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Regulatory Matters (Details)
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Change in Accumulated OCI (Details)
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Depositary Shares, each representing a 1/1,000th interest in a share of 6.204% Non-Cumulative
Preferred
Stock, Series D
New York Stock Exchange
Depositary Shares, each representing a 1/1,000th interest in a share of Floating Rate Non-Cumulative
Preferred Stock, Series E
New York Stock Exchange
Depositary Shares, each representing a 1/1,000th interest in a share of 6.625% Non-Cumulative
Preferred Stock, Series I
New York Stock Exchange
Depositary Shares, each representing a 1/1,000th interest in a share of 6.625% Non-Cumulative
Preferred Stock, Series W
New York Stock Exchange
Depositary Shares, each representing
a 1/1,000th interest in a share of 6.500% Non-Cumulative
Preferred Stock, Series Y
New York Stock Exchange
7.25% Non-Cumulative Perpetual Convertible Preferred Stock, Series L
New York Stock Exchange
Title
of each class
Name of each exchange on which registered
Depositary Shares, each representing a 1/1,200th interest in a share of Bank of America Corporation Floating Rate Non-Cumulative Preferred Stock, Series 1
New York Stock Exchange
Depositary Shares, each representing a 1/1,200th interest in a share of Bank of America
Corporation Floating Rate Non-Cumulative Preferred Stock, Series 2
New York Stock Exchange
Depositary Shares, each representing a 1/1,200th interest in a share of Bank of America Corporation 6.375% Non-Cumulative Preferred Stock, Series 3
New York Stock Exchange
Depositary Shares, each representing a 1/1,200th interest
in a share of Bank of America Corporation Floating Rate Non-Cumulative Preferred Stock, Series 4
New York Stock Exchange
Depositary Shares, each representing a 1/1,200th interest in a share of Bank of America Corporation Floating Rate Non-Cumulative Preferred Stock, Series 5
New York Stock Exchange
6.75% Trust Preferred
Securities of Countrywide Capital IV (and the guarantees related thereto)
New York Stock Exchange
7.00% Capital Securities of Countrywide Capital V (and the guarantees related thereto)
New York Stock Exchange
6% Capital Securities of BAC Capital Trust VIII (and the guarantee related thereto)
New
York Stock Exchange
Floating Rate Preferred Hybrid Income Term Securities of BAC Capital Trust XIII (and the guarantee related thereto)
New York Stock Exchange
5.63% Fixed to Floating Rate Preferred Hybrid Income Term Securities of BAC Capital Trust XIV (and the guarantee related thereto)
New York Stock Exchange
MBNA
Capital B Floating Rate Capital Securities, Series B (and the guarantee related thereto)
New York Stock Exchange
Trust Preferred Securities of Merrill Lynch Capital Trust I (and the guarantee of the Registrant with respect thereto)
New York Stock Exchange
Trust
Preferred Securities of Merrill Lynch Capital Trust II (and the guarantee of the Registrant with respect thereto)
New York Stock Exchange
Trust Preferred Securities of Merrill Lynch Capital Trust III (and the guarantee of the Registrant with respect thereto)
New York Stock Exchange
7%
Trust Originated Preferred Securities of Merrill Lynch Preferred Capital Trust III and 7% Partnership Preferred Securities of Merrill Lynch Preferred Funding III, L.P. (and the guarantee of the Registrant with respect thereto)
New York Stock Exchange
7.12% Trust Originated Preferred Securities of Merrill Lynch Preferred Capital Trust IV and 7.12% Partnership Preferred Securities of Merrill Lynch Preferred Funding IV, L.P. (and the guarantee of the Registrant
with
respect thereto)
New York Stock Exchange
7.28% Trust Originated Preferred Securities of Merrill Lynch Preferred Capital Trust V and 7.28% Partnership Preferred Securities of Merrill Lynch Preferred Funding V, L.P. (and the guarantee of the Registrant
with respect thereto)
New York Stock Exchange
Market
Index Target-Term Securities® Linked to the S&P 500® Index, due February 27, 2015
NYSE Arca, Inc.
Market Index Target-Term Securities® Linked to the Dow Jones Industrial AverageSM, due March 27, 2015
NYSE Arca, Inc.
Market
Index Target-Term Securities® Linked to the Dow Jones Industrial AverageSM, due April 24, 2015
NYSE Arca, Inc.
Market Index Target-Term Securities® Linked to the Dow Jones Industrial AverageSM, due May 29, 2015
NYSE
Arca, Inc.
Market Index Target-Term Securities® Linked to the Dow Jones Industrial AverageSM, due June 26, 2015
NYSE Arca, Inc.
Market Index Target-Term Securities® Linked to the S&P 500® Index, due July 31,
2015
NYSE Arca, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No ü
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No ü
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ü No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ü No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ü
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ü
Accelerated filer
Non-accelerated filer
Smaller
reporting company
(do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No ü
The aggregate market value of the registrant’s
common stock (“Common Stock”) held on June 30, 2014 by non-affiliates was approximately $161,628,224,532 (based on the June 30, 2014 closing price of Common Stock of $15.37 per share as reported on the New York Stock Exchange). As of February 24, 2015, there were 10,519,566,829 shares of Common Stock outstanding.
Bank of America Corporation (together, with its consolidated subsidiaries, Bank of America, we or us) is a Delaware corporation, a bank holding company (BHC) and a financial holding company. When used in this report, “the Corporation” may refer to Bank of America Corporation individually, Bank of America Corporation and its subsidiaries, or certain of Bank of America Corporation’s subsidiaries
or affiliates. As part of our efforts to streamline the Corporation’s organizational structure and reduce complexity and costs, the Corporation has reduced and intends to continue to reduce the number of its corporate subsidiaries, including through intercompany mergers.
Bank of America is one of the world’s largest financial institutions, serving individual consumers, small- and middle-market businesses, institutional investors, large corporations and governments with a full range of banking, investing, asset management and other financial and risk management products and services. Our principal executive offices are located in the Bank of America Corporate Center, 100 North Tryon Street, Charlotte, North
Carolina28255.
Bank of America’s website is www.bankofamerica.com. 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 our website at http://investor.bankofamerica.com
under the heading Financial Information SEC Filings as soon as reasonably practicable after we electronically file such reports with, or furnish them to, the U.S. Securities and Exchange Commission (SEC). In addition, we make available on http://investor.bankofamerica.com under the heading Corporate Governance: (i) our Code of Conduct (including our insider trading policy); (ii) our Corporate Governance Guidelines (accessible by clicking on the Governance Highlights link); and (iii) the charter of each active committee of our Board of Directors (the Board) (accessible by clicking on the committee names under the Committee Composition link), and we also intend to disclose any amendments to our Code of Conduct, or waivers of our Code of Conduct on behalf of our Chief Executive Officer, Chief Financial Officer or Chief Accounting Officer, on our
website. All of these corporate governance materials are also available free of charge in print to stockholders who request them in writing to: Bank of America Corporation, Attention: Office of the Corporate Secretary, Hearst Tower, 214 North Tryon Street, NC1-027-20-05, Charlotte, North Carolina28255.
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 five business segments: Consumer & Business Banking (CBB), Consumer Real Estate Services (CRES), Global Wealth & Investment Management (GWIM), Global Banking and Global Markets, with the remaining operations recorded in All Other. Effective January 1, 2015, to align the segments with how we manage the businesses in 2015, the Corporation changed its basis of segment presentation as follows: the Home Loans subsegment within CRES was moved to CBB, and Legacy Assets
&
Servicing became a separate segment. Also, a portion of the Business Banking business, based on the size of the client relationship, was moved from CBB to Global Banking. Prior periods will be restated in our quarterly 2015 filings with the SEC under Section 13(a) or 15(d) of the Exchange Act, to conform to the new segment alignment. Additional information related to our business segments and the products and services they provide is included in the information set forth on pages 34 through 49 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 in
Item 8. Financial Statements and Supplementary Data (Consolidated Financial Statements).
Competition
We operate in a highly competitive environment. Our competitors include banks, thrifts, credit unions, investment banking firms, investment advisory firms, brokerage firms, investment companies, insurance companies, mortgage banking companies, credit card issuers, mutual fund companies, and e-commerce and other internet-based companies. We compete with some of these competitors globally and with others on a regional or product basis.
Competition is based on a number of factors including, among others, customer service, quality and range of products and services offered, price, reputation, interest rates on loans and deposits, lending limits, and customer convenience. Our ability to continue to compete effectively also depends in large part
on our ability to attract new employees and retain and motivate our existing employees, while managing compensation and other costs.
Employees
As of December 31, 2014, we had approximately 224,000 full-time equivalent 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. 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 stockholders and creditors.
General
We are subject to an extensive regulatory framework applicable to BHCs, financial holding companies and banks and other financial services entities.
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. banking subsidiaries (the Banks) organized as national banking associations are subject to regulation, supervision and examination by the Office of the Comptroller of
Bank
of America 2014 2
the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve. The Consumer Financial Protection Bureau (CFPB) regulates consumer financial products and services.
U.S. financial holding companies, and the companies under their control, are permitted to engage in activities considered “financial in nature” as defined by the Gramm-Leach-Bliley Act and related Federal Reserve interpretations. Unless otherwise limited by the Federal Reserve, a financial holding company may engage directly or indirectly in activities considered financial in nature provided the financial holding company gives the Federal Reserve after-the-fact notice of the new activities. The Gramm-Leach-Bliley Act also permits
national banks to engage in activities considered financial in nature through a financial subsidiary, subject to certain conditions and limitations and with the approval of the OCC. If the Federal Reserve finds that any of our Banks is not “well-capitalized” or “well-managed,” we would be required to enter into an agreement with the Federal Reserve to comply with all applicable capital and management requirements, which may contain additional limitations or conditions relating to our activities.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 permits a BHC to acquire banks located in states other than its home state without regard to state law, subject to certain conditions, including the condition that the BHC, after and as a result of the acquisition, controls no more than 10 percent of the total amount of deposits of insured depository institutions in the U.S. and no more than 30 percent
or such lesser or greater amount set by state law of such deposits in that state. At December 31, 2014, we held approximately 11 percent of the total amount of deposits of insured depository institutions in the U.S. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Financial Reform Act) restricts acquisitions by a financial institution if, as a result of the acquisition, the total liabilities of the financial institution would exceed 10 percent of the total liabilities of all financial institutions in the U.S. At December 31, 2014, our liabilities did not exceed 10 percent of the total liabilities of all financial institutions in the U.S.
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 stockholders. Our U.S. broker-dealer subsidiaries are subject to regulation by and supervision of the SEC, the New York Stock Exchange and the Financial Industry Regulatory Authority; our commodities businesses in the U.S. are subject to regulation by and supervision of the U.S. Commodity Futures Trading Commission (CFTC); our U.S. derivatives activity is subject to regulation and supervision of the CFTC and National Futures Association or the SEC, and in the case of the Banks, certain banking regulators; and our
insurance activities are subject to licensing and regulation by state
insurance regulatory agencies.
Our non-U.S. businesses are also subject to extensive regulation by various non-U.S. regulators, including governments, securities exchanges, central banks and other regulatory bodies, in the jurisdictions in which those businesses operate. For example, our financial services operations in the U.K. are subject to regulation by and supervision of the Prudential Regulatory Authority (PRA) for prudential matters, and the Financial Conduct Authority (FCA) for the conduct of business matters.
Financial Reform Act
The Financial Reform Act enacted sweeping financial regulatory reform across the financial services industry, including significant changes regarding capital adequacy and capital planning, stress testing, resolution planning, derivatives activities, prohibitions on proprietary trading and restrictions
on debit interchange fees. As a result of the Financial Reform Act, we have altered and will continue to alter the way in which we conduct certain businesses. Our costs and revenues could continue to be negatively impacted as additional final rules of the Financial Reform Act are adopted.
Resolution Planning
As a BHC with greater than $50 billion of assets, the Corporation is required by the Federal Reserve and the FDIC to annually submit a plan for a rapid and orderly resolution in the event of material financial distress or failure.
A resolution plan is intended to be a detailed roadmap for the orderly resolution of a BHC and material entities pursuant to the U.S. Bankruptcy Code and other applicable resolution regimes under one or more hypothetical scenarios assuming no extraordinary government assistance.
If
both the Federal Reserve and the FDIC determine that our plan is not credible and the deficiencies are not cured in a timely manner, the Federal Reserve and the FDIC may jointly impose on us more stringent capital, leverage or liquidity requirements or restrictions on our growth, activities or operations. A description of our plan is available on the Federal Reserve and FDIC websites.
Similarly, in the U.K., the PRA has issued rules requiring the submission of significant information about certain U.K.-incorporated subsidiaries and other financial institutions, as well as branches of non-U.K. banks located in the U.K. (including information on intra-group dependencies, legal entity separation and barriers to resolution)
to allow the PRA to develop resolution plans. As a result of the PRA review, we could be required to take certain actions over the next several years which could impose operating costs and potentially result in the restructuring of certain business and subsidiaries.
3 Bank of America 2014
The
Volcker Rule
The Volcker Rule prohibits insured depository institutions and companies affiliated with insured depository institutions (collectively, banking entities) from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options for their own account. The Volcker Rule also imposes limits on banking entities’ investments in, and other relationships with, hedge funds and private equity funds, although the Federal Reserve extended the conformance period for certain existing covered investments and relationships to July 2016 (with indications that the conformance period may be further extended to July 2017). The Volcker Rule provides exemptions for certain activities, including market-making, underwriting, hedging, trading in government obligations, insurance company activities, and organizing and offering hedge funds and private equity funds. The Volcker Rule also clarifies
that certain activities are not prohibited, including acting as agent, broker or custodian. A banking entity with significant trading operations, such as the Corporation, is required to establish a detailed compliance program to comply with the restrictions of the Volcker Rule. We exited our stand-alone proprietary trading business in 2011 and continue to wind down our Global Principal Investments operations.
Derivatives
Our derivatives operations are subject to extensive regulation both in the U.S. and internationally. In the U.S., the Financial Reform Act broadens the scope of derivative instruments subject to regulation by requiring clearing and exchange trading of certain derivatives; imposing new capital, margin, reporting, registration and business conduct requirements for certain market participants; and imposing position limits on certain over-the-counter (OTC) derivatives.
Additionally, in Europe, the European Commission and European Securities and Markets Authority (ESMA) have been granted authority to adopt and implement the European Market Infrastructure Regulation (EMIR), which regulates OTC derivatives, central counterparties and the trade repositories, and imposes requirements for certain market participants with respect to derivatives reporting, OTC derivatives clearing, business conduct and collateral. The adoption of many of these U.S. and European Union (EU) regulations is ongoing and their ultimate impact remains uncertain.
