BANK OF AMERICA CORP /DE/
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 regarding the Corporation on our website. Accordingly, 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 under the heading Financial Information (accessible by clicking on the SEC Filings link) as soon as reasonably practicable after we electronically file such reports with, or furnish them to, the SEC and at the SEC’s website, www.sec.gov. Notwithstanding the foregoing, the information contained on our website as referenced in this paragraph is not incorporated by reference into this Annual Report on Form 10-K. Also, we make available on the Investor Relations portion of our website under the heading Corporate Governance: (i) our Code of Conduct; (ii) our Corporate Governance Guidelines (accessible by clicking on the Governance Highlights link); and (iii) the charter of each active committee of our Board of Directors (the Board) (accessible by clicking on the committee names under the Committee Composition link). We also intend to disclose any amendments to our Code of Conduct 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 banking and various nonbank subsidiaries throughout the U.S. and in international markets, we provide a diversified range of banking and nonbank financial services and products through four business segments: Consumer Banking, Global
Wealth & Investment Management (GWIM), Global Banking and Global Markets, with the remaining operations recorded in All Other. Additional information related to our business segments and the products and services they provide is included in the information set forth on pages 32 through 41 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and Note 24 - Business Segment Information to the Consolidated Financial Statements.
Competition
We operate in a highly competitive environment. Our competitors include banks, thrifts, credit unions, investment banking firms, investment advisory firms, brokerage firms, investment companies, insurance companies, mortgage banking companies, credit card issuers, mutual fund companies, hedge funds, private equity firms, and e-commerce and other internet-based companies. We compete with some of these competitors globally and with others on a regional or product specific basis.
Competition is based on a number of factors including, among others, customer service, quality and range of products and services offered, price, reputation, interest rates on loans and deposits, lending limits and customer convenience. Our ability to continue to compete effectively also depends in large part on our ability to attract new employees and retain and motivate our existing employees, while managing compensation and other costs.
Employees
At December 31, 2019, we had approximately 208,000 employees. None of our domestic employees are subject to a collective bargaining agreement. Management considers our employee relations to be good.
Government Supervision and Regulation
The following discussion describes, among other things, elements of an extensive regulatory framework applicable to BHCs, financial holding companies, banks and broker-dealers, including specific information about Bank of America.
We are subject to an extensive regulatory framework applicable to BHCs, financial holding companies and banks and other financial services entities. U.S. federal regulation of banks, BHCs and financial holding companies is intended primarily for the protection of depositors and the Deposit Insurance Fund (DIF) rather than for the protection of shareholders and creditors.
As a registered financial holding company and BHC, the Corporation is subject to the supervision of, and regular inspection by, the Board of Governors of the Federal Reserve System (Federal Reserve). Our U.S. bank subsidiaries (the Banks), organized as national banking associations, are subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve. U.S. financial holding companies, and the companies under their control, are permitted to engage in activities considered “financial in nature” as defined by the Gramm-Leach-Bliley Act and related Federal Reserve interpretations. 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
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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 operations and management and our ability to make distributions to shareholders. For instance, our broker-dealer subsidiaries are subject to both U.S. and international regulation, including supervision by the SEC, Financial Industry Regulatory Authority and New York Stock Exchange, among others; our commodities businesses in the U.S. are subject to regulation by and supervision of the U.S. Commodity Futures Trading Commission (CFTC); our U.S. derivatives activity is subject to regulation and supervision of the CFTC, National Futures Association and SEC, and in the case of the Banks, certain banking regulators; our insurance activities are subject to licensing and regulation by state insurance regulatory agencies; and our consumer financial products and services are regulated by the Consumer Financial Protection Bureau (CFPB).
Our non-U.S. businesses are also subject to extensive regulation by various non-U.S. regulators, including governments, securities exchanges, prudential regulators, central banks and other regulatory bodies, in the jurisdictions in which those businesses operate. For example, our financial services operations in the United Kingdom (U.K.), Ireland and France are subject to regulation by the Prudential Regulatory Authority and Financial Conduct Authority (FCA), 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 its nonbank affiliates. Additionally, transactions between U.S. banks and their nonbank affiliates are required to be on arm’s length terms and must be consistent with standards of safety and soundness.
Deposit Insurance
Deposits placed at U.S. domiciled banks are insured by the FDIC, subject to limits and conditions of applicable law and the FDIC’s regulations. Pursuant to the Financial Reform Act, FDIC insurance coverage limits are $250,000 per customer. All insured depository institutions are required to pay assessments to the FDIC in order to fund the DIF.
The FDIC is required to maintain at least a designated minimum ratio of the DIF to insured deposits in the U.S. The FDIC adopted regulations that establish a long-term target DIF ratio of greater than two percent. As of the date of this report, the DIF ratio is below this required target and the FDIC has adopted a restoration plan that may result in increased deposit insurance assessments. Deposit insurance assessment rates are subject to change by the FDIC and will be impacted by the overall economy and the stability of the banking industry as a whole. For more information regarding deposit insurance, see
Item 1A. Risk Factors
In the course of conducting our business operations, we are exposed to a variety of risks, some of which are inherent in the financial services industry and others of which are more specific to our own businesses. The discussion below addresses the most significant factors, of which we are currently aware, that could affect our businesses, results of operations and financial condition. Additional factors that could affect our businesses, results of operations and financial condition are discussed in Forward-looking Statements in the MD&A on page 22. However, other factors not discussed below or elsewhere in this Annual Report on Form 10-K could also adversely affect our businesses, results of operations and financial condition. Therefore, the risk factors below should not be considered a complete list of potential risks that we may face. For more information on how we manage risks, see Managing Risk in the MD&A on page 42.
Any risk factor described in this Annual Report on Form 10-K or in any of our other SEC filings could by itself, or together with other factors, materially adversely affect our liquidity, competitive position, business, reputation, results of operations, capital position or financial condition, including by materially increasing our expenses or decreasing our revenues, which could result in material losses.
Market
Our business and results of operations may be adversely affected by the U.S. and international financial markets, U.S. and non-U.S. fiscal, monetary, and regulatory policies, and economic conditions generally.
General economic, political and social conditions in the U.S. and in one or more countries abroad affect markets in the U.S. and abroad and our business. In particular, markets in the U.S. or abroad may be affected by the level and volatility of interest rates, availability and market conditions of financing, unexpected changes in gross domestic product (GDP), economic growth or its sustainability, inflation, consumer spending, employment levels, wage stagnation, federal government shutdowns, energy prices, home prices, bankruptcies, a default by a significant market participant, fluctuations or other significant changes in both debt and equity capital markets and currencies, liquidity of the global financial markets, the growth of global trade and commerce, trade policies, the availability and cost of capital and credit, disruption of communication, transportation or energy infrastructure and investor sentiment and confidence. Additionally, global markets may be adversely affected by natural disasters, the emergence of widespread health emergencies or pandemics, cyber attacks or campaigns, military conflict, terrorism or other geopolitical events. Market fluctuations may impact our margin requirements and affect our business liquidity. Also, any sudden or prolonged market downturn in the U.S. or abroad, as a result of the above factors or otherwise could result in a decline in revenue and adversely
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affect our results of operations and financial condition, including capital and liquidity levels.
In the U.S. and abroad, uncertainties surrounding fiscal and monetary policies present economic challenges. Actions taken by the Federal Reserve, including changes in its target funds rate and balance sheet management, and other central banks are beyond our control and difficult to predict and can affect interest rates and the value of financial instruments and other assets and liabilities, and impact our borrowers. A continued protracted period of lower interest rates, or a move to negative interest rates in the U.S., could result in lower revenue, and maintain or increase pressure on net-interest income, which may adversely affect our results of operations. Uncertainty or ongoing developments in connection with the future relationship between the U.K. and the EU, and the resulting impact on the financial markets and regulations in relevant jurisdictions, could negatively impact our revenues and ongoing operations in Europe and beyond.
Changes to existing U.S. laws and regulatory policies, including those related to financial regulation, taxation, international trade, fiscal policy and healthcare, may adversely impact U.S. or global economic activity and our customers', counterparties' and the Corporation's earnings and operations. For example, significant fiscal policy initiatives may increase uncertainty surrounding the formulation and direction of U.S. monetary policy and volatility of interest rates. Higher U.S. interest rates relative to other major economies could increase the likelihood of a more volatile and appreciating U.S. dollar. Changes, or proposed changes, to certain U.S. trade policies, particularly with important trading partners, including China and the EU, have negatively impacted and may continue to negatively impact financial markets, disrupt world trade and commerce and lead to trade retaliation, including through the use of tariffs, foreign exchange measures or the large-scale sale of U.S. Treasury Bonds. Further, the use of tariffs among countries not directly involving the U.S. could spread and could damage our customers directly and indirectly.
Any of these developments could adversely affect our consumer and commercial businesses, our customers, our securities and derivatives portfolios, our level of charge-offs and provision for credit losses, the carrying value of our deferred tax assets, our capital levels, liquidity and our results of operations. Additionally, events and ongoing uncertainty related to the U.K.'s exit from the EU and the uncertainty related to the transition from Interbank Offered Rates (IBORs) and other benchmark rates to alternative reference rates (ARRs) could negatively impact markets in the U.S. and abroad and our business and/or magnify any negative impact of the above referenced developments on our business, customers and results of operations.
Increased market volatility and adverse changes in other financial or capital market conditions may increase our market risk.
Our liquidity, competitive position, business, results of operations and financial condition are affected by market risks such as changes in interest and currency exchange rates, fluctuations in equity and futures prices, lower trading volumes and prices of securitized products, the implied volatility of interest rates and credit spreads and other economic and business factors. These market risks may adversely affect, among other things, (i) the value of our on- and off-balance sheet securities, trading assets and other financial instruments, (ii) the cost of debt capital and our access to credit markets, (iii) the value of assets under management (AUM), (iv) fee income relating to AUM, (v) customer allocation of capital among investment alternatives, (vi) the volume of client activity in our trading operations, (vii) investment banking fees, (viii) the general profitability and risk level of the transactions in which we engage and (ix) our competitiveness with respect to
deposit pricing. For example, the value of certain of our assets is sensitive to changes in market interest rates. If the Federal Reserve or a non-U.S. central bank changes or signals a change in monetary policy, market interest rates could be affected, which could adversely impact the value of such assets. In addition, the low interest rate environment and a flat or inverted yield curve could negatively impact our financial condition or results of operations, including future revenue and earnings growth.
We use various models and strategies to assess and control our market risk exposures but those are subject to inherent limitations. For more information regarding models and strategies, see Item 1A. Risk Factors - Other on page 17. 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. In addition, challenging market conditions may also adversely affect our investment banking fees.
For more information about market risk and our market risk management policies and procedures, see Market Risk Management in the MD&A on page 71.
We may incur losses if the value of certain assets declines, including due to changes in interest rates and prepayment speeds.
We have a large portfolio of financial instruments, including certain loans and loan commitments, loans held-for-sale, securities financing agreements, asset-backed secured financings, long-term deposits, long-term debt, trading account assets and liabilities, derivative assets and liabilities, available-for-sale (AFS) debt and marketable equity securities, other debt securities, equity method investments and certain other assets and liabilities that we measure at fair value and other accounting values, subject to 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, including higher or lower mortgage banking income and earnings, unless we have effectively hedged our exposures. Increases in interest rates may result in a decrease in residential mortgage loan originations. In addition, increases in interest rates may adversely impact the fair value of debt securities and, accordingly, for debt securities classified as AFS, may adversely affect accumulated other comprehensive income and, thus, capital levels.
Fair values may be impacted by declining values of the underlying assets or the prices at which observable market transactions occur and the continued availability of these transactions 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.
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Sudden declines and volatility in the prices of assets may curtail or eliminate trading activities in these assets, which may make it difficult to sell, hedge or value these assets. The inability to sell or effectively hedge assets reduces our ability to limit losses in such positions and the difficulty in valuing assets may increase our risk-weighted assets, which requires us to maintain additional capital and increases our funding costs. Asset values also directly impact revenues in our wealth management and related advisory businesses. We receive asset-based management fees based on the value of our clients’ portfolios or investments in funds managed by us and, in some cases, we also receive performance fees based on increases in the value of such investments. Declines in asset values can reduce the value of our clients’ portfolios or fund assets, which in turn can result in lower fees earned for managing such assets.
For more information on fair value measurements, see Note 21 - Fair Value Measurements to the Consolidated Financial Statements. For more information on our asset management businesses, see GWIM in the MD&A on page 35. For more information on interest rate risk management, see Interest Rate Risk Management for the Banking Book in the MD&A on page 74.
Liquidity
If we are unable to access the capital markets or continue to maintain deposits, or our borrowing costs increase, our liquidity and competitive position will be negatively affected.
Liquidity is essential to our businesses. We fund our assets primarily with globally sourced deposits in our bank entities, as well as secured and unsecured liabilities transacted in the capital markets. We rely on certain secured funding sources, such as repo markets, which are typically short-term and credit-sensitive in nature. We also engage in asset securitization transactions, including with the government-sponsored enterprises (GSEs), to fund consumer lending activities. Our liquidity could be adversely affected by any inability to access the capital markets, illiquidity or volatility in the capital markets, the decrease in value of eligible collateral or increased collateral requirements, including as a result of credit concerns for short-term borrowing, changes to our relationships with our funding providers based on real or perceived changes in our risk profile, prolonged federal government shutdowns, or changes in regulations, guidance or GSE status that impact our funding avenues or ability to access certain funding sources. Additionally, the unwillingness or inability of the Federal Reserve to act as lender of last resort, unexpected simultaneous draws on lines of credit, restricted access to the assets of prime brokerage clients, the withdrawal of customer deposits, which could result from customer attrition for higher yields or the desire for more conservative alternatives, increased regulatory liquidity, capital and margin requirements for our U.S. or international banks and their nonbank subsidiaries, changes in patterns of intraday liquidity usage resulting from a counterparty or technology failure or other idiosyncratic event, failure by a significant market participant or third party, such as a clearing agent or custodian, reputational issues, or negative perceptions about our short- or long-term business prospects, including downgrades of our credit ratings may adversely affect our liquidity.
Several of these factors may arise due to circumstances beyond our control, such as general market volatility, disruption, shock or stress, Federal Reserve policy decisions, including fluctuations in interest rates or Federal Reserve balance sheet composition, negative views about the Corporation or 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 and the need for additional funding for commitments and contingencies, as well as unexpected collateral calls, among other things, the result of which could be a liquidity shortfall and/or impact on our liquidity coverage ratio.
Our cost of obtaining funding is directly related to prevailing market conditions, including changes in interest and currency exchange rates, and to our credit spreads. Credit spreads are the amount in excess of the interest rate of U.S. Treasury securities, or other benchmark securities, of a similar maturity that we need to pay to our funding providers. Increases in interest rates and our credit spreads can increase the cost of our funding and result in mark-to-market or credit valuation adjustment exposures. Changes in our credit spreads are market-driven and may be influenced by market perceptions of our creditworthiness. Changes to interest rates and our credit spreads occur continuously and may be unpredictable and highly volatile. We may also experience spread compression as a result of offering higher than expected deposit rates in order to attract and maintain deposits due to increased marketplace rate competition. Additionally, concentrations within our funding profile, such as maturities, currencies or counterparties, can reduce our funding efficiency.
For more information about our liquidity position and other liquidity matters, including credit ratings and outlooks and the policies and procedures we use to manage our liquidity risks, see Liquidity Risk in the MD&A on page 50.
Adverse changes to our credit ratings from the major credit rating agencies could significantly limit our access to funding or the capital markets, increase our borrowing costs or trigger additional collateral or funding requirements.
Our borrowing costs and ability to raise funds are directly impacted by our credit ratings. In addition, credit ratings may be important to customers or counterparties when we compete in certain markets and seek to engage in certain transactions, including OTC derivatives. Credit ratings and outlooks are opinions expressed by rating agencies on our creditworthiness and that of our obligations or securities, including long-term debt, short-term borrowings, preferred stock and asset securitizations. Our credit ratings are subject to ongoing review by rating agencies, which consider a number of factors, including our own financial strength, performance, prospects and operations as well as factors not under our control such as the current economic and geopolitical environment, and to a lesser extent, the likelihood of the U.S. government providing meaningful support to us or our subsidiaries in a crisis.
Rating agencies could make adjustments to our credit ratings at any time, and there can be no assurance as to when and whether downgrades will occur. A reduction in certain of our credit ratings could result in a wider credit spread and negatively affect our liquidity, access to credit markets, the related cost of funds, our businesses and certain trading revenues, particularly in those businesses where counterparty creditworthiness is critical. If the short-term credit ratings of our parent company, or bank or broker-dealer subsidiaries, were downgraded by one or more levels, we may suffer the potential loss of access to short-term funding sources such as repo financing, and/or incur increased cost of funds and increased collateral requirements. Under the terms of certain OTC derivative contracts and other trading agreements, if our or our subsidiaries’ credit ratings are downgraded, the counterparties may require additional collateral or terminate these contracts or agreements.
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While certain potential impacts are contractual and quantifiable, the full consequences of a credit rating downgrade to a financial institution are inherently uncertain, as they depend upon numerous dynamic, complex and inter-related factors and assumptions, including whether any downgrade of a firm’s long-term credit ratings precipitates downgrades to its short-term credit ratings, and assumptions about the potential behaviors of various customers, investors and counterparties.
For more information on the amount of additional collateral required and derivative liabilities that would be subject to unilateral termination at December 31, 2019, if the rating agencies had downgraded their long-term senior debt ratings for the Corporation or certain subsidiaries by each of two incremental notches, see Credit-related Contingent Features and Collateral in Note 3 - Derivatives to the Consolidated Financial Statements.
For more information about our credit ratings and their potential effects to our liquidity, see Liquidity Risk - Credit Ratings in the MD&A on page 52 and Note 3 - Derivatives to the Consolidated Financial Statements.
Bank of America Corporation is a holding company and we depend upon our subsidiaries for liquidity, including the ability to pay dividends to shareholders and to fund payments on other obligations. Applicable laws and regulations, including capital and liquidity requirements, and actions taken pursuant to our resolution plan could restrict our ability to transfer funds from subsidiaries to Bank of America Corporation or to other subsidiaries, which could adversely affect our cash flow and financial condition.
Bank of America Corporation, as the parent company, is a separate and distinct legal entity from our banking and nonbank subsidiaries. We evaluate and manage liquidity on a legal entity basis. Legal entity liquidity is an important consideration as there are legal, 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, advances and other payments from our banking and nonbank subsidiaries to fund dividend payments on our common stock and preferred stock and to fund all payments on our other obligations, including debt obligations. Any inability of our subsidiaries to pay dividends or make payments to us may adversely affect our cash flow and financial condition.
Many of our subsidiaries, including our bank and broker-dealer subsidiaries, are subject to laws that restrict dividend payments, or authorize regulatory bodies to block or reduce the flow of funds from those subsidiaries to the parent company or other subsidiaries. Our bank and broker-dealer subsidiaries are subject to restrictions on their ability to lend or transact with affiliates and to minimum regulatory capital and liquidity requirements, as well as restrictions on their ability to use funds deposited with them in bank or brokerage accounts to fund their businesses. Intercompany arrangements we entered into in connection with our resolution planning submissions could restrict the amount of funding available to the parent company from our subsidiaries under certain adverse conditions.
Additional restrictions on related party transactions, increased capital and liquidity requirements and additional limitations on the use of funds on deposit in bank or brokerage accounts, as well as lower earnings, can reduce the amount of funds available to meet the obligations of the parent company and even require the parent company to provide additional funding to such subsidiaries. Also, regulatory action that requires additional liquidity at each of our subsidiaries could impede access to funds we need to pay our obligations or pay dividends. In addition, our right to participate in
a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to prior claims of the subsidiary’s creditors. For more information regarding our ability to pay dividends, see Capital Management in the MD&A on page 45 and Note 14 - Shareholders’ Equity to the Consolidated Financial Statements.
In the event of a resolution, whether in a bankruptcy proceeding or under the orderly liquidation authority of the FDIC, such resolution could materially adversely affect our liquidity and financial condition, and the ability to pay dividends to shareholders and to pay obligations.
Bank of America Corporation, our parent holding company, is required to periodically submit a plan to the FDIC and Federal Reserve describing its resolution strategy under the U.S. Bankruptcy Code in the event of material financial distress or failure. In the current plan, Bank of America Corporation’s preferred resolution strategy is a “single point of entry” strategy. This strategy provides that only the parent holding company files for resolution under the U.S. Bankruptcy Code and contemplates providing certain key operating subsidiaries with sufficient capital and liquidity to operate through severe stress and to enable such subsidiaries to continue operating or be wound down in a solvent manner following a bankruptcy of the parent holding company. Bank of America Corporation has entered into intercompany arrangements resulting in the contribution of most of its capital and liquidity to key subsidiaries. Pursuant to these arrangements, if Bank of America Corporation’s liquidity resources deteriorate so severely that resolution becomes imminent, Bank of America Corporation will no longer be able to draw liquidity from its key subsidiaries, and will be required to contribute its remaining financial assets to a wholly-owned holding company subsidiary, which could materially and adversely affect our liquidity and financial condition and the ability to pay dividends to shareholders 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. Further, we could be required to take certain actions that could impose operating costs and could potentially result in the divestiture or restructuring of certain businesses and subsidiaries.
Additionally, under the Financial Reform Act, when a G-SIB such as Bank of America Corporation is in default or danger of default, the FDIC may be appointed receiver in order to conduct an orderly liquidation of such institution. In the event of such appointment, the FDIC could, among other things, invoke the orderly liquidation authority, instead of the U.S. Bankruptcy Code, if the Secretary of the Treasury makes certain financial distress and systemic risk determinations. In 2013, the FDIC issued a notice describing its preferred “single point of entry” strategy for resolving a G-SIB. Under this approach, the FDIC could replace Bank of America Corporation with a bridge holding company, which could continue operations and result in an orderly resolution of the underlying bank, but whose equity would be held solely for the benefit of our creditors. The FDIC’s “single point of entry” strategy may result in our security holders suffering greater losses than would have been the case under a bankruptcy proceeding or a different resolution strategy.
For more information about resolution planning, see Item 1. Business - Resolution Planning on page 4. For more information about the FDIC’s orderly liquidation, see Item 1. Business - Insolvency and the Orderly Liquidation Authority on page 4.
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Credit
Economic or market disruptions, insufficient credit loss reserves or concentrations of credit risk may result in an increase in the provision for credit losses, which could have an adverse effect on our financial condition and results of operations.
A number of our products expose us to credit risk, including loans, letters of credit, derivatives, debt securities, trading account assets and assets held-for-sale. A 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.
Global and U.S. economic conditions and macroeconomic or market events and disruptions, including a continuing slowdown in global GDP growth, a decline in consumer spending, a decline in property values or an asset price correction, increasing consumer and corporate leverage, as well as rising unemployment, fluctuations in foreign exchange or interest rates, widespread health emergencies or pandemics and/or natural disasters, may impact our credit portfolios. In addition, significant economic or market stresses and disruptions could have a negative impact on the business environment and financial markets, increasing the risk that borrowers or counterparties would default or become delinquent in their obligations to us, which could lead to recessionary conditions and/or increase our credit losses and provision for credit losses, which could have a negative impact on our results of operations.
In particular, increases in delinquencies and default rates could adversely affect our consumer credit card, home equity and residential mortgage portfolios through increased charge-offs and provision for credit losses. A deteriorating economic environment in the U.S. or globally could also adversely affect our consumer and commercial loan portfolios with weakened client and collateral positions. 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. The impact of this could also be magnified by lending to leveraged borrowers, elevated asset prices and/or declining property or collateral values unrelated to macroeconomic stress.
We estimate and establish an allowance for credit losses for losses inherent in our lending activities (including unfunded lending commitments), excluding those measured at fair value, through a charge to earnings. The process for determining the amount of the allowance requires us to make difficult and complex judgments, including forecasting how borrowers will react to changing economic conditions. The ability of our borrowers or counterparties to repay their obligations will likely be impacted by changes in future economic conditions, which in turn could impact the accuracy of our loss forecasts and allowance estimates. There is also the possibility that we will fail to accurately identify the appropriate economic indicators or that we will fail to accurately estimate their impacts to our borrowers and the reserves that we hold.
We may suffer unexpected losses if the models and assumptions we use to establish reserves and make judgments in extending credit to our borrowers or counterparties prove inaccurate in predicting future events. In addition, external factors, such as the macroeconomic or market events disclosed above can also negatively impact our recognition of credit losses in our portfolios and impact our allowance for credit losses. As of January 1, 2020, we implemented a new accounting standard to estimate our allowance for credit losses. For more information, see Note 1 - Summary of Significant Accounting Principles to the Consolidated Financial Statements. Although we believe that the allowance for credit losses is in compliance with the new accounting standard
at January 1, 2020, there is no guarantee that it will be sufficient to address credit losses, particularly if economic conditions deteriorate quickly and/or significantly. In such an event, we may increase the size of our allowance which would reduce our earnings.
In the ordinary course of our business, we also may be subject to concentrations of credit risk because of a common characteristic or common sensitivity to economic, financial or business developments. For example, concentrations in credit risk may result in a particular industry, geographic location, product, asset class, counterparty, individual exposure or within any pool of exposures with a common risk characteristic. A deterioration in the financial condition or prospects of a particular industry, geographic location, product or asset class, or a failure or downgrade of, or default by, any particular entity or group of entities could negatively affect our businesses and it is possible our limits and credit monitoring exposure controls will not function as anticipated.
While our activities expose us to many different industries and counterparties, we routinely execute a high volume of transactions with counterparties in the financial services industry, including broker-dealers, commercial banks, investment banks, insurers, mutual funds and hedge funds, central counterparties and other institutional clients. This has resulted in significant credit concentration with respect to this industry. Financial services institutions and other counterparties are inter-related because of trading, funding, clearing or other relationships. As a result, defaults by, or even market uncertainty about the financial stability of one or more financial services institutions, or the financial services industry generally, could lead to market-wide liquidity disruptions, losses and defaults.
Many of these transactions expose us to credit risk and, in some cases, disputes and litigation in the event of default of a counterparty. In addition, our credit risk may be heightened by market risk when the collateral held by us cannot be liquidated or is liquidated at prices not sufficient to recover the full amount of the loan or derivatives exposure due to us, which may occur as a result of fraud or other events that impact the value of the collateral. Further, disputes with obligors as to the valuation of collateral could increase in times of significant market stress, volatility or illiquidity, and we could suffer losses during such periods if we are unable to realize the fair value of the collateral or manage declines in the value of collateral.
In the ordinary course of business, we also enter into transactions with sovereign nations, U.S. states and U.S. municipalities. Unfavorable economic or political conditions, disruptions to capital markets, currency fluctuations, changes in oil prices, social instability and changes in government or monetary policies could impact the operating budgets or credit ratings of these government entities and expose us to credit risk.
We also 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. Additionally, decreases in home price valuations or commercial real estate valuations in certain markets where we have large concentrations, including as a result of climate change or natural disasters (e.g., rising sea levels, hurricanes and fires), as well as more broadly within the U.S. or globally, could result in increased defaults, delinquencies or credit loss. For more information, see Consumer Portfolio Credit Risk Management in the MD&A on page 54.
Furthermore, our commercial portfolios include exposures to certain industries, including asset managers and funds, real estate, capital goods and finance companies. For more information, see Commercial Portfolio Credit Risk Management in
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the MD&A on page 60. Economic weaknesses, adverse business conditions, market disruptions, rising interest or capitalization rates, the collapse of speculative bubbles, greater volatility in areas where we have concentrated credit risk or deterioration in real estate values or household incomes may cause us to experience a decrease in cash flow and higher credit losses in either our consumer or commercial portfolios or cause us to write down the value of certain assets.
Liquidity disruptions in the financial markets may result in our inability to sell, syndicate or realize the value of our positions, leading to increased concentrations, which could increase the credit and market risk associated with our positions, as well as increase our risk-weighted assets.
For more information on our credit risk and credit risk management policies and procedures, see Credit Risk Management in the MD&A on page 53, Note 1 - Summary of Significant Accounting Principles, Note 5 - Outstanding Loans and Leases and Note 6 - Allowance for Credit Losses to the Consolidated Financial Statements.
If the U.S. housing market weakens or home prices decline, our consumer loan portfolios, credit quality, credit losses, representations and warranties exposures and earnings may be adversely affected.
While U.S. home prices continued to generally increase in 2019, the rate of increase has slowed compared to recent periods. We remain conscious of geographic markets where housing price growth has slowed or decreased and other geographic markets where housing prices have declined, as further declines in future periods may negatively impact the demand for many of our products. Additionally, our mortgage loan production volume is generally influenced by the rate of growth in residential mortgage debt outstanding and the size of the residential mortgage market, both of which may be adversely affected by rising interest rates. Conditions in the U.S. housing market during the most recent financial crisis resulted in both significant write-downs of asset values in several asset classes, notably mortgage-backed securities, and exposure to monolines. If the U.S. housing market were to weaken, the value of real estate could decline, which could result in increased credit losses and delinquent servicing expenses and negatively affect our representations and warranties exposures, which could have an adverse effect on our financial condition and results of operations.
Our derivatives businesses may expose us to unexpected risks and potential losses.
We are party to a large number of derivatives transactions 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 a particular Bank of America entity or entities, we may be required to provide additional collateral or take other remedial actions and could experience increased difficulty obtaining funding or hedging risks. In some cases our counterparties may have the right to terminate or otherwise diminish our rights under these contracts or agreements.
We are also a member of various central counterparties (CCPs) in part due to regulatory requirements for mandatory clearing of derivative transactions, which potentially increases our credit risk exposures to CCPs. In the event that one or more members of the CCP defaults on its obligations, we may be required to pay a portion
of any losses incurred by the CCP as a result of that default. A CCP may modify, in its discretion, the margin we are required to post, which could mean unexpected and increased exposure to the CCP. As a clearing member, we are exposed to the risk of non-performance by our clients for which we clear transactions, which may not be covered by available collateral. Additionally, any default by a significant market participant may result in further risk and potential losses.
For more information on our derivatives exposure, see Note 3 - Derivatives to the Consolidated Financial Statements.
Geopolitical
We are subject to numerous political, economic, market, reputational, operational, legal, regulatory and other risks in the jurisdictions in which we operate.
We do business throughout the world including in emerging markets. Economic or geopolitical stress in one or more countries could have a negative impact regionally or globally, resulting in, among other things, market volatility, reduced market value and economic output. Our businesses and revenues derived from non-U.S. jurisdictions are subject to risk of loss from currency fluctuations, financial, social or judicial instability, changes in government leadership, including as a result of electoral outcomes or otherwise, changes in governmental policies or policies of central banks, expropriation, nationalization and/or confiscation of assets, price controls, high inflation, natural disasters, the emergence of widespread health emergencies or pandemics, capital controls, currency redenomination risk, exchange controls, unfavorable political and diplomatic developments, oil price fluctuations and changes in legislation. Additionally, protectionist trade policies and continued trade tensions between the U.S. and important trading partners, particularly China and the EU, including the risk that tariffs continue to rise and other restrictive actions are taken that weigh heavily on regional trade volumes and domestic demand through falling business sentiment and lower consumer confidence, could adversely affect our businesses and revenues. These risks are especially elevated in emerging markets.
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 unrest. In Europe, the political and economic environment remains challenging due to slowing GDP growth, debt concerns of certain EU countries and elevated recessionary risks, including in Germany and the U.K. The current degree of European political and economic uncertainty could increase and create additional market volatility and negatively impact our business and results of operations. Significant market volatility and geopolitical unrest could also result from ongoing uncertainty related to the U.K.'s exit from the EU and the transition period during which the terms of such exit will be negotiated, which could adversely affect us.
Potential risks of default on or devaluation of sovereign debt in some non-U.S. jurisdictions could expose us to substantial losses. Risks in one nation can limit our opportunities for portfolio growth and negatively affect our operations in other nations, including our U.S. operations. Market and economic disruptions of all types may affect consumer confidence levels and spending, corporate investment and job creation, bankruptcy rates, levels of incurrence and default on consumer and corporate debt, economic growth rates and asset values, among other factors. Any such unfavorable conditions or developments could have an adverse impact on the Corporation.
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
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subject to negative fluctuations as a result of the above factors. Furthermore, the impact of these fluctuations could be magnified because non-U.S. trading markets, particularly in emerging markets, are generally smaller, less liquid and more volatile than U.S. trading markets.
Our non-U.S. businesses are also subject to extensive regulation by governments, securities exchanges and regulators, central banks and other regulatory bodies. In many countries, the laws and regulations applicable to the financial services and securities industries are uncertain and evolving, and it may be difficult for us to determine the exact requirements of local laws in every market or manage our relationships with multiple regulators in various jurisdictions. Our potential inability to remain in compliance with local laws in a particular market and manage our relationships with regulators could result in increased expenses and changes to our organizational structure and have an adverse effect on our businesses and results of operations in that market, as well as our reputation in general.
In addition to non-U.S. legislation, our international operations are also subject to U.S. legal requirements. For example, our operations are subject to U.S. and non-U.S. laws and regulations relating to bribery and corruption, anti-money laundering, and economic sanctions, which can vary by jurisdiction. The increasing speed and novel ways in which funds circulate could make it more challenging to track the movement of funds and heightens financial crimes risk. Our ability to comply with these legal requirements depends on our ability to continually improve detection and reporting and analytic capabilities.
In the U.S., debt ceiling and budget deficit concerns, which have increased the possibility of U.S. government defaults on its debt and/or downgrades to its credit ratings, and prolonged government shutdowns could negatively impact the global economy and banking system and adversely affect our financial condition, including our liquidity. Additionally, changes in fiscal, monetary or regulatory policy 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 acts or threats of terrorism, actions taken by the U.S. or other governments in response thereto, state-sponsored cyber attacks or campaigns and/or military conflicts, which could adversely affect business and economic conditions abroad, as well as in the U.S.
For more information on our non-U.S. credit and trading portfolios, see Non-U.S. Portfolio in the MD&A on page 66.
The U.K. Referendum, and the planned exit of the U.K. from the EU, could adversely affect us.
We conduct business in Europe, the Middle East and Africa primarily through our subsidiaries in the U.K. France and Ireland. For the year ended December 31, 2019, our operations in Europe, the Middle East and Africa, including the U.K., represented approximately six percent of our total revenue, net of interest expense.
On January 31, 2020, the U.K. formally exited the EU. Upon exit, a transition period began during which time the U.K. and the EU expect to negotiate a trade agreement and other terms associated with their future relationship. The transition period is scheduled to end on December 31, 2020. The ultimate impact and terms of such negotiation and any trade or other agreements remain unclear, and short- and long-term global economic and market volatility and disruptions to regional and global financial markets may occur, including as a result of currency fluctuations and trade relations. There can be no guarantee that the U.K. and EU will reach an agreement on trade or any other matters during the transition period or that the transition period will be extended if agreements are not reached. Additionally, there may be
heightened geopolitical uncertainty and/or market volatility if a trade and other agreements are not reached by the end of the transition period, including with regard to cross-border conduct of financial services and the treatment of existing financial transactions and contracts. If uncertainty resulting from the U.K.’s exit or the end to the transition period negatively impacts economic conditions, financial markets, including currency markets and consumer confidence, or clients, counterparties, and financial markets are not prepared for the trade and other agreements that are ultimately agreed upon or the transition period ends without a trade or other agreements, our business, results of operations, financial position and/or operational model could be adversely affected.
We are also subject to different laws, regulations and regulatory authorities and may incur additional costs and/or experience negative tax consequences as a result of establishing our principal EU banking and broker-dealer operations outside of the U.K., which could adversely impact our EU business, results of operations and operational model. Additionally, changes to the legal and regulatory framework under which our subsidiaries will continue to provide products and services in the U.K. and in the EU following the transition period may result in additional compliance costs and have negative tax consequences or an adverse impact on our results of operations. For more information on our EU operations outside of the U.K., see Executive Summary - Recent Developments - U.K. Exit from the EU in the MD&A on page 23.
Business Operations
A failure in or breach of our operational or security systems or infrastructure, or those of third parties, including their downstream service providers and the financial services industry, could disrupt our critical business operations and customer services, result in regulatory, market, privacy, liquidity and operational risk exposures, and adversely impact our results of operations and financial condition, as well as cause legal or reputational harm.
The potential for operational risk exposure exists throughout our organization and as a result of our interactions with, and reliance on, third parties, 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 rely on our employees and third parties in our day-to-day and ongoing operations, who may, as a result of human error, misconduct, malfeasance or a failure or breach of systems or infrastructure, expose us to risk.
Additionally, our financial, accounting, data processing and transmission, storage, backup or other operating or security systems and infrastructure or those of third parties with whom we interact or upon whom we rely may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our or such third party’s control, which could adversely affect our ability to process transactions or provide services. We could also experience prolonged computer and network outages resulting in disruptions to our critical business operations and customer services, including abuse or failure of our electronic trading and algorithmic platforms. We may experience electrical, telecommunications or other major physical infrastructure outages, newly identified vulnerabilities in key hardware or software, failure of aging infrastructure, technology project implementation challenges, natural disasters such as earthquakes, tornadoes, hurricanes and floods, widespread health emergencies or pandemics and events arising from local or larger
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scale political or social matters, including terrorist acts, which could result in prolonged operational outages.
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 a systematic cyber campaign that results in system outages and unavailability of part or all of the financial services industry infrastructure. Our ability to implement backup systems and other safeguards with respect to third-party systems and the financial services industry infrastructure is more limited than with respect to our own systems.
In the event 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 continuously update the systems on which we rely to support our operations and growth and to remain compliant with all applicable laws, rules and regulations globally. This updating entails significant costs and creates risks associated with implementing new systems and integrating them with existing ones, including business interruptions. A failure or breach of our operational or security systems or infrastructure resulting in disruption to our critical business operations and customer services could expose us to regulatory, market, privacy and liquidity risk, and adversely impact our results of operations and financial condition, as well as cause legal or reputational harm.
A cyber attack, information or security breach, or a technology failure of ours or of a third party could adversely affect our ability to conduct our business, manage our exposure to risk or expand our businesses, result in the disclosure or misuse of confidential or proprietary information, increase our costs to maintain and update our operational and security systems and infrastructure, and adversely impact our results of operations, liquidity and financial condition, as well as cause legal or reputational harm.
Our business is highly dependent on the security, controls and efficacy of our infrastructure, computer and data management systems, as well as those of our customers, suppliers, counterparties and other third parties, including their downstream service providers, the financial services industry and financial data aggregators, with whom we interact, on whom we rely or who have access to our customers' personal or account information. Our business relies on effective access management and the secure collection, processing, transmission, storage and retrieval of confidential, proprietary, personal and other information in our computer and data management systems and networks, and in the computer and data management systems and networks of third parties. In addition, to access our network, products and services, our employees, customers, suppliers, counterparties and other third parties increasingly use personal mobile devices or computing devices that are outside of our network and control environments and are subject to their own cybersecurity risks.
We, our employees and customers, regulators and other third parties are regularly the target of cyber attacks and are likely to continue to be the target of cyber attacks. These cyber attacks are pervasive and evolving and include computer viruses, malicious or destructive code (such as ransomware), phishing attacks, denial of service or information or other security breach tactics that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction or theft of confidential, proprietary and other information, including intellectual property, of ours, our employees, our customers or of third parties, damages to systems, or otherwise material disruption to our or our customers’ or other third parties’ network access or business
operations, both domestically and internationally. As cyber threats continue to evolve, we may be required to expend significant additional resources to modify or enhance our protective measures, investigate and remediate any information security vulnerabilities or incidents and develop our capabilities to respond and recover. Cyber threats are rapidly changing, and despite substantial efforts to protect the integrity of our systems and implement controls, processes, policies and other protective measures, we may not be able to anticipate cyber attacks or information or security breaches, nor may we be able to implement effective preventive or defensive measures to address 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. Targeted social engineering attacks are becoming more sophisticated and are extremely difficult to prevent.
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 role in the financial services industry and the broader economy. The financial services industry is particularly at risk because of the proliferation of new and emerging technologies, including third-party financial data aggregators, and the use of the Internet and telecommunications technologies to conduct financial transactions. For example, our plans to continue our use of automation, artificial intelligence and robotics, increase our internet and mobile banking products, including mobile payment and other web- and cloud-based products and applications, and develop additional remote connectivity solutions to serve our customers when and how they want to be served, increase our cybersecurity risks and exposure.
Additionally, our continuous transmission of sensitive information to, and storage of such information by, third parties, including our vendors and regulators, our geographic footprint and international presence, the outsourcing of some of our business operations, threats of cyber terrorism, external extremist parties, including state-sponsored actors, in some circumstances as a means to promote political ends, and system and customer account updates and conversions result in heightened risk exposure. As a result, cybersecurity and the continued development and enhancement of our controls, processes and practices designed to protect our systems, computers, intellectual property and proprietary information, software, data and networks from attack, damage or unauthorized access remain a critical priority. Cybersecurity risks have also significantly increased in recent years in part due to the increasingly sophisticated activities of organized crime groups, hackers, terrorist organizations, hostile foreign governments, disgruntled employees or vendors, activists and other external parties, including those involved in corporate espionage. The techniques used in cyber attacks change frequently, and these attacks or ensuing 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.
We also face indirect technology, cybersecurity and operational risks relating to the customers, clients and other third parties, including their downstream service providers and the financial services industry, with whom we do business, upon whom we rely to facilitate or enable our business activities or upon whom our customers rely. Such third parties also include financial counterparties, financial data aggregators, financial intermediaries, such as clearing agents, exchanges and clearing
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houses, vendors, regulators, providers of critical infrastructure, such as internet access and electrical power, and retailers for whom we process transactions. As a result of increasing consolidation, interdependence and complexity of financial entities and technology systems, a technology failure, cyber attack or other information or security breach that significantly degrades, deletes or compromises the systems or data of one or more financial entities or third-party or their downstream service providers could have a material impact on counterparties or other market participants, including us. This consolidation, interconnectivity and complexity increases the risk of operational failure, on both individual and industry-wide bases, as disparate systems need to be integrated, often on an accelerated basis. Any technology failure, cyber attack or other information or security breach, termination or constraint of any third party, including their downstream service providers, the financial services industry infrastructure or financial data aggregators, could, among other things, adversely affect our ability to conduct day-to-day business activities, effect transactions, service our clients, manage our exposure to risk or expand our businesses, result in the misappropriation or destruction of the personal, proprietary or confidential information of our employees, customers, suppliers, counterparties and other third parties or result in fraudulent or unauthorized transactions. Further, any such event may not be disclosed to us in a timely manner.
Although to date we have not experienced any material losses or other material consequences relating to technology failure, cyber attacks or other information or security breaches, whether directed at us or third parties, there can be no assurance that our controls and procedures in place to monitor and mitigate the risks of cyber threats will be sufficient and that we will not suffer material losses or consequences in the future. Cyber attacks or other information or security breaches, whether directed at us or third parties, may result in significant lost revenue, give rise to losses or have other negative consequences. Furthermore, the public perception that a cyber attack on our systems has been successful, whether or not this perception is correct, may damage our reputation with customers and third parties with whom we do business. Although we maintain cyber insurance, there can be no assurance that liabilities or losses we may incur will be covered under such policies or that the amount of insurance will be adequate.
Also, successful penetration or circumvention of system security could result in negative consequences, including loss of customers and business opportunities, the withdrawal of customer deposits, prolonged computer and network outages resulting in disruptions to our critical business operations and customer services, misappropriation or destruction of our intellectual property, proprietary information or confidential information and/or the confidential, proprietary or personal information of certain parties, such as our employees, customers, suppliers, counterparties and other third parties, or damage to their computers or systems. This could result in a violation of applicable privacy and other laws in the U.S. and abroad, litigation exposure, regulatory fines, penalties or intervention, loss of confidence in our security measures, reputational damage, reimbursement or other compensatory costs, additional compliance costs and our internal controls or disclosure controls being rendered ineffective. The occurrence of any of these events could adversely impact our results of operations, liquidity and financial condition.
Our mortgage loan repurchase obligations or claims from third parties could result in additional losses.
We and our legacy companies have sold significant amounts of residential mortgage loans. In connection with these sales, we or certain of our subsidiaries or legacy companies made various
representations and warranties, breaches of which may result in a requirement that we repurchase the mortgage loans, or otherwise make whole or provide other remedies to counterparties. At December 31, 2019, we had $10.7 billion of unresolved repurchase claims, net of duplicate claims and excluding claims where the statute of limitations has expired without litigation being commenced.
At December 31, 2019, our liability for obligations under representations and warranties exposures was $1.8 billion. We also have an estimated range of possible loss (RPL) for representations and warranties exposures that is combined with the litigation RPL, which we disclose in Note 13 - Commitments and Contingencies to the Consolidated Financial Statements. The recorded liability and estimated RPL are based on currently available information, significant judgment and a number of assumptions that are subject to change. There can be no assurance that the Corporation will reach future settlements or, if it does, that the terms of past settlements can be relied upon to predict the terms of future settlements. Future representations and warranties losses may occur in excess of our recorded liability and estimated RPL, and such losses could have a material adverse effect on our results of operations.
Additionally, our recorded liability for representations and warranties exposures and the corresponding estimated RPL do not consider certain losses related to servicing, including foreclosure and related costs, fraud, indemnity or claims (including for residential mortgage-backed securities) related to securities law. Losses with respect to one or more of these matters could be material to our results of operations.
For more information about our representations and warranties exposure, see Off-Balance Sheet Arrangements and Contractual Obligations - Representations and Warranties in the MD&A on page 42 and Note 13 - Commitments and Contingencies to the Consolidated Financial Statements.
Failure to satisfy our obligations as servicer for residential mortgage securitizations and residential mortgage loans owned by other entities, along with other losses we could incur in our capacity as servicer, could harm our reputation, increase servicing costs or adversely impact our 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 or adversely impact our results of operations. Additionally, with respect to foreclosures, we may incur costs or losses due to irregularities in the underlying documentation, or if the validity of a foreclosure action is challenged by a borrower or overturned by a court because of errors or deficiencies in the foreclosure process. We may also incur costs or losses relating to delays or alleged deficiencies in processing documents necessary to comply with state law governing foreclosure.
Changes in the structure of the GSEs and the relationship among the GSEs, the government and the private markets could result in changes to our business operations and may adversely impact our business.
During 2019, we sold approximately $3.5 billion of loans to Fannie Mae (FNMA) and Freddie Mac (FHLMC). Each is currently in a conservatorship with its primary regulator, the Federal Housing
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Finance Agency (FHFA), acting as conservator. In September 2019, the Treasury Department published a proposal to recapitalize FNMA and FHLMC and remove them from conservatorship as well as reduce GSEs' role in the marketplace. There can be no assurance that these proposals will be fully adopted, and it is not possible to predict when the conservatorships will end. If 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. Although the Treasury Department has released an administrative proposal and the FHFA has taken steps to unify underwriting parameters and create a common securitization platform, we cannot predict the prospects for the enactment, 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. Accordingly, uncertainty regarding their future continues to exist.
Any of these developments could adversely affect the value of our securities portfolios, capital levels and liquidity and results of operations.
Our risk management framework may not be effective in mitigating risk and reducing the potential for losses.
Our risk management framework is designed to minimize risk and loss to us. We seek to effectively and consistently identify, measure, monitor, report and control the types of risk to which we are subject, including strategic, credit, market, liquidity, compliance, operational and reputational risks. While we employ a broad and diversified set of controls and risk mitigation techniques, including modeling and forecasting, hedging strategies and techniques that seek to balance our ability to profit from trading positions with our exposure to potential losses, our ability to control and mitigate risks that result in losses is inherently limited by our ability to identify all risks, including emerging and unknown risks, anticipate the timing of risks, apply effective hedging strategies, make correct assumptions, manage and aggregate data correctly and efficiently, and develop risk management models to assess and control risk.
Our ability to manage risk is limited by 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, their downstream service providers, and vendors, to enable effective risk management and ensure that risks are appropriately considered, evaluated and responded to in a timely manner. Uncertain economic conditions, heightened legislative and regulatory scrutiny of and change within the financial services industry, the pace of technological changes, accounting and market developments, the failure of employees to comply with policies, values and our risk framework and the overall complexity of our operations, among other developments, may result in a heightened level of risk for us. Accordingly, we could suffer losses as a result of our failure to manage change or properly anticipate, manage, control or mitigate risks.
For more information about our risk management policies and procedures, see Managing Risk in the MD&A on page 42.
Regulatory, Compliance and Legal
We are subject to comprehensive government legislation and regulations, both domestically and internationally, which impact our operating costs and could require us to make changes to our operations. Additionally, we are subject to certain settlements, orders and agreements with government authorities from time to
time, which could increase our compliance and operational risks and costs.
We are subject to comprehensive regulation under federal and state laws in the U.S. and the laws of the various jurisdictions in which we operate, 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 clients and customers.
We continue to make adjustments to our business and operations, legal entity structure and capital and liquidity management policies, procedures and controls to comply with currently effective laws and regulations, as well as final rulemaking, guidance and interpretation by regulatory authorities, including the Department of Treasury, Federal Reserve, OCC, CFPB, Financial Stability Oversight Council, FDIC, Department of Labor, SEC and CFTC in the U.S. and foreign regulators and other government authorities. Further, we could become subject to future regulatory requirements beyond those currently proposed, adopted or contemplated, including rulemaking related to the Financial Reform Act and the U.K.'s exit from the EU. The cumulative effect of all of the legislation and regulations on our business, operations and profitability remains uncertain. This uncertainty necessitates that in our business planning we make certain assumptions with respect to the scope and requirements of the proposed rules. If these assumptions prove incorrect, we could be subject to increased regulatory and compliance risks and costs as well as potential reputational harm. In addition, U.S. and international regulatory initiatives may overlap, and non-U.S. regulations and initiatives may be inconsistent or may conflict with current or proposed U.S. regulations, which could lead to compliance risks and increased costs.
Our regulators’ prudential and supervisory authority gives them broad power and discretion to direct our actions, and they have assumed an active oversight, inspection and investigatory role across the financial services industry. However, regulatory focus is not limited to laws and regulations applicable to the financial services industry specifically, but also 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. Additionally, we are subject to laws, rules and regulations in the U.S. and abroad, including GDPR and CCPA, regarding compliance with our privacy policies and the disclosure, collection, use, sharing and safeguarding of personal identifiable information of certain parties, such as our employees, customers, suppliers, counterparties and other third parties, the violation of which could result in litigation, regulatory fines and enforcement actions. Additionally, we will likely be subject to new and evolving data privacy laws in the U.S. and abroad, which could result in additional costs of compliance, litigation, regulatory fines and enforcement actions.
As part of their enforcement authority, our regulators and other government authorities have the authority to, among other things, assess significant civil or criminal monetary penalties or restitution and issue cease and desist or removal orders and 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
Bank of America 14
inability to operate certain businesses or offer certain products for a period of time.
The Corporation and the conduct of its employees and representatives are subject to regulatory scrutiny across jurisdictions. Additionally, the complexity of the federal and state regulatory and enforcement regimes in the U.S., coupled with the global scope of our operations and the aggressiveness of the regulatory environment worldwide also means that a single event or practice or a series of related events or practices may give rise to a 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, regardless of the ultimate outcome of the matter, is time-consuming and expensive and can divert the attention of our senior management from our business. The outcome of such proceedings, which may last a number of years, may be difficult to predict or estimate until late in the proceedings.
We are currently subject to the terms of settlements, orders and agreements that we have entered into with government entities and regulatory authorities and may become subject to additional settlements, orders or agreements in the future. Such settlements, orders or agreements can impose significant operational and compliance costs on us as they typically require us to enhance our procedures and controls, expand our risk and control functions within our lines of business, invest in technology and hire significant numbers of additional risk, control and compliance personnel. Moreover, if we fail to meet the requirements of the regulatory settlements, orders or agreements to which we are subject, or, more generally, fail to maintain risk and control procedures and processes that meet the heightened standards established by our regulators and other government authorities, we could be required to enter into further settlements, orders or agreements and pay additional fines, penalties or judgments, or accept material regulatory restrictions on our businesses.
While we believe that we have adopted appropriate risk management and compliance programs to identify, assess, monitor and report on applicable laws, policies and procedures, compliance risks will continue to exist, particularly as we adapt to new and evolving laws, rules and regulations. Additionally, changing U.S. fiscal, monetary and regulatory policies arising from potential changes to the U.S. presidential administration and Congress result in ongoing regulatory uncertainties. There is no guarantee that our risk management and compliance programs will be consistently executed to successfully manage compliance risk. We also rely upon third parties who may expose us to compliance and legal risk. Future legislative or regulatory actions, and any required changes to our business or operations, or those of third parties, including their downstream providers, upon whom we rely, resulting from such developments and actions could result in a significant loss of revenue, impose additional compliance and other costs or otherwise reduce our profitability, limit the products and services that we offer or our ability to pursue certain business opportunities, require us to dispose of or curtail certain businesses, affect the value of assets that we hold, require us to increase our prices and therefore reduce demand for our products, or otherwise adversely affect our businesses. In addition, legal and regulatory proceedings and other contingencies will arise from time to time that may result in fines, regulatory sanctions, penalties, equitable relief and changes to our business practices. As a result, we are and will continue to be subject to heightened
compliance and operating costs that could adversely affect our results of operations.
We are subject to significant financial and reputational risks from potential liability arising from lawsuits and regulatory and government action.
We face significant legal risks in our business, and the volume of claims and amount of damages, penalties and fines claimed in litigation and other disputes, and regulatory and government proceedings against us and other financial institutions continue to be high. Greater than expected litigation and investigation costs, substantial legal liability or significant regulatory or government action against us could have adverse effects on our business, financial condition, including liquidity, and results of operations, and/or cause significant reputational harm to us. We continue to experience a significant volume of litigation and other disputes, including claims for contractual indemnification with counterparties regarding relative rights and responsibilities. Consumers, clients and other counterparties continue to be litigious. Among other things, financial institutions, including us, continue to be the subject of claims alleging anti-competitive conduct with respect to various products and markets, including U.S. antitrust class actions claiming joint and several liability for treble damages. In addition, regulatory authorities have had a supervisory focus on enforcement, including in connection with alleged violations of law and customer harm. For example, U.S. regulators and government agencies have pursued claims against financial institutions under the Financial Institutions Reform, Recovery, and Enforcement Act, False Claims Act, Equal Credit Opportunity Act, Fair Housing Act and antitrust laws. Such claims may carry significant and, in certain cases, treble damages. The global environment of extensive regulation, regulatory compliance burdens, litigation and regulatory and government enforcement, combined with uncertainty related to the continually evolving regulatory environment, may affect operational and compliance costs and risks, which may limit or cease our ability to continue providing certain products and services.
Additionally, misconduct by employees, including improper or illegal conduct, or other unfair, deceptive, abusive or discriminatory business practices, can cause significant reputational harm as well as litigation and regulatory government enforcement action.
For more information on litigation and regulatory matters, see Note 13 - Commitments and Contingencies to the Consolidated Financial Statements.
U.S. federal banking agencies may require us to increase our regulatory capital, TLAC, long-term debt or liquidity requirements, which could result in the need to issue additional qualifying securities or to take other actions, such as to sell company assets.
We are subject to U.S. regulatory capital and liquidity rules. These rules, among other things, establish minimum requirements to qualify as a well-capitalized institution. If any of our subsidiary insured depository institutions fails to maintain its status as well capitalized under the applicable regulatory capital rules, the Federal Reserve will require us to agree to bring the insured depository institution back to well-capitalized status. For the duration of such an agreement, the Federal Reserve may impose restrictions on our activities. If we were to fail to enter into or comply with such an agreement, or fail to comply with the terms of such agreement, the Federal Reserve may impose more severe restrictions on our activities, including requiring us to cease and desist activities permitted under the Bank Holding Company Act of 1956.
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
15 Bank of America
increase liquidity requirements. Our G-SIB surcharge may increase from current estimates, and we are also subject to a countercyclical capital buffer which, while currently set at zero, may be increased by regulators. In 2018, the Federal Reserve issued a proposal to implement a stress capital buffer into its capital requirements, which may increase our regulatory capital requirements, if adopted. A significant component of regulatory capital ratios is calculating our risk-weighted assets and our leverage exposure, which may increase. The Basel Committee on Banking Supervision has also revised several key methodologies for measuring risk-weighted assets, including a standardized approach for credit risk, standardized approach for operational risk and constraints on the use of internal models, as well as a capital floor based on the revised standardized approaches. U.S. banking regulators may update the U.S. Basel 3 rules to incorporate the Basel Committee revisions.
Additionally, Net Stable Funding Ratio requirements have been proposed, which would apply to us and our subsidiary depository institutions, and target longer term liquidity risk. While the impact of these proposals remains uncertain, they could have a negative impact on our capital and liquidity positions. In 2019, U.S. banking regulators published a final rule outlining a standardized approach for counterparty credit risk, which updates the calculation of the exposure amount for derivative contracts under the regulatory capital rule. The final rule will be effective on April 1, 2020, with a mandatory compliance date of January 1, 2022. This rule could have a negative impact on our capital position upon final implementation.
As part of its annual 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 have an effect on our projected regulatory capital amounts in the annual CCAR submission, including the CCAR capital plan affecting our dividends and stock repurchases. Such ability to return capital to our shareholders substantially depends on the Federal Reserve's response to our annual CCAR submission. To the extent that the Federal Reserve objects to our annual CCAR submission or objects to the amount of dividends or stock repurchases proposed, our shareholder returns could decrease.
Changes to and compliance with the regulatory capital and liquidity requirements may impact our operations by requiring us to liquidate assets, increase borrowings, issue additional equity or other securities, cease or alter certain operations, sell company assets or hold highly liquid assets, which may adversely affect our results of operations. We may be prohibited from taking capital actions such as paying or increasing dividends, or repurchasing securities if the Federal Reserve objects to our CCAR capital plan.
For more information, see Capital Management - Regulatory Capital in the MD&A on page 46 and Note 17 - Regulatory Requirements and Restrictions to the Consolidated Financial Statements.
Changes in accounting standards or assumptions in applying accounting policies could adversely affect us.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Some of these policies require use of estimates and assumptions that may affect the reported value of our assets or liabilities and results of operations and are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain. If those assumptions, estimates or judgments were incorrectly made, we could be required to correct and restate prior-period financial statements. Accounting standard-setters and those who interpret the accounting standards, the SEC, banking regulators and our
independent registered public accounting firm may also amend or even reverse their previous interpretations or positions on how various standards should be applied. These changes may be difficult to predict and could impact how we prepare and report our financial statements. In some cases, we could be required to apply a new or revised standard retrospectively, resulting in us revising prior-period financial statements. For more information on some of our critical accounting policies and recent accounting changes, see Complex Accounting Estimates in the MD&A on page 77 and Note 1 - Summary of Significant Accounting Principles to the Consolidated Financial Statements.
We may be adversely affected by changes in U.S. and non-U.S. tax laws and regulations.
In December 2017, the President signed into law the Tax Cuts and Jobs Act (the Tax Act) which made significant changes to federal income tax law including, among other things, reducing the statutory corporate income tax rate to 21 percent from 35 percent and changing the taxation of our non-U.S. business activities.
In addition, we have U.K. net deferred tax assets which consist primarily of net operating losses that are expected to be realized by certain subsidiaries over an extended number of years. Adverse developments with respect to tax laws or to other material factors, such as prolonged worsening of Europe’s capital markets or changes in the ability of our U.K. subsidiaries to conduct business in the EU, could lead our management to reassess and/or change its current conclusion that no valuation allowance is necessary with respect to our U.K. net deferred tax assets.
It is possible that governmental authorities in the U.S. and/or other countries could further amend tax laws in a way that would adversely affect us, including the possibility that aspects of the Tax Act could be amended in the future.
Reputation
Damage to our reputation could harm our businesses, including our competitive position and business prospects.
Our ability to attract and retain customers, clients, investors and employees is impacted by our reputation. Harm to our reputation can arise from various sources, including officer, director or employee misconduct, unethical behavior, security breaches, litigation or regulatory outcomes, compensation 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 and sales practices. Additionally, our reputation may be harmed by failing to deliver products, subpar standards of service and quality expected by our customers, clients and the community, compliance failures, the inability to manage technology change or maintain effective data management, cyber incidents, inadequacy of responsiveness to internal controls, unintended disclosure of personal, proprietary or confidential information, perception of our environmental, social and governance practices and disclosures, conflicts of interest and breach of fiduciary obligations, and the activities of our clients, customers, counterparties and third parties, including vendors. Actions by the financial services industry generally or by certain members or individuals in the industry also can adversely affect our reputation. In addition, adverse publicity or negative information posted on social media 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, know-your-customer requirements, data protection, including the GDPR and CCPA, cross-border data movement and other matters. Principles concerning the appropriate scope of consumer and commercial privacy vary
Bank of America 16
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 have an adverse effect on our financial condition and results of operations.
We could suffer reputational harm if we fail to properly identify and manage potential conflicts of interest. Management of potential conflicts of interests has become increasingly complex as we expand our business activities through more numerous transactions, obligations and interests with and among our clients.
The failure to adequately address, or the perceived failure to adequately address, conflicts of interest could affect the willingness of clients to 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. For more information on reputational risk, see Reputational Risk Management in the MD&A on page 77.
Other
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, reputation, interest rates on loans and deposits, lending limits and customer convenience. Additionally, the changing regulatory environment may create competitive disadvantages for us given geography-driven capital and liquidity requirements. For example, U.S. regulators have in certain instances adopted stricter capital and liquidity requirements than those applicable to non-U.S. institutions. To the extent we expand into new business areas and new geographic regions, we may face competitors with more experience and more established relationships with clients, regulators and industry participants in the relevant market, which could adversely affect our ability to compete.
In addition, 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, marketplace lending, financial data aggregation and payment processing, including real-time payment
platforms. Further, clients may choose to conduct business with other market participants who engage in business or offer products in areas we deem speculative or risky, such as cryptocurrencies. Increased competition may negatively affect our earnings by creating pressure to lower prices or credit standards on our products and services requiring additional investment to improve the quality and delivery of our technology and/or reducing our market share, or affecting the willingness of our clients to do business with us.
Our inability to adapt our products and services to evolving industry standards and consumer preferences could harm our business.
Our business model is based on a diversified mix of businesses that provide a broad range of financial products and services, delivered through multiple distribution channels. Our success depends on our, and our third-party vendors', ability to adapt and develop products, services and technology to rapidly evolving industry standards and consumer preferences. There is increasing pressure by competitors to provide products and services on more attractive terms, including higher interest rates on deposits, and offer lower cost investment strategies, which may impact our ability to grow revenue and/or effectively compete. Additionally, legislative and regulatory developments may affect the competitive landscape. Further, the competitive landscape may be impacted by the growth of non-depository institutions that offer traditional banking products at higher rates or with no fees, or otherwise offer alternative products. This can reduce our net interest margin and revenues from our fee-based products and services, either from a decrease in the volume of transactions or through a compression of spreads.
In addition, the widespread adoption and rapid evolution of new technologies, including analytic capabilities, self-service digital trading platforms, internet services, distributed ledgers, such as the blockchain system, cryptocurrencies and payment systems, could require substantial expenditures to modify or adapt our existing products and services as we grow and develop our online and mobile banking channel strategies in addition to remote connectivity solutions. We may not be as timely or successful in developing or introducing new products and services, integrating new products or services into our existing offerings, responding or adapting to changes in consumer behavior, preferences, spending, investing and/or saving habits, achieving market acceptance of our products and services, reducing costs in response to pressures to deliver products and services at lower prices or sufficiently developing and maintaining loyal customers. Our or our third-party vendors' inability to adapt products and services to evolving industry standards and consumer preferences could harm our business and adversely affect our results of operations and reputation.
Our ability to attract and retain qualified employees is critical to the success of our business and failure to do so could hurt our business prospects and competitive position.
Our performance is heavily dependent on the talents and efforts of highly skilled individuals. Competition for qualified personnel within the financial services industry and from businesses outside the financial services industry is intense. Our competitors include non-U.S. based institutions and institutions subject to different compensation and hiring regulations than those imposed on U.S. institutions and financial institutions.
In order to attract and retain qualified personnel, we must provide market-level compensation. As a large financial and banking institution, we may be subject to limitations on compensation practices (which may or may not affect our competitors) by the Federal Reserve, the OCC, the FDIC and other regulators around the world. EU and U.K. rules limit and subject
17 Bank of America
to clawback certain forms of variable compensation for senior employees. Current and potential future limitations on executive compensation imposed by legislation or regulation could adversely affect our ability to attract and maintain qualified employees. Furthermore, a substantial portion of our annual incentive compensation paid to our senior employees has in recent years taken the form of long-term equity-based awards. Therefore, the ultimate value of this compensation depends on the price of our common stock when the awards vest. If we are unable to continue to attract and retain qualified individuals, our business prospects and competitive position could be adversely affected.
We could suffer operational, reputational and financial harm if our models and strategies fail to properly anticipate and manage risk.
We use proprietary models and strategies extensively to forecast losses, project revenue, measure and assess capital requirements for credit, country, market, operational and strategic risks and assess and control our operations and financial condition. These models require oversight, including independent validation before initial use, ongoing monitoring through outcomes analysis and benchmarking, and periodic revalidation. Models are subject to inherent limitations due to the use of historical trends and simplifying assumptions, uncertainty regarding economic and financial outcomes, and emerging risks from the use of applications that rely on artificial intelligence.
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 illiquidity, especially during severe market downturns or stress events, which could limit their effectiveness. The models that we use to assess and control our market risk exposures also reflect assumptions about the degree of correlation among prices of various asset classes or other market indicators, which may not be representative of the next downturn and would magnify the limitations inherent in using historical data to manage risk. Our models may not be effective if we fail to properly oversee them and detect their flaws during our review and monitoring processes, they contain erroneous data, assumptions, valuations, formulas or algorithms or our applications running the models do not perform as expected. Regardless of the steps we take to ensure effective controls, governance, monitoring and testing, and implement new technology and automated processes, we could suffer operational, reputational and financial harm if models and strategies fail to properly anticipate and manage current and evolving risks.
Failure to properly manage and aggregate data may result in our inability to manage risk and business needs, errors in our day-to-day operations, critical reporting and strategic decision-making and inaccurate financial, regulatory and operational reporting.
We rely on our ability to manage, aggregate, interpret and use data in an accurate, timely and complete manner for effective risk reporting and management. Our policies, programs, processes and practices govern how data is managed, aggregated, interpreted and used. While we continuously update our policies, programs, processes and practices and implement emerging technologies, such as automation, artificial intelligence and robotics, our data management and aggregation processes are subject to failure, including human error, system failure or failed controls. Failure to maintain and manage data and information effectively and to aggregate data and information in an accurate, timely and complete manner may impact its quality and reliability and limit our ability to manage current and emerging risk, to produce accurate financial, regulatory and operational reporting, as well as to manage changing business needs, strategic decision-making and day-to-day operations. The failure to establish and maintain
effective, efficient and controlled data management could have an adverse impact on our ability to develop our products and relationships with our customers and damage our reputation.
Reforms to and uncertainty regarding IBORs, including the London Interbank Offered Rate (LIBOR), and certain other rates or indices may adversely affect our business, financial condition and results of operations and could result in reputational harm to the Corporation.
In 2017, the U.K. FCA announced that it will no longer persuade or require participating banks to submit rates for LIBOR after 2021. The continuation of LIBOR on the current basis cannot be guaranteed after 2021, and there is substantial risk that LIBOR will be modified by 2021 or discontinued thereafter. This announcement, in conjunction with financial benchmark reforms and changes in short-term interbank lending markets more generally, have resulted in significant uncertainty about the potential or actual discontinuation of IBORs, including LIBOR, and certain other rates or indices that serve as “benchmarks.” Such benchmarks are used extensively in the global financial markets and in our business. In particular, LIBOR is used in many of our products and contracts, including mortgages, consumer, commercial and corporate loans, derivatives, floating-rate notes and other adjustable-rate products and financial instruments. The aggregate notional amount of these products and contracts is material to our business. These reforms and actions may result in significant uncertainty as to future rules or methodologies used to calculate benchmarks, cause new or reformed benchmarks to perform differently from the discontinued benchmarks they are replacing, cause existing benchmarks to disappear or become unavailable or unrepresentative, or have other consequences that cannot be fully anticipated, which expose us to various financial, operational and legal risks.
Certain ARRs have been proposed to replace LIBOR and other IBORs. For example, the Alternative Reference Rates Committee, a group of private-market participants and official-sector entities convened by the Federal Reserve Board and the Federal Reserve Bank of New York, has recommended that the Secured Overnight Financing Rate (SOFR) replace U.S. dollar LIBOR. However, the market transition from IBORs to ARRs is complex and pervasive throughout a number of different types of products and global financial markets. There can be no assurance that ARRs will be adequate alternatives to IBORs, that existing assets and liabilities based on or linked to IBORs will transition successfully to ARRs, of the timing of adoption and degree of integration and acceptance of such ARRs in the global financial markets, or of the future availability or representativeness of such ARRs. Our products and contracts that reference IBORs, in particular LIBOR, may contain language that determines when a successor rate including the ARR and/or the applicable spread adjustment to the designated rate (including IBORs) would be selected or determined. If a trigger is satisfied, our products and contracts may give the calculation agent (which may be us) discretion over the successor rate to be selected. The considerable uncertainty as to how the financial services industry will address the discontinuation of IBORs and/or such IBORs ceasing to be acceptable reference rates in financial instruments could ultimately result in client disputes and litigation surrounding the proper interpretation of our IBOR-based products and contracts. Accordingly, uncertainty regarding ARRs may continue to impact our business, operations and financial condition repeatedly and indefinitely.
The discontinuation of IBORs, including LIBOR, will require us to remediate IBOR-based products and contracts, including related hedging arrangements, that mature after the discontinuation date of the IBOR. These changes may adversely affect the yield on loans or securities held by us, amounts paid on securities we have
Bank of America 18
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. While some of these outstanding IBOR-based products and contracts include fallback provisions to ARRs, some of our outstanding IBOR-based products and contracts do not include fallback provisions or adequate fallback mechanisms requiring remediation to modify their terms. Additionally, some outstanding IBOR-based products and contracts are particularly challenging to modify due to the requirement that all impacted parties consent to such modification.
In light of the extensive use of IBOR-based products and contracts by us and other market participants, there can be no assurance that we and other market participants will be able to successfully modify all outstanding IBOR-based products and contracts or be adequately prepared for a discontinuation of an IBOR at the time such IBOR may cease to be published or otherwise discontinued. Also, there can be no assurance that existing or new provisions for successor rates in our IBOR-based products and contracts will include adequate methodologies for adjustments between the applicable IBOR and the corresponding successor rate or that the characteristics of the successor rates will be similar to or produce the economic equivalent of the benchmarks they seek to replace. For example, SOFR and other ARRs have compositions and characteristics that differ significantly from the benchmarks they may replace, have limited history, and may demonstrate less predictable performance over time than the benchmarks they replace.
Changes or uncertainty resulting from the market transition from IBORs to ARRs could adversely affect the return on and pricing, liquidity and value of outstanding IBOR-based products and contracts, cause significant market dislocations and
disruptions that are relevant to our business segments, particularly Global Banking and Global Markets, potentially increase the cost of and access to capital, increase the risk of litigation or other disputes, including in connection with the interpretation and enforceability of, or our historical marketing practices or disclosures with respect to, outstanding IBOR-based products and contracts with counterparties, and/or increase expenses related to the transition to ARRs, among other adverse consequences. Additionally, the process of transitioning to ARRs may result in increased costs and may also divert management time and attention from other areas of our business.
The market transition from IBORs to ARRs may also alter our risk profile and risk management strategies, including derivatives and hedging strategies, modeling and analytics, valuation tools, product design and systems, controls, procedures and operational infrastructure. This may prove challenging given the limited history of many of the proposed ARRs and may increase the costs and risks related to potential regulatory compliance, requirements or inquiries. Among other risks, various products and contracts may transition to ARRs at different times or in different manners, with the result that we may face significant unexpected interest rate, pricing or other exposures across business or product lines. Reforms to and uncertainty regarding market transition from current IBORs to ARRs and other factors, including the pace of the transition to ARRs, the specific terms and parameters for market acceptance of any ARRs, prices of and liquidity of trading markets for products based on ARRs, and our ability to transition and develop appropriate systems and analytics for one or more ARRs, may adversely affect our business, including the ability to serve customers and maintain market share, financial condition or results of operations and could result in reputational harm to the Corporation.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
As of December 31, 2019, certain principal offices and other materially important properties consisted of the following:
Facility Name
Location
General Character of the Physical Property
Primary Business Segment
Property Status
Property Square Feet (1)
Bank of America Corporate Center
Charlotte, NC
60 Story Building
Principal Executive Offices
Owned
1,212,177
Bank of America Tower at One Bryant Park
New York, NY
55 Story Building
GWIM, Global Banking and
Global Markets
Leased (2)
1,836,575
Bank of America Financial Centre
London, UK
4 Building Campus
Global Banking and Global Markets
Leased
562,595
Cheung Kong Center
Hong Kong
62 Story Building
Global Banking and Global Markets
Leased
149,790
(1)
For leased properties, property square feet represents the square footage occupied by the Corporation.
(2)
The Corporation has a 49.9 percent joint venture interest in this property.
We own or lease approximately 76.3 million square feet in over 20,000 facility and ATM locations globally, including approximately 70.7 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 5.6 million square feet in more than 35 countries.
We believe our owned and leased properties are adequate for our business needs and are well maintained. We continue to evaluate our owned and leased real estate and may determine from time to time that certain of our premises and facilities, or ownership structures, are no longer necessary for our operations. In connection therewith, we are evaluating the sale or sale/leaseback of certain properties and we may incur costs in connection with any such transactions.
Item 3. Legal Proceedings
See Litigation and Regulatory Matters in Note 13 - Commitments and Contingencies to the Consolidated Financial Statements, which is incorporated herein by reference.
Item 4. Mine Safety Disclosures
None
19 Bank of America
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, 2020, there were 161,882 registered shareholders of common stock.
The table below presents share repurchase activity for the three months ended December 31, 2019. 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)
Weighted-Average Per Share Price
Total Shares
Purchased as
Part of Publicly
Announced Programs
Remaining Buyback
Authority Amounts (2)
October 1 - 31, 2019
97,540
$
29.50
97,538
$
20,442
November 1 - 30, 2019
74,649
32.75
74,649
17,997
December 1 - 31, 2019
70,943
34.19
70,940
15,571
Three months ended December 31, 2019
243,132
31.87
243,127
(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 June 27, 2019, following the Board of Governors of the Federal Reserve System's non-objection to the Corporation's 2019 Comprehensive Capital Analysis and Review capital plan, the Corporation's Board of Directors (Board) authorized the repurchase of approximately $30.9 billion in common stock from July 1, 2019 through June 30, 2020, which includes approximately $900 million to offset shares awarded under equity-based compensation plans during the same period. During the three months ended December 31, 2019, pursuant to the Board’s authorization, the Corporation repurchased $7.7 billion of common stock, which included common stock to offset equity-based compensation awards. For more information, see Capital Management - CCAR and Capital Planning in the MD&A on page 45 and Note 14 - Shareholders’ Equity to the Consolidated Financial Statements.
The Corporation did not have any unregistered sales of equity securities during the three months ended December 31, 2019.
Item 6. Selected Financial Data
See Tables 6 and 7 in the MD&A beginning on page 28, which are incorporated herein by reference.
Bank of America 20
Item 7. Bank of America Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Page
Executive Summary
Recent Developments
Financial Highlights
Balance Sheet Overview
Supplemental Financial Data
Business Segment Operations
Consumer Banking
Global Wealth & Investment Management
Global Banking
Global Markets
All Other
Off-Balance Sheet Arrangements and Contractual Obligations
Managing Risk
Strategic Risk Management
Capital Management
Liquidity Risk
Credit Risk Management
Consumer Portfolio Credit Risk Management
Commercial Portfolio Credit Risk Management
Non-U.S. Portfolio
Provision for Credit Losses
Allowance for Credit Losses
Market Risk Management
Trading Risk Management
Interest Rate Risk Management for the Banking Book
Mortgage Banking Risk Management
Compliance and Operational Risk Management
Reputational Risk Management
Complex Accounting Estimates
Non-GAAP Reconciliations
Statistical Tables
21 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, expenses, efficiency ratio, capital measures, strategy and future business and economic conditions more generally, and other future matters. These statements are not guarantees of future results or performance and involve certain known and unknown risks, uncertainties and assumptions that are difficult to predict and are often beyond the Corporation’s control. Actual outcomes and results may differ materially from those expressed in, or implied by, any of these forward-looking statements.
You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties more fully discussed under Item 1A. Risk Factors of this Annual Report on Form 10-K: the Corporation’s potential claims, damages, penalties, fines and reputational damage resulting from pending or future litigation, regulatory proceedings and enforcement actions; the possibility that the Corporation's future liabilities may be in excess of its recorded liability and estimated range of possible loss for litigation, regulatory and representations and warranties exposures; the possibility that the Corporation could face increased servicing, fraud, indemnity, contribution or other claims from one or more counterparties, including trustees, purchasers of loans, underwriters, issuers, monolines, private-label and other investors, or other parties involved in securitizations; the Corporation’s ability to resolve representations and warranties repurchase and related claims, including claims brought by investors or trustees seeking to avoid the statute of limitations for repurchase claims; the risks related to the discontinuation of the London Interbank Offered Rate and other reference rates, including increased expenses and litigation and the effectiveness of hedging strategies; uncertainties about the financial stability and growth rates of non-U.S. jurisdictions, the risk that those jurisdictions may face difficulties servicing their sovereign debt, and related stresses on financial markets, currencies and trade, and the Corporation’s exposures to such risks, including direct, indirect and operational; the impact of U.S. and global interest rates, inflation, currency exchange rates, economic conditions, trade policies and tensions, including tariffs, and potential geopolitical instability; the impact of the interest rate environment on the Corporation’s business, financial condition and results of operations; the possibility that future credit losses may be higher than currently expected due to changes in economic assumptions, customer behavior, adverse developments with respect to U.S. or global economic conditions and other uncertainties; the Corporation’s ability to achieve its expense targets and expectations regarding 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 and/or global systemically important bank surcharges; the potential impact of actions of the Board of Governors of the Federal Reserve System on the Corporation’s capital plans; the effect of regulations, other guidance or additional information on the impact from the Tax Cuts and Jobs Act; the impact of implementation and compliance with U.S. and international laws, regulations and regulatory interpretations, including, but not limited to, recovery and resolution planning requirements, Federal Deposit Insurance Corporation assessments, the Volcker Rule, fiduciary standards and derivatives regulations; a failure or disruption in or breach of the Corporation’s operational or security systems or infrastructure, or those of third parties, including as a result of cyber attacks or campaigns; the impact on the Corporation’s business, financial condition and results of operations from the United Kingdom's exit from the European Union; the impact of any future federal government shutdown and uncertainty regarding the federal government’s debt limit; the impact of natural disasters, the emergence of widespread health emergencies or pandemics, 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 banking and various nonbank subsidiaries throughout the U.S. and in international markets, we provide a diversified range of banking and nonbank financial services and products through four business segments: Consumer Banking, Global Wealth & Investment Management (GWIM), Global Banking and Global Markets, with the remaining operations recorded in All Other. We operate our banking activities primarily under the Bank of America, National Association (Bank of America, N.A. or BANA) charter. At December 31, 2019, the Corporation had $2.4 trillion in assets and a headcount of approximately 208,000 employees.
As of December 31, 2019, we served clients through operations across the U.S., its territories and approximately 35 countries. Our retail banking footprint covers approximately 90 percent of the U.S. population, and we serve approximately 66 million consumer and small business clients with approximately 4,300 retail financial centers, approximately 16,800 ATMs, and leading digital banking platforms (www.bankofamerica.com) with more than 38 million active users, including over 29 million active mobile users. We offer industry-leading support to approximately
Bank of America 22
three million small business owners. Our wealth management businesses, with client balances of $3.0 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
During 2019, we repurchased $28.1 billion of common stock pursuant to the Corporation's Board of Directors’ (the Board) repurchase authorizations. For more information, see Capital Management on page 45.
