11 | 9.52 | 9.71 | 9.76 | 9.85 | 10.60 | ||||||||||||||||||||||||||||||||||||||||||
Dividend payout (1)
|
25.33 | 24.10 | 17.25 | 20.68 | 30.11 | 35.36 | 47.87 | 44.57 | ||||||||||||||||||||||||||||||||||||||||||
| Per common share data | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Earnings | $ | 0.82 | $ | 0.86 | $ | 1.04 | $ | 0.87 | $ | 0.60 | $ | 0.51 | $ | 0.38 | $ | 0.40 | ||||||||||||||||||||||||||||||||||
| Diluted earnings | 0.82 | 0.85 | 1.03 | 0.86 | 0.59 | 0.51 | 0.37 | 0.40 | ||||||||||||||||||||||||||||||||||||||||||
| Dividends paid | 0.21 | 0.21 | 0.18 | 0.18 | 0.18 | 0.18 | 0.18 | 0.18 | ||||||||||||||||||||||||||||||||||||||||||
Book value (1)
|
30.37 | 30.22 | 29.89 | 29.07 | 28.72 | 28.33 | 27.96 | 27.84 | ||||||||||||||||||||||||||||||||||||||||||
Tangible book value (3)
|
21.68 | 21.69 | 21.61 | 20.90 | 20.60 | 20.23 | 19.90 | 19.79 | ||||||||||||||||||||||||||||||||||||||||||
| Market capitalization | $ | 359,383 | $ | 349,841 | $ | 349,925 | $ | 332,337 | $ | 262,206 | $ | 208,656 | $ | 205,772 | $ | 184,181 | ||||||||||||||||||||||||||||||||||
| Average balance sheet | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total loans and leases | $ | 945,062 | $ | 920,509 | $ | 907,900 | $ | 907.723 | $ | 934,798 | $ | 974,018 | $ | 1,031,387 | $ | 990,283 | ||||||||||||||||||||||||||||||||||
| Total assets | 3,164,118 | 3,076,452 | 3,015,113 | 2,879.221 | 2,791,874 | 2,739,684 | 2,704,186 | 2,494,928 | ||||||||||||||||||||||||||||||||||||||||||
| Total deposits | 2,017,223 | 1,942,705 | 1,888,834 | 1,805.747 | 1,737,139 | 1,695,488 | 1,658,197 | 1,439,336 | ||||||||||||||||||||||||||||||||||||||||||
| Long-term debt | 248,525 | 248,988 | 232,034 | 220.836 | 225,423 | 224,254 | 221,167 | 210,816 | ||||||||||||||||||||||||||||||||||||||||||
| Common shareholders’ equity | 246,519 | 252,043 | 250,948 | 249,648 | 246,840 | 243,896 | 242,889 | 241,078 | ||||||||||||||||||||||||||||||||||||||||||
| Total shareholders’ equity | 270,883 | 275,484 | 274,632 | 274,047 | 271,020 | 267,323 | 266,316 | 264,534 | ||||||||||||||||||||||||||||||||||||||||||
| Asset quality | ||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for credit losses (4)
|
$ | 13,843 | $ | 14,693 | $ | 15,782 | $ | 17,997 | $ | 20,680 | $ | 21,506 | $ | 21,091 | $ | 17,126 | ||||||||||||||||||||||||||||||||||
Nonperforming loans, leases and foreclosed properties (5)
|
4,697 | 4,831 | 5,031 | 5,299 | 5,116 | 4,730 | 4,611 | 4,331 | ||||||||||||||||||||||||||||||||||||||||||
Allowance for loan and lease losses as a percentage of total loans and leases outstanding (5)
|
1.28 | % | 1.43 | % | 1.55 | % | 1.80 | % | 2.04 | % | 2.07 | % | 1.96 | % | 1.51 | % | ||||||||||||||||||||||||||||||||||
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (5)
|
271 | 279 | 287 | 313 | 380 | 431 | 441 | 389 | ||||||||||||||||||||||||||||||||||||||||||
| Net charge-offs | $ | 362 | $ | 463 | $ | 595 | $ | 823 | $ | 881 | $ | 972 | $ | 1,146 | $ | 1,122 | ||||||||||||||||||||||||||||||||||
Annualized net charge-offs as a percentage of average loans and leases outstanding (5)
|
0.15 | % | 0.20 | % | 0.27 | % | 0.37 | % | 0.38 | % | 0.40 | % | 0.45 | % | 0.46 | % | ||||||||||||||||||||||||||||||||||
Capital ratios at period end (6)
|
||||||||||||||||||||||||||||||||||||||||||||||||||
Common equity tier 1 capital |
10.6 | % | 11.1 | % | 11.5 | % | 11.8 | % | 11.9 | % | 11.9 | % | 11.4 | % | 10.8 | % | ||||||||||||||||||||||||||||||||||
Tier 1 capital |
12.1 | 12.6 | 13.0 | 13.3 | 13.5 | 13.5 | 12.9 | 12.3 | ||||||||||||||||||||||||||||||||||||||||||
Total capital |
14.1 | 14.7 | 15.1 | 15.6 | 16.1 | 16.1 | 14.8 | 14.6 | ||||||||||||||||||||||||||||||||||||||||||
Tier 1 leverage |
6.4 | 6.6 | 6.9 | 7.2 | 7.4 | 7.4 | 7.4 | 7.9 | ||||||||||||||||||||||||||||||||||||||||||
Supplementary leverage ratio |
5.5 | 5.6 | 5.9 | 7.0 | 7.2 | 6.9 | 7.1 | 6.4 | ||||||||||||||||||||||||||||||||||||||||||
Tangible equity (3)
|
6.4 | 6.7 | 7.0 | 7.0 | 7.4 | 7.4 | 7.3 | 7.7 | ||||||||||||||||||||||||||||||||||||||||||
Tangible common equity (3)
|
5.7 | 5.9 | 6.2 | 6.2 | 6.5 | 6.6 | 6.5 | 6.7 | ||||||||||||||||||||||||||||||||||||||||||
| Total loss-absorbing capacity and long-term debt metrics | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total loss-absorbing capacity to risk-weighted assets | 26.9 | % | 27.7 | % | 27.7 | % | 26.8 | % | 27.4 | % | 26.9 | % | 26.0 | % | 24.6 | % | ||||||||||||||||||||||||||||||||||
| Total loss-absorbing capacity to supplementary leverage exposure | 12.1 | 12.4 | 12.5 | 14.1 | 14.5 | 13.7 | 14.2 | 12.8 | ||||||||||||||||||||||||||||||||||||||||||
| Eligible long-term debt to risk-weighted assets | 14.1 | 14.4 | 14.1 | 13.0 | 13.3 | 12.9 | 12.4 | 11.6 | ||||||||||||||||||||||||||||||||||||||||||
| Eligible long-term debt to supplementary leverage exposure | 6.3 | 6.4 | 6.3 | 6.8 | 7.1 | 6.6 | 6.7 | 6.1 | ||||||||||||||||||||||||||||||||||||||||||
(1)For definitions, see Key Metrics on page 169.
(2)Calculated as total net income for four consecutive quarters divided by annualized average assets for four consecutive quarters.
(3)Tangible equity ratios and tangible book value per share of common stock are non-GAAP financial measures. For more information on these ratios and corresponding reconciliations to GAAP financial measures, see Supplemental Financial Data on page 31 and Non-GAAP Reconciliations on page 85.
(4)Includes the allowance for loan and lease losses and the reserve for unfunded lending commitments.
(5)Balances and ratios do not include loans accounted for under the fair value option. For additional exclusions from nonperforming loans, leases and foreclosed properties, see Consumer Portfolio Credit Risk Management – Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity on page 64 and corresponding Table 27 and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 68 and corresponding Table 34.
(6)For more information, including which approach is used to assess capital adequacy, see Capital Management on page 49.
33 Bank of America
|
||||||||
| Table 8 | Average Balances and Interest Rates - FTE Basis | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Average Balance |
Interest Income/ Expense (1) |
Yield/ Rate |
Average Balance |
Interest Income/ Expense (1) |
Yield/ Rate |
Average Balance |
Interest Income/ Expense (1) |
Yield/ Rate |
||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Earning assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing deposits with the Federal Reserve, non- U.S. central banks and other banks |
$ | 255,595 | $ | 172 | 0.07 | % | $ | 253,227 | $ | 359 | 0.14 | % | $ | 125,555 | $ | 1,823 | 1.45 | % | ||||||||||||||||||||||||||||||||||||||
| Time deposits placed and other short-term investments | 7,603 | 15 | 0.19 | 8,840 | 29 | 0.33 | 9,427 | 207 | 2.19 | |||||||||||||||||||||||||||||||||||||||||||||||
|
Federal funds sold and securities borrowed or purchased
under agreements to resell (2)
|
267,257 | (90) | (0.03) | 309,945 | 903 | 0.29 | 279,610 | 4,843 | 1.73 | |||||||||||||||||||||||||||||||||||||||||||||||
| Trading account assets | 147,891 | 3,823 | 2.58 | 148,076 | 4,185 | 2.83 | 148,076 | 5,269 | 3.56 | |||||||||||||||||||||||||||||||||||||||||||||||
| Debt securities | 905,169 | 12,433 | 1.38 | 532,266 | 9,868 | 1.87 | 450,090 | 11,917 | 2.65 | |||||||||||||||||||||||||||||||||||||||||||||||
Loans and leases (3)
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 216,983 | 5,995 | 2.76 | 236,719 | 7,338 | 3.10 | 220,552 | 7,651 | 3.47 | |||||||||||||||||||||||||||||||||||||||||||||||
| Home equity | 31,014 | 1,066 | 3.44 | 38,251 | 1,290 | 3.37 | 44,600 | 2,194 | 4.92 | |||||||||||||||||||||||||||||||||||||||||||||||
| Credit card | 75,385 | 7,772 | 10.31 | 85,017 | 8,759 | 10.30 | 94,488 | 10,166 | 10.76 | |||||||||||||||||||||||||||||||||||||||||||||||
| Direct/Indirect and other consumer | 96,472 | 2,276 | 2.36 | 89,974 | 2,545 | 2.83 | 90,656 | 3,261 | 3.60 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total consumer | 419,854 | 17,109 | 4.08 | 449,961 | 19,932 | 4.43 | 450,296 | 23,272 | 5.17 | |||||||||||||||||||||||||||||||||||||||||||||||
| U.S. commercial | 324,795 | 8,606 | 2.65 | 344,095 | 9,712 | 2.82 | 321,467 | 13,161 | 4.09 | |||||||||||||||||||||||||||||||||||||||||||||||
| Non-U.S. commercial | 99,584 | 1,752 | 1.76 | 106,487 | 2,208 | 2.07 | 103,918 | 3,402 | 3.27 | |||||||||||||||||||||||||||||||||||||||||||||||
Commercial real estate (4)
|
60,303 | 1,496 | 2.48 | 63,428 | 1,790 | 2.82 | 62,044 | 2,741 | 4.42 | |||||||||||||||||||||||||||||||||||||||||||||||
| Commercial lease financing | 15,865 | 462 | 2.91 | 18,496 | 559 | 3.02 | 20,691 | 718 | 3.47 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total commercial | 500,547 | 12,316 | 2.46 | 532,506 | 14,269 | 2.68 | 508,120 | 20,022 | 3.94 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total loans and leases | 920,401 | 29,425 | 3.20 | 982,467 | 34,201 | 3.48 | 958,416 | 43,294 | 4.52 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other earning assets | 112,512 | 2,321 | 2.06 | 83,078 | 2,539 | 3.06 | 69,089 | 4,478 | 6.48 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total earning assets | 2,616,428 | 48,099 | 1.84 | 2,317,899 | 52,084 | 2.25 | 2,040,263 | 71,831 | 3.52 | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash and due from banks | 31,214 | 31,885 | 26,193 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other assets, less allowance for loan and lease losses | 386,981 | 333,338 | 339,374 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 3,034,623 | $ | 2,683,122 | $ | 2,405,830 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. interest-bearing deposits | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Demand and money market deposits | $ | 925,970 | $ | 314 | 0.03 | % | $ | 829,719 | $ | 977 | 0.12 | % | $ | 741,126 | $ | 4,471 | 0.60 | % | ||||||||||||||||||||||||||||||||||||||
| Time and savings deposits | 161,512 | 170 | 0.11 | 170,750 | 734 | 0.43 | 166,463 | 1,883 | 1.13 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total U.S. interest-bearing deposits | 1,087,482 | 484 | 0.04 | 1,000,469 | 1,711 | 0.17 | 907,589 | 6,354 | 0.70 | |||||||||||||||||||||||||||||||||||||||||||||||
| Non-U.S. interest-bearing deposits | 82,769 | 53 | 0.06 | 77,046 | 232 | 0.30 | 71,468 | 834 | 1.17 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing deposits | 1,170,251 | 537 | 0.05 | 1,077,515 | 1,943 | 0.18 | 979,057 | 7,188 | 0.73 | |||||||||||||||||||||||||||||||||||||||||||||||
|
Federal funds purchased and securities loaned or sold
under agreements to repurchase (5)
|
210,848 | 461 | 0.22 | 188,511 | 1,229 | 0.65 | 198,533 | 4,404 | 2.22 | |||||||||||||||||||||||||||||||||||||||||||||||
|
Short-term borrowings and other interest bearing
liabilities (2,5)
|
106,975 | (819) | (0.77) | 104,955 | (242) | (0.23) | 77,899 | 2,804 | 3.60 | |||||||||||||||||||||||||||||||||||||||||||||||
| Trading account liabilities | 54,107 | 1,128 | 2.08 | 41,386 | 974 | 2.35 | 45,449 | 1,249 | 2.75 | |||||||||||||||||||||||||||||||||||||||||||||||
| Long-term debt | 237,703 | 3,431 | 1.44 | 220,440 | 4,321 | 1.96 | 201,623 | 6,700 | 3.32 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 1,779,884 | 4,738 | 0.27 | 1,632,807 | 8,225 | 0.50 | 1,502,561 | 22,345 | 1.49 | |||||||||||||||||||||||||||||||||||||||||||||||
| Noninterest-bearing sources | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noninterest-bearing deposits | 744,035 | 555,483 | 401,269 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Other liabilities (6)
|
236,947 | 227,523 | 234,111 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shareholders’ equity | 273,757 | 267,309 | 267,889 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 3,034,623 | $ | 2,683,122 | $ | 2,405,830 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest spread | 1.57 | % | 1.75 | % | 2.03 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Impact of noninterest-bearing sources | 0.09 | 0.15 | 0.40 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income/yield on earning assets (7)
|
$ | 43,361 | 1.66 | % | $ | 43,859 | 1.90 | % | $ | 49,486 | 2.43 | % | ||||||||||||||||||||||||||||||||||||||||||||
(1)Includes the impact of interest rate risk management contracts. For more information, see Interest Rate Risk Management for the Banking Book on page 79.
(2)For more information on negative interest, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
(3)Nonperforming loans are included in the respective average loan balances. Income on these nonperforming loans is generally recognized on a cost recovery basis.
(4)Includes U.S. commercial real estate loans of $56.5 billion, $59.8 billion and $57.3 billion, and non-U.S. commercial real estate loans of $3.8 billion, $3.6 billion and $4.7 billion for 2021, 2020 and 2019, respectively.
(5)Certain prior-period amounts have been reclassified to conform to current period presentation.
(6)Includes $30.4 billion, $34.3 billion and $35.5 billion of structured notes and liabilities for 2021, 2020 and 2019, respectively.
(7)Net interest income includes FTE adjustments of $427 million, $499 million and $595 million for 2021, 2020 and 2019, respectively.
Bank of America 34
|
||||||||
| Table 9 | Analysis of Changes in Net Interest Income - FTE Basis | |||||||||||||||||||||||||||||||||||||
Due to Change in (1)
|
Net Change |
Due to Change in (1)
|
Net Change | |||||||||||||||||||||||||||||||||||
| Volume | Rate | Volume | Rate | |||||||||||||||||||||||||||||||||||
| (Dollars in millions) | From 2020 to 2021 | From 2019 to 2020 | ||||||||||||||||||||||||||||||||||||
| Increase (decrease) in interest income | ||||||||||||||||||||||||||||||||||||||
Interest-bearing deposits with the Federal Reserve, non-U.S. central banks and other banks |
$ | (1) | $ | (186) | $ | (187) | $ | 1,849 | $ | (3,313) | $ | (1,464) | ||||||||||||||||||||||||||
| Time deposits placed and other short-term investments | (4) | (10) | (14) | (13) | (165) | (178) | ||||||||||||||||||||||||||||||||
Federal funds sold and securities borrowed or purchased under agreements to resell |
(128) | (865) | (993) | 519 | (4,459) | (3,940) | ||||||||||||||||||||||||||||||||
| Trading account assets | — | (362) | (362) | 3 | (1,087) | (1,084) | ||||||||||||||||||||||||||||||||
| Debt securities | 7,059 | (4,494) | 2,565 | 2,188 | (4,237) | (2,049) | ||||||||||||||||||||||||||||||||
| Loans and leases | ||||||||||||||||||||||||||||||||||||||
| Residential mortgage | (612) | (731) | (1,343) | 563 | (876) | (313) | ||||||||||||||||||||||||||||||||
| Home equity | (245) | 21 | (224) | (312) | (592) | (904) | ||||||||||||||||||||||||||||||||
| Credit card | (994) | 7 | (987) | (1,018) | (389) | (1,407) | ||||||||||||||||||||||||||||||||
| Direct/Indirect and other consumer | 185 | (454) | (269) | (22) | (694) | (716) | ||||||||||||||||||||||||||||||||
| Total consumer | (2,823) | (3,340) | ||||||||||||||||||||||||||||||||||||
| U.S. commercial | (553) | (553) | (1,106) | 912 | (4,361) | (3,449) | ||||||||||||||||||||||||||||||||
| Non-U.S. commercial | (147) | (309) | (456) | 80 | (1,274) | (1,194) | ||||||||||||||||||||||||||||||||
| Commercial real estate | (89) | (205) | (294) | 63 | (1,014) | (951) | ||||||||||||||||||||||||||||||||
| Commercial lease financing | (80) | (17) | (97) | (76) | (83) | (159) | ||||||||||||||||||||||||||||||||
| Total commercial | (1,953) | (5,753) | ||||||||||||||||||||||||||||||||||||
| Total loans and leases | (4,776) | (9,093) | ||||||||||||||||||||||||||||||||||||
| Other earning assets | 904 | (1,122) | (218) | 905 | (2,844) | (1,939) | ||||||||||||||||||||||||||||||||
| Net decrease in interest income | $ | (3,985) | $ | (19,747) | ||||||||||||||||||||||||||||||||||
| Increase (decrease) in interest expense | ||||||||||||||||||||||||||||||||||||||
| U.S. interest-bearing deposits | ||||||||||||||||||||||||||||||||||||||
| Demand and money market deposit accounts | $ | 134 | $ | (797) | $ | (663) | $ | 507 | $ | (4,001) | $ | (3,494) | ||||||||||||||||||||||||||
| Time and savings deposits | (39) | (525) | (564) | 46 | (1,195) | (1,149) | ||||||||||||||||||||||||||||||||
| Total U.S. interest-bearing deposits | (1,227) | (4,643) | ||||||||||||||||||||||||||||||||||||
| Non-U.S. interest-bearing deposits | 16 | (195) | (179) | 67 | (669) | (602) | ||||||||||||||||||||||||||||||||
| Total interest-bearing deposits | (1,406) | (5,245) | ||||||||||||||||||||||||||||||||||||
|
Federal funds purchased and securities loaned or sold under agreements to
repurchase (2)
|
142 | (910) | (768) | (219) | (2,956) | (3,175) | ||||||||||||||||||||||||||||||||
Short-term borrowings and other interest bearing liabilities (2)
|
(4) | (573) | (577) | 974 | (4,020) | (3,046) | ||||||||||||||||||||||||||||||||
| Trading account liabilities | 298 | (144) | 154 | (111) | (164) | (275) | ||||||||||||||||||||||||||||||||
| Long-term debt | 338 | (1,228) | (890) | 619 | (2,998) | (2,379) | ||||||||||||||||||||||||||||||||
| Net decrease in interest expense | (3,487) | (14,120) | ||||||||||||||||||||||||||||||||||||
Net decrease in net interest income (3)
|
$ | (498) | $ | (5,627) | ||||||||||||||||||||||||||||||||||
(1)The changes for each category of interest income and expense are divided between the portion of change attributable to the variance in volume and the portion of change attributable to the variance in rate for that category. The unallocated change in rate or volume variance is allocated between the rate and volume variances.
(2)Certain prior-period amounts have been reclassified to conform to current-period presentation.
(3)Includes changes in FTE basis adjustments of a $72 million decrease from 2020 to 2021 and a $96 million decrease from 2019 to 2020.
35 Bank of America
|
||||||||
Business Segment Operations
Segment Description and Basis of Presentation
We report our results of operations through the following four business segments: Consumer Banking, GWIM, Global Banking and Global Markets, with the remaining operations recorded in All Other. We manage our segments and report their results on an FTE basis. The primary activities, products and businesses of the business segments and All Other are shown below.
We periodically review capital allocated to our businesses and allocate capital annually during the strategic and capital planning processes. We utilize a methodology that considers the effect of regulatory capital requirements in addition to internal risk-based capital models. Our internal risk-based capital models use a risk-adjusted methodology incorporating each segment’s credit, market, interest rate, business and operational risk components. For more information on the nature of these risks, see Managing Risk on page 46. The capital allocated to the business segments is referred to as allocated capital. Allocated equity in the reporting units is comprised of allocated capital plus capital for the portion of goodwill and intangibles specifically assigned to the reporting unit. For more information, including the definition of a reporting unit, see Note 7 – Goodwill and Intangible Assets to the Consolidated Financial Statements.
For information on our presentation of financial information on an FTE basis, see Supplemental Financial Data on page 31,
and for reconciliations to consolidated total revenue, net income and year-end total assets, see Note 23 – Business Segment Information to the Consolidated Financial Statements.
Effective October 1, 2021, a business activity previously included in Global Markets is being reported as a liquidating business in All Other, consistent with a realignment in performance reporting to senior management. The activity was not material to Global Markets’ results of operations and historical results have not been restated. For more information, see Note 23 – Business Segment Information to the Consolidated Financial Statements.
Key Performance Indicators
We present certain key financial and nonfinancial performance indicators that management uses when evaluating segment results. We believe they are useful to investors because they provide additional information about our segments’ operational performance, customer trends and business growth.
Bank of America 36
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Consumer Banking
| Deposits | Consumer Lending | Total Consumer Banking | |||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | % Change | ||||||||||||||||||||||||||||
| Net interest income | $ | 14,358 | $ | 13,739 | $ | 10,571 | $ | 10,959 | $ | 24,929 | $ | 24,698 | 1 | % | |||||||||||||||||||||
| Noninterest income: | |||||||||||||||||||||||||||||||||||
| Card income | (28) | (20) | 5,200 | 4,693 | 5,172 | 4,673 | 11 | ||||||||||||||||||||||||||||
| Service charges | 3,535 | 3,416 | 3 | 1 | 3,538 | 3,417 | 4 | ||||||||||||||||||||||||||||
| All other income | 223 | 310 | 143 | 164 | 366 | 474 | (23) | ||||||||||||||||||||||||||||
| Total noninterest income | 3,730 | 3,706 | 5,346 | 4,858 | 9,076 | 8,564 | 6 | ||||||||||||||||||||||||||||
Total revenue, net of interest expense |
18,088 | 17,445 | 15,917 | 15,817 | 34,005 | 33,262 | 2 | ||||||||||||||||||||||||||||
| Provision for credit losses | 240 | 379 | (1,275) | 5,386 | (1,035) | 5,765 | (118) | ||||||||||||||||||||||||||||
| Noninterest expense | 11,650 | 11,508 | 7,640 | 7,374 | 19,290 | 18,882 | 2 | ||||||||||||||||||||||||||||
| Income before income taxes | 6,198 | 5,558 | 9,552 | 3,057 | 15,750 | 8,615 | 83 | ||||||||||||||||||||||||||||
| Income tax expense | 1,519 | 1,362 | 2,340 | 749 | 3,859 | 2,111 | 83 | ||||||||||||||||||||||||||||
| Net income | $ | 4,679 | $ | 4,196 | $ | 7,212 | $ | 2,308 | $ | 11,891 | $ | 6,504 | 83 | ||||||||||||||||||||||
Effective tax rate (1)
|
24.5 | % | 24.5 | % | |||||||||||||||||||||||||||||||
| Net interest yield | 1.48 | % | 1.69 | % | 3.77 | % | 3.53 | % | 2.45 | 2.88 | |||||||||||||||||||||||||
| Return on average allocated capital | 39 | 35 | 27 | 9 | 31 | 17 | |||||||||||||||||||||||||||||
| Efficiency ratio | 64.41 | 65.97 | 48.00 | 46.62 | 56.73 | 56.77 | |||||||||||||||||||||||||||||
| Balance Sheet | |||||||||||||||||||||||||||||||||||
| Average | |||||||||||||||||||||||||||||||||||
| Total loans and leases | $ | 4,431 | $ | 5,144 | $ | 279,630 | $ | 310,436 | $ | 284,061 | $ | 315,580 | (10) | % | |||||||||||||||||||||
Total earning assets (2)
|
973,018 | 813,779 | 280,080 | 310,862 | 1,016,751 | 858,724 | 18 | ||||||||||||||||||||||||||||
Total assets (2)
|
1,009,387 | 849,924 | 285,532 | 314,599 | 1,058,572 | 898,606 | 18 | ||||||||||||||||||||||||||||
| Total deposits | 976,093 | 816,968 | 6,934 | 6,698 | 983,027 | 823,666 | 19 | ||||||||||||||||||||||||||||
| Allocated capital | 12,000 | 12,000 | 26,500 | 26,500 | 38,500 | 38,500 | — | ||||||||||||||||||||||||||||
| Year end | |||||||||||||||||||||||||||||||||||
| Total loans and leases | $ | 4,206 | $ | 4,673 | $ | 282,305 | $ | 295,261 | $ | 286,511 | $ | 299,934 | (4) | % | |||||||||||||||||||||
Total earning assets (2)
|
1,048,009 | 899,951 | 282,850 | 295,627 | 1,090,331 | 945,343 | 15 | ||||||||||||||||||||||||||||
Total assets (2)
|
1,082,449 | 939,629 | 289,220 | 299,185 | 1,131,142 | 988,580 | 14 | ||||||||||||||||||||||||||||
| Total deposits | 1,049,085 | 906,092 | 5,910 | 6,560 | 1,054,995 | 912,652 | 16 | ||||||||||||||||||||||||||||
(1)Estimated at the segment level only.
(2)In segments and businesses where the total of liabilities and equity exceeds assets, we allocate assets from All Other to match the segments’ and businesses’ liabilities and allocated shareholders’ equity. As a result, total earning assets and total assets of the businesses may not equal total Consumer Banking.
Consumer Banking, comprised of Deposits and Consumer Lending, offers a diversified range of credit, banking and investment products and services to consumers and small businesses. Deposits and Consumer Lending include the net impact of migrating customers and their related deposit, brokerage asset and loan balances between Deposits, Consumer Lending and GWIM, as well as other client-managed businesses. Our customers and clients have access to a coast-to-coast network including financial centers in 38 states and the District of Columbia. As of December 31, 2021, our network includes approximately 4,200 financial centers, approximately 16,000 ATMs, nationwide call centers and leading digital banking platforms with more than 41 million active users, including approximately 33 million active mobile users.
Consumer Banking Results
Net income for Consumer Banking increased $5.4 billion to $11.9 billion primarily due to improvement in the provision for credit losses and higher revenue, partially offset by higher noninterest expense. Net interest income increased $231 million to $24.9 billion primarily due to the benefit of higher
deposit balances and the acceleration of net capitalized loan fees due to PPP loan forgiveness, partially offset by lower interest rates and loan balances. Noninterest income increased $512 million to $9.1 billion primarily driven by higher card income and service charges due to increased client activity, partially offset by the allocation of asset and liability management (ALM) results.
The provision for credit losses improved $6.8 billion to a benefit of $1.0 billion primarily driven by reserve releases due to improvements in the macroeconomic outlook and credit quality. Noninterest expense increased $408 million to $19.3 billion primarily driven by an impairment charge for real estate rationalization, the contribution to the Bank of America Foundation, cost of increased client activity and continued investments for business growth, including the merchant services platform, partially offset by lower COVID-19 related costs.
The return on average allocated capital was 31 percent, up from 17 percent, driven by higher net income. For more information on capital allocated to the business segments, see Business Segment Operations on page 36.
37 Bank of America
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Deposits
Deposits includes the results of consumer deposit activities that consist of a comprehensive range of products provided to consumers and small businesses. Our deposit products include noninterest- and interest-bearing checking accounts, money market savings accounts, traditional savings accounts, CDs and IRAs, 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 Consumer Investment accounts. Consumer Investments serves investment client relationships through the Merrill Edge integrated investing and banking service platform, providing investment advice and guidance, client brokerage asset services, self-directed online investing and key banking capabilities including access to the Corporation’s network of financial centers and ATMs.
Net income for Deposits increased $483 million to $4.7 billion due to higher revenue and lower provision for credit losses, partially offset by higher noninterest expense. Net interest income increased $619 million to $14.4 billion primarily due to the benefit of higher deposit balances. Noninterest income increased $24 million to $3.7 billion primarily driven by higher service charges and investment and brokerage fees, largely offset by the allocation of ALM results.
The provision for credit losses decreased $139 million to $240 million due to an improved macroeconomic outlook. Noninterest expense increased $142 million to $11.7 billion primarily driven by an impairment charge for real estate rationalization, and the cost of increased client activity and continued investments for business growth, partially offset by lower COVID-19 related costs.
Average deposits increased $159.1 billion to $976.1 billion primarily due to net inflows of $90.4 billion in checking and time deposits and $68.0 billion in traditional savings and money market savings driven by strong organic growth and government stimulus measures.
The table below provides key performance indicators for Deposits. Management uses these metrics, and we believe they are useful to investors because they provide additional information to evaluate our deposit profitability and digital/mobile trends.
| Key Statistics – Deposits | |||||||||||
| 2021 | 2020 | ||||||||||
Total deposit spreads (excludes noninterest costs) (1)
|
1.69% | 1.94% | |||||||||
| Year End | |||||||||||
Consumer investment assets (in millions) (2)
|
$ | 368,831 | $ | 306,104 | |||||||
Active digital banking users (in thousands) (3)
|
41,365 | 39,315 | |||||||||
Active mobile banking users (in thousands) (4)
|
32,980 | 30,783 | |||||||||
| Financial centers | 4,173 | 4,312 | |||||||||
| ATMs | 16,209 | 16,904 | |||||||||
(1)Includes deposits held in Consumer Lending.