Capital, Liquidity and Operational Requirements
As a financial services holding company, we and our bank subsidiaries are subject to the risk-based capital guidelines issued by the Federal Reserve and other U.S. banking regulators,
including the FDIC and the OCC. These rules are complex and are evolving as U.S. and international regulatory authorities propose and enact enhanced capital and liquidity rules. The Corporation seeks to manage its capital position to maintain sufficient capital to meet these regulatory guidelines and to support our business activities. These evolving capital and liquidity rules are likely to influence our regulatory capital and liquidity planning processes, and require additional capital and liquidity, and may impose additional operational and compliance costs on the Corporation. In addition, the Federal Reserve and the OCC have adopted guidelines that
establish minimum standards for the design, implementation and board oversight of BHC’s and national banks’ risk governance frameworks.
For
more information on regulatory capital rules, capital composition and pending or proposed regulatory capital changes, see Capital Management – Regulatory Capital in the MD&A on page 59, and Note 16 – Regulatory Requirements and Restrictions to the Consolidated Financial Statements, which are incorporated by reference in this Item 1.
Distributions
We are subject to various regulatory policies and requirements relating to capital actions, including payment of dividends and common stock repurchases. 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. Additionally, the applicable federal regulatory authority is authorized to determine, under certain circumstances relating to the financial condition of a bank or BHC, that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. For instance, Federal Reserve regulations require major U.S. BHCs to submit a capital plan as part of an annual Comprehensive Capital Analysis and Review (CCAR). The purpose of the CCAR is to assess the capital planning process of the BHC,
including any planned capital actions, such as payment of dividends on common stock and common stock repurchases.
Our ability to pay dividends is also affected by the various minimum capital requirements and the capital and non-capital standards established under the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). The right of the Corporation, our stockholders and our creditors to participate in any distribution of the assets or earnings of our subsidiaries is further subject to the prior claims of creditors of the respective subsidiaries.
For more information regarding the requirements relating to the payment of dividends, including the minimum capital requirements, see Note
13 – Shareholders’ Equity and Note 16 – Regulatory Requirements and Restrictions to the Consolidated Financial Statements.
Insolvency and the Orderly Liquidation Authority
Under the Federal Deposit Insurance Act, the FDIC may be appointed receiver of an insured depository institution if it is insolvent or in certain other circumstances. In addition, under the Financial Reform Act, when a systemically important financial institution such as the Corporation is in default or danger of default, the FDIC may be appointed receiver in order to conduct an orderly liquidation of such institution. In the event of such appointment, the FDIC could invoke the orderly liquidation authority, instead of the U.S. Bankruptcy Code, if the Secretary of the Treasury makes certain financial
distress and systemic risk determinations. The orderly liquidation authority is modeled in part on the Federal Deposit Insurance Act, but also adopts certain concepts from the U.S. Bankruptcy Code.
Bank of America 2014 4
In 2013, the FDIC issued a notice describing its preferred “single point of entry” strategy for resolving systemically important
financial institutions. Under this approach, the FDIC could replace a distressed BHC with a bridge holding company, which could continue operations and result in an orderly resolution of the underlying bank, but whose equity is held solely for the benefit of creditors of the original BHC. Furthermore, the Federal Reserve Board has indicated that it will be proposing regulations regarding the minimum levels of long-term debt required for BHCs to ensure there is adequate loss absorbing capacity in the event of a resolution. The orderly liquidation authority contains certain differences from the U.S. Bankruptcy Code. For example, in certain circumstances, the FDIC could permit payment of obligations it determines to be systemically significant (e.g., short-term creditors or operating creditors) in lieu of paying other obligations (e.g., long-term creditors) without the need to obtain creditors’ consent or prior court review. The insolvency and resolution process could also
lead to a large reduction or total elimination of the value of a BHC’s outstanding equity, as well as impairment or elimination of certain debt.
Deposit Insurance
Deposits placed at U.S. domiciled banks (U.S. banks) are insured by the FDIC, subject to limits and conditions of applicable law and the FDIC’s regulations. Pursuant to the Financial Reform Act, FDIC insurance coverage limits were permanently increased to $250,000 per customer. All insured depository institutions are required to pay assessments to the FDIC in order to fund the Deposit Insurance Fund (DIF).
The FDIC is required to maintain at least a designated minimum ratio of the DIF to insured deposits in the U.S. The Financial Reform Act requires the FDIC to assess insured depository institutions to achieve a DIF ratio of at least 1.35 percent by September
30, 2020. The FDIC has adopted new regulations that establish a long-term target DIF ratio of greater than two percent. The DIF ratio is currently below the required targets and the FDIC has adopted a restoration plan that may result in increased deposit insurance assessments. Deposit insurance assessment rates are subject to change by the FDIC and will be impacted by the overall economy and the stability of the banking industry as a whole. For more information regarding deposit insurance, see Item 1A. Risk Factors – Regulatory, Compliance and Legal Risk on page 12.
Source of Strength
According to 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 FDICIA, in the event of a loss suffered or anticipated by the FDIC, either as a result of default of a banking 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.
Consumer Regulations
Our consumer businesses are subject to extensive regulation and oversight by federal and state regulators. Certain federal consumer finance laws to which we are subject, including, but not limited to, the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, the Electronic Fund Transfer Act, the Fair Credit Reporting Act, the Real Estate Settlement Procedures
Act (RESPA), the Truth in Lending Act (TILA) and Truth in Savings Act, are enforced by the CFPB. Other federal consumer finance laws, such as the Servicemembers Civil Relief Act, are enforced by the Officer of the Comptroller of the Currency.
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.
Privacy
and Information Security
We are subject to many U.S. federal, state and international laws and regulations governing requirements for maintaining policies and procedures to protect the non-public confidential information of our customers. The Gramm-Leach-Bliley Act requires the Banks to periodically disclose Bank of America’s privacy policies and practices relating to sharing such information and enables retail customers to opt out of our ability to share information with unaffiliated third parties under certain circumstances. Other laws and regulations, at both the federal and state level, impact our ability to share certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes, or to contact customers with marketing offers. The Gramm-Leach-Bliley Act also requires the Banks to implement a comprehensive information security program that includes administrative, technical, and physical
safeguards to ensure the security and confidentiality of customer records and information. These security and privacy policies and procedures for the protection of personal and confidential information are in effect across all businesses and geographic locations.
5 Bank of America 2014
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.
Any risk factor described in this Annual Report on Form 10-K or in any of our other Securities and Exchange Commission (SEC) filings could by itself, or together with other factors, materially adversely affect our liquidity, cash flows, 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.
General Economic and Market Conditions Risk
Our businesses and results of operations may be adversely affected by the U.S. and international financial markets, U.S. and non-U.S. fiscal and monetary policy, and economic conditions generally.
Our businesses and results of operations are affected by the financial markets
and general economic conditions in the U.S. and abroad, including factors such as the level and volatility of short-term and long-term interest rates, inflation, home prices, unemployment and under-employment levels, bankruptcies, household income, consumer spending, fluctuations in both debt and equity capital markets and currencies, liquidity of the global financial markets, the availability and cost of capital and credit, investor sentiment and confidence in the financial markets, the sustainability of economic growth in the U.S., Europe, China and Japan, and economic, market, political and social conditions in several larger emerging market countries. The deterioration of any of these conditions could adversely affect our consumer and commercial businesses, our securities and derivatives portfolios, our level of charge-offs and provision for credit losses, the carrying value of our deferred tax assets, our capital levels and liquidity, and our results of operations.
Despite
improving labor markets in the past year and recent sharp declines in energy costs, an elevated level of under-employment and household debt, the prolonged low interest rate environment and a strengthening U.S. Dollar, along with a continued sluggish recovery in the consumer real estate market and certain commercial real estate markets in the U.S., pose challenges for domestic economic performance and the financial services industry. The elevated level of under-employment and modest wage growth have directly impaired consumer finances and pose risks to the financial services industry.
Continued uncertainty in a number of housing markets and still elevated levels of distressed and delinquent mortgages remain risks to the housing market. The current environment of heightened scrutiny of financial institutions has resulted in increased public awareness of and sensitivity to banking fees and practices. Mortgage and housing market-related
risks may be accentuated by attempts to forestall foreclosure proceedings, as well as state
and federal investigations into foreclosure practices by mortgage servicers. Each of these factors may adversely affect our fees and costs.
The recent sharp drop in oil prices, while likely a net positive for the U.S. economy, may also add distress to select regional markets that are energy industry-dependent and may negatively impact certain commercial and consumer loan portfolios.
Our businesses and results of operations are also affected by domestic and international fiscal and monetary policy. The actions of the Federal Reserve in the U.S. and central banks internationally regulate the supply of money and credit in the global financial system.
Their policies affect our cost of funds for lending, investing and capital raising activities and the return we earn on those loans and investments, both of which affect our net interest margin. The actions of the Federal Reserve in the U.S. and central banks internationally also can affect the value of financial instruments and other assets, such as debt securities and mortgage servicing rights (MSRs), and its policies also can affect our borrowers, potentially increasing the risk that they may fail to repay their loans. Our businesses and earnings are also affected by the fiscal or other policies that are adopted by the U.S. government, various U.S. regulatory authorities, and non-U.S. governments and regulatory authorities. Changes in domestic and international fiscal and monetary policies are beyond our control and difficult to predict but could have an adverse impact on our capital requirements and the costs of running our business.
For
more information about economic conditions and challenges discussed above, see Executive Summary – 2014 Economic and Business Environment in the MD&A on page 23.
Liquidity Risk
Liquidity Risk is the Potential Inability to Meet Our Contractual and Contingent Financial Obligations, On- or Off-balance Sheet, as they Become Due.
Adverse changes to our credit ratings from the major credit rating agencies could significantly limit our access to funding or the capital markets, increase our borrowing costs, or trigger additional collateral or funding requirements.
Our borrowing costs and ability to raise funds are directly impacted by our credit ratings. In addition, credit ratings may be important to
customers or counterparties when we compete in certain markets and when we seek to engage in certain transactions, including OTC derivatives. Credit ratings and outlooks are opinions expressed by rating agencies on our creditworthiness and that of our obligations or securities, including long-term debt, short-term borrowings, preferred stock and other securities, including asset securitizations. Our credit ratings are subject to ongoing review by the 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.
Currently, the Corporation’s long-term/short-term senior debt ratings and outlooks expressed by the rating agencies are as follows: Baa2/P-2 (Stable) by Moody’s Investors
Service, Inc. (Moody’s); A-/A-2 (Negative) by Standard & Poor’s Ratings Services (S&P); and A/F1 (Negative) by Fitch Ratings (Fitch). The rating agencies could make adjustments to our credit ratings at any time, including as a result of a determination to no longer incorporate an uplift for U.S. government support. There can be no assurance that downgrades will not occur.
Bank
of America 2014 6
A reduction in certain of our credit ratings could negatively affect our liquidity, access to credit markets, the related cost of funds, our businesses and certain trading revenues, particularly in those businesses where counterparty creditworthiness is critical. If the short-term credit ratings of our parent company, bank or broker-dealer subsidiaries were downgraded by one or more levels, we may suffer the potential loss of access to short-term funding sources such as repo financing, and/or increased cost of funds.
In addition, under the terms of certain OTC derivative contracts
and other trading agreements, in the event of a downgrade of our credit ratings or certain subsidiaries’ credit ratings, counterparties to those agreements may require us or certain subsidiaries to provide additional collateral, terminate these contracts or agreements, or provide other remedies. At December 31, 2014, if the rating agencies had downgraded their long-term senior debt ratings for us or certain subsidiaries by one incremental notch, the amount of additional collateral contractually required by derivative
contracts and other trading agreements would have been approximately $1.4 billion, including $1.1 billion for Bank of America, N.A. (BANA). If the rating agencies had downgraded their long-term senior debt ratings for these entities by an additional incremental notch, approximately $2.8 billion in additional incremental collateral, including $1.9 billion for BANA would have been required.
Also, if the rating agencies had downgraded their long-term senior debt ratings for us or certain subsidiaries by one incremental notch, the derivative liability that would
be subject to unilateral termination by counterparties as of December 31, 2014 was $1.8 billion against which $1.5 billion of collateral has been posted. If the rating agencies had downgraded their long-term senior debt ratings for us and certain subsidiaries by a second incremental notch, the derivative liability that would be subject to unilateral termination by counterparties as of December 31, 2014 was an incremental $3.9 billion, against which $3.0 billion of collateral has been posted.
While
certain potential impacts are contractual and quantifiable, the full consequences of a credit ratings 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 about our credit ratings and their potential effects to our liquidity, see Liquidity Risk – Credit Ratings in the MD&A on page 68 and Note 2 – Derivatives to the Consolidated Financial Statements.
If
we are unable to access the capital markets, continue to maintain deposits, or our borrowing costs increase, our liquidity and competitive position will be negatively affected.
Liquidity is essential to our businesses. We fund our assets primarily with globally sourced deposits in our bank entities, as well as secured and unsecured liabilities transacted in the capital markets. We rely on certain secured funding sources, such as repo markets, which are typically short-term and credit-sensitive in
nature. We also engage in asset securitization transactions, including with the government-sponsored enterprises (GSEs), to fund consumer lending activities. Our liquidity could be adversely affected by any inability to access the capital markets; illiquidity or volatility in the capital markets;
unforeseen outflows of cash, including customer deposits, funding for commitments and contingencies; increased liquidity requirements on our banking and nonbank subsidiaries imposed by their home countries; or negative perceptions about our short- or long-term business prospects, including downgrades of our credit ratings. Several of these factors may arise due to circumstances beyond our control, such as a general market disruption, negative views about the financial services industry generally, changes in the regulatory environment, actions by credit rating agencies or an operational problem that affects third parties or us.
Our cost of obtaining funding is directly related to prevailing market interest rates and to our credit spreads. Credit spreads are the amount in excess of the interest rate of U.S. Treasury securities, or other
benchmark securities, of a similar maturity that we need to pay to our funding providers. Increases in interest rates and our credit spreads can increase the cost of our funding. Changes in our credit spreads are market-driven and may be influenced by market perceptions of our creditworthiness. Changes to interest rates and our credit spreads occur continuously and may be unpredictable and highly volatile.
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 65.
Bank of America Corporation is a holding company and we depend upon our subsidiaries
for liquidity, including our ability to pay dividends to shareholders. Applicable laws and regulations, including capital and liquidity requirements, may restrict our ability to transfer funds from our subsidiaries to Bank of America Corporation or other subsidiaries.