Merchant Services Joint Venture
A significant portion of our merchant processing activity is performed by a joint venture, formed in 2009, in which we own a 49 percent ownership interest. The joint venture is accounted for as an equity method investment. As previously disclosed in the Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, we gave notice on July 29, 2019 to the joint venture partner of the termination of the joint venture upon the conclusion of its current term, after which we expect to pursue our own merchant services strategy. In addition, the Corporation and the joint venture partner have an agreement to provide uninterrupted delivery of products and services to the joint venture merchants through at least June 2023. As a result of the above actions, we incurred a non-cash, pretax impairment charge of $2.1 billion included in other general operating expense in the three months ended September 30, 2019. As stated above, the Corporation expects to pursue its own merchant services strategy, which is expected to begin in the third quarter of 2020. Under this strategy, we will begin to record the revenues and expenses from those operations in the Consolidated Statement of Income instead of recognizing our proportionate share of the joint venture's income under the equity method. For more information, see Note 13 - Commitments and Contingencies to the Consolidated Financial Statements.
U.K. Exit from the EU
On January 31, 2020, the U.K. formally exited the European Union (EU). Upon exit, a transition period began during which time the U.K. and the EU expect to negotiate a trade agreement and other terms associated with their future relationship. The transition period is scheduled to end on December 31, 2020.
We conduct business in Europe, the Middle East and Africa primarily through our subsidiaries in the U.K., Ireland and France. For information on the changes we have implemented to enable us to continue to operate in the region, including establishing a bank and broker-dealer in the EU, see the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019. While we have taken measures to minimize operational disruption and prepare for various potential outcomes of the U.K.’s withdrawal from the EU, the preparedness of our counterparties and the relevant financial markets infrastructure remain outside our control. The global economic impact of the U.K.’s withdrawal from
the EU remains uncertain and could result in regional and global
financial market disruptions. We continue to assess potential risks, including operational, regulatory and legal risks.
LIBOR and Other Benchmark Rates
Following the 2017 announcement by the U.K.’s Financial Conduct Authority (FCA) that it will no longer persuade or require participating banks to submit rates for the London Interbank Offered Rate (LIBOR) after 2021, central banks and regulators around the world have commissioned working groups to find suitable replacements for Interbank Offered Rates (IBOR), including LIBOR, and other benchmark rates and to implement financial benchmark reforms more generally. The future discontinuance of IBORs is a complex process that has resulted in significant uncertainty regarding the transition to suitable alternative reference rates (ARRs) and could cause disruptions in a variety of global financial markets, as well as adversely impact our business, operations and financial results.
IBORs, including LIBOR, are used in many of the Corporation’s products and contracts, including mortgages, consumer, commercial and corporate loans, derivatives, floating-rate notes and other adjustable-rate products and financial instruments. The aggregate notional amount of these products and contracts is material to our business. As previously disclosed, to facilitate an orderly transition from IBORs and other benchmark rates to ARRs, the Corporation has established an enterprise-wide initiative led by senior management. As part of this initiative, the Corporation continues to identify, assess and monitor risks associated with the expected discontinuation or unavailability of LIBOR and other benchmarks and evaluate and address documentation and contractual mechanics of outstanding IBOR-based products and contracts that mature after 2021 and new and potential future ARR-based products and contracts to achieve operational readiness. Additionally, the Corporation is continuing to evaluate potential regulatory, tax and accounting impacts of the transition, including guidance published and/or proposed by the Internal Revenue Service and Financial Accounting Standards Board, engage impacted clients in connection with the transition to ARRs and work actively with global regulators, industry working groups and trade associations to develop strategies for an effective transition to ARRs.
The Corporation is also modifying its operational models, systems, procedures and internal infrastructure to transition to ARRs. In 2019, the Corporation launched capabilities to support issuance and trading in products indexed to the new Secured Overnight Financing Rate (SOFR), which is the alternative benchmark rate to U.S. dollar LIBOR recommended by the Alternative Reference Rates Committee, a group of private-market participants and official-sector entities convened by the Board of Governors of the Federal Reserve System (Federal Reserve) and the Federal Reserve Bank of New York, and a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities. Also, in 2019, the Corporation issued debt linked to SOFR, and the Corporation co-arranged one of the first credit facilities linked to SOFR and has implemented fallback provisions into certain new IBOR-based products and contracts. The Corporation continues to monitor the development and usage of ARRs, including SOFR. For more information on the expected replacement of LIBOR and other benchmark rates, see Item 1A. Risk Factors - Other on page 17.
23 Bank of America
Financial Highlights
In the Consolidated Statement of Income, amounts related to certain asset and liability management (ALM) activities have been reclassified from other income to market making and similar activities, which was previously referred to as trading account income. All prior periods presented reflect this change, which has no impact on the Corporation's total noninterest income or net income, and has no impact on business segment results. For more information, see Note 1 - Summary of Significant Accounting Principles to the Consolidated Financial Statements.
Table 1
Summary Income Statement and Selected Financial Data
(Dollars in millions, except per share information)
Income statement
Net interest income
$
48,891
$
48,162
Noninterest income
42,353
42,858
Total revenue, net of interest expense
91,244
91,020
Provision for credit losses
3,590
3,282
Noninterest expense
54,900
53,154
Income before income taxes
32,754
34,584
Income tax expense
5,324
6,437
Net income
27,430
28,147
Preferred stock dividends
1,432
1,451
Net income applicable to common shareholders
$
25,998
$
26,696
Per common share information
Earnings
$
2.77
$
2.64
Diluted earnings
2.75
2.61
Dividends paid
0.66
0.54
Performance ratios
Return on average assets
1.14
%
1.21
%
Return on average common shareholders’ equity
10.62
11.04
Return on average tangible common shareholders’ equity (1)
14.86
15.55
Efficiency ratio
60.17
58.40
Balance sheet at year end
Total loans and leases
$
983,426
$
946,895
Total assets
2,434,079
2,354,507
Total deposits
1,434,803
1,381,476
Total liabilities
2,169,269
2,089,182
Total common shareholders’ equity
241,409
242,999
Total shareholders’ equity
264,810
265,325
(1)
Return on average tangible common shareholders’ equity is a non-GAAP financial measure. For more information and a corresponding reconciliation to the most closely related financial measures defined by accounting principles generally accepted in the United States of America, see Non-GAAP Reconciliations on page 80.
Net income was $27.4 billion or $2.75 per diluted share in 2019 compared to $28.1 billion, or $2.61 per diluted share in 2018. The decrease in net income was primarily driven by an increase in noninterest expense as a result of the $2.1 billion pretax impairment charge related to the notice of termination of the merchant services joint venture at the conclusion of its current term. Also contributing to the decrease in net income were higher provision for credit losses and lower noninterest income, partially offset by an increase in net interest income.
For discussion and analysis of our consolidated and business segment results of operations for 2018 compared to 2017, see
the Financial Highlights and Business Segment Operations sections in the MD&A of the Corporation's 2018 Annual Report on Form 10-K.
Net Interest Income
Net interest income increased $729 million to $48.9 billion in 2019 compared 2018. Net interest yield on a fully taxable-equivalent (FTE) basis decreased two basis points (bps) to 2.43 percent for 2019. The increase in net interest income was primarily driven by loan and deposit growth, partially offset by lower long-end rates. Assuming a stable economic and interest rate environment compared to December 31, 2019, we expect quarterly net interest income for the first two quarters of 2020 to be lower compared to the fourth quarter of 2019 driven by the impact of rates and one fewer day of interest accruals. Quarterly net interest income is expected to rise modestly in the second half of 2020 due to one additional day of interest accruals and expected loan and deposit growth. For more information on net interest yield and the FTE basis, see Supplemental Financial Data on page 27, and for more information on interest rate risk management, see Interest Rate Risk Management for the Banking Book on page 74.
Noninterest Income
Table 2
Noninterest Income
(Dollars in millions)
Fees and commissions:
Card income
$
5,797
$
5,824
Service charges
7,674
7,767
Investment and brokerage services
13,902
14,160
Investment banking fees
5,642
5,327
Total fees and commissions
33,015
33,078
Market making and similar activities
9,034
9,008
Other income
Total noninterest income
$
42,353
$
42,858
Noninterest income decreased $505 million to $42.4 billion in 2019 compared to 2018. The following highlights the significant changes.
●
Service charges decreased $93 million primarily driven by lower fees due to policy changes in 2018 and lower ATM volume in Consumer Banking.
●
Investment and brokerage services income decreased $258 million primarily due to lower transactional revenue and a decrease in assets under management (AUM) pricing, partially offset by the positive impact of AUM flows and higher market valuations.
●
Investment banking fees increased $315 million due to increases in advisory fees and equity and debt underwriting fees.
●
Other income decreased $468 million primarily due to lower gains on sales of non-core consumer loans and higher partnership losses associated with an increase in tax-advantaged investments, partially offset by higher gains on sales of debt securities.
Bank of America 24
Provision for Credit Losses
The provision for credit losses increased $308 million to $3.6 billion in 2019 compared to 2018. The increase was primarily due to the energy reserve releases in the commercial portfolio in 2018, partially offset by the impact of recoveries recorded in connection with sales of previously charged-off non-core consumer real estate loans. For more information on the provision for credit losses, see Provision for Credit Losses on page 68.
Noninterest Expense
Table 3
Noninterest Expense
(Dollars in millions)
Compensation and benefits
$
31,977
$
31,880
Occupancy and equipment
6,588
6,380
Information processing and communications
4,646
4,555
Product delivery and transaction related
2,762
2,857
Marketing
1,934
1,674
Professional fees
1,597
1,699
Other general operating
5,396
4,109
Total noninterest expense
$
54,900
$
53,154
Noninterest expense increased $1.7 billion to $54.9 billion in 2019 compared to 2018. The increase was primarily due to the
aforementioned impairment charge related to our merchant services joint venture of $2.1 billion as well as increased costs associated with investment in the businesses, including brand-related marketing costs, and higher litigation expense. These were partially offset by efficiency savings, lower Federal Deposit Insurance Corporation (FDIC) expense and lower amortization of intangibles expense.
Income Tax Expense
Table 4
Income Tax Expense
(Dollars in millions)
Income before income taxes
$
32,754
$
34,584
Income tax expense
5,324
6,437
Effective tax rate
16.3
%
18.6
%
The effective tax rates for 2019 and 2018 reflect the impact of our recurring tax preference benefits. The 2019 effective rate also included net tax benefits primarily related to the resolution of various tax controversy matters.
We expect the effective tax rate for 2020 to be approximately 18 percent, absent unusual items.
Balance Sheet Overview
Table 5
Selected Balance Sheet Data
December 31
(Dollars in millions)
% Change
Assets
Cash and cash equivalents
$
161,560
$
177,404
(9
)%
Federal funds sold and securities borrowed or purchased under agreements to resell
274,597
261,131
Trading account assets
229,826
214,348
Debt securities
472,197
441,753
Loans and leases
983,426
946,895
Allowance for loan and lease losses
(9,416
)
(9,601
)
(2
)
All other assets
321,889
322,577
-
Total assets
$
2,434,079
$
2,354,507
Liabilities
Deposits
$
1,434,803
$
1,381,476
Federal funds purchased and securities loaned or sold under agreements to repurchase
165,109
186,988
(12
)
Trading account liabilities
83,270
68,220
Short-term borrowings
24,204
20,189
Long-term debt
240,856
229,392
All other liabilities
221,027
202,917
Total liabilities
2,169,269
2,089,182
Shareholders’ equity
264,810
265,325
-
Total liabilities and shareholders’ equity
$
2,434,079
$
2,354,507
Assets
At December 31, 2019, total assets were approximately $2.4 trillion, up $79.6 billion from December 31, 2018. The increase in assets was primarily due to higher loans and leases and debt securities primarily funded by deposit growth.
Cash and Cash Equivalents
Cash and cash equivalents decreased $15.8 billion driven by investment of short-term excess cash into securities purchased under agreements to resell, debt securities and growth in loans and leases.
Federal Funds Sold and Securities Borrowed or Purchased Under Agreements to Resell
Federal funds transactions involve lending reserve balances on a short-term basis. Securities borrowed or purchased under agreements to resell are collateralized lending transactions utilized to accommodate customer transactions, earn interest rate spreads, and obtain securities for settlement and for collateral. Federal funds sold and securities borrowed or purchased under agreements to resell increased $13.5 billion due to investment of excess cash levels.
25 Bank of America
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 $15.5 billion primarily driven by additional inventory in Global Markets to facilitate client demand.
Debt Securities
Debt securities primarily include U.S. Treasury and agency securities, mortgage-backed securities (MBS), principally agency MBS, non-U.S. bonds, corporate bonds and municipal debt. We use the debt securities portfolio primarily to manage interest rate and liquidity risk and to take advantage of market conditions that create economically attractive returns on these investments. Debt securities increased $30.4 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 $36.5 billion primarily due to net loan growth driven by client demand for commercial loans and increases in residential mortgage. For more information on the loan portfolio, see Credit Risk Management on page 53.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses decreased $185 million primarily due to the impact of improvements in credit quality from a stronger economy and continued runoff and sales in the non-core consumer real estate portfolio. For more information, see Allowance for Credit Losses on page 68.
Liabilities
At December 31, 2019, total liabilities were approximately $2.2 trillion, up $80.1 billion from December 31, 2018, primarily due to deposit growth.
Deposits
Deposits increased $53.3 billion primarily due to increases in both 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 decreased $21.9 billion primarily driven by balance sheet efficiencies within Global Markets.
Trading Account Liabilities
Trading account liabilities consist primarily of short positions in equity and fixed-income securities including U.S. Treasury and agency securities, corporate securities and non-U.S. sovereign debt. Trading account liabilities increased $15.1 billion primarily due to higher levels of short positions in government and corporate bonds driven by client demand within Global Markets.
Short-term Borrowings
Short-term borrowings provide an additional funding source and primarily consist of Federal Home Loan Bank (FHLB) short-term borrowings, notes payable and various other borrowings that generally have maturities of one year or less. Short-term borrowings increased $4.0 billion primarily due to an increase in short-term FHLB advances to manage liquidity needs. For more information on short-term borrowings, see Note 11 - Federal Funds Sold or Purchased, Securities Financing Agreements, Short-term Borrowings and Restricted Cash to the Consolidated Financial Statements.
Long-term Debt
Long-term debt increased $11.5 billion primarily driven by debt issuances and valuation adjustments, partially offset by maturities and redemptions. For more information on long-term debt, see Note 12 - Long-term Debt to the Consolidated Financial Statements.
All Other Liabilities
All other liabilities increased $18.1 billion primarily driven by an increase in broker-dealer payables within Global Markets due to timing of unsettled trades and an increase in lease liabilities due to implementation of the new lease accounting standard.
Shareholders’ Equity
Shareholders’ equity decreased $515 million driven by returns of capital to shareholders through share repurchases, common and preferred stock dividends of $35.7 billion, as well as redemption of preferred stock, largely offset by earnings, market value increases on debt securities and issuances of preferred stock.
Cash Flows Overview
The Corporation’s operating assets and liabilities support our global markets and lending activities. We believe that cash flows from operations, available cash balances and our ability to generate cash through short- and long-term debt are sufficient to fund our operating liquidity needs. Our investing activities primarily include the debt securities portfolio and loans and leases. Our financing activities reflect cash flows primarily related to customer deposits, securities financing agreements and long-term debt. For more information on liquidity, see Liquidity Risk on page 50.
Bank of America 26
Supplemental Financial Data
In this Form 10-K, we present certain non-GAAP financial measures. Non-GAAP financial measures exclude certain items or otherwise include components that differ from the most directly comparable measures calculated in accordance with accounting principles generally accepted in the United States of America (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 for 2019 and 2018 (35 percent for 2017) 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 goals. 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 that the use of ratios that utilize tangible equity provides additional useful information because they present measures of those assets that can generate income. Tangible book value per 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 80.
27 Bank of America
Table 6
Five-year Summary of Selected Financial Data
(In millions, except per share information)
Income statement
Net interest income
$
48,891
$
48,162
$
45,239
$
41,486
$
38,958
Noninterest income
42,353
42,858
41,887
42,012
44,007
Total revenue, net of interest expense
91,244
91,020
87,126
83,498
82,965
Provision for credit losses
3,590
3,282
3,396
3,597
3,161
Noninterest expense
54,900
53,154
54,517
54,880
57,617
Income before income taxes
32,754
34,584
29,213
25,021
22,187
Income tax expense
5,324
6,437
10,981
7,199
6,277
Net income
27,430
28,147
18,232
17,822
15,910
Net income applicable to common shareholders
25,998
26,696
16,618
16,140
14,427
Average common shares issued and outstanding
9,390.5
10,096.5
10,195.6
10,248.1
10,462.3
Average diluted common shares issued and outstanding
9,442.9
10,236.9
10,778.4
11,046.8
11,236.2
Performance ratios
Return on average assets
1.14
%
1.21
%
0.80
%
0.81
%
0.74
%
Return on average common shareholders’ equity
10.62
11.04
6.72
6.69
6.28
Return on average tangible common shareholders’ equity (1)
14.86
15.55
9.41
9.51
9.16
Return on average shareholders’ equity
10.24
10.63
6.72
6.70
6.33
Return on average tangible shareholders’ equity (1)
13.85
14.46
9.08
9.17
8.88
Total ending equity to total ending assets
10.88
11.27
11.71
12.17
11.92
Total average equity to total average assets
11.14
11.39
11.96
12.14
11.64
Dividend payout
23.65
20.31
24.24
15.94
14.49
Per common share data
Earnings
$
2.77
$
2.64
$
1.63
$
1.57
$
1.38
Diluted earnings
2.75
2.61
1.56
1.49
1.31
Dividends paid
0.66
0.54
0.39
0.25
0.20
Book value
27.32
25.13
23.80
23.97
22.48
Tangible book value (1)
19.41
17.91
16.96
16.89
15.56
Market capitalization
$
311,209
$
238,251
$
303,681
$
222,163
$
174,700
Average balance sheet
Total loans and leases
$
958,416
$
933,049
$
918,731
$
900,433
$
876,787
Total assets
2,405,830
2,325,246
2,268,633
2,190,218
2,160,536
Total deposits
1,380,326
1,314,941
1,269,796
1,222,561
1,155,860
Long-term debt
201,623
200,399
194,882
204,826
240,059
Common shareholders’ equity
244,853
241,799
247,101
241,187
229,576
Total shareholders’ equity
267,889
264,748
271,289
265,843
251,384
Asset quality (2)
Allowance for credit losses (3)
$
10,229
$
10,398
$
11,170
$
11,999
$
12,880
Nonperforming loans, leases and foreclosed properties (4)
3,837
5,244
6,758
8,084
9,836
Allowance for loan and lease losses as a percentage of total loans and leases outstanding (4)
0.97
%
1.02
%
1.12
%
1.26
%
1.37
%
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (4)
Net charge-offs
$
3,648
$
3,763
$
3,979
$
3,821
$
4,338
Net charge-offs as a percentage of average loans and leases outstanding (4)
0.38
%
0.41
%
0.44
%
0.43
%
0.50
%
Capital ratios at year end (5)
Common equity tier 1 capital
11.2
%
11.6
%
11.5
%
10.8
%
9.8
%
Tier 1 capital
12.6
13.2
13.0
12.4
11.2
Total capital
14.7
15.1
14.8
14.2
12.8
Tier 1 leverage
7.9
8.4
8.6
8.8
8.4
Supplementary leverage ratio
6.4
6.8
n/a
n/a
n/a
Tangible equity (1)
8.2
8.6
8.9
9.2
8.9
Tangible common equity (1)
7.3
7.6
7.9
8.0
7.8
(1)
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 27 and Non-GAAP Reconciliations on page 80.
(2)
Asset quality metrics include $75 million of non-U.S. consumer credit card net charge-offs in 2017 and $243 million of non-U.S. consumer credit card allowance for loan and lease losses, $9.2 billion of non-U.S. consumer credit card loans and $175 million of non-U.S. consumer credit card net charge-offs in 2016. The non-U.S. consumer credit card business was sold in 2017.
(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 59 and corresponding Table 29 and Commercial Portfolio Credit Risk Management - Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 63 and corresponding Table 36.
(5)
Basel 3 transition provisions for regulatory capital adjustments and deductions were fully phased-in as of January 1, 2018. Prior periods are presented on a fully phased-in basis. For more information, including which approach is used to assess capital adequacy, see Capital Management on page 45.
n/a = not applicable
Bank of America 28
Table 7
Selected Quarterly Financial Data
2019 Quarters
2018 Quarters
(In millions, except per share information)
Fourth
Third
Second
First
Fourth
Third
Second
First
Income statement
Net interest income
$
12,140
$
12,187
$
12,189
$
12,375
$
12,504
$
12,061
$
11,828
$
11,769
Noninterest income
10,209
10,620
10,895
10,629
10,173
10,663
10,721
11,301
Total revenue, net of interest expense
22,349
22,807
23,084
23,004
22,677
22,724
22,549
23,070
Provision for credit losses
1,013
Noninterest expense
13,239
15,169
13,268
13,224
13,074
13,014
13,224
13,842
Income before income taxes
8,169
6,859
8,959
8,767
8,698
8,994
8,498
8,394
Income tax expense
1,175
1,082
1,611
1,456
1,420
1,827
1,714
1,476
Net income
6,994
5,777
7,348
7,311
7,278
7,167
6,784
6,918
Net income applicable to common shareholders
6,748
5,272
7,109
6,869
7,039
6,701
6,466
6,490
Average common shares issued and outstanding
9,017.1
9,303.6
9,523.2
9,725.9
9,855.8
10,031.6
10,181.7
10,322.4
Average diluted common shares issued and outstanding
9,079.5
9,353.0
9,559.6
9,787.3
9,996.0
10,170.8
10,309.4
10,472.7
Performance ratios
Return on average assets
1.13
%
0.95
%
1.23
%
1.26
%
1.24
%
1.23
%
1.17
%
1.21
%
Four-quarter trailing return on average assets (1)
1.14
1.17
1.24
1.22
1.21
1.00
0.93
0.86
Return on average common shareholders’ equity
11.00
8.48
11.62
11.42
11.57
10.99
10.75
10.85
Return on average tangible common shareholders’ equity (2)
15.43
11.84
16.24
16.01
16.29
15.48
15.15
15.26
Return on average shareholders’ equity
10.40
8.48
11.00
11.14
10.95
10.74
10.26
10.57
Return on average tangible shareholders’ equity (2)
14.09
11.43
14.88
15.10
14.90
14.61
13.95
14.37
Total ending equity to total ending assets
10.88
11.06
11.33
11.23
11.27
11.21
11.53
11.43
Total average equity to total average assets
10.89
11.21
11.17
11.28
11.30
11.42
11.42
11.41
Dividend payout
23.90
31.48
19.95
21.20
20.90
22.35
18.83
19.06
Per common share data
Earnings
$
0.75
$
0.57
$
0.75
$
0.71
$
0.71
$
0.67
$
0.64
$
0.63
Diluted earnings
0.74
0.56
0.74
0.70
0.70
0.66
0.63
0.62
Dividends paid
0.18
0.18
0.15
0.15
0.15
0.15
0.12
0.12
Book value
27.32
26.96
26.41
25.57
25.13
24.33
24.07
23.74
Tangible book value (2)
19.41
19.26
18.92
18.26
17.91
17.23
17.07
16.84
Market capitalization
$
311,209
$
264,842
$
270,935
$
263,992
$
238,251
$
290,424
$
282,259
$
305,176
Average balance sheet
Total loans and leases
$
973,986
$
964,733
$
950,525
$
944,020
$
934,721
$
930,736
$
934,818
$
931,915
Total assets
2,450,005
2,412,223
2,399,051
2,360,992
2,334,586
2,317,829
2,322,678
2,325,878
Total deposits
1,410,439
1,375,052
1,375,450
1,359,864
1,344,951
1,316,345
1,300,659
1,297,268
Long-term debt
206,026
202,620
201,007
196,726
201,056
203,239
199,448
197,787
Common shareholders’ equity
243,439
246,630
245,438
243,891
241,372
241,812
241,313
242,713
Total shareholders’ equity
266,900
270,430
267,975
266,217
263,698
264,653
265,181
265,480
Asset quality
Allowance for credit losses (3)
$
10,229
$
10,242
$
10,333
$
10,379
$
10,398
$
10,526
$
10,837
$
11,042
Nonperforming loans, leases and foreclosed properties (4)
3,837
3,723
4,452
5,145
5,244
5,449
6,181
6,694
Allowance for loan and lease losses as a percentage of total loans and leases outstanding (4)
0.97
%
0.98
%
1.00
%
1.02
%
1.02
%
1.05
%
1.08
%
1.11
%
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (4)
Net charge-offs
$
$
$
$
$
$
$
$
Annualized net charge-offs as a percentage of average loans and leases outstanding (4)
0.39
%
0.34
%
0.38
%
0.43
%
0.39
%
0.40
%
0.43
%
0.40
%
Capital ratios at period end
Common equity tier 1 capital
11.2
%
11.4
%
11.7
%
11.6
%
11.6
%
11.4
%
11.4
%
11.3
%
Tier 1 capital
12.6
12.9
13.3
13.1
13.2
12.9
13.0
13.0
Total capital
14.7
15.1
15.4
15.2
15.1
14.7
14.8
14.8
Tier 1 leverage
7.9
8.2
8.4
8.4
8.4
8.3
8.4
8.4
Supplementary leverage ratio
6.4
6.6
6.8
6.8
6.8
6.7
6.7
6.8
Tangible equity (2)
8.2
8.4
8.7
8.5
8.6
8.5
8.7
8.7
Tangible common equity (2)
7.3
7.4
7.6
7.6
7.6
7.5
7.7
7.6
Total loss-absorbing capacity and long-term debt metrics (5)
Total loss-absorbing capacity to risk-weighted assets
24.6
%
24.8
%
25.5
%
24.8
%
Total loss-absorbing capacity to supplementary leverage exposure
12.5
12.7
13.0
12.8
Eligible long-term debt to risk-weighted assets
11.5
11.4
11.8
11.4
Eligible long-term debt to supplementary leverage exposure
5.8
5.8
6.0
5.9
(1)
Calculated as total net income for four consecutive quarters divided by annualized average assets for four consecutive quarters.
(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 27 and Non-GAAP Reconciliations on page 80.
(3)
Includes the allowance for loan and lease losses and the reserve for unfunded lending commitments.
(4)
Balances and ratios do not include loans accounted for under the fair value option. For additional exclusions from nonperforming loans, leases and foreclosed properties, see Consumer Portfolio Credit Risk Management - Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity on page 59 and corresponding Table 29 and Commercial Portfolio Credit Risk Management - Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 63 and corresponding Table 36.
(5)
Effective January 1, 2019, we became subject to minimum total loss-absorbing capacity and long-term debt requirements. For more information, see Capital Management on page 45.
29 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)
Earning assets
Interest-bearing deposits with the Federal Reserve, non-U.S. central banks and other banks
$
125,555
$
1,823
1.45
%
$
139,848
$
1,926
1.38
%
$
127,431
$
1,122
0.88
%
Time deposits placed and other short-term investments
9,427
2.19
9,446
2.29
12,112
1.99
Federal funds sold and securities borrowed or purchased under agreements to resell
279,610
4,843
1.73
251,328
3,176
1.26
222,818
1,806
0.81
Trading account assets
148,076
5,269
3.56
132,724
4,901
3.69
129,007
4,618
3.58
Debt securities
450,090
11,917
2.65
437,312
11,837
2.66
435,005
10,626
2.44
Loans and leases (2):
Residential mortgage
220,552
7,651
3.47
207,523
7,294
3.51
197,766
6,831
3.45
Home equity
44,600
2,194
4.92
53,886
2,573
4.77
62,260
2,608
4.19
Credit card
94,488
10,166
10.76
94,612
9,579
10.12
91,068
8,791
9.65
Non-U.S. credit card (3)
-
-
-
-
-
-
3,929
9.12
Direct/Indirect and other consumer (4)
90,656
3,261
3.60
93,036
3,104
3.34
96,002
2,734
2.85
Total consumer
450,296
23,272
5.17
449,057
22,550
5.02
451,025
21,322
4.73
U.S. commercial
321,467
13,016
4.05
304,387
11,937
3.92
292,452
9,765
3.34
Non-U.S. commercial
103,918
3,547
3.41
97,664
3,220
3.30
95,005
2,566
2.70
Commercial real estate (5)
62,044
2,741
4.42
60,384
2,618
4.34
58,502
2,116
3.62
Commercial lease financing
20,691
3.47
21,557
3.24
21,747
3.25
Total commercial
508,120
20,022
3.94
483,992
18,473
3.82
467,706
15,153
3.24
Total loans and leases (3)
958,416
43,294
4.52
933,049
41,023
4.40
918,731
36,475
3.97
Other earning assets
69,089
4,478
6.48
76,524
4,300
5.62
76,957
3,224
4.19
Total earning assets
2,040,263
71,831
3.52
1,980,231
67,379
3.40
1,922,061
58,112
3.02
Cash and due from banks
26,193
25,830
27,995
Other assets, less allowance for loan and lease losses
339,374
319,185
318,577
Total assets
$
2,405,830
$
2,325,246
$
2,268,633
Interest-bearing liabilities
U.S. interest-bearing deposits:
Savings
$
52,020
$
0.01
%
$
54,226
$
0.01
%
$
53,783
$
0.01
%
NOW and money market deposit accounts
741,126
4,471
0.60
676,382
2,636
0.39
628,647
0.14
Consumer CDs and IRAs
47,577
0.99
39,823
0.39
44,794
0.27
Negotiable CDs, public funds and other deposits
66,866
1,407
2.11
50,593
1.96
36,782
0.96
Total U.S. interest-bearing deposits
907,589
6,354
0.70
821,024
3,790
0.46
764,006
1,353
0.18
Non-U.S. interest-bearing deposits:
Banks located in non-U.S. countries
1,936
1.04
2,312
1.69
2,442
0.85
Governments and official institutions
-
0.05
-
0.01
1,006
0.95
Time, savings and other
69,351
1.17
65,097
1.02
62,386
0.88
Total non-U.S. interest-bearing deposits
71,468
1.17
68,219
1.03
65,834
0.88
Total interest-bearing deposits
979,057
7,188
0.73
889,243
4,495
0.51
829,840
1,931
0.23
Federal funds purchased, securities loaned or sold under agreements to repurchase, short-term borrowings and other interest-bearing liabilities
276,432
7,208
2.61
269,748
5,839
2.17
274,975
3,146
1.14
Trading account liabilities
45,449
1,249
2.75
50,928
1,358
2.67
45,518
1,204
2.64
Long-term debt
201,623
6,700
3.32
200,399
6,915
3.45
194,882
5,667
2.91
Total interest-bearing liabilities
1,502,561
22,345
1.49
1,410,318
18,607
1.32
1,345,215
11,948
0.89
Noninterest-bearing sources:
Noninterest-bearing deposits
401,269
425,698
439,956
Other liabilities (6)
234,111
224,482
212,173
Shareholders’ equity
267,889
264,748
271,289
Total liabilities and shareholders’ equity
$
2,405,830
$
2,325,246
$
2,268,633
Net interest spread
2.03
%
2.08
%
2.13
%
Impact of noninterest-bearing sources
0.40
0.37
0.27
Net interest income/yield on earning assets (7)
$
49,486
2.43
%
$
48,772
2.45
%
$
46,164
2.40
%
(1)
Includes the impact of interest rate risk management contracts. For more information, see Interest Rate Risk Management for the Banking Book on page 74.
(2)
Nonperforming loans are included in the respective average loan balances. Income on these nonperforming loans is generally recognized on a cost recovery basis.
(3)
Includes assets of the Corporation's non-U.S. consumer credit card business, which was sold during the second quarter of 2017.
(4)
Includes non-U.S. consumer loans of $2.9 billion, $2.8 billion and $2.9 billion for 2019, 2018 and 2017, respectively.
(5)
Includes U.S. commercial real estate loans of $57.3 billion, $56.4 billion and $55.0 billion, and non-U.S. commercial real estate loans of $4.7 billion, $4.0 billion and $3.5 billion for 2019, 2018 and 2017, respectively.
(6)
Includes $35.5 billion, $30.4 billion and $30.3 billion of structured notes and liabilities for 2019, 2018 and 2017, respectively.
(7)
Net interest income includes FTE adjustments of $595 million, $610 million and $925 million for 2019, 2018 and 2017, respectively.
Bank of America 30
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 2018 to 2019
From 2017 to 2018
Increase (decrease) in interest income
Interest-bearing deposits with the Federal Reserve, non-U.S. central banks and other banks
$
(193
)
$
$
(103
)
$
$
$
Time deposits placed and other short-term investments
-
(9
)
(9
)
(53
)
(25
)
Federal funds sold and securities borrowed or purchased under agreements to resell
1,320
1,667
1,140
1,370
Trading account assets
(195
)
Debt securities
(55
)
1,167
1,211
Loans and leases:
Residential mortgage
(90
)
Home equity
(446
)
(379
)
(350
)
(35
)
Credit card
(17
)
Non-U.S. credit card (2)
-
-
-
(358
)
-
(358
)
Direct/Indirect and other consumer
(76
)
(82
)
Total consumer
1,228
U.S. commercial
1,079
1,770
2,172
Non-U.S. commercial
Commercial real estate
Commercial lease financing
(28
)
(5
)
(3
)
(8
)
Total commercial
1,549
3,320
Total loans and leases
2,271
4,548
Other earning assets
(417
)
(18
)
1,094
1,076
Total interest income
$
4,452
$
9,267
Increase (decrease) in interest expense
U.S. interest-bearing deposits:
Savings
$
(1
)
$
-
$
(1
)
$
-
$
$
NOW and money market deposit accounts
1,581
1,835
1,689
1,763
Consumer CDs and IRAs
(13
)
Negotiable CDs, public funds and other deposits
Total U.S. interest-bearing deposits
2,564
2,437
Non-U.S. interest-bearing deposits:
Banks located in non-U.S. countries
(6
)
(13
)
(19
)
(1
)
Governments and official institutions
-
-
-
(2
)
(8
)
(10
)
Time, savings and other
Total non-U.S. interest-bearing deposits
Total interest-bearing deposits
2,693
2,564
Federal funds purchased, securities loaned or sold under agreements to repurchase, short-term borrowings and other interest-bearing liabilities
1,209
1,369
(71
)
2,764
2,693
Trading account liabilities
(145
)
(109
)
Long-term debt
(256
)
(215
)
1,083
1,248
Total interest expense
3,738
6,659
Net increase in net interest income (3)
$
$
2,608
(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)
The Corporation sold its non-U.S. credit card business in the second quarter of 2017.
(3)
Includes decreases in FTE basis adjustments of $15 million from 2018 to 2019 and $315 million from 2017 to 2018.
31 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 42. 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 8 - Goodwill and Intangible Assets to the Consolidated Financial Statements.
For more information on our presentation of financial information on an FTE basis, see Supplemental Financial Data on page 27, and for reconciliations to consolidated total revenue, net income and year-end total assets, see Note 24 - Business Segment Information to the Consolidated Financial Statements.
Bank of America 32
Consumer Banking
Deposits
Consumer Lending
Total Consumer Banking
(Dollars in millions)
% Change
Net interest income
$
16,904
$
15,939
$
11,254
$
11,086
$
28,158
$
27,025
%
Noninterest income:
Card income
(33
)
(33
)
5,117
5,135
5,084
5,102
-
Service charges
4,217
4,298
4,219
4,300
(2
)
All other income
1,126
1,191
(5
)
Total noninterest income
5,016
5,027
5,413
5,566
10,429
10,593
(2
)
Total revenue, net of interest expense
21,920
20,966
16,667
16,652
38,587
37,618
Provision for credit losses
3,503
3,469
3,772
3,664
Noninterest expense
10,682
10,657
6,936
7,015
17,618
17,672
-
Income before income taxes
10,969
10,114
6,228
6,168
17,197
16,282
Income tax expense
2,687
2,578
1,526
1,572
4,213
4,150
Net income
$
8,282
$
7,536
$
4,702
$
4,596
$
12,984
$
12,132
Effective tax rate (1)
24.5
%
25.5
%
Net interest yield
2.40
%
2.34
%
3.80
%
3.97
%
3.81
3.77
Return on average allocated capital
Efficiency ratio
48.73
50.83
41.61
42.12
45.66
46.98
Balance Sheet
Average
Total loans and leases
$
5,373
$
5,233
$
295,562
$
278,574
$
300,935
$
283,807
%
Total earning assets (2)
703,444
682,592
296,051
279,217
738,770
717,189
Total assets (2)
735,232
710,925
306,169
290,068
780,676
756,373
Total deposits
702,908
678,640
5,368
5,533
708,276
684,173
Allocated capital
12,000
12,000
25,000
25,000
37,000
37,000
-
Year end
Total loans and leases
$
5,472
$
5,470
$
311,942
$
288,865
$
317,414
$
294,335
%
Total earning assets (2)
724,536
694,672
312,684
289,249
760,137
728,813
Total assets (2)
758,385
724,019
322,717
299,970
804,019
768,881
Total deposits
725,598
691,666
5,080
4,480
730,678
696,146
(1)
Estimated at the segment level only.
(2)
In segments and businesses where the total of liabilities and equity exceeds assets, we allocate assets from All Other to match the segments’ and businesses’ liabilities and allocated shareholders’ equity. As a result, total earning assets and total assets of the businesses may not equal total Consumer Banking.
Consumer Banking, which is comprised of Deposits and Consumer Lending, offers a diversified range of credit, banking and investment products and services to consumers and small businesses. Deposits and Consumer Lending include the net impact of migrating customers and their related deposit, brokerage asset and loan balances between Deposits, Consumer Lending and GWIM, as well as other client-managed businesses. Our customers and clients have access to a coast to coast network including financial centers in 38 states and the District of Columbia. Our network includes approximately 4,300 financial centers, approximately 16,800 ATMs, nationwide call centers, and leading digital banking platforms with more than 38 million active users, including over 29 million active mobile users.
Consumer Banking Results
Net income for Consumer Banking increased $852 million to $13.0 billion in 2019 compared to 2018 primarily driven by higher net interest income and lower noninterest expense, partially offset by lower noninterest income. Net interest income increased $1.1 billion to $28.2 billion primarily due to growth in deposits and loans. Noninterest income decreased $164 million to $10.4 billion driven by lower service charges and lower mortgage banking income, largely offset by higher results from ALM activities.
The provision for credit losses increased $108 million to $3.8 billion driven by overdrafts and portfolio seasoning in the credit card portfolio. Noninterest expense decreased $54 million to
$17.6 billion primarily driven by lower FDIC expense and operating efficiencies, partially offset by continued investment in the business.
The return on average allocated capital was 35 percent, up from 33 percent, driven by higher net income. For information on capital allocated to the business segments, see Business Segment Operations on page 32.
Deposits
Deposits includes the results of consumer deposit activities which consist of a comprehensive range of products provided to consumers and small businesses. Our deposit products include traditional savings accounts, money market savings accounts, CDs and IRAs, and noninterest- and interest-bearing checking accounts, as well as investment accounts and products. Net interest income is allocated to the deposit products using our funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics. Deposits generates fees such as account service fees, non-sufficient funds fees, overdraft charges and ATM fees, as well as investment and brokerage fees from Merrill Edge accounts. Merrill Edge is an integrated investing and banking service targeted at customers with less than $250,000 in investable assets. Merrill Edge provides investment advice and guidance, client brokerage asset services, a self-directed online investing platform and key banking capabilities including access to the Corporation’s network of financial centers and ATMs.
33 Bank of America
Net income for Deposits increased $746 million to $8.3 billion driven by higher net interest income. Net interest income increased $965 million to $16.9 billion primarily due to growth in deposits and pricing discipline. Noninterest income decreased $11 million to $5.0 billion primarily driven by lower service charges, largely offset by higher results from ALM activities.
The provision for credit losses increased $74 million to $269 million in 2019. Noninterest expense increased $25 million to $10.7 billion driven by continued investment in the business, partially offset by lower FDIC expense and operating efficiencies.
Average deposits increased $24.3 billion to $702.9 billion in 2019 driven by strong organic growth. Growth in checking and time deposits of $27.0 billion was partially offset by a decline in traditional savings and money market savings of $2.5 billion.
Key Statistics - Deposits
Total deposit spreads (excludes noninterest costs) (1)
2.34
%
2.14
%
Year end
Consumer investment assets (in millions) (2)
$
240,132
$
185,881
Active digital banking users (units in thousands) (3)
38,266
36,264
Active mobile banking users (units in thousands)
29,174
26,433
Financial centers
4,300
4,341
ATMs
16,788
16,255
(1)
Includes deposits held in Consumer Lending.
(2)
Includes client brokerage assets, deposit sweep balances and AUM in Consumer Banking.
(3)
Active digital banking users represents mobile and/or online users.
Consumer investment assets increased $54 billion in 2019 driven by strong market performance and client flows. Active mobile banking users increased 3 million reflecting continuing changes in our customers’ banking preferences. The number of financial centers declined by a net 41 reflecting changes in customer preferences to self-service options as we continue to optimize our consumer banking network and improve our cost to serve.
Consumer Lending
Consumer Lending offers products to consumers and small businesses across the U.S. The products offered include credit and debit cards, residential mortgages and home equity loans, and direct and indirect loans such as automotive, recreational vehicle and consumer personal loans. In addition to earning net interest spread revenue on its lending activities, Consumer Lending generates interchange revenue from credit and debit card transactions, late fees, cash advance fees, annual credit card fees, mortgage banking fee income and other miscellaneous fees. Consumer Lending products are available to our customers through our retail network, direct telephone, and online and mobile channels. Consumer Lending results also include the impact of servicing residential mortgages and home equity loans in the core portfolio, including loans held on the balance sheet of Consumer Lending and loans serviced for others.
Net income for Consumer Lending increased $106 million to $4.7 billion driven by higher net interest income and lower noninterest expense, partially offset by lower noninterest income. Net interest income increased $168 million to $11.3 billion driven by loan growth. Noninterest income decreased $153 million to $5.4 billion primarily driven by lower mortgage banking income and lower card income.
The provision for credit losses increased $34 million to $3.5 billion primarily driven by portfolio seasoning in the credit card portfolio. Noninterest expense decreased $79 million to $6.9 billion primarily driven by operating efficiencies.
Average loans increased $17.0 billion to $295.6 billion primarily driven by increases in residential mortgages and credit card, partially offset by lower home equity loans.
Key Statistics - Consumer Lending
(Dollars in millions)
Total credit card (1)
Gross interest yield
10.76
%
10.12
%
Risk-adjusted margin
8.28
8.25
New accounts (in thousands)
4,320
4,544
Purchase volumes
$
277,852
$
264,706
Debit card purchase volumes
$
360,672
$
338,810
(1)
Includes GWIM's credit card portfolio.
During 2019, the total credit card risk-adjusted margin increased 3 bps compared to 2018, primarily driven by a portfolio shift away from promotional-rate loans. Total credit card purchase volumes increased $13.1 billion to $277.9 billion, and debit card purchase volumes increased $21.9 billion to $360.7 billion, reflecting higher levels of consumer spending.
Key Statistics - Loan Production (1)
(Dollars in millions)
Total (2):
First mortgage
$
72,467
$
41,195
Home equity
11,131
14,869
Consumer Banking:
First mortgage
$
49,179
$
27,280
Home equity
9,755
13,251
(1)
The loan production amounts represent the unpaid principal balance of loans and, in the case of home equity, the principal amount of the total line of credit.
(2)
In addition to loan production in Consumer Banking, there is also first mortgage and home equity loan production in GWIM.
First mortgage loan originations in Consumer Banking and for the total Corporation increased $21.9 billion and $31.3 billion in 2019 primarily driven by a lower interest rate environment driving higher first-lien mortgage refinances.
Home equity production in Consumer Banking and for the total Corporation decreased $3.5 billion and $3.7 billion in 2019 primarily driven by lower demand.
Bank of America 34
Global Wealth & Investment Management
(Dollars in millions)
% Change
Net interest income
$
6,504
$
6,265
%
Noninterest income:
Investment and brokerage services
11,870
11,959
(1
)
All other income
1,163
1,229
(5
)
Total noninterest income
13,033
13,188
(1
)
Total revenue, net of interest expense
19,537
19,453
-
Provision for credit losses
(5
)
Noninterest expense
13,823
14,015
(1
)
Income before income taxes
5,632
5,352
Income tax expense
1,380
1,364
Net income
$
4,252
$
3,988
Effective tax rate
24.5
%
25.5
%
Net interest yield
2.33
2.41
Return on average allocated capital
Efficiency ratio
70.75
72.04
Balance Sheet
Average
Total loans and leases
$
168,910
$
161,342
%
Total earning assets
279,684
259,808
Total assets
292,003
277,220
Total deposits
256,505
241,256
Allocated capital
14,500
14,500
-
Year end
Total loans and leases
$
176,600
$
164,854
%
Total earning assets
287,212
287,199
-
Total assets
299,756
305,907
(2
)
Total deposits
263,103
268,700
(2
)
GWIM consists of two primary businesses: Merrill Lynch Global Wealth Management (MLGWM) and Bank of America Private Bank.
MLGWM’s advisory business provides a high-touch client experience through a network of financial advisors focused on clients with over $250,000 in total investable assets. MLGWM provides tailored solutions to meet clients’ needs through a full set of investment management, brokerage, banking and retirement products.
Bank of America Private Bank, together with MLGWM’s Private Wealth Management business, provides comprehensive wealth management solutions targeted to high net worth and ultra high net worth clients, as well as customized solutions to meet clients’ wealth structuring, investment management, trust and banking needs, including specialty asset management services.
Net income for GWIM increased $264 million to $4.3 billion due to lower noninterest expense and higher revenue. The operating margin was 29 percent compared to 28 percent in 2018.
Net interest income increased $239 million to $6.5 billion due to the impact of growth in deposits and loans.
Noninterest income, which primarily includes investment and brokerage services income, decreased $155 million to $13.0 billion. The decrease was primarily driven by declines in AUM pricing and transactional revenue, partially offset by the impact of positive AUM flows and higher market valuations.
Noninterest expense decreased $192 million to $13.8 billion, as investments for business growth were more than offset by lower amortization of intangibles and FDIC expense.
The return on average allocated capital was 29 percent, up from 28 percent, due to higher net income.
MLGWM revenue of $16.1 billion increased one percent primarily driven by higher net interest income and the impact of positive AUM flows and higher market valuations, partially offset by lower transactional volumes and AUM pricing.
Bank of America Private Bank revenue of $3.4 billion decreased one percent primarily due to lower net interest income.
35 Bank of America
Key Indicators and Metrics
(Dollars in millions, except as noted)
Revenue by Business
Merrill Lynch Global Wealth Management
$
16,111
$
15,998
Bank of America Private Bank
3,426
3,455
Total revenue, net of interest expense
$
19,537
$
19,453
Client Balances by Business, at year end
Merrill Lynch Global Wealth Management
$
2,558,102
$
2,193,562
Bank of America Private Bank
489,690
427,294
Total client balances
$
3,047,792
$
2,620,856
Client Balances by Type, at year end
Assets under management
$
1,275,555
$
1,072,234
Brokerage and other assets
1,372,733
1,162,997
Deposits
263,103
268,700
Loans and leases (1)
179,296
167,938
Less: Managed deposits in assets under management
(42,895
)
(51,013
)
Total client balances
$
3,047,792
$
2,620,856
Assets Under Management Rollforward
Assets under management, beginning of year
$
1,072,234
$
1,121,383
Net client flows
24,865
44,607
Market valuation/other
178,456
(93,756
)
Total assets under management, end of year
$
1,275,555
$
1,072,234
Associates, at year end
Number of financial advisors
17,458
17,518
Total wealth advisors, including financial advisors
19,440
19,459
Total primary sales professionals, including financial advisors and wealth advisors
20,586
20,586
Merrill Lynch Global Wealth Management Metric
Financial advisor productivity (in thousands)
$
1,082
$
1,034
Bank of America Private Bank Metric, at year end
Primary sales professionals
1,766
1,748
(1)
Includes margin receivables which are classified in customer and other receivables on the Consolidated Balance Sheet.
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 $426.9 billion, or 16 percent, to $3.0 trillion at December 31, 2019 compared to December 31, 2018. The increase in client balances was primarily due to higher market valuations and positive net flows over the last year.
Bank of America 36
Global Banking
(Dollars in millions)
% Change
Net interest income
$
10,675
$
10,993
(3
)%
Noninterest income:
Service charges
3,015
3,027
-
Investment banking fees
3,137
2,891
All other income
3,656
3,090
Total noninterest income
9,808
9,008
Total revenue, net of interest expense
20,483
20,001
Provision for credit losses
n/m
Noninterest expense
9,017
8,745
Income before income taxes
11,052
11,248
(2
)
Income tax expense
2,984
2,923
Net income
$
8,068
$
8,325
(3
)
Effective tax rate
27.0
%
26.0
%
Net interest yield
2.75
3.01
Return on average allocated capital
Efficiency ratio
44.02
43.72
Balance Sheet
Average
Total loans and leases
$
374,304
$
354,236
%
Total earning assets
388,152
364,748
Total assets
443,083
425,675
Total deposits
362,731
336,337
Allocated capital
41,000
41,000
-
Year end
Total loans and leases
$
379,268
$
365,717
%
Total earning assets
407,180
377,812
Total assets
464,032
442,330
Total deposits
383,180
360,248
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 and short-term investing options. We also provide investment banking products to our clients such as debt and equity underwriting and distribution, and merger-related and other advisory services. Underwriting debt and equity issuances, fixed-income and equity research, and certain market-based activities are executed through our global broker-dealer affiliates, which are our primary dealers in several countries. Within Global Banking, Global Commercial Banking clients generally include middle-market companies, commercial real estate firms and not-for-profit companies. Global Corporate Banking clients generally include large global corporations, financial institutions and leasing clients. Business Banking clients include mid-sized U.S.-based businesses requiring customized and integrated financial advice and solutions.
Net income for Global Banking decreased $257 million to $8.1 billion in 2019 compared to 2018 primarily driven by higher provision for credit losses and noninterest expense partially offset by higher revenue.
Revenue increased $482 million to $20.5 billion driven by higher noninterest income, partially offset by lower net interest income. Net interest income decreased $318 million to $10.7 billion primarily due to the allocation of ALM results and credit spread compression, partly offset by growth in loan and deposit balances.
Noninterest income increased $800 million to $9.8 billion primarily due to higher leasing-related revenue and investment banking fees. The provision for credit losses increased $406 million to $414 million primarily driven by reserve releases in 2018 primarily from energy exposures. Noninterest expense increased $272 million primarily due to continued investment in the business partially offset by lower FDIC expense.
The return on average allocated capital was 20 percent in 2019 and 2018. For information on capital allocated to the business segments, see Business Segment Operations on page 32.
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.
37 Bank of America
The table below and following discussion present a summary of the results, which exclude certain investment banking activities in Global Banking.
Global Corporate, Global Commercial and Business Banking
Global Corporate Banking
Global Commercial Banking
Business Banking
Total
(Dollars in millions)
Revenue
Business Lending
$
3,994
$
3,904
$
4,132
$
4,330
$
$
$
8,489
$
8,665
Global Transaction Services
3,994
3,832
3,499
3,346
1,064
8,557
8,165
Total revenue, net of interest expense
$
7,988
$
7,736
$
7,631
$
7,676
$
1,427
$
1,418
$
17,046
$
16,830
Balance Sheet
Average
Total loans and leases
$
177,713
$
163,516
$
181,485
$
174,279
$
15,058
$
16,432
$
374,256
$
354,227
Total deposits
177,924
163,559
144,620
135,337
40,196
37,462
362,740
336,358
Year end
Total loans and leases
$
181,409
$
174,378
$
182,727
$
175,937
$
15,152
$
15,402
$
379,288
$
365,717
Total deposits
185,352
173,183
157,322
149,118
40,504
37,973
383,178
360,274
Business Lending revenue decreased $176 million in 2019 compared to 2018. The decrease was primarily driven by the allocation of ALM results, partly offset by higher leasing-related revenue.
Global Transaction Services revenue increased $392 million in 2019 compared to 2018 driven by the impact of higher deposit balances.
Average loans and leases increased six percent in 2019 compared to 2018 driven by growth in the commercial and industrial portfolio. Average deposits increased eight percent due to growth in domestic and international interest-bearing balances.
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)
Products
Advisory
$
1,336
$
1,153
$
1,460
$
1,258
Debt issuance
1,348
1,326
3,107
3,084
Equity issuance
1,259
1,183
Gross investment banking fees
3,137
2,891
5,826
5,525
Self-led deals
(62
)
(68
)
(184
)
(198
)
Total investment banking fees
$
3,075
$
2,823
$
5,642
$
5,327
Total Corporation investment banking fees, excluding self-led deals, of $5.6 billion, which are primarily included within Global Banking and Global Markets, increased six percent due to increases in advisory fees as well as higher equity issuance fees.
Bank of America 38
Global Markets
(Dollars in millions)
% Change
Net interest income
$
3,915
$
3,857
%
Noninterest income:
Investment and brokerage services
1,738
1,780
(2
)
Investment banking fees
2,288
2,296
-
Market making and similar activities
7,065
7,260
(3
)
All other income
(39
)
Total noninterest income
11,699
12,326
(5
)
Total revenue, net of interest expense
15,614
16,183
(4
)
Provision for credit losses
(9
)
-
n/m
Noninterest expense
10,722
10,835
(1
)
Income before income taxes
4,901
5,348
(8
)
Income tax expense
1,397
1,390
Net income
$
3,504
$
3,958
(11
)
Effective tax rate
28.5
%
26.0
%
Return on average allocated capital
Efficiency ratio
68.67
66.96
Balance Sheet
Average
Trading-related assets:
Trading account securities
$
246,335
$
215,112
%
Reverse repurchases
116,883
125,084
(7
)
Securities borrowed
83,216
78,889
Derivative assets
43,271
46,047
(6
)
Total trading-related assets
489,705
465,132
Total loans and leases
71,334
72,651
(2
)
Total earning assets
476,225
473,383
Total assets
679,297
666,000
Total deposits
31,380
31,209
Allocated capital
35,000
35,000
-
Year end
Total trading-related assets
$
452,496
$
447,998
%
Total loans and leases
72,993
73,928
(1
)
Total earning assets
471,701
457,224
Total assets
641,806
641,923
-
Total deposits
34,676
37,841
(8
)
n/m = not meaningful
Global Markets offers sales and trading services and research services to institutional clients across fixed-income, credit, currency, commodity and equity businesses. Global Markets product coverage includes securities and derivative products in both the primary and secondary markets. Global Markets provides market-making, financing, securities clearing, settlement and custody services globally to our institutional investor clients in support of their investing and trading activities. We also work with our commercial and corporate clients to provide risk management products using interest rate, equity, credit, currency and commodity derivatives, foreign exchange, fixed-income and mortgage-related products. As a result of our market-making activities in these products, we may be required to manage risk in a broad range of financial products including government securities, equity and equity-linked securities, high-grade and high-yield corporate debt securities, syndicated loans, MBS, commodities and asset-backed securities. The economics of certain investment banking and underwriting activities are shared primarily between Global Markets and Global Banking under an internal revenue-sharing arrangement. Global Banking originates certain deal-related transactions with our corporate and commercial clients that are executed and distributed by Global Markets. For information on investment banking fees on a consolidated basis, see page 38.
The following explanations for year-over-year changes in results for Global Markets, including those disclosed under Sales and Trading Revenue, exclude net DVA, but the explanations would be the same if net DVA was included.
Net income for Global Markets decreased $454 million to $3.5 billion in 2019 compared to 2018. Net DVA losses were $222 million compared to losses of $162 million in 2018. Excluding net DVA, net income decreased $408 million to $3.7 billion. These decreases were primarily driven by a decrease in revenue, partially offset by lower noninterest expense.
Revenue declined $569 million to $15.6 billion as sales and trading revenue decreased $492 million, and excluding net DVA, decreased $432 million. These decreases were primarily driven by a decline in Equities revenue. Noninterest expense decreased $113 million to $10.7 billion, primarily driven by lower revenue-related expenses.
Average total assets increased $13.3 billion to $679.3 billion, primarily due to increased levels of inventory in fixed-income, currencies and commodities (FICC) to facilitate expected client demand. Year-end total assets were largely unchanged at $641.8 billion.
The return on average allocated capital was 10 percent, down from 11 percent, reflecting lower net income. For information on
39 Bank of America
capital allocated to the business segments, see Business Segment Operations on page 32.
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 27.
Sales and Trading Revenue (1, 2, 3)
(Dollars in millions)
Sales and trading revenue (2)
Fixed-income, currencies and commodities
$
8,188
$
8,271
Equities
4,491
4,900
Total sales and trading revenue
$
12,679
$
13,171
Sales and trading revenue, excluding net DVA (4)
Fixed-income, currencies and commodities
$
8,396
$
8,413
Equities
4,505
4,920
Total sales and trading revenue, excluding net DVA
$
12,901
$
13,333
(1)
For more information on sales and trading revenue, see Note 3 - Derivatives to the Consolidated Financial Statements.
(2)
Includes FTE adjustments of $189 million and $248 million for 2019 and 2018.
(3)
Includes Global Banking sales and trading revenue of $533 million and $421 million for 2019 and 2018.
(4)
FICC and Equities sales and trading revenue, excluding net DVA, is a non-GAAP financial measure. FICC net DVA losses were $208 million and $142 million for 2019 and 2018. Equities net DVA losses were $14 million and $20 million for 2019 and 2018.
FICC revenue decreased $17 million. Equities revenue decreased $415 million driven by under performance in equity derivatives compared to a strong prior year which benefited from higher client activity and a more volatile market environment.
All Other
(Dollars in millions)
% Change
Net interest income
$
$
(63
)%
Noninterest income (loss)
(2,616
)
(2,257
)
Total revenue, net of interest expense
(2,382
)
(1,625
)
Provision for credit losses
(669
)
(476
)
Noninterest expense
3,720
1,887
Loss before income taxes
(5,433
)
(3,036
)
Income tax benefit
(4,055
)
(2,780
)
Net loss
$
(1,378
)
$
(256
)
n/m
Balance Sheet
Average
Total loans and leases
$
42,933
$
61,013
(30
)%
Total assets (1)
210,771
199,978
Total deposits
21,434
21,966
(2
)
Year end
Total loans and leases
$
37,151
$
48,061
(23
)%
Total assets (1)
224,466
195,466
Total deposits
23,166
18,541
(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 544.2 billion and $517.0 billion for 2019 and 2018, and year-end allocated assets were $565.3 billion and $540.8 billion at December 31, 2019 and 2018.
n/m = not meaningful
All Other consists of ALM activities, equity investments, non-core mortgage loans and servicing activities, liquidating businesses and certain expenses not otherwise allocated to a business segment. ALM activities encompass certain residential mortgages, debt securities, and interest rate and foreign currency risk management activities. Substantially all of the results of ALM activities are allocated to our business segments. For more information on our ALM activities, see Note 24 - Business Segment Information to the Consolidated Financial Statements. Equity investments include our merchant services joint venture, as well as a portfolio of equity, real estate and other alternative investments. For information on our merchant services joint venture, see Note 13 - Commitments and Contingencies to the Consolidated Financial Statements.
Residential mortgage loans that are held for ALM purposes, including interest rate or liquidity risk management, are classified as core and are presented on the balance sheet of All Other. During 2019, residential mortgage loans held for ALM activities decreased $3.2 billion to $21.7 billion primarily as a result of payoffs and paydowns. Non-core residential mortgage and home equity loans, which are principally runoff portfolios, are also held in All Other. During 2019, total non-core loans decreased $7.8 billion to $15.7 billion due primarily to payoffs, paydowns and sales, as well as Federal Housing Administration (FHA) loan conveyances, partially offset by repurchases. For more information on the composition of the core and non-core portfolios, see Consumer Portfolio Credit Risk Management on page 54.
Bank of America 40
The net loss for All Other increased $1.1 billion to a net loss of $1.4 billion, primarily driven by the $2.1 billion pretax impairment charge disclosed in Executive Summary - Recent Developments - Merchant Services Joint Venture, as well as lower revenue, partially offset by a higher benefit in the provision for credit losses.
Revenue decreased $757 million due to lower net interest income and an increase in the loss in noninterest income. Net interest income decreased $398 million due to the impact of non-core consumer real estate loan sales and portfolio run-off. The loss in noninterest income increased $359 million primarily due to lower gains on sales of non-core consumer loans and higher partnership losses associated with an increase in tax-advantaged investments, partially offset by a $729 million charge related to the redemption of certain trust preferred securities in 2018.
Noninterest expense increased $1.8 billion to $3.7 billion primarily due to the aforementioned $2.1 billion pretax impairment charge.
The income tax benefit was $4.1 billion compared to a benefit of $2.8 billion in 2018. The increase in the tax benefit was primarily driven by the tax effect of the higher pretax loss, the positive impact from the resolution of various tax controversy matters and a higher level of income tax credits. Both years included income tax benefit adjustments to eliminate the FTE treatment of certain tax credits recorded in Global Banking.
Off-Balance Sheet Arrangements and Contractual Obligations
We have contractual obligations to make future payments on debt and lease agreements. Additionally, in the normal course of business, we enter into contractual arrangements whereby we commit to future purchases of products or services from unaffiliated parties. Purchase obligations are defined as obligations that are legally binding agreements whereby we agree
to purchase products or services with a specific minimum quantity at a fixed, minimum or variable price over a specified period of time. Included in purchase obligations are vendor contracts, the most significant of which include communication services, processing services and software contracts. Debt, lease and other obligations are more fully discussed in Note 12 - Long-term Debt and Note 13 - Commitments and Contingencies to the Consolidated Financial Statements.
Other long-term liabilities include our contractual funding obligations related to the Non-U.S. Pension Plans and Nonqualified and Other Pension Plans (together, the Plans). Obligations to the Plans are based on the current and projected obligations of the Plans, performance of the Plans’ assets, and any participant contributions, if applicable. During 2019 and 2018, we contributed $135 million and $156 million to the Plans, and we expect to make $128 million of contributions during 2020. The Plans are more fully discussed in Note 18 - Employee Benefit Plans to the Consolidated Financial Statements.
We enter into commitments to extend credit such as loan commitments, standby letters of credit (SBLCs) and commercial letters of credit to meet the financing needs of our customers. For a summary of the total unfunded, or off-balance sheet, credit extension commitment amounts by expiration date, see Credit Extension Commitments in Note 13 - Commitments and Contingencies to the Consolidated Financial Statements.
We also utilize variable interest entities (VIEs) in the ordinary course of business to support our financing and investing needs as well as those of our customers. For more information on our involvement with unconsolidated VIEs, see Note 7 - Securitizations and Other Variable Interest Entities to the Consolidated Financial Statements.
Table 10 includes certain contractual obligations at December 31, 2019 and 2018.
Table 10
Contractual Obligations
December 31, 2019
December 31
(Dollars in millions)
Due in One
Year or Less
Due After
One Year Through
Three Years
Due After
Three Years Through
Five Years
Due After
Five Years
Total
Total
Long-term debt
$
24,151
$
46,049
$
47,096
$
123,560
$
240,856
$
229,392
Operating lease obligations
1,966
3,265
2,338
4,225
11,794
15,770
Purchase obligations
1,272
1,126
3,530
4,048
Time deposits
68,351
4,612
1,463
74,673
61,039
Other long-term liabilities
1,670
1,056
4,099
3,933
Estimated interest expense on long-term debt and time deposits (1)
5,571
8,073
6,870
23,871
44,385
56,852
Total contractual obligations
$
102,981
$
64,181
$
58,882
$
153,293
$
379,337
$
371,034
(1)
Represents forecasted net interest expense on long-term debt and time deposits based on interest rates at December 31, 2019 and 2018. Forecasts are based on the contractual maturity dates of each liability, and are net of derivative hedges, where applicable.
41 Bank of America
Representations and Warranties Obligations
For information on representations and warranties obligations in connection with the sale of mortgage loans, see Note 13 - Commitments and Contingencies to the Consolidated Financial Statements.
Managing Risk
Overview
Risk is inherent in all our business activities. Sound risk management enables us to serve our customers and deliver for our shareholders. If not managed well, risks can result in financial loss, regulatory sanctions and penalties, and damage to our reputation, each of which may adversely impact our ability to execute our business strategies. We take a comprehensive approach to risk management with a defined Risk Framework and an articulated Risk Appetite Statement which are approved annually by the Enterprise Risk Committee (ERC) and the Board.
The seven key types of risk faced by the Corporation are strategic, credit, market, liquidity, compliance, operational and reputational.
●
Strategic risk is the risk resulting from incorrect assumptions about external or internal factors, inappropriate business plans, ineffective business strategy execution, or failure to respond in a timely manner to changes in the regulatory, macroeconomic or competitive environments in the geographic locations in which we operate.
●
Credit risk is the risk of loss arising from the inability or failure of a borrower or counterparty to meet its obligations.
●
Market risk is the risk that changes in market conditions may adversely impact the value of assets or liabilities, or otherwise negatively impact earnings.
●
Liquidity risk is the inability to meet expected or unexpected cash flow and collateral needs while continuing to support our businesses and customers under a range of economic conditions.
●
Compliance risk is the risk of legal or regulatory sanctions, material financial loss or damage to the reputation of the Corporation arising from the failure of the Corporation to comply with the requirements of applicable laws, rules and regulations and our internal policies and procedures.
●
Operational risk is the risk of loss resulting from inadequate or failed processes, people and systems, or from external events.
●
Reputational risk is the risk that negative perceptions of the Corporation’s conduct or business practices may adversely impact its profitability or operations.
The following sections address in more detail the specific procedures, measures and analyses of the major categories of risk. This discussion of managing risk focuses on the current Risk Framework that, as part of its annual review process, was approved by the ERC and the Board.
As set forth in our Risk Framework, a culture of managing risk well is fundamental to fulfilling our purpose and our values and delivering responsible growth. It requires us to focus on risk in all activities and encourages the necessary mindset and behavior to enable effective risk management, and promotes sound risk-taking within our risk appetite. Sustaining a culture of managing risk well
throughout the organization is critical to our success and is a clear expectation of our executive management team and the Board.
Our Risk Framework serves as the foundation for the consistent and effective management of risks facing the Corporation. The Risk Framework sets forth clear roles, responsibilities and accountability for the management of risk and provides a blueprint for how the Board, through delegation of authority to committees and executive officers, establishes risk appetite and associated limits for our activities.
Executive management assesses, with Board oversight, the risk-adjusted returns of each business. Management reviews and approves the strategic and financial operating plans, as well as the capital plan and Risk Appetite Statement, and recommends them annually to the Board for approval. Our strategic plan takes into consideration return objectives and financial resources, which must align with risk capacity and risk appetite. Management sets financial objectives for each business by allocating capital and setting a target for return on capital for each business. Capital allocations and operating limits are regularly evaluated as part of our overall governance processes as the businesses and the economic environment in which we operate continue to evolve. For more information regarding capital allocations, see Business Segment Operations on page 32.
The Corporation’s risk appetite indicates the amount of capital, earnings or liquidity we are willing to put at risk to achieve our strategic objectives and business plans, consistent with applicable regulatory requirements. Our risk appetite provides a common and comparable set of measures for senior management and the Board to clearly indicate our aggregate level of risk and to monitor whether the Corporation’s risk profile remains in alignment with our strategic and capital plans. Our risk appetite is formally articulated in the Risk Appetite Statement, which includes both qualitative components and quantitative limits.
Our overall capacity to take risk is limited; therefore, we prioritize the risks we take in order to maintain a strong and flexible financial position so we can withstand challenging economic conditions and take advantage of organic growth opportunities. Therefore, we set objectives and targets for capital and liquidity that are intended to permit us to continue to operate in a safe and sound manner, including during periods of stress.
Our lines of business operate with risk limits (which may include credit, market and/or operational limits, as applicable) that align with the Corporation’s risk appetite. Executive management is responsible for tracking and reporting performance measurements as well as any exceptions to guidelines or limits. The Board, and its committees when appropriate, oversee financial performance, execution of the strategic and financial operating plans, adherence to risk appetite limits and the adequacy of internal controls.
For a more detailed discussion of our risk management activities, see the discussion below and pages 45 through 77.
Risk Management Governance
The Risk Framework describes delegations of authority whereby the Board and its committees may delegate authority to management-level committees or executive officers. Such delegations may authorize certain decision-making and approval functions, which may be evidenced in, for example, committee charters, job descriptions, meeting minutes and resolutions.
Bank of America 42
The chart below illustrates the inter-relationship among the Board, Board committees and management committees that have the majority of risk oversight responsibilities for the Corporation.
(1) Reports to the CEO and CFO with oversight by the Audit Committee
Board of Directors and Board Committees
The Board is composed of 17 directors, all but one of whom are independent. The Board authorizes management to maintain an effective Risk Framework, and oversees compliance with safe and sound banking practices. In addition, the Board or its committees conduct inquiries of, and receive reports from management on risk-related matters to assess scope or resource limitations that could impede the ability of Independent Risk Management (IRM) and/or Corporate Audit to execute its responsibilities. The Board committees discussed below have the principal responsibility for enterprise-wide oversight of our risk management activities. Through these activities, the Board and applicable committees are provided with information on our risk profile and oversee executive management addressing key risks we face. Other Board committees, as described below, provide additional oversight of specific risks.
Each of the committees shown on the above chart regularly reports to the Board on risk-related matters within the committee’s responsibilities, which is intended to collectively provide the Board with integrated insight about our management of enterprise-wide risks.
Audit Committee
The Audit Committee oversees the qualifications, performance and independence of the Independent Registered Public Accounting Firm, the performance of our corporate audit function, the integrity of our consolidated financial statements, our compliance with legal and regulatory requirements, and makes inquiries of management or the Chief Audit Executive (CAE) to determine whether there are scope or resource limitations that impede the ability of Corporate Audit to execute its responsibilities. The Audit Committee is also responsible for overseeing compliance risk pursuant to the New York Stock Exchange listing standards.
Enterprise Risk Committee
The ERC has primary responsibility for oversight of the Risk Framework and key risks we face and of the Corporation’s overall risk appetite. It approves the Risk Framework and the Risk Appetite Statement and further recommends these documents to the Board for approval. The ERC oversees senior management’s responsibilities for the identification, measurement, monitoring and control of key risks we face. The ERC may consult with other Board committees on risk-related matters.
Other Board Committees
Our Corporate Governance, ESG, and Sustainability Committee oversees our Board’s governance processes, identifies and reviews the qualifications of potential Board members, recommends nominees for election to our Board, recommends committee appointments for Board approval and reviews our Environmental, Social and Governance and stockholder engagement activities.
Our Compensation and Human Capital Committee oversees establishing, maintaining and administering our compensation programs and employee benefit plans, including approving and recommending our Chief Executive Officer’s (CEO) compensation to our Board for further approval by all independent directors; reviewing and approving all of our executive officers’ compensation, as well as compensation for non-management directors; and reviewing certain other human capital management topics.
Management Committees
Management committees may receive their authority from the Board, a Board committee, another management committee or from one or more executive officers. Our primary management-level risk committee is the Management Risk Committee (MRC). Subject to Board oversight, the MRC is responsible for management oversight of key risks facing the Corporation. This includes providing management oversight of our compliance and operational risk programs, balance sheet and capital management, funding activities and other liquidity activities, stress testing, trading activities, recovery and resolution planning, model risk, subsidiary governance and activities between member banks and their nonbank affiliates pursuant to Federal Reserve rules and regulations, among other things.
Lines of Defense
We have clear ownership and accountability across three lines of defense: Front Line Units (FLUs), IRM and Corporate Audit. We also have control functions outside of FLUs and IRM (e.g., Legal and Global Human Resources). The three lines of defense are integrated into our management-level governance structure. Each of these functional roles is described in more detail below.
43 Bank of America
Executive Officers
Executive officers lead various functions representing the functional roles. Authority for functional roles may be delegated to executive officers from the Board, Board committees or management-level committees. Executive officers, in turn, may further delegate responsibilities, as appropriate, to management-level committees, management routines or individuals. Executive officers review our activities for consistency with our Risk Framework, Risk Appetite Statement and applicable strategic, capital and financial operating plans, as well as applicable policies, standards, procedures and processes. Executive officers and other employees make decisions individually on a day-to-day basis, consistent with the authority they have been delegated. Executive officers and other employees may also serve on committees and participate in committee decisions.
Front Line Units
FLUs, which include the lines of business as well as the Global Technology and Operations Group, are responsible for appropriately assessing and effectively managing all of the risks associated with their activities.
Three organizational units that include FLU activities and control function activities, but are not part of IRM are first, the Chief Financial Officer (CFO) Group; second, Environmental, Social and Governance (ESG), Capital Deployment (CD) and Public Policy (PP); and third, the Chief Administrative Officer (CAO) Group.
Independent Risk Management
IRM is part of our control functions and includes Global Risk Management. We have other control functions that are not part of IRM (other control functions may also provide oversight to FLU activities), including Legal, Global Human Resources and certain activities within the CFO Group; ESG, CD and PP; and CAO Group. IRM, led by the Chief Risk Officer (CRO), is responsible for independently assessing and overseeing risks within FLUs and other control functions. IRM establishes written enterprise policies and procedures that include concentration risk limits, where appropriate. Such policies and procedures outline how aggregate risks are identified, measured, monitored and controlled.
The CRO has the stature, authority and independence to develop and implement a meaningful risk management framework. The CRO has unrestricted access to the Board and reports directly to both the ERC and to the CEO. Global Risk Management is organized into horizontal risk teams that cover a specific risk area and vertical CRO teams that cover a particular front line unit or control function. These teams work collaboratively in executing their respective duties.
Corporate Audit
Corporate Audit and the CAE maintain their independence from the FLUs, IRM and other control functions by reporting directly to the Audit Committee or the Board. The CAE administratively reports to the CEO. Corporate Audit provides independent assessment and validation through testing of key processes and controls across the Corporation. Corporate Audit includes Credit Review which periodically tests and examines credit portfolios and processes.
Risk Management Processes
The Risk Framework requires that strong risk management practices are integrated in key strategic, capital and financial planning processes and in day-to-day business processes across the Corporation, with a goal of ensuring risks are appropriately considered, evaluated and responded to in a timely manner.
We employ our risk management process, referred to as Identify, Measure, Monitor and Control, as part of our daily activities.
Identify - To be effectively managed, risks must be clearly defined and proactively identified. Proper risk identification focuses on recognizing and understanding key risks inherent in our business activities or key risks that may arise from external factors. Each employee is expected to identify and escalate risks promptly. Risk identification is an ongoing process, incorporating input from FLUs and control functions, designed to be forward looking and capture relevant risk factors across all of our lines of business.
Measure - Once a risk is identified, it must be prioritized and accurately measured through a systematic risk quantification process including quantitative and qualitative components. Risk is measured at various levels including, but not limited to, risk type, FLU, legal entity and on an aggregate basis. This risk quantification process helps to capture changes in our risk profile due to changes in strategic direction, concentrations, portfolio quality and the overall economic environment. Senior management considers how risk exposures might evolve under a variety of stress scenarios.
Monitor - We monitor risk levels regularly to track adherence to risk appetite, policies, standards, procedures and processes. We also regularly update risk assessments and review risk exposures. Through our monitoring, we can determine our level of risk relative to limits and can take action in a timely manner. We also can determine when risk limits are breached and have processes to appropriately report and escalate exceptions. This includes requests for approval to managers and alerts to executive management, management-level committees or the Board (directly or through an appropriate committee).
Control - We establish and communicate risk limits and controls through policies, standards, procedures and processes that define the responsibilities and authority for risk-taking. The limits and controls can be adjusted by the Board or management when conditions or risk tolerances warrant. These limits may be absolute (e.g., loan amount, trading volume) or relative (e.g., percentage of loan book in higher-risk categories). Our lines of business are held accountable to perform within the established limits.
The formal processes used to manage risk represent a part of our overall risk management process. We instill a strong and comprehensive culture of managing risk well through communications, training, policies, procedures and organizational roles and responsibilities. Establishing a culture reflective of our purpose to help make our customers’ financial lives better and delivering our responsible growth strategy is also critical to effective risk management. We understand that improper actions, behaviors or practices that are illegal, unethical or contrary to our core values could result in harm to the Corporation, our shareholders or our customers, damage the integrity of the financial markets, or negatively impact our reputation, and have established protocols and structures so that such conduct risk is governed and reported across the Corporation. Specifically, our Code of Conduct provides a framework for all of our employees to conduct themselves with the highest integrity. Additionally, we continue to strengthen the link between the employee performance management process and individual compensation to encourage employees to work toward enterprise-wide risk goals.
Bank of America 44
Corporation-wide Stress Testing
Integral to our Capital Planning, Financial Planning and Strategic Planning processes, we conduct capital scenario management and stress forecasting on a periodic basis to better understand balance sheet, earnings and capital sensitivities to certain economic and business scenarios, including economic and market conditions that are more severe than anticipated. These stress forecasts provide an understanding of the potential impacts from our risk profile on the balance sheet, earnings and capital, and serve as a key component of our capital and risk management practices. The intent of stress testing is to develop a comprehensive understanding of potential impacts of on- and off-balance sheet risks at the Corporation and how they impact financial resiliency, which provides confidence to management, regulators and our investors.
Contingency Planning
We have developed and maintain contingency plans that are designed to prepare us in advance to respond in the event of potential adverse economic, financial or market stress. These contingency plans include our Capital Contingency Plan and Financial Contingency and Recovery Plan, which provide monitoring, escalation, actions and routines designed to enable us to increase capital, access funding sources and reduce risk through consideration of potential options that include asset sales, business sales, capital or debt issuances, or other de-risking strategies. We also maintain a Resolution Plan to limit adverse systemic impacts that could be associated with a potential resolution of Bank of America.
Strategic Risk Management
Strategic risk is embedded in every business and is one of the major risk categories along with credit, market, liquidity, compliance, operational and reputational risks. This risk results from incorrect assumptions about external or internal factors, inappropriate business plans, ineffective business strategy execution, or failure to respond in a timely manner to changes in the regulatory, macroeconomic or competitive environments, in the geographic locations in which we operate, such as competitor actions, changing customer preferences, product obsolescence and technology developments. Our strategic plan is consistent with our risk appetite, capital plan and liquidity requirements, and specifically addresses strategic risks.
On an annual basis, the Board reviews and approves the strategic plan, capital plan, financial operating plan and Risk Appetite Statement. With oversight by the Board, executive management directs the lines of business to execute our strategic plan consistent with our core operating principles and risk appetite. The executive management team monitors business performance throughout the year and provides the Board with regular progress reports on whether strategic objectives and timelines are being met, including reports on strategic risks and if additional or alternative actions need to be considered or implemented. The regular executive reviews focus on assessing forecasted earnings and returns on capital, the current risk profile, current capital and liquidity requirements, staffing levels and changes required to support the strategic plan, stress testing results, and other qualitative factors such as market growth rates and peer analysis.
Significant strategic actions, such as capital actions, material acquisitions or divestitures, and resolution plans are reviewed and approved by the Board. At the business level, processes are in place to discuss the strategic risk implications of new, expanded or modified businesses, products or services and other strategic initiatives, and to provide formal review and approval where required. With oversight by the Board and the ERC, executive
management performs similar analyses throughout the year, and evaluates changes to the financial forecast or the risk, capital or liquidity positions as deemed appropriate to balance and optimize achieving the targeted risk appetite, shareholder returns and maintaining the targeted financial strength. Proprietary models are used to measure the capital requirements for credit, country, market, operational and strategic risks. The allocated capital assigned to each business is based on its unique risk profile. With oversight by the Board, executive management assesses the risk-adjusted returns of each business in approving strategic and financial operating plans. The businesses use allocated capital to define business strategies, and price products and transactions.
Capital Management
The Corporation manages its capital position so that its capital is more than adequate to support its business activities and aligns with risk, risk appetite and strategic planning. Additionally, we seek to maintain safety and soundness at all times, even under adverse scenarios, take advantage of organic growth opportunities, meet obligations to creditors and counterparties, maintain ready access to financial markets, continue to serve as a credit intermediary, remain a source of strength for our subsidiaries, and satisfy current and future regulatory capital requirements. Capital management is integrated into our risk and governance processes, as capital is a key consideration in the development of our strategic plan, risk appetite and risk limits.