(2)Includes client brokerage assets, deposit sweep balances and AUM in Consumer Banking.
(3)Represents mobile and/or online active users over the past 90 days.
(4)Represents mobile active users over the past 90 days.
Consumer investment assets increased $62.7 billion to $368.8 billion driven by market performance and client flows. Active mobile banking users increased approximately two million, reflecting continuing changes in our customers’ banking preferences. We had a net decrease of 139 financial centers as we continue to optimize our consumer banking network.
Consumer Lending
Consumer Lending offers products to consumers and small businesses across the U.S. The products offered include debit and credit 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 debit and credit 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, including loans held on the balance sheet of Consumer Lending and loans serviced for others.
Bank of America 38
|
||||||||
Net income for Consumer Lending was $7.2 billion, an increase of $4.9 billion, primarily due to improvement in the provision for credit losses. Net interest income declined $388 million to $10.6 billion primarily due to lower interest rates and loan balances. Noninterest income increased $488 million to $5.3 billion primarily driven by higher card income due to increased client activity.
The provision for credit losses improved $6.7 billion to a benefit of $1.3 billion primarily driven by reserve releases due to improvements in the macroeconomic outlook and credit quality. Noninterest expense increased $266 million to $7.6 billion primarily driven by continued investments for business growth, partially offset by lower COVID-19 related costs.
Average loans decreased $30.8 billion to $279.6 billion primarily driven by a decline in residential mortgage and credit card loans.
The table below provides key performance indicators for Consumer Lending. Management uses these metrics, and we believe they are useful to investors because they provide additional information about loan growth and profitability.
| Key Statistics – Consumer Lending | |||||||||||
| (Dollars in millions) | 2021 | 2020 | |||||||||
Total credit card (1)
|
|||||||||||
Gross interest yield (2)
|
10.17 | % | 10.27 | % | |||||||
Risk-adjusted margin (3)
|
10.17 | 9.16 | |||||||||
| New accounts (in thousands) | 3,594 | 2,505 | |||||||||
| Purchase volumes | $ | 311,571 | $ | 251,599 | |||||||
Debit card purchase volumes |
$ | 473,770 | $ | 384,503 | |||||||
(1)Includes GWIM's credit card portfolio.
(2)Calculated as the effective annual percentage rate divided by average loans.
(3)Calculated as the difference between total revenue, net of interest expense, and net credit losses divided by average loans.
During 2021, the total risk-adjusted margin increased 101 bps primarily driven by lower net credit losses, higher fee income and higher net interest margin. Total credit card purchase volumes increased $60.0 billion to $311.6 billion as spending continued to recover, with improvements across all categories. Debit card purchase volumes increased $89.3 billion to $473.8 billion due to continued retail growth from the pandemic recovery, as well as the impact of government stimulus measures, and tax refunds.
Key Statistics – Loan Production (1)
| |||||||||||
| (Dollars in millions) | 2021 | 2020 | |||||||||
| Consumer Banking: | |||||||||||
| First mortgage | $ | 45,976 | $ | 43,197 | |||||||
| Home equity | 3,996 | 6,930 | |||||||||
Total (2):
|
|||||||||||
| First mortgage | $ | 79,692 | $ | 69,086 | |||||||
| Home equity | 4,895 | 8,160 | |||||||||
(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 for Consumer Banking and the total Corporation increased $2.8 billion and $10.6 billion during 2021 primarily driven by higher demand.
Home equity production in Consumer Banking and the total Corporation decreased $2.9 billion and $3.3 billion during 2021 primarily driven by lower demand due to increased borrower liquidity.
39 Bank of America
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Global Wealth & Investment Management
| (Dollars in millions) | 2021 | 2020 | % Change | ||||||||||||||||||||
| Net interest income | $ | 5,664 | $ | 5,468 | 4 | % | |||||||||||||||||
| Noninterest income: | |||||||||||||||||||||||
| Investment and brokerage services | 14,312 | 12,270 | 17 | ||||||||||||||||||||
| All other income | 772 | 846 | (9) | ||||||||||||||||||||
| Total noninterest income | 15,084 | 13,116 | 15 | ||||||||||||||||||||
| Total revenue, net of interest expense | 20,748 | 18,584 | 12 | ||||||||||||||||||||
| Provision for credit losses | (241) | 357 | n/m | ||||||||||||||||||||
| Noninterest expense | 15,258 | 14,160 | 8 | ||||||||||||||||||||
| Income before income taxes | 5,731 | 4,067 | 41 | ||||||||||||||||||||
| Income tax expense | 1,404 | 996 | 41 | ||||||||||||||||||||
| Net income | $ | 4,327 | $ | 3,071 | 41 | ||||||||||||||||||
| Effective tax rate | 24.5 | % | 24.5 | % | |||||||||||||||||||
| Net interest yield | 1.51 | 1.73 | |||||||||||||||||||||
| Return on average allocated capital | 26 | 21 | |||||||||||||||||||||
| Efficiency ratio | 73.54 | 76.19 | |||||||||||||||||||||
| Balance Sheet | |||||||||||||||||||||||
| Average | |||||||||||||||||||||||
| Total loans and leases | $ | 196,899 | $ | 183,402 | 7 | % | |||||||||||||||||
| Total earning assets | 374,273 | 316,008 | 18 | ||||||||||||||||||||
| Total assets | 386,918 | 328,384 | 18 | ||||||||||||||||||||
| Total deposits | 340,124 | 287,123 | 18 | ||||||||||||||||||||
| Allocated capital | 16,500 | 15,000 | 10 | ||||||||||||||||||||
| Year end | |||||||||||||||||||||||
| Total loans and leases | $ | 208,971 | $ | 188,562 | 11 | % | |||||||||||||||||
| Total earning assets | 425,112 | 356,873 | 19 | ||||||||||||||||||||
| Total assets | 438,275 | 369,736 | 19 | ||||||||||||||||||||
| Total deposits | 390,143 | 322,157 | 21 | ||||||||||||||||||||
n/m = not meaningful
GWIM consists of two primary businesses: Merrill Wealth Management (MWM) and Bank of America Private Bank.
MWM'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. MWM provides tailored solutions to meet clients' needs through a full set of investment management, brokerage, banking and retirement products.
Bank of America Private Bank, together with MWM's Private Wealth Management business, provides comprehensive wealth management solutions targeted to high net worth and ultra high net worth clients, as well as customized solutions to meet clients' wealth structuring, investment management, trust and banking needs, including specialty asset management services.
Net income for GWIM increased $1.3 billion to $4.3 billion driven by higher revenue and improvement in the provision for credit losses, partially offset by higher noninterest expense. The operating margin was 28 percent compared to 22 percent a year ago.
Net interest income increased $196 million to $5.7 billion due to the benefits of loan and deposit growth, partially offset by lower interest rates.
Noninterest income, which primarily includes investment and brokerage services income, increased $2.0 billion to $15.1
billion primarily due to higher market valuations and positive AUM flows, partially offset by declines in AUM pricing.
The provision for credit losses improved $598 million to a benefit of $241 million primarily due to improvements in the macroeconomic outlook and credit quality. Noninterest expense increased $1.1 billion to $15.3 billion primarily driven by higher revenue-related incentives.
The return on average allocated capital was 26 percent, up from 21 percent, due to higher net income, partially offset by an increase in allocated capital. For more information on capital allocated to the business segments, see Business Segment Operations on page 36.
Average loans increased $13.5 billion to $196.9 billion primarily driven by securities-based lending, custom lending and residential mortgage. Average deposits increased $53.0 billion to $340.1 billion primarily driven by inflows from new accounts and client responses to market volatility.
MWM revenue of $17.4 billion increased 14 percent primarily driven by the benefits of higher market valuations, positive AUM flows and loan and deposit growth.
Bank of America Private Bank revenue of $3.3 billion remained relatively flat with the benefits of higher market valuations, AUM flows, and loan and deposit growth mostly offset by the realignment of certain business results to MWM.
Bank of America 40
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Key Indicators and Metrics |
||||||||||||||
| (Dollars in millions) | 2021 | 2020 | ||||||||||||
| Revenue by Business | ||||||||||||||
| Merrill Wealth Management | $ | 17,448 | $ | 15,292 | ||||||||||
Bank of America Private Bank |
3,300 | 3,292 | ||||||||||||
| Total revenue, net of interest expense | $ | 20,748 | $ | 18,584 | ||||||||||
| Client Balances by Business, at period end | ||||||||||||||
| Merrill Wealth Management | $ | 3,214,881 | $ | 2,808,340 | ||||||||||
Bank of America Private Bank |
625,453 | 541,464 | ||||||||||||
| Total client balances | $ | 3,840,334 | $ | 3,349,804 | ||||||||||
| Client Balances by Type, at period end | ||||||||||||||
| Assets under management | $ | 1,638,782 | $ | 1,408,465 | ||||||||||
| Brokerage and other assets | 1,655,021 | 1,479,614 | ||||||||||||
| Deposits | 390,143 | 322,157 | ||||||||||||
Loans and leases (1)
|
212,251 | 191,124 | ||||||||||||
| Less: Managed deposits in assets under management | (55,863) | (51,556) | ||||||||||||
| Total client balances | $ | 3,840,334 | $ | 3,349,804 | ||||||||||
| Assets Under Management Rollforward | ||||||||||||||
| Assets under management, beginning of period | $ | 1,408,465 | $ | 1,275,555 | ||||||||||
| Net client flows | 66,250 | 19,596 | ||||||||||||
Market valuation/other
|
164,067 | 113,314 | ||||||||||||
| Total assets under management, end of period | $ | 1,638,782 | $ | 1,408,465 | ||||||||||
Total wealth advisors, at period end (2)
|
18,846 | 20,103 | ||||||||||||
(1)Includes margin receivables which are classified in customer and other receivables on the Consolidated Balance Sheet.
(2)Includes advisors across all wealth management businesses in GWIM and Consumer Banking. Prior period has been revised to conform to current-period presentation.
Client Balances
Client balances managed under advisory and/or discretion of GWIM are AUM and are typically held in diversified portfolios. Fees earned on AUM are calculated as a percentage of clients’ AUM balances. The asset management fees charged to clients per year depend on various factors, but are commonly driven by the breadth of the client’s relationship. The net client AUM flows
represent the net change in clients’ AUM balances over a specified period of time, excluding market appreciation/depreciation and other adjustments.
Client balances increased $490.5 billion, or 15 percent, to $3.8 trillion at December 31, 2021 compared to December 31, 2020. The increase in client balances was primarily due to higher market valuations and positive client flows.
41 Bank of America
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Global Banking
| (Dollars in millions) | 2021 | 2020 | % Change | |||||||||||||||||
| Net interest income | $ | 8,511 | $ | 9,013 | (6) | % | ||||||||||||||
| Noninterest income: | ||||||||||||||||||||
| Service charges | 3,523 | 3,238 | 9 | |||||||||||||||||
| Investment banking fees | 5,107 | 4,010 | 27 | |||||||||||||||||
| All other income | 3,734 | 2,726 | 37 | |||||||||||||||||
| Total noninterest income | 12,364 | 9,974 | 24 | |||||||||||||||||
| Total revenue, net of interest expense | 20,875 | 18,987 | 10 | |||||||||||||||||
| Provision for credit losses | (3,201) | 4,897 | n/m | |||||||||||||||||
| Noninterest expense | 10,632 | 9,342 | 14 | |||||||||||||||||
| Income before income taxes | 13,444 | 4,748 | n/m | |||||||||||||||||
| Income tax expense | 3,630 | 1,282 | n/m | |||||||||||||||||
| Net income | $ | 9,814 | $ | 3,466 | n/m | |||||||||||||||
| Effective tax rate | 27.0 | % | 27.0 | % | ||||||||||||||||
| Net interest yield | 1.55 | 1.86 | ||||||||||||||||||
| Return on average allocated capital | 23 | 8 | ||||||||||||||||||
| Efficiency ratio | 50.93 | 49.20 | ||||||||||||||||||
| Balance Sheet | ||||||||||||||||||||
| Average | ||||||||||||||||||||
Total loans and leases
|
$ | 329,655 | $ | 382,264 | (14) | % | ||||||||||||||
| Total earning assets | 549,749 | 485,688 | 13 | |||||||||||||||||
| Total assets | 611,304 | 542,302 | 13 | |||||||||||||||||
| Total deposits | 522,790 | 456,562 | 15 | |||||||||||||||||
| Allocated capital | 42,500 | 42,500 | — | |||||||||||||||||
| Year end | ||||||||||||||||||||
| Total loans and leases | $ | 352,933 | $ | 339,649 | 4 | % | ||||||||||||||
| Total earning assets | 574,583 | 522,650 | 10 | |||||||||||||||||
| Total assets | 638,131 | 580,561 | 10 | |||||||||||||||||
| Total deposits | 551,752 | 493,748 | 12 | |||||||||||||||||
n/m = not meaningful
Global Banking, which includes Global Corporate Banking, Global Commercial Banking, Business Banking and Global Investment Banking, provides a wide range of lending-related products and services, integrated working capital management and treasury solutions, and underwriting and advisory services through our network of offices and client relationship teams. Our lending products and services include commercial loans, leases, commitment facilities, trade finance, commercial real estate lending and asset-based lending. Our treasury solutions business includes treasury management, foreign exchange, short-term investing options and merchant services. We also provide investment banking products to our clients such as debt and equity underwriting and distribution, and merger-related and other advisory services. Underwriting debt and equity issuances, fixed-income and equity research, and certain market-based activities are executed through our global broker-dealer affiliates, which are our primary dealers in several countries. Within Global Banking, Global Corporate Banking clients generally include large global corporations, financial institutions and leasing clients. Global Commercial Banking clients generally include middle-market companies, commercial real estate firms and not-for-profit companies. Business Banking clients include mid-sized U.S.-based businesses requiring customized and integrated financial advice and solutions.
Net income for Global Banking increased $6.3 billion to $9.8 billion driven by improvement in the provision for credit losses and higher revenue, partially offset by higher noninterest expense.
Net interest income decreased $502 million to $8.5 billion
primarily due to the impact of lower average loan balances and deposit spreads, partially offset by the benefits of higher deposit balances and credit spreads.
Noninterest income increased $2.4 billion to $12.4 billion driven by higher investment banking fees, higher valuation-driven adjustments on the fair value loan portfolio, debt securities and leveraged loans, higher income from ESG investment activities, as well as higher treasury and credit service charges.
The provision for credit losses improved $8.1 billion to a benefit of $3.2 billion primarily driven by reserve releases due to improvements in the macroeconomic outlook and credit quality.
Noninterest expense increased $1.3 billion to $10.6 billion, primarily due to higher revenue-related incentives and higher operating costs.
The return on average allocated capital was 23 percent, up from eight percent, due to higher net income. For more information on capital allocated to the business segments, see Business Segment Operations on page 36.
Global Corporate, Global Commercial and Business Banking
Global Corporate, Global Commercial and Business Banking each include Business Lending and Global Transaction Services activities. Business Lending includes various lending-related products and services, and related hedging activities, including commercial loans, leases, commitment facilities, trade finance, real estate lending and asset-based lending. Global Transaction Services includes deposits, treasury management, credit card, foreign exchange and short-term investment products.
Bank of America 42
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||||||||
The table below and following discussion present a summary of the results, which exclude certain investment banking, merchant services and PPP activities in Global Banking.
| Global Corporate, Global Commercial and Business Banking | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Global Corporate Banking | Global Commercial Banking | Business Banking | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||
| Revenue | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Business Lending | $ | 3,725 | $ | 3,552 | $ | 3,676 | $ | 3,743 | $ | 225 | $ | 261 | $ | 7,626 | $ | 7,556 | ||||||||||||||||||||||||||||||||||
| Global Transaction Services | 3,127 | 2,986 | 3,209 | 3,169 | 889 | 893 | 7,225 | 7,048 | ||||||||||||||||||||||||||||||||||||||||||
Total revenue, net of interest expense |
$ | 6,852 | $ | 6,538 | $ | 6,885 | $ | 6,912 | $ | 1,114 | $ | 1,154 | $ | 14,851 | $ | 14,604 | ||||||||||||||||||||||||||||||||||
| Balance Sheet | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Average | ||||||||||||||||||||||||||||||||||||||||||||||||||
Total loans and leases
|
$ | 150,159 | $ | 179,393 | $ | 161,012 | $ | 182,212 | $ | 12,763 | $ | 14,410 | $ | 323,934 | $ | 376,015 | ||||||||||||||||||||||||||||||||||
| Total deposits | 251,303 | 216,371 | 213,708 | 191,813 | 56,321 | 48,214 | 521,332 | 456,398 | ||||||||||||||||||||||||||||||||||||||||||
| Year end | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total loans and leases | $ | 163,027 | $ | 153,126 | $ | 175,228 | $ | 164,641 | $ | 12,822 | $ | 13,242 | $ | 351,077 | $ | 331,009 | ||||||||||||||||||||||||||||||||||
| Total deposits | 259,160 | 233,484 | 232,670 | 207,597 | 57,848 | 52,150 | 549,678 | 493,231 | ||||||||||||||||||||||||||||||||||||||||||
Business Lending revenue increased $70 million in 2021 compared to 2020 primarily due to higher credit spreads and income from ESG investment activities, partially offset by the impact of lower average loan balances.
Global Transaction Services revenue increased $177 million in 2021 compared to 2020 driven by the benefit of higher deposit balances and treasury service charges, partially offset by lower deposit spreads.
Average loans and leases decreased 14 percent in 2021 compared to 2020 driven by client paydowns and lower demand. Average deposits increased 14 percent primarily driven by elevated balances from prior-year inflows on client responses to market volatility and government stimulus measures.
Global Investment Banking
Client teams and product specialists underwrite and distribute debt, equity and loan products, and provide advisory services and tailored risk management solutions. The economics of certain investment banking and underwriting activities are shared primarily between Global Banking and Global Markets under an internal revenue-sharing arrangement. Global Banking originates certain deal-related transactions with our corporate and commercial clients that are executed and distributed by
Global Markets. To provide a complete discussion of our consolidated investment banking fees, the following table presents total Corporation investment banking fees and the portion attributable to Global Banking.
| Investment Banking Fees | ||||||||||||||||||||||||||
| Global Banking | Total Corporation | |||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| Products | ||||||||||||||||||||||||||
| Advisory | $ | 2,139 | $ | 1,458 | $ | 2,311 | $ | 1,621 | ||||||||||||||||||
| Debt issuance | 1,736 | 1,555 | 4,015 | 3,443 | ||||||||||||||||||||||
| Equity issuance | 1,232 | 997 | 2,784 | 2,328 | ||||||||||||||||||||||
Gross investment banking fees |
5,107 | 4,010 | 9,110 | 7,392 | ||||||||||||||||||||||
| Self-led deals | (93) | (93) | (223) | (212) | ||||||||||||||||||||||
Total investment banking fees |
$ | 5,014 | $ | 3,917 | $ | 8,887 | $ | 7,180 | ||||||||||||||||||
Total Corporation investment banking fees, excluding self-led deals, of $8.9 billion, which are primarily included within Global Banking and Global Markets, increased 24 percent primarily driven by higher advisory fees as well as higher debt issuance and equity issuance fees.
43 Bank of America
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Global Markets
| (Dollars in millions) | 2021 | 2020 | % Change | |||||||||||||||||
| Net interest income | $ | 4,011 | $ | 4,646 | (14) | % | ||||||||||||||
| Noninterest income: | ||||||||||||||||||||
| Investment and brokerage services | 1,979 | 1,973 | — | |||||||||||||||||
| Investment banking fees | 3,616 | 2,991 | 21 | |||||||||||||||||
| Market making and similar activities | 8,760 | 8,471 | 3 | |||||||||||||||||
| All other income | 889 | 684 | 30 | |||||||||||||||||
| Total noninterest income | 15,244 | 14,119 | 8 | |||||||||||||||||
| Total revenue, net of interest expense | 19,255 | 18,765 | 3 | |||||||||||||||||
| Provision for credit losses | 65 | 251 | (74) | |||||||||||||||||
| Noninterest expense | 13,032 | 11,417 | 14 | |||||||||||||||||
| Income before income taxes | 6,158 | 7,097 | (13) | |||||||||||||||||
| Income tax expense | 1,601 | 1,845 | (13) | |||||||||||||||||
| Net income | $ | 4,557 | $ | 5,252 | (13) | |||||||||||||||
| Effective tax rate | 26.0 | % | 26.0 | % | ||||||||||||||||
| Return on average allocated capital | 12 | 15 | ||||||||||||||||||
| Efficiency ratio | 67.68 | 60.84 | ||||||||||||||||||
| Balance Sheet | ||||||||||||||||||||
| Average | ||||||||||||||||||||
| Trading-related assets: | ||||||||||||||||||||
| Trading account securities | $ | 291,505 | $ | 243,519 | 20 | % | ||||||||||||||
| Reverse repurchases | 113,989 | 104,697 | 9 | |||||||||||||||||
| Securities borrowed | 100,292 | 87,125 | 15 | |||||||||||||||||
| Derivative assets | 43,582 | 47,655 | (9) | |||||||||||||||||
| Total trading-related assets | 549,368 | 482,996 | 14 | |||||||||||||||||
| Total loans and leases | 91,339 | 73,062 | 25 | |||||||||||||||||
| Total earning assets | 541,391 | 482,171 | 12 | |||||||||||||||||
| Total assets | 785,998 | 685,047 | 15 | |||||||||||||||||
| Total deposits | 51,833 | 47,400 | 9 | |||||||||||||||||
| Allocated capital | 38,000 | 36,000 | 6 | |||||||||||||||||
| Year end | ||||||||||||||||||||
| Total trading-related assets | $ | 491,160 | $ | 421,698 | 16 | % | ||||||||||||||
| Total loans and leases | 114,846 | 78,415 | 46 | |||||||||||||||||
| Total earning assets | 561,135 | 447,350 | 25 | |||||||||||||||||
| Total assets | 747,794 | 616,609 | 21 | |||||||||||||||||
| Total deposits | 46,374 | 53,925 | (14) | |||||||||||||||||
Global Markets offers sales and trading services and research services to institutional clients across fixed-income, credit, currency, commodity and equity businesses. Global Markets product coverage includes securities and derivative products in both the primary and secondary markets. Global Markets provides market-making, financing, securities clearing, settlement and custody services globally to our institutional investor clients in support of their investing and trading activities. We also work with our commercial and corporate clients to provide risk management products using interest rate, equity, credit, currency and commodity derivatives, foreign exchange, fixed-income and mortgage-related products. As a result of our market-making activities in these products, we may be required to manage risk in a broad range of financial products including government securities, equity and equity-linked securities, high-grade and high-yield corporate debt securities, syndicated loans, MBS, commodities and asset-backed securities. The economics of certain investment banking and underwriting activities are shared primarily between Global Markets and Global Banking under an internal revenue-sharing arrangement. Global Banking originates certain deal-related transactions with our corporate and commercial clients that are executed and distributed by Global Markets. For information on
investment banking fees on a consolidated basis, see page 43.
The following explanations for year-over-year changes for Global Markets, including those disclosed under Sales and Trading Revenue, are the same for amounts including and excluding net DVA. Amounts excluding net DVA are a non-GAAP financial measure. For more information on net DVA, see Supplemental Financial Data on page 31.
Net income for Global Markets decreased $695 million to $4.6 billion. Net DVA losses were $54 million compared to losses of $133 million in 2020. Excluding net DVA, net income decreased $755 million to $4.6 billion. These decreases were primarily driven by higher noninterest expense, partially offset by higher revenue and lower provision for credit losses.
Revenue increased $490 million to $19.3 billion primarily driven by higher investment banking fees and sales and trading revenue. Sales and trading revenue increased $172 million, and excluding net DVA, increased $93 million. These increases were driven by higher revenue in Equities, partially offset by lower revenue in FICC.
The provision for credit losses decreased $186 million primarily due to an improved macroeconomic outlook.
Noninterest expense increased $1.6 billion to $13.0 billion primarily driven by higher revenue-related expenses for sales and trading as well as costs associated with processing
Bank of America 44
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||||||||
transactional card claims related to state unemployment benefits.
Average total assets increased $101.0 billion to $786.0 billion. Year-end total assets increased $131.2 billion to $747.8 billion. Both increases were primarily due to higher client balances in Equities and higher levels of inventory and loan growth in FICC.
The return on average allocated capital was 12 percent, down from 15 percent, reflecting lower net income and an increase in allocated capital. For more information on capital allocated to the business segments, see Business Segment Operations on page 36.
Sales and Trading Revenue
Sales and trading revenue includes unrealized and realized gains and losses on trading and other assets which are included in market making and similar activities, net interest income, and fees primarily from commissions on equity securities. Sales and trading revenue is segregated into fixed-income (government debt obligations, investment and non-investment grade corporate debt obligations, commercial MBS, residential mortgage-backed securities, collateralized loan obligations, interest rate and credit derivative contracts), currencies (interest rate and foreign exchange contracts), commodities (primarily futures, forwards, swaps and options) and equities (equity-linked derivatives and cash equity activity). The following table and related discussion present sales and trading revenue, substantially all of which is in Global Markets, with the remainder in Global Banking. In addition, the following table and related discussion present sales and trading revenue,
excluding net DVA, which is a non-GAAP financial measure. For more information on net DVA, see Supplemental Financial Data on page 31.
Sales and Trading Revenue (1, 2, 3)
| |||||||||||
| (Dollars in millions) | 2021 | 2020 | |||||||||
| Sales and trading revenue | |||||||||||
Fixed income, currencies and commodities |
$ | 8,761 | $ | 9,595 | |||||||
| Equities | 6,428 | 5,422 | |||||||||
| Total sales and trading revenue | $ | 15,189 | $ | 15,017 | |||||||
Sales and trading revenue, excluding net DVA (4)
|
|||||||||||
Fixed income, currencies and commodities |
$ | 8,810 | $ | 9,725 | |||||||
| Equities | 6,433 | 5,425 | |||||||||
Total sales and trading revenue, excluding net DVA |
$ | 15,243 | $ | 15,150 | |||||||
(1)For more information on sales and trading revenue, see Note 3 – Derivatives to the Consolidated Financial Statements.
(2)Includes FTE adjustments of $421 million and $196 million for 2021 and 2020.
(3) Includes Global Banking sales and trading revenue of $510 million and $479 million for 2021 and 2020.
(4) FICC and Equities sales and trading revenue, excluding net DVA, is a non-GAAP financial measure. FICC net DVA losses were $49 million and $130 million for 2021 and 2020. Equities net DVA losses were $5 million and $3 million for 2021 and 2020.
FICC revenue decreased $915 million driven by reduced activity in macro products, partially offset by stronger performance in credit and municipal products, and gains in commodities (partially offset by related losses in another segment) from market volatility driven by a weather-related event in the first quarter of 2021. Equities revenue increased $1.0 billion driven by growth in client financing activities, a stronger trading performance and increased client activity.
All Other
| (Dollars in millions) | 2021 | 2020 | % Change | |||||||||||||||||
| Net interest income | $ | 246 | $ | 34 | n/m | |||||||||||||||
| Noninterest income (loss) | (5,589) | (3,605) | 55 | % | ||||||||||||||||
| Total revenue, net of interest expense | (5,343) | (3,571) | 50 | |||||||||||||||||
| Provision for credit losses | (182) | 50 | n/m | |||||||||||||||||
| Noninterest expense | 1,519 | 1,412 | 8 | |||||||||||||||||
| Loss before income taxes | (6,680) | (5,033) | 33 | |||||||||||||||||
| Income tax benefit | (8,069) | (4,634) | 74 | |||||||||||||||||
| Net income (loss) | $ | 1,389 | $ | (399) | n/m | |||||||||||||||
| Balance Sheet | ||||||||||||||||||||
| Year Ended December 31 | ||||||||||||||||||||
| Average | 2021 | 2020 | % Change | |||||||||||||||||
| Total loans and leases | $ | 18,447 | $ | 28,159 | (34) | % | ||||||||||||||
Total assets (1)
|
191,831 | 228,783 | (16) | |||||||||||||||||
| Total deposits | 16,512 | 18,247 | (10) | |||||||||||||||||
| Year end | December 31 2021 |
December 31 2020 |
% Change | |||||||||||||||||
| Total loans and leases | $ | 15,863 | $ | 21,301 | (26) | % | ||||||||||||||
Total assets (1)
|
214,153 | 264,141 | (19) | |||||||||||||||||
| Total deposits | 21,182 | 12,998 | 63 | |||||||||||||||||
(1)In segments where the total of liabilities and equity exceeds assets, which are generally deposit-taking segments, we allocate assets from All Other to those segments to match liabilities (i.e., deposits) and allocated shareholders’ equity. Average allocated assets were $1.1 trillion and $763.1 billion for 2021 and 2020, and year-end allocated assets were $1.2 trillion and $977.7 billion at December 31, 2021 and 2020.
n/m = not meaningful
All Other primarily consists of ALM activities, liquidating businesses and certain expenses not otherwise allocated to a business segment. ALM activities encompass interest rate and foreign currency risk management activities for which substantially all of the results are allocated to our business segments. For more information on our ALM activities, see Note 23 – Business Segment Information to the Consolidated Financial Statements.
Net income increased $1.8 billion to $1.4 billion primarily due to a higher income tax benefit and improvement in the provision for credit losses, partially offset by lower revenue.
Revenue decreased $1.8 billion primarily due to higher partnership losses for ESG investments and a $704 million gain on sales of certain mortgage loans in the prior year.
45 Bank of America
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The provision for credit losses improved $232 million to a benefit of $182 million primarily due to an improved macroeconomic outlook.
Noninterest expense increased $107 million primarily due to higher technology costs and the realignment of a liquidating business activity from Global Markets to All Other in the fourth quarter of 2021, partially offset by lower litigation expense. For more information on realignment of the business activity, see Note 23 – Business Segment Information to the Consolidated Financial Statements.
The income tax benefit was $8.1 billion in 2021 compared to a benefit of $4.6 billion in 2020. The increase in the tax benefit was primarily driven by the impact of U.K. tax law changes and increased income tax credits in 2021. For more information on U.K. tax law changes, see Financial Highlights – Income Tax Expense on page 29. Both years included income tax benefit adjustments to eliminate the FTE treatment of certain tax credits recorded in Global Banking.
Managing Risk
Risk is inherent in all our business activities. Sound risk management enables us to serve our customers and deliver for our shareholders. If not managed well, risk can result in financial loss, regulatory sanctions and penalties, and damage to our reputation, each of which may adversely impact our ability to execute our business strategies. We take a comprehensive approach to risk management with a defined Risk Framework and an articulated Risk Appetite Statement, which are approved annually by the ERC and the Board.
The seven key types of risk faced by the Corporation are strategic, credit, market, liquidity, compliance, operational and reputational.