Bank of America Corporation, as the parent company, is a separate and distinct legal entity from our banking and nonbank subsidiaries. We evaluate and manage liquidity on a legal entity basis. Legal entity liquidity is an important consideration as there are legal and other limitations on our ability to utilize liquidity from one legal entity to satisfy the liquidity requirements of another, including
the parent company. For instance, the parent company depends on dividends, distributions and other payments from our banking and nonbank subsidiaries to fund dividend payments on our common stock and preferred stock and to fund all payments on our other obligations, including debt obligations. Many of our subsidiaries, including our bank and broker-dealer subsidiaries, are subject to laws that restrict dividend payments, or authorize regulatory bodies to block or reduce the flow of funds from those subsidiaries to the parent company or other subsidiaries.
In addition, 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.
7 Bank of America 2014
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, additional liquidity may be required at each subsidiary entity. Regulatory action of that kind could impede access to funds we need to make payments on our obligations or dividend payments. In addition, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the 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 59 and Note 13 – Shareholders’ Equity to the Consolidated Financial Statements.
Credit Risk
Credit Risk is the Risk of Loss Arising from the Inability or Failure of a Borrower or Counterparty to Meet its Obligations.
Economic or market disruptions, insufficient credit loss reserves or concentration of credit risk may result in an increase in the provision for credit losses, which could have an adverse effect on our financial condition and results of operations.
A number of our products expose us to credit risk, including loans, letters of credit, derivatives, trading account assets and assets held-for-sale. The financial condition of
our consumer and commercial borrowers and counterparties could adversely affect our earnings.
Global and U.S. economic conditions may impact our credit portfolios. To the extent economic or market disruptions occur, such disruptions would likely increase the risk that borrowers or counterparties would default or become delinquent on their obligations to us. Increases in delinquencies and default rates could adversely affect our consumer credit card, home equity, residential mortgage and purchased credit-impaired (PCI) portfolios through increased charge-offs and provision for credit losses. Additionally, increased credit risk could also adversely affect our commercial loan portfolios with weakened customer and collateral positions.
We estimate and establish an allowance for credit losses for losses inherent in our lending activities (including unfunded lending commitments), excluding
those measured at fair value, through a charge to earnings. The amount of allowance is determined based on our evaluation of the potential credit losses included within our loan portfolios. The process for determining the amount of the allowance requires difficult and complex judgments, including forecasts of economic conditions and how borrowers will react to those conditions. The ability of our borrowers or counterparties to repay their obligations will likely be impacted by changes in economic conditions, which in turn could impact the accuracy of our forecasts. There is also the chance that we will fail to accurately identify the appropriate economic indicators or that we will fail to accurately estimate their impacts.
We may suffer unexpected losses if the models and assumptions we use to establish reserves and make judgments in extending credit to our borrowers or counterparties become less predictive of future events.
Although we believe that our allowance for credit losses was in compliance with applicable accounting standards at December 31, 2014, there is no guarantee that it
will be sufficient to address future credit losses, particularly if economic conditions deteriorate. In such an event, we may increase the size of our allowance, which reduces our earnings.
In the ordinary course of our business, we also may be subject to a concentration of credit risk in a particular industry, country, counterparty, borrower or issuer. A deterioration in the financial condition or prospects of a particular industry or a failure or downgrade of, or default by, any particular entity or group of entities could
negatively affect our businesses and the processes by which we set limits and monitor the level of our credit exposure to individual entities, industries and countries may not function as we have anticipated. While our activities expose us to many different industries and counterparties, we routinely execute a high volume of transactions with counterparties in the financial services industry, including brokers-dealers, commercial banks, investment banks, insurers, mutual and hedge funds, and other institutional clients. This has resulted in significant credit concentration with respect to this industry. Financial services institutions and other counterparties are inter-related because of trading, funding, clearing or other relationships. As a result, defaults by, or even rumors or questions 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 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 realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivatives exposure due to us.
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 energy prices, social instability and changes in government policies could impact the operating budgets or credit ratings of sovereign nations, U.S. states and U.S. municipalities and expose us to credit risk.
We also have a concentration of credit risk with respect to our consumer real estate, consumer credit card
and commercial real estate portfolios, which represent a large percentage of our overall credit portfolio. Economic downturns have adversely affected these portfolios. Continued economic weakness or deterioration in real estate values or household incomes could result in higher credit losses.
For more information about our credit risk and credit risk management policies and procedures, see Credit Risk Management in the MD&A on page 70 and Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
Our derivatives businesses may expose us to unexpected risks and potential losses.
We are party to a large number
of derivatives transactions, including credit derivatives. Our derivatives businesses may expose us to unexpected market, credit and operational risks that could cause us to suffer unexpected losses. Severe declines in asset values, unanticipated credit events or unforeseen circumstances that may cause previously uncorrelated factors to become correlated (and vice versa) may create losses resulting from risks not appropriately taken into account in the development, structuring or pricing of a derivative instrument. The terms of certain of our OTC derivative contracts and other trading agreements provide that upon the occurrence of certain specified events, such as a change in our credit ratings, we may be required
Bank
of America 2014 8
to provide additional collateral or to provide other remedies, or our counterparties may have the right to terminate or otherwise diminish our rights under these contracts or agreements.
Many derivative instruments are individually negotiated and non-standardized, which can make exiting, transferring or settling some positions difficult. Many derivatives require that we deliver to the counterparty the underlying security, loan or other obligation in order to receive payment. In a number of cases, we do not hold, and may not be able to obtain, the underlying security, loan or
other obligation.
In the event of a downgrade of the Corporation’s credit ratings, certain derivative and other counterparties may request we substitute BANA (which has generally had equal or higher credit ratings than the Corporation’s) as counterparty for certain derivative contracts and other trading agreements. The Corporation’s ability to substitute or make changes to these agreements to meet counterparties’ requests may be subject to certain limitations, including counterparty willingness, regulatory limitations on naming BANA as the new counterparty and the type or amount of collateral required. It is possible that such limitations on our ability to substitute or make changes to these agreements, including naming BANA as the new counterparty, could adversely affect our results of operations.
Derivatives
contracts, including new and more complex derivatives products, and other transactions entered into with third parties are not always confirmed by the counterparties or settled on a timely basis. While a transaction remains unconfirmed, or during any delay in settlement, we are subject to heightened credit, market and operational risk and, in the event of default, may find it more difficult to enforce the contract. In addition, disputes may arise with counterparties, including government entities, about the terms, enforceability and/or suitability of the underlying contracts. These factors could negatively impact our ability to effectively manage our risk exposures from these products and subject us to
increased credit and operating costs and reputational risk. For more information on our derivatives exposure, see Note 2 – Derivatives to the Consolidated Financial Statements.
Market Risk
Market Risk is the Risk that Market Conditions May Adversely Impact the Value of Assets or Liabilities or Otherwise Negatively Impact Earnings. Market Risk is Inherent in the Financial Instruments Associated with our Operations, Including Loans, Deposits, Securities, Short-term Borrowings, Long-term Debt, Trading Account Assets and Liabilities, and Derivatives.
Increased market volatility and adverse changes in other financial or capital market conditions may increase our market risk.
Our liquidity, cash flows,
competitive position, business, results of operations and financial condition are affected by market risk factors such as changes in interest and currency exchange rates, equity and futures prices, the implied volatility of interest rates, credit spreads and other economic and business factors. These market risks may adversely affect, among other things, (i) the value of our on- and off-balance sheet securities, trading assets, other financial instruments, and MSRs, (ii) the cost of debt capital and our access to credit markets, (iii) the value of assets under management (AUM), (iv) fee income relating to AUM, (v) customer
allocation of capital among investment alternatives, (vi) the volume of client activity in our trading operations, (vii) investment banking fees, and (viii) the general profitability and risk level of the transactions
in which we engage. For example, the value of certain of our assets is sensitive to changes in market interest rates. If the Federal Reserve, or central banks internationally, change or signal a change in monetary policy, market interest rates could be affected, which could adversely impact the value of such assets. In addition, the existence of a prolonged low interest rate environment could negatively impact our cash flows, 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. Our models, which rely on historical trends and assumptions, may not be sufficiently predictive of future results due to limited historical patterns, extreme or unanticipated market movements and illiquidity, especially during severe market downturns or stress events. The models that
we use to assess and control our market risk exposures also reflect assumptions about the degree of correlation among prices of various asset classes or other market indicators. In addition, market conditions in recent years have involved unprecedented dislocations and highlight the limitations inherent in using historical data to manage risk.
In times of market stress or other unforeseen circumstances, such as the market conditions experienced in 2008 and 2009, previously uncorrelated indicators may become correlated, or previously correlated indicators may move in different directions. These types of market movements have at times limited the effectiveness of our hedging strategies and have caused us to incur significant losses, and they may do so in the future. These changes in correlation can be exacerbated where other market participants are using risk or trading models with assumptions or algorithms that are similar
to ours. In these and other cases, it may be difficult to reduce our risk positions due to the 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 99.
A downgrade
in the U.S. government’s sovereign credit rating, or in the credit ratings of instruments issued, insured or guaranteed by related institutions, agencies or instrumentalities, could result in risks to the Corporation and its credit ratings and general economic conditions that we are not able to predict.
On June 6, 2014, S&P affirmed its AA+ long-term and A-1+ short-term sovereign credit rating on the U.S. government with a stable outlook. On March 21, 2014, Fitch affirmed its AAA long-term and F1+ short-term sovereign credit rating on the U.S. government with a stable outlook. This resolved the rating watch negative that was placed on the ratings on October 15, 2013. On July 18,
2013, Moody’s revised its outlook on the U.S. government to stable from negative and affirmed its Aaa long-term sovereign credit rating on the U.S. government.
9 Bank of America 2014
The ratings and perceived creditworthiness of instruments issued, insured or guaranteed by institutions, agencies or instrumentalities directly linked to
the U.S. government could also be correspondingly affected by any downgrade. Instruments of this nature are often held as trading, investment or excess liquidity positions on the balance sheets of financial institutions, including the Corporation, and are widely used as collateral by financial institutions to raise cash in the secured financing markets. A downgrade of the sovereign credit ratings of the U.S. government and perceived creditworthiness of U.S. government-related obligations could impact our ability to obtain funding that is collateralized by affected instruments, as well as affecting the pricing of that funding when it is available. A downgrade may also adversely affect the market value of such instruments.
We cannot predict if, when or how any changes to the credit ratings or perceived creditworthiness of these organizations will affect economic conditions. The credit rating agencies’ ratings for the Corporation
or its subsidiaries could be directly or indirectly impacted by a downgrade of the U.S. government’s sovereign rating because credit ratings of large systemically important financial institutions issued by S&P and Fitch, including those of the Corporation or its subsidiaries, currently include a degree of uplift due to rating agencies’ assumptions concerning potential government support. In addition, the Corporation presently delivers a portion of the residential mortgage loans it originates into GSEs, agencies or instrumentalities (or instruments insured or guaranteed thereby). We cannot predict if, when or how any changes to the credit ratings of these organizations will affect their ability to finance residential mortgage loans.
A downgrade
of the sovereign credit ratings of the U.S. government or the credit ratings of related institutions, agencies or instrumentalities would exacerbate the other risks to which the Corporation is subject and any related adverse effects on our business, financial condition and results of operations.
Our businesses may be affected by uncertainty 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.
Risks and ongoing concerns about the financial stability of several non-U.S. jurisdictions could impact our operations and have a detrimental impact on the global economic recovery. For instance, sovereign and non-sovereign debt levels remain elevated. Market and economic disruptions have affected, and may continue to affect,
consumer confidence levels and spending, corporate investment and job creation, bankruptcy rates, levels of incurrence and default on consumer debt and corporate debt, economic growth rates and asset values, among other factors.
A number of non-U.S. jurisdictions in which we do business have been negatively impacted by slowing growth rates or recessionary conditions, market volatility and/or political unrest. Additionally, there can be no assurance that market stabilization in Europe, which has recently experienced a renewed slowdown and increased volatility, is sustainable, nor can there be any assurance that future assistance packages, if required, will be available or, even if provided, will be sufficient to stabilize the affected countries and markets in Europe or elsewhere. To the extent European economic recovery uncertainty continues to negatively impact consumer and business confidence and credit factors, or should
the EU enter a deep recession, both the U.S. economy and our business and results of operations could be adversely affected.
Global economic and political uncertainty, regulatory initiatives and reform have impacted, and will likely continue to impact, non-U.S. credit and trading portfolios. There can be no assurance our risk mitigation efforts in this respect will be sufficient or successful.
For more information on our exposures in the top 20 non-U.S. countries, see Non-U.S. Portfolio in the MD&A on page 93.
We may incur losses if the values of certain assets decline, including due to changes in interest rates and prepayment speeds.
We
have a large portfolio of financial instruments, including, among others, certain loans and loan commitments, loans held-for-sale, securities financing agreements, asset-backed secured financings, long-term deposits, long-term debt, trading account assets and liabilities, derivative assets and liabilities, available-for-sale (AFS) debt and equity securities, other debt securities, certain MSRs and certain other assets and liabilities that we measure at fair value. We determine the fair values of these instruments based on the fair value hierarchy under applicable accounting guidance. The fair values of these financial instruments include adjustments for market liquidity, credit quality, funding impact on certain derivatives and other transaction-specific factors, where appropriate.
Gains or losses on these instruments can have a direct impact on our results of operations, including higher or lower mortgage banking income and
earnings, unless we have effectively hedged our exposures. For example, decreases in interest rates and increases in mortgage prepayment speeds, which are influenced by interest rates and other factors such as reductions in mortgage insurance premiums and origination costs, could adversely impact the value of our MSR asset, cause a significant acceleration of purchase premium amortization on our mortgage portfolio, because a decline in long-term interest rates shortens the expected lives of the securities, and adversely affect our net interest margin. Conversely, increases in interest rates may result in a decrease in residential mortgage loan originations. In addition, increases in interest rates may adversely impact the fair value of debt securities and, accordingly, for debt securities classified as AFS, may adversely affect accumulated other comprehensive income and, thus, capital levels.
Fair values may be impacted by
declining values of the underlying assets or the prices at which observable market transactions occur and the continued availability of these transactions. The financial strength of counterparties, with whom we have economically hedged some of our exposure to these assets, also will affect the fair value of these assets. Sudden declines and volatility in the prices of assets may curtail or eliminate the trading activity for these assets, which may make it difficult to sell, hedge or value such 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 asset management 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.
Bank of America 2014 10
For more information
about fair value measurements, see Note 20 – Fair Value Measurements to the Consolidated Financial Statements. For more information about our asset management businesses, see GWIM in the MD&A on page 42. For more information about interest rate risk management, see Interest Rate Risk Management for Non-trading Activities in the MD&A on page 105.