We conduct an Internal Capital Adequacy Assessment Process (ICAAP) on a periodic basis. The ICAAP is a forward-looking assessment of our projected capital needs and resources, incorporating earnings, balance sheet and risk forecasts under baseline and adverse economic and market conditions. We utilize periodic stress tests to assess the potential impacts to our balance sheet, earnings, regulatory capital and liquidity under a variety of stress scenarios. We perform qualitative risk assessments to identify and assess material risks not fully captured in our forecasts or stress tests. We assess the potential capital impacts of proposed changes to regulatory capital requirements. Management assesses ICAAP results and provides documented quarterly assessments of the adequacy of our capital guidelines and capital position to the Board or its committees.
We periodically review capital allocated to our businesses and allocate capital annually during the strategic and capital planning processes. For more information, see Business Segment Operations on page 32.
CCAR and Capital Planning
The Federal Reserve requires BHCs to submit a capital plan and requests for capital actions on an annual basis, consistent with the rules governing the Comprehensive Capital Analysis and Review (CCAR) capital plan.
On June 27, 2019, following the Federal Reserve’s non-objection to our 2019 CCAR capital plan, the Board authorized the repurchase of approximately $30.9 billion in common stock from July 1, 2019 through June 30, 2020, which includes approximately $900 million to offset shares awarded under equity-based compensation plans during the same period. During 2019, pursuant to the Board’s authorizations, including those related to our 2018 CCAR capital plan that expired June 30, 2019, we repurchased $28.1 billion of common stock, which includes common stock repurchases to offset equity-based compensation awards. At December 31, 2019, our remaining stock repurchase authorization was $15.6 billion.
Our stock repurchases are subject to various factors, including the Corporation’s capital position, liquidity, financial performance and alternative uses of capital, stock trading price and general
45 Bank of America
market conditions, and may be suspended at any time. The 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, 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 risk-weighted assets under both the Standardized and Advanced approaches. The approach that yields the lower ratio is used to assess capital adequacy including under the PCA framework. As of December 31, 2019, the Common equity tier 1 (CET1) and Tier 1 capital ratios for the Corporation were lower under the Standardized approach whereas the Advanced approaches yielded a lower Total capital ratio.
Minimum Capital Requirements
Minimum capital requirements and related buffers were fully phased in as of January 1, 2019. The PCA framework established categories of capitalization, including well capitalized, based on
the Basel 3 regulatory ratio requirements. U.S. banking regulators are required to take certain mandatory actions depending on the category of capitalization, with no mandatory actions required for well-capitalized banking organizations.
In order to avoid restrictions on capital distributions and discretionary bonus payments, the Corporation must meet risk-based capital ratio requirements that include a capital conservation buffer greater than 2.5 percent, plus any applicable countercyclical capital buffer and a global systemically important bank (G-SIB) surcharge. The buffers and surcharge must be comprised solely of CET1 capital.
The Corporation is also required to maintain a minimum supplementary leverage ratio (SLR) of 3.0 percent plus a leverage buffer of 2.0 percent in order to avoid certain restrictions on capital distributions and discretionary bonus payments. Our insured depository institution subsidiaries are required to maintain a minimum 6.0 percent SLR to be considered well capitalized under the PCA framework. The numerator of the SLR is quarter-end Basel 3 Tier 1 capital. The denominator is total leverage exposure based on the daily average of the sum of on-balance sheet exposures less permitted Tier 1 deductions, as well as the simple average of certain off-balance sheet exposures, as of the end of each month in a quarter.
Capital Composition and Ratios
Table 11 presents Bank of America Corporation’s capital ratios and related information in accordance with Basel 3 Standardized and Advanced approaches as measured at December 31, 2019 and 2018. As of the periods presented herein, the Corporation met the definition of well capitalized under current regulatory requirements.
Bank of America 46
Table 11
Bank of America Corporation Regulatory Capital under Basel 3
Standardized
Approach
Advanced
Approaches
Regulatory
Minimum (1)
(Dollars in millions, except as noted)
December 31, 2019
Risk-based capital metrics:
Common equity tier 1 capital
$
166,760
$
166,760
Tier 1 capital
188,492
188,492
Total capital (2)
221,230
213,098
Risk-weighted assets (in billions)
1,493
1,447
Common equity tier 1 capital ratio
11.2
%
11.5
%
9.5
%
Tier 1 capital ratio
12.6
13.0
11.0
Total capital ratio
14.8
14.7
13.0
Leverage-based metrics:
Adjusted quarterly average assets (in billions) (3)
$
2,374
$
2,374
Tier 1 leverage ratio
7.9
%
7.9
%
4.0
SLR leverage exposure (in billions)
$
2,946
SLR
6.4
%
5.0
December 31, 2018
Risk-based capital metrics:
Common equity tier 1 capital
$
167,272
$
167,272
Tier 1 capital
189,038
189,038
Total capital (2)
221,304
212,878
Risk-weighted assets (in billions)
1,437
1,409
Common equity tier 1 capital ratio
11.6
%
11.9
%
8.25
%
Tier 1 capital ratio
13.2
13.4
9.75
Total capital ratio
15.4
15.1
11.75
Leverage-based metrics:
Adjusted quarterly average assets (in billions) (3)
$
2,258
$
2,258
Tier 1 leverage ratio
8.4
%
8.4
%
4.0
SLR leverage exposure (in billions)
$
2,791
SLR
6.8
%
5.0
(1)
The capital conservation buffer and G-SIB surcharge were 2.5 percent at December 31, 2019 and 1.875 percent at December 31, 2018. The countercyclical capital buffer for both periods was zero. The SLR minimum includes a leverage buffer of 2.0 percent.
(2)
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.
(3)
Reflects total average assets adjusted for certain Tier 1 capital deductions.
At December 31, 2019, CET1 capital and Total capital under the Advanced approaches were relatively unchanged compared to December 31, 2018. Risk-weighted assets under the Standardized approach, which yielded the lower CET1 capital ratio at December 31, 2019, increased $56.3 billion during 2019 to $1,493 billion
primarily due to loan growth and increased client activity in Global Markets and Global Banking.
Table 12 shows the capital composition at December 31, 2019 and 2018.
Table 12
Capital Composition under Basel 3
December 31
(Dollars in millions)
Total common shareholders’ equity
$
241,409
$
242,999
Goodwill, net of related deferred tax liabilities
(68,570
)
(68,572
)
Deferred tax assets arising from net operating loss and tax credit carryforwards
(5,193
)
(5,981
)
Intangibles, other than mortgage servicing rights and goodwill, net of related deferred tax liabilities
(1,328
)
(1,294
)
Other
Common equity tier 1 capital
166,760
167,272
Qualifying preferred stock, net of issuance cost
22,329
22,326
Other
(597
)
(560
)
Tier 1 capital
188,492
189,038
Tier 2 capital instruments
22,538
21,887
Eligible credit reserves included in Tier 2 capital
2,097
1,972
Other
(29
)
(19
)
Total capital under the Advanced approaches
$
213,098
$
212,878
47 Bank of America
Table 13 shows the components of risk-weighted assets as measured under Basel 3 at December 31, 2019 and 2018.
Table 13
Risk-weighted Assets under Basel 3
Standardized Approach
Advanced Approaches
Standardized Approach
Advanced Approaches
December 31
(Dollars in billions)
Credit risk
$
1,437
$
$
1,384
$
Market risk
Operational risk
n/a
n/a
Risks related to credit valuation adjustments
n/a
n/a
Total risk-weighted assets
$
1,493
$
1,447
$
1,437
$
1,409
n/a = not applicable
Bank of America, N.A. Regulatory Capital
Table 14 presents regulatory capital information for BANA in accordance with Basel 3 Standardized and Advanced approaches as measured at December 31, 2019 and 2018. BANA met the definition of well capitalized under the PCA framework at both year ends.
Table 14
Bank of America, N.A. Regulatory Capital under Basel 3
Standardized
Approach
Advanced
Approaches
Regulatory
Minimum (1)
(Dollars in millions, except as noted)
December 31, 2019
Risk-based capital metrics:
Common equity tier 1 capital
$
154,626
$
154,626
Tier 1 capital
154,626
154,626
Total capital (2)
166,567
158,665
Risk-weighted assets (in billions)
1,241
Common equity tier 1 capital ratio
12.5
%
15.6
%
7.0
%
Tier 1 capital ratio
12.5
15.6
8.5
Total capital ratio
13.4
16.0
10.5
Leverage-based metrics:
Adjusted quarterly average assets (in billions) (3)
$
1,780
$
1,780
Tier 1 leverage ratio
8.7
%
8.7
%
5.0
SLR leverage exposure (in billions)
$
2,177
SLR
7.1
%
6.0
December 31, 2018
Risk-based capital metrics:
Common equity tier 1 capital
$
149,824
$
149,824
Tier 1 capital
149,824
149,824
Total capital (2)
161,760
153,627
Risk-weighted assets (in billions)
1,195
Common equity tier 1 capital ratio
12.5
%
15.6
%
6.5
%
Tier 1 capital ratio
12.5
15.6
8.0
Total capital ratio
13.5
16.0
10.0
Leverage-based metrics:
Adjusted quarterly average assets (in billions) (3)
$
1,719
$
1,719
Tier 1 leverage ratio
8.7
%
8.7
%
5.0
SLR leverage exposure (in billions)
$
2,112
SLR
7.1
%
6.0
(1)
Risk-based capital regulatory minimums at December 31, 2019 are the minimum ratios under Basel 3 including a capital conservation buffer of 2.5 percent. The regulatory minimums for the leverage ratios as of both period ends and risk-based capital ratios as of December 31, 2018 are the percent required to be considered well capitalized under the PCA framework.
(2)
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.
(3)
Reflects total average assets adjusted for certain Tier 1 capital deductions.
Total Loss-Absorbing Capacity Requirements
Effective January 1, 2019, the Corporation is subject to the Federal Reserve’s final rule requiring G-SIBs to maintain minimum levels of total loss-absorbing capacity (TLAC) and long-term debt. TLAC consists of the Corporation’s Tier 1 capital and eligible long-term debt issued directly by the Corporation. Eligible long-term debt for TLAC ratios is comprised of unsecured debt that has a remaining
maturity of at least one year and satisfies additional requirements as prescribed in the TLAC final rule. As with the risk-based capital ratios and SLR, the Corporation is required to maintain TLAC ratios in excess of minimum requirements plus applicable buffers to avoid restrictions on capital distributions and discretionary bonus payments. Table 15 presents the Corporation's TLAC and long-term debt ratios and related information as of December 31, 2019.
Bank of America 48
Table 15
Bank of America Corporation Total Loss-Absorbing Capacity and Long-Term Debt
TLAC
Regulatory Minimum (1)
Long-term
Debt
Regulatory Minimum (2)
(Dollars in millions)
December 31, 2019
Total eligible balance
$
367,449
$
171,349
Percentage of risk-weighted assets (3)
24.6
%
22.0
%
11.5
%
8.5
%
Percentage of SLR leverage exposure
12.5
9.5
5.8
4.5
(1)
The TLAC risk-weighted assets regulatory minimum consists of 18.0 percent plus a TLAC risk-weighted assets buffer comprised of 2.5 percent plus the method 1 G-SIB surcharge of 1.5 percent. The countercyclical buffer is zero for this period. The TLAC SLR leverage exposure regulatory minimum consists of 7.5 percent plus a 2.0 percent TLAC leverage buffer. The TLAC risk-weighted assets and leverage buffers must be comprised solely of CET1 capital and Tier 1 capital, respectively.
(2)
The long-term debt risk-weighted assets 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.
(3)
The approach that yields the higher risk-weighted assets is used to calculate TLAC and long-term debt ratios, which was the Standardized approach as of December 31, 2019.
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). BofAS was formed as a result of the reorganization of MLPF&S which was completed in May 2019. 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 15c3-1, 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 U.S. Commodity Futures Trading Commission (CFTC) Regulation 1.17.
BofAS provides institutional services, and in accordance with the alternative net capital requirements, is required to maintain tentative net capital in excess of $1.0 billion and net capital in excess of the greater of $500 million or a certain percentage of its reserve requirement. BofAS must also notify the Securities and Exchange Commission (SEC) in the event its tentative net capital is less than $5.0 billion. BofAS is also required to hold a certain percentage of its risk-based margin in order to meet its CFTC minimum net capital requirement. At December 31, 2019, BofAS had tentative net capital of $12.5 billion. BofAS also had regulatory net capital of $10.4 billion which exceeded the minimum requirement of $2.4 billion.
MLPCC is a fully-guaranteed subsidiary of BofAS and provides clearing and settlement services. At December 31, 2019, MLPCC’s regulatory net capital of $5.3 billion exceeded the minimum requirement of $1.3 billion.
MLPF&S provides retail services. At December 31, 2019, MLPF&S' regulatory net capital was $4.1 billion which exceeded the minimum requirement of $102 million.
Our European broker-dealers are regulated by non-U.S. regulators. MLI, a U.K. investment firm, is regulated by the Prudential Regulation Authority and the FCA and is subject to certain regulatory capital requirements. At December 31, 2019, MLI’s capital resources were $34.8 billion, which exceeded the minimum Pillar 1 requirement of $13.9 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, 2019, BofASE's capital resources were $5.5 billion which exceeded the minimum Pillar 1 requirement of $1.3 billion.
Regulatory Developments
Revisions to Basel 3 to Address Current Expected Credit Loss Accounting
On January 1, 2020, the Corporation adopted the new accounting standard that requires the measurement of the allowance for credit losses to be based on management’s best estimate of lifetime expected credit losses inherent in the Corporation's relevant financial assets. For more information, see Note 1 - Summary of Significant Accounting Principles to the Consolidated Financial Statements. Our adoption of the standard resulted in a decrease to the CET1 capital ratio of 17 bps, which will be phased in evenly, or approximately four bps per year, at the beginning of each year from January 1, 2020 through January 1, 2023 in accordance with transition provisions issued by the U.S. banking regulators.
Security-Based Swap Dealer Capital, Margin and Segregation Requirements
On June 21, 2019, the SEC published a final rule establishing capital, margin and segregation requirements for security-based swap dealers (SBSDs). The final rule increases the minimum net capital requirements for broker-dealers authorized to use internal models to compute alternative net capital (ANC broker-dealers). For ANC broker-dealers, the minimum tentative net capital requirement increased from $1.0 billion to $5.0 billion, and the net capital requirement was raised to the greater of $1.0 billion or two percent of the applicable risk-margin amount (initial margin maintained for cleared and non-cleared security-based swaps) plus two percent of certain customer-related assets. For stand-alone SBSDs that use models to calculate haircuts, the minimum tentative net capital requirement is $100 million and the minimum net capital requirement is the greater of $20 million or two percent of the risk-margin amount.
Capital Requirements for Swap Dealers
On December 10, 2019, the CFTC re-opened the comment period on its 2016 proposal to establish capital requirements for swap dealers and major swap participants that are not subject to existing U.S. prudential regulation. Under the proposal, applicable subsidiaries of the Corporation would be permitted to elect one of two approaches to compute their regulatory capital. The first approach is a bank-based capital approach which requires that firms maintain CET1 capital greater than or equal to the larger of 8.0 percent of the entity’s RWA as calculated under Basel 3, or 8.0 percent of the margin of the entity’s cleared and uncleared swaps, security-based swaps, futures and foreign futures positions. The second approach is based on net liquid assets and requires that a firm maintain net capital greater than or equal to 8.0 percent of the margin as described above. The proposal also includes liquidity and reporting requirements.
49 Bank of America
Single-Counterparty Credit Limits
The Federal Reserve established single-counterparty credit limits (SCCL) for BHCs with total consolidated assets of $250 billion or more. The SCCL rule is designed to ensure that the maximum possible loss that a BHC could incur due to the default of a single counterparty or a group of connected counterparties would not endanger the BHC’s survival, thereby reducing the probability of future financial crises. Beginning January 1, 2020, G-SIBs must calculate SCCL on a daily basis by dividing the aggregate net credit exposure to a given counterparty by the G-SIB’s Tier 1 capital, ensuring that exposures to other G-SIBs and nonbank financial institutions regulated by the Federal Reserve do not breach 15 percent of Tier 1 capital and exposures to most other counterparties do not breach 25 percent of Tier 1 capital. Certain exposures, including exposures to the U.S. government, U.S. government-sponsored entities and qualifying central counterparties, are exempt from the credit limits.
Liquidity Risk
Funding and Liquidity Risk Management
Our primary liquidity risk management objective is to meet expected or unexpected cash flow and collateral needs while continuing to support our businesses and customers under a range of economic conditions. To achieve that objective, we analyze and monitor our liquidity risk under expected and stressed conditions, maintain liquidity and access to diverse funding sources, including our stable deposit base, and seek to align liquidity-related incentives and risks.
We define liquidity as readily available assets, limited to cash and high-quality, liquid, unencumbered securities that we can use to meet our contractual and contingent financial obligations as those obligations arise. We manage our liquidity position through line of business and ALM activities, as well as through our legal entity funding strategy, on both a forward and current (including intraday) basis under both expected and stressed conditions. We believe that a centralized approach to funding and liquidity management enhances our ability to monitor liquidity requirements, maximizes access to funding sources, minimizes borrowing costs and facilitates timely responses to liquidity events.
The Board approves our liquidity 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 42. Under this governance framework, we have developed certain funding and liquidity risk management practices which include: maintaining liquidity at the parent company and selected subsidiaries, including our bank subsidiaries and other regulated entities; determining what amounts of liquidity are appropriate for these entities based on analysis of debt maturities and other potential cash outflows, including those that we may experience during stressed market conditions; diversifying funding sources, considering our asset profile and legal entity structure; and performing contingency planning.
NB Holdings Corporation
We have intercompany arrangements with certain key subsidiaries under which we transferred certain assets of Bank of America Corporation, as the parent company, which is a separate and distinct legal entity from our banking and nonbank subsidiaries,
and agreed to transfer certain additional parent company assets not needed to satisfy anticipated near-term expenditures, to NB Holdings Corporation, a wholly-owned holding company subsidiary (NB Holdings). The parent company is expected to continue to have access to the same flow of dividends, interest and other amounts of cash necessary to service its debt, pay dividends and perform other obligations as it would have had if it had not entered into these arrangements and transferred any assets.
In consideration for the transfer of assets, NB Holdings issued a subordinated note to the parent company in a principal amount equal to the value of the transferred assets. The aggregate principal amount of the note will increase by the amount of any future asset transfers. NB Holdings also provided the parent company with a committed line of credit that allows the parent company to draw funds necessary to service near-term cash needs. These arrangements support our preferred single point of entry resolution strategy, under which only the parent company would be resolved under the U.S. Bankruptcy Code. These arrangements include provisions to terminate the line of credit, forgive the subordinated note and require the parent company to transfer its remaining financial assets to NB Holdings if our projected liquidity resources deteriorate so severely that resolution of the parent company becomes imminent.
Global Liquidity Sources and Other Unencumbered Assets
We maintain liquidity available to the Corporation, including the parent company and selected subsidiaries, in the form of cash and high-quality, liquid, unencumbered securities. Our liquidity buffer, referred to as Global Liquidity Sources (GLS), is comprised of assets that are readily available to the parent company and selected subsidiaries, including holding company, bank and broker-dealer subsidiaries, even during stressed market conditions. Our cash is primarily on deposit with the Federal Reserve Bank and, to a lesser extent, central banks outside of the U.S. We limit the composition of high-quality, liquid, unencumbered securities to U.S. government securities, U.S. agency securities, U.S. agency MBS and a select group of non-U.S. government securities. We can quickly obtain cash for these securities, even in stressed conditions, through repurchase agreements or outright sales. We hold our GLS in legal entities that allow us to meet the liquidity requirements of our global businesses, and we consider the impact of potential regulatory, tax, legal and other restrictions that could limit the transferability of funds among entities.
Table 16 presents average GLS for the three months ended December 31, 2019 and 2018.
Table 16
Average Global Liquidity Sources
Three Months Ended
December 31
(Dollars in billions)
Parent company and NB Holdings
$
$
Bank subsidiaries
Other regulated entities
Total Average Global Liquidity Sources
$
$
Typically, parent company and NB Holdings liquidity is in the form of cash deposited with BANA.
Our bank subsidiaries’ liquidity is primarily driven by deposit and lending activity, as well as securities valuation and net debt activity. Liquidity at bank subsidiaries excludes the cash deposited by the parent company and NB Holdings. Our bank subsidiaries can also generate incremental liquidity by pledging a range of unencumbered loans and securities to certain FHLBs and the Federal Reserve Discount Window. The cash we could have
Bank of America 50
obtained by borrowing against this pool of specifically-identified eligible assets was $372 billion and $344 billion at December 31, 2019 and 2018. 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 held in other regulated entities, comprised primarily of broker-dealer subsidiaries, is primarily available to meet the obligations of that entity and transfers to the parent company or to any other subsidiary may be subject to prior regulatory approval due to regulatory restrictions and minimum requirements. Our other regulated entities also hold unencumbered investment-grade securities and equities that we believe could be used to generate additional liquidity.
Table 17 presents the composition of average GLS for the three months ended December 31, 2019 and 2018.
Table 17
Average Global Liquidity Sources Composition
Three Months Ended
December 31
(Dollars in billions)
Cash on deposit
$
$
U.S. Treasury securities
U.S. agency securities and mortgage-backed securities
Non-U.S. government securities
Total Average Global Liquidity Sources
$
$
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 $464 billion and $446 billion for the three months ended December 31, 2019 and 2018. For the same periods, the average consolidated LCR was 116 percent and 118 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 issuance; diminished access to secured financing
markets; potential deposit withdrawals; increased draws on loan commitments, liquidity facilities and letters of credit; additional collateral that counterparties could call if our credit ratings were downgraded; collateral and margin requirements arising from market value changes; and potential liquidity required to maintain businesses and finance customer activities. Changes in certain market factors, including, but not limited to, credit rating downgrades, could negatively impact potential contractual and contingent outflows and the related financial instruments, and in some cases these impacts could be material to our financial results.
We consider all sources of funds that we could access during each stress scenario and focus particularly on matching available sources with corresponding liquidity requirements by legal entity. We also use the stress modeling results to manage our asset and liability profile and establish limits and guidelines on certain funding sources and businesses.
Net Stable Funding Ratio
U.S. banking regulators issued a proposal for a Net Stable Funding Ratio (NSFR) requirement applicable to U.S. financial institutions following the Basel Committee’s final standard. The proposed U.S. NSFR would apply to the Corporation on a consolidated basis and to our insured depository institutions. While the final requirement remains pending and is subject to change, if finalized as proposed, we expect to be in compliance within the regulatory timeline. The standard is intended to reduce funding risk over a longer time horizon. The NSFR is designed to provide an appropriate amount of stable funding, generally capital and liabilities maturing beyond one year, given the mix of assets and off-balance sheet items.
Diversified Funding Sources
We fund our assets primarily with a mix of deposits, and secured and unsecured liabilities through a centralized, globally coordinated funding approach diversified across products, programs, markets, currencies and investor groups.
The primary benefits of our centralized funding approach include greater control, reduced funding costs, wider name recognition by investors and greater flexibility to meet the variable funding requirements of subsidiaries. Where regulations, time zone differences or other business considerations make parent company funding impractical, certain other subsidiaries may issue their own debt.
We fund a substantial portion of our lending activities through our deposits, which were $1.43 trillion and $1.38 trillion at December 31, 2019 and 2018. Deposits are primarily generated by our Consumer Banking, GWIM and Global Banking segments. These deposits are diversified by clients, product type and geography, and the majority of our U.S. deposits are insured by the FDIC. We consider a substantial portion of our deposits to be a stable, low-cost and consistent source of funding. We believe this deposit funding is generally less sensitive to interest rate changes, market volatility or changes in our credit ratings than wholesale funding sources. Our lending activities may also be financed through secured borrowings, including credit card securitizations and securitizations with government-sponsored enterprises (GSE), the FHA and private-label investors, as well as FHLB loans.
Our trading activities in other regulated entities are primarily funded on a secured basis through securities lending and repurchase agreements, and these amounts will vary based on customer activity and market conditions. We believe funding these activities in the secured financing markets is more cost-efficient and less sensitive to changes in our credit ratings than unsecured financing. Repurchase agreements are generally short-term and
51 Bank of America
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 11 - Federal Funds Sold or Purchased, Securities Financing Agreements, Short-term Borrowings and Restricted Cash to the Consolidated Financial Statements.
We issue long-term unsecured debt in a variety of maturities and currencies to achieve cost-efficient funding and to maintain an appropriate maturity profile. While the cost and availability of unsecured funding may be negatively impacted by general market conditions or by matters specific to the financial services industry or the Corporation, we seek to mitigate refinancing risk by actively managing the amount of our borrowings that we anticipate will mature within any month or quarter.
Table 18 presents our long-term debt by major currency at December 31, 2019 and 2018.
Table 18
Long-term Debt by Major Currency
December 31
(Dollars in millions)
U.S. dollar
$
191,284
$
180,724
Euro
32,781
34,328
British pound
5,067
5,450
Japanese yen
4,310
3,038
Canadian dollar
3,857
2,936
Australian dollar
1,957
1,722
Other
1,600
1,194
Total long-term debt
$
240,856
$
229,392
Total long-term debt increased $11.5 billion during 2019, primarily due to debt issuances and valuation adjustments, partially offset by maturities and redemptions. We may, from time to time, purchase outstanding debt instruments in various transactions, depending on market conditions, liquidity and other factors. Our other regulated entities may also make markets in our debt instruments to provide liquidity for investors.
During 2019, the Corporation issued $52.5 billion of long-term debt consisting of $29.3 billion of notes issued by Bank of America Corporation, substantially all of which was TLAC compliant, $10.9 billion of notes issued by Bank of America, N.A. and $12.3 billion of other debt, substantially all of which was structured liabilities. During 2018, the Corporation issued $64.4 billion of long-term debt consisting of $30.7 billion of notes issued by Bank of America Corporation, substantially all of which was TLAC compliant, $18.7 billion of notes issued by Bank of America, N.A. and $15.0 billion of other debt, substantially all of which was structured liabilities.
During 2019, the Corporation had total long-term debt maturities and redemptions in the aggregate of $50.6 billion consisting of $21.1 billion for Bank of America Corporation, $19.9 billion for Bank of America, N.A. and $9.6 billion of other debt. During 2018, the Corporation had total long-term debt maturities and redemptions in the aggregate of $53.3 billion consisting of $29.8 billion for Bank of America Corporation, $11.2 billion for Bank of America, N.A. and $12.3 billion of other debt.
At December 31, 2019, Bank of America Corporation's senior notes of $159.8 billion included $107.7 billion of outstanding notes that are both TLAC eligible and callable at least one year before their stated maturities. Of these senior notes, $7.4 billion will be callable and become TLAC ineligible during 2020, and $11.7
billion, $14.8 billion, $10.7 billion and $9.2 billion will do so during each of 2021 through 2024, respectively, and $53.9 billion thereafter.
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 74.
We may issue unsecured debt in the form of structured notes for client purposes, certain of which qualify as TLAC-eligible debt. During 2019, we issued $9.6 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 12 - Long-term Debt to the Consolidated Financial Statements.
Contingency Planning
We maintain contingency funding plans that outline our potential responses to liquidity stress events at various levels of severity. These policies and plans are based on stress scenarios and include potential funding strategies and communication and notification procedures that we would implement in the event we experienced stressed liquidity conditions. We periodically review and test the contingency funding plans to validate efficacy and assess readiness.
Our U.S. bank subsidiaries can access contingency funding through the Federal Reserve Discount Window. Certain non-U.S. subsidiaries have access to central bank facilities in the jurisdictions in which they operate. While we do not rely on these sources in our liquidity modeling, we maintain the policies, procedures and governance processes that would enable us to access these sources if necessary.
Credit Ratings
Our borrowing costs and ability to raise funds are impacted by our credit ratings. In addition, credit ratings may be important to customers or counterparties when we compete in certain markets and when we seek to engage in certain transactions, including over-the-counter (OTC) derivatives. Thus, it is our objective to maintain high-quality credit ratings, and management maintains an active dialogue with the major rating agencies.
Credit ratings and outlooks are opinions expressed by rating agencies on our creditworthiness and that of our obligations or securities, including long-term debt, short-term borrowings, preferred stock and other securities, including asset securitizations. Our credit ratings are subject to ongoing review by the rating agencies, and they consider a number of factors, including our own financial strength, performance, prospects and operations as well as factors not under our control. The rating
Bank of America 52
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 June 12, 2019, Fitch Ratings (Fitch) completed its periodic review of the 12 large, complex securities trading and universal banks, including Bank of America Corporation. The agency affirmed the long-term and short-term senior debt ratings of the Corporation and all of its rated subsidiaries, except Bank of America Merrill
Lynch International Designated Activity Company, which Fitch upgraded by one notch to AA-/F1+. The rating outlook for all long-term ratings is currently stable.
On March 6, 2019, Moody’s Investors Service (Moody’s) upgraded the long-term and short-term ratings of the Corporation by one notch to A2/P-1 from A3/P-2 for senior debt, as well as the long-term ratings of its rated subsidiaries, including BANA, which the agency upgraded to Aa2 from Aa3 for senior debt. Moody’s concurrently affirmed the short-term ratings of the Corporation’s rated subsidiaries, including BANA. Moody’s cited the Corporation’s strengthening profitability, continued adherence to a conservative risk profile and stable capital ratios as rationale for the upgrade. The rating outlook for all long-term ratings is currently stable.
The ratings from Standard & Poor’s Global Ratings (S&P) for the Corporation and its subsidiaries did not change during 2019. The long-term and short-term debt ratings of BofAS and BofASE, which were initially rated by S&P during the first quarter 2019, also remained unchanged during the rest of 2019.
Table 19 presents the Corporation’s current long-term/short-term senior debt ratings and outlooks expressed by the rating agencies.
Table 19
Senior Debt Ratings
Moody’s Investors Service
Standard & Poor’s Global Ratings
Fitch Ratings
Long-term
Short-term
Outlook
Long-term
Short-term
Outlook
Long-term
Short-term
Outlook
Bank of America Corporation
A2
P-1
Stable
A-
A-2
Stable
A+
Stable
Bank of America, N.A.
Aa2
P-1
Stable
A+
A-1
Stable
AA-
+
Stable
Bank of America Merrill Lynch International Designated Activity Company
NR
NR
NR
A+
A-1
Stable
AA-
+
Stable
Merrill Lynch, Pierce, Fenner & Smith Incorporated
NR
NR
NR
A+
A-1
Stable
AA-
+
Stable
BofA Securities, Inc.
NR
NR
NR
A+
A-1
Stable
AA-
+
Stable
Merrill Lynch International
NR
NR
NR
A+
A-1
Stable
A+
Stable
BofA Securities Europe SA
NR
NR
NR
A+
A-1
Stable
A+
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 51.
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 2019 and through February 19, 2020, see Note 14 - Shareholders’ Equity 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
53 Bank of America
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 13 - Commitments and Contingencies to the Consolidated Financial Statements.
We manage credit risk based on the risk profile of the borrower or counterparty, repayment sources, the nature of underlying collateral, and other support given current events, conditions and expectations. We classify our portfolios as either consumer or commercial and monitor credit risk in each as discussed below.
We refine our underwriting and credit risk management practices as well as credit standards to meet the changing economic environment. To mitigate losses and enhance customer support in our consumer businesses, we have in place collection programs and loan modification and customer assistance infrastructures. We utilize a number of actions to mitigate losses in the commercial businesses including increasing the frequency and intensity of portfolio monitoring, hedging activity and our practice of transferring management of deteriorating commercial exposures to independent special asset officers as credits enter criticized categories.
For more information on our credit risk management activities, see Consumer Portfolio Credit Risk Management below, Commercial Portfolio Credit Risk Management on page 60, Non-U.S. Portfolio on page 66, Provision for Credit Losses on page 68, Allowance for Credit Losses on page 68, and Note 5 - Outstanding Loans and Leases and Note 6 - Allowance for Credit Losses to the Consolidated Financial Statements.
Consumer Portfolio Credit Risk Management
Credit risk management for the consumer portfolio begins with initial underwriting and continues throughout a borrower’s credit cycle. Statistical techniques in conjunction with experiential judgment are used in all aspects of portfolio management including underwriting, product pricing, risk appetite, setting credit limits, and establishing operating processes and metrics to quantify and balance risks and returns. Statistical models are built using detailed behavioral information from external sources such as credit bureaus and/or internal historical experience and are a component of our consumer credit risk management process. These models are used in part to assist in making both new and ongoing credit decisions, as well as portfolio management strategies, including authorizations and line management, collection practices and strategies, and determination of the allowance for loan and lease losses and allocated capital for credit risk.
Consumer Credit Portfolio
Improvement in home prices continued during 2019 resulting in improved credit quality compared to 2018. Net recoveries in the consumer real estate portfolio due primarily to non-core loan sales were partially offset by seasoning in the credit card portfolio compared to 2018.
Improved credit quality and continued loan balance runoff primarily in the non-core consumer real estate portfolio, partially offset by seasoning within the credit card portfolio, drove a $260 million decrease in the consumer allowance for loan and lease losses in 2019 to $4.5 billion. For more information, see Allowance for Credit Losses on page 68.
For more information on our accounting policies regarding delinquencies, nonperforming status, charge-offs and troubled debt restructurings (TDRs) for the consumer portfolio, see Note 1 - Summary of Significant Accounting Principles and Note 5 - Outstanding Loans and Leases to the Consolidated Financial Statements.
Table 20 presents our outstanding consumer loans and leases, consumer nonperforming loans and accruing consumer loans past due 90 days or more.
Table 20
Consumer Credit Quality
Outstandings
Nonperforming
Accruing Past Due
90 Days or More
December 31
(Dollars in millions)
Residential mortgage (1)
$
236,169
$
208,557
$
1,470
$
1,893
$
1,088
$
1,884
Home equity
40,208
48,286
1,893
-
-
Credit card
97,608
98,338
n/a
n/a
1,042
Direct/Indirect consumer (2)
90,998
91,166
Other consumer
-
-
-
-
Consumer loans excluding loans accounted for under the fair value option
$
465,175
$
446,549
$
2,053
$
3,842
$
2,163
$
2,916
Loans accounted for under the fair value option (3)
Total consumer loans and leases
$
465,769
$
447,231
Percentage of outstanding consumer loans and leases (4)
n/a
n/a
0.44
%
0.86
%
0.47
%
0.65
%
Percentage of outstanding consumer loans and leases, excluding fully-insured loan portfolios (4)
n/a
n/a
0.46
0.90
0.24
0.24
(1)
Residential mortgage loans accruing past due 90 days or more are fully-insured loans. At December 31, 2019 and 2018, residential mortgage includes $740 million and $1.4 billion of loans on which interest had been curtailed by the FHA, and therefore were no longer accruing interest, although principal was still insured, and $348 million and $498 million of loans on which interest was still accruing.
(2)
Outstandings primarily include auto and specialty lending loans and leases of $50.4 billion and $50.1 billion, U.S. securities-based lending loans of $36.7 billion and $37.0 billion and non-U.S. consumer loans of $2.8 billion and $2.9 billion at December 31, 2019 and 2018.
(3)
Consumer loans accounted for under the fair value option include residential mortgage loans of $257 million and $336 million and home equity loans of $337 million and $346 million at December 31, 2019 and 2018. For more information on the fair value option, see Note 22 - Fair Value Option to the Consolidated Financial Statements.
(4)
Excludes consumer loans accounted for under the fair value option. At December 31, 2019 and 2018, $6 million and $12 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
Bank of America 54
Table 21 presents net charge-offs and related ratios for consumer loans and leases.
Table 21
Consumer Net Charge-offs and Related Ratios
Net Charge-offs
Net Charge-off Ratios (1)
(Dollars in millions)
Residential mortgage
$
(47
)
$
(0.02
)%
0.01
%
Home equity
(358
)
(2
)
(0.81
)
-
Credit card
2,948
2,837
3.12
3.00
Direct/Indirect consumer
0.23
0.21
Other consumer
n/m
n/m
Total
$
2,986
$
3,240
0.66
0.72
(1)
Net charge-off ratios are calculated as net charge-offs divided by average outstanding loans and leases excluding loans accounted for under the fair value option.
n/m = not meaningful
Table 22 presents outstandings, nonperforming balances, net charge-offs, allowance for loan and lease losses and provision for loan and lease losses for the core and non-core portfolios within the consumer real estate portfolio. We categorize consumer real estate loans as core and non-core based on loan and customer characteristics such as origination date, product type, loan-to-value (LTV), Fair Isaac Corporation (FICO) score and delinquency status consistent with our current consumer and mortgage servicing strategy. Generally, loans that were originated after January 1, 2010, qualified under GSE underwriting guidelines, or otherwise met our underwriting guidelines in place in 2015 are characterized
as core loans. All other loans are generally characterized as non-core loans and represent runoff portfolios. Core loans as reported in Table 22 include loans held in the Consumer Banking and GWIM segments, as well as loans held for ALM activities in All Other.
As shown in Table 22, outstanding core consumer real estate loans increased $27.3 billion during 2019 driven by an increase of $32.1 billion in residential mortgage, partially offset by a $4.8 billion decrease in home equity.
During 2019, we sold $4.7 billion of consumer real estate loans, primarily non-core, compared to $11.6 billion in 2018.
Table 22
Consumer Real Estate Portfolio (1)
Outstandings
Nonperforming
December 31
Net Charge-offs
(Dollars in millions)
Core portfolio
Residential mortgage
$
225,770
$
193,695
$
$
1,010
$
$
Home equity
35,226
40,010
Total core portfolio
260,996
233,705
1,246
1,965
Non-core portfolio
Residential mortgage
10,399
14,862
(54
)
Home equity
4,982
8,276
(409
)
(80
)
Total non-core portfolio
15,381
23,138
1,821
(463
)
(63
)
Consumer real estate portfolio
Residential mortgage
236,169
208,557
1,470
1,893
(47
)
Home equity
40,208
48,286
1,893
(358
)
(2
)
Total consumer real estate portfolio
$
276,377
$
256,843
$
2,006
$
3,786
$
(405
)
$
Allowance for Loan
and Lease Losses
Provision for Loan
and Lease Losses
December 31
Core portfolio
Residential mortgage
$
$
$
$
Home equity
(58
)
(60
)
Total core portfolio
(36
)
(53
)
Non-core portfolio
Residential mortgage
(134
)
(104
)
Home equity
(510
)
(335
)
Total non-core portfolio
(644
)
(439
)
Consumer real estate portfolio
Residential mortgage
(112
)
(97
)
Home equity
(568
)
(395
)
Total consumer real estate portfolio
$
$
$
(680
)
$
(492
)
(1)
Outstandings and nonperforming loans exclude loans accounted for under the fair value option. Consumer loans accounted for under the fair value option include residential mortgage loans of $257 million and $336 million and home equity loans of $337 million and $346 million at December 31, 2019 and 2018. For more information, see Note 22 - Fair Value Option to the Consolidated Financial Statements.
55 Bank of America
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 at December 31, 2019. Approximately 50 percent of the residential mortgage portfolio was in Consumer Banking and 36 percent was in GWIM. The remaining portion was in All Other and was comprised of loans used in our overall ALM activities,
delinquent FHA loans repurchased pursuant to our servicing agreements with the Government National Mortgage Association as well as loans repurchased related to our representations and warranties.
Outstanding balances in the residential mortgage portfolio increased $27.6 billion in 2019 as retention of new originations was partially offset by loan sales of $2.7 billion and runoff.
At December 31, 2019 and 2018, the residential mortgage portfolio included $18.7 billion and $20.1 billion of outstanding fully-insured loans, of which $11.2 billion and $14.0 billion had FHA insurance with the remainder protected by long-term standby agreements.
Table 23 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 23
Residential Mortgage - Key Credit Statistics
Reported Basis (1)
Excluding Fully-insured Loans (1)
December 31
(Dollars in millions)
Outstandings
$
236,169
$
208,557
$
217,479
$
188,427
Accruing past due 30 days or more
3,108
3,945
1,296
1,155
Accruing past due 90 days or more
1,088
1,884
-
-
Nonperforming loans
1,470
1,893
1,470
1,893
Percent of portfolio
Refreshed LTV greater than 90 but less than or equal to 100
%
%
%
%
Refreshed LTV greater than 100
Refreshed FICO below 620
2006 and 2007 vintages (2)
(1)
Outstandings, accruing past due, nonperforming loans and percentages of portfolio exclude loans accounted for under the fair value option.
(2)
These vintages of loans accounted for $365 million, or 25 percent, and $536 million, or 28 percent, of nonperforming residential mortgage loans at December 31, 2019 and 2018.
Nonperforming residential mortgage loans decreased $423 million in 2019 primarily driven by sales. Of the nonperforming residential mortgage loans at December 31, 2019, $616 million, or 42 percent, were current on contractual payments. Loans accruing past due 30 days or more increased $141 million.
Net charge-offs improved $75 million to a net recovery of $47 million in 2019 compared to net charge-offs of $28 million in 2018 primarily due to recoveries from the sales of previously charged-off loans and continued improvement in credit quality.
Of the $217.5 billion in total residential mortgage loans outstanding at December 31, 2019, as shown in Table 23, 26 percent were originated as interest-only loans. The outstanding balance of interest-only residential mortgage loans that have entered the amortization period was $7.4 billion, or 13 percent, at December 31, 2019. Residential mortgage loans that have entered the amortization period generally have experienced a higher rate of early stage delinquencies and nonperforming status compared to the residential mortgage portfolio as a whole. At December 31, 2019, $124 million, or two percent, of outstanding interest-only residential mortgages that had entered the amortization period were accruing past due 30 days or more
compared to $1.3 billion, or one percent, for the entire residential mortgage portfolio. In addition, at December 31, 2019, $260 million, or four percent, of outstanding interest-only residential mortgage loans that had entered the amortization period were nonperforming, of which $108 million were contractually current, compared to $1.5 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 94 percent of these loans that have yet to enter the amortization period will not be required to make a fully-amortizing payment until 2022 or later.
Table 24 presents outstandings, nonperforming loans and net charge-offs by certain state concentrations for the residential mortgage portfolio. The Los Angeles-Long Beach-Santa Ana Metropolitan Statistical Area (MSA) within California represented 16 percent of outstandings at both December 31, 2019 and 2018. In the New York area, the New York-Northern New Jersey-Long Island MSA made up 13 percent of outstandings at both December 31, 2019 and 2018.
Bank of America 56
Table 24
Residential Mortgage State Concentrations
Outstandings (1)
Nonperforming (1)
December 31
Net Charge-offs
(Dollars in millions)
California
$
88,998
$
76,323
$
$
$
(22
)
$
(22
)
New York
22,385
19,219
Florida
12,833
11,624
(12
)
(6
)
Texas
8,943
7,820
New Jersey
8,734
7,051
(4
)
Other
75,586
66,390
(15
)
Residential mortgage loans
$
217,479
$
188,427
$
1,470
$
1,893
$
(47
)
$
Fully-insured loan portfolio
18,690
20,130
Total residential mortgage loan portfolio
$
236,169
$
208,557
(1)
Outstandings and nonperforming loans exclude loans accounted for under the fair value option.
Home Equity
At December 31, 2019, the home equity portfolio made up nine percent of the consumer portfolio and was comprised of home equity lines of credit (HELOCs), home equity loans and reverse mortgages. We no longer originate home equity loans or reverse mortgages.
At December 31, 2019, our HELOC portfolio had an outstanding balance of $37.5 billion, or 93 percent of the total home equity portfolio, compared to $44.3 billion, or 92 percent, at December 31, 2018. 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.
At December 31, 2019, our home equity loan portfolio had an outstanding balance of $1.2 billion, or three percent of the total home equity portfolio, compared to $1.8 billion, or four percent, at December 31, 2018. At December 31, 2019, our reverse mortgage portfolio had an outstanding balance of $1.5 billion, or four percent of the total home equity portfolio, compared to $2.2 billion, also four percent, at December 31, 2018.
At December 31, 2019, 80 percent of the home equity portfolio was in Consumer Banking, 12 percent was in All Other and the remainder of the portfolio was primarily in GWIM. Outstanding balances in the home equity portfolio decreased $8.1 billion in 2019 primarily due to paydowns and loan sales of $2.0 billion outpacing new originations and draws on existing lines. Of the total home equity portfolio at December 31, 2019 and 2018, $15.0 billion, or 37 percent, and $17.3 billion, or 36 percent, were in first-lien positions. At December 31, 2019, 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 $6.9 billion, or 17 percent of our total home equity portfolio.
Unused HELOCs totaled $43.6 billion and $43.1 billion at December 31, 2019 and 2018. The increase was primarily driven by the impact of lower utilization of open lines and new production partially offset by customers choosing to close accounts. The HELOC utilization rate was 46 percent and 51 percent at December 31, 2019 and 2018.
Table 25 presents certain home equity portfolio key credit statistics.
Table 25
Home Equity - Key Credit Statistics (1)
December 31
(Dollars in millions)
Outstandings
$
40,208
$
48,286
Accruing past due 30 days or more (2)
Nonperforming loans (2)
1,893
Percent of portfolio
Refreshed CLTV greater than 90 but less than or equal to 100
%
%
Refreshed CLTV greater than 100
Refreshed FICO below 620
2006 and 2007 vintages (3)
(1)
Outstandings, accruing past due, nonperforming loans and percentages of the portfolio exclude loans accounted for under the fair value option.
(2)
Accruing past due 30 days or more include $30 million and $48 million and nonperforming loans include $57 million and $218 million of loans where we serviced the underlying first lien at December 31, 2019 and 2018.
(3)
These vintages of loans accounted for 34 percent and 49 percent of nonperforming home equity loans at December 31, 2019 and 2018.
Nonperforming outstanding balances in the home equity portfolio decreased $1.4 billion in 2019 as outflows, primarily sales, outpaced new inflows. Of the nonperforming home equity loans at December 31, 2019, $241 million, or 45 percent, were current on contractual payments. Nonperforming loans that are contractually current primarily consist of collateral-dependent TDRs, including those that have been discharged in Chapter 7 bankruptcy, junior-lien loans where the underlying first lien is 90 days or more past due, as well as loans that have not yet demonstrated a sustained period of payment performance following a TDR. In addition, $162 million, or 30 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 $145 million in 2019.
Net charge-offs decreased $356 million to a net recovery of $358 million in 2019 compared to a net recovery of $2 million in 2018 primarily driven by recoveries from the sales of previously charged off non-core home equity loans.
Of the $40.2 billion in total home equity portfolio outstandings at December 31, 2019, as shown in Table 25, 17 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 $11.5 billion at December 31, 2019. The HELOCs that have entered the amortization period have experienced a higher percentage of early stage delinquencies and
57 Bank of America
nonperforming status when compared to the HELOC portfolio as a whole. At December 31, 2019, $149 million, or one percent, of outstanding HELOCs that had entered the amortization period were accruing past due 30 days or more. In addition, at December 31, 2019, $472 million, or four 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 2019, 13 percent of these customers with an outstanding balance did not pay any principal on their HELOCs.
Table 26 presents outstandings, nonperforming balances and net charge-offs by certain state concentrations for the home equity portfolio. In the New York area, the New York-Northern New Jersey-Long Island MSA made up 13 percent of the outstanding home equity portfolio at both December 31, 2019 and 2018. The Los Angeles-Long Beach-Santa Ana MSA within California made up 11 percent of the outstanding home equity portfolio at both December 31, 2019 and 2018.
Table 26
Home Equity State Concentrations
Outstandings (1)
Nonperforming (1)
December 31
Net Charge-offs
(Dollars in millions)
California
$
11,232
$
13,515
$
$
$
(117
)
$
(54
)
Florida
4,327
5,418
(74
)
New Jersey
3,216
3,871
(8
)
New York
2,899
3,590
(1
)
Massachusetts
2,023
2,400
(5
)
Other
16,511
19,492
(153
)
(2
)
Total home equity loan portfolio
$
40,208
$
48,286
$
$
1,893
$
(358
)
$
(2
)
(1)
Outstandings and nonperforming loans exclude loans accounted for under the fair value option.
Credit Card
At December 31, 2019, 97 percent of the credit card portfolio was managed in Consumer Banking with the remainder in GWIM. Outstandings in the credit card portfolio decreased $730 million in 2019 to $97.6 billion. In 2019, net charge-offs increased $111 million to $2.9 billion compared to net charge-offs of $2.8 billion in 2018. Credit card loans 30 days or more past due and still
accruing interest increased $46 million and loans 90 days or more past due and still accruing interest increased $48 million. These increases were driven by portfolio seasoning.
Unused lines of credit for credit card increased to $336.9 billion at December 31, 2019 from $334.8 billion at December 31, 2018.
Table 27 presents certain state concentrations for the credit card portfolio.
Table 27
Credit Card State Concentrations
Outstandings
Accruing Past Due
90 Days or More
December 31
Net Charge-offs
(Dollars in millions)
California
$
16,135
$
16,062
$
$
$
$
Florida
9,075
8,840
Texas
7,815
7,730
New York
5,975
6,066
Washington
4,639
4,558
Other
53,969
55,082
1,504
1,471
Total credit card portfolio
$
97,608
$
98,338
$
1,042
$
$
2,948
$
2,837
Direct/Indirect Consumer
At December 31, 2019, 56 percent of the direct/indirect portfolio was included in Consumer Banking (consumer auto and specialty lending - automotive, recreational vehicle, marine, aircraft and consumer personal loans) and 44 percent was included in GWIM (principally securities-based lending loans).
Outstandings of $91.0 billion in the direct/indirect portfolio were relatively unchanged at December 31, 2019.
Table 28 presents certain state concentrations for the direct/indirect consumer loan portfolio.
Bank of America 58
Table 28
Direct/Indirect State Concentrations
Outstandings
Accruing Past Due
90 Days or More
December 31
Net Charge-offs
(Dollars in millions)
California
$
11,912
$
11,734
$
$
$
$
Florida
10,154
10,240
Texas
9,516
9,876
New York
6,394
6,296
New Jersey
3,468
3,308
Other
49,554
49,712
Total direct/indirect loan portfolio
$
90,998
$
91,166
$
$
$
$
Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity
Table 29 presents nonperforming consumer loans, leases and foreclosed properties activity during 2019 and 2018. During 2019, nonperforming consumer loans decreased $1.8 billion to $2.1 billion primarily driven by loan sales of $1.5 billion.
At December 31, 2019, $606 million, or 29 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, 2019, $901 million, or 44
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 $15 million in 2019 to $229 million as liquidations outpaced additions.
Nonperforming loans also include certain loans that have been modified in TDRs where economic concessions have been granted to borrowers experiencing financial difficulties. Nonperforming TDRs are included in Table 29.
Table 29
Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity
(Dollars in millions)
Nonperforming loans and leases, January 1
$
3,842
$
5,166
Additions
1,407
2,440
Reductions:
Paydowns and payoffs
(701
)
(958
)
Sales
(1,523
)
(969
)
Returns to performing status (1)
(766
)
(1,283
)
Charge-offs
(111
)
(401
)
Transfers to foreclosed properties
(95
)
(151
)
Transfers to loans held-for-sale
-
(2
)
Total net reductions to nonperforming loans and leases
(1,789
)
(1,324
)
Total nonperforming loans and leases, December 31
2,053
3,842
Foreclosed properties, December 31 (2)
Nonperforming consumer loans, leases and foreclosed properties, December 31
$
2,282
$
4,086
Nonperforming consumer loans and leases as a percentage of outstanding consumer loans and leases (3)
0.44
%
0.86
%
Nonperforming consumer loans, leases and foreclosed properties as a percentage of outstanding consumer loans, leases and foreclosed properties (3)
0.49
0.92
(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 $260 million and $488 million at December 31, 2019 and 2018.
(3)
Outstanding consumer loans and leases exclude loans accounted for under the fair value option.
Table 30 presents TDRs for the consumer real estate portfolio. Performing TDR balances are excluded from nonperforming loans and leases in Table 29.
Table 30
Consumer Real Estate Troubled Debt Restructurings
December 31, 2019
December 31, 2018
(Dollars in millions)
Nonperforming
Performing
Total
Nonperforming
Performing
Total
Residential mortgage (1, 2)
$
$
3,832
$
4,753
$
1,209
$
4,988
$
6,197
Home equity (3)
1,229
1,107
1,252
2,359
Total consumer real estate troubled debt restructurings
$
1,173
$
4,809
$
5,982
$
2,316
$
6,240
$
8,556
(1)
At December 31, 2019 and 2018, residential mortgage TDRs deemed collateral dependent totaled $1.2 billion and $1.6 billion, and included $748 million and $960 million of loans classified as nonperforming and $468 million and $605 million of loans classified as performing.
(2)
At December 31, 2019 and 2018, residential mortgage performing TDRs include $2.1 billion and $2.8 billion of loans that were fully-insured.
(3)
At December 31, 2019 and 2018, home equity TDRs deemed collateral dependent totaled $442 million and $1.3 billion, and include $209 million and $961 million of loans classified as nonperforming and $233 million and $322 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, all of which are considered TDRs (the renegotiated TDR portfolio).
59 Bank of America
Modifications of credit card and other consumer loans are made through renegotiation programs utilizing direct customer contact, but may also utilize external renegotiation programs. The renegotiated TDR portfolio is excluded in large part from Table 29 as substantially all of the loans remain on accrual status until either charged off or paid in full. At December 31, 2019 and 2018, our renegotiated TDR portfolio was $679 million and $566 million, of which $570 million and $481 million were current or less than 30 days past due under the modified terms. The increase in the renegotiated TDR portfolio was primarily driven by new renegotiated enrollments outpacing runoff of existing portfolios.
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 35, 38 and 41 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 64 and Table 38.
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 13 - Commitments and Contingencies to the Consolidated Financial Statements.
Commercial Credit Portfolio
During 2019, credit quality among large corporate and middle-market borrowers in our commercial and industrial portfolio remained strong. Credit quality of commercial real estate borrowers in most sectors remained stable with conservative LTV ratios. However, some of the real estate markets experienced slowing tenant demand and decelerating rental income.
Total commercial utilized credit exposure increased $14.3 billion in 2019 to $635.3 billion driven by higher loans and leases. The utilization rate for loans and leases, SBLCs and financial guarantees, and commercial letters of credit, in the aggregate, was 58 percent at December 31, 2019 and 59 percent at December 31, 2018.
Table 31 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.
Bank of America 60
Table 31
Commercial Credit Exposure by Type
Commercial Utilized (1)
Commercial Unfunded (2, 3, 4)
Total Commercial Committed
December 31
(Dollars in millions)
Loans and leases
$
517,657
$
499,664
$
405,834
$
369,282
$
923,491
$
868,946
Derivative assets (5)
40,485
43,725
-
-
40,485
43,725
Standby letters of credit and financial guarantees
36,062
34,941
36,530
35,432
Debt securities and other investments
25,546
25,425
5,101
4,250
30,647
29,675
Loans held-for-sale
7,047
9,090
15,135
14,812
22,182
23,902
Operating leases
6,660
6,060
-
-
6,660
6,060
Commercial letters of credit
1,049
1,210
1,500
1,378
Other
-
-
Total
$
635,306
$
621,013
$
426,989
$
389,003
$
1,062,295
$
1,010,016
(1)
Commercial utilized exposure includes loans of $7.7 billion and $3.7 billion and issued letters of credit with a notional amount of $170 million and $100 million accounted for under the fair value option at December 31, 2019 and 2018.
(2)
Commercial unfunded exposure includes commitments accounted for under the fair value option with a notional amount of $4.2 billion and $3.0 billion at December 31, 2019 and 2018.
(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 $10.6 billion and $10.7 billion at December 31, 2019 and 2018.
(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 $33.9 billion and $32.4 billion at December 31, 2019 and 2018. Not reflected in utilized and committed exposure is additional non-cash derivative collateral held of $35.2 billion and $33.0 billion at December 31, 2019 and 2018, which consists primarily of other marketable securities.
Outstanding commercial loans and leases increased $18.0 billion during 2019 primarily in the commercial and industrial portfolio. Nonperforming commercial loans increased $397 million and commercial reservable criticized utilized exposure increased $391 million driven by a small number of client downgrades across industries which were not indicative of broader issues in the
portfolio. The allowance for loan and lease losses for the commercial portfolio increased $75 million to $4.9 billion at December 31, 2019. For more information, see Allowance for Credit Losses on page 68. Table 32 presents our commercial loans and leases portfolio and related credit quality information at December 31, 2019 and 2018.
Table 32
Commercial Credit Quality
Outstandings
Nonperforming
Accruing Past Due
90 Days or More
December 31
(Dollars in millions)
Commercial and industrial:
U.S. commercial
$
307,048
$
299,277
$
1,094
$
$
$
Non-U.S. commercial
104,966
98,776
-
Total commercial and industrial
412,014
398,053
1,137
Commercial real estate
62,689
60,845
Commercial lease financing
19,880
22,534
494,583
481,432
1,449
1,048
U.S. small business commercial (1)
15,333
14,565
Commercial loans excluding loans accounted for under the fair value option
509,916
495,997
1,499
1,102
Loans accounted for under the fair value option (2)
7,741
3,667
-
-
-
-
Total commercial loans and leases
$
517,657
$
499,664
$
1,499
$
1,102
$
$
(1)
Includes card-related products.
(2)
Commercial loans accounted for under the fair value option include U.S. commercial of $4.7 billion and $2.5 billion and non-U.S. commercial of $3.1 billion and $1.1 billion at December 31, 2019 and 2018. For more information on the fair value option, see Note 22 - Fair Value Option to the Consolidated Financial Statements.
Table 33 presents net charge-offs and related ratios for our commercial loans and leases for 2019 and 2018.
Table 33
Commercial Net Charge-offs and Related Ratios
Net Charge-offs
Net Charge-off Ratios (1)
(Dollars in millions)
Commercial and industrial:
U.S. commercial
$
$
0.08
%
0.07
%
Non-U.S. commercial
0.08
0.07
Total commercial and industrial
0.08
0.07
Commercial real estate
0.05
-
Commercial lease financing
(1
)
0.10
(0.01
)
0.08
0.06
U.S. small business commercial
1.83
1.70
Total commercial
$
$
0.13
0.11
(1)
Net charge-off ratios are calculated as net charge-offs divided by average outstanding loans and leases excluding loans accounted for under the fair value option.
61 Bank of America
Table 34 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. At December 31, 2019 and 2018, 90 percent and 91 percent of commercial reservable criticized utilized exposure was secured.
Table 34
Commercial Reservable Criticized Utilized Exposure (1, 2)
December 31
(Dollars in millions)
Commercial and industrial:
U.S. commercial
$
8,272
2.46
%
$
7,986
2.43
%
Non-U.S. commercial
0.89
1,013
0.97
Total commercial and industrial
9,261
2.07
8,999
2.08
Commercial real estate
1,129
1.75
1.50
Commercial lease financing
1.66
1.62
10,719
2.01
10,301
1.99
U.S. small business commercial
4.78
5.22
Total commercial reservable criticized utilized exposure (1)
$
11,452
2.09
$
11,061
2.08
(1)
Total commercial reservable criticized utilized exposure includes loans and leases of $10.7 billion and $10.3 billion and commercial letters of credit of $715 million and $781 million at December 31, 2019 and 2018.
(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, 2019, 70 percent of the U.S. commercial loan portfolio, excluding small business, was managed in Global Banking, 16 percent in Global Markets, 13 percent in GWIM (generally business-purpose loans for high net worth clients) and the remainder primarily in Consumer Banking. U.S. commercial loans increased $7.8 billion during 2019, across lines of business.
Non-U.S. Commercial
At December 31, 2019, 83 percent of the non-U.S. commercial loan portfolio was managed in Global Banking and 17 percent in Global Markets. Non-U.S. commercial loans increased $6.2 billion during 2019, primarily in Global Banking. For information on the non-U.S. commercial portfolio, see Non-U.S. Portfolio on page 66.
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 $1.8 billion, or three percent, during 2019 to $62.7 billion due to new originations slightly outpacing paydowns. The portfolio remains diversified across property types and geographic regions. California represented the largest state concentration at 24 percent and 23 percent of the commercial real estate portfolio at December 31, 2019 and 2018. 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 2019, we continued to see low default rates and solid credit quality in both the residential and non-residential portfolios. We use a number of proactive risk mitigation initiatives to reduce adversely rated exposure in the commercial real estate portfolio, including transfers of deteriorating exposures to management by independent special asset officers and the pursuit of loan restructurings or asset sales to achieve the best results for our customers and the Corporation.
Table 35 presents outstanding commercial real estate loans by geographic region, based on the geographic location of the collateral, and by property type.
Bank of America 62
Table 35
Outstanding Commercial Real Estate Loans
December 31
(Dollars in millions)
By Geographic Region
California
$
14,910
$
14,002
Northeast
12,408
10,895
Southwest
8,408
7,339
Southeast
5,937
5,726
Florida
3,984
3,680
Illinois
3,349
2,989
Midwest
3,203
3,772
Midsouth
2,468
2,919
Northwest
1,638
2,178
Non-U.S.
3,724
4,240
Other (1)
2,660
3,105
Total outstanding commercial real estate loans
$
62,689
$
60,845
By Property Type
Non-residential
Office
$
17,902
$
17,246
Industrial / Warehouse
8,677
5,379
Shopping centers / Retail
8,183
8,798
Multi-family rental
7,250
7,762
Hotels / Motels
6,982
7,248
Unsecured
3,438
2,956
Multi-use
1,788
2,848
Other
6,958
7,029
Total non-residential
61,178
59,266
Residential
1,511
1,579
Total outstanding commercial real estate loans
$
62,689
$
60,845
(1)
Includes unsecured loans to real estate investment trusts and national home builders whose portfolios of properties span multiple geographic regions and properties in the states of Colorado, Utah, Hawaii, Wyoming and Montana.
U.S. Small Business Commercial
The U.S. small business commercial loan portfolio is comprised of small business card loans and small business loans managed in Consumer Banking. Credit card-related products were 52 percent and 51 percent of the U.S. small business commercial portfolio at December 31, 2019 and 2018. Of the U.S. small business commercial net charge-offs, 94 percent and 95 percent were credit card-related products in 2019 and 2018.
Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity
Table 36 presents the nonperforming commercial loans, leases and foreclosed properties activity during 2019 and 2018.
Nonperforming loans do not include loans accounted for under the fair value option. During 2019, nonperforming commercial loans and leases increased $397 million to $1.5 billion. At December 31, 2019, 94 percent of commercial nonperforming loans, leases and foreclosed properties were secured and 64 percent were contractually current. Commercial nonperforming loans were carried at 88 percent of their unpaid principal balance before consideration of the allowance for loan and lease losses as the carrying value of these loans has been reduced to the estimated collateral value less costs to sell.
Table 36
Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity (1, 2)
(Dollars in millions)
Nonperforming loans and leases, January 1
$
1,102
$
1,304
Additions
2,048
1,415
Reductions:
Paydowns
(648
)
(771
)
Sales
(215
)
(210
)
Returns to performing status (3)
(120
)
(246
)
Charge-offs
(478
)
(361
)
Transfers to foreclosed properties
(9
)
(12
)
Transfers to loans held-for-sale
(181
)
(17
)
Total net reductions to nonperforming loans and leases
(202
)
Total nonperforming loans and leases, December 31
1,499
1,102
Foreclosed properties, December 31
Nonperforming commercial loans, leases and foreclosed properties, December 31
$
1,555
$
1,158
Nonperforming commercial loans and leases as a percentage of outstanding commercial loans and leases (4)
0.29
%
0.22
%
Nonperforming commercial loans, leases and foreclosed properties as a percentage of outstanding commercial loans, leases and foreclosed properties (4)
0.30
0.23
(1)
Balances do not include nonperforming loans held-for-sale of $239 million and $292 million at December 31, 2019 and 2018.
(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.
63 Bank of America
Table 37 presents our commercial TDRs by product type and performing status. U.S. small business commercial TDRs are comprised of renegotiated small business card loans and small business loans. The renegotiated small business card loans are not classified as nonperforming as they are charged off no later than the end of the month in which the loan becomes 180 days past due. For more information on TDRs, see Note 5 - Outstanding Loans and Leases to the Consolidated Financial Statements.
Table 37
Commercial Troubled Debt Restructurings
December 31, 2019
December 31, 2018
(Dollars in millions)
Nonperforming
Performing
Total
Nonperforming
Performing
Total
Commercial and industrial:
U.S. commercial
$
$
$
1,616
$
$
1,092
$
1,398
Non-U.S. commercial
Total commercial and industrial
1,192
1,850
1,254
1,638
Commercial real estate
Commercial lease financing
1,237
2,125
1,328
1,829
U.S. small business commercial
-
Total commercial troubled debt restructurings
$
$
1,264
$
2,152
$
$
1,346
$
1,850
Industry Concentrations
Table 38 presents commercial committed and utilized credit exposure by industry and the total net credit default protection purchased to cover the funded and unfunded portions of certain credit exposures. Our commercial credit exposure is diversified across a broad range of industries. Total commercial committed exposure increased $52.3 billion, or five percent, during 2019 to $1.1 trillion. The increase in commercial committed exposure was concentrated in the Real estate, Utilities and Finance companies industry sectors. Increases were partially offset by decreased exposure to the Pharmaceuticals and biotechnology, Technology hardware and equipment, and Government and public education industry sectors.
Industry limits are used internally to manage industry concentrations and are based on committed exposure that is allocated on an industry-by-industry basis. A risk management framework is in place to set and approve industry limits as well
as to provide ongoing monitoring. The MRC oversees industry limit governance.
Asset managers and funds, our largest industry concentration with committed exposure of $110.0 billion, increased $2.1 billion, or two percent, during 2019.
Real estate, our second largest industry concentration with committed exposure of $96.3 billion, increased $9.8 billion, or 11 percent, during 2019. This growth occurred primarily in the category of industrial and warehouse buildings, partially offset by declines in REITs.
Capital goods, our third largest industry concentration with committed exposure of $80.9 billion, increased $5.8 billion, or eight percent, during 2019 with the growth largely occurring in the trading companies and distributors industry categories, partially offset by a decrease in industrial conglomerates. For more information on the commercial real estate and related portfolios, see Commercial Portfolio Credit Risk Management - Commercial Real Estate on page 62.
Bank of America 64
Table 38
Commercial Credit Exposure by Industry (1)
Commercial
Utilized
Total Commercial
Committed (2)
December 31
(Dollars in millions)
Asset managers and funds
$
71,289
$
71,756
$
109,972
$
107,888
Real estate (3)
70,341
65,328
96,349
86,514
Capital goods
41,060
39,192
80,871
75,080
Finance companies
40,171
36,662
63,940
56,659
Healthcare equipment and services
34,353
35,763
55,918
56,489
Government and public education
41,889
43,675
53,566
54,749
Materials
26,663
27,347
52,128
51,865
Consumer services
28,434
25,702
49,071
43,298
Retailing
25,868
25,333
48,317
47,507
Food, beverage and tobacco
24,163
23,586
45,956
42,745
Commercial services and supplies
23,102
22,623
38,943
39,349
Energy
16,407
13,727
36,327
32,279
Utilities
12,383
12,035
36,060
27,623
Transportation
23,448
22,814
33,027
31,523
Global commercial banks
26,492
26,583
28,670
28,627
Individuals and trusts
18,926
18,643
27,815
25,019
Technology hardware and equipment
10,645
13,014
24,071
26,228
Media
12,429
12,132
23,629
24,502
Vehicle dealers
18,013
17,603
21,435
20,446
Consumer durables and apparel
10,193
9,904
21,245
20,199
Software and services
10,432
8,809
20,556
19,172
Pharmaceuticals and biotechnology
5,962
7,430
20,203
23,634
Telecommunication services
9,144
8,686
16,103
14,166
Insurance
6,669
8,674
15,214
15,807
Automobiles and components
7,345
7,131
14,910
13,893
Financial markets infrastructure (clearinghouses)
9,351
8,317
11,851
10,042
Food and staples retailing
6,290
4,787
10,392
9,093
Religious and social organizations
3,844
3,757
5,756
5,620
Total commercial credit exposure by industry
$
635,306
$
621,013
$
1,062,295
$
1,010,016
Net credit default protection purchased on total commitments (4)
$
(3,349
)
$
(2,663
)
(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 $10.6 billion and $10.7 billion at December 31, 2019 and 2018.
(3)
Industries are viewed from a variety of perspectives to best isolate the perceived risks. For purposes of this table, the real estate industry is defined based on the primary business activity of the borrowers or counterparties using operating cash flows and primary source of repayment as key factors.
(4)
Represents net notional credit protection purchased to hedge funded and unfunded exposures for which we elected the fair value option, as well as certain other credit exposures. For more information, see Commercial Portfolio Credit Risk Management - Risk Mitigation.
Risk Mitigation
We purchase credit protection to cover the funded portion as well as the unfunded portion of certain credit exposures. To lower the cost of obtaining our desired credit protection levels, we may add credit exposure within an industry, borrower or counterparty group by selling protection.
At December 31, 2019 and 2018, 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 $3.3 billion and $2.7 billion. We recorded net losses of $145 million in 2019 compared to net losses of $2 million in 2018 on these positions. The gains and losses on these instruments were offset by gains and losses on the related exposures. The Value-at-Risk
(VaR) results for these exposures are included in the fair value
option portfolio information in Table 45. For more information, see Trading Risk Management on page 72.
Tables 39 and 40 present the maturity profiles and the credit exposure debt ratings of the net credit default protection portfolio at December 31, 2019 and 2018.
Table 39
Net Credit Default Protection by Maturity
December 31
Less than or equal to one year
%
%
Greater than one year and less than or equal to five years
Greater than five years
Total net credit default protection
%
%
65 Bank of America
Table 40
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)
Ratings (2, 3)
A
$
(697
)
20.8
%
$
(700
)
26.3
%
BBB
(1,089
)
32.5
(501
)
18.8
BB
(766
)
22.9
(804
)
30.2
B
(373
)
11.1
(422
)
15.8
CCC and below
(119
)
3.6
(205
)
7.7
NR (4)
(305
)
9.1
(31
)
1.2
Total net credit
default protection
$
(3,349
)
100.0
%
$
(2,663
)
100.0
%
(1)
Represents net credit default protection purchased.
(2)
Ratings are refreshed on a quarterly basis.
(3)
Ratings of BBB- or higher are considered to meet the definition of investment grade.
(4)
NR is comprised of index positions held and any names that have not been rated.
In addition to our net notional credit default protection purchased to cover the funded and unfunded portion of certain credit exposures, credit derivatives are used for market-making activities for clients and establishing positions intended to profit from directional or relative value changes. We execute the majority of our credit derivative trades in the OTC market with large, multinational financial institutions, including broker-dealers and, to a lesser degree, with a variety of other investors. Because these transactions are executed in the OTC market, we are subject to settlement risk. We are also subject to credit risk in the event that these counterparties fail to perform under the terms of these contracts. In order to properly reflect counterparty credit risk, we record counterparty credit risk valuation adjustments on certain derivative assets, including our purchased credit default protection.
In most cases, credit derivative transactions are executed on a daily margin basis. Therefore, events such as a credit downgrade, depending on the ultimate rating level, or a breach of credit covenants would typically require an increase in the amount of collateral required by the counterparty, where applicable, and/or
allow us to take additional protective measures such as early termination of all trades. For more information on credit derivatives and counterparty credit risk valuation adjustments, see Note 3 - Derivatives to the Consolidated Financial Statements.
Non-U.S. Portfolio
Our non-U.S. credit and trading portfolios are subject to country risk. We define country risk as the risk of loss from unfavorable economic and political conditions, currency fluctuations, social instability and changes in government policies. A risk management framework is in place to measure, monitor and manage non-U.S. risk and exposures. In addition to the direct risk of doing business in a country, we also are exposed to indirect country risks (e.g., related to the collateral received on secured financing transactions or related to client clearing activities). These indirect exposures are managed in the normal course of business through credit, market and operational risk governance, rather than through country risk governance.
Table 41 presents our 20 largest non-U.S. country exposures at December 31, 2019. These exposures accounted for 88 percent and 89 percent of our total non-U.S. exposure at December 31, 2019 and 2018. Net country exposure for these 20 countries increased $8.5 billion in 2019, primarily driven by increased sovereign and corporate exposure across multiple countries.
Non-U.S. exposure is presented on an internal risk management basis and includes sovereign and non-sovereign credit exposure, securities and other investments issued by or domiciled in countries other than the U.S.
Funded loans and loan equivalents include loans, leases, and other extensions of credit and funds, including letters of credit and due from placements. Unfunded commitments are the undrawn portion of legally binding commitments related to loans and loan equivalents. Net counterparty exposure includes the fair value of derivatives, including the counterparty risk associated with credit default swaps (CDS), and secured financing transactions. Securities and other investments are carried at fair value and long securities exposures are netted against short exposures with the same underlying issuer to, but not below, zero. Net country exposure represents country exposure less hedges and credit default protection purchased, net of credit default protection sold.
Bank of America 66
Table 41
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
Hedges and Credit Default Protection
Net Country Exposure at December 31
Increase (Decrease) from December 31
United Kingdom
$
29,156
$
17,341
$
7,800
$
3,545
$
57,842
$
(1,998
)
$
55,844
$
Germany
21,920
7,408
1,828
1,967
33,123
(2,295
)
30,828
2,171
Canada
7,967
8,255
1,690
2,879
20,791
(669
)
20,122
France
7,243
9,208
18,296
(2,041
)
16,255
3,604
China
13,304
1,085
15,835
(248
)
15,587
India
7,817
3,660
12,239
(222
)
12,017
Brazil
7,393
3,683
12,010
(238
)
11,772
1,523
Australia
6,100
3,583
1,443
11,541
(439
)
11,102
1,172
Japan
8,450
1,002
1,589
11,937
(1,405
)
10,532
(9,491
)
Netherlands
6,322
3,585
11,113
(786
)
10,327
(1,250
)
South Korea
5,981
1,762
8,887
(182
)
8,705
(465
)
Singapore
3,749
3,528
7,884
(58
)
7,826
2,309
Mexico
4,190
1,733
1,814
7,961
(150
)
7,811
1,575
Switzerland
4,387
2,947
7,872
(487
)
7,385
(379
)
Hong Kong
5,106
1,194
7,087
(31
)
7,056
(180
)
Belgium
5,077
1,259
7,021
(514
)
6,507
Italy
2,353
2,303
1,386
6,552
(1,175
)
5,377
2,296
Spain
3,153
1,073
5,351
(629
)
4,722
United Arab Emirates
3,267
3,625
(38
)
3,587
(62
)
Ireland
2,142
3,398
(31
)
3,367
1,206
Total top 20 non-U.S. countries exposure
$
155,077
$
63,922
$
18,560
$
32,806
$
270,365
$
(13,636
)
$
256,729
$
8,478
A number of economic conditions and geopolitical events have given rise to risk aversion in certain emerging markets. Additionally, in light of ongoing trade tensions, we continue to closely monitor our exposures to tariff-sensitive regions and industries, particularly to countries that account for a large percentage of U.S. trade, such as China.
Our largest emerging market country exposure at December 31, 2019 was China, with net exposure of $15.6 billion, concentrated in large state-owned companies, subsidiaries of multinational corporations and commercial banks.
The economic performance in the EU remains uncertain, including as a result of the uncertainty surrounding the terms of a potential trade agreement and other terms associated with the future relationship between the U.K. and the EU, which could weigh unevenly on the economic performance of EU countries generally, and even more heavily on that of the U.K. For more information, see Item 1A. Risk Factors - Geopolitical on page 10 and Executive Summary - Recent Developments - U.K. Exit from the EU on page 23. Our largest EU country exposure at December 31, 2019 was
the U.K. with net exposure of $55.8 billion, which represents a $990 million increase from December 31, 2018. Our second largest EU exposure was Germany with net exposure of $30.8 billion as of December 31, 2019, which represents a $2.2 billion increase from December 31, 2018. The increase in Germany was primarily driven by an increase in sovereign exposure.
Table 42 presents countries that had total cross-border exposure, including the notional amount of cash loaned under secured financing agreements, exceeding one percent of our total assets at December 31, 2019. Local exposure, defined as exposure booked in local offices of a respective country with clients in the same country, is excluded. At December 31, 2019, the U.K. and France were the only countries where their respective total cross-border exposures exceeded one percent of our total assets. At December 31, 2019, Germany had total cross-border exposure of $19.4 billion representing 0.80 percent of our total assets. No other countries had total cross-border exposure that exceeded 0.75 percent of our total assets at December 31, 2019.
Table 42
Total Cross-border Exposure Exceeding One Percent of Total Assets
(Dollars in millions)
December 31
Public Sector
Banks
Private Sector
Cross-border
Exposure
Exposure as a
Percent of
Total Assets
United Kingdom
$
1,859
$
3,580
$
93,232
$
98,671
4.05
%
1,505
3,458
46,191
51,154
2.17
2,984
47,205
51,112
2.24
France
2,473
23,172
26,381
1.08
2,385
29,847
32,865
1.40
2,964
1,521
27,903
32,388
1.42
67 Bank of America
Provision for Credit Losses
The provision for credit losses increased $308 million to $3.6 billion in 2019 compared to 2018. The provision for credit losses was $58 million lower than net charge-offs for 2019, resulting in a decrease in the allowance for credit losses. This compared to a decrease of $481 million in the allowance for credit losses in 2018. Net charge-offs in 2019 were $3.6 billion compared to $3.8 billion in 2018.
The provision for credit losses for the consumer portfolio decreased $117 million to $2.8 billion in 2019 compared to 2018. The decrease was primarily driven by consumer real estate loan sales.
The provision for credit losses for the commercial portfolio, including unfunded lending commitments, increased $425 million to $758 million in 2019 compared to 2018. The increase was due in part to energy reserve releases in the prior-year periods.
Assuming a stable economic environment in 2020 compared to the end of 2019, we expect net charge-offs of approximately $1 billion per quarter in 2020. In view of the newly adopted accounting standard on the measurement of the allowance for credit losses, we expect the provision for credit losses to be modestly higher than net charge-offs in 2020, assuming no change in the current economic outlook and estimates of loan growth, including product mix. For more information regarding the new accounting standard, see Note 1 - Summary of Significant Accounting Principles to the Consolidated Financial Statements.
Allowance for Credit Losses
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is comprised of two components. The first component covers nonperforming commercial loans and TDRs. The second component covers loans and leases on which there are incurred losses that are not yet individually identifiable, as well as incurred losses that may not be represented in the loss forecast models. We evaluate the adequacy of the allowance for loan and lease losses based on the total of these two components, each of which is described in more detail below. The allowance for loan and lease losses excludes loans held-for-sale (LHFS) and loans accounted for under the fair value option as the fair value reflects a credit risk component.
The first component of the allowance for loan and lease losses covers both nonperforming commercial loans and all TDRs within the consumer and commercial portfolios. These loans are subject to impairment measurement based on the present value of projected future cash flows discounted at the loan’s original effective interest rate, or in certain circumstances, impairment may also be based upon the collateral value or the loan’s observable market price if available. Impairment measurement for the renegotiated consumer credit card and small business credit card TDR portfolios is based on the present value of projected cash flows discounted using the average portfolio contractual interest rate, excluding promotionally priced loans, in effect prior to restructuring. For purposes of computing this specific loss component of the allowance, larger impaired loans are evaluated individually and smaller impaired loans are evaluated as a pool using historical experience for the respective product types and risk ratings of the loans.