● Strategic risk is the risk to current or projected financial condition arising from incorrect assumptions about external or internal factors, inappropriate business plans, ineffective business strategy execution or failure to respond in a timely manner to changes in the regulatory, macroeconomic or competitive environments in the geographic locations in which we operate.
● Credit risk is the risk of loss arising from the inability or failure of a borrower or counterparty to meet its obligations.
● Market risk is the risk that changes in market conditions adversely impact the value of assets or liabilities or otherwise negatively impact earnings. Market risk is composed of price risk and interest rate risk.
● Liquidity risk is the inability to meet expected or unexpected cash flow and collateral needs while continuing to support our businesses and customers under a range of economic conditions.
● Compliance risk is the risk of legal or regulatory sanctions, material financial loss or damage to the reputation of the Corporation arising from the failure of the Corporation to comply with the requirements of applicable laws, rules and regulations and our internal policies and procedures.
● Operational risk is the risk of loss resulting from inadequate or failed internal processes or systems, people or external events.
● Reputational risk is the risk that negative perception of the Corporation may adversely impact 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 our purpose, and how we drive Responsible Growth. It requires us to focus on risk in all activities and encourages the necessary mindset and behavior to enable effective risk management and promote sound risk-taking within our risk appetite. Sustaining a culture of managing risk well throughout the organization is critical to the success of the Corporation 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 roles and responsibilities for the management of risk and provides a blueprint for how the Board, through delegation of authority to committees and executive officers, establishes risk appetite and associated limits for our activities.
Executive management assesses, with Board oversight, the risk-adjusted returns of each business. Management reviews and approves the strategic and financial operating plans, as well as the capital plan and Risk Appetite Statement, and recommends them annually to the Board for approval. Our strategic plan takes into consideration return objectives and financial resources, which must align with risk capacity and risk appetite. Management sets financial objectives for each business by allocating capital and setting a target for return on capital for each business. Capital allocations and operating limits are regularly evaluated as part of our overall governance processes as the businesses and the economic environment in which we operate continue to evolve. For more information regarding capital allocations, see Business Segment Operations on page 36.
The Corporation’s risk appetite indicates the amount of capital, earnings or liquidity we are willing to put at risk to achieve our strategic objectives and business plans, consistent with applicable regulatory requirements. Our risk appetite provides a common set of measures for senior management and the Board to clearly indicate the level of risk we are willing to take in alignment with our strategic and capital plans and ensure that the Corporation’s risk profile remains aligned with our risk appetite. Our risk appetite is formally articulated in the Risk Appetite Statement, which includes both qualitative components and quantitative limits.
Our overall capacity to take risk is limited; therefore, we prioritize the risks we take in order to maintain a strong and flexible financial position so we can withstand challenging economic conditions and take advantage of organic growth opportunities. Therefore, we set objectives and targets for capital and liquidity that are intended to permit us to continue to operate in a safe and sound manner, including during periods of stress.
Our lines of business operate with risk limits (which may include credit, market and/or operational limits, as applicable) that align with the Corporation’s risk appetite. Executive management is responsible for tracking and reporting performance measurements as well as any exceptions to guidelines or limits. The Board, and its committees when appropriate, oversee financial performance, execution of the strategic and financial operating plans, adherence to risk appetite limits and the adequacy of internal controls.
For a more detailed discussion of our risk management activities, see the discussion below and pages 49 through 82.
For more information about the Corporation's risks related to the pandemic, see Item 1A. Risk Factors on page 8. These
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COVID-19 related risks are being managed within our Risk Framework and supporting risk management programs.
Risk Management Governance
The Risk Framework describes delegations of authority whereby the Board and its committees may delegate authority to management-level committees or executive officers. Such delegations may authorize certain decision-making and approval
functions, which may be evidenced in documents such as committee charters, job descriptions, meeting minutes and resolutions.
The chart below illustrates the interrelationship among the Board, Board committees and management committees that have the majority of risk oversight responsibilities for the Corporation.
Board of Directors and Board Committees
The Board is composed of 16 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 Global Risk Management (GRM) and/or Corporate Audit to execute its responsibilities. The Board committees discussed below have the principal responsibility for enterprise-wide oversight of our risk management activities. Through these activities, the Board and applicable committees are provided with information on our risk profile and oversee executive management addressing key risks we face. Other Board committees, as described below, provide additional oversight of specific risks.
Each of the committees shown on the above chart regularly reports to the Board on risk-related matters within the committee’s responsibilities, which is intended to collectively provide the Board with integrated insight about our management of enterprise-wide risks.
Audit Committee
The Audit Committee oversees the qualifications, performance and independence of the Independent Registered Public Accounting Firm, the performance of our corporate audit function, the integrity of our consolidated financial statements, our compliance with legal and regulatory requirements, and makes inquiries of management or the Chief Audit Executive (CAE) to determine whether there are scope or resource limitations that impede the ability of Corporate Audit to execute its responsibilities. The Audit Committee is also responsible for overseeing compliance risks pursuant to the New York Stock Exchange listing standards.
Enterprise Risk Committee
The ERC has primary responsibility for oversight of the Risk Framework and key risks we face and of the Corporation’s
overall risk appetite. It approves the Risk Framework and the Risk Appetite Statement and further recommends these documents to the Board for approval. The ERC oversees senior management’s responsibilities for the identification, measurement, monitoring and control of key risks we face. The ERC may consult with other Board committees on risk-related matters.
Other Board Committees
Our Corporate Governance, ESG, and Sustainability Committee oversees our Board’s governance processes, identifies and reviews the qualifications of potential Board members, recommends nominees for election to our Board, recommends committee appointments for Board approval and reviews our ESG and stockholder engagement activities.
Our Compensation and Human Capital Committee oversees establishing, maintaining and administering our compensation programs and employee benefit plans, including approving and recommending our Chief Executive Officer’s (CEO) compensation to our Board for further approval by all independent directors; reviewing and approving our executive officers’ compensation, as well as compensation for non-management directors; and reviewing certain other human capital management topics.
Management Committees
Management committees receive their authority from the Board, a Board committee, another management committee or from one or more executive officers. Our primary management risk committee is the MRC. Subject to Board oversight, the MRC is responsible for management oversight of key risks facing the Corporation, including an integrated evaluation of risk, earnings, capital and liquidity.
Lines of Defense
We have clear ownership and accountability for managing risk across three lines of defense: Front Line Units (FLUs), GRM and Corporate Audit. We also have control functions outside of FLUs and GRM (e.g., Legal and Global Human Resources). The three
47 Bank of America
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lines of defense are integrated into our management-level governance structure. Each of these functional roles is further described in this section.
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, and applicable strategic, capital and financial operating plans, as well as applicable policies and standards. Executive officers and other employees make decisions individually on a day-to-day basis, consistent with the authority they have been delegated. Executive officers and other employees may also serve on committees and participate in committee decisions.
Front Line Units
FLUs, which include the lines of business as well as Global Technology and Global Operations, 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 GRM are first, the Chief Financial Officer (CFO) Group; second, the Chief Administrative Officer (CAO) Group; and third, Global Strategy and Enterprise Platforms (GSEP).
Global Risk Management
GRM is part of our control functions and operates as our independent risk management function. GRM, led by the Chief Risk Officer (CRO), is responsible for independently assessing and overseeing risks within FLUs and other control functions. GRM establishes written enterprise policies and procedures outlining how aggregate risks are identified, measured, monitored and controlled.
The CRO has the stature, authority and independence needed to develop and implement a meaningful risk management framework and practices to guide the Corporation in managing risk. The CRO has unrestricted access to the Board and reports directly to both the ERC and the CEO. GRM is organized into horizontal risk teams that cover a specific risk area and vertical CRO teams that cover a particular FLU or control function. These teams work collaboratively in executing their respective duties.
Corporate Audit
Corporate Audit and the CAE maintain their independence from the FLUs, GRM and other control functions by reporting directly to the Audit Committee. The CAE administratively reports to the CEO. Corporate Audit provides independent assessment and validation through testing of key processes and controls across the Corporation. Corporate Audit includes Credit Review, which provides an independent assessment of credit lending decisions and the effectiveness of credit processes across the Corporation’s credit platform through examinations and monitoring.
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, thereby ensuring risks are appropriately
considered, evaluated and responded to in a timely manner. We employ an effective 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 proactively identified and well understood. 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 that incorporates input from FLUs and control functions. It is designed to be forward-looking and to 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 process including quantitative and qualitative components. Risk is measured at various levels, including, but not limited to, risk type, FLU and legal entity, and also on an aggregate basis. This risk measurement 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 and standards. We also regularly update risk assessments and review risk exposures. Through our monitoring, we know our level of risk relative to limits and can take action in a timely manner. We also know when risk limits are breached and have processes to appropriately report and escalate exceptions. This includes timely 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. 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, operational loss) or relative (e.g., percentage of loan book in higher-risk categories). Our FLUs are held accountable for performing within the established limits.
The formal processes used to manage risk represent a part of our overall risk management process. We instill a strong and comprehensive culture of managing risk well through communications, training, policies, procedures and organizational roles and responsibilities. Establishing a culture reflective of our purpose to help make our customers’ financial lives better and delivering on Responsible Growth is also critical to effective risk management. We are committed to the highest principles of ethical and professional conduct. Conduct risk is the risk of improper actions, behaviors or practices that are illegal, unethical and/or contrary to our core values that could result in harm to the Corporation, our shareholders or our customers, damage the integrity of the financial markets, or negatively impact our reputation. We have established protocols and structures so that conduct risk is governed and reported across the Corporation appropriately. All employees are held accountable for adhering to the Code of Conduct, operating within our risk appetite and managing risk in their daily business activities. In addition, our performance management and compensation practices encourage responsible risk-taking that is consistent with our Risk Framework and risk appetite.
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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 certain subsidiaries and how they impact financial resiliency, which provides confidence to management, regulators and our investors.
Contingency Planning
We have developed and maintain contingency plans that are designed to prepare us in advance to respond in the event of potential adverse economic, financial or market stress. These contingency plans include our Capital Contingency Plan and Financial Contingency and Recovery Plan, which provide monitoring, escalation, actions and routines designed to enable us to increase capital, access funding sources and reduce risk through consideration of potential options that include asset sales, business sales, capital or debt issuances, or other de-risking strategies. We also maintain a Resolution Plan to limit adverse systemic impacts that could be associated with a potential resolution of Bank of America.
Strategic Risk Management
Strategic risk is embedded in every business and is one of the major risk categories along with credit, market, liquidity, compliance, operational and reputational risks. This risk results from incorrect assumptions about external or internal factors, inappropriate business plans, ineffective business strategy execution, or failure to respond in a timely manner to changes in the regulatory, macroeconomic or competitive environments in the geographic locations in which we operate, such as competitor actions, changing customer preferences, product obsolescence and technology developments. Our strategic plan is consistent with our risk appetite, capital plan and liquidity requirements, and specifically addresses strategic risks.
On an annual basis, the Board reviews and approves the strategic plan, capital plan, financial operating plan and Risk Appetite Statement. With oversight by the Board, executive management directs the lines of business to execute our strategic plan consistent with our core operating principles and risk appetite. The executive management team monitors business performance throughout the year and provides the Board with regular progress reports on whether strategic objectives and timelines are being met, including reports on strategic risks and if additional or alternative actions need to be considered or implemented. The regular executive reviews focus on assessing forecasted earnings and returns on capital, the current risk profile, current capital and liquidity requirements, staffing levels and changes required to support the strategic plan, stress testing results, and other qualitative factors such as market growth rates and peer analysis.
Significant strategic actions, such as capital actions, material acquisitions or divestitures, and resolution plans are reviewed and approved by the Board. At the business level, processes are in place to discuss the strategic risk implications of new, expanded or modified businesses, products or services
and other strategic initiatives, and to provide formal review and approval where required. With oversight by the Board and the ERC, executive management performs similar analyses throughout the year, and evaluates changes to the financial forecast or the risk, capital or liquidity positions as deemed appropriate to balance and optimize achieving the targeted risk appetite, shareholder returns and maintaining the targeted financial strength. Proprietary models are used to measure the capital requirements for credit, country, market, operational and strategic risks. The allocated capital assigned to each business is based on its unique risk profile. With oversight by the Board, executive management assesses the risk-adjusted returns of each business in approving strategic and financial operating plans. The businesses use allocated capital to define business strategies, and price products and transactions.
Capital Management
The Corporation manages its capital position so that its capital is more than adequate to support its business activities and aligns with risk, risk appetite and strategic planning. Additionally, we seek to maintain safety and soundness at all times, even under adverse scenarios, take advantage of organic growth opportunities, meet obligations to creditors and counterparties, maintain ready access to financial markets, continue to serve as a credit intermediary, remain a source of strength for our subsidiaries, and satisfy current and future regulatory capital requirements. Capital management is integrated into our risk and governance processes, as capital is a key consideration in the development of our strategic plan, risk appetite and risk limits.
We conduct an Internal Capital Adequacy Assessment Process (ICAAP) on a periodic basis. The ICAAP is a forward-looking assessment of our projected capital needs and resources, incorporating earnings, balance sheet and risk forecasts under baseline and adverse economic and market conditions. We utilize periodic stress tests to assess the potential impacts to our balance sheet, earnings, regulatory capital and liquidity under a variety of stress scenarios. We perform qualitative risk assessments to identify and assess material risks not fully captured in our forecasts or stress tests. We assess the potential capital impacts of proposed changes to regulatory capital requirements. Management assesses ICAAP results and provides documented quarterly assessments of the adequacy of our capital guidelines and capital position to the Board or its committees.
We periodically review capital allocated to our businesses and allocate capital annually during the strategic and capital planning processes. For more information, see Business Segment Operations on page 36.
CCAR and Capital Planning
The Federal Reserve requires BHCs to submit a capital plan and planned capital actions on an annual basis, consistent with the rules governing the Comprehensive Capital Analysis and Review (CCAR) capital plan. Based on the results of our 2021 CCAR capital plan and related supervisory stress tests, we are subject to a 2.5 percent stress capital buffer (SCB), unchanged from the prior level, effective October 1, 2021 through September 30, 2022. Our Common equity tier 1 (CET1) capital ratio under the Standardized approach must remain above 9.5 percent during this period in order to avoid restrictions on capital distributions and discretionary bonus payments.
Due to uncertainty resulting from the pandemic, the Federal Reserve imposed various restrictions on share repurchase programs and dividends during 2020 and the first half of 2021.
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In conjunction with its release of 2021 CCAR supervisory stress test results, the Federal Reserve announced those restrictions would end as of July 1, 2021 for large banks, including the Corporation, and large banks would be subject to the normal restrictions under the Federal Reserve's SCB framework. On October 20, 2021, we announced that the Board renewed the Corporation’s $25 billion common stock repurchase program previously announced in April 2021. The Board’s authorization replaced the previous program. As with the April authorization, the Board also authorized common stock repurchases to offset shares awarded under the Corporation’s equity-based compensation plans. Pursuant to the Board’s authorization, during 2021 we repurchased $25.1 billion of common stock, including repurchases to offset shares awarded under equity-based compensation plans.
The timing and amount of common stock repurchases made pursuant to our stock repurchase program are subject to various factors, including the Corporation’s capital position, liquidity, financial performance and alternative uses of capital, stock trading price, regulatory requirements and general market conditions, and may be suspended at any time. Such repurchases may be effected through open market purchases or privately negotiated transactions, including repurchase plans that satisfy the conditions of Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (Exchange Act).
Regulatory Capital
As a financial services holding company, we are subject to regulatory capital rules, including Basel 3, issued by U.S. banking regulators. Basel 3 established minimum capital ratios and buffer requirements and outlined two methods of calculating risk-weighted assets (RWA), the Standardized approach and the Advanced approaches. The Standardized approach relies primarily on supervisory risk weights based on exposure type, and the Advanced approaches determine risk weights based on internal models.
The Corporation's depository institution subsidiaries are also subject to the Prompt Corrective Action (PCA) framework. The Corporation and its primary affiliated banking entity, BANA, are Advanced approaches institutions under Basel 3 and are required to report regulatory risk-based capital ratios and RWA under both the Standardized and Advanced approaches. The approach that yields the lower ratio is used to assess capital adequacy, including under the PCA framework. As of December 31, 2021, the CET1, Tier 1 capital and Total capital ratios for the Corporation were lower under the Standardized approach.
Minimum Capital Requirements
In order to avoid restrictions on capital distributions and discretionary bonus payments, the Corporation must meet risk-based capital ratio requirements that include a capital
conservation buffer of 2.5 percent (under the Advanced approaches only), an SCB (under the Standardized approach only), plus any applicable countercyclical capital buffer and a global systemically important bank (G-SIB) surcharge. Including a regulatory minimum requirement of 4.5 percent, an SCB of 2.5 percent and a G-SIB surcharge of 2.5 percent, the Corporation's CET1 capital ratio must be a minimum of 9.5 percent under both the Standardized and Advanced approaches.
The Corporation is required to calculate its G-SIB surcharge on an annual basis under two methods and is subject to the higher of the resulting two surcharges. Method 1 is consistent with the approach prescribed by the Basel Committee’s assessment methodology and is calculated using specified indicators of systemic importance. Method 2 modifies the Method 1 approach by, among other factors, including a measure of the Corporation’s reliance on short-term wholesale funding. The Corporation’s G-SIB surcharge, which is higher under Method 2, is expected to increase to 3.0 percent on January 1, 2024 unless its surcharge calculated as of December 31, 2022 is lower than 3.0 percent.
The current SCB of 2.5 percent, which remains effective from October 1, 2021 through September 30, 2022, could change based on results of the 2022 CCAR capital plan and related supervisory stress tests to be submitted in the first half of 2022.
The Corporation is also required to maintain a minimum supplementary leverage ratio (SLR) of 3.0 percent plus a leverage buffer of 2.0 percent in order to avoid certain restrictions on capital distributions and discretionary bonus payments. Our insured depository institution subsidiaries are required to maintain a minimum 6.0 percent SLR to be considered well capitalized under the PCA framework. The numerator of the SLR is quarter-end Basel 3 Tier 1 capital. The denominator is total leverage exposure based on the daily average of the sum of on-balance sheet exposures less permitted deductions, and applicable temporary exclusions, as well as the simple average of certain off-balance sheet exposures, as of the end of each month in a quarter. The temporary exclusions expired after March 31, 2021 and were not applicable for December 31, 2021. For more information, see Capital Management – Regulatory Developments on page 54.
Capital Composition and Ratios
Table 10 presents Bank of America Corporation’s capital ratios and related information in accordance with Basel 3 Standardized and Advanced approaches as measured at December 31, 2021 and 2020. For the periods presented herein, the Corporation met the definition of well capitalized under current regulatory requirements.
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| Table 10 | Bank of America Corporation Regulatory Capital under Basel 3 | |||||||||||||||||||
Standardized Approach (1) |
Advanced Approaches (1) |
Regulatory Minimum (2) |
||||||||||||||||||
| (Dollars in millions, except as noted) | December 31, 2021 | |||||||||||||||||||
| Risk-based capital metrics: | ||||||||||||||||||||
| Common equity tier 1 capital | $ | 171,759 | $ | 171,759 | ||||||||||||||||
| Tier 1 capital | 196,465 | 196,465 | ||||||||||||||||||
Total capital (3)
|
227,592 | 220,616 | ||||||||||||||||||
| Risk-weighted assets (in billions) | 1,618 | 1,399 | ||||||||||||||||||
| Common equity tier 1 capital ratio | 10.6 | % | 12.3 | % | 9.5 | % | ||||||||||||||
| Tier 1 capital ratio | 12.1 | 14.0 | 11.0 | |||||||||||||||||
| Total capital ratio | 14.1 | 15.8 | 13.0 | |||||||||||||||||
| Leverage-based metrics: | ||||||||||||||||||||
Adjusted quarterly average assets (in billions) (4)
|
$ | 3,087 | $ | 3,087 | ||||||||||||||||
| Tier 1 leverage ratio | 6.4 | % | 6.4 | % | 4.0 | |||||||||||||||
Supplementary leverage exposure (in billions) (5)
|
$ | 3,604 | ||||||||||||||||||
| Supplementary leverage ratio | 5.5 | % | 5.0 | |||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||
| Risk-based capital metrics: | ||||||||||||||||||||
| Common equity tier 1 capital | $ | 176,660 | $ | 176,660 | ||||||||||||||||
| Tier 1 capital | 200,096 | 200,096 | ||||||||||||||||||
Total capital (3)
|
237,936 | 227,685 | ||||||||||||||||||
| Risk-weighted assets (in billions) | 1,480 | 1,371 | ||||||||||||||||||
| Common equity tier 1 capital ratio | 11.9 | % | 12.9 | % | 9.5 | % | ||||||||||||||
| Tier 1 capital ratio | 13.5 | 14.6 | 11.0 | |||||||||||||||||
| Total capital ratio | 16.1 | 16.6 | 13.0 | |||||||||||||||||
| Leverage-based metrics: | ||||||||||||||||||||
Adjusted quarterly average assets (in billions) (4)
|
$ | 2,719 | $ | 2,719 | ||||||||||||||||
| Tier 1 leverage ratio | 7.4 | % | 7.4 | % | 4.0 | |||||||||||||||
Supplementary leverage exposure (in billions) (5)
|
$ | 2,786 | ||||||||||||||||||
| Supplementary leverage ratio | 7.2 | % | 5.0 | |||||||||||||||||
(1)Capital ratios as of December 31, 2021 and 2020 are calculated using the regulatory capital rule that allows a five-year transition period related to the adoption of the current expected credit losses (CECL) accounting standard.
(2)The capital conservation buffer and G-SIB surcharge were 2.5 percent at both December 31, 2021 and 2020. At both December 31, 2021 and 2020, the Corporation's SCB of 2.5 percent was applied in place of the capital conservation buffer under the Standardized approach. The countercyclical capital buffer for both periods was zero. The CET1 capital regulatory minimum is the sum of the CET1 capital ratio minimum of 4.5 percent, our G-SIB surcharge of 2.5 percent and our SCB or the capital conservation buffer, as applicable, of 2.5 percent. The SLR regulatory minimum includes a leverage buffer of 2.0 percent.
(3)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.
(4)Reflects total average assets adjusted for certain Tier 1 capital deductions.
(5)Supplementary leverage exposure at December 31, 2020 reflects the temporary exclusion of U.S. Treasury securities and deposits at Federal Reserve Banks. The temporary relief expired after March 31, 2021 and is not reflected in supplementary leverage exposure at December 31, 2021.
At December 31, 2021, CET1 capital was $171.8 billion, a decrease of $4.9 billion from December 31, 2020, driven by common stock repurchases, dividends and decreases in net unrealized gains on available-for-sale (AFS) debt securities included in accumulated other comprehensive income (OCI), partially offset by earnings. Tier 1 capital decreased $3.6 billion primarily driven by the same factors as CET1 capital, partially offset by non-cumulative perpetual preferred stock issuances. Total capital under the Standardized approach decreased $10.3 billion primarily due to the same factors driving the decrease in CET1 capital, and a decrease in the adjusted allowance for credit losses included in Tier 2 capital. RWA under the
Standardized approach, which yielded the lower CET1 capital
ratio at December 31, 2021, increased $138.1 billion during 2021 to $1,618 billion primarily due to loan growth in Global Banking, strong client activity in Global Markets and an increase in debt securities resulting from the deployment of cash received from deposit inflows. Supplementary leverage exposure at December 31, 2021 increased $818.1 billion during 2021 primarily due to the expiration of the Federal Reserve’s temporary relief to exclude U.S. Treasury securities and deposits at Federal Reserve Banks and an increase in debt securities resulting from the deployment of cash received from deposit inflows.
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Table 11 shows the capital composition at December 31, 2021 and 2020.
| Table 11 | Capital Composition under Basel 3 | |||||||||||||
| December 31 | ||||||||||||||
| (Dollars in millions) | 2021 | 2020 | ||||||||||||
| Total common shareholders’ equity | $ | 245,358 | $ | 248,414 | ||||||||||
CECL transitional amount (1)
|
2,508 | 4,213 | ||||||||||||
| Goodwill, net of related deferred tax liabilities | (68,641) | (68,565) | ||||||||||||
| Deferred tax assets arising from net operating loss and tax credit carryforwards | (7,743) | (5,773) | ||||||||||||
| Intangibles, other than mortgage servicing rights, net of related deferred tax liabilities | (1,605) | (1,617) | ||||||||||||
| Defined benefit pension plan net assets | (1,261) | (1,164) | ||||||||||||
| Cumulative unrealized net (gain) loss related to changes in fair value of financial liabilities attributable to own creditworthiness, net-of-tax |
1,400 | 1,753 | ||||||||||||
Accumulated net (gain) loss on certain cash flow hedges (2)
|
1,870 | (436) | ||||||||||||
| Other | (127) | (165) | ||||||||||||
| Common equity tier 1 capital | 171,759 | 176,660 | ||||||||||||
| Qualifying preferred stock, net of issuance cost | 24,707 | 23,437 | ||||||||||||
| Other | (1) | (1) | ||||||||||||
| Tier 1 capital | 196,465 | 200,096 | ||||||||||||
| Tier 2 capital instruments | 20,750 | 22,213 | ||||||||||||
Qualifying allowance for credit losses (3)
|
10,534 | 15,649 | ||||||||||||
| Other | (157) | (22) | ||||||||||||
| Total capital under the Standardized approach | 227,592 | 237,936 | ||||||||||||
Adjustment in qualifying allowance for credit losses under the Advanced approaches (3)
|
(6,976) | (10,251) | ||||||||||||
| Total capital under the Advanced approaches | $ | 220,616 | $ | 227,685 | ||||||||||
(1)Includes the impact of the Corporation's adoption of the CECL accounting standard on January 1, 2020 and 25 percent of the increase in reserves since the initial adoption.
(2)Includes amounts in accumulated other comprehensive income related to the hedging of items that are not recognized at fair value on the Consolidated Balance Sheet.
(3)Includes the impact of transition provisions related to the CECL accounting standard.
Table 12 shows the components of RWA as measured under Basel 3 at December 31, 2021 and 2020.
| Table 12 | Risk-weighted Assets under Basel 3 | |||||||||||||||||||||||||
| Standardized Approach | Advanced Approaches | Standardized Approach | Advanced Approaches | |||||||||||||||||||||||
| December 31 | ||||||||||||||||||||||||||
| (Dollars in billions) | 2021 | 2020 | ||||||||||||||||||||||||
| Credit risk | $ | 1,549 | $ | 913 | $ | 1,420 | $ | 896 | ||||||||||||||||||
| Market risk | 69 | 69 | 60 | 60 | ||||||||||||||||||||||
| Operational risk | n/a | 378 | n/a | 372 | ||||||||||||||||||||||
| Risks related to credit valuation adjustments | n/a | 39 | n/a | 43 | ||||||||||||||||||||||
| Total risk-weighted assets | $ | 1,618 | $ | 1,399 | $ | 1,480 | $ | 1,371 | ||||||||||||||||||
n/a = not applicable
Bank of America 52
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Bank of America, N.A. Regulatory Capital
Table 13 presents regulatory capital information for BANA in accordance with Basel 3 Standardized and Advanced approaches as measured at December 31, 2021 and 2020. BANA met the definition of well capitalized under the PCA framework for both periods.
| Table 13 | Bank of America, N.A. Regulatory Capital under Basel 3 | |||||||||||||||||||
Standardized Approach (1) |
Advanced Approaches (1) |
Regulatory Minimum (2) |
||||||||||||||||||
| (Dollars in millions, except as noted) | December 31, 2021 | |||||||||||||||||||
| Risk-based capital metrics: | ||||||||||||||||||||
Common equity tier 1 capital |
$ | 182,526 | $ | 182,526 | ||||||||||||||||
| Tier 1 capital | 182,526 | 182,526 | ||||||||||||||||||
Total capital (3)
|
194,773 | 188,091 | ||||||||||||||||||
| Risk-weighted assets (in billions) | 1,352 | 1,048 | ||||||||||||||||||
| Common equity tier 1 capital ratio | 13.5 | % | 17.4 | % | 7.0 | % | ||||||||||||||
| Tier 1 capital ratio | 13.5 | 17.4 | 8.5 | |||||||||||||||||
| Total capital ratio | 14.4 | 17.9 | 10.5 | |||||||||||||||||
| Leverage-based metrics: | ||||||||||||||||||||
Adjusted quarterly average assets (in billions) (4)
|
$ | 2,414 | $ | 2,414 | ||||||||||||||||
| Tier 1 leverage ratio | 7.6 | % | 7.6 | % | 5.0 | |||||||||||||||
| Supplementary leverage exposure (in billions) | $ | 2,824 | ||||||||||||||||||
| Supplementary leverage ratio | 6.5 | % | 6.0 | |||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||
| Risk-based capital metrics: | ||||||||||||||||||||
Common equity tier 1 capital |
$ | 164,593 | $ | 164,593 | ||||||||||||||||
| Tier 1 capital | 164,593 | 164,593 | ||||||||||||||||||
Total capital (3)
|
181,370 | 170,922 | ||||||||||||||||||
| Risk-weighted assets (in billions) | 1,221 | 1,014 | ||||||||||||||||||
| Common equity tier 1 capital ratio | 13.5 | % | 16.2 | % | 7.0 | % | ||||||||||||||
| Tier 1 capital ratio | 13.5 | 16.2 | 8.5 | |||||||||||||||||
| Total capital ratio | 14.9 | 16.9 | 10.5 | |||||||||||||||||
| Leverage-based metrics: | ||||||||||||||||||||
Adjusted quarterly average assets (in billions) (4)
|
$ | 2,143 | $ | 2,143 | ||||||||||||||||
| Tier 1 leverage ratio | 7.7 | % | 7.7 | % | 5.0 | |||||||||||||||
| Supplementary leverage exposure (in billions) | $ | 2,525 | ||||||||||||||||||
| Supplementary leverage ratio | 6.5 | % | 6.0 | |||||||||||||||||
(1)Capital ratios for both December 31, 2021 and 2020 are calculated using the regulatory capital rule that allows a five-year transition period related to the adoption of CECL.
(2)Risk-based capital regulatory minimums at both December 31, 2021 and 2020 are the minimum ratios under Basel 3 including a capital conservation buffer of 2.5 percent. The regulatory minimums for the leverage ratios as of both period ends are the percent required to be considered well capitalized under the PCA framework.
(3)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.
(4)Reflects total average assets adjusted for certain Tier 1 capital deductions.
Total Loss-Absorbing Capacity Requirements
Total loss-absorbing capacity (TLAC) consists of the Corporation’s Tier 1 capital and eligible long-term debt issued directly by the Corporation. Eligible long-term debt for TLAC ratios is comprised of unsecured debt that has a remaining maturity of at least one year and satisfies additional requirements as prescribed in the TLAC final rule. As with the
risk-based capital ratios and SLR, the Corporation is required to maintain TLAC ratios in excess of minimum requirements plus applicable buffers to avoid restrictions on capital distributions and discretionary bonus payments. Table 14 presents the Corporation's TLAC and long-term debt ratios and related information as of December 31, 2021 and 2020.