Changes in the method of determining the London Interbank Offered Rate (LIBOR) or other reference rates may adversely impact the value of debt securities and other financial instruments we hold or issue that are linked to LIBOR or other reference rates in ways that are difficult to predict and
could adversely impact our financial condition or results of operations.
In recent years, concerns have been raised about the accuracy of the calculation of LIBOR. Aspects of the method for determining how LIBOR is formulated and its use in the market have changed and may continue to change. Effective February 1, 2014, the transfer of LIBOR administration to the ICE Benchmark Administration, Ltd. was completed following authorization by the U.K. Financial Conduct Authority. On July 22, 2014, the Financial Stability Board published its report recommending reforms to the administration of major benchmarks, including LIBOR. Changes to LIBOR administration include, but are not limited to, the introduction of statutory regulation of LIBOR by U.K. regulatory authorities; reducing the currencies for which LIBOR is calculated to five;
reducing the tenors for which LIBOR is calculated to seven; delay in the publication of individual banks’ LIBOR submissions for three months from submission; and requiring banks to provide LIBOR submissions based on an effective methodology on the basis of relevant criteria and information, including observable market transactions where possible. Each such change and any future changes could impact the availability and volatility of LIBOR. Similar changes have occurred or may occur with respect to other reference rates. Accordingly, it is not currently possible to determine whether, or to what extent, any such changes would impact the value of any debt securities we hold or issue that are linked to LIBOR or other reference rates, or any loans, derivatives and other financial obligations or extensions of credit we hold or are due to us, or for which we are an obligor, that are linked to LIBOR or other reference rates, or whether, or to what extent, such changes would
impact our financial condition or results of operations.
Mortgage and Housing Market-Related Risk
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 make or have 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 (collectively, repurchases). At December 31, 2014, we had approximately $22.4 billion
of unresolved repurchase claims, net of duplicate claims. These repurchase claims relate primarily to private-label securitizations and include claims in the amount of $4.7 billion, net of duplicate claims, where we believe the statute of limitations has expired under current law. Private-label securitization unresolved repurchase claims have increased in recent periods, and such claims may continue to increase. In
addition to unresolved repurchase claims, we have received notifications pertaining to loans for which we have not received a repurchase request from sponsors of third-party securitizations with whom the Corporation engaged in whole-loan transactions and for which we may owe indemnity obligations. We also from time to time receive correspondence purporting to raise representations
and warranties breach issues from entities that do not have contractual standing or ability to bring such claims. We believe such communications to be procedurally and/or substantially invalid, and generally do not respond to such correspondence. In addition to repurchase claims, we receive notices from mortgage insurance companies of claim denials, cancellations or coverage rescission (collectively, MI rescission notices). Although they declined during 2014, the number of open MI rescission notices remains elevated.
We have recorded a liability of $12.1 billion for obligations under representations and warranties exposures (which includes exposures related to MI rescission notices). We have also established an estimated range of possible loss of up to $4 billion over our recorded liability. The liability for representations and
warranties exposures and the corresponding estimated range of possible loss do not consider losses related to servicing (except as such losses are included as potential costs of the BNY Mellon Settlement), including foreclosure and related costs, fraud, indemnity, or claims (including for residential mortgage-backed securities (RMBS)) related to securities law or monoline litigations. Losses with respect to one or more of these matters could be material to the Corporation’s results of operations or cash flows for any particular reporting period.
Our recorded liability and estimated range of possible loss for representations and warranties exposures are based on currently available information and are necessarily dependent on, and limited by, a number of factors, including our historical claims and settlement experiences as well as significant judgment and a number of assumptions that are subject to change. As a result, our
liability and estimated range of possible loss related to our representations and warranties exposures may materially change in the future. Additionally, if final court approval of the settlement with the Bank of New York Mellon, as trustee (BNY Mellon Settlement) is not obtained, or if the Corporation and legacy Countrywide Financial Corporation determine to withdraw from the BNY Mellon Settlement agreement in accordance with its terms, the Corporation’s future representations and warranties losses could be substantially different from existing accruals and the existing estimated range of possible loss. If future representations and warranties losses occur in excess of our recorded liability and estimated range of possible loss, such losses could have an adverse effect on our cash flows, financial condition and results of operations.
For more information about our representations and warranties exposure, including the estimated
range of possible loss, see Off-Balance Sheet Arrangements and Contractual Obligations – Representations and Warranties in the MD&A on page 50, Consumer Portfolio Credit Risk Management in the MD&A on page 70 and Note 7 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements.
For more information regarding the BNY Mellon Settlement, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements.
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of America 2014
Failure to satisfy our obligations as servicer for residential mortgage securitizations, along with other losses we could incur in our capacity as servicer, and continued foreclosure delays and/or investigations into our residential mortgage foreclosure practices could cause losses.
We and our legacy companies have securitized a significant portion of the residential mortgage loans that we originated or acquired. We service a large portion of the loans we have securitized and also service loans on behalf of third-party securitization vehicles and other investors. At December
31, 2014, we serviced approximately 5.3 million loans with an aggregate unpaid principal balance of $693 billion, including loans owned by us and by others. Of the 3.2 million loans serviced for others, approximately 67 percent are held in GSE securitization vehicles and 33 percent are held in non-GSE securitization vehicles or by other investors. If we commit a material breach of our obligations as servicer or master servicer, we may be subject to termination if the breach is not cured within a specified period of time following notice, which could cause us to lose servicing income. In addition, for loans held in non-GSE securitization vehicles, we may have liability for any failure by us, as a servicer or master servicer, for any act or omission on our part that involves willful misfeasance, bad faith, gross negligence or reckless disregard of our duties. If any such breach were found to have occurred, it may harm our reputation, increase our servicing costs or
adversely impact our results of operations. Additionally, with respect to foreclosures, we may incur costs or losses due to irregularities in the underlying documentation, or if the validity of a foreclosure action is challenged by a borrower or overturned by a court because of errors or deficiencies in the foreclosure process. We may also incur costs or losses relating to delays or alleged deficiencies in processing documents necessary to comply with state law governing foreclosures.
We are subject to certain legal and contractual requirements for how we hold, transfer, use or enforce promissory notes, security instruments and other documents for residential mortgage loans that we service. In recent years, challenges have been raised to whether we have adhered to these requirements, and whether, as a result in some instances, the loans can be enforced as local law otherwise would permit. Additionally, we currently use the
Mortgage Electronic Registration Systems, Inc. (MERS) system for approximately half of the residential mortgage loans that remain in our servicing portfolio. Individual borrowers and certain local governments have contended that the use of MERS is improper or otherwise adversely affects the security interest. If documentation requirements were not met, or if the use of MERS or the MERS system is found not valid or effective, we could be obligated to, or choose to, take remedial actions and may be subject to additional costs or losses.
For additional information, Off-Balance Sheet Arrangements and Contractual Obligations in the MD&A on page 50.
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.
Although U.S. home prices continued to improve during 2014, the declines in prior years have negatively impacted the demand for many of our products. Additionally, our mortgage loan production volume is generally influenced by the rate of growth in residential mortgage debt outstanding and the size of the residential mortgage market.
Conditions in the U.S. housing market in prior years have also resulted in significant write-downs of asset values in several asset classes, notably mortgage-backed securities, and increased exposure to monolines. If the U.S. housing market were to weaken, the value of real estate could decline, which could negatively affect our exposure to representations and warranties. While there were continued
indications in 2014 that the U.S. economy is improving, the performance of our overall consumer portfolios may not significantly improve in the near future. A protracted continuation or worsening of difficult housing market conditions may exacerbate the adverse effects outlined above and could have an adverse effect on our financial condition and results of operations.
In addition, our home equity portfolio, which makes up approximately 28 percent of our total home loans portfolio, contains a significant percentage of loans in second-lien or more junior-lien positions, and such loans have elevated risk characteristics. Our home equity portfolio had an outstanding balance of $85.7 billion as of December 31, 2014, including $74.2
billion of home equity lines of credit (HELOC), $9.8 billion of home equity loans and $1.7 billion of reverse mortgages. Of the total home equity portfolio at December 31, 2014, $20.6 billion, or 24 percent, were in first-lien positions (26 percent excluding the PCI home equity portfolio) and $65.1 billion, or 76 percent (74 percent excluding the PCI home equity portfolio) were in second-lien or more junior-lien positions. The HELOCs that have entered the amortization period have experienced a higher percentage of early stage delinquencies and nonperforming status when compared to the HELOC portfolio as a whole.
Loans in our HELOC portfolio generally have an initial draw period of 10 years and more than 75 percent of these loans will not enter their amortization period until 2016 or later. As a result, delinquencies and defaults may increase in future periods. For additional information, see Off-Balance Sheet Arrangements and Contractual Obligations in the MD&A on page 50 and Consumer Portfolio Credit Risk Management on page 70.
Regulatory, Compliance and Legal Risk
U.S. federal banking agencies may require us to hold higher levels of regulatory capital, increase our regulatory capital ratios or increase liquidity, which could result in the need to
issue additional securities that qualify as regulatory capital or to take other actions, such as to sell company assets.
We are subject to the Federal Reserve’s risk-based capital rules. These rules establish regulatory capital requirements for banking institutions to meet minimum requirements as well as to qualify as a “well-capitalized” institution. If any of our subsidiary insured depository institutions fail 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 or institutions 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 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.
The current regulatory environment is fluid, with requirements frequently being introduced and amended. It is possible that increases in regulatory capital requirements, changes in how regulatory capital is calculated or increases to liquidity
Bank of America 2014 12
requirements
could cause us to increase our capital levels by issuing additional common stock, thus diluting our existing shareholders, or by taking other actions, such as selling company assets, in order to maintain our “well-capitalized” status.
In October 2013, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) (the Agencies, or U.S. banking regulators) published the final Basel 3 regulatory capital rules (Basel 3). Basel 3 materially changes Tier 1 and Total capital calculations and formally establishes a Common equity tier 1 capital ratio, notably phasing out trust preferred securities. Additionally, Basel 3 introduces new minimum capital ratios and buffer requirements and a supplementary leverage ratio (SLR), changes the composition of regulatory capital, revises the adequately capitalized minimum requirements under the Prompt Corrective Action (PCA)
framework, expands and modifies the risk-sensitive calculation of risk weighted-assets for credit and market risk (the Advanced approaches) and introduces a Standardized approach for the calculation of risk-weighted assets, which serves as a minimum. Changes to the composition of regulatory capital under Basel 3, as compared to the Basel 1 – 2013 Rules, are subject to a transition period. The new minimum capital ratio requirements and related buffers will be phased in from January 1, 2014 through January 1, 2019. When presented on a fully phased-in basis, capital, risk-weighted assets and the capital ratios assume all regulatory capital adjustments and deductions are fully recognized. The Advanced approaches require approval by the Agencies of our internal analytical models used to calculate risk-weighted assets. As an advanced
approaches bank, under Basel 3, we are required to complete a qualification period (parallel run) to demonstrate compliance with the final Basel 3 rules to the satisfaction of U.S. banking regulators. Our estimates under the Basel 3 Advanced approaches may be refined over time as a result of further rulemaking or clarification by U.S. banking regulators or as our understanding and interpretation of the rules evolve. We are currently working with the U.S. banking regulators to obtain approval of certain internal analytical models including the wholesale (e.g., commercial) and other credit models in order to exit parallel run. The U.S. banking regulators have indicated that they will require modifications to these models which would likely result in a material increase in our risk-weighted assets resulting in a decrease in our capital ratios.
In April 2014, the Agencies adopted a final rule to strengthen the SLR standards for
the largest U.S. banking organizations by requiring such institutions to maintain a leverage buffer greater than 2.0 percentage points above the minimum SLR requirement of 3.0 percent, for a total of greater than 5.0 percent, to avoid restrictions on capital distributions and variable compensation payments. Banking subsidiaries of such organizations are required to maintain at least a six percent SLR to be considered “well capitalized” under the PCA framework. In addition, in September 2014, the Agencies adopted a final rule modifying the definition of the denominator of the SLR in a manner consistent with changes adopted by the Basel Committee on Banking Supervision (Basel Committee) to better capture on- and off-balance sheet exposures, including credit derivatives, repo-style transactions, and lines of credit.
In
September 2014, the Agencies issued a final Liquidity Coverage Ratio (LCR) rule. This rule creates a standardized minimum liquidity requirement for the largest U.S. financial institutions. The rule will require an institution to hold high quality liquid assets (HQLA), such as central bank reserves and
government debt that can be converted easily and quickly into cash, in an amount equal to or greater than prescribed net cash outflows during a 30-day stress period. In October 2014, the Basel Committee issued its final standard for the Net Stable Funding Ratio (NSFR) regulation. The NSFR requires banks to maintain a stable funding profile in relation to their on- and off-balance sheet activities. Although the timing is uncertain, the Agencies are expected to propose similar regulation for the NSFR in the near future.
In
November 2014, the Financial Stability Board, in consultation with the Basel Committee, issued for public consultation a proposal for a common international standard on total loss-absorbing capacity (TLAC) for global systemically important banks (GSIBs). Although the timing is uncertain, the Agencies are expected to propose TLAC regulation in the near future.
In December 2014, a U.S. banking regulator proposed a regulation that would implement GSIB surcharge requirements for the largest U.S. BHCs. The proposed rule would require such organizations to calculate a GSIB capital buffer that is the higher of the GSIB’s capital buffer proposed by the Basel Committee in 2012 and a modified capital buffer with a short-term wholesale funding component. As proposed, the Federal Reserve estimates that the GSIB surcharge requirements, which currently ranges from 1.0 percent to 4.5 percent, would require us to hold Common equity tier 1
capital in excess of regulatory minimums and the capital conservation buffer. Consequences of falling below this level are expected to include limitations on capital distributions and variable compensation payments.
Compliance with the regulatory capital and liquidity requirements may impact our ability to return capital to shareholders and may impact our operations by requiring us to liquidate assets, increase borrowings, issue additional equity or other securities, cease or alter certain operations, or hold highly liquid assets, which may adversely affect our results of operations.
For additional information, see Capital Management and Liquidity Risk – Basel 3 Liquidity Standards on pages 59 and 67.
We
are subject to extensive government legislation and regulations, both domestically and internationally, which impact our operating costs and could require us to make changes to our operations, which could result in an adverse impact on our results of operations. Additionally, these regulations, and certain consent orders and settlements we have entered into, have increased and will continue to increase our compliance and operational costs.
We are subject to extensive laws and regulations promulgated by U.S. state, U.S. federal and non-U.S. laws in the jurisdictions in which we operate. In response to the financial crisis, the U.S. adopted the Financial Reform Act, which has resulted in significant rulemaking and proposed rulemaking by the U.S. Department of the Treasury, the Federal Reserve, the OCC, the CFPB, FSOC, the FDIC, the SEC and CFTC. In addition, non-U.S. regulators, such as the U.K. financial regulators and the
European Parliament and Commission, have adopted or have proposed laws and regulations regarding financial institutions located in their jurisdictions.