The second component of the allowance for loan and lease losses covers the remaining consumer and commercial loans and leases that have incurred losses that are not yet individually identifiable. The allowance for consumer (including credit card and other consumer loans) and certain homogeneous commercial loan and lease products is based on aggregated portfolio evaluations, which include both quantitative and qualitative components,
generally by product type. Loss forecast models are utilized that consider a variety of factors including, but not limited to, historical loss experience, estimated defaults or foreclosures based on portfolio trends, delinquencies, economic trends, credit scores and the amount of loss in the event of default. Our consumer real estate loss forecast model estimates the portion of loans that will default based on individual loan attributes, the most significant of which are refreshed LTV or combined loan-to-value (CLTV), and borrower credit score as well as vintage and geography, all of which are further broken down into current delinquency status. Additionally, we incorporate the delinquency status of underlying first-lien loans on our junior-lien home equity portfolio in our allowance process. Incorporating refreshed LTV and CLTV into our probability of default allows us to factor the impact of changes in home prices into our allowance for loan and lease losses. These loss forecast models are updated on a quarterly basis to incorporate information reflecting the current economic environment. As of December 31, 2019, the loss forecast process resulted in reductions in the allowance related to the residential mortgage and home equity portfolios compared to December 31, 2018.
The allowance for commercial loan and lease losses is established by product type after analyzing historical loss experience, internal risk rating, current economic conditions, industry performance trends, geographic and obligor concentrations within each portfolio and any other pertinent information. The statistical models for commercial loans are generally updated annually and utilize our historical database of actual defaults and other data, including external default data. The loan risk ratings and composition of the commercial portfolios used to calculate the allowance are updated quarterly to incorporate the most recent data reflecting the current economic environment. For risk-rated commercial loans, we estimate the probability of default and the loss given default (LGD) based on our historical experience of defaults and credit losses. Factors considered when assessing the internal risk rating include the value of the underlying collateral, if applicable, the industry in which the obligor operates, the obligor’s liquidity and other financial indicators, and other quantitative and qualitative factors relevant to the obligor’s credit risk. As of December 31, 2019, the allowance for the commercial real estate portfolio increased compared to December 31, 2018.
Also included within the second component of the allowance for loan and lease losses are reserves to cover losses that are incurred but, in our assessment, may not be adequately represented in the historical loss data used in the loss forecast models. For example, factors that we consider include, among others, changes in lending policies and procedures, changes in economic and business conditions, changes in the nature and size of the portfolio, changes in portfolio concentrations, changes in the volume and severity of past due loans and nonaccrual loans, the effect of external factors such as competition, and legal and regulatory requirements. Further, we consider the inherent uncertainty in mathematical models that are built upon historical data.
We monitor differences between estimated and actual incurred loan and lease losses. This monitoring process includes periodic assessments by senior management of loan and lease portfolios and the models used to estimate incurred losses in those portfolios.
The allowance for loan and lease losses for the consumer portfolio, as presented in Table 43, was $4.5 billion at December 31, 2019, a decrease of $260 million from December 31, 2018. The decrease was primarily in the consumer real estate portfolio, partially offset by an increase in the credit card portfolio. The
Bank of America 68
reduction in the allowance for the consumer real estate portfolio was driven by improved credit quality, a decrease in loan balances in our non-core portfolio, proactive credit risk management initiatives and high credit quality originations. The improved credit quality was impacted by continuing improvements in the U.S. economy and strong labor markets evidenced by low levels of unemployment and increases in home prices. Nonperforming consumer loans decreased $1.8 billion during 2019 as loan sales, returns to performing status and paydowns continued to outpace additions. The increase in allowance for the credit card portfolio was primarily driven by continued portfolio seasoning.
The allowance for loan and lease losses for the commercial portfolio, as presented in Table 43, was $4.9 billion at December 31, 2019, an increase of $75 million from December 31, 2018. Commercial reservable criticized utilized exposure increased to $11.5 billion at December 31, 2019 from $11.1 billion (to 2.09 percent from 2.08 percent of total commercial reservable utilized exposure) at December 31, 2018, and nonperforming commercial loans increased to $1.5 billion at December 31, 2019 from $1.1 billion (to 0.29 percent from 0.22 percent of outstanding commercial loans excluding loans accounted for under the fair value option) at December 31, 2018 with the increases spread across multiple industries. See Tables 32, 33 and 34 for more details on key commercial credit statistics.
The allowance for loan and lease losses as a percentage of total loans and leases outstanding was 0.97 percent at December 31, 2019 compared to 1.02 percent at December 31, 2018.
On January 1, 2020, the Corporation adopted the new accounting standard that requires the measurement of the allowance for credit losses to be based on management’s best estimate of lifetime expected credit losses inherent in the
Corporation’s relevant financial assets. Upon adoption of the standard on January 1, 2020, the Corporation recorded a $3.3 billion, or 32 percent, increase to the allowance for credit losses. After adjusting for deferred taxes and other adoption effects, a $2.4 billion decrease was recorded in retained earnings through a cumulative-effect adjustment. For more information regarding this new accounting standard, see Note 1 - Summary of Significant Accounting Principles to the Consolidated Financial Statements.
Reserve for Unfunded Lending Commitments
In addition to the allowance for loan and lease losses, we also estimate probable losses related to unfunded lending commitments such as letters of credit, financial guarantees, unfunded bankers’ acceptances and binding loan commitments, excluding commitments accounted for under the fair value option. Unfunded lending commitments are subject to the same assessment as funded loans, including estimates of probability of default and LGD. Due to the nature of unfunded commitments, the estimate of probable losses must also consider utilization. To estimate the portion of these undrawn commitments that is likely to be drawn by a borrower at the time of estimated default, analyses of our historical experience are applied to the unfunded commitments to estimate the funded exposure at default (EAD). The expected loss for unfunded lending commitments is the product of the probability of default, the LGD and the EAD, adjusted for any qualitative factors including economic uncertainty and inherent imprecision in models.
The reserve for unfunded lending commitments was $813 million at December 31, 2019 compared to $797 million at December 31, 2018.
Table 43
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, 2019
December 31, 2018
Allowance for loan and lease losses
Residential mortgage
$
3.45
%
0.14
%
$
4.40
%
0.20
%
Home equity
2.35
0.55
5.27
1.05
Credit card
3,710
39.39
3.80
3,597
37.47
3.66
Direct/Indirect consumer
2.49
0.26
2.58
0.27
Other consumer
0.55
n/m
0.30
n/m
Total consumer
4,542
48.23
0.98
4,802
50.02
1.08
U.S. commercial (2)
3,015
32.02
0.94
3,010
31.35
0.96
Non-U.S. commercial
6.99
0.63
7.05
0.69
Commercial real estate
1,042
11.07
1.66
9.98
1.57
Commercial lease financing
1.69
0.80
1.60
0.68
Total commercial
4,874
51.77
0.96
4,799
49.98
0.97
Allowance for loan and lease losses
9,416
100.00
%
0.97
9,601
100.00
%
1.02
Reserve for unfunded lending commitments
Allowance for credit losses
$
10,229
$
10,398
(1)
Ratios are calculated as allowance for loan and lease losses as a percentage of loans and leases outstanding excluding loans accounted for under the fair value option. Consumer loans accounted for under the fair value option include residential mortgage loans of $257 million and $336 million and home equity loans of $337 million and $346 million at December 31, 2019 and 2018. Commercial loans accounted for under the fair value option include U.S. commercial loans of $4.7 billion and $2.5 billion and non-U.S. commercial loans of $3.1 billion and $1.1 billion at December 31, 2019 and 2018.
(2)
Includes allowance for loan and lease losses for U.S. small business commercial loans of $523 million and $474 million at December 31, 2019 and 2018.
n/m = not meaningful
69 Bank of America
Table 44 presents a rollforward of the allowance for credit losses, which includes the allowance for loan and lease losses and the reserve for unfunded lending commitments, for 2019 and 2018.
Table 44
Allowance for Credit Losses
(Dollars in millions)
Allowance for loan and lease losses, January 1
$
9,601
$
10,393
Loans and leases charged off
Residential mortgage
(93
)
(207
)
Home equity
(429
)
(483
)
Credit card
(3,535
)
(3,345
)
Direct/Indirect consumer
(518
)
(495
)
Other consumer
(249
)
(197
)
Total consumer charge-offs
(4,824
)
(4,727
)
U.S. commercial (1)
(650
)
(575
)
Non-U.S. commercial
(115
)
(82
)
Commercial real estate
(31
)
(10
)
Commercial lease financing
(26
)
(8
)
Total commercial charge-offs
(822
)
(675
)
Total loans and leases charged off
(5,646
)
(5,402
)
Recoveries of loans and leases previously charged off
Residential mortgage
Home equity
Credit card
Direct/Indirect consumer
Other consumer
Total consumer recoveries
1,838
1,487
U.S. commercial (2)
Non-U.S. commercial
Commercial real estate
Commercial lease financing
Total commercial recoveries
Total recoveries of loans and leases previously charged off
1,998
1,639
Net charge-offs
(3,648
)
(3,763
)
Provision for loan and lease losses
3,574
3,262
Other (3)
(111
)
(291
)
Allowance for loan and lease losses, December 31
9,416
9,601
Reserve for unfunded lending commitments, January 1
Provision for unfunded lending commitments
Reserve for unfunded lending commitments, December 31
Allowance for credit losses, December 31
$
10,229
$
10,398
Loan and allowance ratios:
Loans and leases outstanding at December 31 (4)
$
975,091
$
942,546
Allowance for loan and lease losses as a percentage of total loans and leases outstanding at December 31 (4)
0.97
%
1.02
%
Consumer allowance for loan and lease losses as a percentage of total consumer loans and leases outstanding at
December 31 (5)
0.98
1.08
Commercial allowance for loan and lease losses as a percentage of total commercial loans and leases outstanding at December 31 (6)
0.96
0.97
Average loans and leases outstanding (4)
$
951,583
$
927,531
Net charge-offs as a percentage of average loans and leases outstanding (4)
0.38
%
0.41
%
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases at December 31
Ratio of the allowance for loan and lease losses at December 31 to net charge-offs
2.58
2.55
Amounts included in allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases at December 31 (7)
$
4,151
$
4,031
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases, excluding the allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases at December 31 (7)
%
%
(1)
Includes U.S. small business commercial charge-offs of $320 million and $287 million in 2019 and 2018.
(2)
Includes U.S. small business commercial recoveries of $48 million and $47 million in 2019 and 2018.
(3)
Primarily represents write-offs of purchased credit-impaired (PCI) loans, the net impact of portfolio sales, and transfers to loans held-for-sale.
(4)
Outstanding loan and lease balances and ratios do not include loans accounted for under the fair value option of $8.3 billion and $4.3 billion at December 31, 2019 and 2018. Average loans accounted for under the fair value option were $6.8 billion and $5.5 billion in 2019 and 2018.
(5)
Excludes consumer loans accounted for under the fair value option of $594 million and $682 million at December 31, 2019 and 2018.
(6)
Excludes commercial loans accounted for under the fair value option of $7.7 billion and $3.7 billion at December 31, 2019 and 2018.
(7)
Primarily includes amounts allocated to credit card and unsecured consumer lending portfolios in Consumer Banking.
Bank of America 70
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 74.
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 risk. The Enterprise Model Risk Committee (EMRC), a subcommittee of the MRC, is responsible for providing management oversight and approval of model risk management and governance. The EMRC defines model risk standards, consistent with the Corporation’s 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 EMRC 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 76.
Equity Market Risk
Equity market risk represents exposures to securities that represent an ownership interest in a corporation in the form of domestic and foreign common stock or other equity-linked instruments. Instruments that would lead to this exposure include, but are not limited to, the following: common stock, exchange-traded funds, American Depositary Receipts, convertible bonds, listed equity options (puts and calls), OTC equity options, equity total return swaps, equity index futures and other equity derivative products. Hedging instruments used to mitigate this risk include options, futures, swaps, convertible bonds and cash positions.
Commodity Risk
Commodity risk represents exposures to instruments traded in the petroleum, natural gas, power and metals markets. These instruments consist primarily of futures, forwards, swaps and options. Hedging instruments used to mitigate this risk include options, futures and swaps in the same or similar commodity product, as well as cash positions.
Issuer Credit Risk
Issuer credit risk represents exposures to changes in the creditworthiness of individual issuers or groups of issuers. Our portfolio is exposed to issuer credit risk where the value of an asset may be adversely impacted by changes in the levels of credit spreads, by credit migration or by defaults. Hedging instruments
71 Bank of America
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 45.
Global Risk Management continually reviews, evaluates and enhances our VaR model so that it reflects the material risks in our trading portfolio. Changes to the VaR model are reviewed and approved prior to implementation and any material changes are reported to management through the appropriate management committees.
Trading limits on quantitative risk measures, including VaR, are independently set by Global Markets Risk Management and reviewed on a regular basis so that trading limits remain relevant and within our overall risk appetite for market risks. Trading limits are reviewed in the context of market liquidity, volatility and strategic business priorities. Trading limits are set at both a granular level to allow for extensive coverage of risks as well as at aggregated portfolios to account for correlations among risk factors. All trading limits are approved at least annually. Approved trading limits are stored and tracked in a centralized limits management system. Trading limit excesses are communicated to management for review. Certain quantitative market risk measures and corresponding limits have been identified as critical in the Corporation’s Risk Appetite Statement. These risk appetite limits are reported on a daily basis and are approved at least annually by the ERC and the Board.
In periods of market stress, Global Markets senior leadership communicates daily to discuss losses, key risk positions and any limit excesses. As a result of this process, the businesses may selectively reduce risk.
Table 45 presents the total market-based portfolio VaR which is the combination of the total covered positions (and less liquid trading positions) portfolio and the fair value option portfolio. Covered positions are defined by regulatory standards as trading assets and liabilities, both on- and off-balance sheet, that meet a defined set of specifications. These specifications identify the most liquid trading positions which are intended to be held for a short-term horizon and where we are able to hedge the material risk elements in a two-way market. Positions in less liquid markets, or where there are restrictions on the ability to trade the positions, typically do not qualify as covered positions. Foreign exchange and commodity positions are always considered covered positions, except for structural foreign currency positions that are excluded with prior regulatory approval. In addition, Table 45 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 45 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 45 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 45 presents year-end, average, high and low daily trading VaR for 2019 and 2018 using a 99 percent confidence level. The amounts disclosed in Table 45 and Table 46 align to the view of covered positions used in the Basel 3 capital calculations. Foreign
Bank of America 72
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 slightly increased during 2019 with no significant drivers.
Table 45
Market Risk VaR for Trading Activities
(Dollars in millions)
Year End
Average
High (1)
Low (1)
Year End
Average
High (1)
Low (1)
Foreign exchange
$
$
$
$
$
$
$
$
Interest rate
Credit
Equity
Commodities
Portfolio diversification
(47
)
(49
)
-
-
(59
)
(55
)
-
-
Total covered positions portfolio
Impact from less liquid exposures
-
-
-
-
-
Total covered positions and less liquid trading positions portfolio
Fair value option loans
Fair value option hedges
Fair value option portfolio diversification
(9
)
(10
)
-
-
(7
)
(11
)
-
-
Total fair value option portfolio
Portfolio diversification
(5
)
(7
)
-
-
(3
)
(5
)
-
-
Total market-based portfolio
$
$
$
$
(1)
The high and low for each portfolio may have occurred on different trading days than the high and low for the components. Therefore the impact from less liquid exposures and the amount of portfolio diversification, which is the difference between the total portfolio and the sum of the individual components, is not relevant.
The graph below presents the daily covered positions and less liquid trading positions portfolio VaR for 2019, corresponding to the data in Table 45.
Additional VaR statistics produced within our single VaR model are provided in Table 46 at the same level of detail as in Table 45. 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 46 presents average trading VaR statistics at 99 percent and 95 percent confidence levels for 2019 and 2018.
Table 46
Average Market Risk VaR for Trading Activities - 99 percent and 95 percent VaR Statistics
(Dollars in millions)
99 percent
95 percent
99 percent
95 percent
Foreign exchange
$
$
$
$
Interest rate
Credit
Equity
Commodities
Portfolio diversification
(49
)
(29
)
(55
)
(33
)
Total covered positions portfolio
Impact from less liquid exposures
Total covered positions and less liquid trading positions portfolio
Fair value option loans
Fair value option hedges
Fair value option portfolio diversification
(10
)
(5
)
(11
)
(7
)
Total fair value option portfolio
Portfolio diversification
(7
)
(5
)
(5
)
(3
)
Total market-based portfolio
$
$
$
$
73 Bank of America
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 2019, there were no days in which there was a backtesting excess for 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. Trading account assets and liabilities are reported at fair value. For more information on fair value, see Note 21 - 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 2019 and 2018. During 2019, positive trading-related revenue was recorded for 98 percent of the trading days, of which 80 percent were daily trading gains of over $25 million, and the largest loss was $35 million. This compares to 2018 where positive trading-related revenue was recorded for 98 percent of the trading days, of which 79 percent were daily trading gains of over $25 million.
Trading Portfolio Stress Testing
Because the very nature of a VaR model suggests results can exceed our estimates and it is dependent on a limited historical window, we also stress test our portfolio using scenario analysis. This analysis estimates the change in the value of our trading portfolio that may result from abnormal market movements.
A set of scenarios, categorized as either historical or hypothetical, are computed daily for the overall trading portfolio and individual businesses. These scenarios include shocks to underlying market risk factors that may be well beyond the shocks found in the historical data used to calculate VaR. Historical scenarios simulate the impact of the market moves that occurred during a period of extended historical market stress. Generally, a multi-week period representing the most severe point during a crisis is selected for each historical scenario. Hypothetical scenarios provide estimated portfolio impacts from potential future market stress events. Scenarios are reviewed and updated in response to changing positions and new economic or political information. In addition, new or ad hoc scenarios are developed to address specific potential market events or particular vulnerabilities in the portfolio. The stress tests are reviewed on a regular basis and the results are presented to senior management.
Stress testing for the trading portfolio is integrated with enterprise-wide stress testing and incorporated into the limits framework. The macroeconomic scenarios used for enterprise-wide stress testing purposes differ from the typical trading portfolio scenarios in that they have a longer time horizon and the results are forecasted over multiple periods for use in consolidated capital and liquidity planning. For more information, see Managing Risk on page 42.
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
Bank of America 74
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 47 presents the spot and 12-month forward rates used in our baseline forecasts at December 31, 2019 and 2018.
Table 47
Forward Rates
December 31, 2019
Federal
Funds
Three-month
LIBOR
10-Year
Swap
Spot rates
1.75
%
1.91
%
1.90
%
12-month forward rates
1.50
1.62
1.92
December 31, 2018
Spot rates
2.50
%
2.81
%
2.71
%
12-month forward rates
2.50
2.64
2.75
Table 48 shows the pretax impact to forecasted net interest income over the next 12 months from December 31, 2019 and 2018, resulting from instantaneous parallel and non-parallel shocks to the market-based forward curve. Periodically we evaluate the scenarios presented so that they are meaningful in the context of the current rate environment.
During 2019, the asset sensitivity of our balance sheet increased primarily due to decreases in interest rates. We continue to be asset sensitive to a parallel 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 available for sale (AFS), may adversely affect accumulated other comprehensive income (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 46.
Table 48
Estimated Banking Book Net Interest Income Sensitivity to Curve Changes
Short
Rate (bps)
Long
Rate (bps)
December 31
(Dollars in millions)
Parallel Shifts
+100 bps
instantaneous shift
+100
+100
$
4,190
$
2,833
-100 bps
instantaneous shift
(6,536
)
(4,280
)
Flatteners
Short-end
instantaneous change
+100
-
2,641
2,158
Long-end
instantaneous change
-
(2,965
)
(1,618
)
Steepeners
Short-end
instantaneous change
-
(3,527
)
(2,648
)
Long-end
instantaneous change
-
+100
1,561
The sensitivity analysis in Table 48 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 48 assumes no change in deposit portfolio size or mix from the baseline forecast in alternate rate environments. In higher rate scenarios, any customer activity resulting in the replacement of low-cost or noninterest-bearing deposits with higher yielding deposits or market-based funding would reduce our benefit in those scenarios.
Interest Rate and Foreign Exchange Derivative Contracts
Interest rate and foreign exchange derivative contracts are utilized in our ALM activities and serve as an efficient tool to manage our interest rate and foreign exchange risk. We use derivatives to hedge the variability in cash flows or changes in fair value on our balance sheet due to interest rate and foreign exchange components. For more information on our hedging activities, see Note 3 - Derivatives to the Consolidated Financial Statements.
Our interest rate contracts are generally non-leveraged generic interest rate and foreign exchange basis swaps, options, futures and forwards. In addition, we use foreign exchange contracts, including cross-currency interest rate swaps, foreign currency futures contracts, foreign currency forward contracts and options to mitigate the foreign exchange risk associated with foreign currency-denominated assets and liabilities.
Changes to the composition of our derivatives portfolio during 2019 reflect actions taken for interest rate and foreign exchange rate risk management. The decisions to reposition our derivatives portfolio are based on the current assessment of economic and financial conditions including the interest rate and foreign currency environments, balance sheet composition and trends, and the relative mix of our cash and derivative positions.
We use interest rate derivative instruments to hedge the variability in the cash flows of our assets and liabilities and other forecasted transactions (collectively referred to as cash flow hedges). The net losses on both open and terminated cash flow hedge derivative instruments recorded in accumulated OCI were $496 million and $1.3 billion, on a pretax basis, at December 31, 2019 and 2018. These net losses are expected to be reclassified into earnings in the same period as the hedged cash flows affect earnings and will decrease income or increase expense on the respective hedged cash flows. Assuming no change in open cash flow derivative hedge positions and no changes in prices or interest rates beyond what is implied in forward yield curves at December 31, 2019, the pretax net losses are expected to be reclassified into earnings as follows: 17 percent within the next year, 44 percent in years two through five, 22 percent in years six through ten, with the remaining 17 percent thereafter. For more information on derivatives designated as cash flow hedges, see Note 3 - Derivatives to the Consolidated Financial Statements.
We hedge our net investment in non-U.S. operations determined to have functional currencies other than the U.S. dollar using forward foreign exchange contracts that typically settle in less than 180 days, cross-currency basis swaps and foreign exchange options. We recorded net after-tax losses on derivatives in accumulated OCI associated with net investment hedges which were offset by gains on our net investments in consolidated non-U.S. entities at December 31, 2019.
Table 49 presents derivatives utilized in our ALM activities and shows the notional amount, fair value, weighted-average receive-fixed and pay-fixed rates, expected maturity and average estimated
75 Bank of America
durations of our open ALM derivatives at December 31, 2019 and 2018. These amounts do not include derivative hedges on our MSRs. During 2019, the fair value of receive-fixed interest rate
swaps increased while pay-fixed interest rate swaps decreased, driven by lower swap rates.
Table 49
Asset and Liability Management Interest Rate and Foreign Exchange Contracts
December 31, 2019
Expected Maturity
(Dollars in millions, average estimated duration in years)
Fair
Value
Total
Thereafter
Average
Estimated
Duration
Receive-fixed interest rate swaps (1)
$
12,370
6.47
Notional amount
$
215,123
$
16,347
$
14,642
$
21,616
$
36,356
$
21,257
$
104,905
Weighted-average fixed-rate
2.68
%
2.68
%
3.17
%
2.48
%
2.36
%
2.55
%
2.79
%
Pay-fixed interest rate swaps (1)
(2,669
)
6.99
Notional amount
$
69,586
$
4,344
$
2,117
$
-
$
13,993
$
8,194
$
40,938
Weighted-average fixed-rate
2.36
%
2.16
%
2.15
%
-
%
2.52
%
2.26
%
2.35
%
Same-currency basis swaps (2)
(290
)
Notional amount
$
152,160
$
18,857
$
18,590
$
4,306
$
2,017
$
14,567
$
93,823
Foreign exchange basis swaps (1, 3, 4)
(1,258
)
Notional amount
113,529
23,639
24,215
14,611
7,111
3,521
40,432
Foreign exchange contracts (1, 4, 5)
Notional amount (6)
(53,106
)
(79,315
)
4,539
2,674
2,340
4,432
12,224
Option products
-
Notional amount
-
-
-
-
-
Net ALM contracts
$
8,567
December 31, 2018
Expected Maturity
(Dollars in millions, average estimated duration in years)
Fair
Value
Total
Thereafter
Average
Estimated
Duration
Receive-fixed interest rate swaps (1)
$
2,128
5.17
Notional amount
$
198,914
$
27,176
$
16,347
$
14,640
$
19,866
$
36,215
$
84,670
Weighted-average fixed-rate
2.66
%
1.87
%
2.68
%
3.17
%
2.56
%
2.37
%
2.97
%
Pay-fixed interest rate swaps (1)
6.30
Notional amount
$
49,275
$
1,210
$
4,344
$
1,616
$
-
$
10,801
$
31,304
Weighted-average fixed-rate
2.50
%
2.07
%
2.16
%
2.22
%
-
%
2.59
%
2.55
%
Same-currency basis swaps (2)
Notional amount
$
101,203
$
7,628
$
15,097
$
15,493
$
2,586
$
2,017
$
58,382
Foreign exchange basis swaps (1, 3, 4)
(1,716
)
Notional amount
106,742
13,946
21,448
19,241
10,239
6,260
35,608
Foreign exchange contracts (1, 4, 5)
Notional amount (6)
(8,447
)
(27,823
)
4,196
2,741
2,448
9,978
Option products
Notional amount
-
-
-
-
Net ALM contracts
$
(1)
Does not include basis adjustments on either fixed-rate debt issued by the Corporation or AFS debt securities, which are hedged using derivatives designated as fair value hedging instruments, that substantially offset the fair values of these derivatives.
(2)
At December 31, 2019 and 2018, the notional amount of same-currency basis swaps included $152.2 billion and $101.2 billion in both foreign currency and U.S. dollar-denominated basis swaps in which both sides of the swap are in the same currency.
(3)
Foreign exchange basis swaps consisted of cross-currency variable interest rate swaps used separately or in conjunction with receive-fixed interest rate swaps.
(4)
Does not include foreign currency translation adjustments on certain non-U.S. debt issued by the Corporation that substantially offset the fair values of these derivatives.
(5)
The notional amount of foreign exchange contracts of $(53.1) billion at December 31, 2019 was comprised of $29.0 billion in foreign currency-denominated and cross-currency receive-fixed swaps, $(82.4) billion in net foreign currency forward rate contracts, $(313) million in foreign currency-denominated interest rate swaps and $644 million in net foreign currency futures contracts. Foreign exchange contracts of $(8.4) billion at December 31, 2018 were comprised of $25.2 billion in foreign currency-denominated and cross-currency receive-fixed swaps, $(32.7) billion in net foreign currency forward rate contracts, $(1.8) billion in foreign currency-denominated interest rate swaps and $814 million in foreign currency futures contracts.
(6)
Reflects the net of long and short positions. Amounts shown as negative reflect a net short position.
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 2019, 2018 and 2017, we recorded gains of $291 million, $244 million and $118 million related to the change in fair value of the MSRs, IRLCs and LHFS, net of gains and losses on the hedge portfolio. For more information on MSRs, see Note 21 - 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
Bank of America 76
requirements of applicable laws, rules, regulations and our internal policies and procedures (collectively, applicable laws, rules and regulations).
Operational risk is the risk of loss resulting from inadequate or failed processes, people and systems or from external events. Operational risk may occur anywhere in the Corporation, including third-party business processes, and is not limited to operations functions. Effects may extend beyond financial losses and may result in reputational risk impacts. Operational risk includes legal risk. Additionally, operational risk is a component in the calculation of total risk-weighted assets used in the Basel 3 capital calculation. For more information on Basel 3 calculations, see Capital Management on page 45.
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, 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.
Global Compliance and Operational Risk teams independently assess compliance and operational risk, monitor business activities and processes, 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 IRM, 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 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 in support of Global Compliance and Operational Risk’s responsibilities for conducting independent oversight of our compliance and operational risk management activities. The Board provides oversight of compliance risk through its Audit Committee and the ERC, and operational risk through the 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' (including their downstream service providers, the financial services industry and financial data aggregators) operations, systems or data, including sensitive corporate and customer information. The Corporation manages information security risk in accordance with internal policies which govern our
comprehensive information security program designed to protect the Corporation by enabling preventative, detective and responsive measures to combat information and cybersecurity risks. The Board and the ERC provide cybersecurity and information security risk oversight for the Corporation and our Global Information Security Team manages the day-to-day implementation of our information security program.
Reputational Risk Management
Reputational risk is the risk that negative perceptions of the Corporation’s conduct or business practices may adversely impact its 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 in its businesses and risk management processes to mitigate reputational risks in a timely manner and through proactive monitoring and identification of potential reputational risk events. 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, and 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 Compliance, Legal and Risk, that is responsible for the oversight of reputational risk. Such committees’ oversight includes providing approval for business activities that present elevated levels of reputational risks.
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.
77 Bank of America
Allowance for Credit Losses
The allowance for credit losses, which includes the allowance for loan and lease losses and the reserve for unfunded lending commitments, represents management’s estimate of probable incurred credit losses in the Corporation’s loan and lease portfolio excluding those loans accounted for under the fair value option. The allowance for credit losses includes both quantitative and qualitative components. The qualitative component has a higher degree of management subjectivity, and includes factors such as concentrations, economic conditions and other considerations. Our process for determining the allowance for credit losses is discussed in Note 1 - Summary of Significant Accounting Principles to the Consolidated Financial Statements.
Our estimate for the allowance for loan and lease losses is sensitive to the loss rates and expected cash flows from our Consumer Real Estate and Credit Card and Other Consumer portfolio segments, as well as our U.S. small business commercial card portfolio within the Commercial portfolio segment. For each one-percent increase in the loss rates on loans collectively evaluated for impairment in our Consumer Real Estate portfolio segment, coupled with a one-percent decrease in the discounted cash flows on those loans individually evaluated for impairment within this portfolio segment, the allowance for loan and lease losses at December 31, 2019 would have increased $18 million. Within our Credit Card and Other Consumer portfolio segment and U.S. small business commercial card portfolio, for each one-percent increase in the loss rates on loans collectively evaluated for impairment coupled with a one-percent decrease in the expected cash flows on those loans individually evaluated for impairment, the allowance for loan and lease losses at December 31, 2019 would have increased $46 million.
Our allowance for loan and lease losses is sensitive to the risk ratings assigned to loans and leases within the Commercial portfolio segment (excluding the U.S. small business commercial card portfolio). Assuming a downgrade of one level in the internal risk ratings for commercial loans and leases, except loans and leases already classified as Substandard and Doubtful as defined by regulatory authorities, the allowance for loan and lease losses would have increased $2.6 billion at December 31, 2019.
The allowance for loan and lease losses as a percentage of total loans and leases at December 31, 2019 was 0.97 percent and these hypothetical increases in the allowance would raise the ratio to 1.24 percent.
These sensitivity analyses do not represent management’s expectations of the deterioration in risk ratings or the increases in loss rates but are provided as hypothetical scenarios to assess the sensitivity of the allowance for loan and lease losses to changes in key inputs. We believe the risk ratings and loss severities currently in use are appropriate and that the probability of the alternative scenarios outlined above occurring within a short period of time is remote.
The process of determining the level of the allowance for credit losses requires a high degree of judgment. It is possible that others, given the same information, may at any point in time reach different reasonable conclusions.
The processes, judgments and estimates described herein relate to the accounting standard in effect through December 31, 2019. On January 1, 2020, the Corporation adopted the new accounting standard that requires the measurement of the allowance for credit losses to be based on management’s best estimate of lifetime expected credit losses inherent in the Corporation’s relevant financial assets. The Corporation’s lifetime
expected credit losses are determined using macroeconomic forecast assumptions and management judgments applicable to and through the expected life of the loan portfolios. For more
information, see Note 1 - Summary of Significant Accounting Principles to the Consolidated Financial Statements.
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 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 21 - Fair Value Measurements and Note 22 - 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 2019, 2018
Bank of America 78
and 2017, see Note 21 - 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 20 - Income Taxes to the Consolidated Financial Statements for a table of significant tax attributes and additional information. For more information, see page 14 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 8 - Goodwill and Intangible Assets to the Consolidated Financial Statements.
We completed our annual goodwill impairment test as of June 30, 2019 for all of our reporting units that had goodwill. We performed that test by assessing qualitative factors to determine whether it is more likely than not that the fair value of each reporting unit is less than its respective carrying value. Factors considered in the qualitative assessments include, 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. If based on the results of the qualitative assessment, it is more likely than not that the fair value of a reporting unit is less than its carrying value, a quantitative assessment is performed.
Based on our qualitative assessments, we determined that for each reporting unit with goodwill, it was more likely than not that its respective fair value exceeded its carrying value, indicating there was no impairment. For more information regarding goodwill balances at June 30, 2019, see Note 8 - Goodwill and Intangible Assets to the Consolidated Financial Statements.
Certain Contingent Liabilities
For more information on the complex judgments associated with certain contingent liabilities, see Note 13 - Commitments and Contingencies to the Consolidated Financial Statements.
79 Bank of America
Non-GAAP Reconciliations
Tables 50 and 51 provide reconciliations of certain non-GAAP financial measures to GAAP financial measures.
Table 50
Five-year Reconciliations to GAAP Financial Measures (1)
(Dollars in millions, shares in thousands)
Reconciliation of average shareholders’ equity to average tangible shareholders’ equity and average tangible common shareholders’ equity
Shareholders’ equity
$
267,889
$
264,748
$
271,289
$
265,843
$
251,384
Goodwill
(68,951
)
(68,951
)
(69,286
)
(69,750
)
(69,772
)
Intangible assets (excluding MSRs)
(1,721
)
(2,058
)
(2,652
)
(3,382
)
(4,201
)
Related deferred tax liabilities
1,463
1,644
1,852
Tangible shareholders’ equity
$
197,990
$
194,645
$
200,814
$
194,355
$
179,263
Preferred stock
(23,036
)
(22,949
)
(24,188
)
(24,656
)
(21,808
)
Tangible common shareholders’ equity
$
174,954
$
171,696
$
176,626
$
169,699
$
157,455
Reconciliation of year-end shareholders’ equity to year-end tangible shareholders’ equity and year-end tangible common shareholders’ equity
Shareholders’ equity
$
264,810
$
265,325
$
267,146
$
266,195
$
255,615
Goodwill
(68,951
)
(68,951
)
(68,951
)
(69,744
)
(69,761
)
Intangible assets (excluding MSRs)
(1,661
)
(1,774
)
(2,312
)
(2,989
)
(3,768
)
Related deferred tax liabilities
1,545
1,716
Tangible shareholders’ equity
$
194,911
$
195,458
$
196,826
$
195,007
$
183,802
Preferred stock
(23,401
)
(22,326
)
(22,323
)
(25,220
)
(22,272
)
Tangible common shareholders’ equity
$
171,510
$
173,132
$
174,503
$
169,787
$
161,530
Reconciliation of year-end assets to year-end tangible assets
Assets
$
2,434,079
$
2,354,507
$
2,281,234
$
2,188,067
$
2,144,606
Goodwill
(68,951
)
(68,951
)
(68,951
)
(69,744
)
(69,761
)
Intangible assets (excluding MSRs)
(1,661
)
(1,774
)
(2,312
)
(2,989
)
(3,768
)
Related deferred tax liabilities
1,545
1,716
Tangible assets
$
2,364,180
$
2,284,640
$
2,210,914
$
2,116,879
$
2,072,793
(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 27.
Table 51
Quarterly Reconciliations to GAAP Financial Measures (1)
2019 Quarters
2018 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
$
266,900
$
270,430
$
267,975
$
266,217
$
263,698
$
264,653
$
265,181
$
265,480
Goodwill
(68,951
)
(68,951
)
(68,951
)
(68,951
)
(68,951
)
(68,951
)
(68,951
)
(68,951
)
Intangible assets (excluding MSRs)
(1,678
)
(1,707
)
(1,736
)
(1,763
)
(1,857
)
(1,992
)
(2,126
)
(2,261
)
Related deferred tax liabilities
Tangible shareholders’ equity
$
197,001
$
200,524
$
198,058
$
196,344
$
193,764
$
194,606
$
195,020
$
195,207
Preferred stock
(23,461
)
(23,800
)
(22,537
)
(22,326
)
(22,326
)
(22,841
)
(23,868
)
(22,767
)
Tangible common shareholders’ equity
$
173,540
$
176,724
$
175,521
$
174,018
$
171,438
$
171,765
$
171,152
$
172,440
Reconciliation of period-end shareholders’ equity to period-end tangible shareholders’ equity and period-end tangible common shareholders’ equity
Shareholders’ equity
$
264,810
$
268,387
$
271,408
$
267,010
$
265,325
$
262,158
$
264,216
$
266,224
Goodwill
(68,951
)
(68,951
)
(68,951
)
(68,951
)
(68,951
)
(68,951
)
(68,951
)
(68,951
)
Intangible assets (excluding MSRs)
(1,661
)
(1,690
)
(1,718
)
(1,747
)
(1,774
)
(1,908
)
(2,043
)
(2,177
)
Related deferred tax liabilities
Tangible shareholders’ equity
$
194,911
$
198,480
$
201,495
$
197,085
$
195,458
$
192,177
$
194,122
$
196,016
Preferred stock
(23,401
)
(23,606
)
(24,689
)
(22,326
)
(22,326
)
(22,326
)
(23,181
)
(24,672
)
Tangible common shareholders’ equity
$
171,510
$
174,874
$
176,806
$
174,759
$
173,132
$
169,851
$
170,941
$
171,344
Reconciliation of period-end assets to period-end tangible assets
Assets
$
2,434,079
$
2,426,330
$
2,395,892
$
2,377,164
$
2,354,507
$
2,338,833
$
2,291,670
$
2,328,478
Goodwill
(68,951
)
(68,951
)
(68,951
)
(68,951
)
(68,951
)
(68,951
)
(68,951
)
(68,951
)
Intangible assets (excluding MSRs)
(1,661
)
(1,690
)
(1,718
)
(1,747
)
(1,774
)
(1,908
)
(2,043
)
(2,177
)
Related deferred tax liabilities
Tangible assets
$
2,364,180
$
2,356,423
$
2,325,979
$
2,307,239
$
2,284,640
$
2,268,852
$
2,221,576
$
2,258,270
(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 27.
Bank of America 80
Statistical Tables
Page
Table I - Outstanding Loans and Leases
Table II - Nonperforming Loans, Leases and Foreclosed Properties
Table III - Accruing Loans and Leases Past Due 90 Days or More
Table IV - Selected Loan Maturity Data
Table V - Allowance for Credit Losses
Table VI - Allocation of the Allowance for Credit Losses by Product Type
Table I
Outstanding Loans and Leases
December 31
(Dollars in millions)
Consumer
Residential mortgage
$
236,169
$
208,557
$
203,811
$
191,797
$
187,911
Home equity
40,208
48,286
57,744
66,443
75,948
Credit card
97,608
98,338
96,285
92,278
89,602
Non-U.S. credit card
-
-
-
9,214
9,975
Direct/Indirect consumer (1)
90,998
91,166
96,342
95,962
90,149
Other consumer (2)
Total consumer loans excluding loans accounted for under the fair value option
465,175
446,549
454,348
456,320
454,298
Consumer loans accounted for under the fair value option (3)
1,051
1,871
Total consumer
465,769
447,231
455,276
457,371
456,169
Commercial
U.S. commercial
307,048
299,277
284,836
270,372
252,771
Non-U.S. commercial
104,966
98,776
97,792
89,397
91,549
Commercial real estate (4)
62,689
60,845
58,298
57,355
57,199
Commercial lease financing
19,880
22,534
22,116
22,375
21,352
494,583
481,432
463,042
439,499
422,871
U.S. small business commercial (5)
15,333
14,565
13,649
12,993
12,876
Total commercial loans excluding loans accounted for under the fair value option
509,916
495,997
476,691
452,492
435,747
Commercial loans accounted for under the fair value option (3)
7,741
3,667
4,782
6,034
5,067
Total commercial
517,657
499,664
481,473
458,526
440,814
Less: Loans of business held for sale (6)
-
-
-
(9,214
)
-
Total loans and leases
$
983,426
$
946,895
$
936,749
$
906,683
$
896,983
(1)
Includes primarily auto and specialty lending loans and leases of $50.4 billion, $50.1 billion, $52.4 billion, $50.7 billion and $43.9 billion, U.S. securities-based lending loans of $36.7 billion, $37.0 billion, $39.8 billion, $40.1 billion and $39.8 billion and non-U.S. consumer loans of $2.8 billion, $2.9 billion, $3.0 billion, $3.0 billion and $3.9 billion at December 31, 2019, 2018, 2017, 2016 and 2015, respectively.
(2)
Substantially all of other consumer at December 31, 2019, 2018 and 2017 is consumer overdrafts. Other consumer at December 31, 2016 and 2015 also includes consumer finance loans of $465 million and $564 million, respectively.
(3)
Consumer loans accounted for under the fair value option include residential mortgage loans of $257 million, $336 million, $567 million, $710 million and $1.6 billion, and home equity loans of $337 million, $346 million, $361 million, $341 million and $250 million at December 31, 2019, 2018, 2017, 2016 and 2015, respectively. Commercial loans accounted for under the fair value option include U.S. commercial loans of $4.7 billion, $2.5 billion, $2.6 billion, $2.9 billion and $2.3 billion, and non-U.S. commercial loans of $3.1 billion, $1.1 billion, $2.2 billion, $3.1 billion and $2.8 billion at December 31, 2019, 2018, 2017, 2016 and 2015, respectively.
(4)
Includes U.S. commercial real estate loans of $59.0 billion, $56.6 billion, $54.8 billion, $54.3 billion and $53.6 billion, and non-U.S. commercial real estate loans of $3.7 billion, $4.2 billion, $3.5 billion, $3.1 billion and $3.5 billion at December 31, 2019, 2018, 2017, 2016 and 2015, respectively.
(5)
Includes card-related products.
(6)
Represents non-U.S. credit card loans, which were included in assets of business held for sale on the Consolidated Balance Sheet.
81 Bank of America
Table II
Nonperforming Loans, Leases and Foreclosed Properties (1)
December 31
(Dollars in millions)
Consumer
Residential mortgage
$
1,470
$
1,893
$
2,476
$
3,056
$
4,803
Home equity
1,893
2,644
2,918
3,337
Direct/Indirect consumer
Other consumer
-
-
-
Total consumer (2)
2,053
3,842
5,166
6,004
8,165
Commercial
U.S. commercial
1,094
1,256
Non-U.S. commercial
Commercial real estate
Commercial lease financing
1,449
1,048
1,249
1,643
1,130
U.S. small business commercial
Total commercial (3)
1,499
1,102
1,304
1,703
1,212
Total nonperforming loans and leases
3,552
4,944
6,470
7,707
9,377
Foreclosed properties
Total nonperforming loans, leases and foreclosed properties
$
3,837
$
5,244
$
6,758
$
8,084
$
9,836
(1)
Balances exclude foreclosed properties insured by certain government-guaranteed loans, principally FHA-insured loans, that entered foreclosure of $260 million, $488 million, $801 million, $1.2 billion and $1.4 billion at December 31, 2019, 2018, 2017, 2016 and 2015, respectively.
(2)
In 2019, $422 million in interest income was estimated to be contractually due on $2.1 billion of consumer loans and leases classified as nonperforming at December 31, 2019, as presented in the table above, plus $5.5 billion of TDRs classified as performing at December 31, 2019. Approximately $297 million of the estimated $422 million in contractual interest was received and included in interest income for 2019.
(3)
In 2019, $133 million in interest income was estimated to be contractually due on $1.5 billion of commercial loans and leases classified as nonperforming at December 31, 2019, as presented in the table above, plus $1.3 billion of TDRs classified as performing at December 31, 2019. Approximately $88 million of the estimated $133 million in contractual interest was received and included in interest income for 2019.
Table III
Accruing Loans and Leases Past Due 90 Days or More (1)
December 31
(Dollars in millions)
Consumer
Residential mortgage (2)
$
1,088
$
1,884
$
3,230
$
4,793
$
7,150
Credit card
1,042
Non-U.S. credit card
-
-
-
Direct/Indirect consumer
Other consumer
-
-
-
Total consumer
2,163
2,916
4,170
5,679
8,057
Commercial
U.S. commercial
Non-U.S. commercial
-
Commercial real estate
Commercial lease financing
U.S. small business commercial
Total commercial
Total accruing loans and leases past due 90 days or more
$
2,413
$
3,230
$
4,415
$
5,887
$
8,250
(1)
Our policy is to classify consumer real estate-secured loans as nonperforming at 90 days past due, except the fully-insured loan portfolio and loans accounted for under the fair value option.
(2)
Balances are fully-insured loans.
Bank of America 82
Table IV
Selected Loan Maturity Data (1, 2)
December 31, 2019
(Dollars in millions)
Due in One
Year or Less
Due After One Year Through Five Years
Due After
Five Years
Total
U.S. commercial
$
76,523
$
200,298
$
50,216
$
327,037
U.S. commercial real estate
13,683
39,259
6,023
58,965
Non-U.S. and other (3)
47,828
56,072
7,875
111,775
Total selected loans
$
138,034
$
295,629
$
64,114
$
497,777
Percent of total
%
%
%
%
Sensitivity of selected loans to changes in interest rates for loans due after one year:
Fixed interest rates
$
21,526
$
31,383
Floating or adjustable interest rates
274,103
32,731
Total
$
295,629
$
64,114
(1)
Loan maturities are based on the remaining maturities under contractual terms.
(2)
Includes loans accounted for under the fair value option.
(3)
Loan maturities include non-U.S. commercial and commercial real estate loans.
Table V
Allowance for Credit Losses
(Dollars in millions)
Allowance for loan and lease losses, January 1
$
9,601
$
10,393
$
11,237
$
12,234
$
14,419
Loans and leases charged off
Residential mortgage
(93
)
(207
)
(188
)
(403
)
(866
)
Home equity
(429
)
(483
)
(582
)
(752
)
(975
)
Credit card
(3,535
)
(3,345
)
(2,968
)
(2,691
)
(2,738
)
Non-U.S. credit card (1)
-
-
(103
)
(238
)
(275
)
Direct/Indirect consumer
(518
)
(495
)
(491
)
(392
)
(383
)
Other consumer
(249
)
(197
)
(212
)
(232
)
(224
)
Total consumer charge-offs
(4,824
)
(4,727
)
(4,544
)
(4,708
)
(5,461
)
U.S. commercial (2)
(650
)
(575
)
(589
)
(567
)
(536
)
Non-U.S. commercial
(115
)
(82
)
(446
)
(133
)
(59
)
Commercial real estate
(31
)
(10
)
(24
)
(10
)
(30
)
Commercial lease financing
(26
)
(8
)
(16
)
(30
)
(19
)
Total commercial charge-offs
(822
)
(675
)
(1,075
)
(740
)
(644
)
Total loans and leases charged off
(5,646
)
(5,402
)
(5,619
)
(5,448
)
(6,105
)
Recoveries of loans and leases previously charged off
Residential mortgage
Home equity
Credit card
Non-U.S. credit card (1)
-
-
Direct/Indirect consumer
Other consumer
Total consumer recoveries
1,838
1,487
1,466
1,389
1,545
U.S. commercial (3)
Non-U.S. commercial
Commercial real estate
Commercial lease financing
Total commercial recoveries
Total recoveries of loans and leases previously charged off
1,998
1,639
1,640
1,627
1,767
Net charge-offs
(3,648
)
(3,763
)
(3,979
)
(3,821
)
(4,338
)
Provision for loan and lease losses
3,574
3,262
3,381
3,581
3,043
Other (4)
(111
)
(291
)
(246
)
(514
)
(890
)
Total allowance for loan and lease losses, December 31
9,416
9,601
10,393
11,480
12,234
Less: Allowance included in assets of business held for sale (5)
-
-
-
(243
)
-
Allowance for loan and lease losses, December 31
9,416
9,601
10,393
11,237
12,234
Reserve for unfunded lending commitments, January 1
Provision for unfunded lending commitments
Other (4)
-
-
-
-
Reserve for unfunded lending commitments, December 31
Allowance for credit losses, December 31
$
10,229
$
10,398
$
11,170
$
11,999
$
12,880
(1)
Represents amounts related to the non-U.S. credit card loan portfolio, which was sold in 2017.
(2)
Includes U.S. small business commercial charge-offs of $320 million, $287 million, $258 million, $253 million and $282 million in 2019, 2018, 2017, 2016 and 2015, respectively.
(3)
Includes U.S. small business commercial recoveries of $48 million, $47 million, $43 million, $45 million and $57 million in 2019, 2018, 2017, 2016 and 2015, respectively.
(4)
Primarily represents write-offs of PCI loans, the net impact of portfolio sales, consolidations and deconsolidations, foreign currency translation adjustments, transfers to held for sale and certain other reclassifications.
(5)
Represents allowance related to the non-U.S. credit card loan portfolio, which was sold in 2017.
83 Bank of America
Table V
Allowance for Credit Losses (continued)
(Dollars in millions)
Loan and allowance ratios (6):
Loans and leases outstanding at December 31 (7)
$
975,091
$
942,546
$
931,039
$
908,812
$
890,045
Allowance for loan and lease losses as a percentage of total loans and leases outstanding at December 31 (7)
0.97
%
1.02
%
1.12
%
1.26
%
1.37
%
Consumer allowance for loan and lease losses as a percentage of total consumer loans and leases outstanding at December 31 (8)
0.98
1.08
1.18
1.36
1.63
Commercial allowance for loan and lease losses as a percentage of total commercial loans and leases outstanding at December 31 (9)
0.96
0.97
1.05
1.16
1.11
Average loans and leases outstanding (7)
$
951,583
$
927,531
$
911,988
$
892,255
$
869,065
Net charge-offs as a percentage of average loans and leases outstanding (7)
0.38
%
0.41
%
0.44
%
0.43
%
0.50
%
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases at December 31
Ratio of the allowance for loan and lease losses at December 31 to net charge-offs
2.58
2.55
2.61
3.00
2.82
Amounts included in allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases at December 31 (10)
$
4,151
$
4,031
$
3,971
$
3,951
$
4,518
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 (10)
%
%
%
%
%
(6)
Loan and allowance ratios for 2016 include $243 million of non-U.S. credit card allowance for loan and lease losses and $9.2 billion of ending non-U.S. credit card loans, which were sold in 2017.
(7)
Outstanding loan and lease balances and ratios do not include loans accounted for under the fair value option of $8.3 billion, $4.3 billion, $5.7 billion, $7.1 billion and $6.9 billion at December 31, 2019, 2018, 2017, 2016 and 2015, respectively. Average loans accounted for under the fair value option were $6.8 billion, $5.5 billion, $6.7 billion, $8.2 billion and $7.7 billion in 2019, 2018, 2017, 2016 and 2015, respectively.
(8)
Excludes consumer loans accounted for under the fair value option of $594 million, $682 million, $928 million, $1.1 billion and $1.9 billion at December 31, 2019, 2018, 2017, 2016 and 2015, respectively.
(9)
Excludes commercial loans accounted for under the fair value option of $7.7 billion, $3.7 billion, $4.8 billion, $6.0 billion and $5.1 billion at December 31, 2019, 2018, 2017, 2016 and 2015, respectively.
(10)
Primarily includes amounts allocated to credit card and unsecured consumer lending portfolios in Consumer Banking and, in 2016 and 2015, the non-U.S. credit card portfolio in All Other.
Table VI
Allocation of the Allowance for Credit Losses by Product Type
December 31
(Dollars in millions)
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Allowance for loan and lease losses
Residential mortgage
$
3.45
%
$
4.40
%
$
6.74
%
$
1,012
8.82
%
$
1,500
12.26
%
Home equity
2.35
5.27
1,019
9.80
1,738
15.14
2,414
19.73
Credit card
3,710
39.39
3,597
37.47
3,368
32.41
2,934
25.56
2,927
23.93
Non-U.S. credit card
-
-
-
-
-
-
2.12
2.24
Direct/Indirect consumer
2.49
2.58
2.54
2.13
1.82
Other consumer
0.55
0.30
0.30
0.44
0.38
Total consumer
4,542
48.23
4,802
50.02
5,383
51.79
6,222
54.21
7,385
60.36
U.S. commercial (1)
3,015
32.02
3,010
31.35
3,113
29.95
3,326
28.97
2,964
24.23
Non-U.S. commercial
6.99
7.05
7.73
7.61
6.17
Commercial real estate
1,042
11.07
9.98
9.00
8.01
7.90
Commercial lease financing
1.69
1.60
1.53
1.20
1.34
Total commercial
4,874
51.77
4,799
49.98
5,010
48.21
5,258
45.79
4,849
39.64
Total allowance for loan and lease losses
9,416
100.00
%
9,601
100.00
%
10,393
100.00
%
11,480
100.00
%
12,234
100.00
%
Less: Allowance included in assets of business held for sale (2)
-
-
-
(243
)
-
Allowance for loan and lease losses
9,416
9,601
10,393
11,237
12,234
Reserve for unfunded lending commitments
Allowance for credit losses
$
10,229
$
10,398
$
11,170
$
11,999
$
12,880
(1)
Includes allowance for loan and lease losses for U.S. small business commercial loans of $523 million, $474 million, $439 million, $416 million and $507 million at December 31, 2019, 2018, 2017, 2016 and 2015, respectively.
(2)
Represents allowance for loan and lease losses related to the non-U.S. credit card loan portfolio, which was sold in 2017.
Bank of America 84
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
See Market Risk Management on page 71 in the MD&A and the sections referenced therein for Quantitative and Qualitative Disclosures about Market Risk.
Item 8. Financial Statements and Supplementary Data
Page
Consolidated Statement of Income
Consolidated Statement of Comprehensive Income
Consolidated Balance Sheet
Consolidated Statement of Changes in Shareholders’ Equity
Consolidated Statement of Cash Flows
Note 1 - Summary of Significant Accounting Principles
Note 2 - Net Interest Income and Noninterest Income
Note 3 - Derivatives
Note 4 - Securities
Note 5 - Outstanding Loans and Leases
Note 6 - Allowance for Credit Losses
Note 7 - Securitizations and Other Variable Interest Entities
Note 8 - Goodwill and Intangible Assets
Note 9 - Leases
Note 10 - Deposits
Note 11 - Federal Funds Sold or Purchased, Securities Financing Agreements, Short-term Borrowings and Restricted Cash
Note 12 - Long-term Debt
Note 13 - Commitments and Contingencies
Note 14 - Shareholders’ Equity
Note 15 - Accumulated Other Comprehensive Income (Loss)
Note 16 - Earnings Per Common Share
Note 17 - Regulatory Requirements and Restrictions
Note 18 - Employee Benefit Plans
Note 19 - Stock-based Compensation Plans
Note 20 - Income Taxes
Note 21 - Fair Value Measurements
Note 22 - Fair Value Option
Note 23 - Fair Value of Financial Instruments
Note 24 - Business Segment Information
Note 25 - Parent Company Information
Note 26 - Performance by Geographical Area
Glossary
Acronyms
85 Bank of America
Report of Management on Internal Control Over Financial Reporting
The management of Bank of America Corporation is responsible for establishing and maintaining adequate internal control over financial reporting.
The Corporation’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Corporation’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of management and directors of the Corporation; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Corporation’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2019 based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). Based on that assessment, management concluded that, as of December 31, 2019, the Corporation’s internal control over financial reporting is effective.
The Corporation’s internal control over financial reporting as of December 31, 2019 has been audited by PricewaterhouseCoopers, LLP, an independent registered public accounting firm, as stated in their accompanying report which expresses an unqualified opinion on the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2019.
Brian T. Moynihan
Chairman, Chief Executive Officer and President
Paul M. Donofrio
Chief Financial Officer
Bank of America 86
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Bank of America Corporation:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Bank of America Corporation and its subsidiaries (the "Corporation") as of December 31, 2019 and December 31, 2018, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Corporation’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Corporation as of December 31, 2019 and December 31, 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Corporation’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Corporation’s consolidated financial statements and on the Corporation’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Loan and Lease Losses
As described in Notes 1 and 6 to the consolidated financial statements, the allowance for loan and lease losses represents management’s estimate of probable incurred credit losses in the Corporation’s loan and lease portfolio. As of December 31, 2019, the allowance for loan and lease losses was $9.4 billion on total loans and leases of $975.1 billion, which excludes loans accounted for under the fair value option. The allowance for loan and lease losses includes both quantitative and qualitative components. The allowance for certain consumer loan portfolios considers a variety of factors including historical loss experience, estimated defaults or foreclosures based on portfolio trends, delinquencies, bankruptcies, economic conditions, credit scores and the amount of loss in the event of default. The allowance for certain commercial loans is calculated using loss rates delineated by risk rating and product type. In addition, the qualitative
87 Bank of America
component has a higher degree of management subjectivity, and includes factors such as concentrations, economic conditions and other considerations.
The principal considerations for our determination that performing procedures relating to the allowance for loan and lease losses is a critical audit matter are (i) there was significant judgment and estimation by management in determining the allowance for loan and lease losses, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and in evaluating audit evidence obtained relating to the allowance for loan and lease losses, including the qualitative component, and (ii) the audit effort involved professionals with specialized skill and knowledge to assist in evaluating certain audit evidence.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the allowance for loan and lease losses. These procedures also included, among others, testing management’s process for estimating the allowance for loan and lease losses, including evaluating the appropriateness of the loss forecast models and methodology, testing the completeness and accuracy of certain data used in the allowance for loan and lease losses, and evaluating the reasonableness of significant assumptions and judgments used by management to estimate the qualitative component of the allowance for loan and lease losses including those judgments related to the impact of concentrations, economic conditions and other considerations. The procedures also included the involvement of professionals with specialized skill and knowledge to assist in evaluating the reasonableness of certain loss forecast models and methodologies, evaluating the reasonableness of risk ratings used in the allowance for commercial loans, and evaluating the reasonableness of certain judgments used by management in estimating the qualitative component of the allowance for loan and lease losses.
Valuation of Certain Level 3 Financial Instruments
As described in Notes 1 and 21 to the consolidated financial statements, the Corporation carries certain financial instruments at fair value, which includes $10.3 billion of assets and $5.9 billion
of liabilities classified as Level 3 fair value measurements for which the determination of fair value requires significant
management judgment or estimation. The Corporation determines the fair value of certain Level 3 financial instruments using quantitative models that utilize multiple significant unobservable inputs, including long-dated volatility and forward price, as applicable. As disclosed by management, estimation risk is greater for financial instruments that are either option-based or have longer maturity dates where observable market inputs are less readily available, or are unobservable, in which case, quantitative-based extrapolations are used in determining fair values.
The principal considerations for our determination that performing procedures relating to the valuation of certain Level 3 financial instruments is a critical audit matter are the significant judgment and estimation used by management to determine the fair value of these financial instruments. This in turn led to a high degree of auditor judgment and effort in performing procedures, including the involvement of professionals with specialized skill and knowledge to assist in evaluating certain audit evidence.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of financial instruments, including controls related to valuation models, significant unobservable inputs, and data. These procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in developing an independent estimate of fair value for a sample of these certain financial instruments and comparison of management’s estimate to the independently developed estimate of fair value. Developing the independent estimate involved testing the completeness and accuracy of data provided by management and evaluating the reasonableness of management’s assumptions used to develop the significant unobservable inputs.
Charlotte, North Carolina
February 19, 2020
We have served as the Corporation’s auditor since 1958.
Bank of America 88
Bank of America Corporation and Subsidiaries
Consolidated Statement of Income
(In millions, except per share information)
Net interest income
Interest income
$
71,236
$
66,769
$
57,579
Interest expense
22,345
18,607
12,340
Net interest income
48,891
48,162
45,239
Noninterest income
Fees and commissions
33,015
33,078
33,341
Market making and similar activities
9,034
9,008
7,102
Other income
1,444
Total noninterest income
42,353
42,858
41,887
Total revenue, net of interest expense
91,244
91,020
87,126
Provision for credit losses
3,590
3,282
3,396
Noninterest expense
Compensation and benefits
31,977
31,880
31,931
Occupancy and equipment
6,588
6,380
6,264
Information processing and communications
4,646
4,555
4,530
Product delivery and transaction related
2,762
2,857
3,041
Marketing
1,934
1,674
1,746
Professional fees
1,597
1,699
1,888
Other general operating
5,396
4,109
5,117
Total noninterest expense
54,900
53,154
54,517
Income before income taxes
32,754
34,584
29,213
Income tax expense
5,324
6,437
10,981
Net income
$
27,430
$
28,147
$
18,232
Preferred stock dividends
1,432
1,451
1,614
Net income applicable to common shareholders
$
25,998
$
26,696
$
16,618
Per common share information
Earnings
$
2.77
$
2.64
$
1.63
Diluted earnings
2.75
2.61
1.56
Average common shares issued and outstanding
9,390.5
10,096.5
10,195.6
Average diluted common shares issued and outstanding
9,442.9
10,236.9
10,778.4
Consolidated Statement of Comprehensive Income
(Dollars in millions)
Net income
$
27,430
$
28,147
$
18,232
Other comprehensive income (loss), net-of-tax:
Net change in debt securities
5,875
(3,953
)
Net change in debit valuation adjustments
(963
)
(293
)
Net change in derivatives
(53
)
Employee benefit plan adjustments
(405
)
Net change in foreign currency translation adjustments
(86
)
(254
)
Other comprehensive income (loss)
5,578
(3,916
)
Comprehensive income
$
33,008
$
24,231
$
18,438
See accompanying Notes to Consolidated Financial Statements.
89 Bank of America
Bank of America Corporation and Subsidiaries
Consolidated Balance Sheet
December 31
(Dollars in millions)
Assets
Cash and due from banks
$
30,152
$
29,063
Interest-bearing deposits with the Federal Reserve, non-U.S. central banks and other banks
131,408
148,341
Cash and cash equivalents
161,560
177,404
Time deposits placed and other short-term investments
7,107
7,494
Federal funds sold and securities borrowed or purchased under agreements to resell
(includes $50,364 and $56,399 measured at fair value)
274,597
261,131
Trading account assets (includes $90,946 and $119,363 pledged as collateral)
229,826
214,348
Derivative assets
40,485
43,725
Debt securities:
Carried at fair value
256,467
238,101
Held-to-maturity, at cost (fair value - $219,821 and $200,435)
215,730
203,652
Total debt securities
472,197
441,753
Loans and leases (includes $8,335 and $4,349 measured at fair value)
983,426
946,895
Allowance for loan and lease losses
(9,416
)
(9,601
)
Loans and leases, net of allowance
974,010
937,294
Premises and equipment, net
10,561
9,906
Goodwill
68,951
68,951
Loans held-for-sale (includes $3,709 and $2,942 measured at fair value)
9,158
10,367
Customer and other receivables
55,937
65,814
Other assets (includes $15,518 and $19,739 measured at fair value)
129,690
116,320
Total assets
$
2,434,079
$
2,354,507
Liabilities
Deposits in U.S. offices:
Noninterest-bearing
$
403,305
$
412,587
Interest-bearing (includes $508 and $492 measured at fair value)
940,731
891,636
Deposits in non-U.S. offices:
Noninterest-bearing
13,719
14,060
Interest-bearing
77,048
63,193
Total deposits
1,434,803
1,381,476
Federal funds purchased and securities loaned or sold under agreements to repurchase
(includes $16,008 and $28,875 measured at fair value)
165,109
186,988
Trading account liabilities
83,270
68,220
Derivative liabilities
38,229
37,891
Short-term borrowings (includes $3,941 and $1,648 measured at fair value)
24,204
20,189
Accrued expenses and other liabilities (includes $15,434 and $20,075 measured at fair value
and $813 and $797 of reserve for unfunded lending commitments)
182,798
165,026
Long-term debt (includes $34,975 and $27,689 measured at fair value)
240,856
229,392
Total liabilities
2,169,269
2,089,182
Commitments and contingencies (Note 7 - Securitizations and Other Variable Interest Entities
and Note 13 - Commitments and Contingencies)
Shareholders’ equity
Preferred stock, $0.01 par value; authorized - 100,000,000 shares; issued and outstanding - 3,887,440 and 3,843,140 shares
23,401
22,326
Common stock and additional paid-in capital, $0.01 par value; authorized - 12,800,000,000 shares;
issued and outstanding - 8,836,148,954 and 9,669,286,370 shares
91,723
118,896
Retained earnings
156,319
136,314
Accumulated other comprehensive income (loss)
(6,633
)
(12,211
)
Total shareholders’ equity
264,810
265,325
Total liabilities and shareholders’ equity
$
2,434,079
$
2,354,507
Assets of consolidated variable interest entities included in total assets above (isolated to settle the liabilities of the variable interest entities)
Trading account assets
$
5,811
$
5,798
Loans and leases
38,837
43,850
Allowance for loan and lease losses
(807
)
(912
)
Loans and leases, net of allowance
38,030
42,938
All other assets
Total assets of consolidated variable interest entities
$
44,381
$
49,073
Liabilities of consolidated variable interest entities included in total liabilities above
Short-term borrowings
$
2,175
$
Long-term debt (includes $8,717 and $10,943 of non-recourse debt)
8,718
10,944
All other liabilities (includes $19 and $27 of non-recourse liabilities)
Total liabilities of consolidated variable interest entities
$
10,915
$
11,716
See accompanying Notes to Consolidated Financial Statements.
Bank of America 90
Bank of America Corporation and Subsidiaries
Consolidated Statement of Changes in Shareholders’ Equity
Preferred
Stock
Common Stock and
Additional Paid-in Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders’
Equity
(In millions)
Shares
Amount
Balance, December 31, 2016
$
25,220
10,052.6
$
147,038
$
101,225
$
(7,288
)
$
266,195
Net income
18,232
18,232
Net change in debt securities
Net change in debit valuation adjustments
(293
)
(293
)
Net change in derivatives
Employee benefit plan adjustments
Net change in foreign currency translation adjustments
Dividends declared:
Common
(4,027
)
(4,027
)
Preferred
(1,578
)
(1,578
)
Common stock issued in connection with exercise of warrants and exchange of preferred stock
(2,897
)
700.0
2,933
(36
)
-
Common stock issued under employee plans, net, and other
43.3
Common stock repurchased
(508.6
)
(12,814
)
(12,814
)
Balance, December 31, 2017
$
22,323
10,287.3
$
138,089
$
113,816
$
(7,082
)
$
267,146
Cumulative adjustment for adoption of hedge accounting standard
(32
)
Adoption of accounting standard related to certain tax effects stranded in accumulated other comprehensive income (loss)
1,270
(1,270
)
-
Net income
28,147
28,147
Net change in debt securities
(3,953
)
(3,953
)
Net change in debit valuation adjustments
Net change in derivatives
(53
)
(53
)
Employee benefit plan adjustments
(405
)
(405
)
Net change in foreign currency translation adjustments
(254
)
(254
)
Dividends declared:
Common
(5,424
)
(5,424
)
Preferred
(1,451
)
(1,451
)
Issuance of preferred stock
4,515
4,515
Redemption of preferred stock
(4,512
)
(4,512
)
Common stock issued under employee plans, net, and other
58.2
(12
)
Common stock repurchased
(676.2
)
(20,094
)
(20,094
)
Balance, December 31, 2018
$
22,326
9,669.3
$
118,896
$
136,314
$
(12,211
)
$
265,325
Cumulative adjustment for adoption of lease accounting standard
Net income
27,430
27,430
Net change in debt securities
5,875
5,875
Net change in debit valuation adjustments
(963
)
(963
)
Net change in derivatives
Employee benefit plan adjustments
Net change in foreign currency translation adjustments
(86
)
(86
)
Dividends declared:
Common
(6,146
)
(6,146
)
Preferred
(1,432
)
(1,432
)
Issuance of preferred stock
3,643
3,643
Redemption of preferred stock
(2,568
)
(2,568
)
Common stock issued under employee plans, net, and other
123.3
(12
)
Common stock repurchased
(956.5
)
(28,144
)
(28,144
)
Balance, December 31, 2019
$
23,401
8,836.1
$
91,723
$
156,319
$
(6,633
)
$
264,810
See accompanying Notes to Consolidated Financial Statements.
91 Bank of America
Bank of America Corporation and Subsidiaries
Consolidated Statement of Cash Flows
(Dollars in millions)
Operating activities
Net income
$
27,430
$
28,147
$
18,232
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses
3,590
3,282
3,396
Gains on sales of debt securities
(217
)
(154
)
(255
)
Depreciation and amortization
1,729
2,063
2,103
Net amortization of premium/discount on debt securities
2,066
1,824
2,251
Deferred income taxes
2,435
3,041
8,175
Stock-based compensation
1,974
1,729
1,649
Impairment of equity method investment
2,072
-
-
Loans held-for-sale:
Originations and purchases
(28,874
)
(28,071
)
(43,506
)
Proceeds from sales and paydowns of loans originally classified as held for sale and instruments
from related securitization activities
30,191
28,972
40,548
Net change in:
Trading and derivative assets/liabilities
7,920
(23,673
)
(14,663
)
Other assets
(11,113
)
11,920
(20,090
)
Accrued expenses and other liabilities
16,363
13,010
4,673
Other operating activities, net
6,211
(2,570
)
7,351
Net cash provided by operating activities
61,777
39,520
9,864
Investing activities
Net change in:
Time deposits placed and other short-term investments
3,659
(1,292
)
Federal funds sold and securities borrowed or purchased under agreements to resell
(13,466
)
(48,384
)
(14,523
)
Debt securities carried at fair value:
Proceeds from sales
52,006
5,117
73,353
Proceeds from paydowns and maturities
79,114
78,513
93,874
Purchases
(152,782
)
(76,640
)
(166,975
)
Held-to-maturity debt securities:
Proceeds from paydowns and maturities
34,770
18,789
16,653
Purchases
(37,115
)
(35,980
)
(25,088
)
Loans and leases:
Proceeds from sales of loans originally classified as held for investment and instruments
from related securitization activities
12,201
21,365
11,996
Purchases
(5,963
)
(4,629
)
(6,846
)
Other changes in loans and leases, net
(46,808
)
(31,292
)
(41,104
)
Other investing activities, net
(2,974
)
(1,986
)
8,411
Net cash used in investing activities
(80,630
)
(71,468
)
(51,541
)
Financing activities
Net change in:
Deposits
53,327
71,931
48,611
Federal funds purchased and securities loaned or sold under agreements to repurchase
(21,879
)
10,070
7,024
Short-term borrowings
4,004
(12,478
)
8,538
Long-term debt:
Proceeds from issuance
52,420
64,278
53,486
Retirement
(50,794
)
(53,046
)
(49,480
)
Preferred stock:
Proceeds from issuance
3,643
4,515
-
Redemption
(2,568
)
(4,512
)
-
Common stock repurchased
(28,144
)
(20,094
)
(12,814
)
Cash dividends paid
(5,934
)
(6,895
)
(5,700
)
Other financing activities, net
(698
)
(651
)
(397
)
Net cash provided by financing activities
3,377
53,118
49,268
Effect of exchange rate changes on cash and cash equivalents
(368
)
(1,200
)
2,105
Net increase (decrease) in cash and cash equivalents
(15,844
)
19,970
9,696
Cash and cash equivalents at January 1
177,404
157,434
147,738
Cash and cash equivalents at December 31
$
161,560
$
177,404
$
157,434
Supplemental cash flow disclosures
Interest paid
$
22,196
$
19,087
$
12,852
Income taxes paid, net
4,359
2,470
3,235
See accompanying Notes to Consolidated Financial Statements.
Bank of America 92
Bank of America Corporation and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1 Summary of Significant Accounting Principles
Bank of America Corporation, a bank holding company and a financial holding company, provides a diverse range of financial services and products throughout the U.S. and in certain international markets. The term “the Corporation” as used herein 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.
Principles of Consolidation and Basis of Presentation
The Consolidated Financial Statements include the accounts of the Corporation and its majority-owned subsidiaries and those variable interest entities (VIEs) where the Corporation is the primary beneficiary. Intercompany accounts and transactions have been eliminated. Results of operations of acquired companies are included from the dates of acquisition, and for VIEs, from the dates that the Corporation became the primary beneficiary. Assets held in an agency or fiduciary capacity are not included in the Consolidated Financial Statements. The Corporation accounts for investments in companies for which it owns a voting interest and for which it has the ability to exercise significant influence over operating and financing decisions using the equity method of accounting. These investments are included in other assets. Equity method investments are subject to impairment testing, and the Corporation’s proportionate share of income or loss is included in other income.
The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could materially differ from those estimates and assumptions. Certain prior-period amounts have been reclassified to conform to current-period presentation.
In the Consolidated Statement of Income, amounts related to certain asset and liability management (ALM) activities have been reclassified from other income to market making and similar activities, which was previously referred to as trading account income. All prior periods presented reflect this change, which has no impact on the Corporation's total noninterest income or net income, and has no impact on business segment results. The amounts included in market making and similar activities related to this change in presentation are increases of $930 million, $1.1 billion and $332 million for 2019, 2018 and 2017, respectively.
New Accounting Standards
Lease Accounting
On January 1, 2019, the Corporation adopted the new accounting standards that require lessees to recognize operating leases on the balance sheet as right-of-use assets and lease liabilities based on the value of the discounted future lease payments. Lessor accounting is largely unchanged. Expanded disclosures about the nature and terms of lease agreements are required prospectively and are included in Note 9 - Leases. The Corporation elected to retain prior determinations of whether an existing contract contains a lease and how the lease should be classified. The Corporation elected to recognize leases existing on January 1, 2019 through a cumulative-effect adjustment which increased retained earnings by $165 million, with no adjustment to prior periods presented. Upon adoption, the Corporation also recognized right-of-use assets and lease liabilities of $9.7 billion.
Adoption of the standards did not have a significant effect on the Corporation’s regulatory capital measures.
Accounting for Financial Instruments -- Credit Losses
On January 1, 2020, the Corporation adopted the new accounting standard that requires the measurement of the allowance for credit losses to be based on management’s best estimate of lifetime expected credit losses inherent in the Corporation’s relevant financial assets. The Corporation’s lifetime expected credit losses are determined using macroeconomic forecast assumptions and management judgments applicable to and through the expected life of the loan portfolios, and are net of expected recoveries on loans that were previously charged off. The standard also expands credit quality disclosures beginning in the first quarter of 2020. While the standard changes the measurement of the allowance for credit losses, it does not change the Corporation’s credit risk of its lending portfolios or the ultimate losses in those portfolios. Upon adoption of the standard on January 1, 2020, the Corporation recorded a $3.3 billion, or 32 percent, increase to the allowance for credit losses. After adjusting for deferred taxes and other adoption effects, a $2.4 billion decrease was recorded in retained earnings through a cumulative-effect adjustment.
Significant Accounting Principles
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash items in the process of collection, cash segregated under federal and other brokerage regulations, and amounts due from correspondent banks, the Federal Reserve Bank and certain non-U.S. central banks. Certain cash balances are restricted as to withdrawal or usage by legally binding contractual agreements or regulatory requirements.
Securities Financing Agreements
Securities borrowed or purchased under agreements to resell and securities loaned or sold under agreements to repurchase (securities financing agreements) are treated as collateralized financing transactions except in instances where the transaction is required to be accounted for as individual sale and purchase transactions. Generally, these agreements are recorded at acquisition or sale price plus accrued interest, except for certain securities financing agreements that the Corporation accounts for under the fair value option. Changes in the fair value of securities financing agreements that are accounted for under the fair value option are recorded in market making and similar activities in the Consolidated Statement of Income.
The Corporation’s policy is to monitor the market value of the principal amount loaned under resale agreements and obtain collateral from or return collateral pledged to counterparties when appropriate. Securities financing agreements do not create material credit risk due to these collateral provisions; therefore, an allowance for loan losses is not necessary.
In transactions where the Corporation acts as the lender in a securities lending agreement and receives securities that can be pledged or sold as collateral, it recognizes an asset on the Consolidated Balance Sheet at fair value, representing the securities received, and a liability, representing the obligation to return those securities.
Collateral
The Corporation accepts securities and loans as collateral that it is permitted by contract or practice to sell or repledge. At December 31, 2019 and 2018, the fair value of this collateral was $693.0 billion and $599.0 billion, of which $593.8 billion and $508.6
93 Bank of America
billion were sold or repledged. The primary source of this collateral is securities borrowed or purchased under agreements to resell.
The Corporation also pledges company-owned securities and loans as collateral in transactions that include repurchase agreements, securities loaned, public and trust deposits, U.S. Treasury tax and loan notes, and short-term borrowings. This collateral, which in some cases can be sold or repledged by the counterparties to the transactions, is parenthetically disclosed on the Consolidated Balance Sheet.
In certain cases, the Corporation has transferred assets to consolidated VIEs where those restricted assets serve as collateral for the interests issued by the VIEs. These assets are included on the Consolidated Balance Sheet in Assets of Consolidated VIEs.
In addition, the Corporation obtains collateral in connection with its derivative contracts. Required collateral levels vary depending on the credit risk rating and the type of counterparty. Generally, the Corporation accepts collateral in the form of cash, U.S. Treasury securities and other marketable securities. Based on provisions contained in master netting agreements, the Corporation nets cash collateral received against derivative assets. The Corporation also pledges collateral on its own derivative positions which can be applied against derivative liabilities.
Trading Instruments
Financial instruments utilized in trading activities are carried at fair value. Fair value is generally based on quoted market prices for the same or similar assets and liabilities. If these market prices are not available, fair values are estimated based on dealer quotes, pricing models, discounted cash flow methodologies, or similar techniques where the determination of fair value may require significant management judgment or estimation. Realized gains and losses are recorded on a trade-date basis. Realized and unrealized gains and losses are recognized in market making and similar activities.
Derivatives and Hedging Activities
Derivatives are entered into on behalf of customers, for trading or to support risk management activities. Derivatives used in risk management activities include derivatives that are both designated in qualifying accounting hedge relationships and derivatives used to hedge market risks in relationships that are not designated in qualifying accounting hedge relationships (referred to as other risk management activities). The Corporation manages interest rate and foreign currency exchange rate sensitivity predominantly through the use of derivatives. Derivatives utilized by the Corporation include swaps, futures and forward settlement contracts, and option contracts.
All derivatives are recorded on the Consolidated Balance Sheet at fair value, taking into consideration the effects of legally enforceable master netting agreements that allow the Corporation to settle positive and negative positions and offset cash collateral held with the same counterparty on a net basis. For exchange-traded contracts, fair value is based on quoted market prices in active or inactive markets or is derived from observable market- based pricing parameters, similar to those applied to over-the-counter (OTC) derivatives. For non-exchange traded contracts, fair value is based on dealer quotes, pricing models, discounted cash flow methodologies or similar techniques for which the determination of fair value may require significant management judgment or estimation.
Valuations of derivative assets and liabilities reflect the value of the instrument including counterparty credit risk. These values also take into account the Corporation’s own credit standing.
Trading Derivatives and Other Risk Management Activities
Derivatives held for trading purposes are included in derivative assets or derivative liabilities on the Consolidated Balance Sheet with changes in fair value included in market making and similar activities.
Derivatives used for other risk management activities are included in derivative assets or derivative liabilities. Derivatives used in other risk management activities have not been designated in qualifying accounting hedge relationships because they did not qualify or the risk that is being mitigated pertains to an item that is reported at fair value through earnings so that the effect of measuring the derivative instrument and the asset or liability to which the risk exposure pertains will offset in the Consolidated Statement of Income to the extent effective. The changes in the fair value of derivatives that serve to mitigate certain risks associated with mortgage servicing rights (MSRs), interest rate lock commitments (IRLCs) and first-lien mortgage loans held-for-sale (LHFS) that are originated by the Corporation are recorded in other income. Changes in the fair value of derivatives that serve to mitigate interest rate risk and foreign currency risk are included in market making and similar activities. Credit derivatives are also used by the Corporation to mitigate the risk associated with various credit exposures. The changes in the fair value of these derivatives are included in market making and similar activities and other income.
Derivatives Used For Hedge Accounting Purposes (Accounting Hedges)
For accounting hedges, the Corporation formally documents at inception all relationships between hedging instruments and hedged items, as well as the risk management objectives and strategies for undertaking various accounting hedges. Additionally, the Corporation primarily uses regression analysis at the inception of a hedge and for each reporting period thereafter to assess whether the derivative used in an accounting hedge transaction is expected to be and has been highly effective in offsetting changes in the fair value or cash flows of a hedged item or forecasted transaction. The Corporation discontinues hedge accounting when it is determined that a derivative is not expected to be or has ceased to be highly effective as a hedge, and then reflects changes in fair value of the derivative in earnings after termination of the hedge relationship.