53 Bank of America
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| Table 14 | Bank of America Corporation Total Loss-Absorbing Capacity and Long-Term Debt | |||||||||||||||||||||||||
|
TLAC (1)
|
Regulatory Minimum (2)
|
Long-term Debt |
Regulatory Minimum (3)
|
|||||||||||||||||||||||
| (Dollars in millions) | December 31, 2021 | |||||||||||||||||||||||||
| Total eligible balance | $ | 435,904 | $ | 227,714 | ||||||||||||||||||||||
Percentage of risk-weighted assets (4)
|
26.9 | % | 22.0 | % | 14.1 | % | 8.5 | % | ||||||||||||||||||
Percentage of supplementary leverage exposure (5)
|
12.1 | 9.5 | 6.3 | 4.5 | ||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||
| Total eligible balance | $ | 405,153 | $ | 196,997 | ||||||||||||||||||||||
Percentage of risk-weighted assets (4)
|
27.4 | % | 22.0 | % | 13.3 | % | 8.5 | % | ||||||||||||||||||
Percentage of supplementary leverage exposure (5)
|
14.5 | 9.5 | 7.1 | 4.5 | ||||||||||||||||||||||
(1)As of December 31, 2021 and 2020, TLAC ratios are calculated using the regulatory capital rule that allows a five-year transition period related to the adoption of CECL.
(2)The TLAC RWA regulatory minimum consists of 18.0 percent plus a TLAC RWA buffer comprised of 2.5 percent plus the Method 1 G-SIB surcharge of 1.5 percent. The countercyclical buffer is zero for both periods. The TLAC supplementary leverage exposure regulatory minimum consists of 7.5 percent plus a 2.0 percent TLAC leverage buffer. The TLAC RWA and leverage buffers must be comprised solely of CET1 capital and Tier 1 capital, respectively.
(3)The long-term debt RWA regulatory minimum is comprised of 6.0 percent plus an additional 2.5 percent requirement based on the Corporation’s Method 2 G-SIB surcharge. The long-term debt leverage exposure regulatory minimum is 4.5 percent.
(4)The approach that yields the higher RWA is used to calculate TLAC and long-term debt ratios, which was the Standardized approach as of December 31, 2021 and 2020.
(5)Supplementary leverage exposure at December 31, 2020 reflects the temporary exclusion of U.S. Treasury Securities and deposits at Federal Reserve Banks. The temporary relief expired after March 31, 2021 and is not reflected in supplementary leverage exposure at December 31, 2021.
Regulatory Developments
Supplementary Leverage Ratio
On March 19, 2021, U.S. banking regulators announced that temporary changes issued in 2020 for BHCs and depository institutions would expire as scheduled after March 31, 2021. These temporary changes to the SLR allowed the exclusion of on-balance sheet amounts of U.S. Treasury securities and deposits at Federal Reserve Banks from the calculation of supplementary leverage exposure. While the temporary relief automatically applied to the Corporation, the Corporation’s lead depository institution, Bank of America, N.A., did not opt to take advantage of the SLR relief offered by the OCC. At December 31, 2021, the Corporation’s SLR was 5.5 percent, which exceeds the 5.0 percent minimum required by the Federal Reserve.
Regulatory Capital and Securities Regulation
The Corporation’s principal U.S. broker-dealer subsidiaries are BofA Securities, Inc. (BofAS), Merrill Lynch Professional Clearing Corp. (MLPCC) and Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). The Corporation's principal European broker-dealer subsidiaries are Merrill Lynch International (MLI) and BofA Securities Europe SA (BofASE).
The U.S. broker-dealer subsidiaries are subject to the net capital requirements of Rule 15c3-1 under the Exchange Act. BofAS computes its minimum capital requirements as an alternative net capital broker-dealer under Rule 15c3-1e, and MLPCC and MLPF&S compute their minimum capital requirements in accordance with the alternative standard under Rule 15c3-1. BofAS and MLPCC are also registered as futures commission merchants and are subject to Commodity Futures Trading Commission (CFTC) Regulation 1.17. The U.S. broker-dealer subsidiaries are also registered with the Financial Industry Regulatory Authority, Inc. (FINRA). Pursuant to FINRA Rule 4110, FINRA may impose higher net capital requirements than Rule 15c3-1 under the Exchange Act with respect to each of the broker-dealers.
BofAS provides institutional services, and in accordance with the alternative net capital requirements, is required to maintain tentative net capital in excess of $5.0 billion and net capital in excess of the greater of $1.0 billion or a certain percentage of its reserve requirement in addition to a certain percentage of securities-based swap risk margin. BofAS must also notify the SEC in the event its tentative net capital is less than $6.0 billion. BofAS is also required to hold a certain percentage of its
customers' and affiliates' risk-based margin in order to meet its CFTC minimum net capital requirement. At December 31, 2021, BofAS had tentative net capital of $19.4 billion. BofAS also had regulatory net capital of $16.6 billion, which exceeded the minimum requirement of $3.5 billion.
MLPCC is a fully-guaranteed subsidiary of BofAS and provides clearing and settlement services as well as prime brokerage and arranged financing services for institutional clients. At December 31, 2021, MLPCC’s regulatory net capital of $6.2 billion exceeded the minimum requirement of $1.5 billion.
MLPF&S provides retail services. At December 31, 2021, MLPF&S' regulatory net capital was $5.7 billion, which exceeded the minimum requirement of $199 million.
Our European broker-dealers are regulated by non-U.S. regulators. MLI, a U.K. investment firm, is regulated by the Prudential Regulation Authority and the Financial Conduct Authority and is subject to certain regulatory capital requirements. At December 31, 2021, MLI’s capital resources were $33.6 billion, which exceeded the minimum Pillar 1 requirement of $14.0 billion. BofASE, a French investment firm, is regulated by the Autorité de Contrôle Prudentiel et de Résolution and the Autorité des Marchés Financiers, and is subject to certain regulatory capital requirements. At December 31, 2021, BofASE's capital resources were $7.9 billion, which exceeded the minimum Pillar 1 requirement of $2.8 billion.
Liquidity Risk
Funding and Liquidity Risk Management
Our primary liquidity risk management objective is to meet expected or unexpected cash flow and collateral requirements, including payments under long-term debt agreements, commitments to extend credit and customer deposit withdrawals, while continuing to support our businesses and customers under a range of economic conditions. To achieve that objective, we analyze and monitor our liquidity risk under expected and stressed conditions, maintain liquidity and access to diverse funding sources, including our stable deposit base, and seek to align liquidity-related incentives and risks. These liquidity risk management practices have allowed us to effectively manage the market fluctuation from the pandemic. For more information on the risks of the pandemic, see Part I. Item 1A. Risk Factors – Coronavirus Disease on page 8 and Executive Summary – Recent Developments – COVID-19
Bank of America 54
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Pandemic on page 27.
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 they arise. We manage our liquidity position through line-of-business and ALM activities, as well as through our legal entity funding strategy, on both a forward and current (including intraday) basis under both expected and stressed conditions. We believe that a centralized approach to funding and liquidity management enhances our ability to monitor liquidity requirements, maximizes access to funding sources, minimizes borrowing costs and facilitates timely responses to liquidity events.
The Board approves our liquidity risk policy and the Financial Contingency and Recovery Plan. The ERC establishes our liquidity risk tolerance levels. The MRC is responsible for overseeing liquidity risks and directing management to maintain exposures within the established tolerance levels. The MRC reviews and monitors our liquidity position and stress testing results, approves certain liquidity risk limits and reviews the impact of strategic decisions on our liquidity. For more information, see Managing Risk on page 46. Under this governance framework, we developed certain funding and liquidity risk management practices which include: maintaining liquidity at the parent company and selected subsidiaries, including our bank subsidiaries and other regulated entities; determining what amounts of liquidity are appropriate for these entities based on analysis of debt maturities and other potential cash outflows, including those that we may experience during stressed market conditions; diversifying funding sources, considering our asset profile and legal entity structure; and performing contingency planning.
NB Holdings Corporation
The parent company, which is a separate and distinct legal entity from our bank and nonbank subsidiaries, has an intercompany arrangement with our wholly-owned holding company subsidiary, NB Holdings Corporation (NB Holdings). We have transferred, and agreed to transfer, additional parent company assets not required to satisfy anticipated near-term expenditures to 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 it not entered into these arrangements and transferred any assets. These arrangements support our preferred single point of entry resolution strategy, under which only the parent company would be resolved under the U.S. Bankruptcy Code.
In consideration for the transfer of assets, NB Holdings issued a subordinated note to the parent company in a principal amount equal to the value of the transferred assets. The aggregate principal amount of the note will increase by the amount of any future asset transfers. NB Holdings also provided the parent company with a committed line of credit that allows the parent company to draw funds necessary to service near-term cash needs. These arrangements support our preferred single point of entry resolution strategy, under which only the parent company would be resolved under the U.S. Bankruptcy Code. These arrangements include provisions to terminate the line of credit, forgive the subordinated note and require the parent company to transfer its remaining financial assets to NB Holdings if our projected liquidity resources deteriorate so severely that resolution of the parent company becomes imminent.
Global Liquidity Sources and Other Unencumbered Assets
We maintain liquidity available to the Corporation, including the parent company and selected subsidiaries, in the form of cash and high-quality, liquid, unencumbered securities. Our liquidity buffer, referred to as Global Liquidity Sources (GLS), is comprised of assets that are readily available to the parent company and selected subsidiaries, including holding company, bank and broker-dealer subsidiaries, even during stressed market conditions. Our cash is primarily on deposit with the Federal Reserve Bank and, to a lesser extent, central banks outside of the U.S. We limit the composition of high-quality, liquid, unencumbered securities to U.S. government securities, U.S. agency securities, U.S. agency MBS and other investment-grade securities, and a select group of non-U.S. government securities. We can obtain cash for these securities, even in stressed conditions, through repurchase agreements or outright sales. We hold our GLS in legal entities that allow us to meet the liquidity requirements of our global businesses, and we consider the impact of potential regulatory, tax, legal and other restrictions that could limit the transferability of funds among entities.
Table 15 presents average GLS for the three months ended December 31, 2021 and 2020.
| Table 15 | Average Global Liquidity Sources | |||||||||||||
| Three Months Ended December 31 |
||||||||||||||
| (Dollars in billions) | 2021 | 2020 | ||||||||||||
| Bank entities | $ | 1,006 | $ | 773 | ||||||||||
Nonbank and other entities (1)
|
152 | 170 | ||||||||||||
Total Average Global Liquidity Sources |
$ | 1,158 | $ | 943 | ||||||||||
(1) Nonbank includes Parent, NB Holdings and other regulated entities.
Our bank subsidiaries’ liquidity is primarily driven by deposit and lending activity, as well as securities valuation and net debt activity. Bank subsidiaries can also generate incremental liquidity by pledging a range of unencumbered loans and securities to certain FHLBs and the Federal Reserve Discount Window. The cash we could have obtained by borrowing against this pool of specifically-identified eligible assets was $322 billion and $306 billion at December 31, 2021 and 2020. We have established operational procedures to enable us to borrow against these assets, including regularly monitoring our total pool of eligible loans and securities collateral. Eligibility is defined in guidelines from the FHLBs and the Federal Reserve and is subject to change at their discretion. Due to regulatory restrictions, liquidity generated by the bank subsidiaries can generally be used only to fund obligations within the bank subsidiaries, and transfers to the parent company or nonbank subsidiaries may be subject to prior regulatory approval.
Liquidity is also held in nonbank entities, including the Parent, NB Holdings and other regulated entities. Parent company and NB Holdings liquidity is typically in the form of cash deposited at BANA, which is excluded from the liquidity at bank subsidiaries, and high-quality, liquid, unencumbered securities. Liquidity held in other regulated entities, comprised primarily of broker-dealer subsidiaries, is primarily available to meet the obligations of that entity, and transfers to the parent company or to any other subsidiary may be subject to prior regulatory approval due to regulatory restrictions and minimum requirements. Our other regulated entities also hold unencumbered investment-grade securities and equities that we believe could be used to generate additional liquidity.
55 Bank of America
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Table 16 presents the composition of average GLS for the three months ended December 31, 2021 and 2020.
| Table 16 | Average Global Liquidity Sources Composition | ||||||||||
| Three Months Ended December 31 |
|||||||||||
| (Dollars in billions) | 2021 | 2020 | |||||||||
| Cash on deposit | $ | 259 | $ | 322 | |||||||
| U.S. Treasury securities | 278 | 141 | |||||||||
U.S. agency securities, mortgage-backed securities, and other investment-grade securities |
606 | 462 | |||||||||
Non-U.S. government securities |
15 | 18 | |||||||||
| Total Average Global Liquidity Sources | $ | 1,158 | $ | 943 | |||||||
Our GLS are substantially the same in composition to what qualifies as High Quality Liquid Assets (HQLA) under the final U.S. Liquidity Coverage Ratio (LCR) rules. However, HQLA for purposes of calculating LCR is not reported at market value, but at a lower value that incorporates regulatory deductions and the exclusion of excess liquidity held at certain subsidiaries. The LCR is calculated as the amount of a financial institution’s unencumbered HQLA relative to the estimated net cash outflows the institution could encounter over a 30-day period of significant liquidity stress, expressed as a percentage. Our average consolidated HQLA, on a net basis, was $617 billion and $584 billion for the three months ended December 31, 2021 and 2020. For the same periods, the average consolidated LCR was 115 percent and 122 percent. Our LCR fluctuates due to normal business flows from customer activity.
Liquidity Stress Analysis
We utilize liquidity stress analysis to assist us in determining the appropriate amounts of liquidity to maintain at the parent company and our subsidiaries to meet contractual and contingent cash outflows under a range of scenarios. The scenarios we consider and utilize incorporate market-wide and Corporation-specific events, including potential credit rating downgrades for the parent company and our subsidiaries, and more severe events including potential resolution scenarios. The scenarios are based on our historical experience, experience of distressed and failed financial institutions, regulatory guidance, and both expected and unexpected future events.
The types of potential contractual and contingent cash outflows we consider in our scenarios may include, but are not limited to, upcoming contractual maturities of unsecured debt and reductions in new debt issuances; diminished access to secured financing markets; potential deposit withdrawals; increased draws on loan commitments, liquidity facilities and letters of credit; additional collateral that counterparties could call if our credit ratings were downgraded; collateral and margin requirements arising from market value changes; and potential liquidity required to maintain businesses and finance customer activities. Changes in certain market factors, including, but not limited to, credit rating downgrades, could negatively impact potential contractual and contingent outflows and the related financial instruments, and in some cases these impacts could be material to our financial results.
We consider all sources of funds that we could access during each stress scenario and focus particularly on matching available sources with corresponding liquidity requirements by legal entity. We also use the stress modeling results to manage our asset and liability profile and establish limits and guidelines on certain funding sources and businesses.
Net Stable Funding Ratio Final Rule
On October 20, 2020, U.S. banking regulators finalized the Net Stable Funding Ratio (NSFR), a rule requiring large banks to maintain a minimum level of stable funding over a one-year period. The final rule is intended to support the ability of banks to lend to households and businesses in both normal and adverse economic conditions and is complementary to the LCR rule, which focuses on short-term liquidity risks. The final rule was effective July 1, 2021, and the Corporation is in compliance. The U.S. NSFR applies to the Corporation on a consolidated basis and to our insured depository institutions. There have not been any significant impacts to the Corporation.
Diversified Funding Sources
We fund our assets primarily with a mix of deposits, and secured and unsecured liabilities through a centralized, globally coordinated funding approach diversified across products, programs, markets, currencies and investor groups.
The primary benefits of our centralized funding approach include greater control, reduced funding costs, wider name recognition by investors and greater flexibility to meet the variable funding requirements of subsidiaries. Where regulations, time zone differences or other business considerations make parent company funding impractical, certain other subsidiaries may issue their own debt.
We fund a substantial portion of our lending activities through our deposits, which were $2.1 trillion and $1.8 trillion at December 31, 2021 and 2020. Deposits are primarily generated by our Consumer Banking, GWIM and Global Banking segments. These deposits are diversified by clients, product type and geography, and the majority of our U.S. deposits are insured by the FDIC. We consider a substantial portion of our deposits to be a stable, low-cost and consistent source of funding. We believe this deposit funding is generally less sensitive to interest rate changes, market volatility or changes in our credit ratings than wholesale funding sources. Our lending activities may also be financed through secured borrowings, including credit card securitizations and securitizations with government-sponsored enterprises (GSE), the Federal Housing Administration (FHA) and private-label investors, as well as FHLB loans.
Our trading activities in other regulated entities are primarily funded on a secured basis through securities lending and repurchase agreements, and these amounts will vary based on customer activity and market conditions. We believe funding these activities in the secured financing markets is more cost-efficient and less sensitive to changes in our credit ratings than unsecured financing. Repurchase agreements are generally short-term and often overnight. Disruptions in secured financing markets for financial institutions have occurred in prior market cycles which resulted in adverse changes in terms or significant 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 – Securities Financing Agreements, Short-term Borrowings and Restricted Cash to the Consolidated Financial Statements.
Total long-term debt increased $17.2 billion to $280.1 billion during 2021, primarily due to debt issuances, partially offset by debt maturities, redemptions and valuation adjustments. We may, from time to time, purchase outstanding debt instruments in various transactions, depending on market conditions, liquidity and other factors. Our other regulated
Bank of America 56
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entities may also make markets in our debt instruments to provide liquidity for investors.
During 2021, we issued $76.7 billion of long-term debt consisting of $56.2 billion of notes issued by Bank of America Corporation, substantially all of which were TLAC compliant, $8.0 billion of notes issued by Bank of America, N.A. and $12.5 billion of other debt. During 2020, we issued $56.9 billion of long-term debt consisting of $43.8 billion of notes issued by Bank of America Corporation, substantially all of which were TLAC compliant, $4.8 billion of notes issued by Bank of America, N.A. and $8.3 billion of other debt.
During 2021, we had total long-term debt maturities and redemptions in the aggregate of $46.4 billion consisting of $24.4 billion for Bank of America Corporation, $10.4 billion for Bank of America, N.A. and $11.6 billion of other debt. During 2020, we had total long-term debt maturities and redemptions in the aggregate of $47.1 billion consisting of $22.6 billion for Bank of America Corporation, $11.5 billion for Bank of America, N.A. and $13.0 billion of other debt.
At December 31, 2021, Bank of America Corporation's senior notes of $212.9 billion included $179.5 billion of outstanding notes that are both TLAC eligible and callable at least one year before their stated maturities. Of these senior notes, $15.0 billion will be callable and become TLAC ineligible during 2022, and $17.0 billion, $17.8 billion, $15.0 billion and $17.7 billion will do so during each of 2023 through 2026, respectively, and $97.0 billion thereafter.
We issue long-term unsecured debt in a variety of maturities and currencies to achieve cost-efficient funding and to maintain an appropriate maturity profile. While the cost and availability of unsecured funding may be negatively impacted by general market conditions or by matters specific to the financial services industry or the Corporation, we seek to mitigate refinancing risk by actively managing the amount of our borrowings that we anticipate will mature within any month or quarter. We may issue unsecured debt in the form of structured notes for client purposes, certain of which qualify as TLAC-eligible debt. During 2021, we issued $7.1 billion of structured notes, which are debt obligations that pay investors returns linked to other debt or equity securities, indices, currencies or commodities. We typically hedge the returns we are obligated to pay on these liabilities with derivatives and/or investments in the underlying instruments, so that from a funding perspective, the cost is similar to our other unsecured long-term debt. We could be required to settle certain structured note obligations for cash or other securities prior to maturity under certain circumstances, which we consider for liquidity planning purposes. We believe, however, that a portion of such borrowings will remain outstanding beyond the earliest put or redemption date.
Substantially all of our senior and subordinated debt obligations contain no provisions that could trigger a requirement for an early repayment, require additional collateral support, result in changes to terms, accelerate maturity or create additional financial obligations upon an adverse change in our credit ratings, financial ratios, earnings, cash flows or stock price. For more information on long-term debt funding, including issuances and maturities and redemptions, see Note 11 – Long-term Debt to the Consolidated Financial Statements.
We use derivative transactions to manage the duration, interest rate and currency risks of our borrowings, considering the characteristics of the assets they are funding. For more information on our ALM activities, see Interest Rate Risk Management for the Banking Book on page 79.
Uninsured Deposits
The FDIC insures the Corporation’s U.S. deposits up to $250,000 per depositor, per insured bank for each account ownership category, and various country-specific funds insure non-U.S. deposits up to specified limits. Deposits that exceed insurance limits are uninsured. At December 31, 2021, the Corporation’s deposits totaled $2.1 trillion, of which total estimated uninsured U.S. and non-U.S. deposits were $701.4 billion and $111.9 billion. At December 31, 2020, the Corporation’s deposits totaled $1.8 trillion, of which total estimated uninsured U.S. and non-U.S. deposits were $597.7 billion and $104.1 billion.
Table 17 presents information about the Corporation’s total estimated uninsured time deposits. For more information on our liquidity sources, see Global Liquidity Sources and Other Unencumbered Assets, and for more information on deposits, see Diversified Funding Sources in this section. For more information on contractual time deposit maturities, see Note 9 – Deposits to the Consolidated Financial Statements.
| Table 17 |
Uninsured Time Deposits (1)
|
|||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||
| (Dollars in millions) | U.S. | Non-U.S. | Total | |||||||||||||||||
| Uninsured time deposits with a maturity of: | ||||||||||||||||||||
| 3 months or less | $ | 2,337 | $ | 7,274 | $ | 9,611 | ||||||||||||||
| Over 3 months through 6 months | 1,668 | 1,663 | 3,331 | |||||||||||||||||
| Over 6 months through 12 months | 1,942 | 239 | 2,181 | |||||||||||||||||
| Over 12 months | 289 | 1,470 | 1,759 | |||||||||||||||||
| Total | $ | 6,236 | $ | 10,646 | $ | 16,882 | ||||||||||||||
(1)Amounts are estimated based on the regulatory methodologies defined by each local jurisdiction.
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
57 Bank of America
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by the rating agencies, and they consider a number of factors, including our own financial strength, performance, prospects and operations as well as factors not under our control. The rating agencies could make adjustments to our ratings at any time, and they provide no assurances that they will maintain our ratings at current levels.
Other factors that influence our credit ratings include changes to the rating agencies’ methodologies for our industry or certain security types; the rating agencies’ assessment of the general operating environment for financial services companies; our relative positions in the markets in which we compete; our various risk exposures and risk management policies and activities; pending litigation and other contingencies or potential tail risks; our reputation; our liquidity position, diversity of funding sources and funding costs; the current and expected level and volatility of our earnings; our capital position and capital management practices; our corporate governance; the sovereign credit ratings of the U.S. government; current or future regulatory and legislative 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 May 24, 2021, Standard & Poor’s Global Ratings (S&P) affirmed the current ratings of the Corporation and its subsidiaries, while at the same time revising its rating outlook to Positive from Stable.
On June 7, 2021, Fitch Ratings (Fitch) upgraded the long-term senior debt ratings of the Corporation and its rated subsidiaries by one notch, to AA- and AA, respectively. Fitch also upgraded the Corporation’s short-term rating to F1+ which is now aligned with the short-term rating of its subsidiaries, including BANA. Following the upgrade, the rating outlook for the Corporation and its subsidiaries is Stable.
On November 22, 2021, Moody’s Investors Service (Moody’s) affirmed the current ratings of the Corporation and its subsidiaries, while at the same time revising its rating outlook to Positive from Stable.
Table 18 presents the Corporation’s current long-term/short-term senior debt ratings and outlooks expressed by the rating agencies.
| Table 18 | Senior Debt Ratings | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Moody’s Investors Service | Standard & Poor’s Global Ratings | Fitch Ratings | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Long-term | Short-term | Outlook | Long-term | Short-term | Outlook | Long-term | Short-term | Outlook | ||||||||||||||||||||||||||||||||||||||||||||||||
| Bank of America Corporation | A2 | P-1 | Positive | A- | A-2 | Positive | AA- | F1+ | Stable | |||||||||||||||||||||||||||||||||||||||||||||||
| Bank of America, N.A. | Aa2 | P-1 | Positive | A+ | A-1 | Positive | AA | F1+ | Stable | |||||||||||||||||||||||||||||||||||||||||||||||
| Bank of America Europe Designated Activity Company | NR | NR | NR | A+ | A-1 | Positive | AA | F1+ | Stable | |||||||||||||||||||||||||||||||||||||||||||||||
| Merrill Lynch, Pierce, Fenner & Smith Incorporated | NR | NR | NR | A+ | A-1 | Positive | AA | F1+ | Stable | |||||||||||||||||||||||||||||||||||||||||||||||
| BofA Securities, Inc. | NR | NR | NR | A+ | A-1 | Positive | AA | F1+ | Stable | |||||||||||||||||||||||||||||||||||||||||||||||
| Merrill Lynch International | NR | NR | NR | A+ | A-1 | Positive | AA | F1+ | Stable | |||||||||||||||||||||||||||||||||||||||||||||||
| BofA Securities Europe SA | NR | NR | NR | A+ | A-1 | Positive | AA | F1+ | Stable | |||||||||||||||||||||||||||||||||||||||||||||||
NR = not rated
A reduction in certain of our credit ratings or the ratings of certain asset-backed securitizations may have a material adverse effect on our liquidity, potential loss of access to credit markets, the related cost of funds, our businesses and on certain revenues, particularly in those businesses where counterparty creditworthiness is critical. In addition, under the terms of certain OTC derivative contracts and other trading agreements, in the event of downgrades of our or our rated subsidiaries’ credit ratings, the counterparties to those agreements may require us to provide additional collateral, or to terminate these contracts or agreements, which could cause us to sustain losses and/or adversely impact our liquidity. If the short-term credit ratings of our parent company, bank or broker-dealer subsidiaries were downgraded by one or more levels, the potential loss of access to short-term funding sources such as repo financing and the effect on our incremental cost of funds could be material.
While certain potential impacts are contractual and quantifiable, the full scope of the consequences of a credit rating downgrade to a financial institution is inherently uncertain, as it depends upon numerous dynamic, complex and inter-related factors and assumptions, including whether any downgrade of a company’s long-term credit ratings precipitates downgrades to its short-term credit ratings, and assumptions about the potential behaviors of various customers, investors and counterparties. For more information on potential impacts of credit rating downgrades, see Liquidity Risk – Liquidity Stress Analysis on page 56.
For more information on 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 3 – Derivatives to the Consolidated Financial Statements and Item 1A. Risk Factors.
Common Stock Dividends
For a summary of our declared quarterly cash dividends on common stock during 2021 and through February 22, 2022, see Note 13 – Shareholders’ Equity to the Consolidated Financial Statements.
Finance Subsidiary Issuers and Parent Guarantor
BofA Finance LLC, a Delaware limited liability company (BofA Finance), is a consolidated finance subsidiary of the Corporation that has issued and sold, and is expected to continue to issue and sell, its senior unsecured debt securities (Guaranteed Notes) that are fully and unconditionally guaranteed by the Corporation. The Corporation guarantees the due and punctual payment, on demand, of amounts payable on the Guaranteed Notes if not paid by BofA Finance. In addition, each of BAC Capital Trust XIII, BAC Capital Trust XIV and BAC Capital Trust XV, Delaware statutory trusts (collectively, the Trusts), is a 100 percent owned finance subsidiary of the Corporation that has issued and sold trust preferred securities (the Trust Preferred Securities) or capital securities (the Capital Securities and, together with the Guaranteed Notes and the Trust Preferred Securities, the Guaranteed Securities), as applicable, that remained outstanding at December 31, 2021. The Corporation guarantees the payment of amounts and distributions with
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respect to the Trust Preferred Securities and Capital Securities if not paid by the Trusts, to the extent of funds held by the Trusts, and this guarantee, together with the Corporation’s other obligations with respect to the Trust Preferred Securities and Capital Securities, effectively constitutes a full and unconditional guarantee of the Trusts’ payment obligations on the Trust Preferred Securities or Capital Securities, as applicable. No other subsidiary of the Corporation guarantees the Guaranteed Securities.
BofA Finance and each of the Trusts are finance subsidiaries, have no independent assets, revenues or operations and are dependent upon the Corporation and/or the Corporation’s other subsidiaries to meet their respective obligations under the Guaranteed Securities in the ordinary course. If holders of the Guaranteed Securities make claims on their Guaranteed Securities in a bankruptcy, resolution or similar proceeding, any recoveries on those claims will be limited to those available under the applicable guarantee by the Corporation, as described above.
The Corporation is a holding company and depends upon its subsidiaries for liquidity. Applicable laws and regulations and intercompany arrangements entered into in connection with the Corporation’s resolution plan could restrict the availability of funds from subsidiaries to the Corporation, which could adversely affect the Corporation’s ability to make payments under its guarantees. In addition, the obligations of the Corporation under the guarantees of the Guaranteed Securities will be structurally subordinated to all existing and future liabilities of its subsidiaries, and claimants should look only to assets of the Corporation for payments. If the Corporation, as guarantor of the Guaranteed Notes, transfers all or substantially all of its assets to one or more direct or indirect majority-owned subsidiaries, under the indenture governing the Guaranteed Notes, the subsidiary or subsidiaries will not be required to assume the Corporation’s obligations under its guarantee of the Guaranteed Notes.
For more information on factors that may affect payments to holders of the Guaranteed Securities, see Liquidity Risk – NB Holdings Corporation in this section, Item 1. Business – Insolvency and the Orderly Liquidation Authority on page 5 and Part I. Item 1A. Risk Factors – Liquidity on page 10.
Representations and Warranties Obligations
For information on representations and warranties obligations in connection with the sale of mortgage loans, see Note 12 – Commitments and Contingencies to the Consolidated Financial Statements.
Credit Risk Management
Credit risk is the risk of loss arising from the inability or failure of a borrower or counterparty to meet its obligations. Credit risk can also arise from operational failures that result in an erroneous advance, commitment or investment of funds. We define the credit exposure to a borrower or counterparty as the loss potential arising from all product classifications including loans and leases, deposit overdrafts, derivatives, assets held-for-sale and unfunded lending commitments which include loan commitments, letters of credit and financial guarantees. Derivative positions are recorded at fair value and assets held-for-sale are recorded at either fair value or the lower of cost or fair value. Certain loans and unfunded commitments are accounted for under the fair value option. Credit risk for categories of assets carried at fair value is not accounted for as part of the allowance for credit losses but as part of the fair value adjustments recorded in earnings. For derivative positions,
our credit risk is measured as the net cost in the event the counterparties with contracts in which we are in a gain position fail to perform under the terms of those contracts. We use the current fair value to represent credit exposure without giving consideration to future mark-to-market changes. The credit risk amounts take into consideration the effects of legally enforceable master netting agreements and cash collateral. Our consumer and commercial credit extension and review procedures encompass funded and unfunded credit exposures. For more information on derivatives and credit extension commitments, see Note 3 – Derivatives and Note 12 – Commitments and Contingencies to the Consolidated Financial Statements.