The ultimate impact of these laws and regulations remains uncertain. For example, we are required to annually submit a resolution plan to the FDIC and the Federal Reserve. If the FDIC and Federal Reserve jointly determine that our resolution plan is not credible and we fail to cure the deficiencies in a timely manner, they could impose more stringent capital, leverage or liquidity requirements or restrictions on growth, activities or operations of the Corporation, and we could be required to take certain actions that could impose operating costs and could potentially result in
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of America 2014
the divestiture or restructuring of certain businesses and subsidiaries. In August 2014, the Federal Reserve and the FDIC completed their reviews of the resolution plans submitted in 2013 by 11 large, complex banking organizations, including Bank of America, and issued letters to each of these banking organizations. Separately, in August 2014, the Federal Reserve and the FDIC issued a joint press release stating that the Board of Directors of the FDIC had
determined that the plans submitted by each of the 11 banks were not credible and do not facilitate an orderly resolution under the U.S. Bankruptcy Code. However, the Federal Reserve did not join the FDIC in its determination that the submitted plans were not credible. Many rules are still being finalized, and upon finalization could require additional regulatory guidance and interpretation. Additionally, laws proposed by different jurisdictions could create competing or conflicting requirements.
We are also subject to other significant regulations, such as OFAC, FCPA, and U.S. and international anti-money laundering regulations. Laws proposed by different jurisdictions could create competing or conflicting requirements. We could become subject to regulatory requirements beyond those currently proposed, adopted or contemplated. We are currently subject to the terms of settlements and consent orders that we have entered into
with government agencies, such as the 2011 OCC Consent Order and the National Mortgage Settlement, and may become subject to additional settlements or orders in the future.
While we believe that we have adopted appropriate risk management and compliance programs, compliance risks will continue to exist, particularly as we adapt to new rules and regulations. Our regulators have assumed an increasingly active oversight, inspection and investigatory role over our operations and the financial services industry generally. In addition, legal and regulatory proceedings and other contingencies will arise from time to time that may result in fines, penalties, equitable relief and changes to our business practices. As a result, we are and will continue to be subject to heightened compliance and operating costs that could adversely affect our results of operations.
Changes in the structure
of the GSEs and the relationship among the GSEs, the government and the private markets, or the conversion of the current conservatorship of the GSEs into receivership, could result in significant changes to our business operations and may adversely impact our business.
During 2013 and 2014, we sold approximately $65 billion of loans to the GSEs. Each GSE is currently in a conservatorship, with its primary regulator, the Federal Housing Finance Agency, acting as conservator. We cannot predict if, when or how the conservatorships will end, or any associated changes to the GSEs’ business structure that could result. We also cannot predict whether the conservatorships will end in receivership. There are several proposed approaches to reform the GSEs that, if enacted, could change the structure of the GSEs and the relationship among the GSEs, the government and the private markets, including the trading markets for agency conforming
mortgage loans and markets for mortgage-related securities in which we participate. We cannot predict the prospects for the enactment, timing or content of legislative or rulemaking proposals regarding the future status of the GSEs. Accordingly, there continues to be uncertainty regarding the future of the GSEs, including whether they will continue to exist in their current form.
We are subject to significant financial and reputational risks from potential liability arising from lawsuits, regulatory and government action.
We face significant legal risks in our business, and the volume of claims and amount of damages, penalties and fines claimed in litigation, and regulatory and government proceedings against us and other financial institutions
remain high. Increased litigation and investigation costs, substantial legal liability or significant regulatory or government action against us could have adverse effects on our financial condition and results of operations or cause significant reputational harm to us, which in turn could adversely impact our business prospects. We continue to experience increased litigation and other disputes, including claims for contractual indemnification, with counterparties regarding relative rights and responsibilities. Consumers, clients and other counterparties have grown more litigious. Our experience with certain regulatory authorities suggests an increasing supervisory focus on enforcement, including in connection with alleged violations of law and customer harm. Recent actions by regulators and government agencies indicate that they may, on an industry basis, increasingly pursue claims under the Financial institutions Reform, Recovery, and Enforcement act of 1989 (FIRREA)
and the False Claims Act. FIRREA contemplates civil monetary penalties as high as $1.1 million per violation or, if permitted by the court, based on pecuniary gain derived or pecuniary loss suffered as a result of the violation. Treble damages are potentially available for False Claims Act claims. The ongoing environment of additional regulation, increased regulatory compliance burdens, and enhanced regulatory enforcement, combined with ongoing uncertainty related to the continuing evolution of the regulatory environment, has resulted in operational and compliance costs and may limit our ability to continue providing certain products and services.
For more information on litigation risks, see Note 12 – Commitments and Contingencies to the Consolidated Financial Statements.
We may be adversely
affected by changes in U.S. and non-U.S. tax and other laws and regulations.
The U.S. Congress and the Administration have indicated an interest in reforming the U.S. corporate income tax code. Possible approaches include lowering the 35 percent corporate tax rate, modifying the taxation of income earned outside the U.S. and limiting or eliminating various other deductions, tax credits and/or other tax preferences. Also, it is possible that New York City will enact corporate tax reform that may conform to New York state’s tax reform enacted during 2014. It is not possible at this time to quantify either the one-time impacts from the remeasurement of deferred tax assets and liabilities that might result upon tax reform enactment or the ongoing impacts reform proposals might have on income tax expense.
In addition, income from certain non-U.S. subsidiaries
has not been subject to U.S. income tax as a result of long-standing deferral provisions applicable to income that is derived in the active conduct of a banking and financing business abroad. These deferral provisions have expired for taxable years beginning on or after January 1, 2015. However, the U.S. Congress has extended these provisions several times, most recently in December 2014, when it reinstated the provisions retroactively to January 2014. Congress this year may similarly consider reinstating these provisions to apply to the 2015 taxable year. Absent an extension, active financing income earned by certain non-U.S. subsidiaries will generally be subject to a tax provision that considers
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of America 2014 14
incremental U.S. income tax. The impact of the expiration of these provisions would depend upon the amount, composition and geographic mix of our future earnings.
The Corporation has $7.7 billion of U.K. net deferred tax assets which consist primarily of net operating losses (NOLs) that are expected to be realized by certain subsidiaries over an extended number of years. Pretax income for these subsidiaries for 2014, 2013 and 2012 on a cumulative basis totaled $1.7 billion, excluding
the impact of debit valuation adjustments (DVA) and the adoption impact of a funding valuation adjustment (FVA). In December 2014, the U.K. Treasury announced that its 2015 Finance Bill, to be introduced soon, will include a proposal that, if enacted, would limit the amount of a bank’s taxable profits that can be reduced by the bank’s existing NOLs to 50 percent of such profits. This proposal would significantly increase the number of years over which our U.K. NOLs, which may be carried forward indefinitely, could be utilized, effectively accelerating U.K. tax that would otherwise have been paid further out in the future. The acceleration of tax and deferral of NOL utilization would not impact our results of operations, but would result in a slower improvement in the amount of our DTAs disallowed for Basel 3 regulatory capital. We are unable to predict whether this proposal will be enacted or, if enacted, what the final provisions will be. Adverse developments with respect
to tax laws or to other material factors, such as a prolonged worsening of Europe’s capital markets, could lead 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.
Other countries have also proposed and adopted certain regulatory changes targeted at financial institutions or that otherwise affect us. The EU has adopted increased capital requirements and the U.K. has (i) increased liquidity requirements for local financial institutions, including regulated U.K. subsidiaries of non-U.K. BHCs and other financial institutions as well as branches of non-U.K. banks located in the U.K.; (ii) adopted a Bank Levy, which applies to the aggregate balance sheet of branches and subsidiaries
of non-U.K. banks and banking groups operating in the U.K.; and (iii) proposed the creation and production of recovery and resolution plans by U.K.-regulated entities.
Risk of the Competitive Environment in which We Operate
We face significant and increasing competition in the financial services industry.
We operate in a highly competitive environment. Over time, there has been substantial consolidation among companies in the financial services industry. This trend has also hastened the globalization of the securities and financial services markets. We will continue to experience intensified competition as consolidation in and globalization of the financial services industry may result in larger, better-capitalized and more geographically diverse companies that are capable of offering a wider array of financial products and services at
more competitive prices. To the extent we expand into new business areas and new geographic regions, we may face competitors with more experience and more established relationships with clients, regulators and industry participants in the relevant market, which could adversely affect our ability to compete. In addition, technological advances and the growth of e-commerce have made it possible for non-depository institutions to offer products and services that traditionally were banking products, and for financial institutions to compete with
technology companies in providing electronic and internet-based financial solutions. Increased competition may negatively affect our earnings by creating pressure to lower prices on our products and services and/or reducing market share.
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. We continue to face increased public and regulatory scrutiny resulting from the financial crisis and economic downturn as well as alleged irregularities in servicing, foreclosure, consumer collections, mortgage loan modifications and other practices, compensation practices, and the suitability or reasonableness of recommending particular trading or investment strategies.
Harm to our reputation can also arise from other sources, including employee misconduct, unethical behavior, litigation or regulatory outcomes, failing to deliver minimum or required standards of service and quality, compliance failures, unintended disclosure of confidential information, and the activities
of our clients, customers and counterparties, including vendors. Actions by the financial services industry generally or by certain members or individuals in the industry also can adversely affect our reputation.
We are subject to complex and evolving laws and regulations regarding privacy, data protections and other matters. Principles concerning the appropriate scope of consumer and commercial privacy vary considerably in different jurisdictions, and regulatory and public expectations regarding the definition and scope of consumer and commercial privacy may remain fluid in the future. 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. We face regulatory, reputational and operational risks if personal, confidential or proprietary information of customers or clients in our possession
is mishandled or misused.
We could suffer reputational harm if we fail to properly identify and manage potential conflicts of interest. Management of potential conflicts of interests has become increasingly complex as we expand our business activities through more numerous transactions, obligations and interests with and among our clients. The failure to adequately address, or the perceived failure to adequately address, conflicts of interest could affect the willingness of clients to deal with us, or give rise to litigation or enforcement actions, which could adversely affect our businesses.
Our actual or perceived failure to address these and other issues gives rise to reputational risk that could cause harm to us and our business prospects, including failure to properly address operational risks. 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.
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 has been, and is expected to continue to be, intense. Our competitors include non-U.S. based institutions and institutions subject to different compensation and
15 Bank
of America 2014
hiring regulations than those imposed on U.S. institutions and financial institutions. The difficulty we face in competing for key personnel is exacerbated in emerging markets, where we are often competing for qualified employees with entities that may have a significantly greater presence or more extensive experience in the region.
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 FDIC or other regulators around the world. For instance, recent EU rules limit and subject to clawback certain forms of variable compensation for senior employees. Current and potential future limitations on executive compensation imposed by legislation or regulation could adversely affect our ability to attract and maintain qualified employees. Furthermore, a substantial portion of our annual incentive compensation paid to our senior employees has in recent years taken the form of long-term equity awards. Therefore, the ultimate value of this compensation depends on the price of our common stock when the awards vest. If we are unable to continue to attract and retain qualified individuals, our business prospects and competitive position could be adversely affected.
In addition, if we fail to retain the wealth advisors that we employ in Global Wealth & Investment Management,
particularly those with significant client relationships, such failure could result in a loss of clients or the withdrawal of significant client assets.
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 business that provides a broad range of financial products and services, delivered through multiple distribution channels. Our success depends on our ability to adapt our products and services to evolving industry standards. There is increasing pressure by competitors to provide products and services at lower prices. This can reduce our net interest margin and revenues from our fee-based products and services. In addition, the widespread adoption of new technologies, including internet services and payment systems, could require us to incur substantial
expenditures to modify or adapt our existing products and services. We might not be successful in developing or introducing new products and services, responding or adapting to changes in consumer spending and saving habits, achieving market acceptance of our products and services, or sufficiently developing and maintaining loyal customers.
We may not be able to achieve expected cost savings from cost-saving initiatives or in accordance with currently anticipated time frames.
We are currently engaged in efforts to achieve cost savings. For example, we currently expect our Legacy Assets and Servicing costs, excluding litigation costs, to decrease to approximately $800 million per quarter by the end of 2015. We may be unable to fully realize the cost savings and other anticipated benefits from our cost saving initiatives or in accordance with currently anticipated timeframes. In addition,
our litigation expense may vary from period to period and may cause our noninterest expense to increase for any particular period even if we otherwise achieve cost savings as the result of our cost savings initiatives or otherwise.
Risks Related to Risk Management
Our risk management framework may not be effective in mitigating risk and reducing the potential for losses.
Our risk management framework is designed to minimize risk and loss to us. We seek to identify, measure, monitor, report and control our exposure to the types of risk to which we are subject, including strategic, credit, market, liquidity, compliance, operational and reputational risks, among others. While we employ a broad and diversified set of risk monitoring and mitigation
techniques, including hedging strategies and techniques that seek to balance our ability to profit from trading positions with our exposure to potential losses, those techniques are inherently limited because they cannot anticipate the existence or future development of currently unanticipated or unknown risks. The Volcker Rule may impact our ability to engage in certain hedging strategies. Recent economic conditions, heightened legislative and regulatory scrutiny of the financial services industry and increases in the overall complexity of our operations, among other developments, have resulted in a heightened level of risk for us. Accordingly, we could suffer losses as a result of our failure to properly anticipate and manage these risks.
For more information about our risk management policies and procedures, see Managing Risk in the MD&A on page 55.
A
failure in or breach of our operational or security systems or infrastructure, or those of third parties, could disrupt our businesses, and adversely impact our results of operations, cash flows, liquidity and financial condition, as well as cause reputational harm.
The potential for operational risk exposure exists throughout our organization and as a result of our interactions with third parties, and is not limited to our operational functions. Our operational and security systems, infrastructure, including our computer systems, data management, and internal processes, as well as those of third parties, are integral to our performance. In addition, we rely on our employees and third parties in our day-to-day and ongoing operations, who may, as a result of human error or malfeasance or failure or breach of third-party systems or infrastructure, expose us to risk. We have taken measures to implement backup systems and other
safeguards to support our operations, but our ability to conduct business may be adversely affected by any significant disruptions to us or to third parties with whom we interact. In addition, our ability to implement backup systems and other safeguards with respect to third-party systems is more limited than with respect to our own systems. Our financial, accounting, data processing, backup or other operating or security systems and infrastructure 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 control which could adversely affect our ability to process these transactions or provide these services. There could be sudden increases in customer transaction volume; electrical, telecommunications or other major physical infrastructure outages; natural disasters such as earthquakes, tornadoes, hurricanes and floods; disease pandemics; and events arising from local or larger
scale political or social matters, including terrorist acts. We continuously update these systems to support our operations and growth. This updating entails significant costs and creates risks associated with implementing new systems and integrating them with existing ones. Operational risk exposures could adversely impact our results of operations, cash flows, liquidity and financial condition, as well as cause reputational harm.