Fair value hedges are used to protect against changes in the fair value of the Corporation’s assets and liabilities that are attributable to interest rate or foreign exchange volatility. Changes in the fair value of derivatives designated as fair value hedges are recorded in earnings, together and in the same income statement line item with changes in the fair value of the related hedged item. If a derivative instrument in a fair value hedge is terminated or the hedge designation removed, the previous adjustments to the carrying value of the hedged asset or liability are subsequently accounted for in the same manner as other components of the carrying value of that asset or liability. For interest-earning assets and interest-bearing liabilities, such adjustments are amortized to earnings over the remaining life of the respective asset or liability.
Cash flow hedges are used primarily to minimize the variability in cash flows of assets and liabilities or forecasted transactions caused by interest rate or foreign exchange rate fluctuations. The Corporation also uses cash flow hedges to hedge the price risk associated with deferred compensation. Changes in the fair value of derivatives used in cash flow hedges are recorded in accumulated other comprehensive income (OCI) and are reclassified into the line item in the income statement in which the hedged item is recorded in the same period the hedged item affects earnings. Components of a derivative that are excluded in
Bank of America 94
assessing hedge effectiveness are recorded in the same income statement line item as the hedged item.
Net investment hedges are used to manage the foreign exchange rate sensitivity arising from a net investment in a foreign operation. Changes in the spot prices of derivatives that are designated as net investment hedges of foreign operations are recorded as a component of accumulated OCI. The remaining components of these derivatives are excluded in assessing hedge effectiveness and are recorded in market making and similar activities.
Securities
Debt securities are reported on the Consolidated Balance Sheet at their trade date. Their classification is dependent on the purpose for which the securities were acquired. Debt securities purchased for use in the Corporation’s trading activities are reported in trading account assets at fair value with unrealized gains and losses included in market making and similar activities. Substantially all other debt securities purchased are used in the Corporation’s ALM activities and are reported on the Consolidated Balance Sheet as either debt securities carried at fair value or as held-to-maturity (HTM) debt securities. Debt securities carried at fair value are either available-for-sale (AFS) securities with unrealized gains and losses net-of-tax included in accumulated OCI or carried at fair value with unrealized gains and losses reported in other income. HTM debt securities, which are certain debt securities that management has the intent and ability to hold to maturity, are reported at amortized cost.
The Corporation regularly evaluates each AFS and HTM debt security where the value has declined below amortized cost to assess whether the decline in fair value is other than temporary. In determining whether an impairment is other than temporary, the Corporation considers the severity and duration of the decline in fair value, the length of time expected for recovery, the financial condition of the issuer, and other qualitative factors, as well as whether the Corporation either plans to sell the security or it is more likely than not that it will be required to sell the security before recovery of the amortized cost. For AFS debt securities the Corporation intends to hold, an analysis is performed to determine how much of the decline in fair value is related to the issuer’s credit and how much is related to market factors (e.g., interest rates). If any of the decline in fair value is due to credit, an other-than-temporary impairment (OTTI) loss is recognized in the Consolidated Statement of Income for that amount. If any of the decline in fair value is related to market factors, that amount is recognized in accumulated OCI. In certain instances, the credit loss may exceed the total decline in fair value, in which case, the difference is due to market factors and is recognized as an unrealized gain in accumulated OCI. If the Corporation intends to sell or believes it is more likely than not that it will be required to sell the debt security, it is written down to fair value as an OTTI loss.
Interest on debt securities, including amortization of premiums and accretion of discounts, is included in interest income. Premiums and discounts are amortized or accreted to interest income at a constant effective yield over the contractual lives of the securities. Realized gains and losses from the sales of debt securities are determined using the specific identification method.
Equity securities with readily determinable fair values that are not held for trading purposes are carried at fair value with unrealized gains and losses included in other income. Equity securities that do not have readily determinable fair values are recorded at cost less impairment, if any, plus or minus qualifying observable price changes. These securities are reported in other assets.
Loans and Leases
Loans, with the exception of loans accounted for under the fair value option, are measured at historical cost and reported at their outstanding principal balances net of any unearned income, charge-offs, unamortized deferred fees and costs on originated loans, and for purchased loans, net of any unamortized premiums or discounts. Loan origination fees and certain direct origination costs are deferred and recognized as adjustments to interest income over the lives of the related loans. Unearned income, discounts and premiums are amortized to interest income using a level yield methodology. The Corporation elects to account for certain consumer and commercial loans under the fair value option with interest reported in interest income and changes in fair value reported in market making and similar activities or other income.
Under applicable accounting guidance, for reporting purposes, the loan and lease portfolio is categorized by portfolio segment and, within each portfolio segment, by class of financing receivables. A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine the allowance for credit losses, and a class of financing receivables is defined as the level of disaggregation of portfolio segments based on the initial measurement attribute, risk characteristics and methods for assessing risk. The Corporation’s three portfolio segments are Consumer Real Estate, Credit Card and Other Consumer, and Commercial. The classes within the Consumer Real Estate portfolio segment are residential mortgage and home equity. The classes within the Credit Card and Other Consumer portfolio segment are credit card, direct/indirect consumer and other consumer. The classes within the Commercial portfolio segment are U.S. commercial, non-U.S. commercial, commercial real estate, commercial lease financing and U.S. small business commercial.
Leases
The Corporation provides equipment financing to its customers through a variety of lessor arrangements. Direct financing leases and sales-type leases are carried at the aggregate of lease payments receivable plus the estimated residual value of the leased property less unearned income, which is accreted to interest income over the lease terms using methods that approximate the interest method. Operating lease income is recognized on a straight-line basis. The Corporation's lease arrangements generally do not contain non-lease components.
Allowance for Credit Losses
The allowance for credit losses, which includes the allowance for loan and lease losses and the reserve for unfunded lending commitments, represents management’s estimate of probable incurred credit losses in the Corporation’s loan and lease portfolio excluding loans and unfunded lending commitments accounted for under the fair value option. The allowance for credit losses includes both quantitative and qualitative components. The qualitative component has a higher degree of management subjectivity, and includes factors such as concentrations, economic conditions and other considerations. The allowance for loan and lease losses represents the estimated probable credit losses on funded consumer and commercial loans and leases while the reserve for unfunded lending commitments, including standby letters of credit (SBLCs) and binding unfunded loan commitments, represents estimated probable credit losses on these unfunded credit instruments based on utilization assumptions. Lending-related credit exposures deemed to be uncollectible, excluding loans carried at fair value, are charged off against these accounts.
95 Bank of America
The Corporation performs periodic and systematic detailed reviews of its lending portfolios to identify credit risks and to assess the overall collectability of those portfolios. The allowance on certain homogeneous consumer loan portfolios, which generally consist of consumer real estate loans within the Consumer Real Estate portfolio segment and credit card loans within the Credit Card and Other Consumer portfolio segment, is based on aggregated portfolio segment evaluations generally by product type. Loss forecast models are utilized for these portfolios which consider a variety of factors including, but not limited to, historical loss experience, estimated defaults or foreclosures based on portfolio trends, delinquencies, bankruptcies, economic conditions, credit scores and the amount of loss in the event of default.
For consumer loans secured by residential real estate, using statistical modeling methodologies, the Corporation estimates the number of loans that will default based on the individual loan attributes aggregated into pools of homogeneous loans with similar attributes. The attributes that are most significant to the probability of default and are used to estimate defaults include refreshed loan-to-value (LTV) or, in the case of a subordinated lien, refreshed combined LTV (CLTV), borrower credit score, months since origination and geography, all of which are further broken down by present collection status (whether the loan is current, delinquent, in default or in bankruptcy). The severity or loss given default is estimated based on the refreshed LTV for first-lien mortgages or CLTV for subordinated liens. The estimates are based on the Corporation’s historical experience with the loan portfolio, adjusted to reflect an assessment of environmental factors not yet reflected in the historical data underlying the loss estimates, such as changes in real estate values, local and national economies, underwriting standards and the regulatory environment. The probability of default models also incorporate recent experience with modification programs including re-defaults subsequent to modification, a loan’s default history prior to modification and the change in borrower payments post-modification. On home equity loans where the Corporation holds only a second-lien position and foreclosure is not the best alternative, the loss severity is estimated at 100 percent.
The allowance on certain commercial loans (except business card and certain small business loans) is calculated using loss rates delineated by risk rating and product type. Factors considered when assessing loss rates include the value of the underlying collateral, if applicable, the industry of the obligor, and the obligor’s liquidity and other financial indicators along with certain qualitative factors. These statistical models are updated regularly for changes in economic and business conditions. Included in the analysis of consumer and commercial loan portfolios are qualitative estimates which are maintained to cover uncertainties that affect the Corporation’s estimate of probable losses including domestic and global economic uncertainty and large single-name defaults.
For individually impaired loans, which include nonperforming commercial loans as well as consumer and commercial loans and leases modified in a troubled debt restructuring (TDR), management measures impairment primarily based on the present value of payments expected to be received, discounted at the loans’ original effective contractual interest rates. Credit card loans are discounted at the portfolio average contractual annual percentage rate, excluding promotionally priced loans, in effect prior to restructuring. Impaired loans and TDRs may also be measured based on observable market prices, or for loans that are solely dependent on the collateral for repayment, the estimated fair value of the collateral less costs to sell. If the recorded investment in impaired loans exceeds this amount, a specific allowance is established as part of the allowance for loan and
lease losses unless these are secured consumer loans that are solely dependent on collateral for repayment, in which case the amount that exceeds the fair value of the collateral is charged off.
Generally, the Corporation initially estimates the fair value of the collateral securing these consumer real estate-secured loans using an automated valuation model (AVM). An AVM is a tool that estimates the value of a property by reference to market data including sales of comparable properties and price trends specific to the Metropolitan Statistical Area in which the property being valued is located. In the event that an AVM value is not available, the Corporation utilizes publicized indices or if these methods provide less reliable valuations, the Corporation uses appraisals or broker price opinions to estimate the fair value of the collateral. While there is inherent imprecision in these valuations, the Corporation believes that they are representative of the portfolio in the aggregate.
In addition to the allowance for loan and lease losses, the Corporation also estimates probable losses related to unfunded lending commitments, such as letters of credit, financial guarantees and binding unfunded loan commitments. Unfunded lending commitments are subject to individual reviews and are analyzed and segregated by risk according to the Corporation’s internal risk rating scale. These risk classifications, in conjunction with an analysis of historical loss experience, utilization assumptions, current economic conditions, performance trends within the portfolio and any other pertinent information, result in the estimation of the reserve for unfunded lending commitments.
The allowance for credit losses related to the loan and lease portfolio is reported separately on the Consolidated Balance Sheet whereas the reserve for unfunded lending commitments is reported on the Consolidated Balance Sheet in accrued expenses and other liabilities. The provision for credit losses related to the loan and lease portfolio and unfunded lending commitments is reported in the Consolidated Statement of Income.
Nonperforming Loans and Leases, Charge-offs and Delinquencies
Nonperforming loans and leases generally include loans and leases that have been placed on nonaccrual status. Loans accounted for under the fair value option and LHFS are not reported as nonperforming.
In accordance with the Corporation’s policies, consumer real estate-secured loans, including residential mortgages and home equity loans, are generally placed on nonaccrual status and classified as nonperforming at 90 days past due unless repayment of the loan is insured by the Federal Housing Administration (FHA) or through individually insured long-term standby agreements with Fannie Mae (FNMA) or Freddie Mac (FHLMC) (the fully-insured portfolio). Residential mortgage loans in the fully-insured portfolio are not placed on nonaccrual status and, therefore, are not reported as nonperforming. Junior-lien home equity loans are placed on nonaccrual status and classified as nonperforming when the underlying first-lien mortgage loan becomes 90 days past due even if the junior-lien loan is current. The outstanding balance of real estate-secured loans that is in excess of the estimated property value less costs to sell is charged off no later than the end of the month in which the loan becomes 180 days past due unless the loan is fully insured, or for loans in bankruptcy, within 60 days of receipt of notification of filing, with the remaining balance classified as nonperforming.
Consumer loans secured by personal property, credit card loans and other unsecured consumer loans are not placed on nonaccrual status prior to charge-off and, therefore, are not reported as nonperforming loans, except for certain secured consumer loans, including those that have been modified in a TDR. Personal
Bank of America 96
property-secured loans (including auto loans) are charged off to collateral value no later than the end of the month in which the account becomes 120 days past due, or upon repossession of an auto or, for loans in bankruptcy, within 60 days of receipt of notification of filing. Credit card and other unsecured customer loans are charged off no later than the end of the month in which the account becomes 180 days past due, within 60 days after receipt of notification of death or bankruptcy, or upon confirmation of fraud.
Commercial loans and leases, excluding business card loans, that are past due 90 days or more as to principal or interest, or where reasonable doubt exists as to timely collection, including loans that are individually identified as being impaired, are generally placed on nonaccrual status and classified as nonperforming unless well-secured and in the process of collection.
Business card loans are charged off in the same manner as consumer credit card loans. Other commercial loans and leases are generally charged off when all or a portion of the principal amount is determined to be uncollectible.
The entire balance of a consumer loan or commercial loan or lease is contractually delinquent if the minimum payment is not received by the specified due date on the customer’s billing statement. Interest and fees continue to accrue on past due loans and leases until the date the loan is placed on nonaccrual status, if applicable. Accrued interest receivable is reversed when loans and leases are placed on nonaccrual status. Interest collections on nonaccruing loans and leases for which the ultimate collectability of principal is uncertain are applied as principal reductions; otherwise, such collections are credited to income when received. Loans and leases may be restored to accrual status when all principal and interest is current and full repayment of the remaining contractual principal and interest is expected.
Troubled Debt Restructurings
Consumer and commercial loans and leases whose contractual terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties are classified as TDRs. Concessions could include a reduction in the interest rate to a rate that is below market on the loan, payment extensions, forgiveness of principal, forbearance or other actions designed to maximize collections. Loans that are carried at fair value and LHFS are not classified as TDRs.
Loans and leases whose contractual terms have been modified in a TDR and are current at the time of restructuring may remain on accrual status if there is demonstrated performance prior to the restructuring and payment in full under the restructured terms is expected. Otherwise, the loans are placed on nonaccrual status and reported as nonperforming, except for fully-insured consumer real estate loans, until there is sustained repayment performance for a reasonable period, generally six months. If accruing TDRs cease to perform in accordance with their modified contractual terms, they are placed on nonaccrual status and reported as nonperforming TDRs.
Secured consumer loans that have been discharged in Chapter 7 bankruptcy and have not been reaffirmed by the borrower are classified as TDRs at the time of discharge. Such loans are placed on nonaccrual status and written down to the estimated collateral value less costs to sell no later than at the time of discharge. If these loans are contractually current, interest collections are generally recorded in interest income on a cash basis. Consumer real estate-secured loans for which a binding offer to restructure has been extended are also classified as TDRs. Credit card and other unsecured consumer loans that have been renegotiated in a TDR generally remain on accrual status until the loan is either
paid in full or charged off, which occurs no later than the end of the month in which the loan becomes 180 days past due or, for loans that have been placed on a fixed payment plan, 120 days past due.
A loan that had previously been modified in a TDR and is subsequently refinanced under current underwriting standards at a market rate with no concessionary terms is accounted for as a new loan and is no longer reported as a TDR.
Loans Held-for-sale
Loans that the Corporation intends to sell in the foreseeable future, including residential mortgages, loan syndications, and to a lesser degree, commercial real estate, consumer finance and other loans, are reported as LHFS and are carried at the lower of aggregate cost or fair value. The Corporation accounts for certain LHFS, including residential mortgage LHFS, under the fair value option with interest recorded in interest income and changes in fair value recorded in other income. Loan origination costs related to LHFS that the Corporation accounts for under the fair value option are recognized in noninterest expense when incurred. Loan origination costs for LHFS carried at the lower of cost or fair value are capitalized as part of the carrying value of the loans and recognized as a reduction of noninterest income upon the sale of such loans. LHFS that are on nonaccrual status and are reported as nonperforming, as defined in the policy herein, are reported separately from nonperforming loans and leases.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are recognized using the straight-line method over the estimated useful lives of the assets. Estimated lives range up to 40 years for buildings, up to 12 years for furniture and equipment, and the shorter of lease term or estimated useful life for leasehold improvements.
Lessee Arrangements
Substantially all of the Corporation’s lessee arrangements are operating leases. Under these arrangements, the Corporation records right-of-use assets and lease liabilities at lease commencement. Right-of-use assets are reported in other assets on the Consolidated Balance Sheet, and the related lease liabilities are reported in accrued expenses and other liabilities. All leases are recorded on the Consolidated Balance Sheet except leases with an initial term less than 12 months for which the Corporation made the short-term lease election. Lease expense is recognized on a straight-line basis over the lease term and is recorded in occupancy and equipment expense in the Consolidated Statement of Income.
The Corporation made an accounting policy election not to separate lease and non-lease components of a contract that is or contains a lease for its real estate and equipment leases. As such, lease payments represent payments on both lease and non-lease components. At lease commencement, lease liabilities are recognized based on the present value of the remaining lease payments and discounted using the Corporation’s incremental borrowing rate. Right-of-use assets initially equal the lease liability, adjusted for any lease payments made prior to lease commencement and for any lease incentives.
Goodwill and Intangible Assets
Goodwill is the purchase premium after adjusting for the fair value of net assets acquired. Goodwill is not amortized but is reviewed for potential impairment on an annual basis, or when events or circumstances indicate a potential impairment, at the reporting
97 Bank of America
unit level. A reporting unit is a business segment or one level below a business segment.
The Corporation assesses the fair value of each reporting unit against its carrying value, including goodwill, as measured by allocated equity. For purposes of goodwill impairment testing, the Corporation utilizes allocated equity as a proxy for the carrying value of its reporting units. 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.
In performing its goodwill impairment testing, the Corporation first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Qualitative factors include, 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.
If the Corporation concludes it is more likely than not that the fair value of a reporting unit is less than its carrying value, a quantitative assessment is performed. If the fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is considered not impaired; however, if the carrying value of the reporting unit exceeds its fair value, an additional step is performed to measure potential impairment.
This step involves calculating an implied fair value of goodwill which is the excess of the fair value of the reporting unit, as determined in the first step, over the aggregate fair values of the assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the goodwill assigned to the reporting unit, there is no impairment. If the goodwill assigned to a reporting unit exceeds the implied fair value of goodwill, an impairment charge is recorded for the excess. An impairment loss recognized cannot exceed the amount of goodwill assigned to a reporting unit. An impairment loss establishes a new basis in the goodwill, and subsequent reversals of goodwill impairment losses are not permitted under applicable accounting guidance.
For intangible assets subject to amortization, an impairment loss is recognized if the carrying value of the intangible asset is not recoverable and exceeds fair value. The carrying value of the intangible asset is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset. Intangible assets deemed to have indefinite useful lives are not subject to amortization. An impairment loss is recognized if the carrying value of the intangible asset with an indefinite life exceeds its fair value.
Variable Interest Entities
A VIE is an entity that lacks equity investors or whose equity investors do not have a controlling financial interest in the entity through their equity investments. The Corporation consolidates a VIE if it has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. On a quarterly basis, the Corporation reassesses its involvement with the VIE and evaluates the impact of changes in governing documents and its financial interests in the VIE. The consolidation status of the VIEs with which the Corporation is involved may change as a result of such reassessments.
The Corporation primarily uses VIEs for its securitization activities, in which the Corporation transfers whole loans or debt securities into a trust or other vehicle. When the Corporation is the servicer of whole loans held in a securitization trust, including non-agency residential mortgages, home equity loans, credit cards, and other loans, the Corporation has the power to direct the most
significant activities of the trust. The Corporation generally does not have the power to direct the most significant activities of a residential mortgage agency trust except in certain circumstances in which the Corporation holds substantially all of the issued securities and has the unilateral right to liquidate the trust. The power to direct the most significant activities of a commercial mortgage securitization trust is typically held by the special servicer or by the party holding specific subordinate securities which embody certain controlling rights. The Corporation consolidates a whole-loan securitization trust if it has the power to direct the most significant activities and also holds securities issued by the trust or has other contractual arrangements, other than standard representations and warranties, that could potentially be significant to the trust.
The Corporation may also transfer trading account securities and AFS securities into municipal bond or resecuritization trusts. The Corporation consolidates a municipal bond or resecuritization trust if it has control over the ongoing activities of the trust such as the remarketing of the trust’s liabilities or, if there are no ongoing activities, sole discretion over the design of the trust, including the identification of securities to be transferred in and the structure of securities to be issued, and also retains securities or has liquidity or other commitments that could potentially be significant to the trust. The Corporation does not consolidate a municipal bond or resecuritization trust if one or a limited number of third-party investors share responsibility for the design of the trust or have control over the significant activities of the trust through liquidation or other substantive rights.
Other VIEs used by the Corporation include collateralized debt obligations (CDOs), investment vehicles created on behalf of customers and other investment vehicles. The Corporation does not routinely serve as collateral manager for CDOs and, therefore, does not typically have the power to direct the activities that most significantly impact the economic performance of a CDO. However, following an event of default, if the Corporation is a majority holder of senior securities issued by a CDO and acquires the power to manage its assets, the Corporation consolidates the CDO.
The Corporation consolidates a customer or other investment vehicle if it has control over the initial design of the vehicle or manages the assets in the vehicle and also absorbs potentially significant gains or losses through an investment in the vehicle, derivative contracts or other arrangements. The Corporation does not consolidate an investment vehicle if a single investor controlled the initial design of the vehicle or manages the assets in the vehicles or if the Corporation does not have a variable interest that could potentially be significant to the vehicle.
Retained interests in securitized assets are initially recorded at fair value. In addition, the Corporation may invest in debt securities issued by unconsolidated VIEs. Fair values of these debt securities, which are classified as trading account assets, debt securities carried at fair value or HTM securities, are based primarily on quoted market prices in active or inactive markets. Generally, quoted market prices for retained residual interests are not available; therefore, the Corporation estimates fair values based on the present value of the associated expected future cash flows.
Fair Value
The Corporation measures the fair values of its assets and liabilities, where applicable, in accordance with accounting guidance that requires an entity to base fair value on exit price. Under this guidance, an entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value. Under applicable accounting standards, fair value measurements are categorized into one of three levels
Bank of America 98
based on the inputs to the valuation technique with the highest priority given to unadjusted quoted prices in active markets and the lowest priority given to unobservable inputs. The Corporation categorizes its fair value measurements of financial instruments based on this three-level hierarchy.
Level 1
Unadjusted quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain U.S. Treasury securities that are highly liquid and are actively traded in OTC markets.
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts where fair value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes U.S. government and agency mortgage-backed (MBS) and asset-backed securities (ABS), corporate debt securities, derivative contracts, certain loans and LHFS.
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the overall fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments for which the determination of fair value requires significant management judgment or estimation. The fair value for such assets and liabilities is generally determined using pricing models, discounted cash flow methodologies or similar techniques that incorporate the assumptions a market participant would use in pricing the asset or liability. This category generally includes retained residual interests in securitizations, consumer MSRs, certain ABS, highly structured, complex or long-dated derivative contracts, certain loans and LHFS, IRLCs and certain CDOs where independent pricing information cannot be obtained for a significant portion of the underlying assets.
Income Taxes
There are two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. These gross deferred tax assets and liabilities represent decreases or increases in taxes expected to be paid in the future 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. Deferred tax assets are also recognized for tax attributes such as net operating loss carryforwards and tax credit carryforwards. Valuation allowances are recorded to reduce deferred tax assets to the amounts management concludes are more likely than not to be realized.
Income tax benefits are recognized and measured based upon a two-step model: first, a tax position must be more likely than not to be sustained based solely on its technical merits in order to be recognized, and second, the benefit is measured as the largest dollar amount of that position that is more likely than not to be sustained upon settlement. The difference between the benefit
recognized and the tax benefit claimed on a tax return is referred to as an unrecognized tax benefit. The Corporation records income tax-related interest and penalties, if applicable, within income tax expense.
Revenue Recognition
The following summarizes the Corporation’s revenue recognition accounting policies for certain noninterest income activities.
Card Income
Card income includes annual, late and over-limit fees as well as fees earned from interchange, cash advances and other miscellaneous transactions and is presented net of direct costs. Interchange fees are recognized upon settlement of the credit and debit card payment transactions and are generally determined on a percentage basis for credit cards and fixed rates for debit cards based on the corresponding payment network’s rates. Substantially all card fees are recognized at the transaction date, except for certain time-based fees such as annual fees, which are recognized over 12 months. Fees charged to cardholders that are estimated to be uncollectible are reserved in the allowance for loan and lease losses. Included in direct cost are rewards and credit card partner payments. Rewards paid to cardholders are related to points earned by the cardholder that can be redeemed for a broad range of rewards including cash, travel and gift cards. The points to be redeemed are estimated based on past redemption behavior, card product type, account transaction activity and other historical card performance. The liability is reduced as the points are redeemed. The Corporation also makes payments to credit card partners. The payments are based on revenue-sharing agreements that are generally driven by cardholder transactions and partner sales volumes. As part of the revenue-sharing agreements, the credit card partner provides the Corporation exclusive rights to market to the credit card partner’s members or customers on behalf of the Corporation.
Service Charges
Service charges include deposit and lending-related fees. Deposit-related fees consist of fees earned on consumer and commercial
deposit activities and are generally recognized when the transactions occur or as the service is performed. Consumer fees are earned on consumer deposit accounts for account maintenance and various transaction-based services, such as ATM transactions, wire transfer activities, check and money order processing and insufficient funds/overdraft transactions. Commercial deposit-related fees are from the Corporation’s Global Transaction Services business and consist of commercial deposit and treasury management services, including account maintenance and other services, such as payroll, sweep account and other cash management services. Lending-related fees generally represent transactional fees earned from certain loan commitments, financial guarantees and SBLCs.
Investment and Brokerage Services
Investment and brokerage services consist of asset management and brokerage fees. Asset management fees are earned from the management of client assets under advisory agreements or the full discretion of the Corporation’s financial advisors (collectively referred to as assets under management (AUM)). Asset management fees are earned as a percentage of the client’s AUM and generally range from 50 basis points (bps) to 150 bps of the AUM. In cases where a third party is used to obtain a client’s investment allocation, the fee remitted to the third party is recorded net and is not reflected in the transaction price, as the Corporation is an agent for those services.
99 Bank of America
Brokerage fees include income earned from transaction-based services that are performed as part of investment management services and are based on a fixed price per unit or as a percentage of the total transaction amount. Brokerage fees also include distribution fees and sales commissions that are primarily in the Global Wealth & Investment Management (GWIM) segment and are earned over time. In addition, primarily in the Global Markets segment, brokerage fees are earned when the Corporation fills customer orders to buy or sell various financial products or when it acknowledges, affirms, settles and clears transactions and/or submits trade information to the appropriate clearing broker. Certain customers pay brokerage, clearing and/or exchange fees imposed by relevant regulatory bodies or exchanges in order to execute or clear trades. These fees are recorded net and are not reflected in the transaction price, as the Corporation is an agent for those services.
Investment Banking Income
Investment banking income includes underwriting income and financial advisory services income. Underwriting consists of fees earned for the placement of a customer’s debt or equity securities. The revenue is generally earned based on a percentage of the fixed number of shares or principal placed. Once the number of shares or notes is determined and the service is completed, the underwriting fees are recognized. The Corporation incurs certain out-of-pocket expenses, such as legal costs, in performing these services. These expenses are recovered through the revenue the Corporation earns from the customer and are included in operating expenses. Syndication fees represent fees earned as the agent or lead lender responsible for structuring, arranging and administering a loan syndication.
Financial advisory services consist of fees earned for assisting clients with transactions related to mergers and acquisitions and financial restructurings. Revenue varies depending on the size of the transaction and scope of services performed and is generally contingent on successful completion of the transaction. Revenue is typically recognized once the transaction is completed and all services have been rendered. Additionally, the Corporation may earn a fixed fee in merger and acquisition transactions to provide a fairness opinion, with the fees recognized when the opinion is delivered to the client.
Other Revenue Measurement and Recognition Policies
The Corporation did not disclose the value of any open performance obligations at December 31, 2019, as its contracts with customers generally have a fixed term that is less than one year, an open term with a cancellation period that is less than one year, or provisions that allow the Corporation to recognize revenue at the amount it has the right to invoice.
Earnings Per Common Share
Earnings per common share (EPS) is computed by dividing net income allocated to common shareholders by the weighted-average common shares outstanding, excluding unvested common shares subject to repurchase or cancellation. Net income allocated to common shareholders is net income adjusted for preferred stock dividends including dividends declared, accretion of discounts on preferred stock including accelerated accretion when preferred stock is repaid early, and cumulative dividends related to the current dividend period that have not been declared as of period end, less income allocated to participating securities. Diluted EPS is computed by dividing income allocated to common shareholders plus dividends on dilutive convertible preferred stock and preferred stock that can be tendered to exercise warrants, by the weighted-average common shares outstanding plus amounts representing the dilutive effect of stock options outstanding, restricted stock, restricted stock units (RSUs), outstanding warrants and the dilution resulting from the conversion of convertible preferred stock, if applicable.
Foreign Currency Translation
Assets, liabilities and operations of foreign branches and subsidiaries are recorded based on the functional currency of each entity. When the functional currency of a foreign operation is the local currency, the assets, liabilities and operations are translated, for consolidation purposes, from the local currency to the U.S. dollar reporting currency at period-end rates for assets and liabilities and generally at average rates for results of operations. The resulting unrealized gains and losses are reported as a component of accumulated OCI, net-of-tax. When the foreign entity’s functional currency is the U.S. dollar, the resulting remeasurement gains or losses on foreign currency-denominated assets or liabilities are included in earnings.
Bank of America 100
NOTE 2 Net Interest Income and Noninterest Income
The table below presents the Corporation’s net interest income and noninterest income disaggregated by revenue source for 2019, 2018 and 2017. For more information, see Note 1 - Summary of Significant Accounting Principles. For a disaggregation of noninterest income by business segment and All Other, see Note 24 - Business Segment Information.
(Dollars in millions)
Net interest income
Interest income
Loans and leases
$
43,086
$
40,811
$
36,221
Debt securities
11,806
11,724
10,471
Federal funds sold and securities borrowed or purchased under agreements to resell
4,843
3,176
2,390
Trading account assets
5,196
4,811
4,474
Other interest income
6,305
6,247
4,023
Total interest income
71,236
66,769
57,579
Interest expense
Deposits
7,188
4,495
1,931
Short-term borrowings
7,208
5,839
3,538
Trading account liabilities
1,249
1,358
1,204
Long-term debt
6,700
6,915
5,667
Total interest expense
22,345
18,607
12,340
Net interest income
$
48,891
$
48,162
$
45,239
Noninterest income
Fees and commissions
Card income
Interchange fees (1)
$
3,834
$
3,866
$
3,777
Other card income
1,963
1,958
1,899
Total card income
5,797
5,824
5,676
Service charges
Deposit-related fees
6,588
6,667
6,708
Lending-related fees
1,086
1,100
1,110
Total service charges
7,674
7,767
7,818
Investment and brokerage services
Asset management fees
10,241
10,189
9,310
Brokerage fees
3,661
3,971
4,526
Total investment and brokerage services
13,902
14,160
13,836
Investment banking fees
Underwriting income
2,998
2,722
2,821
Syndication fees
1,184
1,347
1,499
Financial advisory services
1,460
1,258
1,691
Total investment banking fees
5,642
5,327
6,011
Total fees and commissions
33,015
33,078
33,341
Market making and similar activities
9,034
9,008
7,102
Other income
1,444
Total noninterest income
$
42,353
$
42,858
$
41,887
(1)
Gross interchange fees were $10.0 billion, $9.5 billion and $8.8 billion for 2019, 2018 and 2017, respectively, and are presented net of $6.2 billion, $5.6 billion and $5.1 billion of expenses for rewards and partner payments for the same periods.
101 Bank of America
NOTE 3 Derivatives
Derivative Balances
Derivatives are entered into on behalf of customers, for trading or to support risk management activities. Derivatives used in risk management activities include derivatives that may or may not be designated in qualifying hedge accounting relationships. Derivatives that are not designated in qualifying hedge accounting relationships are referred to as other risk management derivatives. For more information on the Corporation’s derivatives and hedging
activities, see Note 1 - Summary of Significant Accounting Principles. The following tables present derivative instruments included on the Consolidated Balance Sheet in derivative assets and liabilities at December 31, 2019 and 2018. Balances are presented on a gross basis, prior to the application of counterparty and cash collateral netting. Total derivative assets and liabilities are adjusted on an aggregate basis to take into consideration the effects of legally enforceable master netting agreements and have been reduced by cash collateral received or paid.
December 31, 2019
Gross Derivative Assets
Gross Derivative Liabilities
(Dollars in billions)
Contract/
Notional (1)
Trading and Other Risk Management Derivatives
Qualifying
Accounting
Hedges
Total
Trading and Other Risk Management Derivatives
Qualifying
Accounting
Hedges
Total
Interest rate contracts
Swaps
$
15,074.4
$
162.0
$
9.7
$
171.7
$
168.5
$
0.4
$
168.9
Futures and forwards
3,279.8
1.0
-
1.0
1.0
-
1.0
Written options
1,767.7
-
-
-
32.5
-
32.5
Purchased options
1,673.6
37.4
-
37.4
-
-
-
Foreign exchange contracts
Swaps
1,657.7
30.3
0.7
31.0
31.7
0.9
32.6
Spot, futures and forwards
3,792.7
35.9
0.1
36.0
38.7
0.3
39.0
Written options
274.3
-
-
-
3.8
-
3.8
Purchased options
261.6
4.0
-
4.0
-
-
-
Equity contracts
Swaps
315.0
6.5
-
6.5
8.1
-
8.1
Futures and forwards
125.1
0.3
-
0.3
1.1
-
1.1
Written options
731.1
-
-
-
34.6
-
34.6
Purchased options
668.6
42.4
-
42.4
-
-
-
Commodity contracts
Swaps
42.0
2.1
-
2.1
4.4
-
4.4
Futures and forwards
61.3
1.7
-
1.7
0.4
-
0.4
Written options
33.2
-
-
-
1.4
-
1.4
Purchased options
37.9
1.4
-
1.4
-
-
-
Credit derivatives (2)
Purchased credit derivatives:
Credit default swaps
321.6
2.7
-
2.7
5.6
-
5.6
Total return swaps/options
86.6
0.4
-
0.4
1.3
-
1.3
Written credit derivatives:
Credit default swaps
300.2
5.4
-
5.4
2.0
-
2.0
Total return swaps/options
86.2
0.8
-
0.8
0.4
-
0.4
Gross derivative assets/liabilities
$
334.3
$
10.5
$
344.8
$
335.5
$
1.6
$
337.1
Less: Legally enforceable master netting agreements
(270.4
)
(270.4
)
Less: Cash collateral received/paid
(33.9
)
(28.5
)
Total derivative assets/liabilities
$
40.5
$
38.2
(1)
Represents the total contract/notional amount of derivative assets and liabilities outstanding.
(2)
The net derivative asset (liability) and notional amount of written credit derivatives for which the Corporation held purchased credit derivatives with identical underlying referenced names were $2.8 billion and $309.7 billion at December 31, 2019.
Bank of America 102
December 31, 2018
Gross Derivative Assets
Gross Derivative Liabilities
(Dollars in billions)
Contract/
Notional (1)
Trading and Other Risk Management Derivatives
Qualifying
Accounting
Hedges
Total
Trading and Other Risk Management Derivatives
Qualifying
Accounting
Hedges
Total
Interest rate contracts
Swaps
$
15,977.9
$
141.0
$
3.2
$
144.2
$
138.9
$
2.0
$
140.9
Futures and forwards
3,656.6
4.7
-
4.7
5.0
-
5.0
Written options
1,584.9
-
-
-
28.6
-
28.6
Purchased options
1,614.0
30.8
-
30.8
-
-
-
Foreign exchange contracts
Swaps
1,704.8
38.8
1.4
40.2
42.2
2.3
44.5
Spot, futures and forwards
4,276.0
39.8
0.4
40.2
39.3
0.3
39.6
Written options
256.7
-
-
-
5.0
-
5.0
Purchased options
240.4
4.6
-
4.6
-
-
-
Equity contracts
Swaps
253.6
7.7
-
7.7
8.4
-
8.4
Futures and forwards
100.0
2.1
-
2.1
0.3
-
0.3
Written options
597.1
-
-
-
27.5
-
27.5
Purchased options
549.4
36.0
-
36.0
-
-
-
Commodity contracts
Swaps
43.1
2.7
-
2.7
4.5
-
4.5
Futures and forwards
51.7
3.2
-
3.2
0.5
-
0.5
Written options
27.5
-
-
-
2.2
-
2.2
Purchased options
23.4
1.7
-
1.7
-
-
-
Credit derivatives (2)
Purchased credit derivatives:
Credit default swaps
408.1
5.3
-
5.3
4.9
-
4.9
Total return swaps/options
84.5
0.4
-
0.4
1.0
-
1.0
Written credit derivatives:
Credit default swaps
371.9
4.4
-
4.4
4.3
-
4.3
Total return swaps/options
87.3
0.6
-
0.6
0.6
-
0.6
Gross derivative assets/liabilities
$
323.8
$
5.0
$
328.8
$
313.2
$
4.6
$
317.8
Less: Legally enforceable master netting agreements
(252.7
)
(252.7
)
Less: Cash collateral received/paid
(32.4
)
(27.2
)
Total derivative assets/liabilities
$
43.7
$
37.9
(1)
Represents the total contract/notional amount of derivative assets and liabilities outstanding.
(2)
The net derivative asset (liability) and notional amount of written credit derivatives for which the Corporation held purchased credit derivatives with identical underlying referenced names were $(185) million and $342.8 billion at December 31, 2018.
Offsetting of Derivatives
The Corporation enters into International Swaps and Derivatives Association, Inc. (ISDA) master netting agreements or similar agreements with substantially all of the Corporation’s derivative counterparties. Where legally enforceable, these master netting agreements give the Corporation, in the event of default by the counterparty, the right to liquidate securities held as collateral and to offset receivables and payables with the same counterparty. For purposes of the Consolidated Balance Sheet, the Corporation offsets derivative assets and liabilities and cash collateral held with the same counterparty where it has such a legally enforceable master netting agreement.
The following table presents derivative instruments included in derivative assets and liabilities on the Consolidated Balance
Sheet at December 31, 2019 and 2018 by primary risk (e.g., interest rate risk) and the platform, where applicable, on which these derivatives are transacted. Balances are presented on a gross basis, prior to the application of counterparty and cash collateral netting. Total gross derivative assets and liabilities are adjusted on an aggregate basis to take into consideration the effects of legally enforceable master netting agreements which include reducing the balance for counterparty netting and cash collateral received or paid.
For more information on offsetting of securities financing agreements, see Note 11 - Federal Funds Sold or Purchased, Securities Financing Agreements, Short-term Borrowings and Restricted Cash.
103 Bank of America
Offsetting of Derivatives (1)
Derivative
Assets
Derivative Liabilities
Derivative
Assets
Derivative Liabilities
(Dollars in billions)
December 31, 2019
December 31, 2018
Interest rate contracts
Over-the-counter
$
203.1
$
196.6
$
174.2
$
169.4
Exchange-traded
0.1
0.1
-
-
Over-the-counter cleared
6.0
5.3
4.8
4.0
Foreign exchange contracts
Over-the-counter
69.2
73.1
82.5
86.3
Over-the-counter cleared
0.5
0.5
0.9
0.9
Equity contracts
Over-the-counter
21.3
17.8
24.6
14.6
Exchange-traded
26.4
22.8
16.1
15.1
Commodity contracts
Over-the-counter
2.8
4.2
3.5
4.5
Exchange-traded
0.8
0.8
1.0
0.9
Over-the-counter cleared
-
0.1
-
-
Credit derivatives
Over-the-counter
6.4
6.6
7.7
8.2
Over-the-counter cleared
2.5
2.2
2.5
2.3
Total gross derivative assets/liabilities, before netting
Over-the-counter
302.8
298.3
292.5
283.0
Exchange-traded
27.3
23.7
17.1
16.0
Over-the-counter cleared
9.0
8.1
8.2
7.2
Less: Legally enforceable master netting agreements and cash collateral received/paid
Over-the-counter
(274.7
)
(269.3
)
(264.4
)
(259.2
)
Exchange-traded
(21.5
)
(21.5
)
(13.5
)
(13.5
)
Over-the-counter cleared
(8.1
)
(8.1
)
(7.2
)
(7.2
)
Derivative assets/liabilities, after netting
34.8
31.2
32.7
26.3
Other gross derivative assets/liabilities (2)
5.7
7.0
11.0
11.6
Total derivative assets/liabilities
40.5
38.2
43.7
37.9
Less: Financial instruments collateral (3)
(14.6
)
(16.1
)
(16.3
)
(8.6
)
Total net derivative assets/liabilities
$
25.9
$
22.1
$
27.4
$
29.3
(1)
OTC derivatives include bilateral transactions between the Corporation and a particular counterparty. OTC-cleared derivatives include bilateral transactions between the Corporation and a counterparty where the transaction is cleared through a clearinghouse. Exchange-traded derivatives include listed options transacted on an exchange.
(2)
Consists of derivatives entered into under master netting agreements where the enforceability of these agreements is uncertain under bankruptcy laws in some countries or industries.
(3)
Amounts are limited to the derivative asset/liability balance and, accordingly, do not include excess collateral received/pledged. Financial instruments collateral includes securities collateral received or pledged and cash securities held and posted at third-party custodians that are not offset on the Consolidated Balance Sheet but shown as a reduction to derive net derivative assets and liabilities.
ALM and Risk Management Derivatives
The Corporation’s ALM and risk management activities include the use of derivatives to mitigate risk to the Corporation including derivatives designated in qualifying hedge accounting relationships and derivatives used in other risk management activities. Interest rate, foreign exchange, equity, commodity and credit contracts are utilized in the Corporation's ALM and risk management activities.
The Corporation maintains an overall interest rate risk management strategy that incorporates the use of interest rate contracts, which are generally non-leveraged generic interest rate and basis swaps, options, futures and forwards, to minimize significant fluctuations in earnings caused by interest rate volatility. The Corporation’s goal is to manage interest rate sensitivity and volatility so that movements in interest rates do not significantly adversely affect earnings or capital. As a result of interest rate fluctuations, hedged fixed-rate assets and liabilities appreciate or depreciate in fair value. Gains or losses on the derivative instruments that are linked to the hedged fixed-rate assets and liabilities are expected to substantially offset this unrealized appreciation or depreciation.
Market risk, including interest rate risk, can be substantial in the mortgage business. Market risk in the mortgage business is the risk that values of mortgage assets or revenues will be adversely affected by changes in market conditions such as interest rate movements. To mitigate the interest rate risk in mortgage banking production income, the Corporation utilizes forward loan sale commitments and other derivative instruments, including purchased options, and certain debt securities. The
Corporation also utilizes derivatives such as interest rate options, interest rate swaps, forward settlement contracts and eurodollar futures to hedge certain market risks of MSRs.
The Corporation uses foreign exchange contracts to manage the foreign exchange risk associated with certain foreign currency-denominated assets and liabilities, as well as the Corporation’s investments in non-U.S. subsidiaries. Exposure to loss on these contracts will increase or decrease over their respective lives as currency exchange and interest rates fluctuate.
The Corporation purchases credit derivatives to manage credit risk related to certain funded and unfunded credit exposures. Credit derivatives include credit default swaps (CDS), total return swaps and swaptions. These derivatives are recorded on the Consolidated Balance Sheet at fair value with changes in fair value recorded in other income.
Derivatives Designated as Accounting Hedges
The Corporation uses various types of interest rate and foreign exchange derivative contracts to protect against changes in the fair value of its assets and liabilities due to fluctuations in interest rates and exchange rates (fair value hedges). The Corporation also uses these types of contracts to protect against changes in the cash flows of its assets and liabilities, and other forecasted transactions (cash flow hedges). The Corporation hedges its net investment in consolidated non-U.S. operations determined to have functional currencies other than the U.S. dollar using forward exchange contracts and cross-currency basis swaps, and by issuing foreign currency-denominated debt (net investment hedges).
Bank of America 104
Fair Value Hedges
The table below summarizes information related to fair value hedges for 2019, 2018 and 2017.
Gains and Losses on Derivatives Designated as Fair Value Hedges
Derivative
Hedged Item
(Dollars in millions)
Interest rate risk on long-term debt (1)
$
6,113
$
(1,538
)
$
(1,537
)
$
(6,110
)
$
1,429
$
1,045
Interest rate and foreign currency risk on long-term debt (2)
(1,187
)
1,811
(101
)
1,079
(1,767
)
Interest rate risk on available-for-sale securities (3)
(102
)
(52
)
(67
)
Total
$
6,130
$
(2,777
)
$
$
(6,113
)
$
2,558
$
(687
)
(1)
Amounts are recorded in interest expense in the Consolidated Statement of Income.
(2)
In 2019, 2018 and 2017, the derivative amount includes gains (losses) of $73 million, $(116) million and $(365) million in interest expense, $28 million, $(992) million and $2.2 billion in market making and similar activities, and $18 million and $(79) million in accumulated OCI, respectively. Line item totals are in the Consolidated Statement of Income and in the Consolidated Balance Sheet.
(3)
Amounts are recorded in interest income in the Consolidated Statement of Income.
The table below summarizes the carrying value of hedged assets and liabilities that are designated and qualifying in fair value hedging relationships along with the cumulative amount of fair value hedging adjustments included in the carrying value that have been recorded in the current hedging relationships. These fair value hedging adjustments are open basis adjustments that are not subject to amortization as long as the hedging relationship remains designated.
Designated Fair Value Hedged Assets (Liabilities)
Carrying Value
Cumulative
Fair Value Adjustments (1)
Carrying Value
Cumulative
Fair Value Adjustments (1)
(Dollars in millions)
December 31, 2019
December 31, 2018
Long-term debt (2)
$
(162,389
)
$
(8,685
)
$
(138,682
)
$
(2,117
)
Available-for-sale debt securities (2)
1,654
(29
)
(1)
For assets, increase (decrease) to carrying value and for liabilities, (increase) decrease to carrying value.
(2)
At December 31, 2019 and 2018, the cumulative fair value adjustments remaining on long-term debt and AFS debt securities from discontinued hedging relationships resulted in a decrease in the related liability of $1.3 billion and $1.6 billion and an increase (decrease) in the related asset of $8 million and $(29) million, which are being amortized over the remaining contractual life of the de-designated hedged items.
Cash Flow and Net Investment Hedges
The following table summarizes certain information related to cash flow hedges and net investment hedges for 2019, 2018 and 2017. Of the $400 million after-tax net loss ($526 million pretax) on derivatives in accumulated OCI at December 31, 2019, $68 million after-tax ($90 million pretax) is expected to be reclassified into
earnings in the next 12 months. These net losses reclassified into earnings are expected to primarily reduce net interest income related to the respective hedged items. For terminated cash flow hedges, the time period over which the majority of the forecasted transactions are hedged is approximately 3 years, with a maximum length of time for certain forecasted transactions of 16 years.
Gains and Losses on Derivatives Designated as Cash Flow and Net Investment Hedges
Gains (Losses) in
Accumulated OCI on Derivatives
Gains (Losses) in Income
Reclassified from Accumulated OCI
(Dollars in millions, amounts pretax)
Cash flow hedges
Interest rate risk on variable-rate assets (1)
$
$
(159
)
$
(109
)
$
(104
)
$
(165
)
$
(327
)
Price risk on certain compensation plans (2)
(2
)
Total
$
$
(155
)
$
(50
)
$
(106
)
$
(138
)
$
(179
)
Net investment hedges
Foreign exchange risk (3)
$
$
$
(1,588
)
$
$
$
1,782
(1)
Amounts reclassified from accumulated OCI are recorded in interest income in the Consolidated Statement of Income.
(2)
Amounts reclassified from accumulated OCI are recorded in compensation and benefits expense in the Consolidated Statement of Income.
(3)
Amounts reclassified from accumulated OCI are recorded in other income in the Consolidated Statement of Income. Amounts excluded from effectiveness testing and recognized in market making and similar activities were gains of $154 million, $47 million and $120 million in 2019, 2018 and 2017, respectively.
Other Risk Management Derivatives
Other risk management derivatives are used by the Corporation to reduce certain risk exposures by economically hedging various assets and liabilities. The following table presents gains (losses) on these derivatives for 2019, 2018 and 2017. These gains (losses) are largely offset by the income or expense recorded on the hedged item.
105 Bank of America
Gains and Losses on Other Risk Management Derivatives
(Dollars in millions)
Interest rate risk on mortgage activities (1, 2)
$
$
(107
)
$
Credit risk on loans (2)
(58
)
(6
)
Interest rate and foreign currency risk on ALM activities (3)
1,112
3,278
(1,318
)
Price risk on certain compensation plans (4)
(495
)
(1)
Primarily related to hedges of interest rate risk on MSRs and IRLCs to originate mortgage loans that will be held for sale. The net gains on IRLCs, which are not included in the table but are considered derivative instruments, were $73 million, $47 million and $220 million in 2019, 2018 and 2017, respectively.
(2)
Gains (losses) on these derivatives are recorded in other income.
(3)
Gains (losses) on these derivatives are recorded in market making and similar activities. Prior-period amounts have been updated to conform to the current-period presentation.
(4)
Gains (losses) on these derivatives are recorded in compensation and benefits expense.
Transfers of Financial Assets with Risk Retained through Derivatives
The Corporation enters into certain transactions involving the transfer of financial assets that are accounted for as sales where substantially all of the economic exposure to the transferred financial assets is retained through derivatives (e.g., interest rate and/or credit), but the Corporation does not retain control over the assets transferred. As of December 31, 2019 and 2018, the Corporation had transferred $5.2 billion and $5.8 billion of non-U.S. government-guaranteed MBS to a third-party trust and retained economic exposure to the transferred assets through derivative contracts. In connection with these transfers, the Corporation received gross cash proceeds of $5.2 billion and $5.8 billion at the transfer dates. At December 31, 2019 and 2018, the fair value of the transferred securities was $5.3 billion and $5.5 billion.
Sales and Trading Revenue
The Corporation enters into trading derivatives to facilitate client transactions and to manage risk exposures arising from trading account assets and liabilities. It is the Corporation’s policy to include these derivative instruments in its trading activities which include derivatives and non-derivative cash instruments. The resulting risk from these derivatives is managed on a portfolio basis as part of the Corporation’s Global Markets business segment. The related sales and trading revenue generated within Global Markets is recorded in various income statement line items including market making and similar activities and net interest income as well as other revenue categories.
Sales and trading revenue includes changes in the fair value and realized gains and losses on the sales of trading and other assets, net interest income, and fees primarily from commissions on equity securities. Revenue is generated by the difference in the client price for an instrument and the price at which the trading desk can execute the trade in the dealer market. For equity securities, commissions related to purchases and sales are recorded in the “Other” column in the Sales and Trading Revenue table. Changes in the fair value of these securities are included in market making and similar activities. For debt securities, revenue, with the exception of interest associated with the debt securities, is typically included in market making and similar activities. Unlike commissions for equity securities, the initial revenue related to broker-dealer services for debt securities is typically included in the pricing of the instrument rather than being charged through separate fee arrangements. Therefore, this revenue is recorded in market making and similar activities as part of the initial mark to fair value. For derivatives, the majority of revenue is included in market making and similar activities. In
transactions where the Corporation acts as agent, which include exchange-traded futures and options, fees are recorded in other income.
The following table, which includes both derivatives and non-derivative cash instruments, identifies the amounts in the respective income statement line items attributable to the Corporation’s sales and trading revenue in Global Markets, categorized by primary risk, for 2019, 2018 and 2017. This table includes debit valuation adjustment (DVA) and funding valuation adjustment (FVA) gains (losses). Global Markets results in Note 24 - Business Segment Information are presented on a fully taxable-equivalent (FTE) basis. The table below is not presented on an FTE basis.
Sales and Trading Revenue
Market making and similar activities
Net Interest
Income
Other (1)
Total
(Dollars in millions)
Interest rate risk
$
$
1,831
$
$
2,868
Foreign exchange risk
1,300
1,397
Equity risk
3,565
(638
)
1,574
4,501
Credit risk
1,158
1,800
3,469
Other risk
Total sales and trading revenue
$
7,062
$
3,122
$
2,306
$
12,490
Interest rate risk
$
$
1,696
$
$
2,739
Foreign exchange risk
1,486
1,511
Equity risk
3,874
(662
)
1,644
4,856
Credit risk
1,063
1,861
3,512
Other risk
Total sales and trading revenue
$
7,257
$
3,108
$
2,558
$
12,923
Interest rate risk
$
$
1,846
$
$
2,523
Foreign exchange risk
1,409
1,430
Equity risk
2,598
(427
)
1,904
4,075
Credit risk
1,685
1,945
4,208
Other risk
Total sales and trading revenue
$
6,200
$
3,546
$
2,814
$
12,560
(1)
Represents amounts in investment and brokerage services and other income that are recorded in Global Markets and included in the definition of sales and trading revenue. Includes investment and brokerage services revenue of $1.7 billion, $1.7 billion and $2.0 billion in 2019, 2018 and 2017, respectively.
Credit Derivatives
The Corporation enters into credit derivatives primarily to facilitate client transactions and to manage credit risk exposures. Credit derivatives derive value based on an underlying third-party referenced obligation or a portfolio of referenced obligations and generally require the Corporation, as the seller of credit protection, to make payments to a buyer upon the occurrence of a predefined credit event. Such credit events generally include bankruptcy of the referenced credit entity and failure to pay under the obligation, as well as acceleration of indebtedness and payment repudiation or moratorium. For credit derivatives based on a portfolio of referenced credits or credit indices, the Corporation may not be required to make payment until a specified amount of loss has occurred and/or may only be required to make payment up to a specified amount.
Credit derivatives are classified as investment and non-investment grade based on the credit quality of the underlying referenced obligation. The Corporation considers ratings of BBB- or higher as investment grade. Non-investment grade includes non-
Bank of America 106
rated credit derivative instruments. The Corporation discloses internal categorizations of investment grade and non-investment grade consistent with how risk is managed for these instruments.
Credit derivative instruments where the Corporation is the seller of credit protection and their expiration at December 31, 2019 and 2018 are summarized in the following table.
Credit Derivative Instruments
Less than
One Year
One to
Three Years
Three to
Five Years
Over Five
Years
Total
December 31, 2019
(Dollars in millions)
Carrying Value
Credit default swaps:
Investment grade
$
-
$
$
$
$
Non-investment grade
1,731
Total
1,960
Total return swaps/options:
Investment grade
-
-
-
Non-investment grade
-
-
-
Total
-
-
-
Total credit derivatives
$
$
$
$
$
2,339
Credit-related notes:
Investment grade
$
-
$
$
$
$
Non-investment grade
1,125
1,134
Total credit-related notes
$
$
$
$
1,764
$
1,777
Maximum Payout/Notional
Credit default swaps:
Investment grade
$
55,827
$
67,838
$
71,320
$
17,708
$
212,693
Non-investment grade
19,049
26,521
29,618
12,337
87,525
Total
74,876
94,359
100,938
30,045
300,218
Total return swaps/options:
Investment grade
56,488
-
56,626
Non-investment grade
28,707
29,528
Total
85,195
86,154
Total credit derivatives
$
160,071
$
95,016
$
101,104
$
30,181
$
386,372
December 31, 2018
Carrying Value
Credit default swaps:
Investment grade
$
$
$
$
$
Non-investment grade
1,691
3,373
Total
1,350
2,179
4,343
Total return swaps/options:
Investment grade
-
-
-
Non-investment grade
-
-
Total
-
-
Total credit derivatives
$
$
$
1,350
$
2,179
$
4,941
Credit-related notes:
Investment grade
$
-
$
-
$
$
$
Non-investment grade
1,500
1,503
Total credit-related notes
$
$
$
$
2,032
$
2,039
Maximum Payout/Notional
Credit default swaps:
Investment grade
$
53,758
$
95,699
$
95,274
$
20,054
$
264,785
Non-investment grade
24,297
33,881
34,530
14,426
107,134
Total
78,055
129,580
129,804
34,480
371,919
Total return swaps/options:
Investment grade
60,042
60,995
Non-investment grade
24,524
1,649
26,282
Total
84,566
2,471
87,277
Total credit derivatives
$
162,621
$
132,051
$
129,902
$
34,622
$
459,196
The notional amount represents the maximum amount payable by the Corporation for most credit derivatives. However, the Corporation does not monitor its exposure to credit derivatives based solely on the notional amount because this measure does not take into consideration the probability of occurrence. As such, the notional amount is not a reliable indicator of the Corporation’s exposure to these contracts. Instead, a risk framework is used to define risk tolerances and establish limits so that certain credit risk-related losses occur within acceptable, predefined limits.
Credit-related notes in the table above include investments in securities issued by CDO, collateralized loan obligation (CLO) and credit-linked note vehicles. These instruments are primarily classified as trading securities. The carrying value of these
instruments equals the Corporation’s maximum exposure to loss. The Corporation is not obligated to make any payments to the entities under the terms of the securities owned.
Credit-related Contingent Features and Collateral
The Corporation executes the majority of its derivative contracts in the OTC market with large, international financial institutions, including broker-dealers and, to a lesser degree, with a variety of non-financial companies. A significant majority of the derivative transactions are executed on a daily margin basis. Therefore, events such as a credit rating downgrade (depending on the ultimate rating level) or a breach of credit covenants would typically require an increase in the amount of collateral required of the counterparty, where applicable, and/or allow the Corporation to
107 Bank of America
take additional protective measures such as early termination of all trades. Further, as previously discussed on page 103, the Corporation enters into legally enforceable master netting agreements which reduce risk by permitting closeout and netting of transactions with the same counterparty upon the occurrence of certain events.
Certain of the Corporation’s derivative contracts contain credit risk-related contingent features, primarily in the form of ISDA master netting agreements and credit support documentation that enhance the creditworthiness of these instruments compared to other obligations of the respective counterparty with whom the Corporation has transacted. These contingent features may be for the benefit of the Corporation as well as its counterparties with respect to changes in the Corporation’s creditworthiness and the mark-to-market exposure under the derivative transactions. At December 31, 2019 and 2018, the Corporation held cash and securities collateral of $84.3 billion and $81.6 billion and posted cash and securities collateral of $69.1 billion and $56.5 billion in the normal course of business under derivative agreements, excluding cross-product margining agreements where clients are permitted to margin on a net basis for both derivative and secured financing arrangements.
In connection with certain OTC derivative contracts and other trading agreements, the Corporation can be required to provide additional collateral or to terminate transactions with certain counterparties in the event of a downgrade of the senior debt ratings of the Corporation or certain subsidiaries. The amount of
additional collateral required depends on the contract and is usually a fixed incremental amount and/or the market value of the exposure.
At December 31, 2019, the amount of collateral, calculated based on the terms of the contracts, that the Corporation and certain subsidiaries could be required to post to counterparties but had not yet posted to counterparties was $2.3 billion, including $913 million for Bank of America, National Association (BANA).
Some counterparties are currently able to unilaterally terminate certain contracts, or the Corporation or certain subsidiaries may be required to take other action such as find a suitable replacement or obtain a guarantee. At December 31, 2019 and 2018, the liability recorded for these derivative contracts was not significant.
The following table presents the amount of additional collateral that would have been contractually required by derivative contracts and other trading agreements at December 31, 2019 if the rating agencies had downgraded their long-term senior debt ratings for the Corporation or certain subsidiaries by one incremental notch and by an additional second incremental notch.
Additional Collateral Required to be Posted Upon Downgrade at December 31, 2019
(Dollars in millions)
One
incremental notch
Second
incremental notch
Bank of America Corporation
$
$
Bank of America, N.A. and subsidiaries (1)
(1)
Included in Bank of America Corporation collateral requirements in this table.
The following table presents the derivative liabilities that would be subject to unilateral termination by counterparties and the amounts of collateral that would have been contractually required at December 31, 2019 if the long-term senior debt ratings for the Corporation or certain subsidiaries had been lower by one incremental notch and by an additional second incremental notch.
Derivative Liabilities Subject to Unilateral Termination Upon Downgrade at December 31, 2019
(Dollars in millions)
One
incremental notch
Second
incremental notch
Derivative liabilities
$
$
Collateral posted
Valuation Adjustments on Derivatives
The Corporation records credit risk valuation adjustments on derivatives in order to properly reflect the credit quality of the counterparties and its own credit quality. The Corporation calculates valuation adjustments on derivatives based on a modeled expected exposure that incorporates current market risk factors. The exposure also takes into consideration credit mitigants such as enforceable master netting agreements and collateral. CDS spread data is used to estimate the default probabilities and severities that are applied to the exposures. Where no observable credit default data is available for counterparties, the Corporation uses proxies and other market data to estimate default probabilities and severity.
Valuation adjustments on derivatives are affected by changes in market spreads, non-credit related market factors such as interest rates and foreign exchange rates that affect the expected exposure, and other factors like changes in collateral arrangements and partial payments. Credit spreads and non-credit factors can move independently. For example, for an interest rate swap, changes in interest rates may increase the expected exposure, which would increase the counterparty credit valuation adjustment (CVA). Independently, counterparty credit spreads may tighten, which would result in an offsetting decrease to CVA.
The Corporation enters into risk management activities to offset market driven exposures. The Corporation often hedges the counterparty spread risk in CVA with CDS. The Corporation hedges other market risks in both CVA and DVA primarily with foreign exchange and interest rate swaps. In certain instances, the net-of-hedge amounts in the table below move in the same direction as the gross amount or may move in the opposite direction. This movement is a consequence of the complex interaction of the risks being hedged, resulting in limitations in the ability to perfectly hedge all of the market exposures at all times.
The table below presents CVA, DVA and FVA gains (losses) on derivatives, which are recorded in market making and similar activities, on a gross and net of hedge basis for 2019, 2018 and 2017. CVA gains reduce the cumulative CVA thereby increasing the derivative assets balance. DVA gains increase the cumulative DVA thereby decreasing the derivative liabilities balance. CVA and DVA losses have the opposite impact. FVA gains related to derivative assets reduce the cumulative FVA thereby increasing the derivative assets balance. FVA gains related to derivative liabilities increase the cumulative FVA thereby decreasing the derivative liabilities balance. FVA losses have the opposite impact.
Valuation Adjustments Gains (Losses) on Derivatives (1)
Gross
Net
Gross
Net
Gross
Net
Derivative assets (CVA)
$
$
$
$
$
$
Derivative assets/liabilities (FVA)
(2
)
(15
)
Derivative liabilities (DVA)
(147
)
(135
)
(19
)
(55
)
(324
)
(281
)
(1)
At December 31, 2019, 2018 and 2017, cumulative CVA reduced the derivative assets balance by $528 million, $600 million and $677 million, cumulative FVA reduced the net derivatives balance by $153 million, $151 million and $136 million, and cumulative DVA reduced the derivative liabilities balance by $285 million, $432 million and $450 million, respectively.
Bank of America 108
NOTE 4 Securities
The table below presents the amortized cost, gross unrealized gains and losses, and fair value of AFS debt securities, other debt securities carried at fair value and HTM debt securities at December 31, 2019 and 2018.
Debt Securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
(Dollars in millions)
December 31, 2019
Available-for-sale debt securities
Mortgage-backed securities:
Agency
$
121,698
$
1,013
$
(183
)
$
122,528
Agency-collateralized mortgage obligations
4,587
(24
)
4,641
Commercial
14,797
(25
)
15,021
Non-agency residential (1)
(9
)
1,077
Total mortgage-backed securities
142,030
1,478
(241
)
143,267
U.S. Treasury and agency securities
67,700
1,023
(195
)
68,528
Non-U.S. securities
11,987
(2
)
11,991
Other taxable securities, substantially all asset-backed securities
3,874
-
3,941
Total taxable securities
225,591
2,574
(438
)
227,727
Tax-exempt securities
17,716
(6
)
17,912
Total available-for-sale debt securities
243,307
2,776
(444
)
245,639
Other debt securities carried at fair value (2)
10,596
(23
)
10,828
Total debt securities carried at fair value
253,903
3,031
(467
)
256,467
Held-to-maturity debt securities, substantially all U.S. agency mortgage-backed securities
215,730
4,433
(342
)
219,821
Total debt securities (3, 4)
$
469,633
$
7,464
$
(809
)
$
476,288
December 31, 2018
Available-for-sale debt securities
Mortgage-backed securities:
Agency
$
125,116
$
$
(3,428
)
$
121,826
Agency-collateralized mortgage obligations
5,621
(110
)
5,530
Commercial
14,469
(402
)
14,078
Non-agency residential (1)
1,792
(11
)
1,917
Total mortgage-backed securities
146,998
(3,951
)
143,351
U.S. Treasury and agency securities
56,239
(1,378
)
54,923
Non-U.S. securities
9,307
(6
)
9,306
Other taxable securities, substantially all asset-backed securities
4,387
(6
)
4,410
Total taxable securities
216,931
(5,341
)
211,990
Tax-exempt securities
17,349
(72
)
17,376
Total available-for-sale debt securities
234,280
(5,413
)
229,366
Other debt securities carried at fair value (2)
8,595
(32
)
8,735
Total debt securities carried at fair value
242,875
(5,445
)
238,101
Held-to-maturity debt securities, substantially all U.S. agency mortgage-backed securities
203,652
(3,964
)
200,435
Total debt securities (3, 4)
$
446,527
$
1,418
$
(9,409
)
$
438,536
(1)
At December 31, 2019 and 2018, the underlying collateral type included approximately 49 percent and 68 percent prime, six percent and four percent Alt-A and 45 percent and 28 percent subprime.
(2)
Primarily includes non-U.S. securities used to satisfy certain international regulatory requirements. Any changes in value are reported in other income. For detail on the components, see Note 21 - Fair Value Measurements.
(3)
Includes securities pledged as collateral of $67.0 billion and $40.6 billion at December 31, 2019 and 2018.
(4)
The Corporation held debt securities from FNMA and FHLMC that each exceeded 10 percent of shareholders’ equity, with an amortized cost of $157.2 billion and $54.1 billion, and a fair value of $160.6 billion and $55.1 billion at December 31, 2019, and an amortized cost of $161.2 billion and $52.2 billion, and a fair value of $158.5 billion and $51.4 billion at December 31, 2018.
At December 31, 2019, the accumulated net unrealized gain on AFS debt securities, excluding the amount related to debt securities previously transferred to held to maturity, included in accumulated OCI was $1.8 billion, net of the related income tax expense of $569 million. The Corporation had nonperforming AFS debt securities of $9 million and $11 million at December 31, 2019 and 2018.
At December 31, 2019, the Corporation held equity securities at an aggregate fair value of $891 million and other equity securities, as valued under the measurement alternative, at cost of $183 million, both of which are included in other assets. At December 31, 2019, the Corporation also held equity securities at fair value of $1.0 billion included in time deposits placed and other short-term investments.
The gross realized gains and losses on sales of AFS debt securities for 2019, 2018 and 2017 are presented in the table below.
Gains and Losses on Sales of AFS Debt Securities
(Dollars in millions)
Gross gains
$
$
$
Gross losses
(119
)
(15
)
(97
)
Net gains on sales of AFS debt securities
$
$
$
Income tax expense attributable to realized net gains on sales of AFS debt securities
$
$
$
109 Bank of America
The table below presents the fair value and the associated gross unrealized losses on AFS debt securities and whether these securities have had gross unrealized losses for less than 12 months or for 12 months or longer at December 31, 2019 and 2018.
Temporarily Impaired and Other-than-temporarily Impaired AFS Debt Securities
Less than Twelve Months
Twelve Months or Longer
Total
Fair
Value
Gross Unrealized Losses
Fair
Value
Gross Unrealized Losses
Fair
Value
Gross Unrealized Losses
(Dollars in millions)
December 31, 2019
Temporarily impaired AFS debt securities
Mortgage-backed securities:
Agency
$
17,641
$
(41
)
$
17,238
$
(142
)
$
34,879
$
(183
)
Agency-collateralized mortgage obligations
(1
)
(23
)
1,180
(24
)
Commercial
2,180
(22
)
(3
)
2,622
(25
)
Non-agency residential
(1
)
-
(1
)
Total mortgage-backed securities
20,095
(65
)
18,606
(168
)
38,701
(233
)
U.S. Treasury and agency securities
12,836
(71
)
18,866
(124
)
31,702
(195
)
Non-U.S. securities
-
(2
)
1,688
(2
)
Other taxable securities, substantially all asset-backed securities
-
-
1,160
-
Total taxable securities
34,720
(136
)
38,531
(294
)
73,251
(430
)
Tax-exempt securities
4,286
(5
)
(1
)
4,476
(6
)
Total temporarily impaired AFS debt securities
39,006
(141
)
38,721
(295
)
77,727
(436
)
Other-than-temporarily impaired AFS debt securities (1)
Non-agency residential mortgage-backed securities
(5
)
(3
)
(8
)
Total temporarily impaired and other-than-temporarily impaired
AFS debt securities
$
39,109
$
(146
)
$
38,742
$
(298
)
$
77,851
$
(444
)
December 31, 2018
Temporarily impaired AFS debt securities
Mortgage-backed securities:
Agency
$
14,771
$
(49
)
$
99,211
$
(3,379
)
$
113,982
$
(3,428
)
Agency-collateralized mortgage obligations
-
4,452
(110
)
4,455
(110
)
Commercial
1,344
(8
)
11,991
(394
)
13,335
(402
)
Non-agency residential
(8
)
(3
)
(11
)
Total mortgage-backed securities
16,224
(65
)
115,703
(3,886
)
131,927
(3,951
)
U.S. Treasury and agency securities
(1
)
51,374
(1,377
)
51,662
(1,378
)
Non-U.S. securities
(5
)
(1
)
(6
)
Other taxable securities, substantially all asset-backed securities
(1
)
(5
)
(6
)
Total taxable securities
17,468
(72
)
167,283
(5,269
)
184,751
(5,341
)
Tax-exempt securities
(2
)
2,148
(70
)
2,380
(72
)
Total temporarily impaired AFS debt securities
17,700
(74
)
169,431
(5,339
)
187,131
(5,413
)
Other-than-temporarily impaired AFS debt securities (1)
Non-agency residential mortgage-backed securities
-
-
-
Total temporarily impaired and other-than-temporarily impaired
AFS debt securities
$
17,831
$
(74
)
$
169,434
$
(5,339
)
$
187,265
$
(5,413
)
(1)
Includes other-than-temporarily impaired AFS debt securities on which an OTTI loss, primarily related to changes in interest rates, remains in accumulated OCI.
In 2019, 2018 and 2017, the Corporation had $24 million, $33 million and $41 million, respectively, of credit-related OTTI losses on AFS debt securities which were recognized in other income. The amount of non-credit related OTTI losses for these AFS debt securities, which is recognized in OCI, was not significant for all periods presented.
The cumulative OTTI credit losses recognized in income on AFS debt securities that the Corporation does not intend to sell were $85 million, $120 million and $274 million at December 31, 2019, 2018 and 2017, respectively.
The Corporation estimates the portion of a loss on a security that is attributable to credit using a discounted cash flow model and estimates the expected cash flows of the underlying collateral using internal credit, interest rate and prepayment risk models that incorporate management’s best estimate of current key
assumptions such as default rates, loss severity and prepayment rates. Assumptions used for the underlying loans that support the MBS can vary widely from loan to loan and are influenced by such factors as loan interest rate, geographic location of the borrower, borrower characteristics and collateral type. Based on these assumptions, the Corporation then determines how the underlying collateral cash flows will be distributed to each MBS issued from the applicable special purpose entity. Expected principal and interest cash flows on an impaired AFS debt security are discounted using the effective yield of each individual impaired AFS debt security.
Significant assumptions used in estimating the expected cash flows for measuring credit losses on non-agency residential mortgage-backed securities (RMBS) were as follows at December 31, 2019.
Bank of America 110
Significant Assumptions
Range (1)
Weighted
average
10th
Percentile (2)
90th
Percentile (2)
Prepayment speed
16.6
%
5.5
%
27.8
%
Loss severity
14.7
8.0
30.7
Life default rate
11.9
1.0
36.5
(1)
Represents the range of inputs/assumptions based upon the underlying collateral.
(2)
The value of a variable below which the indicated percentile of observations will fall.
Annual constant prepayment speed and loss severity rates are projected considering collateral characteristics such as LTV, creditworthiness of borrowers as measured using Fair Isaac Corporation (FICO) scores, and geographic concentrations. The weighted-average severity by collateral type was 12.9 percent for prime, 11.1 percent for Alt-A and 18.8 percent for subprime at December 31, 2019. Default rates are projected by considering collateral characteristics including, but not limited to, LTV, FICO and geographic concentration. Weighted-average life default rates
by collateral type were 7.8 percent for prime, 11.6 percent for Alt-A and 13.6 percent for subprime at December 31, 2019.
The remaining contractual maturity distribution and yields of the Corporation’s debt securities carried at fair value and HTM debt securities at December 31, 2019 are summarized in the table below. Actual duration and yields may differ as prepayments on the loans underlying the mortgages or other ABS are passed through to the Corporation.
Maturities of Debt Securities Carried at Fair Value and Held-to-maturity Debt Securities
Due in One
Year or Less
Due after One Year
through Five Years
Due after Five Years
through Ten Years
Due after
Ten Years
Total
(Dollars in millions)
Amount
Yield (1)
Amount
Yield (1)
Amount
Yield (1)
Amount
Yield (1)
Amount
Yield (1)
Amortized cost of debt securities carried at fair value
Mortgage-backed securities:
Agency
$
-
-
%
$
5.25
%
$
4.56
%
$
124,618
3.24
%
$
124,695
3.24
%
Agency-collateralized mortgage obligations
-
-
-
-
2.48
4,560
3.16
4,587
3.16
Commercial
-
-
3,806
2.37
10,136
2.57
2.99
14,810
2.54
Non-agency residential
-
-
-
-
-
2,157
9.26
2,169
9.22
Total mortgage-backed securities
-
-
3,817
2.38
10,241
2.58
132,203
3.33
146,261
3.25
U.S. Treasury and agency securities
1,350
0.92
35,544
1.67
30,789
2.25
2.45
67,703
1.92
Non-U.S. securities
15,648
1.17
2,598
1.03
4.17
6.74
18,349
1.18
Other taxable securities, substantially all asset-backed securities
1,189
2.80
1,650
3.02
3.32
2.91
3,874
2.97
Total taxable securities
18,187
1.26
43,609
1.74
41,477
2.34
132,914
3.34
236,187
2.70
Tax-exempt securities
2,189
1.72
7,472
2.10
4,849
2.06
3,206
2.44
17,716
2.10
Total amortized cost of debt securities carried at fair value
$
20,376
1.31
$
51,081
1.79
$
46,326
2.31
$
136,120
3.32
$
253,903
2.67
Amortized cost of HTM debt securities (2)
$
1,025
2.83
$
3.57
$
1,102
2.57
$
213,555
3.19
$
215,730
3.19
Debt securities carried at fair value
Mortgage-backed securities:
Agency
$
-
$
$
$
125,449
$
125,531
Agency-collateralized mortgage obligations
-
-
4,615
4,641
Commercial
-
3,854
10,287
15,034
Non-agency residential
-
-
2,386
2,411
Total mortgage-backed securities
-
3,865
10,409
133,343
147,617
U.S. Treasury and agency securities
1,347
35,686
31,478
68,531
Non-U.S. securities
15,751
2,606
18,463
Other taxable securities, substantially all asset-backed securities
1,196
1,687
3,944
Total taxable securities
18,294
43,844
42,360
134,057
238,555
Tax-exempt securities
2,192
7,509
4,976
3,235
17,912
Total debt securities carried at fair value
$
20,486
$
51,353
$
47,336
$
137,292
$
256,467
Fair value of HTM debt securities (2)
$
1,025
$
$
1,113
$
217,635
$
219,821
(1)
The weighted-average yield is computed based on a constant effective interest rate over the contractual life of each security. The average yield considers the contractual coupon and the amortization of premiums and accretion of discounts, excluding the effect of related hedging derivatives.
(2)
Substantially all U.S. agency MBS.
111 Bank of America
NOTE 5 Outstanding Loans and Leases
The following tables present total outstanding loans and leases and an aging analysis for the Consumer Real Estate, Credit Card and Other Consumer, and Commercial portfolio segments, by class of financing receivables, at December 31, 2019 and 2018.
30-59 Days Past Due (1)
60-89 Days Past Due (1)
90 Days or
More
Past Due (2)
Total Past
Due 30 Days
or More
Total Current or Less Than 30 Days Past Due (3)
Loans Accounted for Under the Fair Value Option
Total
Outstandings
(Dollars in millions)
December 31, 2019
Consumer real estate
Core portfolio
Residential mortgage
$
1,378
$
$
$
2,204
$
223,566
$
225,770
Home equity
34,823
35,226
Non-core portfolio
Residential mortgage
1,263
1,930
8,469
10,399
Home equity
4,860
4,982
Credit card and other consumer
Credit card
1,042
2,035
95,573
97,608
Direct/Indirect consumer (4)
90,581
90,998
Other consumer
-
-
-
-
Total consumer
2,866
1,070
3,175
7,111
458,064
465,175
Consumer loans accounted for under the fair value option (5)
$
Total consumer loans and leases
2,866
1,070
3,175
7,111
458,064
465,769
Commercial
U.S. commercial
1,438
305,610
307,048
Non-U.S. commercial
104,900
104,966
Commercial real estate (6)
62,407
62,689
Commercial lease financing
19,685
19,880
U.S. small business commercial
15,051
15,333
Total commercial
1,186
2,263
507,653
509,916
Commercial loans accounted for under the fair value option (5)
7,741
7,741
Total commercial loans and leases
1,186
2,263
507,653
7,741
517,657
Total loans and leases (7)
$
4,052
$
1,503
$
3,819
$
9,374
$
965,717
$
8,335
$
983,426
Percentage of outstandings
0.41
%
0.15
%
0.39
%
0.95
%
98.20
%
0.85
%
100.00
%
(1)
Consumer real estate loans 30-59 days past due includes fully-insured loans of $517 million and nonperforming loans of $139 million. Consumer real estate loans 60-89 days past due includes fully-insured loans of $206 million and nonperforming loans of $114 million.
(2)
Consumer real estate includes fully-insured loans of $1.1 billion.
(3)
Consumer real estate includes $856 million and direct/indirect consumer includes $45 million of nonperforming loans.
(4)
Total outstandings primarily includes auto and specialty lending loans and leases of $50.4 billion, U.S. securities-based lending loans of $36.7 billion and non-U.S. consumer loans of $2.8 billion.
(5)
Consumer loans accounted for under the fair value option includes residential mortgage loans of $257 million and home equity loans of $337 million. Commercial loans accounted for under the fair value option includes U.S. commercial loans of $4.7 billion and non-U.S. commercial loans of $3.1 billion. For more information, see Note 21 - Fair Value Measurements and Note 22 - Fair Value Option.
(6)
Total outstandings includes U.S. commercial real estate loans of $59.0 billion and non-U.S. commercial real estate loans of $3.7 billion.
(7)
Total outstandings includes loans and leases pledged as collateral of $25.9 billion. The Corporation also pledged $168.2 billion of loans with no related outstanding borrowings to secure potential borrowing capacity with the Federal Reserve Bank and Federal Home Loan Bank.