We manage credit risk based on the risk profile of the borrower or counterparty, repayment sources, the nature of underlying collateral and other support given current events, conditions and expectations. We classify our portfolios as either consumer or commercial and monitor credit risk in each as discussed below.
We refine our underwriting and credit risk management practices as well as credit standards to meet the changing economic environment. To mitigate losses and enhance customer support in our consumer businesses, we have in place collection programs and loan modification and customer assistance infrastructures. We utilize a number of actions to mitigate losses in the commercial businesses including increasing the frequency and intensity of portfolio monitoring, hedging activity and our practice of transferring management of deteriorating commercial exposures to independent special asset officers as credits enter criticized categories.
For information on our credit risk management activities, see Consumer Portfolio Credit Risk Management below, Commercial Portfolio Credit Risk Management on page 65, Non-U.S. Portfolio on page 71, Allowance for Credit Losses on page 73, and Note 5 – Outstanding Loans and Leases and Allowance for Credit Losses to the Consolidated Financial Statements. For more information on the factors that may expose us to credit risk, see Part I. Item 1A. Risk Factors - Credit on page 12.
During 2021, the economy gained momentum as unemployment continued to decline from double-digit highs during 2020 and the economy re-opened as vaccination rates increased and restrictions eased. With the easing of restrictions, we saw increased business openings, a rebound to commercial and consumer spending, higher asset values and increased global GDP, all of which positively impacted our consumer and commercial credit portfolios. Additionally, individuals and businesses in the U.S. benefited from various forms of government support through economic stimulus packages enacted in 2020 and 2021, which contributed to strong asset quality across our credit portfolios.
As a result of the economic recovery experienced in 2021, net charge-offs, nonperforming loans and commercial reservable criticized exposure declined compared to 2020. While there has been significant economic improvement in comparison to 2020, uncertainty remains about the timing and strength of the economy’s recovery, which may also be hampered by supply chain disruptions and inflationary pressures and could lead to adverse impacts to credit quality metrics in future periods. The pandemic and its full impact on the global economy continue to be highly uncertain. While COVID-19 cases eased throughout the majority of 2021, they reached new highs by the end of 2021, and the spread of new, more contagious variants could impact the magnitude and duration of this health crisis. However, ongoing virus containment efforts and vaccination progress, could support the macroeconomic recovery.
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For more information on how the pandemic may affect our operations, see Executive Summary – Recent Developments – COVID-19 Pandemic on page 27 and Item 1A. Risk Factors – Coronavirus Disease on page 7.
Consumer Portfolio Credit Risk Management
Credit risk management for the consumer portfolio begins with initial underwriting and continues throughout a borrower’s credit cycle. Statistical techniques in conjunction with experiential judgment are used in all aspects of portfolio management including underwriting, product pricing, risk appetite, setting credit limits, and establishing operating processes and metrics to quantify and balance risks and returns. Statistical models are built using detailed behavioral information from external sources such as credit bureaus and/or internal historical experience and are a component of our consumer credit risk management process. These models are used in part to assist in making both new and ongoing credit decisions, as well as portfolio management strategies, including authorizations and line management, collection practices and strategies, and determination of the allowance for loan and lease losses and allocated capital for credit risk.
Consumer Credit Portfolio
The economic environment improved during 2021, with the U.S. unemployment rate continuing to decline and home prices increasing. During 2021, net charge-offs decreased $805 million to $1.8 billion primarily due to lower credit card losses, as the impact of government stimulus measures were partially offset by charge-offs associated with deferrals that expired in 2020. During 2021, nonperforming loans increased due to deferral activity.
The consumer allowance for loan and lease losses decreased $3.0 billion in 2021 to $7.0 billion primarily due to improvements in the macroeconomic outlook and credit quality. For more information, see Allowance for Credit Losses on page 73.
For more information on our accounting policies regarding delinquencies, nonperforming status, charge-offs and troubled debt restructurings (TDRs) for the consumer portfolio, as well as interest accrual policies and delinquency status for loan modifications related to the pandemic, see Note 1 – Summary of Significant Accounting Principles and Note 5 – Outstanding Loans and Leases and Allowance for Credit Losses to the Consolidated Financial Statements.
Table 19 presents our outstanding consumer loans and leases, consumer nonperforming loans and accruing consumer loans past due 90 days or more.
| Table 19 | Consumer Credit Quality | |||||||||||||||||||||||||||||||||||||
| Outstandings | Nonperforming | Accruing Past Due 90 Days or More |
||||||||||||||||||||||||||||||||||||
| December 31 | ||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||
Residential mortgage (1)
|
$ | 221,963 | $ | 223,555 | $ | 2,284 | $ | 2,005 | $ | 634 | $ | 762 | ||||||||||||||||||||||||||
| Home equity | 27,935 | 34,311 | 630 | 649 | — | — | ||||||||||||||||||||||||||||||||
| Credit card | 81,438 | 78,708 | n/a | n/a | 487 | 903 | ||||||||||||||||||||||||||||||||
Direct/Indirect consumer (2)
|
103,560 | 91,363 | 75 | 71 | 11 | 33 | ||||||||||||||||||||||||||||||||
| Other consumer | 190 | 124 | — | — | — | — | ||||||||||||||||||||||||||||||||
Consumer loans excluding loans accounted for under the fair value option |
$ | 435,086 | $ | 428,061 | $ | 2,989 | $ | 2,725 | $ | 1,132 | $ | 1,698 | ||||||||||||||||||||||||||
Loans accounted for under the fair value option (3)
|
618 | 735 | ||||||||||||||||||||||||||||||||||||
| Total consumer loans and leases | $ | 435,704 | $ | 428,796 | ||||||||||||||||||||||||||||||||||
Percentage of outstanding consumer loans and leases (4)
|
n/a | n/a | 0.69 | % | 0.64 | % | 0.26 | % | 0.40 | % | ||||||||||||||||||||||||||||
Percentage of outstanding consumer loans and leases, excluding fully-insured loan portfolios (4)
|
n/a | n/a | 0.71 | 0.65 | 0.12 | 0.22 | ||||||||||||||||||||||||||||||||
(1)Residential mortgage loans accruing past due 90 days or more are fully-insured loans. At December 31, 2021 and 2020, residential mortgage includes $444 million and $537 million of loans on which interest had been curtailed by the FHA, and therefore were no longer accruing interest, although principal was still insured, and $190 million and $225 million of loans on which interest was still accruing.
(2)Outstandings primarily include auto and specialty lending loans and leases of $48.5 billion and $46.4 billion, U.S. securities-based lending loans of $51.1 billion and $41.1 billion and non-U.S. consumer loans of $3.0 billion and $3.0 billion at December 31, 2021 and 2020.
(3)For more information on the fair value option, see Note 21 – Fair Value Option to the Consolidated Financial Statements.
(4)Excludes consumer loans accounted for under the fair value option. At December 31, 2021 and 2020, $21 million and $11 million of loans accounted for under the fair value option were past due 90 days or more and not accruing interest.
n/a = not applicable
Table 20 presents net charge-offs and related ratios for consumer loans and leases.
| Table 20 | Consumer Net Charge-offs and Related Ratios | |||||||||||||||||||||||||
| Net Charge-offs |
Net Charge-off Ratios (1)
|
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| (Dollars in millions) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| Residential mortgage | $ | (28) | $ | (30) | (0.01) | % | (0.01) | % | ||||||||||||||||||
| Home equity | (119) | (73) | (0.39) | (0.19) | ||||||||||||||||||||||
| Credit card | 1,723 | 2,349 | 2.29 | 2.76 | ||||||||||||||||||||||
| Direct/Indirect consumer | 1 | 122 | — | 0.14 | ||||||||||||||||||||||
| Other consumer | 270 | 284 | n/m | n/m | ||||||||||||||||||||||
| Total | $ | 1,847 | $ | 2,652 | 0.44 | 0.59 | ||||||||||||||||||||
(1)Net charge-off ratios are calculated as net charge-offs divided by average outstanding loans and leases excluding loans accounted for under the fair value option.
n/m = not meaningful
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We believe that the presentation of information adjusted to exclude the impact of the fully-insured loan portfolio and loans accounted for under the fair value option is more representative of the ongoing operations and credit quality of the business. As a result, in the following tables and discussions of the residential mortgage and home equity portfolios, we exclude loans accounted for under the fair value option and provide information that excludes the impact of the fully-insured loan portfolio in certain credit quality statistics.
Residential Mortgage
The residential mortgage portfolio made up the largest percentage of our consumer loan portfolio at 51 percent of consumer loans and leases in 2021. Approximately 52 percent of the residential mortgage portfolio was in Consumer Banking
and 43 percent was in GWIM. The remaining portion was in All Other.
Outstanding balances in the residential mortgage portfolio decreased $1.6 billion in 2021 as paydowns were partially offset by originations.
At December 31, 2021 and 2020, the residential mortgage portfolio included $12.7 billion and $11.8 billion of outstanding fully-insured loans, of which $2.2 billion and $2.8 billion had FHA insurance, with the remainder protected by Fannie Mae long-term standby agreements.
Table 21 presents certain residential mortgage key credit statistics on both a reported basis and excluding the fully-insured loan portfolio. The following discussion presents the residential mortgage portfolio excluding the fully-insured loan portfolio.
| Table 21 | Residential Mortgage – Key Credit Statistics | |||||||||||||||||||||||||||||||||||||||||||
Reported Basis (1)
|
Excluding Fully-insured Loans (1)
|
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| December 31 | ||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||
| Outstandings | $ | 221,963 | $ | 223,555 | $ | 209,259 | $ | 211,737 | ||||||||||||||||||||||||||||||||||||
| Accruing past due 30 days or more | 1,753 | 2,314 | 866 | 1,224 | ||||||||||||||||||||||||||||||||||||||||
| Accruing past due 90 days or more | 634 | 762 | — | — | ||||||||||||||||||||||||||||||||||||||||
Nonperforming loans (2)
|
2,284 | 2,005 | 2,284 | 2,005 | ||||||||||||||||||||||||||||||||||||||||
| Percent of portfolio | ||||||||||||||||||||||||||||||||||||||||||||
| Refreshed LTV greater than 90 but less than or equal to 100 | 1 | % | 2 | % | 1 | % | 1 | % | ||||||||||||||||||||||||||||||||||||
| Refreshed LTV greater than 100 | — | 1 | — | 1 | ||||||||||||||||||||||||||||||||||||||||
| Refreshed FICO below 620 | 2 | 2 | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||
(1)Outstandings, accruing past due, nonperforming loans and percentages of portfolio exclude loans accounted for under the fair value option. For information on our interest accrual policies and delinquency status for loan modifications related to the pandemic, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
(2)Includes loans that are contractually current which primarily consist of collateral-dependent TDRs, including those that have been discharged in Chapter 7 bankruptcy and loans that have not yet demonstrated a sustained period of payment performance following a TDR.
Nonperforming outstanding balances in the residential mortgage portfolio increased $279 million in 2021 primarily driven by deferral activity. Of the nonperforming residential mortgage loans at December 31, 2021, $1.2 billion, or 51 percent, were current on contractual payments. Loans accruing past due 30 days or more decreased $358 million driven by continued improvement in credit quality.
Net recoveries of $28 million in 2021 remained relatively unchanged compared to 2020.
Of the $209.3 billion in total residential mortgage loans outstanding at December 31, 2021, 27 percent were originated as interest-only loans. The outstanding balance of interest-only residential mortgage loans that have entered the amortization period was $4.8 billion, or eight percent, at December 31, 2021. Residential mortgage loans that have entered the amortization period generally experienced a higher rate of early stage delinquencies and nonperforming status compared to the residential mortgage portfolio as a whole. At December 31, 2021, $66 million, or one percent, of outstanding interest-only residential mortgages that had entered the amortization period were accruing past due 30 days or more compared to $866 million, or less than one percent, for the entire residential
mortgage portfolio. In addition, at December 31, 2021, $275 million, or six percent, of outstanding interest-only residential mortgage loans that had entered the amortization period were nonperforming, of which $83 million were contractually current compared to $2.3 billion, or one percent, for the entire residential mortgage portfolio. Loans that have yet to enter the amortization period in our interest-only residential mortgage portfolio are primarily well-collateralized loans to our wealth management clients and have an interest-only period of three to ten years. Approximately 91 percent of these loans that have yet to enter the amortization period will not be required to make a fully-amortizing payment until 2025 or later.
Table 22 presents outstandings, nonperforming loans and net charge-offs by certain state concentrations for the residential mortgage portfolio. The Los Angeles-Long Beach-Santa Ana Metropolitan Statistical Area (MSA) within California represented 15 percent and 16 percent of outstandings at December 31, 2021 and 2020. In the New York area, the New York-Northern New Jersey-Long Island MSA made up 15 percent and 14 percent of outstandings at December 31, 2021 and 2020.
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| Table 22 | Residential Mortgage State Concentrations | |||||||||||||||||||||||||||||||||||||
Outstandings (1)
|
Nonperforming (1)
|
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| December 31 | Net Charge-offs | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | December 31 2021 |
December 31 2020 |
December 31 2021 |
December 31 2020 |
2021 | 2020 | ||||||||||||||||||||||||||||||||
| California | $ | 77,819 | $ | 83,185 | $ | 693 | $ | 570 | $ | (14) | $ | (18) | ||||||||||||||||||||||||||
| New York | 24,975 | 23,832 | 358 | 272 | 3 | 3 | ||||||||||||||||||||||||||||||||
| Florida | 13,883 | 13,017 | 158 | 175 | (8) | (5) | ||||||||||||||||||||||||||||||||
| Texas | 9,002 | 8,868 | 86 | 78 | — | — | ||||||||||||||||||||||||||||||||
| New Jersey | 8,723 | 8,806 | 117 | 98 | — | (1) | ||||||||||||||||||||||||||||||||
| Other | 74,857 | 74,029 | 872 | 812 | (9) | (9) | ||||||||||||||||||||||||||||||||
| Residential mortgage loans | $ | 209,259 | $ | 211,737 | $ | 2,284 | $ | 2,005 | $ | (28) | $ | (30) | ||||||||||||||||||||||||||
| Fully-insured loan portfolio | 12,704 | 11,818 | ||||||||||||||||||||||||||||||||||||
Total residential mortgage loan portfolio |
$ | 221,963 | $ | 223,555 | ||||||||||||||||||||||||||||||||||
(1)Outstandings and nonperforming loans exclude loans accounted for under the fair value option.
Home Equity
At December 31, 2021, the home equity portfolio made up six percent of the consumer portfolio and was comprised of home equity lines of credit (HELOCs), home equity loans and reverse mortgages. HELOCs generally have an initial draw period of 10 years, and after the initial draw period ends, the loans generally convert to 15- or 20-year amortizing loans. We no longer originate home equity loans or reverse mortgages.
At December 31, 2021, 80 percent of the home equity portfolio was in Consumer Banking, 11 percent was in All Other and the remainder of the portfolio was primarily in GWIM. Outstanding balances in the home equity portfolio decreased $6.4 billion in 2021 primarily due to paydowns outpacing new
originations and draws on existing lines. Of the total home equity portfolio at December 31, 2021 and 2020, $12.2 billion, or 44 percent, and $13.8 billion, or 40 percent, were in first-lien positions. At December 31, 2021, 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 $4.6 billion, or 16 percent of our total home equity portfolio.
Unused HELOCs totaled $40.5 billion and $42.3 billion at December 31, 2021 and 2020. The HELOC utilization rate was 39 percent and 43 percent at December 31, 2021 and 2020.
Table 23 presents certain home equity portfolio key credit statistics.
| Table 23 |
Home Equity – Key Credit Statistics (1)
|
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| December 31 | |||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | |||||||||||||||
| Outstandings | $ | 27,935 | $ | 34,311 | |||||||||||||
| Accruing past due 30 days or more | 157 | 186 | |||||||||||||||
Nonperforming loans (2)
|
630 | 649 | |||||||||||||||
| Percent of portfolio | |||||||||||||||||
| Refreshed CLTV greater than 90 but less than or equal to 100 | — | % | 1 | % | |||||||||||||
| Refreshed CLTV greater than 100 | 1 | 1 | |||||||||||||||
| Refreshed FICO below 620 | 3 | 3 | |||||||||||||||
(1)Outstandings, accruing past due, nonperforming loans and percentages of the portfolio exclude loans accounted for under the fair value option. For information on our interest accrual policies and delinquency status for loan modifications related to the pandemic, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
(2)Includes loans that are contractually current which primarily consist of collateral-dependent TDRs, including those that have been discharged in Chapter 7 bankruptcy, junior-lien loans where the underlying first lien is 90 days or more past due, as well as loans that have not yet demonstrated a sustained period of payment performance following a TDR.
Nonperforming outstanding balances in the home equity portfolio remained relatively flat at $630 million at December 31, 2021. Of the nonperforming home equity loans at December 31, 2021, $227 million, or 36 percent, were current on contractual payments. In addition, $273 million, or 43 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 $29 million in 2021.
Net recoveries increased $46 million to $119 million in 2021 compared to the same period in 2020. The increase was driven by favorable portfolio trends due in part to improvement in home prices.
Of the $27.9 billion in total home equity portfolio outstandings at December 31, 2021, as shown in Table 23, 14 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 $6.8 billion at December 31, 2021. 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, 2021, $105 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, 2021, $455 million, or seven percent, were nonperforming. Loans that have yet to enter the amortization period in our interest-only portfolio are primarily post-2008 vintages and generally have better credit quality than the previous vintages that had entered the amortization period. We communicate to contractually current customers more than a year prior to the end of their draw period to inform them of the potential change to the payment structure before entering the amortization period, and provide payment options to customers prior to the end of the draw period.
Although we do not actively track how many of our home equity customers pay only the minimum amount due on their home equity loans and lines, we can infer some of this information through a review of our HELOC portfolio that we service and that is still in its revolving period. During 2021, nine percent of these customers with an outstanding balance did not pay any principal on their HELOCs.
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Table 24 presents outstandings, nonperforming balances and net recoveries 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, 2021
and 2020. The Los Angeles-Long Beach-Santa Ana MSA within California made up 10 percent and 11 percent of the outstanding home equity portfolio at December 31, 2021 and 2020.
| Table 24 | Home Equity State Concentrations | |||||||||||||||||||||||||||||||||||||
Outstandings (1)
|
Nonperforming (1)
|
|||||||||||||||||||||||||||||||||||||
| December 31 | Net Recoveries | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||
| California | $ | 7,600 | $ | 9,488 | $ | 140 | $ | 143 | $ | (40) | $ | (26) | ||||||||||||||||||||||||||
| Florida | 2,977 | 3,715 | 78 | 80 | (21) | (11) | ||||||||||||||||||||||||||||||||
| New Jersey | 2,259 | 2,749 | 69 | 67 | (4) | (3) | ||||||||||||||||||||||||||||||||
| New York | 2,072 | 2,495 | 96 | 103 | (1) | (1) | ||||||||||||||||||||||||||||||||
| Massachusetts | 1,422 | 1,719 | 32 | 32 | (3) | (1) | ||||||||||||||||||||||||||||||||
| Other | 11,605 | 14,145 | 215 | 224 | (50) | (31) | ||||||||||||||||||||||||||||||||
| Total home equity loan portfolio | $ | 27,935 | $ | 34,311 | $ | 630 | $ | 649 | $ | (119) | $ | (73) | ||||||||||||||||||||||||||
(1)Outstandings and nonperforming loans exclude loans accounted for under the fair value option.
Credit Card
At December 31, 2021, 97 percent of the credit card portfolio was managed in Consumer Banking with the remainder in GWIM. Outstandings in the credit card portfolio increased $2.7 billion in 2021 to $81.4 billion due to higher retail spend. Net charge-offs decreased $626 million to $1.7 billion during 2021 compared to the same period in 2020 due to the impact of government stimulus measures, partially offset by charge-offs of certain loans with deferrals that expired in 2020. Credit card
loans 30 days or more past due and still accruing interest decreased $692 million, and loans 90 days or more past due and still accruing interest decreased $416 million primarily due to charge-offs of certain loans with deferrals that expired in 2020 and the impact of government stimulus measures.
Unused lines of credit for credit card increased to $361.2 billion at December 31, 2021 from $342.4 billion at 2020.
Table 25 presents certain state concentrations for the credit card portfolio.
| Table 25 | Credit Card State Concentrations | |||||||||||||||||||||||||||||||||||||
| Outstandings |
Accruing Past Due
90 Days or More (1)
|
|||||||||||||||||||||||||||||||||||||
| December 31 | Net Charge-offs | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||
| California | $ | 13,076 | $ | 12,543 | $ | 82 | $ | 166 | $ | 322 | $ | 419 | ||||||||||||||||||||||||||
| Florida | 8,046 | 7,666 | 71 | 135 | 245 | 306 | ||||||||||||||||||||||||||||||||
| Texas | 6,894 | 6,499 | 47 | 87 | 158 | 202 | ||||||||||||||||||||||||||||||||
| New York | 4,725 | 4,654 | 35 | 76 | 135 | 188 | ||||||||||||||||||||||||||||||||
| Washington | 4,080 | 3,685 | 13 | 21 | 39 | 56 | ||||||||||||||||||||||||||||||||
| Other | 44,617 | 43,661 | 239 | 418 | 824 | 1,178 | ||||||||||||||||||||||||||||||||
| Total credit card portfolio | $ | 81,438 | $ | 78,708 | $ | 487 | $ | 903 | $ | 1,723 | $ | 2,349 | ||||||||||||||||||||||||||
(1)For information on our interest accrual policies and delinquency status for loan modifications related to the pandemic, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
Direct/Indirect Consumer
At December 31, 2021, 47 percent of the direct/indirect portfolio was included in Consumer Banking (consumer auto and recreational vehicle lending) and 53 percent was included in
GWIM (principally securities-based lending loans). Outstandings in the direct/indirect portfolio increased by $12.2 billion in 2021 to $103.6 billion driven by client demand for liquidity and high asset values in the securities-based lending portfolio.
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Table 26 presents certain state concentrations for the direct/indirect consumer loan portfolio.
| Table 26 | Direct/Indirect State Concentrations | |||||||||||||||||||||||||||||||||||||
| Outstandings |
Accruing Past Due 90 Days or More (1) |
|||||||||||||||||||||||||||||||||||||
| December 31 | Net Charge-offs | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||
| California | $ | 15,061 | $ | 12,248 | $ | 2 | $ | 6 | $ | 3 | $ | 20 | ||||||||||||||||||||||||||
| Florida | 13,352 | 10,891 | 1 | 4 | 1 | 20 | ||||||||||||||||||||||||||||||||
| Texas | 9,505 | 8,981 | 2 | 6 | 2 | 20 | ||||||||||||||||||||||||||||||||
| New York | 7,802 | 6,609 | 1 | 2 | 3 | 9 | ||||||||||||||||||||||||||||||||
| New Jersey | 4,228 | 3,572 | — | — | (3) | 2 | ||||||||||||||||||||||||||||||||
| Other | 53,612 | 49,062 | 5 | 15 | (5) | 51 | ||||||||||||||||||||||||||||||||
| Total direct/indirect loan portfolio | $ | 103,560 | $ | 91,363 | $ | 11 | $ | 33 | $ | 1 | $ | 122 | ||||||||||||||||||||||||||
(1)For information on our interest accrual policies and delinquency status for loan modifications related to the pandemic, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity
Table 27 presents nonperforming consumer loans, leases and foreclosed properties activity during 2021 and 2020. During 2021, nonperforming consumer loans increased $264 million to $3.0 billion primarily driven by consumer real estate deferral activity.
At December 31, 2021, $888 million, or 30 percent of nonperforming loans were 180 days or more past due and had been written down to their estimated property value less costs
to sell. In addition, at December 31, 2021, $1.4 billion, or 48 percent of nonperforming consumer loans were modified and are now current after successful trial periods, or are current loans classified as nonperforming loans in accordance with applicable policies.
Foreclosed properties decreased $22 million in 2021 to $101 million. Nonperforming loans also include certain loans that have been modified in TDRs where economic concessions have been granted to borrowers experiencing financial difficulties.
| Table 27 | Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity | |||||||||||||
| (Dollars in millions) | 2021 | 2020 | ||||||||||||
| Nonperforming loans and leases, January 1 | $ | 2,725 | $ | 2,053 | ||||||||||
| Additions | 2,006 | 2,278 | ||||||||||||
| Reductions: | ||||||||||||||
| Paydowns and payoffs | (625) | (440) | ||||||||||||
| Sales | (4) | (38) | ||||||||||||
Returns to performing status (1)
|
(1,037) | (1,014) | ||||||||||||
| Charge-offs | (64) | (78) | ||||||||||||
| Transfers to foreclosed properties | (12) | (36) | ||||||||||||
| Total net additions to nonperforming loans and leases | 264 | 672 | ||||||||||||
Total nonperforming loans and leases, December 31 |
2,989 | 2,725 | ||||||||||||
Foreclosed properties, December 31 (2)
|
101 | 123 | ||||||||||||
Nonperforming consumer loans, leases and foreclosed properties, December 31 |
$ | 3,090 | $ | 2,848 | ||||||||||
Nonperforming consumer loans and leases as a percentage of outstanding consumer loans and leases (3)
|
0.69 | % | 0.64 | % | ||||||||||
Nonperforming consumer loans, leases and foreclosed properties as a percentage of outstanding consumer loans, leases and foreclosed properties (3)
|
0.71 | 0.66 | ||||||||||||
(1)Consumer loans may be returned to performing status when all principal and interest is current and full repayment of the remaining contractual principal and interest is expected, or when the loan otherwise becomes well-secured and is in the process of collection.
(2)Foreclosed property balances do not include properties insured by certain government-guaranteed loans, principally FHA-insured, of $52 million and $119 million at December 31, 2021 and 2020.
(3)Outstanding consumer loans and leases exclude loans accounted for under the fair value option.
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Table 28 presents TDRs for the consumer real estate portfolio. Performing TDR balances are excluded from nonperforming loans and leases in Table 27.
| Table 28 | Consumer Real Estate Troubled Debt Restructurings | |||||||||||||||||||||||||||||||||||||
| December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Nonperforming | Performing | Total | Nonperforming | Performing | Total | ||||||||||||||||||||||||||||||||
Residential mortgage (1, 2)
|
$ | 1,498 | $ | 2,278 | $ | 3,776 | $ | 1,195 | $ | 2,899 | $ | 4,094 | ||||||||||||||||||||||||||
Home equity (3)
|
254 | 652 | 906 | 248 | 836 | 1,084 | ||||||||||||||||||||||||||||||||
| Total consumer real estate troubled debt restructurings | $ | 1,752 | $ | 2,930 | $ | 4,682 | $ | 1,443 | $ | 3,735 | $ | 5,178 | ||||||||||||||||||||||||||
(1)At December 31, 2021 and 2020, residential mortgage TDRs deemed collateral dependent totaled $1.6 billion and $1.4 billion, and included $1.4 billion and $1.0 billion of loans classified as nonperforming and $279 million and $361 million of loans classified as performing.
(2)At December 31, 2021 and 2020, residential mortgage performing TDRs include $1.2 billion and $1.5 billion of loans that were fully-insured.
(3)At December 31, 2021 and 2020, home equity TDRs deemed collateral dependent totaled $370 million and $407 million, and include $222 million and $216 million of loans classified as nonperforming and $148 million and $191 million of loans classified as performing.
In addition to modifying consumer real estate loans, we work with customers who are experiencing financial difficulty by modifying credit card and other consumer loans. Credit card and other consumer loan modifications generally involve a reduction in the customer’s interest rate on the account and placing the customer on a fixed payment plan not exceeding 60 months.
Modifications of credit card and other consumer loans are made through programs utilizing direct customer contact, but may also utilize external programs. At December 31, 2021 and 2020, our credit card and other consumer TDR portfolio was $672 million and $701 million, of which $599 million and $614 million were current or less than 30 days past due under the modified terms.
Commercial Portfolio Credit Risk Management
Credit risk management for the commercial portfolio begins with an assessment of the credit risk profile of the borrower or counterparty based on an analysis of its financial position. As part of the overall credit risk assessment, our commercial credit exposures are assigned a risk rating and are subject to approval based on defined credit approval standards. Subsequent to loan origination, risk ratings are monitored on an ongoing basis, and if necessary, adjusted to reflect changes in the financial condition, cash flow, risk profile or outlook of a borrower or counterparty. In making credit decisions, we consider risk rating, collateral, country, industry and single-name concentration limits while also balancing these considerations with the total borrower or counterparty relationship. We use a variety of tools to continuously monitor the ability of a borrower or counterparty to perform under its obligations. We use risk rating aggregations to measure and evaluate concentrations within portfolios. In addition, risk ratings are a factor in determining the level of allocated capital and the allowance for credit losses.
As part of our ongoing risk mitigation initiatives, we attempt to work with clients experiencing financial difficulty to modify their loans to terms that better align with their current ability to pay. In situations where an economic concession has been granted to a borrower experiencing financial difficulty, we identify these loans as TDRs. For more information on our accounting policies regarding delinquencies, nonperforming status and net charge-offs for the commercial portfolio, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
Management of Commercial Credit Risk Concentrations
Commercial credit risk is evaluated and managed with the goal that concentrations of credit exposure continue to be aligned with our risk appetite. We review, measure and manage concentrations of credit exposure by industry, product,
geography, customer relationship and loan size. We also review, measure and manage commercial real estate loans by geographic location and property type. In addition, within our non-U.S. portfolio, we evaluate exposures by region and by country. Tables 33, 36 and 39 summarize our concentrations. We also utilize syndications of exposure to third parties, loan sales, hedging and other risk mitigation techniques to manage the size and risk profile of the commercial credit portfolio. For more information on our industry concentrations, see Commercial Portfolio Credit Risk Management – Industry Concentrations on page 69 and Table 36.
We account for certain large corporate loans and loan commitments, including issued but unfunded letters of credit which are considered utilized for credit risk management purposes, that exceed our single-name credit risk concentration guidelines under the fair value option. Lending commitments, both funded and unfunded, are actively managed and monitored, and as appropriate, credit risk for these lending relationships may be mitigated through the use of credit derivatives, with our credit view and market perspectives determining the size and timing of the hedging activity. In addition, we purchase credit protection to cover the funded portion as well as the unfunded portion of certain other credit exposures. To lessen the cost of obtaining our desired credit protection levels, credit exposure may be added within an industry, borrower or counterparty group by selling protection. These credit derivatives do not meet the requirements for treatment as accounting hedges. They are carried at fair value with changes in fair value recorded in other income.