Bank of America 2014 16
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, cash flows, liquidity and financial condition, as well as cause reputational harm.
Our businesses are highly dependent on the security and efficacy of our infrastructure, computer and data management systems, as well as those of third parties with whom we interact. Cyber security risks for financial institutions have significantly increased in recent years in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial
transactions, and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties, including foreign state actors. Our businesses rely on the secure processing, transmission, storage and retrieval of confidential, proprietary and other information in our computer and data management systems and networks, and in the computer and data management systems and networks of third parties. We rely on digital technologies, computer, database and email systems, software, and networks to conduct our operations. In addition, to access our network, products and services, our customers and other third parties may use personal mobile devices or computing devices that are outside of our network environment. We, our customers, regulators and other third parties have been subject to, and are likely to continue to be the target of, cyber attacks, including computer viruses, malicious or destructive code, phishing attacks, denial of service
or information or other security breaches, that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information of the Corporation, our employees, our customers or of third parties, or otherwise materially disrupt our or our customers’ or other third parties’ network access or business operations. For example, in recent years, we have been subject to malicious activity, including distributed denial of service attacks. Additionally, several large retailers have disclosed substantial cyber security breaches affecting debit and credit card accounts of their customers, some of whom were our cardholders. Although these incidents have not, to date, had a material impact on us, we believe that such incidents will continue, and we are unable to predict the severity of such future attacks on us. Our counterparties, regulators, customers and clients, and other third parties with whom we or our customers
and clients interact are exposed to similar incidents, and incidents affecting those third parties could impact us.
Although to date we have not experienced any material losses or other material consequences relating to technology failure, cyber attacks or other information or other security breaches, there can be no assurance that we will not suffer such losses or other consequences in the future. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, our prominent size and scale, and our role in the financial services industry and the broader economy, our plans to continue to implement our internet banking and mobile banking channel strategies and develop additional remote connectivity solutions to serve our customers when and how they want to be served, our continuous transmission of sensitive information to, and storage of such information by, third
parties, including our vendors and regulators, our expanded geographic footprint and international presence, the outsourcing of some of our business operations, the continued uncertain global economic environment, threats of cyber terrorism, external extremist parties, including foreign state actors, in some circumstances as a means to promote political ends, and system and customer account updates and conversions. As a result, cyber security and the continued development and enhancement of our controls, processes and practices designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority for us. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to
investigate and remediate any information security vulnerabilities or incidents.
We also face indirect technology, cyber security and operational risks relating to the third parties with whom we do business or upon whom we rely to facilitate or enable our business activities. In addition to customers and clients, the third parties with whom we interact and upon whom we rely include financial counterparties; financial intermediaries such as clearing agents, exchanges and clearing houses; vendors; regulators; providers of critical infrastructure such as internet access and electrical power, and retailers for whom we process transactions. Each of these third parties faces the risk of cyber attack, information breach or loss, or technology failure. Any such cyber attack, information breach or loss, or technology failure of a third party could, among other things, adversely affect our ability to effect transactions, service our
clients, manage our exposure to risk or expand our businesses. As a result of financial entities and technology systems becoming more interdependent and complex, a cyber incident, information breach or loss, or technology failure that significantly degrades, deletes or compromises the systems or data of one or more financial entities could have a material impact on counterparties or other market participants, including the Corporation. For example, in recent years, there has been significant consolidation among clearing agents, exchanges and clearing houses and increased interconnectivity of multiple financial institutions with central agents, exchanges and clearing houses. This consolidation and interconnectivity increases the risk of operational failure, on both individual and industry-wide bases, as disparate complex systems need to be integrated, often on an accelerated basis. Any such cyber attack, information breach or loss, failure, termination or constraint could,
among other things, adversely affect our ability to effect transactions, service our clients, manage our exposure to risk or expand our businesses.
Any of the matters discussed above could result in our loss of customers and business opportunities, significant business disruption to our operations and business, misappropriation or destruction of our confidential information and/or that of our customers, or damage to our customers’ and/or third parties’ computers or systems, and could result in a violation of applicable privacy laws and other laws, litigation exposure, regulatory fines, penalties or intervention, loss of confidence in our security measures, reputational damage, reimbursement or other compensatory costs, and additional compliance costs. In addition, any of the matters described above could adversely impact our results of operations, cash flows, liquidity and financial condition.
17 Bank
of America 2014
Risk of Being an International Business
We are subject to numerous political, economic, market, reputational, operational, legal, regulatory and other risks in the non-U.S. jurisdictions in which we operate.
We do business throughout the world, including in developing regions of the world commonly known as emerging markets. Our businesses and revenues derived from non-U.S. jurisdictions are subject to risk of loss from currency fluctuations, social or judicial instability, changes in governmental policies or policies of central banks, expropriation,
nationalization and/or confiscation of assets, price controls, capital controls, exchange controls, other restrictive actions, unfavorable political and diplomatic developments, oil price fluctuation and changes in legislation. These risks are especially elevated in emerging markets. A number of non-U.S. jurisdictions in which we do business have been negatively impacted by slowing growth rates or recessionary conditions, market volatility and/or political unrest. Several emerging market economies are particularly vulnerable to the impact of rising interest rates, inflationary pressures, weaker oil and other commodity prices, large external deficits, and political uncertainty. While some of these jurisdictions are showing signs of stabilization or recovery, others, such as Russia and Greece, continue to experience increasing levels of stress and volatility. In addition, the potential risk of default on sovereign debt in some non-U.S. jurisdictions could expose us to
substantial losses. Risks in one country can limit our opportunities for portfolio growth and negatively affect our operations in another country or countries, including our operations in the U.S. As a result, any such unfavorable conditions or developments could have an adverse impact on our company.
Our non-U.S. businesses are also subject to extensive regulation by various regulators, including governments, securities exchanges, central banks and other regulatory bodies, in the jurisdictions in which those businesses operate. 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 have an adverse effect not only on our businesses in that market but also on our reputation generally.
We also invest or trade in the securities of corporations and governments located in non-U.S. jurisdictions, including emerging markets. Revenues from the trading of non-U.S. securities may be subject to negative fluctuations as a result of the above factors. Furthermore, the impact of these fluctuations could be magnified, because non-U.S. trading markets, particularly in emerging market countries, are generally smaller, less liquid and more volatile than U.S. trading markets.
In addition to non-U.S. legislation, our international operations are also subject to U.S. legal requirements. For example, our
international
operations are subject to U.S. laws on foreign corrupt practices, the Office of Foreign Assets Control, and anti-money laundering regulations.
We are subject to geopolitical risks, including acts or threats of terrorism, and actions taken by the U.S. or other governments in response thereto and/or military conflicts, which could adversely affect business and economic conditions abroad as well as in the U.S.
For more information on our non-U.S. credit and trading portfolios, see Non-U.S. Portfolio in the MD&A on page 93.
Risk from Accounting Changes
Changes in accounting standards or inaccurate estimates 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 (such as the Financial Accounting Standards Board (FASB), 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 retroactively, resulting in the Corporation needing to revise and republish prior-period financial statements.
The FASB issued in 2012 a proposed standard on accounting for credit losses. The standard would replace multiple existing impairment models, including replacing an “incurred loss” model for loans with an “expected loss” model. The FASB has not yet established a proposed effective date but a final standard is expected to be issued in the second half of 2015. The final standard may materially reduce retained earnings in the period of adoption.
For more information on some of our critical accounting policies and standards and recent accounting changes, see Complex Accounting Estimates in the MD&A on page
109 and Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
Item 1B. Unresolved Staff Comments
None
Bank
of America 2014 18
Item 2. Properties
As of December 31, 2014, our principal offices and other materially important properties consisted of the following:
Facility
Name
Location
General Character of the Physical Property
Primary Business Segment
Property Status
Property Square Feet (1)
Bank of America Corporate Center
Charlotte,
NC
60 Story Building
Principal Executive Offices
Owned
1,200,392
Bank of America Tower at One Bryant Park
New York, NY
55 Story
Building
GWIM, Global Banking and
Global Markets
Leased (2)
1,798,373
Bank of America Merrill Lynch Financial Centre
London, UK
4 Building Campus
Global
Banking and Global Markets
Leased
568,032
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 90.5 million square feet in 22,530 facility and ATM locations globally, including approximately 84.3 million square feet in the U.S. (all 50 states and the District of Columbia, the U.S. Virgin Islands and Puerto Rico) and approximately 6.2 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 12 – Commitments and Contingencies to the Consolidated Financial Statements, which is
incorporated herein by reference.
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. Our common stock is also listed on the London Stock Exchange, and certain shares are listed on the Tokyo Stock Exchange. As of February 24, 2015, there were 203,715 registered shareholders of common stock. The table below sets forth the high and low closing sales prices of the common stock on the New York Stock Exchange for the periods indicated during 2013 and 2014,
as well as the dividends we paid on a quarterly basis:
Quarter
High
Low
Dividend
2013
first
$
12.78
$
11.03
$
0.01
second
13.83
11.44
0.01
third
14.95
12.83
0.01
fourth
15.88
13.69
0.01
2014
first
17.92
16.10
0.01
second
17.34
14.51
0.01
third
17.18
14.98
0.05
fourth
18.13
15.76
0.05
For
more information regarding our ability to pay dividends, see Note 13 – Shareholders’ Equity and Note 16 – Regulatory Requirements and Restrictions to the Consolidated Financial Statements, which are incorporated herein by reference.
For information on our equity compensation plans, see Note 18 – Stock-based Compensation Plans to the Consolidated Financial Statements and Item 12 on page 270 of this report, which are incorporated herein by reference.
The
table below presents share repurchase activity for the three months ended December 31, 2014. We did not have any unregistered sales of our equity securities in 2014.
(Dollars
in millions, except per share information; shares in thousands)
Includes
shares of the Corporation’s common stock acquired by the Corporation in connection with satisfaction of tax withholding obligations on vested restricted stock or restricted stock units and certain forfeitures and terminations of employment-related awards under equity incentive plans.
(2)
On March 26, 2014, the Corporation announced that the Federal Reserve had informed the Corporation that it completed its 2014 Comprehensive Capital Analysis and Review and did not object to the Corporation’s 2014 capital plan, which included a request to repurchase up to $4.0 billion of common stock over four quarters beginning in the second quarter of 2014. On March
26, 2014, the Corporation’s Board of Directors authorized the repurchase of up to $4.0 billion of the Corporation’s common stock through open market purchases or privately negotiated transactions, including Rule 10b5-1 plans, over four quarters beginning with the second quarter of 2014. On April 28, 2014, the Corporation announced the suspension of the repurchase authorization previously announced on March 26, 2014. On May 27, 2014, the Corporation submitted a revised 2014 capital plan to the Federal Reserve that included no additional repurchases of common stock through the end of the first quarter of 2015 (excluding approximately $233 million of repurchases prior to April 27, 2014). On August 6, 2014, the Federal Reserve
notified the Corporation that it did not object to the revised 2014 capital plan. Amounts shown in the column reflect remaining buyback authority under the March 26, 2014 authorization; however, the Corporation will not repurchase any shares of common stock pursuant to such authorization without prior approval by the Federal Reserve.
Item 6. Selected Financial Data
See Table 7 in the MD&A on page 30 and Statistical Table XII in the MD&A on page 129, which are incorporated herein by reference.
Bank
of America 2014 20
Item 7. Bank of America Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operation
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This report, the documents that it incorporates by reference and the documents into which it may be incorporated by reference may contain, and from time to time Bank of America Corporation (collectively with its subsidiaries, 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,”“goal,”“believes,”“continue” and other similar expressions or future or conditional verbs such as “will,”“may,”“might,”“should,”“would” and “could.” The forward-looking statements made represent the Corporation’s current expectations, plans or forecasts of its future results and revenues, 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 elsewhere in this report, including under Item 1A. Risk Factors of this Annual Report on Form 10-K and in any of the Corporation’s subsequent Securities and Exchange Commission filings for further information about factors that could affect such forward-looking statements: the Corporation’s ability to resolve representations and warranties repurchase claims and the chance that the Corporation could face related servicing, securities, fraud, indemnity or other claims from one or more counterparties, including monolines or private-label and other investors;
the possibility that final court approval of negotiated settlements is not obtained, including the possibility that the court decision with respect to the BNY Mellon Settlement is overturned on appeal in whole or in part; the possibility that future representations and warranties losses may occur in excess of the Corporation’s recorded liability and estimated range of possible loss for its representations and warranties exposures; the possibility that the Corporation may not collect mortgage insurance claims; potential claims, damages, penalties, fines and reputational damage resulting from pending or future litigation and regulatory proceedings, including the possibility that amounts may be in excess of the Corporation’s recorded liability and estimated range of possible losses for litigation exposures; the possibility that the
European
Commission will impose remedial measures in relation to its investigation of the Corporation’s competitive practices; the possible outcome of LIBOR, other reference rate and foreign exchange inquiries and investigations; uncertainties about the financial stability and growth rates of non-U.S. jurisdictions, the risk that those jurisdictions may face difficulties servicing their sovereign debt, and related stresses on financial markets, currencies and trade, and the Corporation’s exposures to such risks, including direct, indirect and operational; the impact of U.S. and global interest rates, currency exchange rates and economic conditions; the negative impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act on the Corporation’s business and earnings, including as a result of additional regulatory interpretations
and rulemaking and the success of the Corporation’s actions to mitigate such impacts; the potential impact of a prolonged low interest rate environment on the Corporation’s business, financial condition and results of operations; adverse changes to the Corporation’s credit ratings from the major credit rating agencies; estimates of the fair value of certain of the Corporation’s assets and liabilities; uncertainty regarding the content, timing and impact of regulatory capital and liquidity requirements, including, but not limited to, any GSIB surcharge or as a result of changes to our Basel 3 Advanced approaches estimates; the Corporation’s ability to fully realize the cost savings and other anticipated benefits from cost-saving initiatives,
including in accordance with currently anticipated timeframes, the impact of implementation and compliance with new and evolving U.S. and international regulations, including, but not limited to, recovery and resolution planning requirements, the Volcker Rule, and derivatives regulations; the potential impact of the U.K. tax authorities’ proposal to limit how much NOLs can offset annual profit; a failure in or breach of the Corporation’s operational or security systems or infrastructure, or those of third parties with whom we do business, including as a result of cyber attacks; and other similar matters.