Bank of America 112
30-59 Days
Past Due (1)
60-89 Days Past Due (1)
90 Days or
More
Past Due (2)
Total Past
Due 30 Days
or More
Total
Current or
Less Than
30 Days
Past Due (3)
Loans
Accounted
for Under
the Fair
Value Option
Total Outstandings
(Dollars in millions)
December 31, 2018
Consumer real estate
Core portfolio
Residential mortgage
$
1,188
$
$
$
2,230
$
191,465
$
193,695
Home equity
39,338
40,010
Non-core portfolio
Residential mortgage
2,201
3,267
11,595
14,862
Home equity
7,729
8,276
Credit card and other consumer
Credit card
1,989
96,349
98,338
Direct/Indirect consumer (4)
90,719
91,166
Other consumer (5)
-
-
-
-
Total consumer
3,178
1,220
4,754
9,152
437,397
446,549
Consumer loans accounted for under the fair value option (6)
$
Total consumer loans and leases
3,178
1,220
4,754
9,152
437,397
447,231
Commercial
U.S. commercial
1,399
297,878
299,277
Non-U.S. commercial
-
98,726
98,776
Commercial real estate (7)
60,786
60,845
Commercial lease financing
22,259
22,534
U.S. small business commercial
14,332
14,565
Total commercial
2,016
493,981
495,997
Commercial loans accounted for under the fair value option (6)
3,667
3,667
Total commercial loans and leases
2,016
493,981
3,667
499,664
Total loans and leases (8)
$
4,009
$
1,685
$
5,474
$
11,168
$
931,378
$
4,349
$
946,895
Percentage of outstandings
0.42
%
0.18
%
0.58
%
1.18
%
98.36
%
0.46
%
100.00
%
(1)
Consumer real estate loans 30-59 days past due includes fully-insured loans of $637 million and nonperforming loans of $217 million. Consumer real estate loans 60-89 days past due includes fully-insured loans of $269 million and nonperforming loans of $146 million.
(2)
Consumer real estate includes fully-insured loans of $1.9 billion.
(3)
Consumer real estate includes $1.8 billion and direct/indirect consumer includes $53 million of nonperforming loans.
(4)
Total outstandings primarily includes auto and specialty lending loans and leases of $50.1 billion, U.S. securities-based lending loans of $37.0 billion and non-U.S. consumer loans of $2.9 billion.
(5)
Substantially all of other consumer is consumer overdrafts.
(6)
Consumer loans accounted for under the fair value option includes residential mortgage loans of $336 million and home equity loans of $346 million. Commercial loans accounted for under the fair value option includes U.S. commercial loans of $2.5 billion and non-U.S. commercial loans of $1.1 billion. For more information, see Note 21 - Fair Value Measurements and Note 22 - Fair Value Option.
(7)
Total outstandings includes U.S. commercial real estate loans of $56.6 billion and non-U.S. commercial real estate loans of $4.2 billion.
(8)
Total outstandings includes loans and leases pledged as collateral of $36.7 billion. The Corporation also pledged $166.1 billion of loans with no related outstanding borrowings to secure potential borrowing capacity with the Federal Reserve Bank and Federal Home Loan Bank.
The Corporation categorizes consumer real estate loans as core and non-core based on loan and customer characteristics such as origination date, product type, LTV, FICO score and delinquency status consistent with its current consumer and mortgage servicing strategy. Generally, loans that were originated after January 1, 2010, qualified under government-sponsored enterprise (GSE) underwriting guidelines, or otherwise met the Corporation’s underwriting guidelines in place in 2015 are characterized as core loans. All other loans are generally characterized as non-core loans and represent runoff portfolios.
The Corporation has entered into long-term credit protection agreements with FNMA and FHLMC on loans totaling $7.5 billion and $6.1 billion at December 31, 2019 and 2018, providing full credit protection on residential mortgage loans that become
severely delinquent. All of these loans are individually insured and therefore the Corporation does not record an allowance for credit losses related to these loans.
During 2019, the Corporation sold $4.7 billion of consumer real estate compared to $11.6 billion in 2018.
Nonperforming Loans and Leases
The Corporation classifies consumer real estate loans that have been discharged in Chapter 7 bankruptcy and not reaffirmed by the borrower as TDRs, irrespective of payment history or delinquency status, even if the repayment terms for the loans have not been otherwise modified. The Corporation continues to have a lien on the underlying collateral.
113 Bank of America
The table below presents the Corporation’s nonperforming loans and leases including nonperforming TDRs, and loans accruing past due 90 days or more at December 31, 2019 and 2018. Nonperforming LHFS are excluded from nonperforming loans and leases as they are recorded at either fair value or the lower of cost or fair value. For more information on the criteria for classification as nonperforming, see Note 1 - Summary of Significant Accounting Principles.
Credit Quality
Nonperforming Loans
and Leases
Accruing Past Due
90 Days or More
December 31
(Dollars in millions)
Consumer real estate
Core portfolio
Residential mortgage (1)
$
$
1,010
$
$
Home equity
-
-
Non-core portfolio
Residential mortgage (1)
1,610
Home equity
-
-
Credit card and other consumer
Credit card
n/a
n/a
1,042
Direct/Indirect consumer
Total consumer
2,053
3,842
2,163
2,916
Commercial
U.S. commercial
1,094
Non-U.S. commercial
-
Commercial real estate
Commercial lease financing
U.S. small business commercial
Total commercial
1,499
1,102
Total loans and leases
$
3,552
$
4,944
$
2,413
$
3,230
(1)
Residential mortgage loans in the core and non-core portfolios accruing past due 90 days or more are fully-insured loans. At December 31, 2019 and 2018, residential mortgage includes $740 million and $1.4 billion of loans on which interest has been curtailed by the FHA and therefore are no longer accruing interest, although principal is still insured, and $348 million and $498 million of loans on which interest is still accruing.
n/a = not applicable
Credit Quality Indicators
The Corporation monitors credit quality within its Consumer Real Estate, Credit Card and Other Consumer, and Commercial portfolio segments based on primary credit quality indicators. For more information on the portfolio segments, see Note 1 - Summary of Significant Accounting Principles. Within the Consumer Real Estate portfolio segment, the primary credit quality indicators are refreshed LTV and refreshed FICO score. Refreshed LTV measures the carrying value of the loan as a percentage of the value of the property securing the loan, refreshed quarterly. Home equity loans are evaluated using CLTV which measures the carrying value of the Corporation’s loan and available line of credit combined with any outstanding senior liens against the property as a percentage of the value of the property securing the loan, refreshed quarterly. FICO score measures the creditworthiness of the borrower based on the financial obligations of the borrower and the borrower’s credit history. FICO scores are typically refreshed quarterly or more frequently. Certain borrowers (e.g., borrowers that have had debts discharged in a bankruptcy proceeding) may not have their FICO
scores updated. FICO scores are also a primary credit quality indicator for the Credit Card and Other Consumer portfolio segment and the business card portfolio within U.S. small business commercial. Within the Commercial portfolio segment, loans are evaluated using the internal classifications of pass rated or reservable criticized as the primary credit quality indicators. The term reservable criticized refers to those commercial loans that are internally classified or listed by the Corporation as Special Mention, Substandard or Doubtful, which are asset quality categories defined by regulatory authorities. These assets have an elevated level of risk and may have a high probability of default or total loss. Pass rated refers to all loans not considered reservable criticized. In addition to these primary credit quality indicators, the Corporation uses other credit quality indicators for certain types of loans.
The following tables present certain credit quality indicators for the Corporation's Consumer Real Estate, Credit Card and Other Consumer, and Commercial portfolio segments, by class of financing receivables, at December 31, 2019 and 2018.
Bank of America 114
Consumer Real Estate - Credit Quality Indicators (1)
Core Residential Mortgage
Non-core Residential Mortgage
Core
Home Equity
Non-core Home Equity
Core Residential Mortgage
Non-core Residential Mortgage
Core
Home Equity
Non-core Home Equity
(Dollars in millions)
December 31, 2019
December 31, 2018
Refreshed LTV
Less than or equal to 90 percent
$
205,357
$
7,433
$
34,733
$
4,127
$
173,911
$
10,272
$
39,246
$
6,478
Greater than 90 percent but less than or equal to 100 percent
3,100
2,349
Greater than 100 percent
1,049
1,083
Fully-insured loans (2)
16,264
2,426
16,618
3,512
Total consumer real estate
$
225,770
$
10,399
$
35,226
$
4,982
$
193,695
$
14,862
$
40,010
$
8,276
Refreshed FICO score
Less than 620
$
2,127
$
1,230
$
$
$
2,125
$
1,974
$
1,064
$
1,503
Greater than or equal to 620 and less than 680
4,821
1,053
1,550
4,538
1,719
2,008
1,720
Greater than or equal to 680 and less than 740
26,905
1,981
6,025
1,412
23,841
3,042
7,008
2,188
Greater than or equal to 740
175,653
3,709
26,900
2,229
146,573
4,615
29,930
2,865
Fully-insured loans (2)
16,264
2,426
16,618
3,512
Total consumer real estate
$
225,770
$
10,399
$
35,226
$
4,982
$
193,695
$
14,862
$
40,010
$
8,276
(1)
Excludes $594 million and $682 million of loans accounted for under the fair value option at December 31, 2019 and 2018.
(2)
Credit quality indicators are not reported for fully-insured loans as principal repayment is insured.
Credit Card and Other Consumer - Credit Quality Indicators
Credit
Card
Direct/Indirect
Consumer
Other Consumer
Credit
Card
Direct/Indirect
Consumer
Other Consumer
(Dollars in millions)
December 31, 2019
December 31, 2018
Refreshed FICO score
Less than 620
$
5,179
$
1,720
$
5,016
$
1,719
Greater than or equal to 620 and less than 680
12,277
2,734
12,415
3,124
Greater than or equal to 680 and less than 740
35,301
8,460
35,781
8,921
Greater than or equal to 740
44,851
37,825
45,126
36,709
Other internal credit metrics (1, 2)
40,259
$
40,693
$
Total credit card and other consumer
$
97,608
$
90,998
$
$
98,338
$
91,166
$
(1)
Other internal credit metrics may include delinquency status, geography or other factors.
(2)
Direct/indirect consumer includes $39.6 billion and $39.9 billion of securities-based lending which is overcollateralized and therefore has minimal credit risk at December 31, 2019 and 2018.
Commercial - Credit Quality Indicators (1)
U.S.
Commercial
Non-U.S.
Commercial
Commercial
Real Estate
Commercial
Lease
Financing
U.S. Small
Business
Commercial (2)
(Dollars in millions)
December 31, 2019
Risk ratings
Pass rated
$
299,380
$
104,051
$
61,598
$
19,551
$
Reservable criticized
7,668
1,091
Refreshed FICO score
Less than 620
Greater than or equal to 620 and less than 680
Greater than or equal to 680 and less than 740
2,267
Greater than or equal to 740
4,607
Other internal credit metrics (3)
7,146
Total commercial
$
307,048
$
104,966
$
62,689
$
19,880
$
15,333
December 31, 2018
Risk ratings
Pass rated
$
291,918
$
97,916
$
59,910
$
22,168
$
Reservable criticized
7,359
Refreshed FICO score
Less than 620
Greater than or equal to 620 and less than 680
Greater than or equal to 680 and less than 740
2,072
Greater than or equal to 740
4,254
Other internal credit metrics (3)
6,873
Total commercial
$
299,277
$
98,776
$
60,845
$
22,534
$
14,565
(1)
Excludes $7.7 billion and $3.7 billion of loans accounted for under the fair value option at December 31, 2019 and 2018.
(2)
At December 31, 2019 and 2018, U.S. small business commercial includes $715 million and $731 million of criticized business card and small business loans which are evaluated using refreshed FICO scores or internal credit metrics, including delinquency status, rather than risk ratings. Refreshed FICO score and other internal credit metrics are applicable only to the U.S. small business commercial portfolio.
(3)
Other internal credit metrics may include delinquency status, application scores, geography or other factors. At both December 31, 2019 and 2018, 99 percent of the balances where internal credit metrics are used were current or less than 30 days past due.
115 Bank of America
Impaired Loans and Troubled Debt Restructurings
A loan is considered impaired when, based on current information, it is probable that the Corporation will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. For more information, see Note 1 - Summary of Significant Accounting Principles.
Consumer Real Estate
Impaired consumer real estate loans within the Consumer Real Estate portfolio segment consist entirely of TDRs. Most modifications of consumer real estate loans meet the definition of TDRs when a binding offer is extended to a borrower. Modifications of consumer real estate loans are done in accordance with government programs or the Corporation’s proprietary programs. These modifications are considered to be TDRs if concessions have been granted to borrowers experiencing financial difficulties. Concessions may include reductions in interest rates, capitalization of past due amounts, principal and/or interest forbearance, payment extensions, principal and/or interest forgiveness, or combinations thereof.
Prior to permanently modifying a loan, the Corporation may enter into trial modifications with certain borrowers under both government and proprietary programs. Trial modifications generally represent a three- to four-month period during which the borrower makes monthly payments under the anticipated modified payment terms. Upon successful completion of the trial period, the Corporation and the borrower enter into a permanent modification. Binding trial modifications are classified as TDRs when the trial offer is made and continue to be classified as TDRs regardless of whether the borrower enters into a permanent modification.
Consumer real estate loans of $632 million that have been discharged in Chapter 7 bankruptcy with no change in repayment terms and not reaffirmed by the borrower were included in TDRs at December 31, 2019, of which $101 million were classified as nonperforming and $275 million were loans fully insured by the FHA. For more information on loans discharged in Chapter 7 bankruptcy, see Nonperforming Loans and Leases in this Note.
Consumer real estate TDRs are measured primarily based on the net present value of the estimated cash flows discounted at the loan’s original effective interest rate. If the carrying value of a TDR exceeds this amount, a specific allowance is recorded as a component of the allowance for loan and lease losses.
Alternatively, consumer real estate TDRs that are considered to be dependent solely on the collateral for repayment (e.g., due to the lack of income verification) are measured based on the estimated fair value of the collateral and a charge-off is recorded if the carrying value exceeds the fair value of the collateral. Consumer real estate loans that reached 180 days past due prior to modification had been charged off to their net realizable value, less costs to sell, before they were modified as TDRs in accordance with established policy. Therefore, modifications of consumer real estate loans that are 180 or more days past due as TDRs do not have an impact on the allowance for loan and lease losses nor are additional charge-offs required at the time of modification. Subsequent declines in the fair value of the collateral after a loan has reached 180 days past due are recorded as charge-offs. Fully-insured loans are protected against principal loss, and therefore, the Corporation does not record an allowance for loan and lease losses on the outstanding principal balance, even after they have been modified in a TDR.
At December 31, 2019 and 2018, remaining commitments to lend additional funds to debtors whose terms have been modified in a consumer real estate TDR were not significant. Consumer real estate foreclosed properties totaled $229 million and $244 million at December 31, 2019 and 2018. The carrying value of consumer real estate loans, including fully-insured loans, for which formal foreclosure proceedings were in process at December 31, 2019 was $1.6 billion. During 2019 and 2018, the Corporation reclassified $611 million and $670 million of consumer real estate loans to foreclosed properties or, for properties acquired upon foreclosure of certain government-guaranteed loans (principally FHA-insured loans), to other assets. The reclassifications represent non-cash investing activities and, accordingly, are not reflected in the Consolidated Statement of Cash Flows.
The following table provides the unpaid principal balance, carrying value and related allowance at December 31, 2019 and 2018 and the average carrying value and interest income recognized in 2019, 2018 and 2017 for impaired loans in the Corporation’s Consumer Real Estate portfolio segment. Certain impaired consumer real estate loans do not have a related allowance as the current valuation of these impaired loans exceeded the carrying value, which is net of previously recorded charge-offs.
Bank of America 116
Impaired Loans - Consumer Real Estate
Unpaid
Principal
Balance
Carrying
Value
Related
Allowance
Unpaid
Principal
Balance
Carrying
Value
Related
Allowance
(Dollars in millions)
December 31, 2019
December 31, 2018
With no recorded allowance
Residential mortgage
$
4,224
$
3,354
$
-
$
5,396
$
4,268
$
-
Home equity
1,176
-
2,948
1,599
-
With an allowance recorded
Residential mortgage
$
1,426
$
1,399
$
$
1,977
$
1,929
$
Home equity
Total
Residential mortgage
$
5,650
$
4,753
$
$
7,373
$
6,197
$
Home equity
1,719
1,229
3,760
2,359
Average
Carrying
Value
Interest
Income
Recognized (1)
Average
Carrying
Value
Interest
Income
Recognized (1)
Average
Carrying
Value
Interest
Income
Recognized (1)
With no recorded allowance
Residential mortgage
$
3,831
$
$
5,424
$
$
7,737
$
Home equity
1,221
1,894
1,997
With an allowance recorded
Residential mortgage
$
1,635
$
$
2,409
$
$
3,414
$
Home equity
Total
Residential mortgage
$
5,466
$
$
7,833
$
$
11,151
$
Home equity
1,858
2,755
2,855
(1)
Interest income recognized includes interest accrued and collected on the outstanding balances of accruing impaired loans as well as interest cash collections on nonaccruing impaired loans for which the principal is considered collectible.
The table below presents the December 31, 2019, 2018 and 2017 unpaid principal balance, carrying value, and average pre- and post-modification interest rates of consumer real estate loans that were modified in TDRs during 2019, 2018 and 2017. The following Consumer Real Estate portfolio segment tables include loans that were initially classified as TDRs during the period and also loans that had previously been classified as TDRs and were modified again during the period.
Consumer Real Estate - TDRs Entered into During 2019, 2018 and 2017
Unpaid Principal Balance
Carrying
Value
Pre-Modification Interest Rate
Post-Modification Interest Rate (1)
(Dollars in millions)
December 31, 2019
Residential mortgage
$
$
4.19
%
4.13
%
Home equity
5.04
4.31
Total
$
$
4.39
4.17
December 31, 2018
Residential mortgage
$
$
4.33
%
4.21
%
Home equity
4.46
3.74
Total
$
1,263
$
4.38
4.03
December 31, 2017
Residential mortgage
$
$
4.43
%
4.16
%
Home equity
4.22
3.49
Total
$
1,588
$
1,302
4.33
3.83
(1)
The post-modification interest rate reflects the interest rate applicable only to permanently completed modifications, which exclude loans that are in a trial modification period.
117 Bank of America
The table below presents the December 31, 2019, 2018 and 2017 carrying value for consumer real estate loans that were modified in a TDR during 2019, 2018 and 2017, by type of modification.
Consumer Real Estate - Modification Programs
TDRs Entered into During
(Dollars in millions)
Modifications under government programs (1)
$
$
$
Modifications under proprietary programs (1)
Loans discharged in Chapter 7 bankruptcy (2)
Trial modifications
Total modifications
$
$
$
1,302
(1)
Includes other modifications such as term or payment extensions and repayment plans. During 2018, this included $198 million of modifications that met the definition of a TDR related to the 2017 hurricanes; there were no such modifications in 2019 or 2017. These modifications were written down to their net realizable value less costs to sell or were fully insured as of December 31, 2018.
(2)
Includes loans discharged in Chapter 7 bankruptcy with no change in repayment terms that are classified as TDRs.
The table below presents the carrying value of consumer real estate loans that entered into payment default during 2019, 2018 and 2017 that were modified in a TDR during the 12 months preceding payment default. A payment default for consumer real estate TDRs is recognized when a borrower has missed three monthly payments (not necessarily consecutively) since modification.
Consumer Real Estate - TDRs Entering Payment Default that were Modified During the Preceding 12 Months
(Dollars in millions)
Modifications under government programs
$
$
$
Modifications under proprietary programs
Loans discharged in Chapter 7 bankruptcy (1)
Trial modifications (2)
Total modifications
$
$
$
(1)
Includes loans discharged in Chapter 7 bankruptcy with no change in repayment terms that are classified as TDRs.
(2)
Includes trial modification offers to which the customer did not respond.
Credit Card and Other Consumer
Impaired loans within the Credit Card and Other Consumer portfolio segment consist entirely of loans that have been modified in TDRs. The Corporation seeks to assist customers that are experiencing financial difficulty by modifying loans while ensuring compliance with federal and local laws and guidelines. Credit card and other consumer loan modifications generally involve reducing the interest rate on the account, placing the customer on a fixed payment plan not exceeding 60 months and canceling the customer’s available line of credit, all of which are considered TDRs. The Corporation makes loan modifications directly with borrowers for debt held only by the Corporation (internal programs). Additionally, the Corporation makes loan modifications for borrowers working with third-party renegotiation agencies that
provide solutions to customers’ entire unsecured debt structures (external programs). The Corporation classifies other secured consumer loans that have been discharged in Chapter 7 bankruptcy as TDRs which are written down to collateral value and placed on nonaccrual status no later than the time of discharge. For more information on the regulatory guidance on loans discharged in Chapter 7 bankruptcy, see Nonperforming Loans and Leases in this Note.
The following table provides the unpaid principal balance, carrying value and related allowance at December 31, 2019 and 2018 and the average carrying value for 2019, 2018 and 2017 on TDRs within the Credit Card and Other Consumer portfolio segment.
Impaired Loans - Credit Card and Other Consumer
Unpaid
Principal
Balance
Carrying
Value (1)
Related
Allowance
Unpaid
Principal
Balance
Carrying
Value (1)
Related
Allowance
Average Carrying Value (2)
(Dollars in millions)
December 31, 2019
December 31, 2018
With no recorded allowance
Direct/Indirect consumer
$
$
$
-
$
$
$
-
$
$
$
With an allowance recorded
Credit card (3)
$
$
$
$
$
$
$
$
$
(1)
Includes accrued interest and fees.
(2)
The related interest income recognized, which includes interest accrued and collected on the outstanding balances of accruing impaired loans as well as interest cash collections on nonaccruing impaired loans for which the principal was considered collectible, was not significant in 2019, 2018 and 2017.
(3)
The average carrying value in 2017 includes $47 million related to the non-U.S. credit card portfolio, which was sold in the second quarter of 2017.
Bank of America 118
The table below provides information on the Corporation’s primary modification programs for the Credit Card and Other Consumer TDR portfolio at December 31, 2019 and 2018.
Credit Card and Other Consumer - TDRs by Program Type at December 31
Credit Card
Direct/Indirect Consumer
Total TDRs by Program Type
(Dollars in millions)
Internal programs
$
$
$
-
$
-
$
$
External programs
-
-
Other
-
Total
$
$
$
$
$
$
Percent of balances current or less than 30 days past due
%
%
%
%
%
%
The table below provides information on the Corporation’s Credit Card and Other Consumer TDR portfolio including the December 31, 2019, 2018 and 2017 unpaid principal balance, carrying value, and average pre- and post-modification interest rates of loans that were modified in TDRs during 2019, 2018 and 2017.
Credit Card and Other Consumer - TDRs Entered into During 2019, 2018 and 2017
Unpaid Principal Balance
Carrying
Value (1)
Pre-Modification Interest Rate
Post-Modification Interest Rate
(Dollars in millions)
December 31, 2019
Credit card
$
$
19.18
%
5.35
%
Direct/Indirect consumer
5.23
5.21
Total
$
$
18.42
5.34
December 31, 2018
Credit card
$
$
19.49
%
5.24
%
Direct/Indirect consumer
5.10
4.95
Total
$
$
18.45
5.22
December 31, 2017
Credit card
$
$
18.47
%
5.32
%
Non-U.S. credit card
4.81
4.30
Total
$
$
17.17
5.22
(1)
Includes accrued interest and fees.
Credit card and other consumer loans are deemed to be in payment default during the quarter in which a borrower misses the second of two consecutive payments. Payment defaults are one of the factors considered when projecting future cash flows in the calculation of the allowance for loan and lease losses for impaired credit card and other consumer loans. Based on historical experience, the Corporation estimates that 14 percent of new credit card TDRs and 20 percent of new direct/indirect consumer TDRs may be in payment default within 12 months after modification.
Commercial Loans
Impaired commercial loans include nonperforming loans and TDRs (both performing and nonperforming). Modifications of loans to commercial borrowers that are experiencing financial difficulty are designed to reduce the Corporation’s loss exposure while providing the borrower with an opportunity to work through financial difficulties, often to avoid foreclosure or bankruptcy. Each modification is unique and reflects the individual circumstances of the borrower. Modifications that result in a TDR may include extensions of maturity at a concessionary (below market) rate of interest, payment forbearances or other actions designed to benefit the customer while mitigating the Corporation’s risk exposure. Reductions in interest rates are rare. Instead, the interest rates are typically increased, although the increased rate may not represent a market rate of interest. Infrequently,
concessions may also include principal forgiveness in connection
with foreclosure, short sale or other settlement agreements leading to termination or sale of the loan.
At the time of restructuring, the loans are remeasured to reflect the impact, if any, on projected cash flows resulting from the modified terms. If there was no forgiveness of principal and the interest rate was not decreased, the modification may have little or no impact on the allowance established for the loan. If a portion of the loan is deemed to be uncollectible, a charge-off may be recorded at the time of restructuring. Alternatively, a charge-off may have already been recorded in a previous period such that no charge-off is required at the time of modification. For more information on modifications for the U.S. small business commercial portfolio, see Credit Card and Other Consumer in this Note.
At December 31, 2019 and 2018, remaining commitments to lend additional funds to debtors whose terms have been modified in a commercial loan TDR were $445 million and $297 million. The balance of commercial TDRs in payment default was not significant at December 31, 2019 and 2018.
The table below provides information on impaired loans in the Commercial loan portfolio segment including the unpaid principal balance, carrying value and related allowance at December 31, 2019 and 2018, and the average carrying value for 2019, 2018 and 2017. Certain impaired commercial loans do not have a related allowance because the valuation of these impaired loans exceeded the carrying value, which is net of previously recorded charge-offs.
119 Bank of America
Impaired Loans - Commercial
Unpaid
Principal
Balance
Carrying
Value
Related
Allowance
Unpaid
Principal
Balance
Carrying
Value
Related
Allowance
Average Carrying Value (1)
(Dollars in millions)
December 31, 2019
December 31, 2018
With no recorded allowance
U.S. commercial
$
$
$
-
$
$
$
-
$
$
$
Non-U.S. commercial
-
-
Commercial real estate
-
-
-
-
Commercial lease financing
-
-
-
-
-
With an allowance recorded
U.S. commercial
$
1,776
$
1,574
$
$
1,437
$
1,270
$
$
1,316
$
1,162
$
1,260
Non-U.S. commercial
Commercial real estate
Commercial lease financing
-
U.S. small business commercial (2)
Total
U.S. commercial
$
2,310
$
2,094
$
$
2,075
$
1,886
$
$
1,951
$
1,817
$
2,032
Non-U.S. commercial
Commercial real estate
Commercial lease financing
-
U.S. small business commercial (2)
(1)
The related interest income recognized, which includes interest accrued and collected on the outstanding balances of accruing impaired loans as well as interest cash collections on nonaccruing impaired loans for which the principal was considered collectible, was not significant in 2019, 2018 and 2017.
(2)
Includes U.S. small business commercial renegotiated TDR loans and related allowance.
Loans Held-for-sale
The Corporation had LHFS of $9.2 billion and $10.4 billion at December 31, 2019 and 2018. Cash and non-cash proceeds from sales and paydowns of loans originally classified as LHFS were $30.6 billion, $29.2 billion and $41.3 billion for 2019, 2018 and 2017, respectively. Cash used for originations and purchases of LHFS totaled $28.9 billion, $28.1 billion and $43.5 billion for 2019, 2018 and 2017, respectively.
NOTE 6 Allowance for Credit Losses
The table below summarizes the changes in the allowance for credit losses by portfolio segment for 2019, 2018 and 2017.
Consumer
Real Estate
Credit Card and Other Consumer
Commercial
Total
(Dollars in millions)
Allowance for loan and lease losses, January 1
$
$
3,874
$
4,799
$
9,601
Loans and leases charged off
(522
)
(4,302
)
(822
)
(5,646
)
Recoveries of loans and leases previously charged off
1,998
Net charge-offs
(3,391
)
(662
)
(3,648
)
Provision for loan and lease losses
(680
)
3,512
3,574
Other (1)
(107
)
(5
)
(111
)
Allowance for loan and lease losses, December 31
3,996
4,874
9,416
Reserve for unfunded lending commitments, January 1
-
-
Provision for unfunded lending commitments
-
-
Reserve for unfunded lending commitments, December 31
-
-
Allowance for credit losses, December 31
$
$
3,996
$
5,687
$
10,229
Allowance for loan and lease losses, January 1
$
1,720
$
3,663
$
5,010
$
10,393
Loans and leases charged off
(690
)
(4,037
)
(675
)
(5,402
)
Recoveries of loans and leases previously charged off
1,639
Net charge-offs
(26
)
(3,214
)
(523
)
(3,763
)
Provision for loan and lease losses
(492
)
3,441
3,262
Other (1)
(274
)
(16
)
(1
)
(291
)
Allowance for loan and lease losses, December 31
3,874
4,799
9,601
Reserve for unfunded lending commitments, January 1
-
-
Provision for unfunded lending commitments
-
-
Reserve for unfunded lending commitments, December 31
-
-
Allowance for credit losses, December 31
$
$
3,874
$
5,596
$
10,398
Allowance for loan and lease losses, January 1
$
2,750
$
3,229
$
5,258
$
11,237
Loans and leases charged off
(770
)
(3,774
)
(1,075
)
(5,619
)
Recoveries of loans and leases previously charged off
1,640
Net charge-offs
(113
)
(2,965
)
(901
)
(3,979
)
Provision for loan and lease losses
(710
)
3,437
3,381
Other (1)
(207
)
(38
)
(1
)
(246
)
Allowance for loan and lease losses, December 31
1,720
3,663
5,010
10,393
Reserve for unfunded lending commitments, January 1
-
-
Provision for unfunded lending commitments
-
-
Reserve for unfunded lending commitments, December 31
-
-
Allowance for credit losses, December 31
$
1,720
$
3,663
$
5,787
$
11,170
(1)
Primarily represents write-offs of purchased credit-impaired loans, the net impact of portfolio sales, and transfers to LHFS.
Bank of America 120
The table below presents the allowance and the carrying value of outstanding loans and leases by portfolio segment at December 31, 2019 and 2018.
Consumer
Real Estate
Credit Card and Other Consumer
Commercial
Total
(Dollars in millions)
December 31, 2019
Impaired loans and troubled debt restructurings (1)
Allowance for loan and lease losses
$
$
$
$
Carrying value (2)
5,982
2,764
9,425
Allowance as a percentage of carrying value
2.32
%
27.69
%
11.58
%
6.86
%
Loans collectively evaluated for impairment
Allowance for loan and lease losses
$
$
3,808
$
4,554
$
8,769
Carrying value (2, 3)
270,395
188,119
507,152
965,666
Allowance as a percentage of carrying value (3)
0.15
%
2.02
%
0.90
%
0.91
%
Total
Allowance for loan and lease losses
$
$
3,996
$
4,874
$
9,416
Carrying value (2, 3)
276,377
188,798
509,916
975,091
Allowance as a percentage of carrying value (3)
0.20
%
2.12
%
0.96
%
0.97
%
December 31, 2018
Impaired loans and troubled debt restructurings (1)
Allowance for loan and lease losses
$
$
$
$
Carrying value (2)
8,556
2,433
11,555
Allowance as a percentage of carrying value
3.02
%
27.21
%
8.06
%
5.26
%
Loans collectively evaluated for impairment
Allowance for loan and lease losses
$
$
3,720
$
4,603
$
8,993
Carrying value (2, 3)
248,287
189,140
493,564
930,991
Allowance as a percentage of carrying value (3)
0.27
%
1.97
%
0.93
%
0.97
%
Total
Allowance for loan and lease losses
$
$
3,874
$
4,799
$
9,601
Carrying value (2, 3)
256,843
189,706
495,997
942,546
Allowance as a percentage of carrying value (3)
0.36
%
2.04
%
0.97
%
1.02
%
(1)
Impaired loans include nonperforming commercial loans and leases, as well as all TDRs, including both commercial and consumer TDRs. Impaired loans exclude nonperforming consumer loans unless they are TDRs, and all consumer and commercial loans accounted for under the fair value option.
(2)
Amounts are presented gross of the allowance for loan and lease losses.
(3)
Outstanding loan and lease balances and ratios do not include loans accounted for under the fair value option of $8.3 billion and $4.3 billion at December 31, 2019 and 2018.
NOTE 7 Securitizations and Other Variable Interest Entities
The Corporation utilizes VIEs in the ordinary course of business to support its own and its customers’ financing and investing needs. The Corporation routinely securitizes loans and debt securities using VIEs as a source of funding for the Corporation and as a means of transferring the economic risk of the loans or debt securities to third parties. The assets are transferred into a trust or other securitization vehicle such that the assets are legally isolated from the creditors of the Corporation and are not available to satisfy its obligations. These assets can only be used to settle obligations of the trust or other securitization vehicle. The Corporation also administers, structures or invests in other VIEs including CDOs, investment vehicles and other entities. For more information on the Corporation’s use of VIEs, see Note 1 - Summary of Significant Accounting Principles.
The tables in this Note present the assets and liabilities of consolidated and unconsolidated VIEs at December 31, 2019 and 2018 in situations where the Corporation has continuing involvement with transferred assets or if the Corporation otherwise has a variable interest in the VIE. The tables also present the Corporation’s maximum loss exposure at December 31, 2019 and 2018 resulting from its involvement with consolidated VIEs and unconsolidated VIEs in which the Corporation holds a variable interest. The Corporation’s maximum loss exposure is based on the unlikely event that all of the assets in the VIEs become worthless and incorporates not only potential losses associated with assets recorded on the Consolidated Balance Sheet but also potential losses associated with off-balance sheet commitments, such as unfunded liquidity commitments and other contractual
arrangements. The Corporation’s maximum loss exposure does not include losses previously recognized through write-downs of assets.
The Corporation invests in ABS issued by third-party VIEs with which it has no other form of involvement and enters into certain commercial lending arrangements that may also incorporate the use of VIEs, for example to hold collateral. These securities and loans are included in Note 4 - Securities or Note 5 - Outstanding Loans and Leases. In addition, the Corporation has used VIEs in connection with its funding activities.
The Corporation did not provide financial support to consolidated or unconsolidated VIEs during 2019, 2018 and 2017 that it was not previously contractually required to provide, nor does it intend to do so.
The Corporation had liquidity commitments, including written put options and collateral value guarantees, with certain unconsolidated VIEs of $1.1 billion and $218 million at December 31, 2019 and 2018.
First-lien Mortgage Securitizations
As part of its mortgage banking activities, the Corporation securitizes a portion of the first-lien residential mortgage loans it originates or purchases from third parties, generally in the form of RMBS guaranteed by GSEs, FNMA and FHLMC (collectively the GSEs), or the Government National Mortgage Association (GNMA) primarily in the case of FHA-insured and U.S. Department of Veterans Affairs (VA)-guaranteed mortgage loans. Securitization usually occurs in conjunction with or shortly after origination or purchase, and the Corporation may also securitize loans held in its residential mortgage portfolio. In addition, the Corporation may, from time to time, securitize commercial mortgages it originates
121 Bank of America
or purchases from other entities. The Corporation typically services the loans it securitizes. Further, the Corporation may retain beneficial interests in the securitization trusts including senior and subordinate securities and equity tranches issued by the trusts. Except as described in Note 13 - Commitments and Contingencies,
the Corporation does not provide guarantees or recourse to the securitization trusts other than standard representations and warranties.
The table below summarizes select information related to first-lien mortgage securitizations for 2019, 2018 and 2017.
First-lien Mortgage Securitizations
Residential Mortgage - Agency
Commercial Mortgage
(Dollars in millions)
Proceeds from loan sales (1)
$
6,858
$
5,801
$
16,161
$
8,661
$
6,991
$
5,887
Gains on securitizations (2)
Repurchases from securitization trusts (3)
1,485
2,713
-
-
-
(1)
The Corporation transfers residential mortgage loans to securitizations sponsored primarily by the GSEs or GNMA in the normal course of business and primarily receives RMBS in exchange. Substantially all of these securities are classified as Level 2 within the fair value hierarchy and are sold shortly after receipt.
(2)
A majority of the first-lien residential mortgage loans securitized are initially classified as LHFS and accounted for under the fair value option. Gains recognized on these LHFS prior to securitization, which totaled $64 million, $71 million and $243 million, net of hedges, during 2019, 2018 and 2017, respectively, are not included in the table above.
(3)
The Corporation may have the option to repurchase delinquent loans out of securitization trusts, which reduces the amount of servicing advances it is required to make. The Corporation may also repurchase loans from securitization trusts to perform modifications. Repurchased loans include FHA-insured mortgages collateralizing GNMA securities.
The Corporation recognizes consumer MSRs from the sale or securitization of consumer real estate loans. The unpaid principal balance of loans serviced for investors, including residential mortgage and home equity loans, totaled $192.1 billion and $226.6 billion at December 31, 2019 and 2018. Servicing fee and ancillary fee income on serviced loans was $585 million, $710 million and $893 million during 2019, 2018 and 2017. Servicing advances on serviced loans, including loans serviced for others and loans held for investment, were $2.4 billion and $3.3 billion
at December 31, 2019 and 2018. For more information on MSRs, see Note 21 - Fair Value Measurements.
During 2019, the Corporation deconsolidated agency residential mortgage securitization trusts with total assets of $1.2 billion. There were no significant deconsolidations in 2018 or 2017.
The following table summarizes select information related to first-lien mortgage securitization trusts in which the Corporation held a variable interest at December 31, 2019 and 2018.
First-lien Mortgage VIEs
Residential Mortgage
Non-agency
Agency
Prime
Subprime
Alt-A
Commercial Mortgage
December 31
(Dollars in millions)
Unconsolidated VIEs
Maximum loss exposure (1)
$
12,554
$
16,011
$
$
$
1,622
$
1,897
$
$
$
1,036
$
On-balance sheet assets
Senior securities:
Trading account assets
$
$
$
$
$
$
$
$
$
$
Debt securities carried at fair value
6,392
9,381
1,178
1,470
-
-
Held-to-maturity securities
5,535
6,170
-
-
-
-
-
-
All other assets
-
-
Total retained positions
$
12,554
$
16,011
$
$
$
1,281
$
1,543
$
$
$
$
Principal balance outstanding (2)
$
160,226
$
187,512
$
7,268
$
8,954
$
8,594
$
8,719
$
19,878
$
23,467
$
60,129
$
43,593
Consolidated VIEs
Maximum loss exposure (1)
$
10,857
$
13,296
$
$
$
$
-
$
-
$
-
$
-
$
On-balance sheet assets
Trading account assets
$
$
1,318
$
$
$
$
-
$
-
$
-
$
-
$
Loans and leases, net
9,917
11,858
-
-
-
-
-
-
-
-
All other assets
-
-
-
-
-
-
-
-
Total assets
$
10,858
$
13,319
$
$
$
$
-
$
-
$
-
$
-
$
Total liabilities
$
$
$
$
$
$
-
$
-
$
-
$
-
$
-
(1)
Maximum loss exposure includes obligations under loss-sharing reinsurance and other arrangements for non-agency residential mortgage and commercial mortgage securitizations, but excludes the reserve for representations and warranties obligations and corporate guarantees and also excludes servicing advances and other servicing rights and obligations. For more information, see Note 13 - Commitments and Contingencies and Note 21 - Fair Value Measurements.
(2)
Principal balance outstanding includes loans where the Corporation was the transferor to securitization VIEs with which it has continuing involvement, which may include servicing the loans.
Bank of America 122
Other Asset-backed Securitizations
The following table summarizes select information related to home equity, credit card and other asset-backed VIEs in which the Corporation held a variable interest at December 31, 2019 and 2018.
Home Equity Loan, Credit Card and Other Asset-backed VIEs
Home Equity (1)
Credit Card (2, 3)
Resecuritization Trusts
Municipal Bond Trusts
December 31
(Dollars in millions)
Unconsolidated VIEs
Maximum loss exposure
$
$
$
-
$
-
$
7,526
$
7,647
$
3,701
$
2,150
On-balance sheet assets
Senior securities (4):
Trading account assets
$
-
$
-
$
-
$
-
$
2,188
$
1,419
$
-
$
Debt securities carried at fair value
-
-
1,126
1,337
-
-
Held-to-maturity securities
-
-
-
-
4,212
4,891
-
-
Total retained positions
$
$
$
-
$
-
$
7,526
$
7,647
$
-
$
Total assets of VIEs (5)
$
1,023
$
1,813
$
-
$
-
$
21,234
$
16,949
$
4,395
$
2,829
Consolidated VIEs
Maximum loss exposure
$
$
$
17,915
$
18,800
$
$
$
2,656
$
1,540
On-balance sheet assets
Trading account assets
$
-
$
-
$
-
$
-
$
$
$
2,480
$
1,553
Loans and leases
26,985
29,906
-
-
-
-
Allowance for loan and lease losses
(2
)
(5
)
(800
)
(901
)
-
-
-
-
All other assets
-
-
Total assets
$
$
$
26,304
$
29,141
$
$
$
2,656
$
1,554
On-balance sheet liabilities
Short-term borrowings
$
-
$
-
$
-
$
-
$
-
$
-
$
2,175
$
Long-term debt
8,372
10,321
-
All other liabilities
-
-
-
-
-
-
Total liabilities
$
$
$
8,389
$
10,341
$
$
$
2,175
$
(1)
For unconsolidated home equity loan VIEs, the maximum loss exposure includes outstanding trust certificates issued by trusts in rapid amortization, net of recorded reserves. For both consolidated and unconsolidated home equity loan VIEs, the maximum loss exposure excludes the reserve for representations and warranties obligations and corporate guarantees. For more information, see Note 13 - Commitments and Contingencies.
(2)
At December 31, 2019 and 2018, loans and leases in the consolidated credit card trust included $10.5 billion and $11.0 billion of seller’s interest.
(3)
At December 31, 2019 and 2018, all other assets in the consolidated credit card trust included unbilled accrued interest and fees.
(4)
The retained senior securities were valued using quoted market prices or observable market inputs (Level 2 of the fair value hierarchy).
(5)
Total assets of VIEs includes loans the Corporation transferred with which it has continuing involvement, which may include servicing the loan.
Home Equity Loans
The Corporation retains interests, primarily senior securities, in home equity securitization trusts to which it transferred home equity loans. In addition, the Corporation may be obligated to provide subordinate funding to the trusts during a rapid amortization event. This obligation is included in the maximum loss exposure in the table above. The charges that will ultimately be recorded as a result of the rapid amortization events depend on the undrawn portion of the home equity lines of credit (HELOCs), performance of the loans, the amount of subsequent draws and the timing of related cash flows.
Credit Card Securitizations
The Corporation securitizes originated and purchased credit card loans. The Corporation’s continuing involvement with the securitization trust includes servicing the receivables, retaining an undivided interest (seller’s interest) in the receivables, and holding certain retained interests including subordinate interests in accrued interest and fees on the securitized receivables.
During 2019, 2018 and 2017, new senior debt securities issued to third-party investors from the credit card securitization trust were $1.3 billion, $4.0 billion and $3.1 billion, respectively.
At December 31, 2019 and 2018, the Corporation held subordinate securities issued by the credit card securitization trust with a notional principal amount of $7.4 billion and $7.7 billion. These securities serve as a form of credit enhancement to the senior debt securities and have a stated interest rate of zero percent. During 2019, 2018 and 2017, the credit card securitization trust issued $202 million, $650 million and $500 million, respectively, of these subordinate securities.
Resecuritization Trusts
The Corporation transfers securities, typically MBS, into resecuritization VIEs at the request of customers seeking securities with specific characteristics. Generally, there are no significant ongoing activities performed in a resecuritization trust, and no single investor has the unilateral ability to liquidate the trust.
The Corporation resecuritized $24.4 billion, $22.8 billion and $25.1 billion of securities during 2019, 2018 and 2017, respectively. Securities transferred into resecuritization VIEs were measured at fair value with changes in fair value recorded in market making and similar activities prior to the resecuritization and, accordingly, no gain or loss on sale was recorded. During 2019, 2018 and 2017, resecuritization proceeds included securities with an initial fair value of $5.2 billion, $4.1 billion and $3.3 billion, respectively. Substantially all of the other securities received as resecuritization proceeds were classified as trading securities and were categorized as Level 2 within the fair value hierarchy.
Municipal Bond Trusts
The Corporation administers municipal bond trusts that hold highly-rated, long-term, fixed-rate municipal bonds. The trusts obtain financing by issuing floating-rate trust certificates that reprice on a weekly or other short-term basis to third-party investors.
The Corporation’s liquidity commitments to unconsolidated municipal bond trusts, including those for which the Corporation was transferor, totaled $3.7 billion and $2.1 billion at December 31, 2019 and 2018. The weighted-average remaining life of bonds held in the trusts at December 31, 2019 was 10.0 years. There were no significant write-downs or downgrades of assets or issuers during 2019, 2018 and 2017.
123 Bank of America
Other Variable Interest Entities
The table below summarizes select information related to other VIEs in which the Corporation held a variable interest at December 31, 2019 and 2018.
Other VIEs
Consolidated
Unconsolidated
Total
Consolidated
Unconsolidated
Total
December 31
(Dollars in millions)
Maximum loss exposure
$
4,055
$
26,326
$
30,381
$
4,177
$
24,498
$
28,675
On-balance sheet assets
Trading account assets
$
2,213
$
$
2,762
$
2,335
$
$
3,195
Debt securities carried at fair value
-
-
Loans and leases
1,810
3,214
5,024
1,949
3,940
5,889
Allowance for loan and lease losses
(2
)
(38
)
(40
)
(2
)
(30
)
(32
)
All other assets
20,547
20,628
18,885
18,938
Total
$
4,102
$
24,346
$
28,448
$
4,335
$
23,739
$
28,074
On-balance sheet liabilities
Long-term debt
$
$
-
$
$
$
-
$
All other liabilities
5,087
5,089
4,231
4,238
Total
$
$
5,087
$
5,135
$
$
4,231
$
4,390
Total assets of VIEs
$
4,102
$
98,491
$
102,593
$
4,335
$
94,746
$
99,081
Customer VIEs
Customer VIEs include credit-linked, equity-linked and commodity-linked note VIEs, repackaging VIEs and asset acquisition VIEs, which are typically created on behalf of customers who wish to obtain market or credit exposure to a specific company, index, commodity or financial instrument.
The Corporation’s maximum loss exposure to consolidated and unconsolidated customer VIEs totaled $2.2 billion and $2.1 billion at December 31, 2019 and 2018, including the notional amount of derivatives to which the Corporation is a counterparty, net of losses previously recorded, and the Corporation’s investment, if any, in securities issued by the VIEs.
Collateralized Debt Obligation VIEs
The Corporation receives fees for structuring CDO VIEs, which hold diversified pools of fixed-income securities, typically corporate debt or ABS, which the CDO VIEs fund by issuing multiple tranches of debt and equity securities. CDOs are generally managed by third-party portfolio managers. The Corporation typically transfers assets to these CDOs, holds securities issued by the CDOs and may be a derivative counterparty to the CDOs. The Corporation’s maximum loss exposure to consolidated and unconsolidated CDOs totaled $304 million and $421 million at December 31, 2019 and 2018.
Investment VIEs
The Corporation sponsors, invests in or provides financing, which may be in connection with the sale of assets, to a variety of investment VIEs that hold loans, real estate, debt securities or other financial instruments and are designed to provide the desired investment profile to investors or the Corporation. At December 31, 2019 and 2018, the Corporation’s consolidated investment VIEs had total assets of $104 million and $270 million. The Corporation also held investments in unconsolidated VIEs with total assets of $32.4 billion and $37.7 billion at December 31, 2019 and 2018. The Corporation’s maximum loss exposure associated with both consolidated and unconsolidated investment VIEs totaled $6.4 billion and $7.2 billion at December 31, 2019 and 2018 comprised primarily of on-balance sheet assets less non-recourse liabilities.
Leveraged Lease Trusts
The Corporation’s net investment in consolidated leveraged lease trusts totaled $1.7 billion and $1.8 billion at December 31, 2019 and 2018. The trusts hold long-lived equipment such as rail cars, power generation and distribution equipment, and commercial aircraft. The Corporation structures the trusts and holds a significant residual interest. The net investment represents the Corporation’s maximum loss exposure to the trusts in the unlikely event that the leveraged lease investments become worthless. Debt issued by the leveraged lease trusts is non-recourse to the Corporation.
Tax Credit VIEs
The Corporation holds investments in unconsolidated limited partnerships and similar entities that construct, own and operate affordable housing, wind and solar projects. An unrelated third party is typically the general partner or managing member and has control over the significant activities of the VIE. The Corporation earns a return primarily through the receipt of tax credits allocated to the projects. The maximum loss exposure included in the Other VIEs table was $18.9 billion and $17.0 billion at December 31, 2019 and 2018. The Corporation’s risk of loss is generally mitigated by policies requiring that the project qualify for the expected tax credits prior to making its investment.
The Corporation’s investments in affordable housing partnerships, which are reported in other assets on the Consolidated Balance Sheet, totaled $10.0 billion and $8.9 billion, including unfunded commitments to provide capital contributions of $4.3 billion and $3.8 billion at December 31, 2019 and 2018. The unfunded commitments are expected to be paid over the next five years. During 2019, 2018 and 2017, the Corporation recognized tax credits and other tax benefits from investments in affordable housing partnerships of $1.0 billion, $981 million and $1.0 billion and reported pretax losses in other income of $882 million, $798 million and $766 million, respectively. Tax credits are recognized as part of the Corporation’s annual effective tax rate used to determine tax expense in a given quarter. Accordingly, the portion of a year’s expected tax benefits recognized in any given quarter may differ from 25 percent. The Corporation may from time to time be asked to invest additional amounts to support a troubled affordable housing project. Such additional investments have not been and are not expected to be significant.
Bank of America 124
NOTE 8 Goodwill and Intangible Assets
Goodwill
The table below presents goodwill balances by business segment and All Other at December 31, 2019 and 2018. The reporting units utilized for goodwill impairment testing are the operating segments or one level below.
Goodwill
December 31
(Dollars in millions)
Consumer Banking
$
30,123
$
30,123
Global Wealth & Investment Management
9,677
9,677
Global Banking
23,923
23,923
Global Markets
5,182
5,182
All Other
Total goodwill
$
68,951
$
68,951
During 2019, the Corporation completed its annual goodwill impairment test as of June 30, 2019 using qualitative assessments for all applicable reporting units. Based on the results of the annual goodwill impairment test, the Corporation determined there was no impairment. For more information on the use of qualitative assessments, see Note 1 - Summary of Significant Accounting Principles.
Intangible Assets
At December 31, 2019 and 2018, the net carrying value of intangible assets was $1.7 billion and $1.8 billion. At December 31, 2019 and 2018, intangible assets included $1.6 billion of intangible assets associated with trade names, substantially all of which had an indefinite life and, accordingly, are not being amortized. Amortization of intangibles expense was $112 million, $538 million and $621 million for 2019, 2018 and 2017, respectively.
NOTE 9 Leases
The Corporation enters into both lessor and lessee arrangements. For more information on lease accounting, see Note 1 - Summary of Significant Accounting Principles, and on lease financing receivables, see Note 5 - Outstanding Loans and Leases.
Lessor Arrangements
The Corporation’s lessor arrangements primarily consist of operating, sales-type and direct financing leases for equipment. Lease agreements may include options to renew and for the lessee to purchase the leased equipment at the end of the lease term.
At December 31, 2019, the total net investment in sales-type and direct financing leases was $21.9 billion, comprised of $19.3 billion in lease receivables and $2.6 billion in unguaranteed residuals. In certain cases, the Corporation obtains third-party residual value insurance to reduce its residual asset risk. The carrying value of residual assets with third-party residual value insurance for at least a portion of the asset value was $5.8 billion.
For 2019, total lease income was $1.7 billion, consisting of $797 million from sales-type and direct financing leases and $891 million from operating leases.
Lessee Arrangements
The Corporation’s lessee arrangements predominantly consist of operating leases for premises and equipment; the Corporation’s
financing leases are not significant. Right-of-use assets were $9.7 billion and lease liabilities were $10.1 billion at December 31, 2019. The weighted-average discount rate used to calculate the present value of future minimum lease payments was four percent.
Lease terms may contain renewal and extension options and early termination features. Generally, these options do not impact the lease term because the Corporation is not reasonably certain that it will exercise the options. The weighted-average lease term was 8.2 years at December 31, 2019.
The table below provides the components of lease cost and supplemental information for 2019.
Lease Cost and Supplemental Information for 2019
(Dollars in millions)
Operating lease cost
$
2,085
Variable lease cost (1)
Total lease cost (2)
$
2,583
Right-of-use assets obtained in exchange for new operating lease liabilities (3)
$
Operating cash flows from operating leases (4)
2,009
(1)
Primarily consists of payments for common area maintenance and property taxes.
(2)
Amounts are recorded in occupancy and equipment expense in the Consolidated Statement of Income.
(3)
Represents non-cash activity and, accordingly, is not reflected in the Consolidated Statement of Cash Flows.
(4)
Represents cash paid for amounts included in the measurement of lease liabilities.
Maturity Analysis
The maturities of lessor and lessee arrangements outstanding at December 31, 2019 are presented in the table below based on undiscounted cash flows.
Maturities of Lessor and Lessee Arrangements
Lessor
Lessee (1)
Operating
Leases
Sales-type and
Direct Financing
Leases (2)
Operating
Leases
(Dollars in millions)
December 31, 2019
$
$
4,657
$
1,966
4,887
1,763
4,259
1,502
3,416
1,240
1,939
1,098
Thereafter
1,057
1,910
4,225
Total undiscounted
cash flows
$
4,224
21,068
11,794
Less: Net present
value adjustment
1,756
1,701
Total (3)
$
19,312
$
10,093
(1)
Excludes $1.5 billion in commitments under lessee arrangements that have not yet commenced with lease terms that will begin in 2020.
(2)
Includes $15.1 billion in commercial lease financing receivables and $4.2 billion in direct/indirect consumer lease financing receivables.
(3)
Represents lease receivables for lessor arrangements and lease liabilities for lessee arrangements.
At December 31, 2018, operating lease commitments under lessee arrangements were $2.4 billion, $2.2 billion, $2.0 billion, $1.7 billion and $1.3 billion for 2019 through 2023, respectively, and $6.2 billion in the aggregate for all years thereafter. These amounts include variable lease payments and commitments under leases that have not yet commenced, both of which are excluded from the lessee maturity analysis presented in the table above.
125 Bank of America
NOTE 10 Deposits
The table below presents information about the Corporation’s time deposits of $100 thousand or more at December 31, 2019 and 2018. The Corporation also had aggregate time deposits of $15.8 billion and $16.4 billion in denominations that met or exceeded the Federal Deposit Insurance Corporation (FDIC) insurance limit at December 31, 2019 and 2018.
Time Deposits of $100 Thousand or More
December 31, 2019
December 31
(Dollars in millions)
Three Months
or Less
Over Three
Months to
Twelve Months
Thereafter
Total
Total
U.S. certificates of deposit and other time deposits
$
16,115
$
21,351
$
2,273
$
39,739
$
29,505
Non-U.S. certificates of deposit and other time deposits
7,108
4,821
1,105
13,034
10,792
The scheduled contractual maturities for total time deposits at December 31, 2019 are presented in the table below.
Contractual Maturities of Total Time Deposits
(Dollars in millions)
U.S.
Non-U.S.
Total
Due in 2020
$
56,351
$
12,000
$
68,351
Due in 2021
3,503
3,604
Due in 2022
1,008
Due in 2023
Due in 2024
1,168
Thereafter
Total time deposits
$
61,523
$
13,150
$
74,673
NOTE 11 Federal Funds Sold or Purchased, Securities Financing Agreements, Short-term Borrowings and Restricted Cash
The table below presents federal funds sold or purchased, securities financing agreements (which include securities borrowed or purchased under agreements to resell and securities loaned or sold under agreements to repurchase) and short-term borrowings. The Corporation elects to account for certain securities financing agreements and short-term borrowings under the fair value option. For more information on the fair value option, see Note 22 - Fair Value Option.
Amount
Rate
Amount
Rate
(Dollars in millions)
Federal funds sold and securities borrowed or purchased under agreements to resell
Average during year
$
279,610
1.73
%
$
251,328
1.26
%
Maximum month-end balance during year
281,684
n/a
279,350
n/a
Federal funds purchased and securities loaned or sold under agreements to repurchase
Average during year
$
201,797
2.31
%
$
193,681
1.80
%
Maximum month-end balance during year
203,063
n/a
201,089
n/a
Short-term borrowings
Average during year
24,301
2.42
36,021
2.69
Maximum month-end balance during year
36,538
n/a
52,480
n/a
n/a = not applicable
Bank of America, N.A. maintains a global program to offer up to a maximum of $75 billion outstanding at any one time, of bank notes with fixed or floating rates and maturities of at least seven days from the date of issue. Short-term bank notes outstanding under this program totaled $11.7 billion and $12.1 billion at December 31, 2019 and 2018. These short-term bank notes, along with Federal Home Loan Bank advances, U.S. Treasury tax and loan notes, and term federal funds purchased, are included in short-term borrowings on the Consolidated Balance Sheet.
Offsetting of Securities Financing Agreements
The Corporation enters into securities financing agreements to accommodate customers (also referred to as “matched-book transactions”), obtain securities to cover short positions and finance inventory positions. Substantially all of the Corporation’s securities financing activities are transacted under legally enforceable master repurchase agreements or legally enforceable master securities lending agreements that give the Corporation,
in the event of default by the counterparty, the right to liquidate securities held and to offset receivables and payables with the same counterparty. The Corporation offsets securities financing transactions with the same counterparty on the Consolidated Balance Sheet where it has such a legally enforceable master netting agreement and the transactions have the same maturity date.
The Securities Financing Agreements table presents securities financing agreements included on the Consolidated Balance Sheet in federal funds sold and securities borrowed or purchased under agreements to resell, and in federal funds purchased and securities loaned or sold under agreements to repurchase at December 31, 2019 and 2018. Balances are presented on a gross basis, prior to the application of counterparty netting. Gross assets and liabilities are adjusted on an aggregate basis to take into consideration the effects of legally enforceable master netting agreements. For more information on the offsetting of derivatives, see Note 3 - Derivatives.
Bank of America 126
Securities Financing Agreements
Gross Assets/Liabilities (1)
Amounts Offset
Net Balance Sheet Amount
Financial Instruments (2)
Net Assets/Liabilities
(Dollars in millions)
December 31, 2019
Securities borrowed or purchased under agreements to resell (3)
$
434,257
$
(159,660
)
$
274,597
$
(244,486
)
$
30,111
Securities loaned or sold under agreements to repurchase
$
324,769
$
(159,660
)
$
165,109
$
(141,482
)
$
23,627
Other (4)
15,346
-
15,346
(15,346
)
-
Total
$
340,115
$
(159,660
)
$
180,455
$
(156,828
)
$
23,627
December 31, 2018
Securities borrowed or purchased under agreements to resell (3)
$
366,274
$
(106,865
)
$
259,409
$
(240,790
)
$
18,619
Securities loaned or sold under agreements to repurchase
$
293,853
$
(106,865
)
$
186,988
$
(176,740
)
$
10,248
Other (4)
19,906
-
19,906
(19,906
)
-
Total
$
313,759
$
(106,865
)
$
206,894
$
(196,646
)
$
10,248
(1)
Includes activity where uncertainty exists as to the enforceability of certain master netting agreements under bankruptcy laws in some countries or industries.
(2)
Includes securities collateral received or pledged under repurchase or securities lending agreements where there is a legally enforceable master netting agreement. These amounts are not offset on the Consolidated Balance Sheet, but are shown as a reduction to derive a net asset or liability. Securities collateral received or pledged where the legal enforceability of the master netting agreements is uncertain is excluded from the table.
(3)
Excludes repurchase activity of $12.9 billion and $11.5 billion reported in loans and leases on the Consolidated Balance Sheet at December 31, 2019 and 2018.
(4)
Balance is reported in accrued expenses and other liabilities on the Consolidated Balance Sheet and relates to transactions where the Corporation acts as the lender in a securities lending agreement and receives securities that can be pledged as collateral or sold. In these transactions, the Corporation recognizes an asset at fair value, representing the securities received, and a liability, representing the obligation to return those securities.
Repurchase Agreements and Securities Loaned Transactions Accounted for as Secured Borrowings
The following tables present securities sold under agreements to repurchase and securities loaned by remaining contractual term to maturity and class of collateral pledged. Included in “Other” are transactions where the Corporation acts as the lender in a
securities lending agreement and receives securities that can be pledged as collateral or sold. Certain agreements contain a right to substitute collateral and/or terminate the agreement prior to maturity at the option of the Corporation or the counterparty. Such agreements are included in the table below based on the remaining contractual term to maturity.
Remaining Contractual Maturity
Overnight and Continuous
30 Days or Less
After 30 Days Through 90 Days
Greater than
90 Days (1)
Total
(Dollars in millions)
December 31, 2019
Securities sold under agreements to repurchase
$
129,455
$
122,685
$
25,322
$
21,922
$
299,384
Securities loaned
18,766
3,329
1,241
2,049
25,385
Other
15,346
-
-
-
15,346
Total
$
163,567
$
126,014
$
26,563
$
23,971
$
340,115
December 31, 2018
Securities sold under agreements to repurchase
$
139,017
$
81,917
$
34,204
$
21,476
$
276,614
Securities loaned
7,753
4,197
1,783
3,506
17,239
Other
19,906
-
-
-
19,906
Total
$
166,676
$
86,114
$
35,987
$
24,982
$
313,759
(1)
No agreements have maturities greater than three years.
Class of Collateral Pledged
Securities Sold Under Agreements to Repurchase
Securities
Loaned
Other
Total
(Dollars in millions)
December 31, 2019
U.S. government and agency securities
$
173,533
$
$
-
$
173,534
Corporate securities, trading loans and other
10,467
2,014
12,739
Equity securities
14,933
20,026
15,024
49,983
Non-U.S. sovereign debt
96,576
3,344
99,984
Mortgage trading loans and ABS
3,875
-
-
3,875
Total
$
299,384
$
25,385
$
15,346
$
340,115
December 31, 2018
U.S. government and agency securities
$
164,664
$
-
$
-
$
164,664
Corporate securities, trading loans and other
11,400
2,163
13,850
Equity securities
14,090
10,869
19,572
44,531
Non-U.S. sovereign debt
81,329
4,207
85,583
Mortgage trading loans and ABS
5,131
-
-
5,131
Total
$
276,614
$
17,239
$
19,906
$
313,759
127 Bank of America
Under repurchase agreements, the Corporation is required to post collateral with a market value equal to or in excess of the principal amount borrowed. For securities loaned transactions, the Corporation receives collateral in the form of cash, letters of credit or other securities. To determine whether the market value of the underlying collateral remains sufficient, collateral is generally valued daily, and the Corporation may be required to deposit additional collateral or may receive or return collateral pledged when appropriate. Repurchase agreements and securities loaned transactions are generally either overnight, continuous (i.e., no stated term) or short-term. The Corporation manages liquidity risks related to these agreements by sourcing funding from a diverse
group of counterparties, providing a range of securities collateral and pursuing longer durations, when appropriate.
Restricted Cash
At December 31, 2019 and 2018, the Corporation held restricted cash included within cash and cash equivalents on the Consolidated Balance Sheet of $24.4 billion and $22.6 billion, predominantly related to cash held on deposit with the Federal Reserve Bank and non-U.S. central banks to meet reserve requirements and cash segregated in compliance with securities regulations.
NOTE 12 Long-term Debt
Long-term debt consists of borrowings having an original maturity of one year or more. The table below presents the balance of long-term debt at December 31, 2019 and 2018, and the related contractual rates and maturity dates as of December 31, 2019.
Weighted-average Rate
December 31
(Dollars in millions)
Interest Rates
Maturity Dates
Notes issued by Bank of America Corporation (1)
Senior notes:
Fixed
3.30
%
0.25 - 8.05
%
2020 - 2050
$
140,265
$
120,548
Floating
1.81
0.25 - 6.68
2020 - 2044
19,552
25,574
Senior structured notes
16,941
13,815
Subordinated notes:
Fixed
4.89
2.94 - 8.57
2021 - 2045
21,632
20,843
Floating
2.74
2.56 - 2.89
2022 - 2026
1,742
Junior subordinated notes:
Fixed
6.71
6.45 - 8.05
2027 - 2066
Floating (2)
2.71
2.71
Total notes issued by Bank of America Corporation
199,909
183,255
Notes issued by Bank of America, N.A.
Senior notes:
Fixed
3.34
3.34
-
Floating
2.18
1.99 - 2.51
2020 - 2041
6,519
1,770
Subordinated notes
6.00
6.00
1,744
1,617
Advances from Federal Home Loan Banks:
Fixed
4.98
0.01 - 7.72
2020 - 2034
Floating
1.79
1.77 - 1.84
2,500
14,751
Securitizations and other BANA VIEs (3)
8,373
10,326
Other
Total notes issued by Bank of America, N.A.
20,158
29,036
Other debt
Structured liabilities
20,442
16,483
Nonbank VIEs (3)
Total other debt
20,789
17,101
Total long-term debt
$
240,856
$
229,392
(1)
Includes total loss-absorbing capacity compliant debt.
(2)
Includes amounts related to trust preferred securities. For more information, see Trust Preferred Securities in this Note.
(3)
Represents liabilities of consolidated VIEs included in total long-term debt on the Consolidated Balance Sheet.
During 2019, the Corporation issued $52.5 billion of long-term debt consisting of $29.3 billion of notes issued by Bank of America Corporation, $10.9 billion of notes issued by Bank of America, N.A. and $12.3 billion of other debt, substantially all of which was structured liabilities. During 2018, the Corporation issued $64.4 billion of long-term debt consisting of $30.7 billion of notes issued by Bank of America Corporation, $18.7 billion of notes issued by Bank of America, N.A. and $15.0 billion of other debt, substantially all of which was structured liabilities.
During 2019, the Corporation had total long-term debt maturities and redemptions in the aggregate of $50.6 billion consisting of $21.1 billion for Bank of America Corporation, $19.9 billion for Bank of America, N.A. and $9.6 billion of other debt. During 2018, the Corporation had total long-term debt maturities and redemptions in the aggregate of $53.3 billion consisting of $29.8 billion for Bank of America Corporation, $11.2 billion for Bank of America, N.A. and $12.3 billion of other debt.
Bank of America Corporation and Bank of America, N.A. maintain various U.S. and non-U.S. debt programs to offer both senior and subordinated notes. The notes may be denominated in U.S. dollars or foreign currencies. At December 31, 2019 and 2018, the amount of foreign currency-denominated debt translated into U.S. dollars included in total long-term debt was $49.6 billion and $48.6 billion. Foreign currency contracts may be used to convert certain foreign currency-denominated debt into U.S. dollars.
At December 31, 2019, long-term debt of consolidated VIEs in the table above included debt from credit card, residential mortgage, home equity, other VIEs and ABS of $8.4 billion, $217 million, $64 million, $46 million and $19 million, respectively. Long-term debt of VIEs is collateralized by the assets of the VIEs. For more information, see Note 7 - Securitizations and Other Variable Interest Entities.
Bank of America 128
The weighted-average effective interest rates for total long-term debt (excluding senior structured notes), total fixed-rate debt and total floating-rate debt were 3.26 percent, 3.55 percent and 1.92 percent, respectively, at December 31, 2019, and 3.29 percent, 3.66 percent and 2.26 percent, respectively, at December 31, 2018. The Corporation’s ALM activities maintain an overall interest rate risk management strategy that incorporates the use of interest rate contracts to manage fluctuations in earnings that are caused by interest rate volatility. The Corporation’s goal is to manage interest rate sensitivity so that movements in interest rates do not significantly adversely affect earnings and capital. The weighted-average rates are the contractual interest rates on the debt and do not reflect the impacts of derivative transactions.
Debt outstanding of $5.7 billion at December 31, 2019 was issued by BofA Finance LLC, a 100 percent owned finance
subsidiary of Bank of America Corporation, the parent company, and is fully and unconditionally guaranteed by the parent company.
The table below shows the carrying value for aggregate annual contractual maturities of long-term debt as of December 31, 2019. Included in the table are certain structured notes issued by the Corporation that contain provisions whereby the borrowings are redeemable at the option of the holder (put options) at specified dates prior to maturity. Other structured notes have coupon or repayment terms linked to the performance of debt or equity securities, indices, currencies or commodities, and the maturity may be accelerated based on the value of a referenced index or security. In both cases, the Corporation or a subsidiary may be required to settle the obligation for cash or other securities prior to the contractual maturity date. These borrowings are reflected in the table as maturing at their contractual maturity date.
Long-term Debt by Maturity
(Dollars in millions)
Thereafter
Total
Bank of America Corporation
Senior notes
$
9,312
$
15,978
$
14,875
$
23,045
$
17,236
$
79,371
$
159,817
Senior structured notes
2,232
12,599
16,941
Subordinated notes
-
-
3,213
18,455
22,414
Junior subordinated notes (1)
-
-
-
-
-
Total Bank of America Corporation
10,134
16,791
17,493
23,333
20,996
111,162
199,909
Bank of America, N.A.
Senior notes
3,000
3,499
-
-
7,027
Subordinated notes
-
-
-
-
-
1,744
1,744
Advances from Federal Home Loan Banks
2,509
-
2,612
Securitizations and other Bank VIEs (2)
3,099
4,080
1,185
-
-
8,373
Other
-
-
Total Bank of America, N.A.
8,742
7,636
1,188
-
1,943
20,158
Other debt
Structured liabilities
5,275
1,884
1,057
1,372
10,109
20,442
Nonbank VIEs (2)
-
-
-
-
Total other debt
5,275
1,884
1,057
1,373
10,455
20,789
Total long-term debt
$
24,151
$
26,311
$
19,738
$
25,355
$
21,741
$
123,560
$
240,856
(1)
Includes amounts related to trust preferred securities. For more information, see Trust Preferred Securities in this Note.
(2)
Represents liabilities of consolidated VIEs included in total long-term debt on the Consolidated Balance Sheet.
Trust Preferred Securities
At December 31, 2019, trust preferred securities (Trust Securities) with a carrying value of $1 million, issued by BAC Capital Trust XV (the Trust), a 100 percent owned, non-consolidated finance subsidiary of the Corporation, were issued and outstanding. The Trust Securities are mandatorily redeemable preferred security obligations of the Trust. The sole asset of the Trust is a junior subordinated deferrable interest note of the Corporation (the Note).
Periodic cash payments and payments upon liquidation or redemption with respect to Trust Securities are guaranteed by the Corporation to the extent of funds held by the Trust (the Preferred Securities Guarantee). The Preferred Securities Guarantee, when taken together with the Corporation’s other obligations including its obligations under the Note, generally will constitute a full and unconditional guarantee, on a subordinated basis, by the Corporation of payments due on the Trust Securities.
NOTE 13 Commitments and Contingencies
In the normal course of business, the Corporation enters into a number of off-balance sheet commitments. These commitments expose the Corporation to varying degrees of credit and market risk and are subject to the same credit and market risk limitation
reviews as those instruments recorded on the Consolidated Balance Sheet.
Credit Extension Commitments
The Corporation enters into commitments to extend credit such as loan commitments, SBLCs and commercial letters of credit to meet the financing needs of its customers. The following table includes the notional amount of unfunded legally binding lending commitments net of amounts distributed (i.e., syndicated or participated) to other financial institutions. The distributed amounts were $10.6 billion and $10.7 billion at December 31, 2019 and 2018. At December 31, 2019, the carrying value of these commitments, excluding commitments accounted for under the fair value option, was $829 million, including deferred revenue of $16 million and a reserve for unfunded lending commitments of $813 million. At December 31, 2018, the comparable amounts were $813 million, $16 million and $797 million, respectively. The carrying value of these commitments is classified in accrued expenses and other liabilities on the Consolidated Balance Sheet.
Legally binding commitments to extend credit generally have specified rates and maturities. Certain of these commitments have adverse change clauses that help to protect the Corporation against deterioration in the borrower’s ability to pay.
129 Bank of America
The table below includes the notional amount of commitments of $4.4 billion and $3.1 billion at December 31, 2019 and 2018 that are accounted for under the fair value option. However, the table excludes cumulative net fair value of $90 million and $169 million at December 31, 2019 and 2018 on these commitments,
which is classified in accrued expenses and other liabilities. For more information regarding the Corporation’s loan commitments accounted for under the fair value option, see Note 22 - Fair Value Option.
Credit Extension Commitments
Expire in One
Year or Less
Expire After One
Year Through
Three Years
Expire After Three Years Through
Five Years
Expire After
Five Years
Total
(Dollars in millions)
December 31, 2019
Notional amount of credit extension commitments
Loan commitments (1)
$
97,454
$
148,000
$
173,699
$
24,487
$
443,640
Home equity lines of credit
1,137
1,948
6,351
34,134
43,570
Standby letters of credit and financial guarantees (2)
21,311
11,512
3,712
36,943
Letters of credit (3)
1,156
1,500
Legally binding commitments
121,058
161,714
183,827
59,054
525,653
Credit card lines (4)
376,067
-
-
-
376,067
Total credit extension commitments
$
497,125
$
161,714
$
183,827
$
59,054
$
901,720
December 31, 2018
Notional amount of credit extension commitments
Loan commitments (1)
$
84,910
$
142,271
$
155,298
$
22,683
$
405,162
Home equity lines of credit
2,578
2,249
3,530
34,702
43,059
Standby letters of credit and financial guarantees (2)
22,571
9,702
2,457
1,074
35,804
Letters of credit (3)
1,168
1,378
Legally binding commitments
111,227
154,306
161,354
58,516
485,403
Credit card lines (4)
371,658
-
-
-
371,658
Total credit extension commitments
$
482,885
$
154,306
$
161,354
$
58,516
$
857,061
(1)
At December 31, 2019 and 2018, $5.1 billion and $4.3 billion of these loan commitments are held in the form of a security.
(2)
The notional amounts of SBLCs and financial guarantees classified as investment grade and non-investment grade based on the credit quality of the underlying reference name within the instrument were $27.9 billion and $8.6 billion at December 31, 2019, and $28.3 billion and $7.1 billion at December 31, 2018. Amounts in the table include consumer SBLCs of $413 million and $372 million at December 31, 2019 and 2018.
(3)
At December 31, 2019 and 2018, included are letters of credit of $1.4 billion and $422 million related to certain liquidity commitments of VIEs. For more information, see Note 7 - Securitizations and Other Variable Interest Entities.
(4)
Includes business card unused lines of credit.
Other Commitments
At December 31, 2019 and 2018, the Corporation had commitments to purchase loans (e.g., residential mortgage and commercial real estate) of $86 million and $329 million, which upon settlement will be included in loans or LHFS, and commitments to purchase commercial loans of $1.1 billion and $463 million, which upon settlement will be included in trading account assets.
At December 31, 2019 and 2018, the Corporation had commitments to purchase commodities, primarily liquefied natural gas, of $830 million and $1.3 billion, which upon settlement will be included in trading account assets.
At December 31, 2019 and 2018, the Corporation had commitments to enter into resale and forward-dated resale and securities borrowing agreements of $97.2 billion and $59.7 billion, and commitments to enter into forward-dated repurchase and securities lending agreements of $24.9 billion and $21.2 billion. These commitments expire primarily within the next 12 months.
At December 31, 2019 and 2018, the Corporation had a commitment to originate or purchase up to $3.3 billion and $3.0 billion on a rolling 12-month basis, of auto loans and leases from a strategic partner. This commitment extends through November 2022 and can be terminated with 12 months prior notice.
Other Guarantees
Bank-owned Life Insurance Book Value Protection
The Corporation sells products that offer book value protection to insurance carriers who offer group life insurance policies to corporations, primarily banks. At December 31, 2019 and 2018, the notional amount of these guarantees totaled $7.3 billion and
$9.8 billion. At December 31, 2019 and 2018, the Corporation’s maximum exposure related to these guarantees totaled $1.1 billion and $1.5 billion, with estimated maturity dates between 2033 and 2039.
Indemnifications
In the ordinary course of business, the Corporation enters into various agreements that contain indemnifications, such as tax indemnifications, whereupon payment may become due if certain external events occur, such as a change in tax law. The indemnification clauses are often standard contractual terms and were entered into in the normal course of business based on an assessment that the risk of loss would be remote. These agreements typically contain an early termination clause that permits the Corporation to exit the agreement upon these events. The maximum potential future payment under indemnification agreements is difficult to assess for several reasons, including the occurrence of an external event, the inability to predict future changes in tax and other laws, the difficulty in determining how such laws would apply to parties in contracts, the absence of exposure limits contained in standard contract language and the timing of any early termination clauses. Historically, any payments made under these guarantees have been de minimis. The Corporation has assessed the probability of making such payments in the future as remote.
Merchant Services
In accordance with credit and debit card association rules, the Corporation sponsors merchant processing servicers that process credit and debit card transactions on behalf of various merchants. If a merchant processor fails to meet its obligation regarding
Bank of America 130
disputed transactions, then the Corporation could be held liable. In 2019 and 2018, the sponsored entities processed $916.6 billion and $874.3 billion of transactions and recorded losses of $24 million and $31 million.
At December 31, 2019 and 2018, the maximum potential exposure for sponsored transactions totaled $384.2 billion and $348.1 billion. However, the Corporation believes that the maximum potential exposure is not representative of the actual potential loss exposure and does not expect to make material payments in connection with these guarantees.
A significant portion of the Corporation's merchant processing activity is performed by a joint venture, formed in 2009, in which the Corporation holds a 49 percent ownership interest. The carrying value of the Corporation’s investment was $640 million and $2.8 billion at December 31, 2019 and 2018. The joint venture is accounted for as an equity method investment and reported in All Other. On July 29, 2019, the Corporation gave notice to the joint venture partner of the termination of the joint venture upon the conclusion of its current term in June 2020. As a result, the Corporation incurred a non-cash, pretax impairment charge in 2019 of $2.1 billion, included in other general operating expense.
Exchange and Clearing House Member Guarantees
The Corporation is a member of various securities and derivative exchanges and clearinghouses, both in the U.S. and other countries. As a member, the Corporation 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. The Corporation’s potential obligations may be limited to its membership interests in such exchanges and clearinghouses, to the amount (or multiple) of the Corporation’s contribution to the guarantee fund or, in limited instances, to the full pro-rata share of the residual losses after applying the guarantee fund. The Corporation’s maximum potential exposure under these membership agreements is difficult to estimate; however, the Corporation has assessed the probability of making any such payments as remote.
Prime Brokerage and Securities Clearing Services
In connection with its prime brokerage and clearing businesses, the Corporation performs securities clearance and settlement services with other brokerage firms and clearinghouses on behalf of its clients. Under these arrangements, the Corporation stands ready to meet the obligations of its clients with respect to securities transactions. The Corporation’s obligations in this respect are secured by the assets in the clients’ accounts and the accounts of their customers as well as by any proceeds received from the transactions cleared and settled by the Corporation on behalf of clients or their customers. The Corporation’s maximum potential exposure under these arrangements is difficult to estimate; however, the potential for the Corporation to incur material losses pursuant to these arrangements is remote.
Other Guarantees
The Corporation has entered into additional guarantee agreements and commitments, including sold risk participation swaps, liquidity facilities, lease-end obligation agreements, partial credit guarantees on certain leases, real estate joint venture guarantees, divested business commitments and sold put options that require gross settlement. The maximum potential future payments under these agreements are approximately $8.7 billion and $5.9 billion at December 31, 2019 and 2018. The estimated maturity dates of these obligations extend up to 2049. The Corporation has made
no material payments under these guarantees. For more information on maximum potential future payments under VIE-related liquidity commitments, see Note 7 - Securitizations and Other Variable Interest Entities.
During 2019, the Corporation recognized a loss of $210 million in other income under its indemnity obligation in connection with the 2017 sale of its non-U.S. consumer credit card business (payment protection insurance).
In the normal course of business, the Corporation periodically guarantees the obligations of its affiliates in a variety of transactions including ISDA-related transactions and non-ISDA related transactions such as commodities trading, repurchase agreements, prime brokerage agreements and other transactions.
Guarantees of Certain Long-term Debt
The Corporation, as the parent company, fully and unconditionally guarantees the securities issued by BofA Finance LLC, a 100 percent owned finance subsidiary of the Corporation, and effectively provides for the full and unconditional guarantee of trust securities issued by certain statutory trust companies that are 100 percent owned finance subsidiaries of the Corporation.