In addition, we are a member of various securities and derivative exchanges and clearinghouses, both in the U.S. and other countries. As a member, we may be required to pay a pro-rata share of the losses incurred by some of these organizations as a result of another member default and under other loss scenarios. For more information, see Note 12 – Commitments and Contingencies to the Consolidated Financial Statements.
Commercial Credit Portfolio
During 2021, commercial credit quality improved as the economic recovery gained momentum driven in part by increased consumer spending and COVID-19 vaccination progress. Accordingly, charge-offs, nonperforming commercial loans and reservable criticized utilized exposure declined during this period. Outstanding commercial loans and leases increased $44.4 billion during 2021 due to growth in commercial and industrial, primarily in Global Markets with most of the increase in investment grade exposures. This increase was partially offset by lower U.S. small business commercial loans due to repayments of PPP loans by the Small Business Administration (SBA) under the terms of the program. For more information on
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PPP loans, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
Credit quality of commercial real estate borrowers has begun to stabilize in many sectors as economies have reopened. However, certain sectors, including hospitality, while showing signs of improvement, continue to be negatively impacted due to the pandemic. Moreover, many real estate markets, while improving, are still experiencing some disruptions in demand, supply chain challenges and tenant difficulties. Current and future office demand is uncertain as companies evaluate space needs with employment models that utilize a mix of remote and conventional office use.
The commercial allowance for loan and lease losses decreased $3.4 billion during 2021 to $5.4 billion driven by improvements in the macroeconomic outlook and credit quality. For more information, see Allowance for Credit Losses on page 73.
Total commercial utilized credit exposure increased $33.2 billion during 2021 to $653.5 billion primarily driven by higher loans and leases. The utilization rate for loans and leases, standby letters of credit (SBLCs) and financial guarantees, and commercial letters of credit, in the aggregate, was 56 percent at December 31, 2021 and 57 percent at December 31, 2020.
Table 29 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 29 | Commercial Credit Exposure by Type | |||||||||||||||||||||||||||||||||||||
Commercial Utilized (1)
|
Commercial Unfunded (2, 3, 4)
|
Total Commercial Committed | ||||||||||||||||||||||||||||||||||||
| December 31 | ||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||
| Loans and leases | $ | 543,420 | $ | 499,065 | $ | 454,256 | $ | 404,740 | $ | 997,676 | $ | 903,805 | ||||||||||||||||||||||||||
Derivative assets (5)
|
35,344 | 47,179 | — | — | 35,344 | 47,179 | ||||||||||||||||||||||||||||||||
| Standby letters of credit and financial guarantees | 34,389 | 34,616 | 639 | 538 | 35,028 | 35,154 | ||||||||||||||||||||||||||||||||
| Debt securities and other investments | 19,427 | 22,618 | 4,638 | 4,827 | 24,065 | 27,445 | ||||||||||||||||||||||||||||||||
| Loans held-for-sale | 13,185 | 8,378 | 16,581 | 9,556 | 29,766 | 17,934 | ||||||||||||||||||||||||||||||||
| Operating leases | 5,935 | 6,424 | — | — | 5,935 | 6,424 | ||||||||||||||||||||||||||||||||
| Commercial letters of credit | 1,176 | 855 | 247 | 280 | 1,423 | 1,135 | ||||||||||||||||||||||||||||||||
| Other | 652 | 1,168 | — | — | 652 | 1,168 | ||||||||||||||||||||||||||||||||
| Total | $ | 653,528 | $ | 620,303 | $ | 476,361 | $ | 419,941 | $ | 1,129,889 | $ | 1,040,244 | ||||||||||||||||||||||||||
(1)Commercial utilized exposure includes loans of $7.2 billion and $5.9 billion accounted for under the fair value option at December 31, 2021 and 2020.
(2)Commercial unfunded exposure includes commitments accounted for under the fair value option with a notional amount of $4.8 billion and $3.9 billion at December 31, 2021 and 2020.
(3)Excludes unused business card lines, which are not legally binding.
(4)Includes the notional amount of unfunded legally binding lending commitments net of amounts distributed (i.e., syndicated or participated) to other financial institutions. The distributed amounts were $10.7 billion and $10.5 billion at December 31, 2021 and 2020.
(5)Derivative assets are carried at fair value, reflect the effects of legally enforceable master netting agreements and have been reduced by cash collateral of $30.8 billion and $42.5 billion at December 31, 2021 and 2020. Not reflected in utilized and committed exposure is additional non-cash derivative collateral held of $44.8 billion and $39.3 billion at December 31, 2021 and 2020, which consists primarily of other marketable securities.
Nonperforming commercial loans decreased $649 million. Table 30 presents our commercial loans and leases portfolio and related credit quality information at December 31, 2021 and 2020.
| Table 30 | Commercial Credit Quality | |||||||||||||||||||||||||||||||||||||
| Outstandings | Nonperforming | Accruing Past Due 90 Days or More |
||||||||||||||||||||||||||||||||||||
| December 31 | ||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||
| Commercial and industrial: | ||||||||||||||||||||||||||||||||||||||
| U.S. commercial | $ | 325,936 | $ | 288,728 | $ | 825 | $ | 1,243 | $ | 171 | $ | 228 | ||||||||||||||||||||||||||
| Non-U.S. commercial | 113,266 | 90,460 | 268 | 418 | 19 | 10 | ||||||||||||||||||||||||||||||||
| Total commercial and industrial | 439,202 | 379,188 | 1,093 | 1,661 | 190 | 238 | ||||||||||||||||||||||||||||||||
| Commercial real estate | 63,009 | 60,364 | 382 | 404 | 40 | 6 | ||||||||||||||||||||||||||||||||
| Commercial lease financing | 14,825 | 17,098 | 80 | 87 | 8 | 25 | ||||||||||||||||||||||||||||||||
| 517,036 | 456,650 | 1,555 | 2,152 | 238 | 269 | |||||||||||||||||||||||||||||||||
U.S. small business commercial (1)
|
19,183 | 36,469 | 23 | 75 | 87 | 115 | ||||||||||||||||||||||||||||||||
| Commercial loans excluding loans accounted for under the fair value option | $ | 536,219 | $ | 493,119 | $ | 1,578 | $ | 2,227 | $ | 325 | $ | 384 | ||||||||||||||||||||||||||
Loans accounted for under the fair value option (2)
|
7,201 | 5,946 | ||||||||||||||||||||||||||||||||||||
| Total commercial loans and leases | $ | 543,420 | $ | 499,065 | ||||||||||||||||||||||||||||||||||
(1)Includes card-related products.
(2)Commercial loans accounted for under the fair value option include U.S. commercial of $4.6 billion and $2.9 billion and non-U.S. commercial of $2.6 billion and $3.0 billion at December 31, 2021 and 2020. For more information on the fair value option, see Note 21 – Fair Value Option to the Consolidated Financial Statements.
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Table 31 presents net charge-offs and related ratios for our commercial loans and leases for 2021 and 2020.
| Table 31 | Commercial Net Charge-offs and Related Ratios | |||||||||||||||||||||||||
| Net Charge-offs |
Net Charge-off Ratios (1)
|
|||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| Commercial and industrial: | ||||||||||||||||||||||||||
| U.S. commercial | $ | (23) | $ | 718 | (0.01) | % | 0.23 | % | ||||||||||||||||||
| Non-U.S. commercial | 35 | 155 | 0.04 | 0.15 | ||||||||||||||||||||||
| Total commercial and industrial | 12 | 873 | — | 0.21 | ||||||||||||||||||||||
| Commercial real estate | 34 | 270 | 0.06 | 0.43 | ||||||||||||||||||||||
| Commercial lease financing | (1) | 59 | — | 0.32 | ||||||||||||||||||||||
| 45 | 1,202 | 0.01 | 0.24 | |||||||||||||||||||||||
| U.S. small business commercial | 351 | 267 | 1.19 | 0.86 | ||||||||||||||||||||||
| Total commercial | $ | 396 | $ | 1,469 | 0.08 | 0.28 | ||||||||||||||||||||
(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 32 presents commercial reservable criticized utilized exposure by loan type. Criticized exposure corresponds to the Special Mention, Substandard and Doubtful asset categories as defined by regulatory authorities. Total commercial reservable criticized utilized exposure decreased $16.3 billion during 2021, which was broad-based across industries. At December 31, 2021 and 2020, 87 percent and 79 percent of commercial reservable criticized utilized exposure was secured.
| Table 32 |
Commercial Reservable Criticized Utilized Exposure (1, 2)
|
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| December 31 | ||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | ||||||||||||||||||||||||
| Commercial and industrial: | ||||||||||||||||||||||||||
| U.S. commercial | $ | 11,327 | 3.20 | % | $ | 21,388 | 6.83 | % | ||||||||||||||||||
| Non-U.S. commercial | 2,582 | 2.17 | 5,051 | 5.03 | ||||||||||||||||||||||
| Total commercial and industrial | 13,909 | 2.94 | 26,439 | 6.40 | ||||||||||||||||||||||
| Commercial real estate | 7,572 | 11.72 | 10,213 | 16.42 | ||||||||||||||||||||||
| Commercial lease financing | 387 | 2.61 | 714 | 4.18 | ||||||||||||||||||||||
| 21,868 | 3.96 | 37,366 | 7.59 | |||||||||||||||||||||||
| U.S. small business commercial | 513 | 2.67 | 1,300 | 3.56 | ||||||||||||||||||||||
| Total commercial reservable criticized utilized exposure | $ | 22,381 | 3.91 | $ | 38,666 | 7.31 | ||||||||||||||||||||
(1)Total commercial reservable criticized utilized exposure includes loans and leases of $21.2 billion and $36.6 billion and commercial letters of credit of $1.2 billion and $2.1 billion at December 31, 2021 and 2020.
(2)Percentages are calculated as commercial reservable criticized utilized exposure divided by total commercial reservable utilized 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, 2021, 62 percent of the U.S. commercial loan portfolio, excluding small business, was managed in Global Banking, 22 percent in Global Markets, 15 percent in GWIM (loans that provide financing for asset purchases, business investments and other liquidity needs for high net worth clients) and the remainder primarily in Consumer Banking. U.S. commercial loans increased $37.2 billion, or 13 percent, during 2021 primarily driven by Global Markets and Global Banking. Reservable criticized utilized exposure decreased $10.1 billion, driven by decreases across a broad range of industries.
Non-U.S. Commercial
At December 31, 2021, 69 percent of the non-U.S. commercial loan portfolio was managed in Global Banking, 30 percent in Global Markets and the remainder in GWIM. Non-U.S. commercial loans increased $22.8 billion, or 25 percent, during 2021 primarily in Global Markets. Reservable criticized utilized exposure decreased $2.5 billion, which was broad-based across industries. For information on the non-U.S. commercial portfolio, see Non-U.S. Portfolio on page 71.
Commercial Real Estate
Commercial real estate primarily includes commercial loans secured by non-owner-occupied real estate and is dependent on the sale or lease of the real estate as the primary source of repayment. Outstanding loans increased $2.6 billion, or four percent, during 2021 to $63.0 billion due to new originations outpacing paydowns. The portfolio remains diversified across property types and geographic regions. California represented the largest state concentration at 21 percent and 23 percent of the commercial real estate portfolio at December 31, 2021 and 2020. The commercial real estate portfolio is predominantly managed in Global Banking and consists of loans made primarily to public and private developers, and commercial real estate firms.
During 2021, we continued to see low default rates and varying degrees of improvement in certain geographic regions and property types of the portfolio. We use a number of proactive risk mitigation initiatives to reduce adversely rated exposure in the commercial real estate portfolio, including transfers of deteriorating exposures for management by independent special asset officers and the pursuit of loan restructurings or asset sales to achieve the best results for our customers and the Corporation.
Table 33 presents outstanding commercial real estate loans by geographic region, based on the geographic location of the collateral, and by property type.
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| Table 33 | Outstanding Commercial Real Estate Loans | |||||||||||||
| December 31 | ||||||||||||||
| (Dollars in millions) | 2021 | 2020 | ||||||||||||
| By Geographic Region | ||||||||||||||
| Northeast | $ | 14,318 | $ | 11,628 | ||||||||||
| California | 13,145 | 14,028 | ||||||||||||
| Southwest | 7,510 | 8,551 | ||||||||||||
| Southeast | 6,758 | 6,588 | ||||||||||||
| Florida | 4,367 | 4,294 | ||||||||||||
| Midwest | 3,221 | 3,483 | ||||||||||||
| Illinois | 2,878 | 2,594 | ||||||||||||
| Midsouth | 2,289 | 2,370 | ||||||||||||
| Northwest | 1,709 | 1,634 | ||||||||||||
| Non-U.S. | 4,760 | 3,187 | ||||||||||||
| Other | 2,054 | 2,007 | ||||||||||||
Total outstanding commercial real estate loans |
$ | 63,009 | $ | 60,364 | ||||||||||
| By Property Type | ||||||||||||||
| Non-residential | ||||||||||||||
| Office | $ | 18,309 | $ | 17,667 | ||||||||||
| Industrial / Warehouse | 10,749 | 8,330 | ||||||||||||
| Multi-family rental | 8,173 | 7,051 | ||||||||||||
| Shopping centers /Retail | 6,502 | 7,931 | ||||||||||||
| Hotel / Motels | 5,932 | 7,226 | ||||||||||||
| Unsecured | 3,178 | 2,336 | ||||||||||||
| Multi-use | 1,835 | 1,460 | ||||||||||||
| Other | 7,238 | 7,146 | ||||||||||||
| Total non-residential | 61,916 | 59,147 | ||||||||||||
| Residential | 1,093 | 1,217 | ||||||||||||
Total outstanding commercial real estate loans |
$ | 63,009 | $ | 60,364 | ||||||||||
U.S. Small Business Commercial
The U.S. small business commercial loan portfolio is comprised of small business card loans and small business loans primarily managed in Consumer Banking, and includes $4.7 billion and $22.7 billion of PPP loans outstanding at December 31, 2021 and 2020. The decline of $18.0 billion in PPP loans during 2021 was due to repayment of the loans by the SBA under the terms of the program. Excluding PPP, credit card-related products were 50 percent of the U.S. small business commercial portfolio at both December 31, 2021 and 2020 and represented 95 percent of net charge-offs in 2021 compared to 91 percent in 2020.
Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity
Table 34 presents the nonperforming commercial loans, leases and foreclosed properties activity during 2021 and 2020. Nonperforming loans do not include loans accounted for under the fair value option. During 2021, nonperforming commercial loans and leases decreased $649 million to $1.6 billion. At December 31, 2021, 88 percent of commercial nonperforming loans, leases and foreclosed properties were secured and 54 percent were contractually current. Commercial nonperforming loans were carried at 90 percent of their unpaid principal balance, as the carrying value of these loans has been reduced to the estimated collateral value less costs to sell.
| Table 34 |
Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity (1, 2)
|
|||||||||||||
| (Dollars in millions) | 2021 | 2020 | ||||||||||||
| Nonperforming loans and leases, January 1 | $ | 2,227 | $ | 1,499 | ||||||||||
| Additions | 1,622 | 3,518 | ||||||||||||
| Reductions: | ||||||||||||||
| Paydowns | (1,163) | (1,002) | ||||||||||||
| Sales | (199) | (350) | ||||||||||||
Returns to performing status (3)
|
(264) | (172) | ||||||||||||
| Charge-offs | (254) | (1,208) | ||||||||||||
| Transfers to foreclosed properties | — | (2) | ||||||||||||
| Transfers to loans held-for-sale | (391) | (56) | ||||||||||||
| Total net additions (reductions) to nonperforming loans and leases | (649) | 728 | ||||||||||||
| Total nonperforming loans and leases, December 31 | 1,578 | 2,227 | ||||||||||||
| Foreclosed properties, December 31 | 29 | 41 | ||||||||||||
| Nonperforming commercial loans, leases and foreclosed properties, December 31 | $ | 1,607 | $ | 2,268 | ||||||||||
Nonperforming commercial loans and leases as a percentage of outstanding commercial loans and leases (4)
|
0.29 | % | 0.45 | % | ||||||||||
Nonperforming commercial loans, leases and foreclosed properties as a percentage of outstanding commercial loans, leases and foreclosed properties (4)
|
0.30 | 0.46 | ||||||||||||
(1)Balances do not include nonperforming loans held-for-sale of $264 million and $359 million at December 31, 2021 and 2020.
(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.
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Table 35 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.
| Table 35 | Commercial Troubled Debt Restructurings | |||||||||||||||||||||||||||||||||||||
| December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Nonperforming | Performing | Total | Nonperforming | Performing | Total | ||||||||||||||||||||||||||||||||
| Commercial and industrial: | ||||||||||||||||||||||||||||||||||||||
| U.S. commercial | $ | 359 | $ | 685 | $ | 1,044 | $ | 509 | $ | 850 | $ | 1,359 | ||||||||||||||||||||||||||
| Non-U.S. commercial | 72 | 8 | 80 | 49 | 119 | 168 | ||||||||||||||||||||||||||||||||
| Total commercial and industrial | 431 | 693 | 1,124 | 558 | 969 | 1,527 | ||||||||||||||||||||||||||||||||
| Commercial real estate | 244 | 437 | 681 | 137 | — | 137 | ||||||||||||||||||||||||||||||||
| Commercial lease financing | 50 | 7 | 57 | 42 | 2 | 44 | ||||||||||||||||||||||||||||||||
| 725 | 1,137 | 1,862 | 737 | 971 | 1,708 | |||||||||||||||||||||||||||||||||
| U.S. small business commercial | — | 38 | 38 | — | 29 | 29 | ||||||||||||||||||||||||||||||||
Total commercial troubled debt restructurings |
$ | 725 | $ | 1,175 | $ | 1,900 | $ | 737 | $ | 1,000 | $ | 1,737 | ||||||||||||||||||||||||||
Industry Concentrations
Table 36 presents commercial committed and utilized credit exposure by industry. Our commercial credit exposure is diversified across a broad range of industries. Total commercial committed exposure increased $89.6 billion, or nine percent, during 2021 to $1.1 trillion. The increase in commercial committed exposure was concentrated in the Asset managers and funds, Finance companies and Utilities industry sectors. Increases were partially offset by decreased exposure to the Government and public education and Automobiles and components industry sectors.
Industry limits are used internally to manage industry concentrations and are based on committed exposure that is determined on an industry-by-industry basis. A risk management framework is in place to set and approve industry limits as well as to provide ongoing monitoring.
Asset managers and funds, our largest industry concentration with committed exposure of $136.9 billion, increased $36.6 billion, or 37 percent, during 2021, which was primarily driven by secured investment grade exposures.
Real estate, our second largest industry concentration with committed exposure of $96.2 billion, increased $4.5 billion, or five percent, during 2021. For more information on the commercial real estate and related portfolios, see Commercial Portfolio Credit Risk Management – Commercial Real Estate on page 67.
Finance companies, our third largest industry concentration with committed exposure of $86.0 billion, increased $16.0 billion, or 23 percent during 2021, with the growth largely occurring in Consumer Finance, Thrifts and Mortgage Finance and Diversified Financials.
Given the widespread impact of the pandemic on the U.S. and global economy, a number of industries have been and will likely continue to be adversely impacted. We continue to monitor all industries, particularly higher risk industries that are experiencing or could experience a more significant impact to their financial condition.
69 Bank of America
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| Table 36 |
Commercial Credit Exposure by Industry (1)
|
|||||||||||||||||||||||||
| Commercial Utilized |
Total Commercial
Committed (2)
|
|||||||||||||||||||||||||
| December 31 | ||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| Asset managers & funds | $ | 89,786 | $ | 67,360 | $ | 136,914 | $ | 100,296 | ||||||||||||||||||
Real estate (3)
|
69,384 | 68,967 | 96,202 | 91,730 | ||||||||||||||||||||||
| Finance companies | 59,327 | 46,948 | 86,009 | 70,004 | ||||||||||||||||||||||
| Capital goods | 42,784 | 39,807 | 84,293 | 80,815 | ||||||||||||||||||||||
| Healthcare equipment and services | 32,003 | 33,488 | 58,195 | 57,540 | ||||||||||||||||||||||
| Materials | 25,133 | 24,516 | 53,652 | 50,757 | ||||||||||||||||||||||
| Retailing | 24,514 | 23,700 | 50,816 | 48,306 | ||||||||||||||||||||||
| Government & public education | 37,597 | 41,669 | 50,066 | 56,212 | ||||||||||||||||||||||
| Consumer services | 28,172 | 31,993 | 48,052 | 47,997 | ||||||||||||||||||||||
| Food, beverage and tobacco | 21,584 | 22,755 | 45,419 | 44,417 | ||||||||||||||||||||||
| Commercial services and supplies | 22,390 | 21,107 | 42,451 | 38,092 | ||||||||||||||||||||||
| Individuals and trusts | 29,752 | 24,727 | 39,869 | 34,036 | ||||||||||||||||||||||
| Utilities | 17,082 | 12,387 | 36,855 | 29,234 | ||||||||||||||||||||||
| Energy | 14,217 | 13,930 | 34,136 | 32,974 | ||||||||||||||||||||||
| Transportation | 21,079 | 23,126 | 32,015 | 33,082 | ||||||||||||||||||||||
| Software and services | 10,663 | 10,853 | 27,643 | 22,524 | ||||||||||||||||||||||
| Technology hardware and equipment | 10,159 | 9,935 | 26,910 | 24,196 | ||||||||||||||||||||||
| Media | 12,495 | 12,632 | 26,318 | 24,120 | ||||||||||||||||||||||
| Global commercial banks | 20,062 | 20,544 | 21,390 | 22,595 | ||||||||||||||||||||||
| Telecommunication services | 10,056 | 9,411 | 21,270 | 15,605 | ||||||||||||||||||||||
| Consumer durables and apparel | 9,740 | 9,232 | 21,226 | 20,223 | ||||||||||||||||||||||
| Pharmaceuticals and biotechnology | 5,608 | 4,830 | 19,439 | 15,901 | ||||||||||||||||||||||
| Automobiles and components | 9,236 | 10,792 | 17,052 | 20,575 | ||||||||||||||||||||||
| Vehicle dealers | 11,030 | 15,028 | 15,678 | 18,696 | ||||||||||||||||||||||
| Insurance | 5,743 | 5,772 | 14,323 | 13,277 | ||||||||||||||||||||||
| Food and staples retailing | 6,902 | 5,209 | 12,226 | 11,795 | ||||||||||||||||||||||
| Financial markets infrastructure (clearinghouses) | 3,876 | 4,939 | 6,076 | 8,648 | ||||||||||||||||||||||
| Religious and social organizations | 3,154 | 4,646 | 5,394 | 6,597 | ||||||||||||||||||||||
| Total commercial credit exposure by industry | $ | 653,528 | $ | 620,303 | $ | 1,129,889 | $ | 1,040,244 | ||||||||||||||||||
(1)Includes U.S. small business commercial exposure.
(2)Includes the notional amount of unfunded legally binding lending commitments net of amounts distributed (i.e., syndicated or participated) to other financial institutions. The distributed amounts were $10.7 billion and $10.5 billion at December 31, 2021 and 2020.
(3)Industries are viewed from a variety of perspectives to best isolate the perceived risks. For purposes of this table, the real estate industry is defined based on the primary business activity of the borrowers or counterparties using operating cash flows and primary source of repayment as key factors.
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, 2021 and 2020, 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 $2.6 billion and $4.2 billion. We recorded net losses of $91 million in 2021 compared to net losses of $240 million in 2020. 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 43. For more information, see Trading Risk Management on page 76.
Tables 37 and 38 present the maturity profiles and the credit exposure debt ratings of the net credit default protection portfolio at December 31, 2021 and 2020.
| Table 37 | Net Credit Default Protection by Maturity | |||||||||||||
| December 31 | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Less than or equal to one year | 34 | % | 65 | % | ||||||||||
Greater than one year and less than or equal to five years |
62 | 34 | ||||||||||||
| Greater than five years | 4 | 1 | ||||||||||||
| Total net credit default protection | 100 | % | 100 | % | ||||||||||
| Table 38 | 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) | 2021 | 2020 | ||||||||||||||||||||||||
Ratings (2, 3)
|
||||||||||||||||||||||||||
| A | $ | (350) | 13.4 | % | $ | (250) | 6.0 | % | ||||||||||||||||||
| BBB | (710) | 27.1 | (1,856) | 44.5 | ||||||||||||||||||||||
| BB | (809) | 30.9 | (1,363) | 32.7 | ||||||||||||||||||||||
| B | (659) | 25.2 | (465) | 11.2 | ||||||||||||||||||||||
| CCC and below | (35) | 1.3 | (182) | 4.4 | ||||||||||||||||||||||
NR (4)
|
(55) | 2.1 | (54) | 1.2 | ||||||||||||||||||||||
|
Total net credit
default protection
|
$ | (2,618) | 100.0 | % | $ | (4,170) | 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.
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In addition to our net notional credit default protection purchased to cover the funded and unfunded portion of certain credit exposures, credit derivatives are used for market-making activities for clients and establishing positions intended to profit from directional or relative value changes. We execute the majority of our credit derivative trades in the OTC market with large, multinational financial institutions, including broker-dealers and, to a lesser degree, with a variety of other investors. Because these transactions are executed in the OTC market, we are subject to settlement risk. We are also subject to credit risk in the event that these counterparties fail to perform under the terms of these contracts. In order to properly reflect counterparty credit risk, we record counterparty credit risk valuation adjustments on certain derivative assets, including our
purchased credit default protection. In most cases, credit derivative transactions are executed on a daily margin basis. Therefore, events such as a credit downgrade, depending on the ultimate rating level, or a breach of credit covenants would typically require an increase in the amount of collateral required by the counterparty, where applicable, and/or allow us to take additional protective measures such as early termination of all trades. For more information on credit derivatives and counterparty credit risk valuation adjustments, see Note 3 – Derivatives to the Consolidated Financial Statements.
Non-U.S. Portfolio
Our non-U.S. credit and trading portfolios are subject to country risk. We define country risk as the risk of loss from unfavorable economic and political conditions, currency fluctuations, social instability and changes in government policies. A risk management framework is in place to measure, monitor and
manage non-U.S. risk and exposures. In addition to the direct risk of doing business in a country, we also are exposed to indirect country risks (e.g., related to the collateral received on secured financing transactions or related to client clearing activities). These indirect exposures are managed in the normal course of business through credit, market and operational risk governance rather than through country risk governance.
Table 39 presents our 20 largest non-U.S. country exposures at December 31, 2021. These exposures accounted for 89 percent and 90 percent of our total non-U.S. exposure at December 31, 2021 and 2020. Net country exposure for these 20 countries increased $10.5 billion in 2021 primarily driven by increases in Australia, Canada and France, partially offset by reductions in Germany and the United Kingdom.
Non-U.S. exposure is presented on an internal risk management basis and includes sovereign and non-sovereign credit exposure, securities and other investments issued by or domiciled in countries other than the U.S.
Funded loans and loan equivalents include loans, leases, and other extensions of credit and funds, including letters of credit and due from placements. Unfunded commitments are the undrawn portion of legally binding commitments related to loans and loan equivalents. Net counterparty exposure includes the fair value of derivatives, including the counterparty risk associated with credit default swaps (CDS), and secured financing transactions. Securities and other investments are carried at fair value and long securities exposures are netted against short exposures with the same underlying issuer to, but not below, zero. Net country exposure represents country exposure less hedges and credit default protection purchased, net of credit default protection sold.
| Table 39 | 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 2021 |
Hedges and Credit Default Protection | Net Country Exposure at December 31 2021 |
Increase (Decrease) from December 31 2020 |
||||||||||||||||||||||||||||||||||||||||||
| United Kingdom | $ | 32,062 | $ | 15,858 | $ | 5,932 | $ | 2,399 | $ | 56,251 | $ | (1,282) | $ | 54,969 | $ | (4,503) | ||||||||||||||||||||||||||||||||||
| Germany | 21,397 | 9,790 | 1,794 | 1,807 | 34,788 | (963) | 33,825 | (11,078) | ||||||||||||||||||||||||||||||||||||||||||
| Canada | 9,138 | 12,783 | 1,441 | 3,551 | 26,913 | (602) | 26,311 | 5,177 | ||||||||||||||||||||||||||||||||||||||||||
| France | 12,393 | 8,234 | 1,391 | 3,710 | 25,728 | (821) | 24,907 | 4,116 | ||||||||||||||||||||||||||||||||||||||||||
| Australia | 9,194 | 9,078 | 434 | 2,812 | 21,518 | (214) | 21,304 | 8,217 | ||||||||||||||||||||||||||||||||||||||||||
| Japan | 14,812 | 1,528 | 1,308 | 371 | 18,019 | (757) | 17,262 | (234) | ||||||||||||||||||||||||||||||||||||||||||
| Brazil | 6,814 | 1,382 | 526 | 4,227 | 12,949 | (199) | 12,750 | 2,457 | ||||||||||||||||||||||||||||||||||||||||||
| China | 9,941 | 689 | 894 | 1,370 | 12,894 | (312) | 12,582 | (838) | ||||||||||||||||||||||||||||||||||||||||||
| Singapore | 3,914 | 709 | 249 | 5,850 | 10,722 | (57) | 10,665 | 1,383 | ||||||||||||||||||||||||||||||||||||||||||
| Netherlands | 3,839 | 4,780 | 452 | 950 | 10,021 | (425) | 9,596 | (88) | ||||||||||||||||||||||||||||||||||||||||||
| India | 6,485 | 388 | 470 | 1,454 | 8,797 | (166) | 8,631 | 820 | ||||||||||||||||||||||||||||||||||||||||||
| Switzerland | 5,072 | 3,125 | 277 | 338 | 8,812 | (237) | 8,575 | 1,680 | ||||||||||||||||||||||||||||||||||||||||||
| South Korea | 5,800 | 771 | 545 | 1,191 | 8,307 | (155) | 8,152 | (399) | ||||||||||||||||||||||||||||||||||||||||||
| Hong Kong | 5,523 | 315 | 338 | 1,167 | 7,343 | (16) | 7,327 | 790 | ||||||||||||||||||||||||||||||||||||||||||
| Mexico | 4,333 | 1,577 | 136 | 629 | j | 6,675 | (213) | 6,462 | 175 | |||||||||||||||||||||||||||||||||||||||||
| Spain | 2,482 | 2,126 | 473 | 1,198 | 6,279 | (359) | 5,920 | 1,104 | ||||||||||||||||||||||||||||||||||||||||||
| Ireland | 4,037 | 1,019 | 136 | 376 | 5,568 | (29) | 5,539 | 1,374 | ||||||||||||||||||||||||||||||||||||||||||
| Italy | 2,843 | 1,098 | 348 | 1,484 | 5,773 | (569) | 5,204 | (488) | ||||||||||||||||||||||||||||||||||||||||||
| Belgium | 2,548 | 1,516 | 462 | 687 | 5,213 | (182) | 5,031 | 64 | ||||||||||||||||||||||||||||||||||||||||||
| United Arab Emirates | 2,942 | 329 | 36 | 234 | 3,541 | (47) | 3,494 | 807 | ||||||||||||||||||||||||||||||||||||||||||
Total top 20 non-U.S. countries exposure |
$ | 165,569 | $ | 77,095 | $ | 17,642 | $ | 35,805 | $ | 296,111 | $ | (7,605) | $ | 288,506 | $ | 10,536 | ||||||||||||||||||||||||||||||||||
71 Bank of America
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Our largest non-U.S. country exposure at December 31, 2021 was the United Kingdom with net exposure of $55.0 billion, which represents a $4.5 billion decrease from December 31, 2020. Our second largest non-U.S. country exposure was Germany with net exposure of $33.8 billion at December 31, 2021, a $11.1 billion decrease from December 31, 2020. The decrease in both of these countries was primarily driven by a reduction in deposits with central banks.