Forward-looking statements speak only as of the date they are made, and the Corporation undertakes no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.
Notes
to the Consolidated Financial Statements referred to in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) are incorporated by reference into the MD&A. Certain prior-year amounts have been reclassified to conform to current-year presentation. Throughout the MD&A, the Corporation uses certain acronyms and abbreviations which are defined in the Glossary.
Bank of America 2014 22
Executive
Summary
Business Overview
The Corporation is a Delaware corporation, a bank holding company (BHC) and a financial holding company. When used in this report, “the Corporation” may refer to Bank of America Corporation individually, Bank of America Corporation and its subsidiaries, or certain of Bank of America Corporation’s subsidiaries or affiliates. Our principal executive offices are located in Charlotte, North Carolina. Through our banking and various nonbank subsidiaries throughout the U.S. and in international markets, we provide a diversified range of banking and nonbank financial services and products
through five business segments: Consumer & Business Banking (CBB), Consumer Real Estate Services (CRES), Global Wealth & Investment Management (GWIM), Global Banking and Global Markets, with the remaining operations recorded in All Other. Effective January 1, 2015, to align the segments with how we manage the businesses in 2015, we changed our basis of segment presentation as follows: the Home Loans subsegment within CRES was moved to CBB, and Legacy Assets & Servicing became a separate segment. Also, a portion of the Business Banking business, based on the size of the client relationship, was moved from CBB to Global
Banking. Prior periods will be restated to conform to the new segment alignment. Prior to October 1, 2014, we operated our banking activities primarily under two charters: Bank of America, National Association (Bank of America, N.A. or BANA) and, to a lesser extent, FIA Card Services, National Association (FIA Card Services, N.A. or FIA). On October 1, 2014, FIA was merged into BANA. At December 31, 2014, the Corporation had approximately $2.1 trillion in assets and approximately 224,000 full-time equivalent employees.
As of December 31, 2014,
we operated in all 50 states, the District of Columbia, the U.S. Virgin Islands, Puerto Rico and more than 35 countries. Our retail banking footprint covers approximately 80 percent of the U.S. population and we serve approximately 48 million consumer and small business relationships with approximately 4,800 banking centers, 15,800 ATMs, nationwide call centers, and leading online and mobile banking platforms (www.bankofamerica.com). We offer industry-leading support to approximately three million small business owners. Our industry leading wealth management and trust businesses, with client balances of $2.5
trillion, provide tailored solutions to meet client needs through a full set of 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.
2014 Economic and Business Environment
In the U.S., economic growth continued in 2014, ending the year in the midst of its sixth consecutive year of recovery. After a tentative and generally soft trajectory for five years where annualized GDP growth averaged 2.3 percent, there were clear
signs of accelerated growth in the final
three quarters of 2014 following a first quarter impacted by adverse weather conditions. Employment gains picked up during the year, and the unemployment rate fell to 5.6 percent at year end. Consumption grew slowly early in the year, before picking up steadily and ending with a robust pace in the final quarter. Core inflation remained relatively unchanged in 2014, rising modestly in the first half and falling thereafter, and ended the year more than half a percentage point below the Board of Governors of the Federal Reserve System’s (Federal Reserve) longer-term annual target of two percent.
U.S. household net worth continued to rise in 2014 but at a substantially slower pace than 2013. Home price appreciation was less in 2014 than 2013 but prices still rose approximately five percent
in 2014 while equity markets gained approximately 11 percent. However, consumer spending was more significantly enhanced by sharply lower oil prices late in the year, reflecting foreign economic weakness amid an ample and growing energy supply.
U.S. Treasury yields fell over the course of the year, reversing much of the previous year’s increase. Declining world inflation and interest rates helped push U.S. Treasury yields lower even as the Federal Reserve steadily reduced and finally ended its purchases of agency mortgage-backed securities (MBS) and long-term U.S. Treasury securities. The Federal Reserve ended the year amid indications that it can be patient with regard to normalizing monetary policy.
Internationally, the eurozone grew modestly for much of the year, with growth restrained by continued deleveraging of the financial
sector, high unemployment and political uncertainty. Inflation in the eurozone also fell significantly to near zero by year end. European bond yields continued to decline, especially as the European Central Bank eased monetary policy and expectations grew late in the year for outright purchases of sovereign and/or corporate securities in 2015, and were subsequently confirmed to begin in March 2015. The Euro/U.S. Dollar exchange rate also fell significantly, boosting European competitiveness, particularly in the second half of 2014, in direct reaction to the differing directions of U.S. and eurozone monetary policies. Contentious negotiations between parties to Greek sovereign and bank support programs added to uncertainty and market volatility in the first quarter of 2015.
In Russia, the combination of the U.S. and European Union sanctions and sharply lower oil prices weakened growth. Select emerging nations that are net energy
suppliers also saw growth diminish sharply, although other nations, including some emerging economies in Asia received some benefits from declining energy prices.
Following a quarter of strong economic growth ahead of a consumption tax increase, Japan contracted through the middle of the year and the Bank of Japan responded with stepped up quantitative easing. Amid gradual economic moderation, China also eased monetary policy late in the year.
23 Bank of America 2014
Selected
Financial Data
Table 1 provides selected consolidated financial data for 2014 and 2013.
Table 1
Selected
Financial Data
(Dollars in millions, except per share information)
2014
2013
Income statement
Revenue,
net of interest expense (FTE basis) (1)
$
85,116
$
89,801
Net income
4,833
11,431
Diluted
earnings per common share
0.36
0.90
Dividends paid per common share
0.12
0.04
Performance ratios
Return
on average assets
0.23
%
0.53
%
Return on average tangible common shareholders’ equity (1)
2.52
6.97
Efficiency ratio (FTE basis) (1)
88.25
77.07
Asset
quality
Allowance for loan and lease losses at December 31
$
14,419
$
17,428
Allowance for loan and lease losses as a percentage
of total loans and leases outstanding at December 31 (2)
1.65
%
1.90
%
Nonperforming loans, leases and foreclosed properties at December 31 (2)
$
12,629
$
17,772
Net
charge-offs (3)
4,383
7,897
Net charge-offs as a percentage of average loans and leases outstanding (2, 3)
0.49
%
0.87
%
Net charge-offs as a percentage of
average loans and leases outstanding, excluding the purchased credit-impaired loan portfolio (2)
0.50
0.90
Net charge-offs and purchased credit-impaired write-offs as a percentage of average loans and leases outstanding (2)
0.58
1.13
Ratio
of the allowance for loan and lease losses at December 31 to net charge-offs (3)
3.29
2.21
Ratio of the allowance for loan and lease losses at December 31 to net charge-offs, excluding the purchased credit-impaired loan portfolio
2.91
1.89
Ratio
of the allowance for loan and lease losses at December 31 to net charge-offs and purchased credit-impaired write-offs
2.78
1.70
Balance sheet at year end
Total loans and leases
$
881,391
$
928,233
Total
assets
2,104,534
2,102,273
Total deposits
1,118,936
1,119,271
Total common shareholders’ equity
224,162
219,333
Total
shareholders’ equity
243,471
232,685
Capital ratios at year end (4)
Common equity tier 1 capital
12.3
%
n/a
Tier 1
common capital
n/a
10.9
%
Tier 1 capital
13.4
12.2
Total capital
16.5
15.1
Tier 1
leverage
8.2
7.7
(1)
Fully taxable-equivalent (FTE) basis, return on average tangible common shareholders’ equity and the efficiency ratio are non-GAAP financial measures. Other companies may define or calculate these measures differently. For more information, see Supplemental Financial Data on page 32, and for corresponding reconciliations
to GAAP financial measures, see Statistical Table XV.
(2)
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 82 and corresponding Table 39, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 89
and corresponding Table 48.
(3)
Net charge-offs exclude $810 million of write-offs in the purchased credit-impaired loan portfolio for 2014 compared to $2.3 billion for 2013. These write-offs decreased the purchased credit-impaired valuation allowance included as part of the allowance for loan and lease losses. For more information on purchased credit-impaired write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio
on page 78.
(4)
On January 1, 2014, the Basel 3 rules became effective, subject to transition provisions primarily related to regulatory deductions and adjustments impacting Common equity tier 1 capital and Tier 1 capital. We reported under Basel 1 (which included the Market Risk Final Rules) at December 31, 2013.
n/a = not applicable
Bank
of America 2014 24
Financial Highlights
Net income was $4.8 billion, or $0.36 per diluted share in 2014 compared to $11.4 billion, or $0.90 per diluted share in 2013. The results for 2014 included an increase of $10.3 billion in litigation expense primarily as a result of charges related to the settlements with the U.S. Department of Justice (DoJ) and
the Federal Housing Finance Agency (FHFA).
Table 2
Summary Income Statement
(Dollars
in millions)
2014
2013
Net interest income (FTE basis) (1)
$
40,821
$
43,124
Noninterest income
44,295
46,677
Total
revenue, net of interest expense (FTE basis) (1)
85,116
89,801
Provision for credit losses
2,275
3,556
Noninterest
expense
75,117
69,214
Income before income taxes (FTE basis) (1)
7,724
17,031
Income
tax expense (FTE basis) (1)
2,891
5,600
Net income
4,833
11,431
Preferred
stock dividends
1,044
1,349
Net income applicable to common shareholders
$
3,789
$
10,082
Per
common share information
Earnings
$
0.36
$
0.94
Diluted earnings
0.36
0.90
(1)
FTE
basis is a non-GAAP financial measure. For more information on this measure, see Supplemental Financial Data on page 32, and for a corresponding reconciliation to GAAP financial measures, see Statistical Table XV.
Net Interest Income
Net interest income on a fully taxable-equivalent (FTE) basis decreased $2.3 billion to $40.8 billion for 2014 compared to 2013. The net interest yield on an FTE basis decreased 12 basis points (bps) to 2.25
percent for 2014. These declines were primarily due to the acceleration of market-related premium amortization on debt securities as the decline in long-term interest rates shortened the expected lives of the securities. Also contributing to these declines were lower loan yields and consumer loan balances, lower net interest income from the asset and liability management (ALM) portfolio and a decrease in trading-related net interest income. Market-related premium amortization was an expense of $1.2 billion in 2014 compared to a benefit of $784 million in 2013. Partially offsetting these declines were reductions in funding yields, lower long-term debt balances and commercial loan growth.
Noninterest Income
Table 3
Noninterest Income
(Dollars
in millions)
2014
2013
Card income
$
5,944
$
5,826
Service charges
7,443
7,390
Investment
and brokerage services
13,284
12,282
Investment banking income
6,065
6,126
Equity investment income
1,130
2,901
Trading
account profits
6,309
7,056
Mortgage banking income
1,563
3,874
Gains on sales of debt securities
1,354
1,271
Other
income (loss)
1,203
(49
)
Total noninterest income
$
44,295
$
46,677
Noninterest
income decreased $2.4 billion to $44.3 billion for 2014 compared to 2013. The following highlights the significant changes.
Ÿ
Investment and brokerage services income increased $1.0 billion primarily driven by increased asset management fees driven by the impact of long-term assets under management (AUM) inflows and higher market levels.
Ÿ
Equity
investment income decreased $1.8 billion to $1.1 billion primarily due to a lower level of gains compared to 2013 and the continued wind-down of Global Principal Investments (GPI).
Ÿ
Trading account profits decreased $747 million, which included a charge of $497 million in 2014 related to the adoption of a funding valuation adjustment (FVA) in Global Markets, partially
offset by a $359 million change in net debit valuation adjustments (DVA) on derivatives. Excluding the FVA/DVA charges, trading account profits decreased $609 million due to both lower market volumes and volatility.
Ÿ
Mortgage banking income decreased $2.3 billion primarily driven by lower servicing income and core production revenue, partially offset by lower representations and warranties provision.
Ÿ
Other
income (loss) improved $1.3 billion due to an increase of $1.1 billion in net DVA gains on structured liabilities as our spreads widened, and gains associated with the sales of residential mortgage loans, partially offset by increases in U.K. consumer payment protection insurance (PPI) costs. The prior year also included the write-down of $450 million on a monoline receivable.
Provision for Credit Losses
The provision for credit losses decreased $1.3 billion to $2.3 billion for 2014 compared to 2013. The provision for credit losses was $2.1 billion
lower than net charge-offs for 2014, resulting in a reduction in the allowance for credit losses. The decrease from the prior year was driven by portfolio improvement, including increased home prices in the home loans portfolio and lower unemployment levels driving improvement in the credit card portfolios, and improved asset quality in the commercial portfolio. Partially offsetting this decline was $400 million of additional costs in 2014 associated with the consumer relief portion of the settlement with the DoJ. We expect reserve releases in 2015 to moderate when compared to 2014.
Net charge-offs totaled $4.4 billion, or 0.49 percent of average loans and leases for 2014 compared to $7.9 billion,
or 0.87 percent for 2013. The decrease in net charge-offs was due to credit quality improvement across all major portfolios and the impact of increased recoveries primarily from nonperforming and delinquent loan sales. For more information on the provision for credit losses, see Provision for Credit Losses on page 95.
25 Bank of America 2014
Noninterest
Expense
Table 4
Noninterest Expense
(Dollars
in millions)
2014
2013
Personnel
$
33,787
$
34,719
Occupancy
4,260
4,475
Equipment
2,125
2,146
Marketing
1,829
1,834
Professional
fees
2,472
2,884
Amortization of intangibles
936
1,086
Data processing
3,144
3,170
Telecommunications
1,259
1,593
Other
general operating
25,305
17,307
Total noninterest expense
$
75,117
$
69,214
Noninterest
expense increased $5.9 billion to $75.1 billion for 2014 compared to 2013 primarily driven by higher litigation expense in other general operating expense. Litigation expense increased $10.3 billion primarily as a result of charges related to the settlements with the DoJ and FHFA. The increase in litigation expense was partially offset by a decrease of $3.3 billion in default-related staffing and other default-related servicing expenses in Legacy Assets & Servicing. Also, personnel expense decreased $932 million in 2014 as we continued to streamline processes and achieve cost savings.
In
connection with Project New BAC, which we first announced in the third quarter of 2011, we expected to achieve cost savings in certain noninterest expense categories as we streamlined workflows, simplified processes and aligned expenses with our overall strategic plan and operating principles. We expected total cost savings from Project New BAC to reach $8 billion on an annualized basis, or $2 billion per quarter, by mid-2015. We successfully completed our Project New BAC expense program ahead of schedule by reaching our target of $2 billion in cost savings per quarter, in the third quarter of 2014.