Representations and Warranties Obligations and Corporate Guarantees
The Corporation securitizes first-lien residential mortgage loans generally in the form of RMBS guaranteed by the GSEs or by GNMA in the case of FHA-insured, VA-guaranteed and Rural Housing Service-guaranteed mortgage loans, and sells pools of first-lien residential mortgage loans in the form of whole loans. In addition, in prior years, legacy companies and certain subsidiaries sold pools of first-lien residential mortgage loans and home equity loans as private-label securitizations or in the form of whole loans. In connection with these transactions, the Corporation or certain of its subsidiaries or legacy companies make and have made various representations and warranties. Breaches of these representations and warranties have resulted in and may continue to result in the requirement to repurchase mortgage loans or to otherwise make whole or provide indemnification or other remedies to sponsors, investors, securitization trusts, guarantors, insurers or other parties (collectively, repurchases).
Unresolved Repurchase Claims
Unresolved representations and warranties repurchase claims represent the notional amount of repurchase claims made by counterparties, typically the outstanding principal balance or the unpaid principal balance at the time of default. In the case of first-lien mortgages, the claim amount is often significantly greater than the expected loss amount due to the benefit of collateral and, in some cases, mortgage insurance or mortgage guarantee payments.
The notional amount of unresolved repurchase claims at December 31, 2019 and 2018 was $10.7 billion and $14.4 billion. These balances included $3.7 billion and $6.2 billion at December 31, 2019 and 2018 of claims related to loans in specific private-label securitization groups or tranches where the Corporation owns substantially all of the outstanding securities or will otherwise realize the benefit of any repurchase claims paid. The balance for 2019 also includes $1.6 billion of repurchase claims related to a single monoline insurer and is the subject of litigation.
During 2019, the Corporation received $461 million in new repurchase claims that were not time-barred. During 2019, $4.2 billion in claims were resolved, including $2.1 billion of claims that were deemed time-barred.
131 Bank of America
Reserve and Related Provision
The reserve for representations and warranties obligations and corporate guarantees was $1.8 billion and $2.0 billion at December 31, 2019 and 2018 and is included in accrued expenses and other liabilities on the Consolidated Balance Sheet and the related provision is included in other income in the Consolidated Statement of Income. The representations and warranties reserve represents the Corporation’s best estimate of probable incurred losses, is based on our experience in previous negotiations, and is subject to judgment, a variety of assumptions, and known or unknown uncertainties. Future representations and warranties losses may occur in excess of the amounts recorded for these exposures; however, the Corporation does not expect such amounts to be material to the Corporation's financial condition and liquidity. See Litigation and Regulatory Matters in this Note below for the Corporation's combined range of possible loss in excess of the reserve for representations and warranties, and the accrued liability for litigation.
Litigation and Regulatory Matters
In the ordinary course of business, the Corporation and its subsidiaries are routinely defendants in or parties to many pending and threatened legal, regulatory and governmental actions and proceedings. In view of the inherent difficulty of predicting the outcome of such matters, particularly where the claimants seek very large or indeterminate damages or where the matters present novel legal theories or involve a large number of parties, the Corporation generally cannot predict the eventual outcome of the pending matters, timing of the ultimate resolution of these matters, or eventual loss, fines or penalties related to each pending matter.
In accordance with applicable accounting guidance, the Corporation establishes an accrued liability when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. As a matter develops, the Corporation, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. Once the loss contingency is deemed to be both probable and estimable, the Corporation will establish an accrued liability and record a corresponding amount of litigation-related expense. The Corporation continues to monitor the matter for further developments that could affect the amount of the accrued liability that has been previously established. Excluding expenses of internal and external legal service providers, litigation-related expense of $681 million and $469 million was recognized in 2019 and 2018.
For a limited number of the matters disclosed in this Note for which a loss, whether in excess of a related accrued liability or where there is no accrued liability, is reasonably possible in future periods, the Corporation is able to estimate a range of possible loss. In determining whether it is possible to estimate a range of possible loss, the Corporation reviews and evaluates its matters on an ongoing basis, in conjunction with any outside counsel handling the matter, in light of potentially relevant factual and legal developments. With respect to the matters disclosed in this Note, in cases in which the Corporation possesses sufficient appropriate information to estimate a range of possible loss, that estimate is aggregated and disclosed below. There may be other disclosed matters for which a loss is probable or reasonably possible but such an estimate of the range of possible loss may not be possible. For such matters disclosed in this Note, where an estimate of the
range of possible loss is possible, as well as for representations and warranties exposures, management currently estimates the aggregate range of reasonably possible loss for these exposures is $0 to $1.6 billion in excess of the accrued liability, if any.
The estimated range of possible loss, as well as the Corporation's accrued liability, is based upon currently available information and is subject to significant judgment, a variety of assumptions and known and unknown uncertainties. The matters underlying the estimated range of possible loss and liability accrual are unpredictable and will change from time to time, and actual losses may vary significantly from the current estimate and accrual. The estimated range of possible loss does not represent the Corporation’s maximum loss exposure.
Information is provided below regarding the nature of the litigation and associated claimed damages. Based on current knowledge, and taking into account accrued liabilities, management does not believe that loss contingencies arising from pending matters, including the matters described herein, will have a material adverse effect on the consolidated financial condition or liquidity of the Corporation. However, in light of the significant judgment, variety of assumptions and uncertainties involved in these matters, some of which are beyond the Corporation’s control, and the very large or indeterminate damages sought in some of these matters, an adverse outcome in one or more of these matters could be material to the Corporation’s business or results of operations for any particular reporting period, or cause significant reputational harm.
Ambac Bond Insurance Litigation
Ambac Assurance Corporation and the Segregated Account of Ambac Assurance Corporation (together, Ambac) have filed four separate lawsuits against the Corporation and its subsidiaries relating to bond insurance policies Ambac provided on certain securitized pools of HELOCs, first-lien subprime home equity loans, fixed-rate second-lien mortgage loans and negative amortization pay option adjustable-rate mortgage loans. Ambac alleges that they have paid or will pay claims as a result of defaults in the underlying loans and asserts that the defendants misrepresented the characteristics of the underlying loans and/or breached certain contractual representations and warranties regarding the underwriting and servicing of the loans. In those actions where the Corporation is named as a defendant, Ambac contends the Corporation is liable on various successor and vicarious liability theories. These actions are at various procedural stages with material developments provided below.
Ambac v. Countrywide I
The Corporation, Countrywide and other Countrywide entities are named as defendants in an action filed on September 28, 2010 in New York Supreme Court. Ambac asserts claims for fraudulent inducement as well as breach of contract and seeks damages in excess of $2.2 billion, plus punitive damages.
On May 16, 2017, the First Department issued its decisions on the parties’ cross-appeals of the trial court’s October 22, 2015 summary judgment rulings. Ambac appealed the First Department’s rulings requiring Ambac to prove all of the elements of its fraudulent inducement claim, including justifiable reliance and loss causation; restricting Ambac’s sole remedy for its breach of contract claims to the repurchase protocol of cure, repurchase or substitution of any materially defective loan; and dismissing Ambac’s claim for reimbursements of attorneys’ fees. On June 27, 2018, the New York Court of Appeals affirmed the First Department rulings that Ambac appealed.
Bank of America 132
Ambac v. Countrywide II
On December 30, 2014, Ambac filed a complaint in New York Supreme Court against the same defendants, claiming fraudulent inducement against Countrywide, and successor and vicarious liability against the Corporation. Ambac seeks damages in excess of $600 million, plus punitive damages. On December 19, 2016, the Court granted in part and denied in part Countrywide’s motion to dismiss the complaint.
Ambac v. Countrywide IV
On July 21, 2015, Ambac filed an action in New York Supreme Court against Countrywide asserting the same claims for fraudulent inducement that Ambac asserted in the now-dismissed Ambac v. Countrywide III. The complaint seeks damages in excess of $350 million, plus punitive damages.
Ambac v. First Franklin
On April 16, 2012, Ambac filed an action against BANA, First Franklin and various Merrill Lynch entities, including Merrill Lynch, Pierce, Fenner & Smith Incorporated, in New York Supreme Court relating to guaranty insurance Ambac provided on a First Franklin securitization sponsored by Merrill Lynch. The complaint alleges fraudulent inducement and breach of contract, including breach of contract claims against BANA based upon its servicing of the loans in the securitization. Ambac seeks as damages hundreds of millions of dollars that Ambac alleges it has paid or will pay in claims.
Deposit Insurance Assessment
On January 9, 2017, the FDIC filed suit against BANA in the U.S. District Court for the District of Columbia alleging failure to pay a December 15, 2016 invoice for additional deposit insurance assessments and interest in the amount of $542 million for the quarters ending June 30, 2013 through December 31, 2014. On April 7, 2017, the FDIC amended its complaint to add a claim for additional deposit insurance and interest in the amount of $583 million for the quarters ending March 31, 2012 through March 31, 2013. The FDIC asserts these claims based on BANA’s alleged underreporting of counterparty exposures that resulted in underpayment of assessments for those quarters and its Enforcement Section is also conducting a parallel investigation related to the same alleged reporting error. BANA disagrees with the FDIC’s interpretation of the regulations as they existed during the relevant time period and is defending itself against the FDIC’s claims. Pending final resolution, BANA has pledged security satisfactory to the FDIC related to the disputed additional assessment amounts.
On March 27, 2018, the U.S. District Court for the District of Columbia denied BANA’s partial motion to dismiss certain of the FDIC’s claims.
Interchange Litigation
In 2005, a group of merchants filed a series of putative class actions and individual actions directed at interchange fees associated with Visa and MasterCard payment card transactions. These actions, which were consolidated in the U.S. District Court for the Eastern District of New York under the caption In re Payment Card Interchange Fee and Merchant Discount Anti-Trust Litigation, named Visa, MasterCard, the Corporation, BANA and other banks as defendants. Plaintiffs alleged antitrust claims and sought compensatory and treble damages as well as injunctive relief.
In 2018, defendants reached a settlement of the putative Rule 23(b)(3) damages class. Defendants agreed to pay an additional amount to participating class members by contribution to the escrow fund established as part of the settlement previously rejected by the U.S. Court of Appeals for the Second Circuit. The
Corporation’s additional contribution was not material. The District Court granted final approval of the settlement in December 2019. Beginning in January 2020, a number of class members who objected to the settlement appealed to the U.S. Court of Appeals for the Second Circuit.
LIBOR, Other Reference Rates, Foreign Exchange (FX) and Bond Trading Matters
Government authorities in the U.S. and various international jurisdictions continue to conduct investigations of, to make inquiries of, and to pursue proceedings against, the Corporation and its subsidiaries regarding FX and other reference rates as well as government, sovereign, supranational and agency bonds in connection with conduct and systems and controls. The Corporation is cooperating with these inquiries and investigations, and responding to the proceedings.
LIBOR
The Corporation, BANA and certain Merrill Lynch entities have been named as defendants along with most of the other London Interbank Offered Rate (LIBOR) panel banks in a number of individual and putative class actions by persons alleging they sustained losses on U.S. dollar LIBOR-based financial instruments as a result of collusion or manipulation by defendants regarding the setting of U.S. dollar LIBOR. Plaintiffs assert a variety of claims, including antitrust, Commodity Exchange Act, Racketeer Influenced and Corrupt Organizations (RICO), Securities Exchange Act of 1934, common law fraud and breach of contract claims, and seek compensatory, treble and punitive damages, and injunctive relief. All cases naming the Corporation and its affiliates relating to U.S. dollar LIBOR are pending in the U.S. District Court for the Southern District of New York.
The District Court has dismissed all RICO claims, and dismissed all manipulation claims based on alleged trader conduct against Bank of America entities. The District Court has also substantially limited the scope of antitrust, Commodity Exchange Act and various other claims, including by dismissing in their entirety certain individual and putative class plaintiffs’ antitrust claims for lack of standing and/or personal jurisdiction. Plaintiffs whose antitrust claims were dismissed by the District Court are pursuing appeals in the Second Circuit. Certain individual and putative class actions remain pending in the District Court against the Corporation, BANA and certain Merrill Lynch entities.
On February 28, 2018, the District Court denied certification of proposed classes of lending institutions and persons that transacted in eurodollar futures, and the U.S. Court of Appeals for the Second Circuit subsequently denied petitions filed by those plaintiffs for interlocutory appeals of those rulings. Also on February 28, 2018, the District Court granted certification of a class of persons that purchased OTC swaps and notes that referenced U.S. dollar LIBOR from one of the U.S. dollar LIBOR panel banks, limited to claims under Section 1 of the Sherman Act. The U.S. Court of Appeals for the Second Circuit subsequently denied a petition filed by the defendants for interlocutory appeal of that ruling.
Mortgage Appraisal Litigation
The Corporation, Countrywide and certain affiliates are named as defendants in two consolidated putative class action lawsuits filed in the U.S. District Court for the Central District of California (Waldrup and Williams, et al.). Plaintiffs allege that Countrywide and a former Countrywide subsidiary, LandSafe Appraisal Services, Inc., arranged for and completed appraisals that were not in compliance with applicable laws and appraisal standards. Plaintiffs assert a RICO claim and seek, among other forms of relief, compensatory and treble damages. On February 8, 2018,
133 Bank of America
the District Court granted plaintiffs’ motion for class certification. On May 22, 2018, the U.S. Court of Appeals for the Ninth Circuit denied defendants’ petition for permission to file an interlocutory appeal of the District Court’s ruling granting class certification.
On January 21, 2020, the parties agreed to resolve the litigation for an amount that is not material to the Corporation, and which was fully accrued as of December 31, 2019. The agreement is subject to court approval.
U.S. Bank - Harborview and SURF/OWNIT Repurchase Litigation
Beginning in 2011, U.S. Bank, National Association (U.S. Bank), as trustee for the HarborView Mortgage Loan Trust 2005-10 and various SURF/OWNIT RMBS trusts filed complaints against the Corporation, Countrywide entities, Merrill Lynch entities and other affiliates in New York Supreme Court alleging breaches of representations and warranties. The defendants and certain certificate-holders in the trusts agreed to settle the respective matters in amounts not material to the Corporation, subject to acceptance by U.S. Bank. The litigations have been stayed pending finalization of the settlements.
NOTE 14 Shareholders’ Equity
Common Stock
Declared Quarterly Cash Dividends on Common Stock (1)
Declaration Date
Record Date
Payment Date
Dividend Per Share
January 29, 2020
March 6, 2020
March 27, 2020
$
0.18
October 22, 2019
December 6, 2019
December 27, 2019
0.18
July 25, 2019
September 6, 2019
September 27, 2019
0.18
April 24, 2019
June 7, 2019
June 28, 2019
0.15
January 30, 2019
March 1, 2019
March 29, 2019
0.15
(1)
In 2019, and through February 19, 2020.
The cash dividends paid per share of common stock were $0.66, $0.54 and $0.39 for 2019, 2018 and 2017, respectively.
The following table summarizes common stock repurchases during 2019, 2018 and 2017.
Common Stock Repurchase Summary
(in millions)
Total share repurchases, including CCAR capital plan repurchases
Purchase price of shares repurchased and retired
CCAR capital plan repurchases
$
25,644
$
16,754
$
9,347
Other authorized repurchases
2,500
3,340
3,467
Total shares repurchased
$
28,144
$
20,094
$
12,814
On June 28, 2018, following the non-objection of the Board of Governors of the Federal Reserve System (Federal Reserve) to the Corporation’s 2018 Comprehensive Capital Analysis and Review (CCAR) capital plan, the Corporation’s Board of Directors (Board) authorized the repurchase of approximately $20.6 billion in common stock from July 1, 2018 through June 30, 2019, which included approximately $600 million in repurchases to offset shares awarded under equity-based compensation plans during the same period. On February 7, 2019, following approval by the Federal Reserve, the Board authorized the repurchase of an additional $2.5 billion of common stock by June 30, 2019.
On June 27, 2019, following the Federal Reserve's non-objection to the Corporation's 2019 CCAR capital plan, the Board authorized the repurchase of approximately $30.9 billion in
common stock from July 1, 2019 through June 30, 2020, which includes approximately $900 million in repurchases to offset shares awarded under equity-based compensation plans during the same period.
During 2019, the Corporation repurchased 956 million shares of common stock in connection with the Board's 2018 and 2019 repurchase authorizations, which reduced shareholders’ equity by $28.1 billion.
In connection with employee stock plans, in 2019, the Corporation issued 91 million shares of its common stock and, to satisfy tax withholding obligations, repurchased 35 million shares of its common stock. At December 31, 2019, the Corporation had reserved 579 million unissued shares of common stock for future issuances under employee stock plans, convertible notes and preferred stock.
Preferred Stock
The cash dividends declared on preferred stock were $1.4 billion, $1.5 billion and $1.6 billion for 2019, 2018 and 2017, respectively.
On June 20, 2019, the Corporation issued 40,000 shares of 5.125% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series JJ for $1.0 billion. On June 25, 2019, the Corporation issued 55,900 shares of 5.375% Non-Cumulative Preferred Stock, Series KK for $1.4 billion. On September 17, 2019, the Corporation issued 52,400 shares of 5.000% Non-Cumulative Preferred Stock, Series LL for $1.3 billion. Additionally, on January 24, 2020, the Corporation issued 44,000 shares of 4.300% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series MM for $1.1 billion.
In 2019, the Corporation fully redeemed Series V and Series W preferred stock for $2.6 billion. Additionally, on January 27, 2020, the Corporation fully redeemed Series Y preferred stock for $1.1 billion.
All series of preferred stock in the Preferred Stock Summary table have a par value of $0.01 per share, are not subject to the operation of a sinking fund, have no participation rights, and with the exception of the Series L Preferred Stock, are not convertible. The holders of the Series B Preferred Stock and Series 1 through 5 Preferred Stock have general voting rights and vote together with the common stock. The holders of the other series included in the table have no general voting rights. All outstanding series of preferred stock of the Corporation have preference over the Corporation’s common stock with respect to the payment of dividends and distribution of the Corporation’s assets in the event of a liquidation or dissolution. With the exception of the Series B, F, G and T Preferred Stock, if any dividend payable on these series is in arrears for three or more semi-annual or six or more quarterly dividend periods, as applicable (whether consecutive or not), the holders of these series and any other class or series of preferred stock ranking equally as to payment of dividends and upon which equivalent voting rights have been conferred and are exercisable (voting as a single class) will be entitled to vote for the election of two additional directors. These voting rights terminate when the Corporation has paid in full dividends on these series for at least two semi-annual or four quarterly dividend periods, as applicable, following the dividend arrearage.
The 7.25% Non-Cumulative Perpetual Convertible Preferred Stock, Series L (Series L Preferred Stock) does not have early redemption/call rights. Each share of the Series L Preferred Stock may be converted at any time, at the option of the holder, into 20 shares of the Corporation’s common stock plus cash in lieu of fractional shares. The Corporation may cause some or all of the Series L Preferred Stock, at its option, at any time or from time to time, to be converted into shares of common stock at the then-applicable conversion rate if, for 20 trading days during any period
Bank of America 134
of 30 consecutive trading days, the closing price of common stock exceeds 130 percent of the then-applicable conversion price of the Series L Preferred Stock. If a conversion of Series L Preferred Stock occurs at the option of the holder, subsequent to a dividend
record date but prior to the dividend payment date, the Corporation will still pay any accrued dividends payable.
The table below presents a summary of perpetual preferred stock outstanding at December 31, 2019.
Preferred Stock Summary
(Dollars in millions, except as noted)
Series
Description
Initial
Issuance
Date
Total
Shares
Outstanding
Liquidation
Preference
per Share
(in dollars)
Carrying
Value
Per Annum
Dividend Rate
Dividend per Share
(in dollars)
Annual Dividend
Redemption Period (1)
Series B
7% Cumulative Redeemable
June
7,110
$
$
7.00
%
$
7.00
$
-
n/a
Series E (2)
Floating Rate Non-Cumulative
November
12,691
25,000
3-mo. LIBOR + 35 bps (3)
1.01
On or after
November 15, 2011
Series F
Floating Rate Non-Cumulative
March
1,409
100,000
3-mo. LIBOR + 40 bps (3)
4,055.56
On or after
March 15, 2012
Series G
Adjustable Rate Non-Cumulative
March
4,926
100,000
3-mo. LIBOR + 40 bps (3)
4,055.56
On or after
March 15, 2012
Series L
7.25% Non-Cumulative Perpetual Convertible
January
3,080,182
1,000
3,080
7.25
%
72.50
n/a
Series T
6% Non-cumulative
September
100,000
6.00
%
6,000.00
After May 7, 2019
Series U (4)
Fixed-to-Floating Rate Non-Cumulative
May
40,000
25,000
1,000
5.2% to, but excluding, 6/1/23; 3-mo. LIBOR + 313.5 bps thereafter
52.00
On or after
June 1, 2023
Series X (4)
Fixed-to-Floating Rate Non-Cumulative
September 2014
80,000
25,000
2,000
6.250% to, but excluding, 9/5/24; 3-mo. LIBOR + 370.5 bps thereafter
62.50
On or after
September 5, 2024
Series Y (2)
6.500% Non-Cumulative
January 2015
44,000
25,000
1,100
6.500
%
1.63
On or after
January 27, 2020
Series Z (4)
Fixed-to-Floating Rate Non-Cumulative
October 2014
56,000
25,000
1,400
6.500% to, but excluding, 10/23/24; 3-mo. LIBOR + 417.4 bps thereafter
65.00
On or after
October 23, 2024
Series AA (4)
Fixed-to-Floating Rate Non-Cumulative
March 2015
76,000
25,000
1,900
6.100% to, but excluding, 3/17/25; 3-mo. LIBOR + 389.8 bps thereafter
61.00
On or after
March 17, 2025
Series CC (2)
6.200% Non-Cumulative
January 2016
44,000
25,000
1,100
6.200
%
1.55
On or after
January 29, 2021
Series DD (4)
Fixed-to-Floating Rate Non-Cumulative
March 2016
40,000
25,000
1,000
6.300% to, but excluding, 3/10/26; 3-mo. LIBOR + 455.3 bps thereafter
63.00
On or after
March 10, 2026
Series EE (2)
6.000% Non-Cumulative
April 2016
36,000
25,000
6.000
%
1.50
On or after
April 25, 2021
Series FF (4)
Fixed-to-Floating Rate Non-Cumulative
March 2018
94,000
25,000
2,350
5.875% to, but excluding, 3/15/28; 3-mo. LIBOR + 293.1 bps thereafter
58.75
On or after
March 15, 2028
Series GG (2)
6.000% Non-Cumulative
May
54,000
25,000
1,350
6.000
%
1.50
On or after
May 16, 2023
Series HH (2)
5.875% Non-Cumulative
July
34,160
25,000
5.875
%
1.47
On or after
July 24, 2023
Series JJ (4)
Fixed-to-Floating Rate Non-Cumulative
June
40,000
25,000
1,000
5.125% to, but excluding, 6/20/24; 3-mo. LIBOR + 329.2 bps thereafter
25.63
On or after
June 20, 2024
Series KK (2)
5.375% Non-Cumulative
June
55,900
25,000
1,398
5.375
%
0.67
On or after
June 25, 2024
Series LL (2)
5.000% Non-Cumulative
September
52,400
25,000
1,310
5.000
%
0.31
On or after
September 17, 2024
Series 1 (5)
Floating Rate Non-Cumulative
November
3,275
30,000
3-mo. LIBOR + 75 bps (6)
0.82
On or after
November 28, 2009
Series 2 (5)
Floating Rate Non-Cumulative
March
9,967
30,000
3-mo. LIBOR + 65 bps (6)
0.81
On or after
November 28, 2009
Series 4 (5)
Floating Rate Non-Cumulative
November
7,010
30,000
3-mo. LIBOR + 75 bps (3)
1.01
On or after
November 28, 2010
Series 5 (5)
Floating Rate Non-Cumulative
March
14,056
30,000
3-mo. LIBOR + 50 bps (3)
1.01
On or after
May 21, 2012
Issuance costs and certain adjustments
(357
)
Total
3,887,440
$
23,401
(1)
The Corporation may redeem series of preferred stock on or after the redemption date, in whole or in part, at its option, at the liquidation preference plus declared and unpaid dividends. Series B and Series L Preferred Stock do not have early redemption/call rights.
(2)
Ownership is held in the form of depositary shares, each representing a 1/1,000th interest in a share of preferred stock, paying a quarterly cash dividend, if and when declared.
(3)
Subject to 4.00% minimum rate per annum.
(4)
Ownership is held in the form of depositary shares, each representing a 1/25th interest in a share of preferred stock, paying a semi-annual cash dividend, if and when declared, until the first redemption date at which time, it adjusts to a quarterly cash dividend, if and when declared, thereafter.
(5)
Ownership is held in the form of depositary shares, each representing a 1/1,200th interest in a share of preferred stock, paying a quarterly cash dividend, if and when declared.
(6)
Subject to 3.00% minimum rate per annum.
n/a = not applicable
135 Bank of America
NOTE 15 Accumulated Other Comprehensive Income (Loss)
The table below presents the changes in accumulated OCI after-tax for 2019, 2018 and 2017.
(Dollars in millions)
Debt Securities
Debit Valuation Adjustments
Derivatives
Employee
Benefit Plans
Foreign
Currency
Total
Balance, December 31, 2016
$
(1,267
)
$
(767
)
$
(895
)
$
(3,480
)
$
(879
)
$
(7,288
)
Net change
(293
)
Balance, December 31, 2017
$
(1,206
)
$
(1,060
)
$
(831
)
$
(3,192
)
$
(793
)
$
(7,082
)
Accounting change related to certain tax effects
(393
)
(220
)
(189
)
(707
)
(1,270
)
Cumulative adjustment for hedge accounting change
-
-
-
-
Net change
(3,953
)
(53
)
(405
)
(254
)
(3,916
)
Balance, December 31, 2018
$
(5,552
)
$
(531
)
$
(1,016
)
$
(4,304
)
$
(808
)
$
(12,211
)
Net change
5,875
(963
)
(86
)
5,578
Balance, December 31, 2019
$
$
(1,494
)
$
(400
)
$
(4,168
)
$
(894
)
$
(6,633
)
The table below presents the net change in fair value recorded in accumulated OCI, net realized gains and losses reclassified into earnings and other changes for each component of OCI pre- and after-tax for 2019, 2018 and 2017.
Pretax
Tax
effect
After-
tax
Pretax
Tax
effect
After-
tax
Pretax
Tax effect
After-
tax
(Dollars in millions)
Debt securities:
Net increase (decrease) in fair value
$
8,020
$
(2,000
)
$
6,020
$
(5,189
)
$
1,329
$
(3,860
)
$
$
$
Net realized (gains) reclassified into earnings (1)
(193
)
(145
)
(123
)
(93
)
(304
)
(193
)
Net change
7,827
(1,952
)
5,875
(5,312
)
1,359
(3,953
)
(64
)
Debit valuation adjustments:
Net increase (decrease) in fair value
(1,276
)
(987
)
(224
)
(490
)
(319
)
Net realized losses reclassified into earnings (1)
(5
)
(16
)
Net change
(1,258
)
(963
)
(229
)
(448
)
(293
)
Derivatives:
Net increase (decrease) in fair value
(156
)
(232
)
(158
)
(50
)
(49
)
Reclassifications into earnings:
Net interest income
(26
)
(40
)
(122
)
Compensation and benefits expense
-
(27
)
(20
)
(148
)
(92
)
Net realized losses reclassified into earnings
(26
)
(33
)
(66
)
Net change
(182
)
(94
)
(53
)
(65
)
Employee benefit plans:
Net increase (decrease) in fair value
(21
)
(703
)
(539
)
(55
)
Net actuarial losses and other reclassified into earnings (2)
(36
)
(46
)
(61
)
Settlements, curtailments and other
(1
)
(2
)
(1
)
Net change
(58
)
(521
)
(405
)
(117
)
Foreign currency:
Net (decrease) in fair value
(13
)
(52
)
(65
)
(8
)
(195
)
(203
)
(439
)
(9
)
Net realized (gains) losses reclassified into earnings (3)
(110
)
(21
)
(149
)
(51
)
(606
)
Net change
(123
)
(86
)
(157
)
(97
)
(254
)
(1,045
)
1,131
Total other comprehensive income (loss)
$
7,438
$
(1,860
)
$
5,578
$
(5,106
)
$
1,190
$
(3,916
)
$
(1,023
)
$
1,229
$
(1)
Reclassifications of pretax debt securities and DVA are recorded in other income in the Consolidated Statement of Income.
(2)
Reclassifications of pretax employee benefit plan costs are recorded in other general operating expense in the Consolidated Statement of Income.
(3)
Reclassifications of pretax debt securities, DVA and foreign currency (gains) losses are recorded in other income in the Consolidated Statement of Income.
Bank of America 136
NOTE 16 Earnings Per Common Share
The calculation of EPS and diluted EPS for 2019, 2018 and 2017 is presented below. For more information on the calculation of EPS, see Note 1 - Summary of Significant Accounting Principles.
(In millions, except per share information)
Earnings per common share
Net income
$
27,430
$
28,147
$
18,232
Preferred stock dividends
(1,432
)
(1,451
)
(1,614
)
Net income applicable to common shareholders
$
25,998
$
26,696
$
16,618
Average common shares issued and outstanding
9,390.5
10,096.5
10,195.6
Earnings per common share
$
2.77
$
2.64
$
1.63
Diluted earnings per common share
Net income applicable to common shareholders
$
25,998
$
26,696
$
16,618
Add preferred stock dividends due to assumed conversions (1)
-
-
Net income allocated to common shareholders
$
25,998
$
26,696
$
16,804
Average common shares issued and outstanding
9,390.5
10,096.5
10,195.6
Dilutive potential common shares (2)
52.4
140.4
582.8
Total diluted average common shares issued and outstanding
9,442.9
10,236.9
10,778.4
Diluted earnings per common share
$
2.75
$
2.61
$
1.56
(1)
Represents the Series T dividends under the "If-converted" method prior to conversion.
(2)
Includes incremental dilutive shares from RSUs, restricted stock and warrants.
For 2019, 2018 and 2017, 62 million average dilutive potential common shares associated with the Series L preferred stock were not included in the diluted share count because the result would have been antidilutive under the “if-converted” method. For 2018 and 2017, average options to purchase four million and 21 million shares of common stock were outstanding but not included in the computation of EPS because the result would have been antidilutive under the treasury stock method. For 2017, average warrants to purchase 122 million shares of common stock were outstanding but not included in the computation of EPS because the result would have been antidilutive under the treasury stock method. These warrants expired on October 29, 2018. For 2019, 2018 and 2017, average warrants to purchase three million, 136 million and 143 million shares of common stock, respectively, were included in the diluted EPS calculation under the treasury stock method. Substantially all of these warrants were exercised on or before their expiration date of January 16, 2019.
NOTE 17 Regulatory Requirements and Restrictions
The Federal Reserve, Office of the Comptroller of the Currency (OCC) and FDIC (collectively, U.S. banking regulators) jointly establish regulatory capital adequacy guidelines, including Basel 3, for U.S. banking organizations. As a financial holding company, the Corporation is subject to capital adequacy rules issued by the
Federal Reserve. The Corporation’s banking entity affiliates are subject to capital adequacy rules issued by the OCC.
The Corporation and its primary banking entity affiliate, BANA, are Advanced approaches institutions under Basel 3. As Advanced approaches institutions, the Corporation and its banking entity affiliates are required to report regulatory risk-based capital ratios and risk-weighted assets under both the Standardized and Advanced approaches. The approach that yields the lower ratio is used to assess capital adequacy, including under the Prompt Corrective Action (PCA) framework. At December 31, 2019 and 2018, Common equity tier 1 and Tier 1 capital ratios were lower under the Standardized approach whereas the Advanced approaches yielded a lower result for the Total capital ratio.
The Corporation is 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. The Corporation’s insured depository institution subsidiaries are required to maintain a minimum 6.0 percent SLR to be considered well capitalized under the PCA framework.
The following table presents capital ratios and related information in accordance with Basel 3 Standardized and Advanced approaches as measured at December 31, 2019 and 2018 for the Corporation and BANA.
137 Bank of America
Regulatory Capital under Basel 3
Bank of America Corporation
Bank of America, N.A.
Standardized Approach
Advanced Approaches
Regulatory Minimum (1)
Standardized Approach
Advanced Approaches
Regulatory Minimum (2)
(Dollars in millions, except as noted)
December 31, 2019
Risk-based capital metrics:
Common equity tier 1 capital
$
166,760
$
166,760
$
154,626
$
154,626
Tier 1 capital
188,492
188,492
154,626
154,626
Total capital (3)
221,230
213,098
166,567
158,665
Risk-weighted assets (in billions)
1,493
1,447
1,241
Common equity tier 1 capital ratio
11.2
%
11.5
%
9.5
%
12.5
%
15.6
%
7.0
%
Tier 1 capital ratio
12.6
13.0
11.0
12.5
15.6
8.5
Total capital ratio
14.8
14.7
13.0
13.4
16.0
10.5
Leverage-based metrics:
Adjusted quarterly average assets (in billions) (4)
$
2,374
$
2,374
$
1,780
$
1,780
Tier 1 leverage ratio
7.9
%
7.9
%
4.0
8.7
%
8.7
%
5.0
SLR leverage exposure (in billions)
$
2,946
$
2,177
SLR
6.4
%
5.0
7.1
%
6.0
December 31, 2018
Risk-based capital metrics:
Common equity tier 1 capital
$
167,272
$
167,272
$
149,824
$
149,824
Tier 1 capital
189,038
189,038
149,824
149,824
Total capital (3)
221,304
212,878
161,760
153,627
Risk-weighted assets (in billions)
1,437
1,409
1,195
Common equity tier 1 capital ratio
11.6
%
11.9
%
8.25
%
12.5
%
15.6
%
6.5
%
Tier 1 capital ratio
13.2
13.4
9.75
12.5
15.6
8.0
Total capital ratio
15.4
15.1
11.75
13.5
16.0
10.0
Leverage-based metrics:
Adjusted quarterly average assets (in billions) (4)
$
2,258
$
2,258
$
1,719
$
1,719
Tier 1 leverage ratio
8.4
%
8.4
%
4.0
8.7
%
8.7
%
5.0
SLR leverage exposure (in billions)
$
2,791
$
2,112
SLR
6.8
%
5.0
7.1
%
6.0
(1)
The capital conservation buffer and global systemically important bank surcharge were 2.5 percent at December 31, 2019 and 1.875 percent at December 31, 2018. The countercyclical capital buffer for both periods was zero. The SLR minimum includes a leverage buffer of 2.0 percent.
(2)
Risk-based capital regulatory minimums at December 31, 2019 are the minimum ratios under Basel 3 including a capital conservation buffer of 2.5 percent. The regulatory minimums for the leverage ratios as of both period ends and risk-based capital ratios as of December 31, 2018 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.
The capital adequacy rules issued by the U.S. banking regulators require institutions to meet the established minimums outlined in the table above. Failure to meet the minimum requirements can lead to certain mandatory and discretionary actions by regulators that could have a material adverse impact on the Corporation’s financial position. At December 31, 2019 and 2018, the Corporation and its banking entity affiliates were well capitalized.
Other Regulatory Matters
The Federal Reserve requires the Corporation’s bank subsidiaries to maintain reserve requirements based on a percentage of certain deposit liabilities. The average daily reserve balance requirements, in excess of vault cash, maintained by the Corporation with the Federal Reserve Bank were $14.6 billion and $11.4 billion for 2019 and 2018. At December 31, 2019 and 2018, the Corporation had cash and cash equivalents in the amount of $6.3 billion and $5.8 billion, and securities with a fair value of $14.7 billion and $16.6 billion that were segregated in compliance with securities regulations. Cash held on deposit with the Federal Reserve Bank to meet reserve requirements and cash and cash equivalents segregated in compliance with securities regulations are components of restricted cash. For more information, see Note 11 - Federal Funds Sold or Purchased, Securities Financing Agreements, Short-term Borrowings and Restricted Cash. In
addition, at December 31, 2019 and 2018, the Corporation had cash deposited with clearing organizations of $7.6 billion and $8.1 billion primarily recorded in other assets on the Consolidated Balance Sheet.
Bank Subsidiary Distributions
The primary sources of funds for cash distributions by the Corporation to its shareholders are capital distributions received from its bank subsidiaries, BANA and Bank of America California, N.A. In 2019, the Corporation received dividends of $20.5 billion from BANA and $215 million from Bank of America California, N.A. In addition, BANA returned capital of $8.0 billion to the Corporation in 2019.
The amount of dividends that a subsidiary bank may declare in a calendar year without OCC approval is the subsidiary bank’s net profits for that year combined with its retained net profits for the preceding two years. Retained net profits, as defined by the OCC, consist of net income less dividends declared during the period. In 2020, BANA can declare and pay dividends of approximately $9.4 billion to the Corporation plus an additional amount equal to its retained net profits for 2020 up to the date of any such dividend declaration. Bank of America California, N.A. can pay dividends of $94 million in 2020 plus an additional amount equal to its retained net profits for 2020 up to the date of any such dividend declaration.
Bank of America 138
NOTE 18 Employee Benefit Plans
Pension and Postretirement Plans
The Corporation sponsors a qualified noncontributory trusteed pension plan (Qualified Pension Plan), a number of noncontributory nonqualified pension plans, and postretirement health and life plans that cover eligible employees. Non-U.S. pension plans sponsored by the Corporation vary based on the country and local practices.
The Qualified Pension Plan has a balance guarantee feature for account balances with participant-selected investments, applied at the time a benefit payment is made from the plan that effectively provides principal protection for participant balances transferred and certain compensation credits. The Corporation is responsible for funding any shortfall on the guarantee feature.
Benefits earned under the Qualified Pension Plan have been frozen. Thereafter, the cash balance accounts continue to earn investment credits or interest credits in accordance with the terms of the plan document.
The Corporation has an annuity contract that guarantees the payment of benefits vested under a terminated U.S. pension plan (Other Pension Plan). The Corporation, under a supplemental agreement, may be responsible for, or benefit from actual experience and investment performance of the annuity assets. The Corporation made no contribution under this agreement in 2019 or 2018. Contributions may be required in the future under this agreement.
The Corporation’s noncontributory, nonqualified pension plans are unfunded and provide supplemental defined pension benefits to certain eligible employees.
In addition to retirement pension benefits, certain benefits-eligible employees may become eligible to continue participation as retirees in health care and/or life insurance plans sponsored by the Corporation. These plans are referred to as the Postretirement Health and Life Plans.
The Pension and Postretirement Plans table summarizes the changes in the fair value of plan assets, changes in the projected benefit obligation (PBO), the funded status of both the accumulated benefit obligation (ABO) and the PBO, and the weighted-average assumptions used to determine benefit obligations for the pension plans and postretirement plans at December 31, 2019 and 2018. The estimate of the Corporation’s PBO associated with these plans considers various actuarial assumptions, including assumptions for mortality rates and discount rates. The discount rate assumptions are derived from a cash flow matching technique that utilizes rates that are based on Aa-rated corporate bonds with cash flows that match estimated benefit payments of each of the plans. The decreases in the weighted-average discount rates in 2019 resulted in increases to the PBO of approximately $2.2 billion at December 31, 2019. The increases in the weighted-average discount rates in 2018 resulted in decreases to the PBO of approximately $1.3 billion at December 31, 2018. Significant gains and losses related to changes in the PBO for 2019 and 2018 primarily resulted from changes in the discount rate.
Pension and Postretirement Plans (1)
Qualified
Pension Plan
Non-U.S.
Pension Plans
Nonqualified and Other
Pension Plans
Postretirement
Health and Life Plans
(Dollars in millions)
Fair value, January 1
$
18,178
$
19,708
$
2,461
$
2,943
$
2,584
$
2,724
$
$
Actual return on plan assets
3,187
(550
)
(181
)
Company contributions
-
-
Plan participant contributions
-
-
-
-
Settlements and curtailments
-
-
(42
)
(107
)
-
-
-
-
Benefits paid
(1,090
)
(980
)
(108
)
(52
)
(237
)
(239
)
(185
)
(214
)
Federal subsidy on benefits paid
n/a
n/a
n/a
n/a
n/a
n/a
-
Foreign currency exchange rate changes
n/a
n/a
(165
)
n/a
n/a
n/a
n/a
Fair value, December 31
$
20,275
$
18,178
$
2,696
$
2,461
$
2,666
$
2,584
$
$
Change in projected benefit obligation
Projected benefit obligation, January 1
$
14,144
$
15,706
$
2,589
$
2,814
$
2,779
$
3,047
$
$
1,056
Service cost
-
-
Interest cost
Plan participant contributions
-
-
-
-
Plan amendments
-
-
-
-
-
-
Settlements and curtailments
-
-
(42
)
(107
)
-
-
-
-
Actuarial loss (gain)
1,714
(1,145
)
(29
)
(135
)
(73
)
Benefits paid
(1,090
)
(980
)
(108
)
(52
)
(237
)
(239
)
(185
)
(214
)
Federal subsidy on benefits paid
n/a
n/a
n/a
n/a
n/a
n/a
-
Foreign currency exchange rate changes
n/a
n/a
(135
)
n/a
n/a
(1
)
Projected benefit obligation, December 31
$
15,361
$
14,144
$
2,887
$
2,589
$
2,919
$
2,779
$
$
Amounts recognized on Consolidated Balance Sheet
Other assets
$
4,914
$
4,034
$
$
$
$
$
-
$
-
Accrued expenses and other liabilities
-
-
(555
)
(444
)
(986
)
(949
)
(790
)
(676
)
Net amount recognized, December 31
$
4,914
$
4,034
$
(191
)
$
(128
)
$
(253
)
$
(195
)
$
(790
)
$
(676
)
Funded status, December 31
Accumulated benefit obligation
$
15,361
$
14,144
$
2,841
$
2,542
$
2,919
$
2,778
n/a
n/a
Overfunded (unfunded) status of ABO
4,914
4,034
(145
)
(81
)
(253
)
(194
)
n/a
n/a
Provision for future salaries
-
-
-
n/a
n/a
Projected benefit obligation
15,361
14,144
2,887
2,589
2,919
2,779
$
$
Weighted-average assumptions, December 31
Discount rate
3.32
%
4.32
%
1.81
%
2.60
%
3.20
%
4.26
%
3.27
%
4.25
%
Rate of compensation increase
n/a
n/a
4.10
4.49
4.00
4.00
n/a
n/a
Interest-crediting rate
5.06
5.18
1.53
1.47
4.52
4.50
n/a
n/a
(1)
The measurement date for all of the above plans was December 31 of each year reported.
n/a = not applicable
139 Bank of America
The Corporation’s estimate of its contributions to be made to the Non-U.S. Pension Plans, Nonqualified and Other Pension Plans, and Postretirement Health and Life Plans in 2020 is $21 million, $92 million and $15 million, respectively. The Corporation does not expect to make a contribution to the Qualified Pension Plan in 2020. It is the policy of the Corporation to fund no less than the
minimum funding amount required by the Employee Retirement Income Security Act of 1974 (ERISA).
Pension Plans with ABO and PBO in excess of plan assets as of December 31, 2019 and 2018 are presented in the table below. For these plans, funding strategies vary due to legal requirements and local practices.
Plans with ABO and PBO in Excess of Plan Assets
Non-U.S.
Pension Plans
Nonqualified
and Other
Pension Plans
(Dollars in millions)
PBO
$
$
$
$
ABO
Fair value of plan assets
Components of Net Periodic Benefit Cost
Qualified Pension Plan
Non-U.S. Pension Plans
(Dollars in millions)
Components of net periodic benefit cost (income)
Service cost
$
-
$
-
$
-
$
$
$
Interest cost
Expected return on plan assets
(1,088
)
(1,136
)
(1,068
)
(99
)
(126
)
(136
)
Amortization of net actuarial loss
Other
-
-
-
(7
)
Net periodic benefit cost (income)
$
(360
)
$
(426
)
$
(308
)
$
(7
)
$
(20
)
$
(39
)
Weighted-average assumptions used to determine net cost for years ended December 31
Discount rate
4.32
%
3.68
%
4.16
%
2.60
%
2.39
%
2.56
%
Expected return on plan assets
6.00
6.00
6.00
4.13
4.37
4.73
Rate of compensation increase
n/a
n/a
n/a
4.49
4.31
4.51
Nonqualified and
Other Pension Plans
Postretirement Health
and Life Plans
(Dollars in millions)
Components of net periodic benefit cost (income)
Service cost
$
$
$
$
$
$
Interest cost
Expected return on plan assets
(95
)
(84
)
(95
)
(5
)
(6
)
-
Amortization of net actuarial loss (gain)
(24
)
(27
)
(21
)
Other
-
-
-
(2
)
(3
)
Net periodic benefit cost (income)
$
$
$
$
$
$
Weighted-average assumptions used to determine net cost for years ended December 31
Discount rate
4.26
%
3.58
%
4.01
%
4.25
%
3.58
%
3.99
%
Expected return on plan assets
3.73
3.19
3.50
2.00
2.00
n/a
Rate of compensation increase
4.00
4.00
4.00
n/a
n/a
n/a
n/a = not applicable
The asset valuation method used to calculate the expected return on plan assets component of net periodic benefit cost for the Qualified Pension Plan recognizes 60 percent of the prior year’s market gains or losses at the next measurement date with the remaining 40 percent spread equally over the subsequent four years.
Gains and losses for all benefit plans except postretirement health care are recognized in accordance with the standard amortization provisions of the applicable accounting guidance. Net periodic postretirement health and life expense was determined using the “projected unit credit” actuarial method. For the Postretirement Health and Life Plans, 50 percent of the unrecognized gain or loss at the beginning of the year (or at subsequent remeasurement) is recognized on a level basis during the year.
Assumed health care cost trend rates affect the postretirement benefit obligation and benefit cost reported for the Postretirement Health and Life Plans. The assumed health care cost trend rate used to measure the expected cost of benefits covered by the Postretirement Health and Life Plans is 6.50 percent for 2020, reducing in steps to 5.00 percent in 2026 and later years.
The Corporation’s net periodic benefit cost (income) recognized for the plans is sensitive to the discount rate and expected return on plan assets. For the Qualified Pension Plan, Non-U.S. Pension Plans, Nonqualified and Other Pension Plans, and Postretirement Health and Life Plans, a 25 bp decline in discount rates and expected return on assets would not have had a significant impact on the net periodic benefit cost for 2019.
Bank of America 140
Pretax Amounts included in Accumulated OCI and OCI
Qualified
Pension Plan
Non-U.S.
Pension Plans
Nonqualified
and Other
Pension Plans
Postretirement
Health and
Life Plans
Total
(Dollars in millions)
Net actuarial loss (gain)
$
3,865
$
4,386
$
$
$
1,008
$
$
$
(75
)
$
5,480
$
5,677
Prior service cost (credits)
-
-
-
-
(6
)
(9
)
Amounts recognized in accumulated OCI
$
3,865
$
4,386
$
$
$
1,008
$
$
$
(84
)
$
5,492
$
5,686
Current year actuarial loss (gain)
$
(385
)
$
$
$
$
$
(59
)
$
$
(73
)
$
(46
)
$
Amortization of actuarial gain (loss) and
prior service cost
(135
)
(147
)
(7
)
(11
)
(34
)
(43
)
(150
)
(171
)
Current year prior service cost (credit)
-
-
-
-
-
-
Amounts recognized in OCI
$
(520
)
$
$
$
$
$
(102
)
$
$
(43
)
$
(194
)
$
Plan Assets
The Qualified Pension Plan has been established as a retirement vehicle for participants, and trusts have been established to secure benefits promised under the Qualified Pension Plan. The Corporation’s policy is to invest the trust assets in a prudent manner for the exclusive purpose of providing benefits to participants and defraying reasonable expenses of administration. The Corporation’s investment strategy is designed to provide a total return that, over the long term, increases the ratio of assets to liabilities. The strategy attempts to maximize the investment return on assets at a level of risk deemed appropriate by the Corporation while complying with ERISA and any applicable regulations and laws. The investment strategy utilizes asset allocation as a principal determinant for establishing the risk/return profile of the assets. Asset allocation ranges are established, periodically reviewed and adjusted as funding levels and liability characteristics change. Active and passive investment managers are employed to help enhance the risk/return profile of the assets. An additional aspect of the investment strategy used to minimize risk (part of the asset allocation plan) includes matching the exposure of participant-selected investment measures.
The assets of the Non-U.S. Pension Plans are primarily attributable to a U.K. pension plan. This U.K. pension plan’s assets are invested prudently so that the benefits promised to members are provided with consideration given to the nature and the duration
of the plans' liabilities. The selected asset allocation strategy is designed to achieve a higher return than the lowest risk strategy.
The expected rate of return on plan assets assumption was developed through analysis of historical market returns, historical asset class volatility and correlations, current market conditions, anticipated future asset allocations, the funds’ past experience, and expectations on potential future market returns. The expected return on plan assets assumption is determined using the calculated market-related value for the Qualified Pension Plan and the Other Pension Plan and the fair value for the Non-U.S. Pension Plans and Postretirement Health and Life Plans. The expected return on plan assets assumption represents a long-term average view of the performance of the assets in the Qualified Pension Plan, the Non-U.S. Pension Plans, the Other Pension Plan, and Postretirement Health and Life Plans, a return that may or may not be achieved during any one calendar year. The Other Pension Plan is invested solely in an annuity contract which is primarily invested in fixed-income securities structured such that asset maturities match the duration of the plan’s obligations.
The target allocations for 2020 by asset category for the Qualified Pension Plan, Non-U.S. Pension Plans, and Nonqualified and Other Pension Plans are presented in the following table. Equity securities for the Qualified Pension Plan include common stock of the Corporation in the amounts of $315 million (1.55 percent of total plan assets) and $221 million (1.22 percent of total plan assets) at December 31, 2019 and 2018.
2020 Target Allocation
Percentage
Asset Category
Qualified
Pension Plan
Non-U.S.
Pension Plans
Nonqualified
and Other
Pension Plans
Equity securities
15 - 50%
5 - 30%
0 - 5%
Debt securities
45 - 80%
40 - 70%
95 - 100%
Real estate
0 - 10%
0 - 15%
0 - 5%
Other
0 - 5%
10 - 40%
0 - 5%
Fair Value Measurements
For more information on fair value measurements, including descriptions of Level 1, 2 and 3 of the fair value hierarchy and the valuation methods employed by the Corporation, see Note 1 - Summary of Significant Accounting Principles and Note 21 - Fair Value Measurements. Combined plan investment assets measured at fair value by level and in total at December 31, 2019 and 2018 are summarized in the Fair Value Measurements table.
141 Bank of America
Fair Value Measurements
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
(Dollars in millions)
December 31, 2019
December 31, 2018
Cash and short-term investments
Money market and interest-bearing cash
$
1,426
$
-
$
-
$
1,426
$
1,530
$
-
$
-
$
1,530
Cash and cash equivalent commingled/mutual funds
-
-
-
-
Fixed income
U.S. government and agency securities
4,403
5,301
3,637
4,451
Corporate debt securities
-
3,676
-
3,676
-
2,852
-
2,852
Asset-backed securities
-
2,684
-
2,684
-
2,119
-
2,119
Non-U.S. debt securities
1,015
-
1,763
-
1,500
Fixed income commingled/mutual funds
1,439
-
2,243
1,177
-
2,110
Equity
Common and preferred equity securities
4,655
-
-
4,655
4,414
-
-
4,414
Equity commingled/mutual funds
1,355
-
1,502
1,275
-
1,563
Public real estate investment trusts
-
-
-
-
Real estate
Private real estate
-
-
-
-
-
-
Real estate commingled/mutual funds
-
-
Limited partnerships
-
-
Other investments (1)
1,037
1,045
Total plan investment assets, at fair value
$
12,285
$
11,890
$
1,661
$
25,836
$
11,538
$
10,368
$
1,569
$
23,475
(1)
Other investments include commodity and balanced funds of $233 million and $305 million, insurance annuity contracts of $614 million and $562 million and other various investments of $190 million and $178 million at December 31, 2019 and 2018.
The Level 3 Fair Value Measurements table presents a reconciliation of all plan investment assets measured at fair value using significant unobservable inputs (Level 3) during 2019, 2018 and 2017.
Level 3 Fair Value Measurements
Balance
January 1
Actual Return on
Plan Assets Still
Held at the
Reporting Date
Purchases, Sales and Settlements
Balance
December 31
(Dollars in millions)
Fixed income
U.S. government and agency securities
$
$
-
$
(1
)
$
Real estate
Private real estate
-
(5
)
-
Real estate commingled/mutual funds
Limited partnerships
-
Other investments
Total
$
1,569
$
$
$
1,661
Fixed income
U.S. government and agency securities
$
$
-
$
-
$
Real estate
Private real estate
(7
)
(81
)
Real estate commingled/mutual funds
Limited partnerships
(12
)
Other investments
-
Total
$
1,092
$
$
$
1,569
Fixed income
U.S. government and agency securities
$
$
-
$
(1
)
$
Real estate
Private real estate
(65
)
Real estate commingled/mutual funds
Limited partnerships
Other investments
(14
)
Total
$
1,029
$
$
(27
)
$
1,092
Bank of America 142
Projected Benefit Payments
Benefit payments projected to be made from the Qualified Pension Plan, Non-U.S. Pension Plans, Nonqualified and Other Pension Plans, and Postretirement Health and Life Plans are presented in the table below.
Projected Benefit Payments
(Dollars in millions)
Qualified
Pension Plan (1)
Non-U.S.
Pension Plans (2)
Nonqualified
and Other
Pension Plans (2)
Postretirement Health and Life Plans (3)
$
$
$
$
2025 - 2029
4,409
1,011
(1)
Benefit payments expected to be made from the plan’s assets.
(2)
Benefit payments expected to be made from a combination of the plans’ and the Corporation’s assets.
(3)
Benefit payments (net of retiree contributions) expected to be made from a combination of the plans’ and the Corporation’s assets.
Defined Contribution Plans
The Corporation maintains qualified and non-qualified defined contribution retirement plans. The Corporation recorded expense of $1.0 billion in each of 2019, 2018 and 2017 related to the qualified defined contribution plans. At December 31, 2019 and 2018, 189 million and 212 million shares of the Corporation’s common stock were held by these plans. Payments to the plans for dividends on common stock were $133 million, $115 million and $86 million in 2019, 2018 and 2017, respectively.
Certain non-U.S. employees are covered under defined contribution pension plans that are separately administered in accordance with local laws.
NOTE 19 Stock-based Compensation Plans
The Corporation administers a number of equity compensation plans, with awards being granted predominantly from the Bank of America Key Employee Equity Plan (KEEP). On April 24, 2019, Bank of America's shareholders approved an amendment to the KEEP to increase the number of shares available for grant by 150 million. Subsequent to this amendment, 600 million shares of the Corporation’s common stock are authorized to be used for grants of awards.
During 2019 and 2018, the Corporation granted 94 million and 71 million RSU awards to certain employees under the KEEP. These RSUs were authorized to settle predominantly in shares of common stock of the Corporation. Certain RSUs will be settled in cash or contain settlement provisions that subject these awards to variable accounting whereby compensation expense is adjusted to fair value based on changes in the share price of the Corporation’s common stock up to the settlement date. Of the RSUs granted in 2019 and 2018, 71 million and 63 million will vest predominantly over three years with most vesting occurring in one-third increments on each of the first three anniversaries of the grant date provided that the employee remains continuously employed with the Corporation during that time, and will be expensed ratably over the vesting period, net of estimated forfeitures, for non-retirement eligible employees based on the grant-date fair value of the shares. For RSUs granted to employees who are retirement eligible, the awards are deemed authorized as of the beginning of the year preceding the grant date when the incentive award plans are generally approved. As a result, the estimated value is expensed ratably over the year preceding the grant date. Additionally, 23 million and eight million of the RSUs granted in 2019 and 2018 will vest predominantly over four years with most vesting occurring in one-fourth increments on each of the first four
anniversaries of the grant date provided that the employee remains continuously employed with the Corporation during that time, and will be expensed ratably over the vesting period, net of estimated forfeitures, based on the grant-date fair value of the shares.
The compensation cost for the stock-based plans was $2.1 billion, $1.8 billion and $2.2 billion and the related income tax benefit was $511 million, $433 million and $829 million for 2019, 2018 and 2017, respectively.
Restricted Stock/Units
The table below presents the status at December 31, 2019 of the share-settled restricted stock/units and changes during 2019.
Stock-settled Restricted Stock/Units
Shares/Units
Weighted-
average Grant Date Fair Value
Outstanding at January 1, 2019
165,621,246
$
23.22
Granted
91,164,482
27.72
Vested
(92,215,549
)
19.30
Canceled
(6,660,864
)
27.49
Outstanding at December 31, 2019
157,909,315
27.93
The table below presents the status at December 31, 2019 of the cash-settled RSUs and changes during 2019.
Cash-settled Restricted Units
Units
Outstanding at January 1, 2019
2,609,122
Granted
2,455,177
Vested
(3,006,707
)
Canceled
(93,170
)
Outstanding at December 31, 2019
1,964,422
At December 31, 2019, there was an estimated $1.6 billion of total unrecognized compensation cost related to certain share-based compensation awards that is expected to be recognized over a period of up to four years, with a weighted-average period of 2.2 years. The total fair value of restricted stock vested in 2019, 2018 and 2017 was $2.6 billion, $2.3 billion and $1.3 billion, respectively. In 2019, 2018 and 2017, the amount of cash paid to settle equity-based awards for all equity compensation plans was $84 million, $1.3 billion and $1.9 billion, respectively.
143 Bank of America
NOTE 20 Income Taxes
The components of income tax expense for 2019, 2018 and 2017 are presented in the table below.
Income Tax Expense
(Dollars in millions)
Current income tax expense
U.S. federal
$
1,136
$
$
1,310
U.S. state and local
1,377
Non-U.S.
1,203
Total current expense
2,889
3,396
2,806
Deferred income tax expense
U.S. federal
2,001
2,579
7,238
U.S. state and local
Non-U.S.
Total deferred expense
2,435
3,041
8,175
Total income tax expense
$
5,324
$
6,437
$
10,981
Total income tax expense does not reflect the tax effects of items that are included in OCI each period. For more information, see Note 15 - Accumulated Other Comprehensive Income (Loss). Other tax effects included in OCI each period resulted in an expense of $1.9 billion in 2019 and a benefit of $1.2 billion in both 2018 and 2017.
Income tax expense for 2019, 2018 and 2017 varied from the amount computed by applying the statutory income tax rate to income before income taxes. The Corporation’s federal statutory tax rate was 21 percent for 2019 and 2018, and 35 percent for 2017. A reconciliation of the expected U.S. federal income tax expense, calculated by applying the federal statutory tax rate, to the Corporation’s actual income tax expense, and the effective tax rates for 2019, 2018 and 2017 are presented in the table below.
On December 22, 2017, the President signed into law the Tax Act which made significant changes to federal income tax law including, among other things, reducing the statutory corporate income tax rate to 21 percent from 35 percent and changing the taxation of the Corporation’s non-U.S. business activities. The impact on net income in 2017 was $2.9 billion, driven by $2.3 billion in income tax expense, largely from a lower valuation of certain U.S. deferred tax assets and liabilities. The change in the statutory tax rate also impacted the Corporation’s tax-advantaged energy investments, resulting in a downward valuation adjustment of $946 million recorded in other income and a related income tax benefit of $347 million, which when netted against the $2.3 billion, resulted in a net impact on income tax expense of $1.9 billion.
Reconciliation of Income Tax Expense
Amount
Percent
Amount
Percent
Amount
Percent
(Dollars in millions)
Expected U.S. federal income tax expense
$
6,878
21.0
%
$
7,263
21.0
%
$
10,225
35.0
%
Increase (decrease) in taxes resulting from:
State tax expense, net of federal benefit
1,283
3.9
1,367
4.0
3.0
Affordable housing/energy/other credits
(2,365
)
(7.2
)
(1,888
)
(5.5
)
(1,406
)
(4.8
)
Changes in prior-period UTBs, including interest
(613
)
(1.9
)
0.4
0.5
Tax-exempt income, including dividends
(433
)
(1.3
)
(413
)
(1.2
)
(672
)
(2.3
)
Stock-based compensation
(225
)
(0.7
)
(257
)
(0.7
)
(236
)
(0.8
)
Rate differential on non-U.S. earnings
1.5
0.3
(272
)
(0.9
)
Nondeductible expenses
0.9
0.9
0.3
Tax law changes
-
-
-
-
2,281
7.8
Other
0.1
(179
)
(0.6
)
(50
)
(0.2
)
Total income tax expense
$
5,324
16.3
%
$
6,437
18.6
%
$
10,981
37.6
%
The reconciliation of the beginning unrecognized tax benefits (UTB) balance to the ending balance is presented in the following table.
Reconciliation of the Change in Unrecognized Tax Benefits
(Dollars in millions)
Balance, January 1
$
2,197
$
1,773
$
Increases related to positions taken during the current year
Increases related to positions taken during prior years (1)
Decreases related to positions taken during prior years (1)
(1,102
)
(371
)
(122
)
Settlements
(541
)
(6
)
(17
)
Expiration of statute of limitations
(18
)
-
(5
)
Balance, December 31
$
1,175
$
2,197
$
1,773
(1)
The sum of the positions taken during prior years differs from the $(613) million, $144 million and $133 million in the Reconciliation of Income Tax Expense table due to temporary items, state items and jurisdictional offsets, as well as the inclusion of interest in the Reconciliation of Income Tax Expense table.
At December 31, 2019, 2018 and 2017, the balance of the Corporation’s UTBs which would, if recognized, affect the Corporation’s effective tax rate was $814 million, $1.6 billion and $1.2 billion, respectively. Included in the UTB balance are some items the recognition of which would not affect the effective tax rate, such as the tax effect of certain temporary differences, the portion of gross state UTBs that would be offset by the tax benefit of the associated federal deduction and the portion of gross non-U.S. UTBs that would be offset by tax reductions in other jurisdictions.
It is reasonably possible that the UTB balance may decrease by as much as $64 million during the next 12 months, since resolved items will be removed from the balance whether their resolution results in payment or recognition.
The Corporation recognized an interest benefit of $19 million in 2019 and interest expense of $43 million and $1 million in 2018 and 2017. At December 31, 2019 and 2018, the Corporation’s accrual for interest and penalties that related to income taxes, net of taxes and remittances, was $147 million and $218 million.
The Corporation files income tax returns in more than 100 state and non-U.S. jurisdictions each year. The IRS and other tax authorities in countries and states in which the Corporation has
Bank of America 144
significant business operations examine tax returns periodically (continuously in some jurisdictions). The following table summarizes the status of examinations by major jurisdiction for the Corporation and various subsidiaries at December 31, 2019.
Tax Examination Status
Years under
Examination (1)
Status at December 31 2019
United States
2017-2018
To begin in 2020
California
2012-2017
Field examination
New York
2016-2018
Field examination
United Kingdom
Field examination
(1)
All tax years subsequent to the years shown remain subject to examination.
Significant components of the Corporation’s net deferred tax assets and liabilities at December 31, 2019 and 2018 are presented in the following table.
Deferred Tax Assets and Liabilities
December 31
(Dollars in millions)
Deferred tax assets
Net operating loss carryforwards
$
7,417
$
7,993
Allowance for credit losses
2,354
2,400
Lease liability
2,321
-
Security, loan and debt valuations
1,860
1,818
Accrued expenses
1,719
1,875
Employee compensation and retirement benefits
1,622
1,564
Credit carryforwards
Available-for-sale securities
-
1,854
Other
1,203
1,037
Gross deferred tax assets
18,679
19,164
Valuation allowance
(1,989
)
(1,569
)
Total deferred tax assets, net of valuation allowance
16,690
17,595
Deferred tax liabilities
Equipment lease financing
2,933
2,684
Right-to-use asset
2,246
-
Tax credit investments
1,577
Fixed assets
1,505
1,104
Available-for-sale securities
-
Other
1,885
2,126
Gross deferred tax liabilities
10,246
6,854
Net deferred tax assets
$
6,444
$
10,741
The table below summarizes the deferred tax assets and related valuation allowances recognized for the net operating loss (NOL) and tax credit carryforwards at December 31, 2019.
Net Operating Loss and Tax Credit Carryforward Deferred Tax Assets
(Dollars in millions)
Deferred
Tax Asset
Valuation
Allowance
Net
Deferred
Tax Asset
First Year
Expiring
Net operating losses - U.S.
$
$
-
$
After 2028
Net operating losses - U.K. (1)
5,276
-
5,276
None
Net operating losses - other non-U.S.
(423
)
Various
Net operating losses - U.S. states (2)
1,336
(580
)
Various
Foreign tax credits
(183
)
-
(1)
Represents U.K. broker-dealer net operating losses that may be carried forward indefinitely.
(2)
The net operating losses and related valuation allowances for U.S. states before considering the benefit of federal deductions were $1.7 billion and $734 million.
Management concluded that no valuation allowance was necessary to reduce the deferred tax assets related to the U.K. NOL carryforwards and U.S. federal and certain state NOL carryforwards since estimated future taxable income will be sufficient to utilize these assets prior to their expiration. The majority of the Corporation’s U.K. net deferred tax assets, which consist primarily of NOLs, are expected to be realized by certain subsidiaries over an extended number of years. Management’s conclusion is supported by financial results, profit forecasts for the relevant entities and the indefinite period to carry forward NOLs. However, a material change in those estimates could lead management to reassess such valuation allowance conclusions.
At December 31, 2019, U.S. federal income taxes had not been provided on approximately $5.0 billion of temporary differences associated with investments in non-U.S. subsidiaries that are essentially permanent in duration. If the Corporation were to record the associated deferred tax liability, the amount would be approximately $1.0 billion.
NOTE 21 Fair Value Measurements
Under applicable accounting standards, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Corporation determines the fair values of its financial instruments under applicable accounting standards that require an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. The Corporation categorizes its financial instruments into three levels based on the established fair value hierarchy and conducts a review of fair value hierarchy classifications on a quarterly basis. Transfers into or out of fair value hierarchy classifications are made if the significant inputs used in the financial models measuring the fair values of the assets and liabilities become unobservable or observable in the current marketplace. For more information regarding the fair value hierarchy and how the Corporation measures fair value, see Note 1 - Summary of Significant Accounting Principles. The Corporation accounts for certain financial instruments under the fair value option. For more information, see Note 22 - Fair Value Option.
Valuation Techniques
The following sections outline the valuation methodologies for the Corporation’s assets and liabilities. While the Corporation believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
During 2019, there were no significant changes to valuation approaches or techniques that had, or are expected to have, a material impact on the Corporation’s consolidated financial position or results of operations.
Trading Account Assets and Liabilities and Debt Securities
The fair values of trading account assets and liabilities are primarily based on actively traded markets where prices are based on either direct market quotes or observed transactions. The fair values of debt securities are generally based on quoted market prices or market prices for similar assets. Liquidity is a significant factor in the determination of the fair values of trading account assets and liabilities and debt securities. Market price quotes may not be readily available for some positions such as positions within a market sector where trading activity has slowed significantly or ceased. Some of these instruments are valued using a discounted
145 Bank of America
cash flow model, which estimates the fair value of the securities using internal credit risk, and interest rate and prepayment risk models that incorporate management’s best estimate of current key assumptions such as default rates, loss severity and prepayment rates. Principal and interest cash flows are discounted using an observable discount rate for similar instruments with adjustments that management believes a market participant would consider in determining fair value for the specific security. Other instruments are valued using a net asset value approach which considers the value of the underlying securities. Underlying assets are valued using external pricing services, where available, or matrix pricing based on the vintages and ratings. Situations of illiquidity generally are triggered by the market’s perception of credit uncertainty regarding a single company or a specific market sector. In these instances, fair value is determined based on limited available market information and other factors, principally from reviewing the issuer’s financial statements and changes in credit ratings made by one or more rating agencies.
Derivative Assets and Liabilities
The fair values of derivative assets and liabilities traded in the OTC market are determined using quantitative models that utilize multiple market inputs including interest rates, prices and indices to generate continuous yield or pricing curves and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. When third-party pricing services are used, the methods and assumptions are reviewed by the Corporation. Estimation risk is greater for derivative asset and liability positions that are either option-based or have longer maturity dates where observable market inputs are less readily available, or are unobservable, in which case, quantitative-based extrapolations of rate, price or index scenarios are used in determining fair values. The fair values of derivative assets and liabilities include adjustments for market liquidity, counterparty credit quality and other instrument-specific factors, where appropriate. In addition, the Corporation incorporates within its fair value measurements of OTC derivatives a valuation adjustment to reflect the credit risk associated with the net position. Positions are netted by counterparty, and fair value for net long exposures is adjusted for counterparty credit risk while the fair value for net short exposures is adjusted for the Corporation’s own credit risk. The Corporation also incorporates FVA within its fair value measurements to include funding costs on uncollateralized derivatives and derivatives where the Corporation is not permitted to use the collateral it receives. An estimate of severity of loss is also used in the determination of fair value, primarily based on market data.
Loans and Loan Commitments
The fair values of loans and loan commitments are based on market prices, where available, or discounted cash flow analyses using market-based credit spreads of comparable debt instruments or credit derivatives of the specific borrower or comparable borrowers. Results of discounted cash flow analyses may be adjusted, as appropriate, to reflect other market conditions or the perceived credit risk of the borrower.
Mortgage Servicing Rights
The fair values of MSRs are primarily determined using an option-adjusted spread valuation approach, which factors in prepayment
risk to determine the fair value of MSRs. This approach consists of projecting servicing cash flows under multiple interest rate scenarios and discounting these cash flows using risk-adjusted discount rates.
Loans Held-for-sale
The fair values of LHFS are based on quoted market prices, where available, or are determined by discounting estimated cash flows using interest rates approximating the Corporation’s current origination rates for similar loans adjusted to reflect the inherent credit risk. The borrower-specific credit risk is embedded within the quoted market prices or is implied by considering loan performance when selecting comparables.
Short-term Borrowings and Long-term Debt
The Corporation issues structured liabilities that have coupons or repayment terms linked to the performance of debt or equity securities, interest rates, indices, currencies or commodities. The fair values of these structured liabilities are estimated using quantitative models for the combined derivative and debt portions of the notes. These models incorporate observable and, in some instances, unobservable inputs including security prices, interest rate yield curves, option volatility, currency, commodity or equity rates and correlations among these inputs. The Corporation also considers the impact of its own credit spread in determining the discount rate used to value these liabilities. The credit spread is determined by reference to observable spreads in the secondary bond market.
Securities Financing Agreements
The fair values of certain reverse repurchase agreements, repurchase agreements and securities borrowed transactions are determined using quantitative models, including discounted cash flow models that require the use of multiple market inputs including interest rates and spreads to generate continuous yield or pricing curves, and volatility factors. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.
Deposits
The fair values of deposits are determined using quantitative models, including discounted cash flow models that require the use of multiple market inputs including interest rates and spreads to generate continuous yield or pricing curves, and volatility factors. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. The Corporation considers the impact of its own credit spread in the valuation of these liabilities. The credit risk is determined by reference to observable credit spreads in the secondary cash market.
Asset-backed Secured Financings
The fair values of asset-backed secured financings are based on external broker bids, where available, or are determined by discounting estimated cash flows using interest rates approximating the Corporation’s current origination rates for similar loans adjusted to reflect the inherent credit risk.
Bank of America 146
Recurring Fair Value
Assets and liabilities carried at fair value on a recurring basis at December 31, 2019 and 2018, including financial instruments that the Corporation accounts for under the fair value option, are summarized in the following tables.
December 31, 2019
Fair Value Measurements
(Dollars in millions)
Level 1
Level 2
Level 3
Netting Adjustments (1)
Assets/Liabilities at Fair Value
Assets
Time deposits placed and other short-term investments
$
1,000
$
-
$
-
$
-
$
1,000
Federal funds sold and securities borrowed or purchased under agreements to resell
-
50,364
-
-
50,364
Trading account assets:
U.S. Treasury and agency securities (2)
49,517
4,157
-
-
53,674
Corporate securities, trading loans and other
-
25,226
1,507
-
26,733
Equity securities
53,597
32,619
-
86,455
Non-U.S. sovereign debt
3,965
23,854
-
28,301
Mortgage trading loans, MBS and ABS:
U.S. government-sponsored agency guaranteed (2)
-
24,324
-
-
24,324
Mortgage trading loans, ABS and other MBS
-
8,786
1,553
-
10,339
Total trading account assets (3)
107,079
118,966
3,781
-
229,826
Derivative assets
14,079
328,442
2,226
(304,262
)
40,485
AFS debt securities:
U.S. Treasury and agency securities
67,332
1,196
-
-
68,528
Mortgage-backed securities:
Agency
-
122,528
-
-
122,528
Agency-collateralized mortgage obligations
-
4,641
-
-
4,641
Non-agency residential
-
-
1,077
Commercial
-
15,021
-
-
15,021
Non-U.S. securities
-
11,989
-
11,991
Other taxable securities
-
3,876
-
3,941
Tax-exempt securities
-
17,804
-
17,912
Total AFS debt securities
67,332
177,708
-
245,639
Other debt securities carried at fair value:
U.S. Treasury and agency securities
-
-
-
Agency MBS
-
3,003
-
-
3,003
Non-agency residential MBS
-
1,035
-
1,334
Non-U.S. and other securities
6,088
-
-
6,488
Total other debt securities carried at fair value
10,126
-
10,828
Loans and leases
-
7,642
-
8,335
Loans held-for-sale
-
3,334
-
3,709
Other assets (4)
11,782
1,376
2,360
-
15,518
Total assets (5)
$
201,675
$
697,958
$
10,333
$
(304,262
)
$
605,704
Liabilities
Interest-bearing deposits in U.S. offices
$
-
$
$
-
$
-
$
Federal funds purchased and securities loaned or sold under agreements to repurchase
-
16,008
-
-
16,008
Trading account liabilities:
U.S. Treasury and agency securities
13,140
-
-
13,422
Equity securities
38,148
4,144
-
42,294
Non-U.S. sovereign debt
10,751
11,310
-
-
22,061
Corporate securities and other
-
5,478
-
5,493
Total trading account liabilities
62,039
21,214
-
83,270
Derivative liabilities
11,904
320,479
4,764
(298,918
)
38,229
Short-term borrowings
-
3,941
-
-
3,941
Accrued expenses and other liabilities
13,927
1,507
-
-
15,434
Long-term debt
-
33,826
1,149
-
34,975
Total liabilities (5)
$
87,870
$
397,483
$
5,930
$
(298,918
)
$
192,365
(1)
Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.
(2)
Includes $26.7 billion of GSE obligations.
(3)
Includes securities with a fair value of $14.7 billion that were segregated in compliance with securities regulations or deposited with clearing organizations. This amount is included in the parenthetical disclosure on the Consolidated Balance Sheet.
(4)
Includes MSRs of $1.5 billion which are classified as Level 3 assets.
(5)
Total recurring Level 3 assets were 0.42 percent of total consolidated assets, and total recurring Level 3 liabilities were 0.27 percent of total consolidated liabilities.
147 Bank of America
December 31, 2018
Fair Value Measurements
(Dollars in millions)
Level 1
Level 2
Level 3
Netting Adjustments (1)
Assets/Liabilities at Fair Value
Assets
Time deposits placed and other short-term investments
$
1,214
$
-
$
-
$
-
$
1,214
Federal funds sold and securities borrowed or purchased under agreements to resell
-
56,399
-
-
56,399
Trading account assets:
U.S. Treasury and agency securities (2)
53,131
1,593
-
-
54,724
Corporate securities, trading loans and other
-
24,630
1,558
-
26,188
Equity securities
53,840
23,163
-
77,279
Non-U.S. sovereign debt
5,818
19,210
-
25,493
Mortgage trading loans, MBS and ABS:
U.S. government-sponsored agency guaranteed (2)
-
19,586
-
-
19,586
Mortgage trading loans, ABS and other MBS
-
9,443
1,635
-
11,078
Total trading account assets (3)
112,789
97,625
3,934
-
214,348
Derivative assets
9,967
315,413
3,466
(285,121
)
43,725
AFS debt securities:
U.S. Treasury and agency securities
53,663
1,260
-
-
54,923
Mortgage-backed securities:
Agency
-
121,826
-
-
121,826
Agency-collateralized mortgage obligations
-
5,530
-
-
5,530
Non-agency residential
-
1,320
-
1,917
Commercial
-
14,078
-
-
14,078
Non-U.S. securities
-
9,304
-
9,306
Other taxable securities
-
4,403
-
4,410
Tax-exempt securities
-
17,376
-
-
17,376
Total AFS debt securities
53,663
175,097
-
229,366
Other debt securities carried at fair value:
U.S. Treasury and agency securities
1,282
-
-
-
1,282
Non-agency residential MBS
-
1,434
-
1,606
Non-U.S. and other securities
5,357
-
-
5,847
Total other debt securities carried at fair value
1,772
6,791
-
8,735
Loans and leases
-
4,011
-
4,349
Loans held-for-sale
-
2,400
-
2,942
Other assets (4)
15,032
1,775
2,932
-
19,739
Total assets (5)
$
194,437
$
659,511
$
11,990
$
(285,121
)
$
580,817
Liabilities
Interest-bearing deposits in U.S. offices
$
-
$
$
-
$
-
$
Federal funds purchased and securities loaned or sold under agreements to repurchase
-
28,875
-
-
28,875
Trading account liabilities:
U.S. Treasury and agency securities
7,894
-
-
8,655
Equity securities
33,739
4,070
-
-
37,809
Non-U.S. sovereign debt
7,452
9,182
-
-
16,634
Corporate securities and other
-
5,104
-
5,122
Total trading account liabilities
49,085
19,117
-
68,220
Derivative liabilities
9,931
303,441
4,401
(279,882
)
37,891
Short-term borrowings
-
1,648
-
-
1,648
Accrued expenses and other liabilities
18,096
1,979
-
-
20,075
Long-term debt
-
26,872
-
27,689
Total liabilities (5)
$
77,112
$
382,424
$
5,236
$
(279,882
)
$
184,890
(1)
Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.
(2)
Includes $20.2 billion of GSE obligations.
(3)
Includes securities with a fair value of $16.6 billion that were segregated in compliance with securities regulations or deposited with clearing organizations. This amount is included in the parenthetical disclosure on the Consolidated Balance Sheet.
(4)
Includes MSRs of $2.0 billion which are classified as Level 3 assets.
(5)
Total recurring Level 3 assets were 0.51 percent of total consolidated assets, and total recurring Level 3 liabilities were 0.25 percent of total consolidated liabilities.
Bank of America 148
The following tables present a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during 2019, 2018 and 2017, including net realized and unrealized gains (losses) included in earnings and accumulated OCI. Transfers into Level 3 occur
primarily due to decreased price observability, and transfers out of Level 3 occur primarily due to increased price observability. Transfers occur on a regular basis for long-term debt instruments due to changes in the impact of unobservable inputs on the value of the embedded derivative in relation to the instrument as a whole.