In light of the global pandemic, we are monitoring our non-U.S. exposure closely, particularly in countries where restrictions on certain activities, in an attempt to contain the spread and impact of the virus, have affected and will likely continue to adversely affect economic activity.
The impact of COVID-19 could have an adverse impact on the global economy for a prolonged period of time. For more information on how the pandemic may affect our operations, see Executive Summary – Recent Developments – COVID-19 Pandemic on page 27 and Part 1. Item 1A. Risk Factors on page 7.
Loan and Lease Contractual Maturities
Table 40 disaggregates total outstanding loans and leases by remaining contractual maturities and interest rates. The amounts provided do not reflect prepayment assumptions or hedging activities related to the loan portfolio. For information on the asset sensitivity of our total banking book balance sheet, see Interest Rate Risk Management for the Banking Book on page 79.
| Table 40 |
Loan and Lease Contractual Maturities (1)
|
|||||||||||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||||||||
| (Dollars in millions) | Due in One Year or Less |
Due After One Year Through Five Years | Due After Five Years Through 15 Years | Due After 15 Years | Total | |||||||||||||||||||||||||||
| Residential mortgage | $ | 175 | $ | 702 | $ | 48,614 | $ | 172,751 | $ | 222,242 | ||||||||||||||||||||||
| Home equity | 1,596 | 92 | 6,159 | 20,427 | 28,274 | |||||||||||||||||||||||||||
| Credit card | 81,438 | — | — | — | 81,438 | |||||||||||||||||||||||||||
| Direct/Indirect consumer | 54,080 | 30,940 | 14,535 | 4,005 | 103,560 | |||||||||||||||||||||||||||
| Other consumer | 190 | — | — | — | 190 | |||||||||||||||||||||||||||
| Total consumer loans | $ | 137,479 | $ | 31,734 | $ | 69,308 | $ | 197,183 | $ | 435,704 | ||||||||||||||||||||||
| U.S. commercial | $ | 93,480 | $ | 195,157 | $ | 39,370 | $ | 2,505 | $ | 330,512 | ||||||||||||||||||||||
| Non-U.S. commercial | 42,570 | 50,514 | 21,754 | 1,053 | 115,891 | |||||||||||||||||||||||||||
| Commercial real estate | 16,322 | 42,363 | 3,386 | 938 | 63,009 | |||||||||||||||||||||||||||
| Commercial lease financing | 1,349 | 8,676 | 3,865 | 935 | 14,825 | |||||||||||||||||||||||||||
| U.S. small business commercial | 9,428 | 3,895 | 5,656 | 204 | 19,183 | |||||||||||||||||||||||||||
| Total commercial loans | $ | 163,149 | $ | 300,605 | $ | 74,031 | $ | 5,635 | $ | 543,420 | ||||||||||||||||||||||
| Total loans and leases | $ | 300,628 | $ | 332,339 | $ | 143,339 | $ | 202,818 | $ | 979,124 | ||||||||||||||||||||||
| Amount due in one year or less at: | Amount due after one year at: | |||||||||||||||||||||||||||||||
| (Dollars in millions) | Variable Interest Rates | Fixed Interest Rates | Variable Interest Rates | Fixed Interest Rates | Total | |||||||||||||||||||||||||||
| Residential mortgage | $ | 18 | $ | 157 | $ | 80,967 | $ | 141,100 | $ | 222,242 | ||||||||||||||||||||||
| Home equity | 98 | 1,498 | 25,982 | 696 | 28,274 | |||||||||||||||||||||||||||
| Credit card | 77,151 | 4,287 | — | — | 81,438 | |||||||||||||||||||||||||||
| Direct/Indirect consumer | 48,424 | 5,656 | 2,551 | 46,929 | 103,560 | |||||||||||||||||||||||||||
| Other consumer | — | 190 | — | — | 190 | |||||||||||||||||||||||||||
| Total consumer loans | $ | 125,691 | $ | 11,788 | $ | 109,500 | $ | 188,725 | $ | 435,704 | ||||||||||||||||||||||
| U.S. commercial | $ | 84,398 | $ | 9,082 | $ | 190,978 | $ | 46,054 | $ | 330,512 | ||||||||||||||||||||||
| Non-U.S. commercial | 39,472 | 3,098 | 70,817 | 2,504 | 115,891 | |||||||||||||||||||||||||||
| Commercial real estate | 15,673 | 649 | 44,626 | 2,061 | 63,009 | |||||||||||||||||||||||||||
| Commercial lease financing | 187 | 1,162 | 1,560 | 11,916 | 14,825 | |||||||||||||||||||||||||||
| U.S. small business commercial | 5,150 | 4,278 | 98 | 9,657 | 19,183 | |||||||||||||||||||||||||||
| Total commercial loans | $ | 144,880 | $ | 18,269 | $ | 308,079 | $ | 72,192 | $ | 543,420 | ||||||||||||||||||||||
| Total loans and leases | $ | 270,571 | $ | 30,057 | $ | 417,579 | $ | 260,917 | $ | 979,124 | ||||||||||||||||||||||
(1)Includes loans accounted for under the fair value option.
Bank of America 72
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Allowance for Credit Losses
The allowance for credit losses decreased $6.8 billion from December 31, 2020 to $13.8 billion at December 31, 2021, which included a $3.8 billion reserve decrease related to the commercial portfolio and a $3.1 billion reserve decrease related
to the consumer portfolio. The decreases were primarily driven by improvements in the macroeconomic outlook and credit quality.
Table 41 presents an allocation of the allowance for credit losses by product type at December 31, 2021 and 2020.
| Table 41 | 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, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||||
| Allowance for loan and lease losses | ||||||||||||||||||||||||||||||||||||||
| Residential mortgage | $ | 351 | 2.83 | % | 0.16 | % | $ | 459 | 2.44 | % | 0.21 | % | ||||||||||||||||||||||||||
| Home equity | 206 | 1.66 | 0.74 | 399 | 2.12 | 1.16 | ||||||||||||||||||||||||||||||||
| Credit card | 5,907 | 47.70 | 7.25 | 8,420 | 44.79 | 10.70 | ||||||||||||||||||||||||||||||||
| Direct/Indirect consumer | 523 | 4.22 | 0.51 | 752 | 4.00 | 0.82 | ||||||||||||||||||||||||||||||||
| Other consumer | 46 | 0.37 | n/m | 41 | 0.22 | n/m | ||||||||||||||||||||||||||||||||
| Total consumer | 7,033 | 56.78 | 1.62 | 10,071 | 53.57 | 2.35 | ||||||||||||||||||||||||||||||||
U.S. commercial (2)
|
3,019 | 24.37 | 0.87 | 5,043 | 26.82 | 1.55 | ||||||||||||||||||||||||||||||||
| Non-U.S. commercial | 975 | 7.87 | 0.86 | 1,241 | 6.60 | 1.37 | ||||||||||||||||||||||||||||||||
| Commercial real estate | 1,292 | 10.43 | 2.05 | 2,285 | 12.15 | 3.79 | ||||||||||||||||||||||||||||||||
| Commercial lease financing | 68 | 0.55 | 0.46 | 162 | 0.86 | 0.95 | ||||||||||||||||||||||||||||||||
| Total commercial | 5,354 | 43.22 | 1.00 | 8,731 | 46.43 | 1.77 | ||||||||||||||||||||||||||||||||
| Allowance for loan and lease losses | 12,387 | 100.00 | % | 1.28 | 18,802 | 100.00 | % | 2.04 | ||||||||||||||||||||||||||||||
| Reserve for unfunded lending commitments | 1,456 | 1,878 | ||||||||||||||||||||||||||||||||||||
| Allowance for credit losses | $ | 13,843 | $ | 20,680 | ||||||||||||||||||||||||||||||||||
(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.
(2)Includes allowance for loan and lease losses for U.S. small business commercial loans of $1.2 billion and $1.5 billion at December 31, 2021 and 2020.
n/m = not meaningful
Net charge-offs for 2021 were $2.2 billion compared to $4.1 billion in 2020 driven by decreases across most products. The provision for credit losses decreased $15.9 billion to a $4.6 billion benefit during 2021 compared to 2020. The allowance for credit losses had a reserve release of $6.8 billion for 2021, primarily driven by improvements in the macroeconomic outlook and credit quality. The provision for credit losses for the consumer portfolio, including unfunded lending commitments, decreased $6.1 billion to a benefit of $1.2 billion during 2021 compared to 2020. The provision for credit losses for the
commercial portfolio, including unfunded lending commitments, decreased $9.8 billion to a $3.4 billion benefit for 2021 compared to 2020.
Table 42 presents a rollforward of the allowance for credit losses, including certain loan and allowance ratios for 2021 and 2020. For more information on the Corporation’s credit loss accounting policies and activity related to the allowance for credit losses, see Note 1 – Summary of Significant Accounting Principles and Note 5 – Outstanding Loans and Leases and Allowance for Credit Losses to the Consolidated Financial Statements.
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| Table 42 | Allowance for Credit Losses | |||||||||||||
| (Dollars in millions) | 2021 | 2020 | ||||||||||||
Allowance for loan and lease losses, January 1 |
$ | 18,802 | $ | 12,358 | ||||||||||
| Loans and leases charged off | ||||||||||||||
| Residential mortgage | (34) | (40) | ||||||||||||
| Home equity | (44) | (58) | ||||||||||||
| Credit card | (2,411) | (2,967) | ||||||||||||
| Direct/Indirect consumer | (297) | (372) | ||||||||||||
| Other consumer | (292) | (307) | ||||||||||||
| Total consumer charge-offs | (3,078) | (3,744) | ||||||||||||
U.S. commercial (1)
|
(626) | (1,163) | ||||||||||||
| Non-U.S. commercial | (47) | (168) | ||||||||||||
| Commercial real estate | (46) | (275) | ||||||||||||
| Commercial lease financing | — | (69) | ||||||||||||
| Total commercial charge-offs | (719) | (1,675) | ||||||||||||
| Total loans and leases charged off | (3,797) | (5,419) | ||||||||||||
| Recoveries of loans and leases previously charged off | ||||||||||||||
| Residential mortgage | 62 | 70 | ||||||||||||
| Home equity | 163 | 131 | ||||||||||||
| Credit card | 688 | 618 | ||||||||||||
| Direct/Indirect consumer | 296 | 250 | ||||||||||||
| Other consumer | 22 | 23 | ||||||||||||
| Total consumer recoveries | 1,231 | 1,092 | ||||||||||||
U.S. commercial (2)
|
298 | 178 | ||||||||||||
| Non-U.S. commercial | 12 | 13 | ||||||||||||
| Commercial real estate | 12 | 5 | ||||||||||||
| Commercial lease financing | 1 | 10 | ||||||||||||
| Total commercial recoveries | 323 | 206 | ||||||||||||
| Total recoveries of loans and leases previously charged off | 1,554 | 1,298 | ||||||||||||
| Net charge-offs | (2,243) | (4,121) | ||||||||||||
| Provision for loan and lease losses | (4,173) | 10,565 | ||||||||||||
| Other | 1 | — | ||||||||||||
Allowance for loan and lease losses, December 31 |
12,387 | 18,802 | ||||||||||||
Reserve for unfunded lending commitments, January 1 |
1,878 | 1,123 | ||||||||||||
| Provision for unfunded lending commitments | (421) | 755 | ||||||||||||
| Other | (1) | — | ||||||||||||
Reserve for unfunded lending commitments, December 31 |
1,456 | 1,878 | ||||||||||||
Allowance for credit losses, December 31 |
$ | 13,843 | $ | 20,680 | ||||||||||
Loan and allowance ratios (3) :
|
||||||||||||||
Loans and leases outstanding at December 31 |
$ | 971,305 | $ | 921,180 | ||||||||||
Allowance for loan and lease losses as a percentage of total loans and leases outstanding at December 31 |
1.28 | % | 2.04 | % | ||||||||||
Consumer allowance for loan and lease losses as a percentage of total consumer loans and leases outstanding at December 31 |
1.62 | 2.35 | ||||||||||||
Commercial allowance for loan and lease losses as a percentage of total commercial loans and leases outstanding at December 31 |
1.00 | 1.77 | ||||||||||||
| Average loans and leases outstanding | $ | 913,354 | $ | 974,281 | ||||||||||
| Annualized net charge-offs as a percentage of average loans and leases outstanding | 0.25 | % | 0.42 | % | ||||||||||
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases at December 31 |
271 | 380 | ||||||||||||
Ratio of the allowance for loan and lease losses at December 31 to net charge-offs |
5.52 | 4.56 | ||||||||||||
Amounts included in allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases at December 31 (4)
|
$ | 7,027 | $ | 9,854 | ||||||||||
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 (4)
|
117 | % | 181 | % | ||||||||||
(1)Includes U.S. small business commercial charge-offs of $425 million in 2021 compared to $321 million in 2020.
(2)Includes U.S. small business commercial recoveries of $74 million for 2021 compared to $54 million in 2020.
(3)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.
(4)Primarily includes amounts related to credit card and unsecured consumer lending portfolios in Consumer Banking.
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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 79.
We have been affected, and may continue to be affected, by market stress resulting from the pandemic that began in the first quarter of 2020. For more information, see Part 1. Item 1A. Risk Factors – Coronavirus Disease on page 8.
Our traditional banking loan and deposit products are non-trading positions and are generally reported at amortized cost for assets or the amount owed for liabilities (historical cost). However, these positions are still subject to changes in economic value based on varying market conditions, with one of the primary risks being changes in the levels of interest rates. The risk of adverse changes in the economic value of our non-trading positions arising from changes in interest rates is managed through our ALM activities. We have elected to account for certain assets and liabilities under the fair value option.
Our trading positions are reported at fair value with changes reflected in income. Trading positions are subject to various changes in market-based risk factors. The majority of this risk is generated by our activities in the interest rate, foreign exchange, credit, equity and commodities markets. In addition, the values of assets and liabilities could change due to market liquidity, correlations across markets and expectations of market volatility. We seek to manage these risk exposures by using a variety of techniques that encompass a broad range of financial instruments. The key risk management techniques are discussed in more detail in the Trading Risk Management section.
Global Risk Management is responsible for providing senior management with a clear and comprehensive understanding of the trading risks to which we are exposed. These responsibilities include ownership of market risk policy, developing and maintaining quantitative risk models, calculating aggregated risk measures, establishing and monitoring position limits consistent with risk appetite, conducting daily reviews and analysis of trading inventory, approving material risk exposures and fulfilling regulatory requirements. Market risks that impact businesses outside of Global Markets are monitored and governed by their respective governance functions.
Model risk is the potential for adverse consequences from decisions based on incorrect or misused model outputs and reports. Given that models are used across the Corporation, model risk impacts all risk types including credit, market and operational risks. The Enterprise Model Risk Policy defines model risk standards, consistent with our Risk Framework and risk appetite, prevailing regulatory guidance and industry best practice. All models, including risk management, valuation and regulatory capital models, must meet certain validation criteria, including effective challenge of the conceptual soundness of the model, independent model testing and ongoing monitoring through outcomes analysis and benchmarking. The Enterprise Model Risk Committee (EMRC), a subcommittee of the MRC, oversees that model standards are consistent with model risk requirements and monitors the effective challenge in the model validation process across the Corporation.
Interest Rate Risk
Interest rate risk represents exposures to instruments whose values vary with the level or volatility of interest rates. These instruments include, but are not limited to, loans, debt securities, certain trading-related assets and liabilities, deposits, borrowings and derivatives. Hedging instruments used to mitigate these risks include derivatives such as options, futures, forwards and swaps.
Foreign Exchange Risk
Foreign exchange risk represents exposures to changes in the values of current holdings and future cash flows denominated in currencies other than the U.S. dollar. The types of instruments exposed to this risk include investments in non-U.S. subsidiaries, foreign currency-denominated loans and securities, future cash flows in foreign currencies arising from foreign exchange transactions, foreign currency-denominated debt and various foreign exchange derivatives whose values fluctuate with changes in the level or volatility of currency exchange rates or non-U.S. interest rates. Hedging instruments used to mitigate this risk include foreign exchange options, currency swaps, futures, forwards, and foreign currency-denominated debt and deposits.
Mortgage Risk
Mortgage risk represents exposures to changes in the values of mortgage-related instruments. The values of these instruments are sensitive to prepayment rates, mortgage rates, agency debt ratings, default, market liquidity, government participation and interest rate volatility. Our exposure to these instruments takes several forms. For example, we trade and engage in market-making activities in a variety of mortgage securities including whole loans, pass-through certificates, commercial mortgages and collateralized mortgage obligations including collateralized debt obligations using mortgages as underlying collateral. In addition, we originate a variety of MBS, which involves the accumulation of mortgage-related loans in anticipation of eventual securitization, and we may hold positions in mortgage securities and residential mortgage loans as part of the ALM portfolio. We also record MSRs as part of our mortgage origination activities. Hedging instruments used to mitigate this risk include derivatives such as options, swaps, futures and forwards as well as securities including MBS and U.S. Treasury securities. For more information, see Mortgage Banking Risk Management on page 80.
Equity Market Risk
Equity market risk represents exposures to securities that represent an ownership interest in a corporation in the form of domestic and foreign common stock or other equity-linked instruments. Instruments that would lead to this exposure include, but are not limited to, the following: common stock, exchange-traded funds, American Depositary Receipts, convertible bonds, listed equity options (puts and calls), OTC equity options, equity total return swaps, equity index futures and other equity derivative products. Hedging instruments used to mitigate this risk include options, futures, swaps, convertible bonds and cash positions.
Commodity Risk
Commodity risk represents exposures to instruments traded in the petroleum, natural gas, power and metals markets. These instruments consist primarily of futures, forwards, swaps and options. Hedging instruments used to mitigate this risk include
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options, futures and swaps in the same or similar commodity product, as well as cash positions.
Issuer Credit Risk
Issuer credit risk represents exposures to changes in the creditworthiness of individual issuers or groups of issuers. Our portfolio is exposed to issuer credit risk where the value of an asset may be adversely impacted by changes in the levels of credit spreads, by credit migration or by defaults. Hedging instruments used to mitigate this risk include bonds, CDS and other credit fixed-income instruments.
Market Liquidity Risk
Market liquidity risk represents the risk that the level of expected market activity changes dramatically and, in certain cases, may even cease. This exposes us to the risk that we will not be able to transact business and execute trades in an orderly manner which may impact our results. This impact could be further exacerbated if expected hedging or pricing correlations are compromised by disproportionate demand or lack of demand for certain instruments. We utilize various risk mitigating techniques as discussed in more detail in Trading Risk Management.
Trading Risk Management
To evaluate risks in our trading activities, we focus on the actual and potential volatility of revenues generated by individual positions as well as portfolios of positions. Various techniques and procedures are utilized to enable the most complete understanding of these risks. Quantitative measures of market risk are evaluated on a daily basis from a single position to the portfolio of the Corporation. These measures include sensitivities of positions to various market risk factors, such as the potential impact on revenue from a one basis point change in interest rates, and statistical measures utilizing both actual and hypothetical market moves, such as VaR and stress testing. Periods of extreme market stress influence the reliability of these techniques to varying degrees. Qualitative evaluations of market risk utilize the suite of quantitative risk measures while understanding each of their respective limitations. Additionally, risk managers independently evaluate the risk of the portfolios under the current market environment and potential future environments.
VaR is a common statistic used to measure market risk as it allows the aggregation of market risk factors, including the effects of portfolio diversification. A VaR model simulates the value of a portfolio under a range of scenarios in order to generate a distribution of potential gains and losses. VaR represents the loss a portfolio is not expected to exceed more than a certain number of times per period, based on a specified holding period, confidence level and window of historical data. We use one VaR model consistently across the trading portfolios and it uses a historical simulation approach based on a three-year window of historical data. Our primary VaR statistic is equivalent to a 99 percent confidence level, which means that for a VaR with a one-day holding period, there should not be losses in excess of VaR, on average, 99 out of 100 trading days.
Within any VaR model, there are significant and numerous assumptions that will differ from company to company. The accuracy of a VaR model depends on the availability and quality of historical data for each of the risk factors in the portfolio. A VaR model may require additional modeling assumptions for new products that do not have the necessary historical market data or for less liquid positions for which accurate daily prices
are not consistently available. For positions with insufficient historical data for the VaR calculation, the process for establishing an appropriate proxy is based on fundamental and statistical analysis of the new product or less liquid position. This analysis identifies reasonable alternatives that replicate both the expected volatility and correlation to other market risk factors that the missing data would be expected to experience.
VaR may not be indicative of realized revenue volatility as changes in market conditions or in the composition of the portfolio can have a material impact on the results. In particular,
the historical data used for the VaR calculation might indicate higher or lower levels of portfolio diversification than will be experienced. In order for the VaR model to reflect current market conditions, we update the historical data underlying our VaR model on a weekly basis, or more frequently during periods of market stress, and regularly review the assumptions underlying the model. A minor portion of risks related to our trading positions is not included in VaR. These risks are reviewed as part of our ICAAP. For more information regarding ICAAP, see Capital Management on page 49.
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 43 presents the total market-based portfolio VaR, which is the combination of the total covered positions (and less liquid trading positions) portfolio and the fair value option portfolio. Covered positions are defined by regulatory standards as trading assets and liabilities, both on- and off-balance sheet, that meet a defined set of specifications. These specifications identify the most liquid trading positions which are intended to be held for a short-term horizon and where we are able to hedge the material risk elements in a two-way market. Positions in less liquid markets, or where there are restrictions on the ability to trade the positions, typically do not qualify as covered positions. Foreign exchange and commodity positions are always considered covered positions, except for structural foreign currency positions that are excluded with prior regulatory approval.
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In addition, Table 43 presents our fair value option portfolio, which includes substantially all of the funded and unfunded exposures for which we elect the fair value option, and their corresponding hedges. Additionally, market risk VaR for trading activities as presented in Table 43 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 43 include market risk to which we are exposed from all business segments, excluding credit valuation adjustment (CVA), DVA and related hedges. The majority of this portfolio is within the Global Markets segment.
Table 43 presents year-end, average, high and low daily trading VaR for 2021 and 2020 using a 99 percent confidence level. The amounts disclosed in Table 43 and Table 44 align to the view of covered positions used in the Basel 3 capital calculations. Foreign exchange and commodity positions are always considered covered positions, regardless of trading or banking treatment for the trade, except for structural foreign currency positions that are excluded with prior regulatory approval.
The annual average of total covered positions and less liquid trading positions portfolio VaR decreased for 2021 compared to 2020 primarily due to an increase in diversification across asset classes.
| Table 43 | Market Risk VaR for Trading Activities | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Year End |
Average |
High (1)
|
Low (1)
|
Year End |
Average |
High (1)
|
Low (1)
|
||||||||||||||||||||||||||||||||||||||||||
| Foreign exchange | $ | 11 | $ | 12 | $ | 21 | $ | 5 | $ | 8 | $ | 7 | $ | 25 | $ | 2 | ||||||||||||||||||||||||||||||||||
| Interest rate | 54 | 40 | 80 | 16 | 30 | 19 | 39 | 7 | ||||||||||||||||||||||||||||||||||||||||||
| Credit | 73 | 69 | 84 | 53 | 79 | 58 | 91 | 25 | ||||||||||||||||||||||||||||||||||||||||||
| Equity | 21 | 24 | 35 | 19 | 20 | 24 | 162 | 12 | ||||||||||||||||||||||||||||||||||||||||||
| Commodities | 6 | 8 | 28 | 4 | 4 | 6 | 12 | 3 | ||||||||||||||||||||||||||||||||||||||||||
| Portfolio diversification | (114) | (100) | — | — | (72) | (61) | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total covered positions portfolio | 51 | 53 | 85 | 34 | 69 | 53 | 171 | 27 | ||||||||||||||||||||||||||||||||||||||||||
Impact from less liquid exposures (2)
|
8 | 20 | — | — | 52 | 27 | — | — | ||||||||||||||||||||||||||||||||||||||||||
Total covered positions and less liquid trading positions portfolio |
59 | 73 | 125 | 46 | 121 | 80 | 169 | 30 | ||||||||||||||||||||||||||||||||||||||||||
| Fair value option loans | 51 | 50 | 65 | 31 | 52 | 52 | 84 | 7 | ||||||||||||||||||||||||||||||||||||||||||
| Fair value option hedges | 15 | 16 | 20 | 11 | 11 | 13 | 17 | 9 | ||||||||||||||||||||||||||||||||||||||||||
| Fair value option portfolio diversification | (27) | (32) | — | — | (17) | (24) | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total fair value option portfolio | 39 | 34 | 53 | 23 | 46 | 41 | 86 | 9 | ||||||||||||||||||||||||||||||||||||||||||
| Portfolio diversification | (24) | (10) | — | — | (4) | (15) | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total market-based portfolio | $ | 74 | $ | 97 | 169 | 54 | $ | 163 | $ | 106 | 171 | 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.
(2)Impact is net of diversification effects between the covered positions and less liquid trading positions portfolios.
The graph below presents the daily covered positions and less liquid trading positions portfolio VaR for 2021, corresponding to the data in Table 43.
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Additional VaR statistics produced within our single VaR model are provided in Table 44 at the same level of detail as in Table 43. 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 44 presents average trading VaR statistics at 99 percent and 95 percent confidence levels for 2021 and 2020.
| Table 44 | Average Market Risk VaR for Trading Activities – 99 percent and 95 percent VaR Statistics | ||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||
| (Dollars in millions) | 99 percent | 95 percent | 99 percent | 95 percent | |||||||||||||||||||||||||
| Foreign exchange | $ | 12 | $ | 8 | $ | 7 | $ | 4 | |||||||||||||||||||||
| Interest rate | 40 | 20 | 19 | 9 | |||||||||||||||||||||||||
| Credit | 69 | 21 | 58 | 18 | |||||||||||||||||||||||||
| Equity | 24 | 12 | 24 | 13 | |||||||||||||||||||||||||
| Commodities | 8 | 4 | 6 | 3 | |||||||||||||||||||||||||
| Portfolio diversification | (100) | (39) | (61) | (26) | |||||||||||||||||||||||||
| Total covered positions portfolio | 53 | 26 | 53 | 21 | |||||||||||||||||||||||||
| Impact from less liquid exposures | 20 | 2 | 27 | 2 | |||||||||||||||||||||||||
Total covered positions and less liquid trading positions portfolio |
73 | 28 | 80 | 23 | |||||||||||||||||||||||||
| Fair value option loans | 50 | 12 | 52 | 13 | |||||||||||||||||||||||||
| Fair value option hedges | 16 | 9 | 13 | 7 | |||||||||||||||||||||||||
| Fair value option portfolio diversification | (32) | (9) | (24) | (8) | |||||||||||||||||||||||||
| Total fair value option portfolio | 34 | 12 | 41 | 12 | |||||||||||||||||||||||||
| Portfolio diversification | (10) | (7) | (15) | (6) | |||||||||||||||||||||||||
| Total market-based portfolio | $ | 97 | $ | 33 | $ | 106 | $ | 29 | |||||||||||||||||||||
Backtesting
The accuracy of the VaR methodology is evaluated by backtesting, which compares the daily VaR results, utilizing a one-day holding period, against a comparable subset of trading revenue. A backtesting excess occurs when a trading loss exceeds the VaR for the corresponding day. These excesses are evaluated to understand the positions and market moves that produced the trading loss with a goal to ensure that the VaR methodology accurately represents those losses. We expect the frequency of trading losses in excess of VaR to be in line with the confidence level of the VaR statistic being tested. For example, with a 99 percent confidence level, we expect one trading loss in excess of VaR every 100 days or between two to three trading losses in excess of VaR over the course of a year. The number of backtesting excesses observed can differ from the statistically expected number of excesses if the current level of market volatility is materially different than the level of market volatility that existed during the three years of historical data used in the VaR calculation.
The trading revenue used for backtesting is defined by regulatory agencies in order to most closely align with the VaR component of the regulatory capital calculation. This revenue differs from total trading-related revenue in that it excludes revenue from trading activities that either do not generate market risk or the market risk cannot be included in VaR. Some examples of the types of revenue excluded for backtesting are fees, commissions, reserves, net interest income and intra-day trading revenues.
We conduct daily backtesting on the VaR results used for regulatory capital calculations as well as the VaR results for key legal entities, regions and risk factors. These results are reported to senior market risk management. Senior management regularly reviews and evaluates the results of these tests.
During 2021, there were two days where this subset of trading revenue had losses that exceeded our total covered portfolio VaR, utilizing a one-day holding period.
Total Trading-related Revenue
Total trading-related revenue, excluding brokerage fees, and CVA, DVA and funding valuation adjustment gains (losses), represents the total amount earned from trading positions, including market-based net interest income, which are taken in a diverse range of financial instruments and markets. For more information on fair value, see Note 20 – Fair Value Measurements to the Consolidated Financial Statements. Trading-related revenue can be volatile and is largely driven by general market conditions and customer demand. Also, trading-related revenue is dependent on the volume and type of transactions, the level of risk assumed, and the volatility of price and rate movements at any given time within the ever-changing market environment. Significant daily revenue by business is monitored and the primary drivers of these are reviewed.
The following histogram is a graphic depiction of trading volatility and illustrates the daily level of trading-related revenue for 2021 and 2020. During 2021, positive trading-related revenue was recorded for 97 percent of the trading days, of which 80 percent were daily trading gains of over $25 million, and the largest loss was $45 million. This compares to 2020 where positive trading-related revenue was recorded for 98 percent of the trading days, of which 87 percent were daily trading gains of over $25 million, and the largest loss was $90 million.
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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 46.