Level 3 - Fair Value Measurements (1)
Balance
January 1
Total Realized/Unrealized Gains (Losses) in Net Income (2)
Gains
(Losses)
in OCI (3)
Gross
Gross
Transfers
into
Level 3
Gross
Transfers
out of
Level 3
Balance
December 31
Change in Unrealized Gains (Losses) in Net Income Related to Financial Instruments Still Held (2)
(Dollars in millions)
Purchases
Sales
Issuances
Settlements
Year Ended December 31, 2019
Trading account assets:
Corporate securities, trading loans and other
$
1,558
$
$
-
$
$
(390
)
$
$
(578
)
$
$
(439
)
$
1,507
$
Equity securities
(12
)
-
(87
)
-
(9
)
(46
)
(18
)
Non-U.S. sovereign debt
(12
)
-
-
(51
)
(6
)
Mortgage trading loans, ABS and other MBS
1,635
(2
)
(899
)
-
(175
)
(505
)
1,553
Total trading account assets
3,934
(14
)
1,235
(1,376
)
(813
)
1,555
(996
)
3,781
Net derivative assets (liabilities) (4,5)
(935
)
(37
)
-
(837
)
-
(97
)
(1,077
)
(2,538
)
AFS debt securities:
Non-agency residential MBS
-
(73
)
-
(40
)
(343
)
-
Non-U.S. securities
-
-
-
-
-
-
-
-
-
Other taxable securities
-
-
-
-
(5
)
-
-
Tax-exempt securities
-
-
-
-
-
-
-
-
-
Total AFS debt securities
-
(73
)
-
(45
)
(343
)
-
Other debt securities carried at fair value - Non-agency residential MBS
-
-
-
-
(17
)
(47
)
Loans and leases (6,7)
-
-
(35
)
(57
)
-
-
(1
)
Loans held-for-sale (6,7)
(6
)
(71
)
(245
)
-
Other assets (7)
2,932
(81
)
-
(10
)
(683
)
(1
)
2,360
(267
)
Trading account liabilities - Equity securities
-
(2
)
-
-
-
-
-
-
-
(2
)
(2
)
Trading account liabilities - Corporate securities
and other
(18
)
-
(1
)
(3
)
(1
)
-
-
-
(15
)
-
Long-term debt (5,6)
(817
)
(59
)
(64
)
-
-
(40
)
(350
)
(1,149
)
(55
)
Year Ended December 31, 2018
Trading account assets:
Corporate securities, trading loans and other
$
1,864
$
(32
)
$
(1
)
$
$
(403
)
$
$
(568
)
$
$
(547
)
$
1,558
$
(117
)
Equity securities
(17
)
-
(11
)
-
(4
)
(49
)
(22
)
Non-U.S. sovereign debt
(44
)
(57
)
-
(30
)
(137
)
Mortgage trading loans, ABS and other MBS
1,498
(910
)
-
(158
)
(236
)
1,635
Total trading account assets
4,153
(42
)
1,078
(1,381
)
(760
)
1,704
(969
)
3,934
Net derivative assets (liabilities) (4)
(1,714
)
-
(1,179
)
-
(935
)
(116
)
AFS debt securities:
Non-agency residential MBS
-
(33
)
-
(71
)
-
(25
)
(75
)
-
Non-U.S. securities
-
(1
)
-
(10
)
-
(15
)
-
-
Other taxable securities
(3
)
-
(23
)
-
(11
)
(526
)
-
Tax-exempt securities
-
-
-
-
-
(1
)
(469
)
-
-
Total AFS debt securities (8)
1,003
(37
)
-
(104
)
-
(52
)
(1,070
)
-
Other debt securities carried at fair value - Non-agency residential MBS
-
(18
)
-
-
(8
)
-
(34
)
(133
)
(18
)
Loans and leases (6,7)
(16
)
-
-
(134
)
-
(83
)
-
-
(9
)
Loans held-for-sale (6)
(26
)
-
(201
)
(60
)
Other assets (7,8)
2,425
(38
)
(69
)
(792
)
(35
)
2,932
Trading account liabilities - Corporate securities
and other
(24
)
-
(12
)
(2
)
-
-
-
(18
)
(7
)
Accrued expenses and other liabilities (6)
(8
)
-
-
-
-
-
-
-
-
-
Long-term debt (6)
(1,863
)
-
(141
)
(262
)
(817
)
(1)
Assets (liabilities). For assets, increase (decrease) to Level 3 and for liabilities, (increase) decrease to Level 3.
(2)
Includes gains (losses) reported in earnings in the following income statement line items: Trading account assets/liabilities - predominantly market making and similar activities; Net derivative assets (liabilities) - market making and similar activities and other income; Other debt securities carried at fair value - other income; Loans and leases - predominantly other income; Loans held-for-sale - other income; Other assets - primarily other income related to MSRs; Long-term debt - primarily market making and similar activities.
(3)
Includes unrealized gains (losses) in OCI on AFS debt securities, foreign currency translation adjustments and the impact of changes in the Corporation’s credit spreads on long-term debt accounted for under the fair value option. Amounts include net unrealized gains (losses) of $3 million and $(105) million related to financial instruments still held at December 31, 2019 and 2018.
(4)
Net derivative assets (liabilities) include derivative assets of $2.2 billion and $3.5 billion and derivative liabilities of $4.8 billion and $4.4 billion at December 31, 2019 and 2018.
(5)
Transfers into long-term debt include a $1.4 billion transfer in of Level 3 derivative assets to reflect the Corporation's change to present bifurcated embedded derivatives with their respective host instruments.
(6)
Amounts represent instruments that are accounted for under the fair value option.
(7)
Issuances represent loan originations and MSRs recognized following securitizations or whole-loan sales.
(8)
Transfers out of AFS debt securities and into other assets primarily relate to the reclassification of certain securities.
149 Bank of America
Level 3 - Fair Value Measurements (1)
(Dollars in millions)
Balance
January 1
Total Realized/Unrealized Gains/(Losses) in Net Income (2)
Gains/
(Losses)
in OCI (3)
Gross
Gross
Transfers
into
Level 3
Gross
Transfers
out of
Level 3
Balance
December 31
Change in Unrealized Gains/(Losses) in Net Income Related to Financial Instruments Still Held (2)
Purchases
Sales
Issuances
Settlements
Year Ended December 31, 2017
Trading account assets:
Corporate securities, trading loans and other
$
2,777
$
$
-
$
$
(702
)
$
$
(666
)
$
$
(1,054
)
$
1,864
$
Equity securities
-
(70
)
-
(10
)
(185
)
(1
)
Non-U.S. sovereign debt
(8
)
(59
)
-
(73
)
(13
)
Mortgage trading loans, ABS and other MBS
1,211
(2
)
1,210
(990
)
-
(233
)
(81
)
1,498
Total trading account assets
4,779
(10
)
1,865
(1,821
)
(982
)
1,164
(1,333
)
4,153
Net derivative assets (liabilities) (4)
(1,313
)
(984
)
-
(979
)
-
(99
)
(1,714
)
(409
)
AFS debt securities:
Non-U.S. securities
-
-
(271
)
-
-
-
Other taxable securities
-
-
(42
)
(94
)
-
Tax-exempt securities
(70
)
-
(11
)
(45
)
-
Total AFS debt securities
1,365
(70
)
-
(324
)
(139
)
1,003
-
Other debt securities carried at fair value - Non-agency residential MBS
(1
)
-
-
(21
)
-
(3
)
-
-
-
-
Loans and leases (5)
-
(34
)
-
(126
)
-
(7
)
Loans held-for-sale (5,6)
(3
)
(189
)
-
(346
)
(32
)
Other assets (6)
2,986
(57
)
(214
)
(758
)
-
2,425
(226
)
Federal funds purchased and securities loaned or sold under agreements to repurchase (5)
(359
)
(5
)
-
-
-
(12
)
(58
)
-
-
Trading account liabilities - Corporate securities and other
(27
)
-
(17
)
(2
)
-
-
-
(24
)
Accrued expenses and other liabilities (5)
(9
)
-
-
-
-
-
-
-
(8
)
-
Long-term debt (5)
(1,514
)
(135
)
(31
)
-
(288
)
(711
)
(1,863
)
(196
)
(1)
Assets (liabilities). For assets, increase (decrease) to Level 3 and for liabilities, (increase) decrease to Level 3.
(2)
Includes gains (losses) reported in earnings in the following income statement line items: Trading account assets/liabilities - market making and similar activities; Net derivative assets (liabilities) - primarily market making and similar activities and other income; Other debt securities carried at fair value - other income; Loans and leases - other income; Loans held-for-sale - other income; Other assets - primarily other income related to MSRs; Long-term debt - predominantly market making and similar activities.
(3)
Includes unrealized gains (losses) in OCI on AFS debt securities, foreign currency translation adjustments and the impact of changes in the Corporation’s credit spreads on long-term debt accounted for under the fair value option.
(4)
Net derivative assets (liabilities) include derivative assets of $4.1 billion and derivative liabilities of $5.8 billion.
(5)
Amounts represent instruments that are accounted for under the fair value option.
(6)
Issuances represent loan originations and MSRs recognized following securitizations or whole-loan sales.
Bank of America 150
The following tables present information about significant unobservable inputs related to the Corporation’s material categories of Level 3 financial assets and liabilities at December 31, 2019 and 2018.
Quantitative Information about Level 3 Fair Value Measurements at December 31, 2019
(Dollars in millions)
Inputs
Financial Instrument
Fair
Value
Valuation
Technique
Significant Unobservable
Inputs
Ranges of
Inputs
Weighted Average (1)
Loans and Securities (2)
Instruments backed by residential real estate assets
$
1,407
Discounted cash flow, Market comparables
Yield
0% to 25%
6%
Trading account assets - Mortgage trading loans, ABS and other MBS
Prepayment speed
1% to 27% CPR
17% CPR
Loans and leases
Default rate
0% to 3% CDR
1% CDR
Loans held-for-sale
Loss severity
0% to 47%
14%
AFS debt securities, primarily non-agency residential
Price
$0 to $160
$94
Other debt securities carried at fair value - Non-agency residential
Instruments backed by commercial real estate assets
$
Discounted cash flow
Yield
0% to 30%
14%
Trading account assets - Corporate securities, trading loans and other
Price
$0 to $100
$55
Trading account assets - Mortgage trading loans, ABS and other MBS
Loans held-for-sale
Commercial loans, debt securities and other
$
3,798
Discounted cash flow, Market comparables
Yield
1% to 20%
6%
Trading account assets - Corporate securities, trading loans and other
1,306
Prepayment speed
10% to 20%
13%
Trading account assets - Non-U.S. sovereign debt
Default rate
3% to 4%
4%
Trading account assets - Mortgage trading loans, ABS and other MBS
1,136
Loss severity
35% to 40%
38%
AFS debt securities - Other taxable securities
Price
$0 to $142
$72
Loans and leases
Long-dated equity volatilities
35%
n/a
Loans held-for-sale
Other assets, primarily auction rate securities
$
Discounted cash flow, Market comparables
Price
$10 to $100
$96
MSRs
$
1,545
Discounted cash flow
Weighted-average life, fixed rate (5)
0 to 14 years
5 years
Weighted-average life, variable rate (5)
0 to 9 years
3 years
Option-adjusted spread, fixed rate
7% to 14%
9%
Option-adjusted spread, variable rate
9% to 15%
11%
Structured liabilities
Long-term debt
$
(1,149
)
Discounted cash flow, Market comparables, Industry standard derivative pricing (3)
Yield
2% to 6%
5%
Equity correlation
9% to 100%
63%
Long-dated equity volatilities
4% to 101%
32%
Price
$0 to $116
$74
Natural gas forward price
$1/MMBtu to $5/MMBtu
$3/MMBtu
Net derivative assets (liabilities)
Credit derivatives
$
Discounted cash flow, Stochastic recovery correlation model
Yield
5%
n/a
Upfront points
0 to 100 points
63 points
Prepayment speed
15% to 100% CPR
22% CPR
Default rate
1% to 4% CDR
2% CDR
Loss severity
35%
n/a
Price
$0 to $104
$73
Equity derivatives
$
(1,081
)
Industry standard derivative pricing (3)
Equity correlation
9% to 100%
63%
Long-dated equity volatilities
4% to 101%
32%
Commodity derivatives
$
(1,357
)
Discounted cash flow, Industry standard derivative pricing (3)
Natural gas forward price
$1/MMBtu to $5/MMBtu
$3/MMBtu
Correlation
30% to 69%
68%
Volatilities
14% to 54%
27%
Interest rate derivatives
$
(113
)
Industry standard derivative pricing (4)
Correlation (IR/IR)
15% to 94%
52%
Correlation (FX/IR)
0% to 46%
2%
Long-dated inflation rates
-23% to 56%
16%
Long-dated inflation volatilities
0% to 1%
1%
Total net derivative assets (liabilities)
$
(2,538
)
(1)
For loans and securities, structured liabilities and net derivative assets (liabilities), the weighted average is calculated based upon the absolute fair value of the instruments.
(2)
The categories are aggregated based upon product type which differs from financial statement classification. The following is a reconciliation to the line items in the table on page 147: Trading account assets - Corporate securities, trading loans and other of $1.5 billion, Trading account assets - Non-U.S. sovereign debt of $482 million, Trading account assets - Mortgage trading loans, ABS and other MBS of $1.6 billion, AFS debt securities of $599 million, Other debt securities carried at fair value - Non-agency residential of $299 million, Other assets, including MSRs, of $2.4 billion, Loans and leases of $693 million and LHFS of $375 million.
(3)
Includes models such as Monte Carlo simulation and Black-Scholes.
(4)
Includes models such as Monte Carlo simulation, Black-Scholes and other methods that model the joint dynamics of interest, inflation and foreign exchange rates.
(5)
The weighted-average life is a product of changes in market rates of interest, prepayment rates and other model and cash flow assumptions.
CPR = Constant Prepayment Rate
CDR = Constant Default Rate
MMBtu = Million British thermal units
IR = Interest Rate
FX = Foreign Exchange
n/a = not applicable
151 Bank of America
Quantitative Information about Level 3 Fair Value Measurements at December 31, 2018
(Dollars in millions)
Inputs
Financial Instrument
Fair
Value
Valuation
Technique
Significant Unobservable
Inputs
Ranges of
Inputs
Weighted Average (1)
Loans and Securities (2)
Instruments backed by residential real estate assets
$
1,536
Discounted cash flow, Market comparables
Yield
0% to 25%
8%
Trading account assets - Mortgage trading loans, ABS and other MBS
Prepayment speed
0% to 21% CPR
12% CPR
Loans and leases
Default rate
0% to 3% CDR
1% CDR
Loans held-for-sale
Loss severity
0% to 51%
17%
AFS debt securities, primarily non-agency residential
Price
$0 to $128
$72
Other debt securities carried at fair value - Non-agency residential
Instruments backed by commercial real estate assets
$
Discounted cash flow
Yield
0% to 25%
7%
Trading account assets - Corporate securities, trading loans and other
Price
$0 to $100
$79
Trading account assets - Mortgage trading loans, ABS and other MBS
Commercial loans, debt securities and other
$
3,489
Discounted cash flow, Market comparables
Yield
1% to 18%
13%
Trading account assets - Corporate securities, trading loans and other
1,358
Prepayment speed
10% to 20%
15%
Trading account assets - Non-U.S. sovereign debt
Default rate
3% to 4%
4%
Trading account assets - Mortgage trading loans, ABS and other MBS
1,125
Loss severity
35% to 40%
38%
Loans held-for-sale
Price
$0 to $141
$68
Other assets, primarily auction rate securities
$
Discounted cash flow, Market comparables
Price
$10 to $100
$95
MSRs
$
2,042
Discounted cash flow
Weighted-average life, fixed rate (5)
0 to 14 years
5 years
Weighted-average life, variable rate (5)
0 to 10 years
3 years
Option-adjusted spread, fixed rate
7% to 14%
9%
Option-adjusted spread, variable rate
9% to 15%
12%
Structured liabilities
Long-term debt
$
(817
)
Discounted cash flow, Market comparables, Industry standard derivative pricing (3)
Equity correlation
11% to 100%
67%
Long-dated equity volatilities
4% to 84%
32%
Yield
7% to 18%
16%
Price
$0 to $100
$72
Net derivative assets (liabilities)
Credit derivatives
$
(565
)
Discounted cash flow, Stochastic recovery correlation model
Yield
0% to 5%
4%
Upfront points
0 points to 100 points
70 points
Credit correlation
70%
n/a
Prepayment speed
15% to 20% CPR
15% CPR
Default rate
1% to 4% CDR
2% CDR
Loss severity
35%
n/a
Price
$0 to $138
$93
Equity derivatives
$
(348
)
Industry standard derivative pricing (3)
Equity correlation
11% to 100%
67%
Long-dated equity volatilities
4% to 84%
32%
Commodity derivatives
$
Discounted cash flow, Industry standard derivative pricing (3)
Natural gas forward price
$1/MMBtu to $12/MMBtu
$3/MMBtu
Correlation
38% to 87%
71%
Volatilities
15% to 132%
38%
Interest rate derivatives
$
(32
)
Industry standard derivative pricing (4)
Correlation (IR/IR)
15% to 70%
61%
Correlation (FX/IR)
0% to 46%
1%
Long-dated inflation rates
-20% to 38%
2%
Long-dated inflation volatilities
0% to 1%
1%
Total net derivative assets (liabilities)
$
(935
)
(1)
For loans and securities, structured liabilities and net derivative assets (liabilities), the weighted average is calculated based upon the absolute fair value of the instruments.
(2)
The categories are aggregated based upon product type which differs from financial statement classification. The following is a reconciliation to the line items in the table on page 148: Trading account assets - Corporate securities, trading loans and other of $1.6 billion, Trading account assets - Non-U.S. sovereign debt of $465 million, Trading account assets - Mortgage trading loans, ABS and other MBS of $1.6 billion, AFS debt securities of $606 million, Other debt securities carried at fair value - Non-agency residential of $172 million, Other assets, including MSRs, of $2.9 billion, Loans and leases of $338 million and LHFS of $542 million.
(3)
Includes models such as Monte Carlo simulation and Black-Scholes.
(4)
Includes models such as Monte Carlo simulation, Black-Scholes and other methods that model the joint dynamics of interest, inflation and foreign exchange rates.
(5)
The weighted-average life is a product of changes in market rates of interest, prepayment rates and other model and cash flow assumptions.
CPR = Constant Prepayment Rate
CDR = Constant Default Rate
MMBtu = Million British thermal units
IR = Interest Rate
FX = Foreign Exchange
n/a = not applicable
Bank of America 152
In the previous tables, instruments backed by residential and commercial real estate assets include RMBS, commercial MBS, whole loans and mortgage CDOs. Commercial loans, debt securities and other include corporate CLOs and CDOs, commercial loans and bonds, and securities backed by non-real estate assets. Structured liabilities primarily include equity-linked notes that are accounted for under the fair value option.
The Corporation uses multiple market approaches in valuing certain of its Level 3 financial instruments. For example, market comparables and discounted cash flows are used together. For a given product, such as corporate debt securities, market comparables may be used to estimate some of the unobservable inputs and then these inputs are incorporated into a discounted cash flow model. Therefore, the balances disclosed encompass both of these techniques.
The level of aggregation and diversity within the products disclosed in the tables result in certain ranges of inputs being wide and unevenly distributed across asset and liability categories.
Uncertainty of Fair Value Measurements from Unobservable Inputs
Loans and Securities
A significant increase in market yields, default rates, loss severities or duration would have resulted in a significantly lower fair value for long positions. Short positions would have been impacted in a directionally opposite way. The impact of changes in prepayment speeds would have resulted in differing impacts depending on the seniority of the instrument and, in the case of CLOs, whether prepayments can be reinvested. A significant increase in price would have resulted in a significantly higher fair value for long positions, and short positions would have been impacted in a directionally opposite way.
Structured Liabilities and Derivatives
For credit derivatives, a significant increase in market yield, upfront points (i.e., a single upfront payment made by a protection buyer at inception), credit spreads, default rates or loss severities would
have resulted in a significantly lower fair value for protection sellers and higher fair value for protection buyers. The impact of changes in prepayment speeds would have resulted in differing impacts depending on the seniority of the instrument.
Structured credit derivatives are impacted by credit correlation. Default correlation is a parameter that describes the degree of dependence among credit default rates within a credit portfolio that underlies a credit derivative instrument. The sensitivity of this input on the fair value varies depending on the level of subordination of the tranche. For senior tranches that are net purchases of protection, a significant increase in default correlation would have resulted in a significantly higher fair value. Net short protection positions would have been impacted in a directionally opposite way.
For equity derivatives, commodity derivatives, interest rate derivatives and structured liabilities, a significant change in long-dated rates and volatilities and correlation inputs (i.e., the degree of correlation between an equity security and an index, between two different commodities, between two different interest rates, or between interest rates and foreign exchange rates) would have resulted in a significant impact to the fair value; however, the magnitude and direction of the impact depend on whether the Corporation is long or short the exposure. For structured liabilities, a significant increase in yield or decrease in price would have resulted in a significantly lower fair value.
Nonrecurring Fair Value
The Corporation holds certain assets that are measured at fair value only in certain situations (e.g., the impairment of an asset), and these measurements are referred to herein as nonrecurring. The amounts below represent assets still held as of the reporting date for which a nonrecurring fair value adjustment was recorded during 2019, 2018 and 2017. In the tables below, other assets includes the measurement of the Corporation's merchant services equity method investment on which the Corporation recorded an impairment charge of $2.1 billion during 2019. For more information, see Note 13 - Commitments and Contingencies.
Assets Measured at Fair Value on a Nonrecurring Basis
December 31, 2019
December 31, 2018
(Dollars in millions)
Level 2
Level 3
Level 2
Level 3
Assets
Loans held-for-sale
$
$
$
$
-
Loans and leases (1)
-
-
Foreclosed properties (2, 3)
-
-
Other assets
Gains (Losses)
Assets
Loans held-for-sale
$
(14
)
$
(18
)
$
(6
)
Loans and leases (1)
(81
)
(202
)
(336
)
Foreclosed properties
(9
)
(24
)
(41
)
Other assets
(2,145
)
(64
)
(124
)
(1)
Includes $36 million, $83 million and $135 million of losses on loans that were written down to a collateral value of zero during 2019, 2018 and 2017, respectively.
(2)
Amounts are included in other assets on the Consolidated Balance Sheet and represent the carrying value of foreclosed properties that were written down subsequent to their initial classification as foreclosed properties. Losses on foreclosed properties include losses recorded during the first 90 days after transfer of a loan to foreclosed properties.
(3)
Excludes $260 million and $488 million of properties acquired upon foreclosure of certain government-guaranteed loans (principally FHA-insured loans) at December 31, 2019 and 2018.
153 Bank of America
The table below presents information about significant unobservable inputs at December 31, 2019 and 2018.
Quantitative Information about Nonrecurring Level 3 Fair Value Measurements
Inputs
Financial Instrument
Fair Value
Valuation
Technique
Significant Unobservable
Inputs
Ranges of
Inputs
Weighted
Average (1)
(Dollars in millions)
December 31, 2019
Loans held-for-sale
$
Discounted cash flow
Price
$85 to $97
$88
Loans and leases (2)
Market comparables
OREO discount
13% to 59%
%
Costs to sell
8% to 26%
%
Other assets (3)
Discounted cash flow
Customer attrition
0% to 19%
%
Costs to service
11% to 19%
%
December 31, 2018
Loans and leases (2)
$
Market comparables
OREO discount
13% to 59%
%
Costs to sell
8% to 26%
%
(1)
The weighted average is calculated based upon the fair value of the loans.
(2)
Represents residential mortgages where the loan has been written down to the fair value of the underlying collateral.
(3)
The fair value of the merchant services joint venture was measured using a discounted cash flow method in which the two primary drivers of fair value were the customer attrition rate and certain costs to service the customers. The weighted averages are calculated based on variations of the attrition rates and costs to service the customers.
NOTE 22 Fair Value Option
Loans and Loan Commitments
The Corporation elects to account for certain loans and loan commitments that exceed the Corporation’s single-name credit risk concentration guidelines under the fair value option. Lending commitments are actively managed and, as appropriate, credit risk for these lending relationships may be mitigated through the use of credit derivatives, with the Corporation’s public side credit view and market perspectives determining the size and timing of the hedging activity. These credit derivatives do not meet the requirements for designation as accounting hedges and therefore are carried at fair value. The fair value option allows the Corporation to carry these loans and loan commitments at fair value, which is more consistent with management’s view of the underlying economics and the manner in which they are managed. In addition, the fair value option allows the Corporation to reduce the accounting volatility that would otherwise result from the asymmetry created by accounting for the financial instruments at historical cost and the credit derivatives at fair value.
Loans Held-for-sale
The Corporation elects to account for residential mortgage LHFS, commercial mortgage LHFS and certain other LHFS under the fair value option. These loans are actively managed and monitored and, as appropriate, certain market risks of the loans may be mitigated through the use of derivatives. The Corporation has elected not to designate the derivatives as qualifying accounting hedges, and therefore, they are carried at fair value. The changes in fair value of the loans are largely offset by changes in the fair value of the derivatives. The fair value option allows the Corporation to reduce the accounting volatility that would otherwise result from the asymmetry created by accounting for the financial instruments at the lower of cost or fair value and the derivatives at fair value. The Corporation has not elected to account for certain other LHFS under the fair value option primarily because these loans are floating-rate loans that are not hedged using derivative instruments.
Loans Reported as Trading Account Assets
The Corporation elects to account for certain loans that are held for the purpose of trading and are risk-managed on a fair value basis under the fair value option.
Other Assets
The Corporation elects to account for certain long-term fixed-rate margin loans that are hedged with derivatives under the fair value option. Election of the fair value option allows the Corporation to reduce the accounting volatility that would otherwise result from the asymmetry created by accounting for the financial instruments at historical cost and the derivatives at fair value.
Securities Financing Agreements
The Corporation elects to account for certain securities financing agreements, including resale and repurchase agreements, under the fair value option based on the tenor of the agreements, which reflects the magnitude of the interest rate risk. The majority of securities financing agreements collateralized by U.S. government securities are not accounted for under the fair value option as these contracts are generally short-dated and therefore the interest rate risk is not significant.
Long-term Deposits
The Corporation elects to account for certain long-term fixed-rate and rate-linked deposits that are hedged with derivatives that do not qualify for hedge accounting under the fair value option. Election of the fair value option allows the Corporation to reduce the accounting volatility that would otherwise result from the asymmetry created by accounting for the financial instruments at historical cost and the derivatives at fair value. The Corporation has not elected to carry other long-term deposits at fair value because they are not hedged using derivatives.
Short-term Borrowings
The Corporation elects to account for certain short-term borrowings, primarily short-term structured liabilities, under the fair value option because this debt is risk-managed on a fair value basis.
The Corporation elects to account for certain asset-backed secured financings, which are also classified in short-term borrowings, under the fair value option. Election of the fair value option allows the Corporation to reduce the accounting volatility that would otherwise result from the asymmetry created by accounting for the asset-backed secured financings at historical cost and the corresponding mortgage LHFS securing these financings at fair value.
Bank of America 154
Long-term Debt
The Corporation elects to account for certain long-term debt, primarily structured liabilities, under the fair value option. This long-term debt is either risk-managed on a fair value basis or the related hedges do not qualify for hedge accounting.
Fair Value Option Elections
The following tables provide information about the fair value carrying amount and the contractual principal outstanding of
assets and liabilities accounted for under the fair value option at December 31, 2019 and 2018, and information about where changes in the fair value of assets and liabilities accounted for under the fair value option are included in the Consolidated Statement of Income for 2019, 2018 and 2017.
Fair Value Option Elections
December 31, 2019
December 31, 2018
(Dollars in millions)
Fair Value Carrying Amount
Contractual Principal Outstanding
Fair Value Carrying Amount Less Unpaid Principal
Fair Value
Carrying
Amount
Contractual Principal Outstanding
Fair Value Carrying
Amount Less Unpaid Principal
Federal funds sold and securities borrowed or purchased under agreements to resell
$
50,364
$
50,318
$
$
56,399
$
56,376
$
Loans reported as trading account assets (1)
6,989
14,703
(7,714
)
6,195
13,088
(6,893
)
Trading inventory - other
19,574
n/a
n/a
13,778
n/a
n/a
Consumer and commercial loans
8,335
8,372
(37
)
4,349
4,399
(50
)
Loans held-for-sale (1)
3,709
4,879
(1,170
)
2,942
4,749
(1,807
)
Other assets
n/a
n/a
n/a
n/a
Long-term deposits
Federal funds purchased and securities loaned or sold under agreements to repurchase
16,008
16,029
(21
)
28,875
28,881
(6
)
Short-term borrowings
3,941
3,930
1,648
1,648
-
Unfunded loan commitments
n/a
n/a
n/a
n/a
Long-term debt (2)
34,975
35,730
(755
)
27,689
29,198
(1,509
)
(1)
A significant portion of the loans reported as trading account assets and LHFS are distressed loans that were purchased at a deep discount to par, and the remainder are loans with a fair value near contractual principal outstanding.
(2)
Includes structured liabilities with a fair value of $34.6 billion and $27.3 billion, and contractual principal outstanding of $35.3 billion and $28.8 billion at December 31, 2019 and 2018.
n/a = not applicable
Gains (Losses) Relating to Assets and Liabilities Accounted for Under the Fair Value Option
Market making and similar activities
Other
Income
Total
(Dollars in millions)
Loans reported as trading account assets
$
$
-
$
Trading inventory - other (1)
5,795
-
5,795
Consumer and commercial loans
Loans held-for-sale (2)
-
Long-term debt (3)
(1,098
)
(78
)
(1,176
)
Other (4)
(15
)
Total (5)
$
4,977
$
$
5,061
Loans reported as trading account assets
$
$
-
$
Trading inventory - other (1)
1,750
-
1,750
Consumer and commercial loans
(422
)
(53
)
(475
)
Loans held-for-sale (2)
Long-term debt (3)
2,157
(93
)
2,064
Other (4)
(31
)
(23
)
Total (5)
$
3,502
$
(153
)
$
3,349
Loans reported as trading account assets
$
$
-
$
Trading inventory - other (1)
3,821
-
3,821
Consumer and commercial loans
(9
)
Loans held-for-sale (2)
-
Long-term debt (3)
(1,044
)
(146
)
(1,190
)
Other (4)
(93
)
(44
)
Total (5)
$
2,993
$
$
3,229
(1)
The gains in market making and similar activities are primarily offset by losses on trading liabilities that hedge these assets.
(2)
Includes the value of IRLCs on funded loans, including those sold during the period.
(3)
The net gains (losses) in market making and similar activities relate to the embedded derivatives in structured liabilities and are typically offset by (losses) gains on derivatives and securities that hedge these liabilities. For the cumulative impact of changes in the Corporation’s own credit spreads and the amount recognized in accumulated OCI, see Note 15 - Accumulated Other Comprehensive Income (Loss). For more information on how the Corporation’s own credit spread is determined, see Note 21 - Fair Value Measurements.
(4)
Includes gains (losses) on federal funds sold and securities borrowed or purchased under agreements to resell, long-term deposits, federal funds purchased and securities loaned or sold under agreements to repurchase, short-term borrowings and unfunded loan commitments.
(5)
Gains (losses) related to borrower-specific credit risk were $194 million, $(148) million and $38 million in 2019, 2018 and 2017, respectively.
155 Bank of America
NOTE 23 Fair Value of Financial Instruments
Financial instruments are classified within the fair value hierarchy using the methodologies described in Note 21 - Fair Value Measurements. Certain loans, deposits, long-term debt and unfunded lending commitments are accounted for under the fair value option. For more information, see Note 22 - Fair Value Option. The following disclosures include financial instruments that are not carried at fair value or only a portion of the ending balance is carried at fair value on the Consolidated Balance Sheet.
Short-term Financial Instruments
The carrying value of short-term financial instruments, including cash and cash equivalents, certain time deposits placed and other short-term investments, federal funds sold and purchased, certain resale and repurchase agreements and short-term borrowings, approximates the fair value of these instruments. These financial instruments generally expose the Corporation to limited credit risk and have no stated maturities or have short-term maturities and carry interest rates that approximate market. The Corporation accounts for certain resale and repurchase agreements under the fair value option.
Under the fair value hierarchy, cash and cash equivalents are classified as Level 1. Time deposits placed and other short-term investments, such as U.S. government securities and short-term commercial paper, are classified as Level 1 or Level 2. Federal funds sold and purchased are classified as Level 2. Resale and repurchase agreements are classified as Level 2 because they are generally short-dated and/or variable-rate instruments collateralized by U.S. government or agency securities. Short-term borrowings are classified as Level 2.
Fair Value of Financial Instruments
The carrying values and fair values by fair value hierarchy of certain financial instruments where only a portion of the ending balance was carried at fair value at December 31, 2019 and 2018 are presented in the following table.
Fair Value of Financial Instruments
Fair Value
Carrying Value
Level 2
Level 3
Total
(Dollars in millions)
December 31, 2019
Financial assets
Loans
$
950,093
$
63,633
$
914,597
$
978,230
Loans held-for-sale
9,158
8,439
9,158
Financial liabilities
Deposits (1)
1,434,803
1,434,809
-
1,434,809
Long-term debt
240,856
247,376
1,149
248,525
Commercial unfunded lending commitments (2)
4,777
4,867
December 31, 2018
Financial assets
Loans
$
911,520
$
58,228
$
859,160
$
917,388
Loans held-for-sale
10,367
9,592
10,367
Financial liabilities
Deposits (1)
1,381,476
1,381,239
-
1,381,239
Long-term debt
229,392
230,019
230,836
Commercial unfunded lending commitments (2)
5,558
5,727
(1)
Includes demand deposits of $545.5 billion and $531.9 billion with no stated maturities at December 31, 2019 and 2018.
(2)
The carrying value of commercial unfunded lending commitments is included in accrued expenses and other liabilities on the Consolidated Balance Sheet. The Corporation does not estimate the fair value of consumer unfunded lending commitments because, in many instances, the Corporation can reduce or cancel these commitments by providing notice to the borrower. For more information on commitments, see Note 13 - Commitments and Contingencies.
NOTE 24 Business Segment Information
The Corporation reports its 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.
Consumer Banking
Consumer Banking offers a diversified range of credit, banking and investment products and services to consumers and small businesses. Consumer Banking product offerings include traditional savings accounts, money market savings accounts, CDs and IRAs, checking accounts, and investment accounts and products, as well as credit and debit cards, residential mortgages and home equity loans, and direct and indirect loans to consumers and small businesses in the U.S. Consumer Banking includes the impact of servicing residential mortgages and home equity loans in the core portfolio.
Global Wealth & Investment Management
GWIM provides a high-touch client experience through a network of financial advisors focused on clients with over $250,000 in total investable assets, including tailored solutions to meet clients’ needs through a full set of investment management, brokerage, banking and retirement products. GWIM also 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.
Global Banking
Global Banking provides a wide range of lending-related products and services, integrated working capital management and treasury solutions, and underwriting and advisory services through the Corporation’s network of offices and client relationship teams. Global Banking also provides investment banking products to clients. 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 clients generally include middle-market companies, commercial real estate firms, not-for-profit companies, large global corporations, financial institutions, leasing clients, and mid-sized U.S.-based businesses requiring customized and integrated financial advice and solutions.
Global Markets
Global Markets offers sales and trading services and research services to institutional clients across fixed-income, credit, currency, commodity and equity businesses. Global Markets provides market-making, financing, securities clearing, settlement and custody services globally to institutional investor clients in support of their investing and trading activities. Global Markets product coverage includes securities and derivative products in both the primary and secondary markets. Global Markets also works with commercial and corporate clients to provide risk management products. As a result of market-making activities, Global Markets may be required to manage risk in a broad range of financial products. In addition, the economics of certain investment banking and underwriting activities are shared primarily between Global Markets and Global Banking under an internal revenue-sharing arrangement.
Bank of America 156
All Other
All Other consists of ALM activities, equity investments, non-core mortgage loans and servicing activities, liquidating businesses and certain expenses not otherwise allocated to business segments. ALM activities encompass certain residential mortgages, debt securities, interest rate and foreign currency risk management activities. Substantially all of the results of ALM activities are allocated to the business segments. Equity investments include the merchant services joint venture as well as a portfolio of equity, real estate and other alternative investments.
Basis of Presentation
The management accounting and reporting process derives segment and business results by utilizing allocation methodologies for revenue and expense. The net income derived for the businesses is dependent upon revenue and cost allocations using an activity-based costing model, funds transfer pricing, and other methodologies and assumptions management believes are appropriate to reflect the results of the business.
Total revenue, net of interest expense, includes net interest income on an FTE basis and noninterest income. The adjustment of net interest income to an FTE basis results in a corresponding increase in income tax expense. The segment results also reflect certain revenue and expense methodologies that are utilized to determine net income. The net interest income of the businesses includes the results of a funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity
and maturity characteristics. In segments where the total of liabilities and equity exceeds assets, which are generally deposit-taking segments, the Corporation allocates assets to match liabilities. Net interest income of the business segments also includes an allocation of net interest income generated by certain of the Corporation’s ALM activities.
The Corporation’s ALM activities include an overall interest rate risk management strategy that incorporates the use of various derivatives and cash instruments to manage fluctuations in earnings and capital that are caused by interest rate volatility. The Corporation’s goal is to manage interest rate sensitivity so that movements in interest rates do not significantly adversely affect earnings and capital. The results of substantially all of the Corporation’s ALM activities are allocated to the business segments and fluctuate based on the performance of the ALM activities. ALM activities include external product pricing decisions including deposit pricing strategies, the effects of the Corporation’s internal funds transfer pricing process and the net effects of other ALM activities.
Certain expenses not directly attributable to a specific business segment are allocated to the segments. The costs of certain centralized or shared functions are allocated based on methodologies that reflect utilization.
The following table presents net income (loss) and the components thereto (with net interest income on an FTE basis for the business segments, All Other and the total Corporation) for 2019, 2018 and 2017, and total assets at December 31, 2019 and 2018 for each business segment, as well as All Other.
Results of Business Segments and All Other
At and for the year ended December 31
Total Corporation (1)
Consumer Banking
(Dollars in millions)
Net interest income
$
49,486
$
48,772
$
46,164
$
28,158
$
27,025
$
24,203
Noninterest income
42,353
42,858
41,887
10,429
10,593
10,101
Total revenue, net of interest expense
91,839
91,630
88,051
38,587
37,618
34,304
Provision for credit losses
3,590
3,282
3,396
3,772
3,664
3,525
Noninterest expense
54,900
53,154
54,517
17,618
17,672
17,847
Income before income taxes
33,349
35,194
30,138
17,197
16,282
12,932
Income tax expense
5,919
7,047
11,906
4,213
4,150
4,897
Net income
$
27,430
$
28,147
$
18,232
$
12,984
$
12,132
$
8,035
Period-end total assets
$
2,434,079
$
2,354,507
$
804,019
$
768,881
Global Wealth &
Investment Management
Global Banking
Net interest income
$
6,504
$
6,265
$
6,152
$
10,675
$
10,993
$
10,615
Noninterest income
13,033
13,188
12,447
9,808
9,008
9,510
Total revenue, net of interest expense
19,537
19,453
18,599
20,483
20,001
20,125
Provision for credit losses
Noninterest expense
13,823
14,015
13,770
9,017
8,745
8,811
Income before income taxes
5,632
5,352
4,773
11,052
11,248
11,102
Income tax expense
1,380
1,364
1,807
2,984
2,923
4,204
Net income
$
4,252
$
3,988
$
2,966
$
8,068
$
8,325
$
6,898
Period-end total assets
$
299,756
$
305,907
$
464,032
$
442,330
Global Markets
All Other
Net interest income
$
3,915
$
3,857
$
4,264
$
$
$
Noninterest income
11,699
12,326
11,698
(2,616
)
(2,257
)
(1,869
)
Total revenue, net of interest expense
15,614
16,183
15,962
(2,382
)
(1,625
)
(939
)
Provision for credit losses
(9
)
-
(669
)
(476
)
(561
)
Noninterest expense
10,722
10,835
10,997
3,720
1,887
3,092
Income (loss) before income taxes
4,901
5,348
4,801
(5,433
)
(3,036
)
(3,470
)
Income tax expense (benefit)
1,397
1,390
1,666
(4,055
)
(2,780
)
(668
)
Net income (loss)
$
3,504
$
3,958
$
3,135
$
(1,378
)
$
(256
)
$
(2,802
)
Period-end total assets
$
641,806
$
641,923
$
224,466
$
195,466
(1)
There were no material intersegment revenues.
157 Bank of America
The table below presents noninterest income and the components thereto for 2019, 2018 and 2017 for each business segment, All Other and the total Corporation. For more information, see Note 2 - Net Interest Income and Noninterest Income.
Noninterest Income by Business Segment and All Other
Total Corporation
Consumer Banking
Global Wealth &
Investment Management
(Dollars in millions)
Fees and commissions:
Card income
Interchange fees
$
3,834
$
3,866
$
3,777
$
3,174
$
3,196
$
3,038
$
$
$
Other card income
1,963
1,958
1,899
1,910
1,906
1,846
Total card income
5,797
5,824
5,676
5,084
5,102
4,884
Service charges
Deposit-related fees
6,588
6,667
6,708
4,219
4,300
4,266
Lending-related fees
1,086
1,100
1,110
-
-
-
-
-
-
Total service charges
7,674
7,767
7,818
4,219
4,300
4,266
Investment and brokerage services
Asset management fees
10,241
10,189
9,310
10,130
10,042
9,177
Brokerage fees
3,661
3,971
4,526
1,740
1,917
2,217
Total investment and brokerage services
13,902
14,160
13,836
11,870
11,959
11,394
Investment banking fees
Underwriting income
2,998
2,722
2,821
-
(1
)
-
Syndication fees
1,184
1,347
1,499
-
-
-
-
-
-
Financial advisory services
1,460
1,258
1,691
-
-
-
-
Total investment banking fees
5,642
5,327
6,011
-
(1
)
-
Total fees and commissions
33,015
33,078
33,341
9,596
9,720
9,467
12,440
12,496
11,942
Market making and similar activities
9,034
9,008
7,102
Other income
1,444
Total noninterest income
$
42,353
$
42,858
$
41,887
$
10,429
$
10,593
$
10,101
$
13,033
$
13,188
$
12,447
Global Banking
Global Markets
All Other (1)
Fees and commissions:
Card income
Interchange fees
$
$
$
$
$
$
$
-
$
-
$
Other card income
(1
)
(2
)
(2
)
-
-
(1
)
Total card income
-
-
Service charges
Deposit-related fees
2,121
2,111
2,197
Lending-related fees
-
-
-
Total service charges
3,015
3,027
3,125
Investment and brokerage services
Asset management fees
-
-
-
-
-
-
(33
)
-
-
Brokerage fees
1,738
1,780
2,049
-
(21
)
Total investment and brokerage services
1,738
1,780
2,049
(33
)
(21
)
Investment banking fees
Underwriting income
1,227
1,090
1,172
1,555
1,495
1,588
(185
)
(197
)
(255
)
Syndication fees
-
Financial advisory services
1,336
1,153
1,557
-
(1
)
Total investment banking fees
3,137
2,891
3,471
2,288
2,296
2,477
(184
)
(196
)
(255
)
Total fees and commissions
6,718
6,523
7,183
4,454
4,505
4,939
(193
)
(166
)
(190
)
Market making and similar activities
7,065
7,260
6,203
1,615
1,368
Other income
2,855
2,225
2,193
(4,038
)
(3,459
)
(2,297
)
Total noninterest income
$
9,808
$
9,008
$
9,510
$
11,699
$
12,326
$
11,698
$
(2,616
)
$
(2,257
)
$
(1,869
)
(1)
All Other includes eliminations of intercompany transactions.
Bank of America 158
Business Segment Reconciliations
(Dollars in millions)
Segments’ total revenue, net of interest expense
$
94,221
$
93,255
$
88,990
Adjustments (1):
ALM activities
(325
)
Liquidating businesses, eliminations and other
(2,623
)
(1,300
)
(1,100
)
FTE basis adjustment
(595
)
(610
)
(925
)
Consolidated revenue, net of interest expense
$
91,244
$
91,020
$
87,126
Segments’ total net income
28,808
28,403
21,034
Adjustments, net-of-tax (1):
ALM activities
(222
)
Liquidating businesses, eliminations and other
(1,580
)
(34
)
(2,956
)
Consolidated net income
$
27,430
$
28,147
$
18,232
December 31
Segments’ total assets
$
2,209,613
$
2,159,041
Adjustments (1):
ALM activities, including securities portfolio
721,806
669,204
Elimination of segment asset allocations to match liabilities
(565,346
)
(540,798
)
Other
68,006
67,060
Consolidated total assets
$
2,434,079
$
2,354,507
(1)
Adjustments include consolidated income, expense and asset amounts not specifically allocated to individual business segments.
NOTE 25 Parent Company Information
The following tables present the Parent Company-only financial information.
Condensed Statement of Income
(Dollars in millions)
Income
Dividends from subsidiaries:
Bank holding companies and related subsidiaries
$
27,820
$
28,575
$
12,088
Nonbank companies and related subsidiaries
-
Interest from subsidiaries
9,502
8,425
7,043
Other income (loss)
(1,025
)
Total income
37,396
36,066
19,361
Expense
Interest on borrowed funds from related subsidiaries
Other interest expense
5,899
6,425
5,555
Noninterest expense
1,641
1,600
1,672
Total expense
7,991
8,260
7,416
Income before income taxes and equity in undistributed earnings of subsidiaries
29,405
27,806
11,945
Income tax expense (benefit)
(281
)
Income before equity in undistributed earnings of subsidiaries
29,064
28,087
10,995
Equity in undistributed earnings (losses) of subsidiaries:
Bank holding companies and related subsidiaries
(1,717
)
8,725
Nonbank companies and related subsidiaries
(246
)
(1,488
)
Total equity in undistributed earnings of subsidiaries
(1,634
)
7,237
Net income
$
27,430
$
28,147
$
18,232
159 Bank of America
Condensed Balance Sheet
December 31
(Dollars in millions)
Assets
Cash held at bank subsidiaries (1)
$
5,695
$
5,141
Securities
Receivables from subsidiaries:
Bank holding companies and related subsidiaries
173,301
152,905
Banks and related subsidiaries
Nonbank companies and related subsidiaries
Investments in subsidiaries:
Bank holding companies and related subsidiaries
297,465
293,045
Nonbank companies and related subsidiaries
3,663
3,432
Other assets
9,438
14,696
Total assets
$
490,660
$
471,011
Liabilities and shareholders’ equity
Accrued expenses and other liabilities
$
13,381
$
8,828
Payables to subsidiaries:
Banks and related subsidiaries
Nonbank companies and related subsidiaries
12,102
13,301
Long-term debt
199,909
183,208
Total liabilities
225,850
205,686
Shareholders’ equity
264,810
265,325
Total liabilities and shareholders’ equity
$
490,660
$
471,011
(1)
Balance includes third-party cash held of $4 million and $389 million at December 31, 2019 and 2018.
Condensed Statement of Cash Flows
(Dollars in millions)
Operating activities
Net income
$
27,430
$
28,147
$
18,232
Reconciliation of net income to net cash provided by (used in) operating activities:
Equity in undistributed (earnings) losses of subsidiaries
1,634
(60
)
(7,237
)
Other operating activities, net
16,973
(3,706
)
(2,593
)
Net cash provided by operating activities
46,037
24,381
8,402
Investing activities
Net sales (purchases) of securities
(17
)
Net payments to subsidiaries
(19,121
)
(2,262
)
(7,087
)
Other investing activities, net
(1
)
Net cash used in investing activities
(19,131
)
(2,163
)
(6,776
)
Financing activities
Net increase (decrease) in other advances
(1,625
)
3,867
(6,672
)
Proceeds from issuance of long-term debt
29,315
30,708
37,704
Retirement of long-term debt
(21,039
)
(29,413
)
(29,645
)
Proceeds from issuance of preferred stock
3,643
4,515
-
Redemption of preferred stock
(2,568
)
(4,512
)
-
Common stock repurchased
(28,144
)
(20,094
)
(12,814
)
Cash dividends paid
(5,934
)
(6,895
)
(5,700
)
Net cash used in financing activities
(26,352
)
(21,824
)
(17,127
)
Net increase (decrease) in cash held at bank subsidiaries
(15,501
)
Cash held at bank subsidiaries at January 1
5,141
4,747
20,248
Cash held at bank subsidiaries at December 31
$
5,695
$
5,141
$
4,747
Bank of America 160
NOTE 26 Performance by Geographical Area
The Corporation’s operations are highly integrated with operations in both U.S. and non-U.S. markets. The non-U.S. business activities are largely conducted in Europe, the Middle East and Africa and in Asia. The Corporation identifies its geographic performance based on the business unit structure used to manage the capital or expense deployed in the region as applicable. This
requires certain judgments related to the allocation of revenue so that revenue can be appropriately matched with the related capital or expense deployed in the region. Certain asset, liability, income and expense amounts have been allocated to arrive at total assets, total revenue, net of interest expense, income before income taxes and net income by geographic area as presented below.
(Dollars in millions)
Total Assets at Year End (1)
Total Revenue, Net of Interest Expense (2)
Income Before Income Taxes
Net Income
U.S. (3)
$
2,122,734
$
81,236
$
30,699
$
25,937
2,051,182
80,777
31,904
26,407
74,604
25,108
15,550
Asia
102,440
3,491
94,865
3,507
3,405
Europe, Middle East and Africa
178,889
5,310
185,285
5,632
1,543
1,126
7,907
2,990
1,926
Latin America and the Caribbean
30,016
1,207
23,175
1,104
1,210
Total Non-U.S.
311,345
10,008
2,055
1,493
303,325
10,243
2,680
1,740
12,522
4,105
2,682
Total Consolidated
$
2,434,079
$
91,244
$
32,754
$
27,430
2,354,507
91,020
34,584
28,147
87,126
29,213
18,232
(1)
Total assets include long-lived assets, which are primarily located in the U.S.
(2)
There were no material intercompany revenues between geographic regions for any of the periods presented.
(3)
Substantially reflects the U.S.
161 Bank of America
Glossary
Alt-A Mortgage - A type of U.S. mortgage that is considered riskier than A-paper, or “prime,” and less risky than “subprime,” the riskiest category. Typically, Alt-A mortgages are characterized by borrowers with less than full documentation, lower credit scores and higher LTVs.
Assets Under Management (AUM) - The total market value of assets under the investment advisory and/or discretion of GWIM which generate asset management fees based on a percentage of the assets’ market values. AUM reflects assets that are generally managed for institutional, high net worth and retail clients, and are distributed through various investment products including mutual funds, other commingled vehicles and separate accounts.
Banking Book - All on- and off-balance sheet financial instruments of the Corporation except for those positions that are held for trading purposes.
Brokerage and Other Assets - Non-discretionary client assets which are held in brokerage accounts or held for safekeeping.
Committed Credit Exposure - Any funded portion of a facility plus the unfunded portion of a facility on which the lender is legally bound to advance funds during a specified period under prescribed conditions.
Credit Derivatives - Contractual agreements that provide protection against a specified credit event on one or more referenced obligations.
Credit Valuation Adjustment (CVA) - A portfolio adjustment required to properly reflect the counterparty credit risk exposure as part of the fair value of derivative instruments.
Debit Valuation Adjustment (DVA) - A portfolio adjustment required to properly reflect the Corporation’s own credit risk exposure as part of the fair value of derivative instruments and/or structured liabilities.
Funding Valuation Adjustment (FVA) - A portfolio adjustment required to include funding costs on uncollateralized derivatives and derivatives where the Corporation is not permitted to use the collateral it receives.
Interest Rate Lock Commitment (IRLC) - Commitment with a loan applicant in which the loan terms are guaranteed for a designated period of time subject to credit approval.
Letter of Credit - A document issued on behalf of a customer to a third party promising to pay the third party upon presentation of specified documents. A letter of credit effectively substitutes the issuer’s credit for that of the customer.
Loan-to-value (LTV) - A commonly used credit quality metric. LTV is calculated as the outstanding carrying value of the loan divided by the estimated value of the property securing the loan.
Margin Receivable - An extension of credit secured by eligible securities in certain brokerage accounts.
Matched Book - Repurchase and resale agreements or securities borrowed and loaned transactions where the overall asset and liability position is similar in size and/or maturity. Generally, these are entered into to accommodate customers where the Corporation earns the interest rate spread.
Mortgage Servicing Rights (MSR) - The right to service a mortgage loan when the underlying loan is sold or securitized. Servicing includes collections for principal, interest and escrow payments from borrowers and accounting for and remitting principal and interest payments to investors.
Net Interest Yield - Net interest income divided by average total interest-earning assets.
Nonperforming Loans and Leases - Includes loans and leases that have been placed on nonaccrual status, including nonaccruing loans whose contractual terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties.
Operating Margin - Income before income taxes divided by total revenue, net of interest expense.
Prompt Corrective Action (PCA) - A framework established by the U.S. banking regulators requiring banks to maintain certain levels of regulatory capital ratios, comprised of five categories of capitalization: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” Insured depository institutions that fail to meet certain of these capital levels are subject to increasingly strict limits on their activities, including their ability to make capital distributions, pay management compensation, grow assets and take other actions.
Subprime Loans - Although a standard industry definition for subprime loans (including subprime mortgage loans) does not exist, the Corporation defines subprime loans as specific product offerings for higher risk borrowers.
Troubled Debt Restructurings (TDRs) - Loans whose contractual terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties. Certain consumer loans for which a binding offer to restructure has been extended are also classified as TDRs.
Value-at-Risk (VaR) - VaR is a model that simulates the value of a portfolio under a range of hypothetical scenarios in order to generate a distribution of potential gains and losses. VaR represents the loss the portfolio is expected to experience with a given confidence level based on historical data. A VaR model is an effective tool in estimating ranges of potential gains and losses on our trading portfolios.
Bank of America 162
Acronyms
ABS
Asset-backed securities
AFS
Available-for-sale
ALM
Asset and liability management
ARR
Alternative reference rates
AUM
Assets under management
AVM
Automated valuation model
BANA
Bank of America, National Association
BHC
Bank holding company
BofAS
BofA Securities, Inc.
BofASE
BofA Securities Europe SA
bps
basis points
CAE
Chief Audit Executive
CAO
Chief Administrative Officer
CCAR
Comprehensive Capital Analysis and Review
CDO
Collateralized debt obligation
CDS
Credit default swap
CET1
Common equity tier 1
CFPB
Consumer Financial Protection Bureau
CLO
Collateralized loan obligation
CFTC
Commodity Futures Trading Commission
CLTV
Combined loan-to-value
CRO
Chief Risk Officer
CVA
Credit valuation adjustment
DIF
Deposit Insurance Fund
DVA
Debit valuation adjustment
EAD
Exposure at default
EMRC
Enterprise Model Risk Committee
EPS
Earnings per common share
ERC
Enterprise Risk Committee
EU
European Union
FCA
Financial Conduct Authority
FDIC
Federal Deposit Insurance Corporation
FDICIA
Federal Deposit Insurance Corporation Improvement Act of 1991
FHA
Federal Housing Administration
FHFA
Federal Housing Finance Agency
FHLB
Federal Home Loan Bank
FHLMC
Freddie Mac
FICC
Fixed-income, currencies and commodities
FICO
Fair Isaac Corporation (credit score)
FLUs
Front line units
FNMA
Fannie Mae
FTE
Fully taxable-equivalent
FVA
Funding valuation adjustment
GAAP
Accounting principles generally accepted in the United States of America
GDPR
General Data Protection Regulation
GLS
Global Liquidity Sources
GNMA
Government National Mortgage Association
GSE
Government-sponsored enterprise
G-SIB
Global systemically important bank
GWIM
Global Wealth & Investment Management
HELOC
Home equity line of credit
HQLA
High Quality Liquid Assets
HTM
Held-to-maturity
ICAAP
Internal Capital Adequacy Assessment Process
IRM
Independent Risk Management
IBOR
Interbank Offered Rates
IRLC
Interest rate lock commitment
ISDA
International Swaps and Derivatives Association, Inc.
LCR
Liquidity Coverage Ratio
LGD
Loss given default
LHFS
Loans held-for-sale
LIBOR
London Interbank Offered Rate
LTV
Loan-to-value
MBS
Mortgage-backed securities
MD&A
Management’s Discussion and Analysis of Financial Condition and Results of Operations
MLGWM
Merrill Lynch Global Wealth Management
MLI
Merrill Lynch International
MLPCC
Merrill Lynch Professional Clearing Corp
MLPF&S
Merrill Lynch, Pierce, Fenner & Smith Incorporated
MRC
Management Risk Committee
MSA
Metropolitan Statistical Area
MSR
Mortgage servicing right
NOL
Net operating loss
NSFR
Net Stable Funding Ratio
OCC
Office of the Comptroller of the Currency
OCI
Other comprehensive income
OREO
Other real estate owned
OTC
Over-the-counter
OTTI
Other-than-temporary impairment
PCA
Prompt Corrective Action
RMBS
Residential mortgage-backed securities
RSU
Restricted stock unit
SBLC
Standby letter of credit
SCCL
Single-counterparty credit limits
SBSDs
Security-based swap dealers
SEC
Securities and Exchange Commission
SLR
Supplementary leverage ratio
SOFR
Secured Overnight Financing Rate
TDR
Troubled debt restructurings
TLAC
Total loss-absorbing capacity
VA
U.S. Department of Veterans Affairs
VaR
Value-at-Risk
VIE
Variable interest entity
163 Bank of America
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this report and pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended (Exchange Act), Bank of America’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness and design of our disclosure controls and procedures (as that term is defined in Rule 13a-15(e) of the Exchange Act). Based upon that evaluation, Bank of America’s Chief Executive Officer and Chief Financial Officer concluded that Bank of America’s disclosure controls and procedures were effective, as of the end of the period covered by this report.
Report of Management on Internal Control Over Financial Reporting
The Report of Management on Internal Control over Financial Reporting is set forth on page 86 and incorporated herein by reference. The Report of Independent Registered Public Accounting Firm with respect to the Corporation’s internal control over financial reporting is set forth on pages 87 and 88 and incorporated herein by reference.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended December 31, 2019, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None
Part III
Bank of America Corporation and Subsidiaries
Item 10. Directors, Executive Officers and Corporate Governance
Information about our Executive Officers
The name, age, position and office, and business experience during the last five years of our current executive officers are:
Dean C. Athanasia (53) President, Retail and Preferred & Small Business Banking since January 2019; Co-Head -- Consumer Banking from September 2014 to January 2019; and Preferred and Small Business Banking Executive from April 2011 to September 2014.
Catherine P. Bessant (59) Chief Operations and Technology Officer since July 2015; Global Technology & Operations Executive from March 2010 to July 2015.
Sheri Bronstein (51) Chief Human Resources Officer since January 2019; Global Human Resources Executive from July 2015
to January 2019; and HR Executive for Global Banking & Markets from March 2010 to July 2015.
Paul M. Donofrio (59) Chief Financial Officer since August 2015; Strategic Finance Executive from April 2015 to August 2015; and Head of Global Corporate Credit and Transaction Banking from January 2012 to April 2015.
Geoffrey S. Greener (55) Chief Risk Officer since April 2014; Head of Enterprise Capital Management from April 2011 to April 2014.
Kathleen A. Knox (56) President, Private Bank since November 2017; Head of Business Banking from October 2014 to November 2017; and Retail Banking & Distribution Executive from June 2011 to October 2014.
David G. Leitch (59) Global General Counsel since January 2016; General Counsel of Ford Motor Company from April 2005 to December 2015.
Thomas K. Montag (63) Chief Operating Officer since September 2014; Co-Chief Operating Officer from September 2011 to September 2014.
Brian T. Moynihan (60) Chairman of the Board since October 2014, and President, and Chief Executive Officer and member of the Board of Directors since January 2010.
Thong M. Nguyen (61) Vice Chairman, Bank of America Corporation since January 2019; Co-Head -- Consumer Banking from September 2014 to January 2019; Retail Banking Executive from April 2014 to September 2014; and Retail Strategy, and Operations & Digital Banking Executive from September 2012 to April 2014.
Andrew M. Sieg (52) President, Merrill Lynch Wealth Management since January 2017; and Head of Global Wealth & Retirement Solutions with Merrill Lynch from October 2011 to January 2017.
Andrea B. Smith (52) Chief Administrative Officer since August 2015; Global Head of Human Resources from January 2010 to August 2015.
Information included under the following captions in the Corporation’s proxy statement relating to its 2020 annual meeting of stockholders (the 2020 Proxy Statement) is incorporated herein by reference:
●
“Proposal 1: Electing Directors - Our Director Nominees;”
●
“Corporate Governance - Additional Corporate Governance Information;” and
●
“Corporate Governance - Board Meetings, Committee Membership, and Attendance.”
Item 11. Executive Compensation
Information included under the following captions in the 2020 Proxy Statement is incorporated herein by reference:
●
“Compensation Discussion and Analysis;”
●
“Compensation and Human Capital Committee Report;”
●
“Executive Compensation;”
●
“Corporate Governance;” and
●
“Director Compensation.”
Bank of America 164
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information included under the following caption in the 2020 Proxy Statement is incorporated herein by reference:
●
“Stock Ownership of Directors, Executive Officers, and Certain Beneficial Owners.”
The table below presents information on equity compensation plans at December 31, 2019:
Plan Category (1)
(a) Number of Shares to
be Issued Under
Outstanding Options, Warrants and Rights (2)
(b) Weighted-average Exercise Price of Outstanding Options, Warrants and Rights (3)
(c) Number of Shares Remaining for Future Issuance Under Equity Compensation Plans (excluding securities reflected in column (a)) (4)
Plans approved by shareholders
158,954,915
-
304,904,984
Plans not approved by shareholders
-
-
-
Total
158,954,915
-
304,904,984
(1)
This table does not include 783,282 vested restricted stock units and stock option gain deferrals at December 31, 2019 that were assumed by the Corporation in connection with prior acquisitions under whose plans the awards were originally granted.
(2)
Consists of outstanding restricted stock units. Includes 1,115,166 vested restricted stock units subject to a required twelve-month holding period.
(3)
Restricted stock units do not have an exercise price and are delivered without any payment or consideration.
(4)
Amount represents shares of common stock available for future issuance under the Bank of America Corporation Key Employee Equity Plan.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information included under the following captions in the 2020 Proxy Statement is incorporated herein by reference:
●
“Related Person and Certain Other Transactions;” and
●
“Corporate Governance - Director Independence.”
Item 14. Principal Accounting Fees and Services
Information included under the following caption in the 2020 Proxy Statement is incorporated herein by reference:
●
“Proposal 3: Ratifying the Appointment of our Independent Registered Public Accounting Firm for 2020.”
165 Bank of America
Part IV
Bank of America Corporation and Subsidiaries
Item 15. Exhibits, Financial Statement Schedules
The following documents are filed as part of this report:
(1) Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Statement of Income for the years ended December 31, 2019, 2018 and 2017
Consolidated Statement of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017
Consolidated Balance Sheet at December 31, 2019 and 2018
Consolidated Statement of Changes in Shareholders’ Equity for the years ended December 31, 2019, 2018 and 2017
Consolidated Statement of Cash Flows for the years ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
(2) Schedules:
None
(3) Index to Exhibits
With the exception of the information expressly incorporated herein by reference, the 2020 Proxy Statement shall not be deemed filed as part of this Annual Report on Form 10-K.
Incorporated by Reference
Exhibit No.
Description
Notes
Form
Exhibit
Filing Date
File No.
3.1
Restated Certificate of Incorporation, as amended and in effect on the date hereof
3.2
Amended Bylaws of the Corporation as in effect on the date hereof
10-Q
3(b)
10/28/19
1-6523
4.1
Indenture dated as of January 1, 1995 between registrant (successor to NationsBank Corporation) and BankAmerica National Trust Company
S-3
4.1
2/1/95
33-57533
4.2
First Supplemental Indenture dated as of September 18, 1998 between registrant and U.S. Bank Trust National Association (successor to BankAmerica National Trust Company) to the indenture dated as of January 1, 1995 (See Exhibit 4.1)
8-K
4.3
11/18/98
1-6523
4.3
Second Supplemental Indenture dated as of May 7, 2001 between registrant, U.S. Bank Trust National Association, as Prior Trustee, and The Bank of New York, as Successor Trustee to the indenture dated as of January 1, 1995 (See Exhibit 4.1)
8-K
4.4
6/14/01
1-6523
4.4
Third Supplemental Indenture dated as of July 28, 2004 between registrant and The Bank of New York to the indenture dated as of January 1, 1995 (See Exhibit 4.1)
8-K
4.2
8/27/04
1-6523
4.5
Fourth Supplemental Indenture dated as of April 28, 2006 between the registrant and The Bank of New York to the indenture dated as of January 1, 1995 (See Exhibit 4.1)
S-3
4.6
5/5/06
333-133852
4.6
Fifth Supplemental Indenture dated as of December 1, 2008 between registrant and The Bank of New York Mellon Trust Company, N.A. (successor to The Bank of New York) to the indenture dated as of January 1, 1995 (See Exhibit 4.1)
8-K
4.1
12/5/08
1-6523
4.7
Sixth Supplemental Indenture dated as of February 23, 2011 between registrant and The Bank of New York Mellon Trust Company, N.A. to the indenture dated as of January 1, 1995 (See Exhibit 4.1)
10-K
4(ee)
2/25/11
1-6523
4.8
Seventh Supplemental Indenture dated as of January 13, 2017 between registrant and The Bank of New York Mellon Trust Company, N.A. to the indenture dated as of January 1, 1995 (See Exhibit 4.1)
8-K
4.1
1/13/17
1-6523
4.9
Eighth Supplemental Indenture dated as of February 23, 2017 between registrant and the Bank of New York Mellon Trust Company, N.A. to the indenture dated as of January 1, 1995 (See Exhibit 4.1)
10-K
4(a)
2/23/17
1-6523
4.10
Successor Trustee Agreement effective December 15, 1995 between registrant (successor to NationsBank Corporation) and First Trust of New York, National Association, as successor trustee to BankAmerica National Trust Company
S-3
4.2
6/28/96
333-07229
4.11
Agreement of Appointment and Acceptance dated as of December 29, 2006 between registrant and The Bank of New York Trust Company, N.A.
10-K
4(aaa)
2/28/07
1-6523
4.12
Form of Senior Registered Note
S-3
4.12
5/1/15
333-202354
4.13
Form of Global Senior Medium-Term Note, Series L
S-3
4.13
5/1/15
333-202354
4.14
Form of Master Global Senior Medium-Term Note, Series L
S-3
4.14
5/1/15
333-202354
4.15
Form of Global Senior Medium-Term Note, Series M
8-K
4.2
1/13/17
1-6523
4.16
Form of Master Global Senior Medium-Term Note, Series M
8-K
4.3
1/13/17
1-6523
4.17
Indenture dated as of January 1, 1995 between registrant (successor to NationsBank Corporation) and The Bank of New York
S-3
4.5
2/1/95
33-57533
4.18
First Supplemental Indenture dated as of August 28, 1998 between registrant and The Bank of New York to the indenture dated as of January 1, 1995 (See Exhibit 4.17)
8-K
4.8
11/18/98
1-6523
Bank of America 166
Incorporated by Reference
Exhibit No.
Description
Notes
Form
Exhibit
Filing Date
File No.
4.19
Second Supplemental Indenture dated as of January 25, 2007 between registrant and The Bank of New York Trust Company, N.A. (successor to The Bank of New York) to the indenture dated as of January 1, 1995 (See Exhibit 4.17)
S-4
4.3
3/16/07
333-141361
4.20
Third Supplemental Indenture dated as of February 23, 2011 between registrant and The Bank of New York Mellon Trust Company, N.A. (formerly The Bank of New York Trust Company, N.A.) to the indenture dated as of January 1, 1995 (See Exhibit 4.17)
10-K
4(ff)
2/25/11
1-6523
4.21
Fourth Supplemental Indenture dated as of February 23, 2017 between registrant and The Bank of New York Mellon Trust Company, N.A. to the indenture dated as of January 1, 1995 (See Exhibit 4.17)
10-K
4(i)
2/23/17
1-6523
4.22
Indenture dated as of June 27, 2018 between the registrant and The Bank of New York Mellon Trust Company, N.A.
S-3
4.3
6/27/18
333-224523
4.23
Form of Global Senior Medium-Term Note, Series N
S-3
4.4
6/27/18
333-224523
4.24
Form of Master Global Senior Medium-Term Note, Series N
S-3
4.5
6/27/18
333-224523
4.25
Indenture dated as of June 27, 2018 between the registrant and The Bank of New York Mellon Trust Company, N.A.
S-3
4.6
6/27/18
333-224523
4.26
Form of Global Subordinated Medium-Term Note, Series N
S-3
4.7
6/27/18
333-224523
Registrant and its subsidiaries have other long-term debt agreements, but these are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. Copies of these agreements will be furnished to the Commission on request
4.27
Description of the Corporation's Securities
10.1
Bank of America Pension Restoration Plan, as amended and restated effective January 1, 2009 (Pension Restoration Plan)
10-K
10(c)
2/27/09
1-6523
10.2
First Amendment to the Pension Restoration Plan dated December 18, 2009
10-K
10(c)
2/26/10
1-6523
10.3
Second Amendment to the Pension Restoration Plan dated June 29, 2012
10-K
10(a)
2/28/13
1-6523
10.4
Third Amendment to the Pension Restoration Plan dated March 26, 2013
1,2
10.5
Fourth Amendment to the Pension Restoration Plan dated August 22, 2013
1,2
10.6
Fifth Amendment to the Pension Restoration Plan dated December 5, 2014
1,2
10.7
Sixth Amendment to the Pension Restoration Plan dated December 15, 2016
1,2
10.8
NationsBank Corporation Benefit Security Trust dated as of June 27, 1990
10-K
10(t)
3/27/91
1-6523
10.9
First Supplement to NationsBank Corporation Benefit Security Trust dated as of
November 30, 1992
10-K
10(v)
3/24/93
1-6523
10.10
NationsBank Corporation Benefit Security Trust Trustee Removal/Appointment Agreement dated as of December 19, 1995
10-K
10(o)
3/29/96
1-6523
10.11
Bank of America Deferred Compensation Plan (formerly known as the Bank of America 401(k) Restoration Plan) as amended and restated effective January 1, 2015
10-K
10(c)
2/25/15
1-6523
10.12
First Amendment to the Bank of America Deferred Compensation Plan (formerly know as the Bank of America 401(k) Restoration Plan), as amended and restated effective January 1, 2015
10-K
10(vv)
2/24/16
1-6523
10.13
Second Amendment to the Bank of America Deferred Compensation Plan (formerly known as the Bank of America 401(k) Restoration Plan), as amended and restated effective January 1, 2015
S-8
4(c)
11/19/19
333-234780
10.14
Third Amendment to the Bank of America Deferred Compensation Plan (formerly known as the Bank of America 401(k) Restoration Plan), as amended and restated effective January 1, 2015
1,2
10.15
Bank of America Executive Incentive Compensation Plan, as amended and restated effective December 10, 2002
10-K
10(g)
3/3/03
1-6523
10.16
Amendment to Bank of America Executive Incentive Compensation Plan, dated January 23, 2013
10-K
10(d)
2/28/13
1-6523
10.17
Bank of America Director Deferral Plan, as amended and restated effective January 1, 2005
10-K
10(g)
2/28/07
1-6523
10.18
Bank of America Director Deferral Plan, as amended and restated effective January 1, 2019
10-K
10(f)
2/26/19
1-6523
10.19
Bank of America Corporation Directors’ Stock Plan as amended and restated effective April 26, 2006 (2006 Directors’ Stock Plan)
8-K
10.2
12/14/05
1-6523
10.20
Form of Restricted Stock Award Agreement to the 2006 Directors' Stock Plan
10-K
10(h)
3/1/05
1-6523
10.21
Form of Directors’ Stock Plan Conditional Restricted Stock Award Agreement for Non-U.S. Director to the 2006 Directors’ Stock Plan
10-Q
10(a)
8/4/11
1-6523
10.22
Bank of America Corporation Key Associate Stock Plan, as amended and restated effective April 28, 2010 (2010 KASP)
8-K
10.2
5/3/10
1-6523
10.23
Form of Performance Restricted Stock Units Award Agreement (February 2014 and subsequent grants), including grants to named executive officers to the 2010 KASP
10-Q
10(a)
5/1/14
1-6523
10.24
Bank of America Corporation Key Employee Equity Plan (formerly known as the Key Associate Stock Plan), as amended and restated effective May 6, 2015 (2015 KEEP)
8-K
10.2
5/7/15
1-6523
167 Bank of America
Incorporated by Reference
Exhibit No.
Description
Notes
Form
Exhibit
Filing Date
File No.
10.25
Form of Cash-settled Restricted Stock Units Award Agreement (February 2016 and subsequent grants) to the 2015 KEEP
10-Q
10(a)
5/2/16
1-6523
10.26
Form of Performance Restricted Stock Units Award Agreement (February 2016) to the 2015 KEEP
10-Q
10(c)
5/2/16
1-6523
10.27
Form of Time-based Restricted Stock Units Award Agreement (February 2017 and February 2018) to the 2015 KEEP
10-Q
10(a)
5/2/17
1-6523
10.28
Form of Performance Restricted Stock Units Award Agreement (February 2017) to the 2015 KEEP
10-Q
10(b)
5/2/17
1-6523
10.29
Form of Performance Restricted Stock Units Award Agreement (February 2018) to the 2015 KEEP
10-Q
4/30/18
1-6523
10.30
Form of Restricted Stock Award Agreement for Non-Employee Directors to the 2015 KEEP
10-K
10(h)
2/26/19
1-6523
10.31
Form of Time-based Restricted Stock Units Award Agreement (February 2019) between the Corporation and certain executive officers of the Corporation, including certain Named Executive Officers to the 2015 KEEP
10-Q
10(a)
4/26/19
1-6523
10.32
Form of Performance Restricted Stock Units Award Agreement (February 2019) between the Corporation and certain executive officers of the Corporation, including certain Named Executive Officers to the 2015 KEEP
10-Q
10(b)
4/26/19
1-6523
10.33
ESA Retention Agreement dated March 15, 2004 between the Corporation and Dean C. Athanasia
10-Q
10(c)
4/26/19
1-6523
10.34
Amendment to various plans in connection with FleetBoston Financial Corporation merger dated October 27, 2003
10-K
10(v)
3/1/04
1-6523
10.35
FleetBoston Supplemental Executive Retirement Plan effective December 31, 2004
10-K
10(r)
3/1/05
1-6523
10.36
FleetBoston Executive Deferred Compensation Plan No. 2 effective December 16, 2003
10-K
10(u)
3/1/05
1-6523
10.37
FleetBoston Executive Supplemental Plan effective December 31, 2004
10-K
10(v)
3/1/05
1-6523
10.38
Retirement Income Assurance Plan for Legacy Fleet, as amended and restated effective January 1, 2009
10-K
10(p)
2/26/10
1-6523
10.39
Amendment thereto dated December 16, 2010, incorporated by reference to Exhibit 10(c) of the 2010 10-K
10-K
10(c)
2/25/11
1-6523
10.40
Amendment thereto dated June 29, 2012, incorporated by reference to Exhibit 10(l) of the 2012 10-K
10-K
10(l)
2/28/13
1-6523
10.41
Trust Agreement for the FleetBoston Executive Deferred Compensation Plans No. 1 and 2 dated December 17, 1997
10-K
10(x)
3/1/05
1-6523
10.42
Trust Agreement for the FleetBoston Executive Supplemental Plan dated June 19, 1996
10-K
10(y)
3/1/05
1-6523
10.43
Trust Agreement for the FleetBoston Retirement Income Assurance Plan and the FleetBoston Supplemental Executive Retirement Plan dated June 19, 1996
10-K
10(z)
3/1/05
1-6523
10.44
FleetBoston Directors Deferred Compensation and Stock Unit Plan effective January 1, 2004
10-K
10(aa)
3/1/05
1-6523
10.45
BankBoston Corporation and its Subsidiaries Deferred Compensation Plan dated December 24, 2001
10-K
10(cc)
3/1/05
1-6523
10.46
BankBoston Director Stock Award Plan effective July 1, 1998
10-K
10(hh)
3/1/05
1-6523
10.47
BankBoston Corporation Directors’ Deferred Compensation Plan effective March 1, 1988
10-K
10(ii)
3/1/05
1-6523
10.48
BankBoston, N.A. Directors’ Deferred Compensation Plan effective March 1, 1988
10-K
10(jj)
3/1/05
1-6523
10.49
Description of BankBoston Director Retirement Benefits Exchange Program
10-K
10(ll)
3/1/05
1-6523
10.50
Global amendment to definition of “change in control” or “change of control,” together with a list of plans affected by such amendment
10-K
10(oo)
3/1/05
1-6523
10.51
Employment Agreement dated October 27, 2003 between registrant and Brian T. Moynihan
S-4
10(d)
12/4/03
333-110924
10.52
Cancellation Agreement dated October 26, 2005 between registrant and Brian T. Moynihan
8-K
10.1
10/26/05
1-6523
10.53
Agreement Regarding Participation in the Fleet Boston Supplemental Executive Retirement Plan dated October 26, 2005 between registrant and Brian T. Moynihan
8-K
10.2
10/26/05
1-6523
10.54
Bank of America Corporation Equity Incentive Plan amended and restated effective as of January 1, 2008
10-K
10(zz)
2/26/10
1-6523
10.55
Merrill Lynch & Co., Inc. Long-Term Incentive Compensation Plan amended as of January 1, 2009 and 2008 Restricted Units/Stock Option Grant Document for Thomas K. Montag
10-K
10(aaa)
2/26/10
1-6523
10.56
Employment Letter dated May 1, 2008 between Merrill Lynch & Co., Inc. and Thomas K. Montag and Summary of Agreement with respect to Post-Employment Medical Coverage
10-K
10(bbb)
2/26/10
1-6523
10.57
Securities Purchase Agreement dated August 25, 2011 between registrant and Berkshire Hathaway Inc. (including forms of the Certificate of Designations, Warrant and Registration Rights Agreement)
8-K
1.1
8/25/11
1-6523
10.58
Form of Waiver of Certain Incremental Payouts from Performance Restricted Stock Units
10-K
10(rr)
2/23/17
1-6523
10.59
Amended and Restated Aircraft Time Sharing Agreement (Multiple Aircraft) dated June 26, 2018 between Bank of America, N.A. and Brian T. Moynihan
10-Q
7/30/18
1-6523
10.60
Form of Aircraft Time Sharing Agreement (Multiple Aircraft) between Bank of America, N.A. and certain executive officers of the Corporation, including certain Named Executive Officers
10-Q
10(b)
6/30/19
1-6523
Bank of America 168
Incorporated by Reference
Exhibit No.
Description
Notes
Form
Exhibit
Filing Date
File No.
10.61
First Amendment to the 2015 KEEP dated December 19, 2018
10-K
10(mm)
2/26/19
1-6523
10.62
Second Amendment to the 2015 KEEP dated April 24, 2019
8-K
10.1
4/24/19
1-6523
Direct and Indirect Subsidiaries of Bank of America Corporation As of December 31, 2019
Consent of PricewaterhouseCoopers LLP
Power of Attorney
31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
Inline XBRL Instance Document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definitions Linkbase Document
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
(1) Filed Herewith.
(2) Exhibit is a management contract or compensatory plan or arrangement.
(3) The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
169 Bank of America
Item 16. Form 10-K Summary
Not applicable.
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 19, 2020
Bank of America Corporation
By:
/s/ Brian T. Moynihan
Brian T. Moynihan
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Brian T. Moynihan
Chief Executive Officer, Chairman and Director
(Principal Executive Officer)
February 19, 2020
Brian T. Moynihan
*/s/ Paul M. Donofrio
Chief Financial Officer
(Principal Financial Officer)
February 19, 2020
Paul M. Donofrio
*/s/ Rudolf A. Bless
Chief Accounting Officer
(Principal Accounting Officer)
February 19, 2020
Rudolf A. Bless
*/s/ Sharon L. Allen
Director
February 19, 2020
Sharon L. Allen
*/s/ Susan S. Bies
Director
February 19, 2020
Susan S. Bies
*/s/ Jack O. Bovender, Jr.
Director
February 19, 2020
Jack O. Bovender, Jr.
*/s/ Frank P. Bramble, Sr.
Director
February 19, 2020
Frank P. Bramble, Sr.
*/s/ Pierre de Weck
Director
February 19, 2020
Pierre de Weck
*/s/ Arnold W. Donald
Director
February 19, 2020
Arnold W. Donald
*/s/ Linda P. Hudson
Director
February 19, 2020
Linda P. Hudson
*/s/ Monica C. Lozano
Director
February 19, 2020
Monica C. Lozano
Bank of America 170
Signature
Title
Date
*/s/ Thomas J. May
Director
February 19, 2020
Thomas J. May
*/s/ Lionel L. Nowell, III
Director
February 19, 2020
Lionel L. Nowell, III
*/s/ Denise L. Ramos
Director
February 19, 2020
Denise L. Ramos
*/s/ Clayton S. Rose
Director
February 19, 2020
Clayton S. Rose
*/s/ Michael D. White
Director
February 19, 2020
Michael D. White
*/s/ Thomas D. Woods
Director
February 19, 2020
Thomas D. Woods
*/s/ R. David Yost
Director
February 19, 2020
R. David Yost
*/s/ Maria T. Zuber
Director
February 19, 2020
Maria T. Zuber
*By
/s/ Ross E. Jeffries, Jr.
Ross E. Jeffries, Jr.
Attorney-in-Fact
171 Bank of America