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 45 presents the spot and 12-month forward rates used in our baseline forecasts at December 31, 2021 and 2020.
| Table 45 | Forward Rates | |||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||
| Federal Funds |
Three-month LIBOR |
10-Year Swap |
||||||||||||||||||
| Spot rates | 0.25 | % | 0.21 | % | 1.58 | % | ||||||||||||||
| 12-month forward rates | 1.00 | 1.07 | 1.84 | |||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||
| Spot rates | 0.25 | % | 0.24 | % | 0.93 | % | ||||||||||||||
| 12-month forward rates | 0.25 | 0.19 | 1.06 | |||||||||||||||||
Table 46 shows the pretax impact to forecasted net interest income over the next 12 months from December 31, 2021 and 2020 resulting from instantaneous parallel and non-parallel shocks to the market-based forward curve. Periodically, we evaluate the scenarios presented so that they are meaningful in the context of the current rate environment. The interest rate scenarios also assume U.S. dollar rates are floored at zero.
During 2021, the overall decrease in asset sensitivity of our balance sheet to Up-rate and Down-rate scenarios was primarily due to ALM activity and an increase in long-end rates. We continue to be asset sensitive to a parallel upward move in interest rates with the majority of that impact coming from the short end of the yield curve. Additionally, higher interest rates impact the fair value of debt securities and, accordingly, for debt securities classified as AFS, may adversely affect accumulated OCI and thus capital levels under the Basel 3 capital rules. Under instantaneous upward parallel shifts, the near-term adverse impact to Basel 3 capital is reduced over time by offsetting positive impacts to net interest income. For more information on Basel 3, see Capital Management – Regulatory Capital on page 50.
| Table 46 | Estimated Banking Book Net Interest Income Sensitivity to Curve Changes | |||||||||||||||||||||||||
| Short Rate (bps) |
Long Rate (bps) |
|||||||||||||||||||||||||
| December 31 | ||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | ||||||||||||||||||||||||
| Parallel Shifts | ||||||||||||||||||||||||||
|
+100 bps
instantaneous shift
|
+100 | +100 | $ | 6,542 | $ | 10,468 | ||||||||||||||||||||
|
-25 bps
instantaneous shift
|
-25 | -25 | (2,092) | (2,766) | ||||||||||||||||||||||
| Flatteners | ||||||||||||||||||||||||||
|
Short-end
instantaneous change
|
+100 | — | 4,982 | 6,321 | ||||||||||||||||||||||
|
Long-end
instantaneous change
|
— | -25 | (735) | (1,686) | ||||||||||||||||||||||
| Steepeners | ||||||||||||||||||||||||||
|
Short-end
instantaneous change
|
-25 | — | (1,344) | (1,084) | ||||||||||||||||||||||
|
Long-end
instantaneous change
|
— | +100 | 1,646 | 4,333 | ||||||||||||||||||||||
The sensitivity analysis in Table 46 assumes that we take no action in response to these rate shocks and does not assume any change in other macroeconomic variables normally correlated with changes in interest rates. As part of our ALM activities, we use securities, certain residential mortgages, and interest rate and foreign exchange derivatives in managing interest rate sensitivity.
The behavior of our deposits portfolio in the baseline forecast and in alternate interest rate scenarios is a key assumption in our projected estimates of net interest income. The sensitivity analysis in Table 46 assumes no change in
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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
We use interest rate and foreign exchange derivative contracts in our ALM activities to manage our interest rate and foreign exchange risks. Specifically, we use those derivatives to manage both the variability in cash flows and changes in fair value of various assets and liabilities arising from those risks. Our interest rate derivative contracts are generally non-leveraged swaps tied to various benchmark interest rates and foreign exchange basis swaps, options, futures and forwards, and our foreign exchange contracts include cross-currency interest rate swaps, foreign currency futures contracts, foreign currency forward contracts and options.
The derivatives used in our ALM activities can be split into two broad categories: designated accounting hedges and other risk management derivatives. Designated accounting hedges are primarily used to manage our exposure to interest rates as described in the Interest Rate Risk Management for the Banking Book section and are included in the sensitivities presented in Table 46. The Corporation also uses foreign currency derivatives in accounting hedges to manage substantially all of the foreign exchange risk of our foreign operations. By hedging the foreign exchange risk of our foreign operations, the Corporation's market risk exposure in this area is insignificant.
Risk management derivatives are predominantly used to hedge foreign exchange risks related to various foreign currency-denominated assets and liabilities and eliminate substantially all foreign currency exposures in the cash flows of the Corporation’s non-trading foreign currency-denominated financial instruments. These foreign exchange derivatives are sensitive to other market risk exposures such as cross-currency basis spreads and interest rate risk. However, as these features are not a significant component of these foreign exchange derivatives, the market risk related to this exposure is insignificant. For more information on the accounting for derivatives, see Note 3 – Derivatives to the Consolidated Financial Statements.
Mortgage Banking Risk Management
We originate, fund and service mortgage loans, which subject us to credit, liquidity and interest rate risks, among others. We determine whether loans will be held for investment or held for sale at the time of commitment and manage credit and liquidity risks by selling or securitizing a portion of the loans we originate.
Interest rate risk and market risk can be substantial in the mortgage business. Changes in interest rates and other market factors impact the volume of mortgage originations. Changes in interest rates also impact the value of interest rate lock commitments (IRLCs) and the related residential first mortgage LHFS between the date of the IRLC and the date the loans are
sold to the secondary market. An increase in mortgage interest rates typically leads to a decrease in the value of these instruments. Conversely, when there is an increase in interest rates, the value of the MSRs will increase driven by lower prepayment expectations. Because the interest rate risks of these hedged items offset, we combine them into one overall hedged item with one combined economic hedge portfolio consisting of derivative contracts and securities.
During 2021, 2020 and 2019, we recorded gains of $39 million, $321 million and $291 million. For more information on MSRs, see Note 20 – Fair Value Measurements to the Consolidated Financial Statements.
Compliance and Operational Risk Management
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 our internal policies and procedures (collectively, applicable laws, rules and regulations). We are subject to comprehensive regulation under federal and state laws, rules and regulations in the U.S. and the laws of the various jurisdictions in which we operate, including those related to financial crimes and anti-money laundering, market conduct, trading activities, fair lending, privacy, data protection and unfair, deceptive or abusive acts or practices.
Operational risk is the risk of loss resulting from inadequate or failed processes or systems, people or external events, and includes legal risk. Operational risk may occur anywhere in the Corporation, including third-party business processes, and is not limited to operations functions. The Corporation faces a number of key operational risks including third-party risk, model risk, conduct risk, technology risk, information security risk and data risk. Operational risk can result in financial losses and reputational impacts and is a component in the calculation of total RWA used in the Basel 3 capital calculation. For more information on Basel 3 calculations, see Capital Management on page 49.
FLUs and control functions are first and foremost responsible for managing all aspects of their businesses, including their compliance and operational risk. FLUs and control functions are required to understand their business processes and related risks and controls, including third-party dependencies and the related regulatory requirements, and monitor and report on the effectiveness of the control environment. In order to actively monitor and assess the performance of their processes and controls, they must conduct comprehensive quality assurance activities and identify issues and risks to remediate control gaps and weaknesses. FLUs and control functions must also adhere to compliance and operational risk appetite limits to meet strategic, capital and financial planning objectives. Finally, FLUs and control functions are responsible for the proactive identification, management and escalation of compliance and operational risks across the Corporation. Collectively, these efforts are important to strengthen their compliance and operational resiliency, which is the ability to deliver critical operations through disruption.
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Global Compliance and Operational Risk teams independently assess compliance and operational risk, monitor business activities and processes and evaluate FLUs and control functions for adherence to applicable laws, rules and regulations, including identifying issues and risks, determining and developing tests to be conducted by the Enterprise Independent Testing unit and reporting on the state of the control environment. Enterprise Independent Testing, an independent testing function within GRM, works with Global Compliance and Operational Risk, the FLUs and control functions in the identification of testing needs and test design, and is accountable for test execution, reporting and analysis of results. Corporate Audit provides an independent assessment and validation through testing of key compliance and operational risk processes and controls across the Corporation.
The Corporation's Global Compliance Enterprise Policy and Operational Risk Management – Enterprise Policy set the requirements for reporting compliance and operational risk information to executive management as well as the Board or appropriate Board-level committees and reflect Global Compliance and Operational Risk’s responsibilities for conducting independent oversight of the Corporation’s compliance and operational risk management activities. The Board provides oversight of compliance risk through its Audit Committee and the ERC, and operational risk through its ERC.
A key operational risk facing the Corporation is information security, which includes cybersecurity. Cybersecurity risk represents, among other things, exposure to failures or interruptions of service or breaches of security, including as a result of malicious technological attacks, that impact the confidentiality, availability or integrity of our or third parties' operations, systems or data. The Corporation seeks to mitigate information security risk and associated reputational and compliance risk by employing a multi-layered and intelligence-led Global Information Security Program, which is focused on preparing for, preventing, detecting, mitigating, responding to and recovering from cyber threats and incidents and ensuring the Corporation’s processes operate effectively and mitigate the aforementioned risks.
The Global Information Security Program is supported by three lines of defense. The Global Information Security Team within the first line of defense is responsible for the day-to-day management of the Global Information Security Program, which includes defining policies and procedures to safeguard the Corporation’s information systems and data, conducting vulnerability and third-party information security assessments, information security event management (e.g., responding to ransomware and distributed denial of service attacks), evaluation of external cyber intelligence, supporting industry cybersecurity efforts and working with governmental agencies, as well as developing employee training to support adherence to the Corporation’s policies and procedures. As the second line of defense, Global Compliance and Operational Risk independently assesses, monitors and tests information security risk across the Corporation as well as the effectiveness of the Global Information Security Program. Corporate Audit serves as the third line of defense, conducting additional independent review and validation of the first line processes and functions.
Through established governance structures, we have processes to help facilitate appropriate and effective oversight of information security risk. These routines enable our three lines of defense and management to debate information security risks and monitor control performance to allow for further escalation to executive management, management and Board-level committees or to the Board, as appropriate. The Board is actively engaged in the oversight of Bank of America’s Global Information Security Program, primarily through the ERC.
Reputational Risk Management
Reputational risk is the risk that negative perception of the Corporation may adversely impact profitability or operations. Reputational risk may result from many of the Corporation’s activities, including those related to the management of our strategic, operational, compliance and credit risks.
The Corporation manages reputational risk through established policies and controls embedded throughout its business and risk management processes. We proactively monitor and identify potential reputational risk events and have processes established to mitigate reputational risks in a timely manner. If reputational risk events occur, we focus on remediating the underlying issue and taking action to minimize damage to the Corporation’s reputation. The Corporation has processes and procedures in place to respond to events that give rise to reputational risk, including educating individuals and organizations that influence public opinion, implementing external communication strategies to mitigate the risk, and informing key stakeholders of potential reputational risks. The Corporation’s organization and governance structure provides oversight of reputational risks. Reputational risk reporting is provided regularly and directly to management and the ERC, which provides primary oversight of reputational risk. In addition, each FLU has a committee, which includes representatives from Legal and Risk, that is responsible for the oversight of reputational risk, including approval for business activities that present elevated levels of reputational risks.
Climate Risk Management
Climate-related risks are divided into two major categories: (1) risks related to the transition to a low-carbon economy, which may entail extensive policy, legal, technology and market changes, and (2) risks related to the physical impacts of climate change, driven by extreme weather events, such as hurricanes and floods, as well as chronic longer-term shifts, such as rising average global temperatures and sea-level rise. These changes and events can have broad impacts on operations, supply chains, distribution networks, customers and markets and are otherwise referred to, respectively, as transition risk and physical risk. These risks can impact both financial and nonfinancial risk types. The impacts of transition risk can lead to and amplify credit risk or market risk by reducing our customers’ operating income or the value of their assets as well as expose us to reputational and/or litigation risk due to increased regulatory scrutiny or negative public sentiment. Physical risk can lead to increased credit risk by diminishing borrowers’ repayment capacity or impacting the value of collateral. In addition, it could pose increased operational risk to our facilities and people.
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Effective management of climate risk requires coordinated governance, clearly defined roles and responsibilities and well-developed processes to identify, measure, monitor and control risks. We continue to build out and enhance our climate risk management capabilities. As climate risk is interconnected with all key risk types, we have developed and continue to enhance processes to embed climate risk considerations into our Risk Framework and risk management programs established for strategic, credit, market, liquidity, compliance, operational and reputational risks. Our Environmental and Social Risk Policy Framework (ESRPF) aligns with our Risk Framework and provides additional clarity and transparency regarding our approach to environmental and social risks, inclusive of climate risk.
Our governance framework establishes oversight of climate risk practices and strategies by the Board, supported by its Corporate Governance, ESG, and Sustainability Committee and ERC, as well as the MRC and the Global ESG Committee, both of which are management-level committees comprised of senior leaders across every major FLU and control function.
Our climate risk management efforts are overseen by the Global Climate Risk Executive who reports to the CRO. The Global Climate Risk Executive chairs the Climate Risk Steering Council, which meets monthly and shapes our approach to managing climate-related risks in line with our Risk Framework.
As outlined in our ESRPF, we are focused on supporting and financing areas critical to the transition to a low-carbon economy. Accordingly, we have a goal, publicly announced in early 2021, to achieve net zero greenhouse gas emissions in our financing activities, operations and supply chain before 2050 (Net Zero Goal). More broadly, achieving this goal will require technological advances, clearly defined roadmaps for industry sectors, public policies, and better emissions data reporting, as well as ongoing, strong and active engagement with clients, suppliers, investors, government officials and other stakeholders.
Our progress towards achieving our Net Zero Goal is based on establishing the baseline for emissions associated with our financing activities often referred to as financed emissions. Currently, we are using the Partnership for Carbon Accounting Financials methodology to assess our financed emissions. Additionally, given the urgency required to address climate change, we helped to launch the Net Zero Banking Alliance (NZBA) in April 2021, which outlines guidelines for banks to achieve net zero greenhouse gas emissions including requirements for setting interim targets. As a member of NZBA, the Corporation and more than 100 other financial institution members representing more than 40 percent of the world’s banking assets, have committed to set emission reduction targets for 2030. We plan to begin disclosure of financed emissions by 2023, and set 2030 targets for the significant majority of emissions in our portfolio.
In 2021, we also announced a goal to deploy $1 trillion by 2030 to accelerate the transition to a low-carbon, sustainable economy by providing lending, capital raising, advisory and investment services, and by developing other client-driven financial solutions. This commitment anchors a broader $1.5
trillion sustainable finance goal to support both environmental transition and social inclusive development, which spans business activities across the globe. These goals are intended to help drive business opportunities and enhance risk management related to the transition to a low-carbon economy.
For more information about climate risk, see the Bank of America website. For more information about the Corporation’s climate-related goals and commitments, including emissions associated with our operations and supply chain and progress on our sustainable finance goals, see the Corporation’s 2021 Annual Report to shareholders that will be available on the Investor Relations portion of our website in March 2022. The contents of the Corporation’s website and 2021 Annual Report to shareholders are not incorporated by reference into this Annual Report on Form 10-K.
The foregoing discussion and our discussion in the 2021 Annual Report to shareholders regarding our goals and commitments with respect to climate risk management, including environmental transition considerations, include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. 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.
Complex Accounting Estimates
Our significant accounting principles, as described in Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements, are essential in understanding the MD&A. Many of our significant accounting principles require complex judgments to estimate the values of assets and liabilities. We have procedures and processes in place to facilitate making these judgments.
The more judgmental estimates are summarized in the following discussion. We have identified and described the development of the variables most important in the estimation processes that involve mathematical models to derive the estimates. In many cases, there are numerous alternative judgments that could be used in the process of determining the inputs to the models. Where alternatives exist, we have used the factors that we believe represent the most reasonable value in developing the inputs. Actual performance that differs from our estimates of the key variables could materially impact our results of operations. Separate from the possible future impact to our results of operations from input and model variables, the value of our lending portfolio and market-sensitive assets and liabilities may change subsequent to the balance sheet date, often significantly, due to the nature and magnitude of future credit and market conditions. Such credit and market conditions may change quickly and in unforeseen ways and the resulting volatility could have a significant, negative effect on future operating results. These fluctuations would not be indicative of deficiencies in our models or inputs.
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Allowance for Credit Losses
The allowance for credit losses includes the allowance for loan and lease losses and the reserve for unfunded lending commitments. Our process for determining the allowance for credit losses is discussed in Note 1 – Summary of Significant Accounting Principles and Note 5 – Outstanding Loans and Leases and Allowance for Credit Losses to the Consolidated Financial Statements.
The determination of allowance for credit losses is based on numerous estimates and assumptions, which require a high degree of judgment and are often interrelated. A critical judgment in the process is the weighting of our forward-looking macroeconomic scenarios that are incorporated into our quantitative models. As any one economic outlook is inherently uncertain, the Corporation uses multiple macroeconomic scenarios in its expected credit losses (ECL) calculation, which have included a baseline scenario, which is derived from consensus estimates, downside scenarios, a tail risk scenario similar to the severely adverse scenario used in stress testing and an upside scenario. Beginning in 2020, the scenarios incorporated the potential impacts of the pandemic and, beginning in the second quarter in 2021, an additional scenario was added to account for inflationary risk and higher interest rates. Generally, as the consensus estimates improve or deteriorate, the allowance for credit losses will change in a similar direction.
There are multiple variables that drive the macroeconomic scenarios with the key variables including, but not limited to, U.S. gross domestic product (GDP) and unemployment rates. As of December 31, 2020, the weighted macroeconomic outlook for U.S. average unemployment rate was forecasted at 6.6 percent, 5.5 percent and 5.0 percent in the fourth quarters of 2021, 2022 and 2023, respectively, and the weighted macroeconomic outlook for U.S. GDP was forecasted to grow at 2.5 percent, 2.4 percent and 2.1 percent year-over-year in the fourth quarters of 2021, 2022 and 2023, respectively. As of December 31, 2021 the latest consensus estimates for the U.S. average unemployment rate for the fourth quarter of 2021 was 4.4 percent and U.S. GDP was forecasted to grow 5.2 percent year-over-year in the fourth quarter of 2021, both of which were meaningfully better than our macroeconomic outlook as of December 31, 2020 and were factored into our December 31, 2021 allowance for credit losses estimate. In addition, as of December 31, 2021, the weighted macroeconomic outlook for the U.S. average unemployment rate was forecasted at 5.2 percent and 4.7 percent in the fourth quarters of 2022 and 2023, and the weighted macroeconomic outlook for U.S. GDP was forecasted to grow 2.1 percent and 1.9 percent year-over-year in the fourth quarters of 2022 and 2023.
In addition to the above judgments and estimates, the allowance for credit losses can also be impacted by unanticipated changes in asset quality of the portfolio, such as increases or decreases in credit and/or internal risk ratings in our commercial portfolio, improvement or deterioration in borrower delinquencies or credit scores in our credit card portfolio and increases or decreases in home prices, which is a primary driver of LTVs, in our consumer real estate portfolio, all
of which have some degree of uncertainty. As the macroeconomic outlook improved in 2021, along with improvements in asset quality, the allowance for credit losses decreased to $13.8 billion from $20.7 billion at December 31, 2020.
To provide an illustration of the sensitivity of the macroeconomic scenarios and other assumptions on the estimate of our allowance for credit losses, the Corporation compared the December 31, 2021 modeled ECL from the baseline scenario and our downside scenario. Relative to the baseline scenario, the downside scenario assumed a peak U.S. unemployment rate of approximately three percentage points higher than the consensus outlook, a decline in U.S. GDP followed by a prolonged recovery and a lower home price outlook with a difference of 14 percent at the trough. This sensitivity analysis resulted in a hypothetical increase in the allowance for credit losses of approximately $5 billion.
While the sensitivity analysis may be useful to understand how changes in macroeconomic assumptions could impact our modeled ECLs, it is not meant to forecast how our allowance for credit losses is expected to change in a different macroeconomic outlook. Importantly, the analysis does not incorporate a variety of factors, including qualitative reserves and the weighting of alternate scenarios, which could have offsetting effects on the estimate. Considering the variety of factors contemplated when developing and weighting macroeconomic outlooks such as recent economic events, leading economic indicators, views of internal and third-party economists and industry trends, in addition to other qualitative factors, the Corporation believes the allowance for credit losses at December 31, 2021 is appropriate.
Fair Value of Financial Instruments
Under applicable accounting standards, we are required to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value. We classify fair value measurements of financial instruments and MSRs based on the three-level fair value hierarchy in the accounting standards.
The fair values of assets and liabilities may include adjustments, such as market liquidity and credit quality, where appropriate. Valuations of products using models or other techniques are sensitive to assumptions used for the significant inputs. Where market data is available, the inputs used for valuation reflect that information as of our valuation date. Inputs to valuation models are considered unobservable if they are supported by little or no market activity. In periods of extreme volatility, lessened liquidity or in illiquid markets, there may be more variability in market pricing or a lack of market data to use in the valuation process. In keeping with the prudent application of estimates and management judgment in determining the fair value of assets and liabilities, we have in place various processes and controls that include: a model validation policy that requires review and approval of quantitative models used for deal pricing, financial statement fair value determination and risk quantification; a trading product valuation policy that requires verification of all traded product valuations; and a periodic review and substantiation of daily profit and loss
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reporting for all traded products. Primarily through validation controls, we utilize both broker and pricing service inputs which can and do include both market-observable and internally-modeled values and/or valuation inputs. Our reliance on this information is affected by our understanding of how the broker and/or pricing service develops its data with a higher degree of reliance applied to those that are more directly observable and lesser reliance applied to those developed through their own internal modeling. For example, broker quotes in less active markets may only be indicative and therefore less reliable. These processes and controls are performed independently of the business. For more information, see Note 20 – Fair Value Measurements and Note 21 – Fair Value Option to the Consolidated Financial Statements.
Level 3 Assets and Liabilities
Financial assets and liabilities, and MSRs, where values are based on valuation techniques that require inputs that are both unobservable and are significant to the overall fair value measurement are classified as Level 3 under the fair value hierarchy established in applicable accounting standards. The fair value of these Level 3 financial assets and liabilities and MSRs is determined using pricing models, discounted cash flow methodologies or similar techniques for which the determination of fair value requires significant management judgment or estimation.
Level 3 financial instruments may be hedged with derivatives classified as Level 1 or 2; therefore, gains or losses associated with Level 3 financial instruments may be offset by gains or losses associated with financial instruments classified in other levels of the fair value hierarchy. The Level 3 gains and losses recorded in earnings did not have a significant impact on our liquidity or capital. We conduct a review of our fair value hierarchy classifications on a quarterly basis. Transfers into or out of Level 3 are made if the significant inputs used in the financial models measuring the fair values of the assets and liabilities became unobservable or observable, respectively, in the current marketplace. For more information on transfers into and out of Level 3 during 2021, 2020 and 2019, see Note 20 – Fair Value Measurements to the Consolidated Financial Statements.
Accrued Income Taxes and Deferred Tax Assets
Accrued income taxes, reported as a component of either other assets or accrued expenses and other liabilities on the Consolidated Balance Sheet, represent the net amount of current income taxes we expect to pay to or receive from various taxing jurisdictions attributable to our operations to date. We currently file income tax returns in more than 100 jurisdictions and consider many factors, including statutory, judicial and
regulatory guidance, in estimating the appropriate accrued income taxes for each jurisdiction.
Net deferred tax assets, reported as a component of other assets on the Consolidated Balance Sheet, represent the net decrease in taxes expected to be paid in the future because of net operating loss (NOL) and tax credit carryforwards and because of future reversals of temporary differences in the bases of assets and liabilities as measured by tax laws and their bases as reported in the financial statements. NOL and tax credit carryforwards result in reductions to future tax liabilities, and many of these attributes can expire if not utilized within certain periods. We consider the need for valuation allowances to reduce net deferred tax assets to the amounts that we estimate are more likely than not to be realized.
Consistent with the applicable accounting guidance, we monitor relevant tax authorities and change our estimates of accrued income taxes and/or net deferred tax assets due to changes in income tax laws and their interpretation by the courts and regulatory authorities. These revisions of our estimates, which also may result from our income tax planning and from the resolution of income tax audit matters, may be material to our operating results for any given period.
See Note 19 – Income Taxes to the Consolidated Financial Statements for a table of significant tax attributes and
additional information. For more information, see page 18 under Item 1A. Risk Factors – Regulatory, Compliance and Legal.
Goodwill and Intangible Assets
The nature of and accounting for goodwill and intangible assets are discussed in Note 1 – Summary of Significant Accounting Principles, and Note 7 – Goodwill and Intangible Assets to the Consolidated Financial Statements.
We completed our annual goodwill impairment test as of June 30, 2021 by using a qualitative assessment to determine whether it was more likely than not that the fair value of each reporting unit was less than its respective carrying value. Factors considered in the qualitative assessment included, among other things, macroeconomic conditions, industry and market considerations, financial performance of the respective reporting unit and other relevant entity- and reporting-unit specific considerations. Based on our qualitative assessment, we have concluded that it was not “more likely than not” that the reporting units’ fair values were less than their carrying values.
Certain Contingent Liabilities
For more information on the complex judgments associated with certain contingent liabilities, see Note 12 – Commitments and Contingencies to the Consolidated Financial Statements.
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Non-GAAP Reconciliations
Tables 47 and 48 provide reconciliations of certain non-GAAP financial measures to GAAP financial measures.
| Table 47 |
Annual Reconciliations to GAAP Financial Measures (1)
|
|||||||||||||||||||
| (Dollars in millions, shares in thousands) | 2021 | 2020 | 2019 | |||||||||||||||||
Reconciliation of average shareholders’ equity to average tangible shareholders’ equity and average tangible common shareholders’ equity |
||||||||||||||||||||
| Shareholders’ equity | $ | 273,757 | $ | 267,309 | $ | 267,889 | ||||||||||||||
| Goodwill | (69,005) | (68,951) | (68,951) | |||||||||||||||||
| Intangible assets (excluding MSRs) | (2,177) | (1,862) | (1,721) | |||||||||||||||||
| Related deferred tax liabilities | 916 | 821 | 773 | |||||||||||||||||
| Tangible shareholders’ equity | $ | 203,491 | $ | 197,317 | $ | 197,990 | ||||||||||||||
| Preferred stock | (23,970) | (23,624) | (23,036) | |||||||||||||||||
| Tangible common shareholders’ equity | $ | 179,521 | $ | 173,693 | $ | 174,954 | ||||||||||||||
Reconciliation of year-end shareholders’ equity to year-end tangible shareholders’ equity and year-end tangible common shareholders’ equity |
||||||||||||||||||||
| Shareholders’ equity | $ | 270,066 | $ | 272,924 | $ | 264,810 | ||||||||||||||
| Goodwill | (69,022) | (68,951) | (68,951) | |||||||||||||||||
| Intangible assets (excluding MSRs) | (2,153) | (2,151) | (1,661) | |||||||||||||||||
| Related deferred tax liabilities | 929 | 920 | 713 | |||||||||||||||||
| Tangible shareholders’ equity | $ | 199,820 | $ | 202,742 | $ | 194,911 | ||||||||||||||
| Preferred stock | (24,708) | (24,510) | (23,401) | |||||||||||||||||
| Tangible common shareholders’ equity | $ | 175,112 | $ | 178,232 | $ | 171,510 | ||||||||||||||
Reconciliation of year-end assets to year-end tangible assets |
||||||||||||||||||||
| Assets | $ | 3,169,495 | $ | 2,819,627 | $ | 2,434,079 | ||||||||||||||
| Goodwill | (69,022) | (68,951) | (68,951) | |||||||||||||||||
| Intangible assets (excluding MSRs) | (2,153) | (2,151) | (1,661) | |||||||||||||||||
| Related deferred tax liabilities | 929 | 920 | 713 | |||||||||||||||||
| Tangible assets | $ | 3,099,249 | $ | 2,749,445 | $ | 2,364,180 | ||||||||||||||
(1)Presents reconciliations of non-GAAP financial measures to GAAP financial measures. For more information on non-GAAP financial measures and ratios we use in assessing the results of the Corporation, see Supplemental Financial Data on page 31.
| Table 48 |
Quarterly Reconciliations to GAAP Financial Measures (1)
|
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| 2021 Quarters | 2020 Quarters | |||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Fourth | Third | Second | First | Fourth | Third | Second | First | ||||||||||||||||||||||||||||||||||||||||||
| Reconciliation of average shareholders’ equity to average tangible shareholders’ equity and average tangible common shareholders’ equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shareholders’ equity | $ | 270,883 | $ | 275,484 | $ | 274,632 | $ | 274,047 | $ | 271,020 | $ | 267,323 | $ | 266,316 | $ | 264,534 | ||||||||||||||||||||||||||||||||||
| Goodwill | (69,022) | (69,023) | (69,023) | (68,951) | (68,951) | (68,951) | (68,951) | (68,951) | ||||||||||||||||||||||||||||||||||||||||||
| Intangible assets (excluding MSRs) | (2,166) | (2,185) | (2,212) | (2,146) | (2,173) | (1,976) | (1,640) | (1,655) | ||||||||||||||||||||||||||||||||||||||||||
| Related deferred tax liabilities | 913 | 915 | 915 | 920 | 910 | 855 | 790 | 728 | ||||||||||||||||||||||||||||||||||||||||||
| Tangible shareholders’ equity | $ | 200,608 | $ | 205,191 | $ | 204,312 | $ | 203,870 | $ | 200,806 | $ | 197,251 | $ | 196,515 | $ | 194,656 | ||||||||||||||||||||||||||||||||||
| Preferred stock | (24,364) | (23,441) | (23,684) | (24,399) | (24,180) | (23,427) | (23,427) | (23,456) | ||||||||||||||||||||||||||||||||||||||||||
| Tangible common shareholders’ equity | $ | 176,244 | $ | 181,750 | $ | 180,628 | $ | 179,471 | $ | 176,626 | $ | 173,824 | $ | 173,088 | $ | 171,200 | ||||||||||||||||||||||||||||||||||
| Reconciliation of period-end shareholders’ equity to period-end tangible shareholders’ equity and period-end tangible common shareholders’ equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shareholders’ equity | $ | 270,066 | $ | 272,464 | $ | 277,119 | $ | 274,000 | $ | 272,924 | $ | 268,850 | $ | 265,637 | $ | 264,918 | ||||||||||||||||||||||||||||||||||
| Goodwill | (69,022) | (69,023) | (69,023) | (68,951) | (68,951) | (68,951) | (68,951) | (68,951) | ||||||||||||||||||||||||||||||||||||||||||
| Intangible assets (excluding MSRs) | (2,153) | (2,172) | (2,192) | (2,134) | (2,151) | (2,185) | (1,630) | (1,646) | ||||||||||||||||||||||||||||||||||||||||||
| Related deferred tax liabilities | 929 | 913 | 915 | 915 | 920 | 910 | 789 | |||||||||||||||||||||||||||||||||||||||||||