Income Tax Expense
Table
5
Income Tax Expense
(Dollars in millions)
2014
2013
Income
before income taxes
$
6,855
$
16,172
Income tax expense
2,022
4,741
Effective
tax rate
29.5
%
29.3
%
The effective tax rate for 2014 was driven by our recurring tax preference items, the resolution of several tax examinations and tax benefits from non-U.S. restructurings, partially offset by the non-deductible treatment of certain litigation charges. We expect an effective tax rate in the low 30 percent range, absent unusual items, for 2015.
The effective tax rate for 2013 was driven by our recurring
tax preference items and by certain tax benefits related to non-U.S. operations, partially offset by the $1.1 billion negative impact from the U.K. 2013 Finance Act, enacted in July 2013, which reduced the U.K. corporate income tax rate by three percent. The $1.1 billion charge resulted from remeasuring our U.K. net deferred tax assets, in the period of enactment, using the lower rates.
Bank of America 2014 26
Balance
Sheet Overview
Table
6
Selected Balance Sheet Data
December
31
Average Balance
(Dollars in millions)
2014
2013
% Change
2014
2013
%
Change
Assets
Cash
and cash equivalents
$
138,589
$
131,322
6
%
$
141,078
$
109,014
29
%
Federal
funds sold and securities borrowed or purchased under agreements to resell
191,823
190,328
1
222,483
224,331
(1
)
Trading
account assets
191,785
200,993
(5
)
202,416
217,865
(7
)
Debt
securities
380,461
323,945
17
351,702
337,953
4
Loans
and leases
881,391
928,233
(5
)
903,901
918,641
(2
)
Allowance
for loan and lease losses
(14,419
)
(17,428
)
(17
)
(15,973
)
(21,188
)
(25
)
All
other assets
334,904
344,880
(3
)
339,983
376,897
(10
)
Total
assets
$
2,104,534
$
2,102,273
—
$
2,145,590
$
2,163,513
(1
)
Liabilities
Deposits
$
1,118,936
$
1,119,271
—
$
1,124,207
$
1,089,735
3
Federal
funds purchased and securities loaned or sold under agreements to repurchase
201,277
198,106
2
215,792
257,600
(16
)
Trading
account liabilities
74,192
83,469
(11
)
87,151
88,323
(1
)
Short-term
borrowings
31,172
45,999
(32
)
41,886
43,816
(4
)
Long-term
debt
243,139
249,674
(3
)
253,607
263,417
(4
)
All
other liabilities
192,347
173,069
11
184,471
186,675
(1
)
Total
liabilities
1,861,063
1,869,588
—
1,907,114
1,929,566
(1
)
Shareholders’
equity
243,471
232,685
5
238,476
233,947
2
Total
liabilities and shareholders’ equity
$
2,104,534
$
2,102,273
—
$
2,145,590
$
2,163,513
(1
)
Year-end
balance sheet amounts may vary from average balance sheet amounts due to liquidity and balance sheet management activities, primarily involving our portfolios of highly liquid assets. These portfolios are designed to ensure the adequacy of capital while enhancing our ability to manage liquidity requirements for the Corporation and our customers, and to position the balance sheet in accordance with the Corporation’s risk appetite. The execution of these activities requires the use of balance sheet and capital-related limits including spot, average and risk-weighted asset limits, particularly within the market-making activities of our trading businesses. One of our key regulatory metrics, Tier 1 leverage ratio, is calculated based on adjusted quarterly average total assets.
Balance Sheet Management Actions in 2014
The Corporation took certain actions during 2014 to further optimize
its balance sheet. While the overall size of the balance sheet remained relatively unchanged compared to December 31, 2013, the composition has improved in terms of liquidity in response to the new Basel 3 Liquidity Coverage Ratio (LCR) requirements. We shifted the mix of certain discretionary assets out of less liquid loans to more liquid debt securities. This included the sale of $10.7 billion of residential mortgage loans with standby insurance agreements and purchase of agency securities, and the sale of $6.7 billion of nonperforming and other delinquent loans. Though the Global Markets balance sheet was relatively stable, there was a decrease of $11.8 billion in low-margin prime brokerage loans. Ending deposits remained relatively unchanged
as
we took actions to optimize the LCR liquidity value of deposits while growing retail deposits. Additionally, from a capital standpoint, $6.0 billion of preferred stock was issued during the year and amendments to our outstanding Series T preferred stock also improved Basel 3 Tier 1 regulatory capital.
Assets
Year-end total assets remained relatively unchanged from December 31, 2013, though the asset mix changed in connection with preparing for the new Basel 3 LCR requirements as discussed above. The key drivers were increased debt securities due to purchases of U.S. Treasury securities, and higher cash and cash equivalents from higher interest-bearing deposits with the Federal Reserve and non-U.S. central banks. These increases were largely offset by a decline in consumer loan balances
due to paydowns, sales of residential loans with long-term standby agreements, nonperforming and delinquent loan sales and net charge-offs collectively outpacing new originations, and declines in all other assets and in trading account assets.
Cash and Cash Equivalents
Year-end and average cash and cash equivalents increased $7.3 billion from December 31, 2013 and $32.1 billion in 2014 driven by an increase in interest-bearing deposits with the Federal Reserve and non-U.S. central banks in connection with preparing for the Basel 3 LCR requirements. For more information, see Liquidity
Risk – Basel 3 Liquidity Standards on page 67.
27 Bank of America 2014
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. Year-end federal funds sold and securities borrowed or purchased under agreements to resell increased $1.5 billion from December 31, 2013 driven by matched-book activity, partially offset by roll-off of supranational positions and a mix shift into securities. Average federal funds sold and securities borrowed or purchased under agreements to resell decreased $1.8 billion in 2014
compared to 2013 due to lower matched-book activity.
Trading Account Assets
Trading account assets consist primarily of long positions in equity and fixed-income securities including U.S. government and agency securities, corporate securities and non-U.S. sovereign debt. Year-end trading account assets decreased $9.2 billion primarily due to lower equity securities inventory as a result of a decrease in client hedging activity. Average trading account assets decreased $15.4 billion primarily due to a reduction in U.S. Treasury securities inventory.
Debt Securities
Debt securities
primarily include U.S. Treasury and agency securities, MBS, principally agency MBS, foreign 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. Year-end and average debt securities increased $56.5 billion and $13.7 billion primarily due to net purchases of U.S. Treasury securities driven by the new LCR rules, and increases in the fair value of available-for-sale (AFS) debt securities resulting from the impact of lower interest rates. For more information on debt securities, see Note 3 – Securities to the Consolidated Financial Statements.
Loans
and Leases
Year-end and average loans and leases decreased $46.8 billion and $14.7 billion. The decreases were primarily driven by a decline in consumer loan balances due to paydowns, loan sales and net charge-offs outpacing new originations, and a decline in commercial loan balances. For more information on the loan portfolio, see Credit Risk Management on page 70.
Allowance for Loan and Lease Losses
Year-end and average allowance for loan and lease losses decreased $3.0 billion and $5.2
billion primarily due to the impact of improvements in credit quality from the improving economy. For more information, see Allowance for Credit Losses on page 95.
All Other Assets
Year-end all other assets decreased $10.0 billion driven by other earning assets and time deposits placed, partially offset by an increase in derivative assets. Average all other assets decreased $36.9 billion primarily driven by lower customer and other receivables, time deposits placed, loans held-for-sale (LHFS) and derivative assets.
Liabilities
At
December 31, 2014, total liabilities were approximately $1.9 trillion, down $8.5 billion from December 31, 2013, driven by planned reductions in short-term borrowings and long-term debt as well as a decrease in trading account liabilities, partially offset by increases in all other liabilities.
Deposits
Year-end deposits remained relatively unchanged from December 31, 2013 due to declines in Global Banking
offset by an increase in retail deposits. Average deposits increased $34.5 billion primarily driven by customer and client shifts into more liquid products in the low rate environment.
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. Year-end federal funds purchased and securities loaned or sold under agreements to repurchase increased $3.2 billion primarily driven
by matched-book activity. Average federal funds purchased and securities loaned or sold under agreements to repurchase decreased $41.8 billion primarily due to targeted reductions in the balance sheet.
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. Year-end and average trading account liabilities decreased $9.3 billion and $1.2 billion primarily due to lower levels of short U.S. Treasury positions.
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. Year-end and average short-term borrowings decreased $14.8 billion and $1.9 billion due to planned reductions in FHLB borrowings. For more information on short-term borrowings, see Note 10 – Federal Funds Sold or Purchased, Securities Financing Agreements and Short-term Borrowings to the Consolidated Financial Statements.
Long-term Debt
Year-end and average long-term debt decreased
$6.5 billion and $9.8 billion. The decreases were a result of maturities outpacing new issuances. For more information on long-term debt, see Note 11 – Long-term Debt to the Consolidated Financial Statements.
All Other Liabilities
Year-end all other liabilities increased $19.3 billion driven by increases in derivative liabilities and payables. Average all other liabilities decreased $2.2 billion driven by decreases in payables and derivative liabilities.
Bank
of America 2014 28
Shareholders’ Equity
Year-end shareholders’ equity increased $10.8 billion driven by issuances of preferred stock, an increase in accumulated other comprehensive income (OCI) due to a positive net change in the fair value of AFS debt securities, and earnings, partially offset by common stock repurchases and dividends. Average shareholders’ equity increased $4.5 billion driven by earnings and accumulated OCI, partially offset by common stock repurchases and dividends.
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 other short-term investments. Our financing activities reflect cash flows primarily related to increased customer deposits and net long-term debt reductions.
Cash and cash equivalents increased $7.3 billion during 2014 due to net cash provided by operating activities, partially offset by net cash used in financing and investing activities. This reflects actions
taken in preparation for the Basel 3 LCR requirements. These changes were primarily due to higher interest-bearing deposits with the Federal Reserve and non-U.S. central banks as well as the sale of residential mortgage loans with standby insurance agreements and the purchase of agency securities, and the sale of nonperforming and other delinquent loans to further
optimize the balance sheet. Cash and cash equivalents increased $20.6 billion during 2013 due to net cash provided by operating and investing activities, partially offset by net cash used in financing activities.
During 2014, net cash
provided by operating activities was $26.7 billion. The more significant drivers included net decreases in trading and derivative instruments, as well as a net increase in accrued expenses and other liabilities. During 2013, net cash provided by operating activities was $92.8 billion. The more significant drivers included net decreases in other assets, and trading and derivative instruments, as well as net proceeds from sales, securitizations and paydowns of LHFS.
During 2014, net cash used in investing activities was $4.2 billion, primarily driven by net purchases of debt securities, partially offset by net decreases in loans and leases. During 2013,
net cash provided by investing activities was $25.1 billion, primarily driven by a decrease in federal funds sold and securities borrowed or purchased under agreements to resell and net sales of debt securities, partially offset by a net increase in loans and leases.
During 2014, net cash used in financing activities of $12.2 billion primarily reflected a reduction in short-term borrowings, partially offset by the issuance of preferred stock. During 2013, the net cash used in financing activities of $95.4 billion primarily reflected a decrease in federal funds purchased and securities loaned or sold under agreements to repurchase and net reductions in long-term debt, partially offset by
growth in short-term borrowings and deposits.
29 Bank of America 2014
Table
7
Five-year Summary of Selected Financial Data
(In
millions, except per share information)
2014
2013
2012
2011
2010
Income statement
Net
interest income
$
39,952
$
42,265
$
40,656
$
44,616
$
51,523
Noninterest
income
44,295
46,677
42,678
48,838
58,697
Total
revenue, net of interest expense
84,247
88,942
83,334
93,454
110,220
Provision
for credit losses
2,275
3,556
8,169
13,410
28,435
Goodwill
impairment
—
—
—
3,184
12,400
Merger
and restructuring charges
—
—
—
638
1,820
All
other noninterest expense
75,117
69,214
72,093
76,452
68,888
Income
(loss) before income taxes
6,855
16,172
3,072
(230
)
(1,323
)
Income
tax expense (benefit)
2,022
4,741
(1,116
)
(1,676
)
915
Net
income (loss)
4,833
11,431
4,188
1,446
(2,238
)
Net
income (loss) applicable to common shareholders
3,789
10,082
2,760
85
(3,595
)
Average
common shares issued and outstanding
10,528
10,731
10,746
10,143
9,790
Average
diluted common shares issued and outstanding (1)
10,585
11,491
10,841
10,255
9,790
Performance
ratios
Return
on average assets
0.23
%
0.53
%
0.19
%
0.06
%
n/m
Return
on average common shareholders’ equity
1.70
4.62
1.27
0.04
n/m
Return
on average tangible common shareholders’ equity (2)
2.52
6.97
1.94
0.06
n/m
Return
on average tangible shareholders’ equity (2)
2.92
7.13
2.60
0.96
n/m
Total
ending equity to total ending assets
11.57
11.07
10.72
10.81
10.08
%
Total
average equity to total average assets
11.11
10.81
10.75
9.98
9.56
Dividend
payout
33.31
4.25
15.86
n/m
n/m
Per
common share data
Earnings
(loss)
$
0.36
$
0.94
$
0.26
$
0.01
$
(0.37
)
Diluted
earnings (loss) (1)
0.36
0.90
0.25
0.01
(0.37
)
Dividends
paid
0.12
0.04
0.04
0.04
0.04
Book
value
21.32
20.71
20.24
20.09
20.99
Tangible
book value (2)
14.43
13.79
13.36
12.95
12.98
Market
price per share of common stock
Closing
$
17.89
$
15.57
$
11.61
$
5.56
$
13.34
High
closing
18.13
15.88
11.61
15.25
19.48
Low
closing
14.51
11.03
5.80
4.99
10.95
Market
capitalization
$
188,141
$
164,914
$
125,136
$
58,580
$
134,536
(1)
The
diluted earnings (loss) per common share excluded the effect of any equity instruments that are antidilutive to earnings per share. There were no potential common shares that were dilutive in 2010 because of the net loss applicable to common shareholders.
(2)
Tangible equity ratios and tangible book value per share of common stock are non-GAAP financial measures. Other companies may define or calculate these measures differently. For more information on these ratios, see Supplemental Financial Data on page 32, and for corresponding reconciliations to GAAP financial measures, see Statistical Table XV on page 134.
(3)
For
more information on the impact of the purchased credit-impaired loan portfolio on asset quality, see Consumer Portfolio Credit Risk Management on page 70.
(4)
Includes the allowance for loan and lease losses and the reserve for unfunded lending commitments.
(5)
Balances and ratios do not include loans accounted for under the fair value option. For additional exclusions from
nonperforming loans, leases and foreclosed properties, see Consumer Portfolio Credit Risk Management – Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity on page 82 and corresponding Table 39, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 89 and corresponding Table 48.
(6)
Primarily includes amounts allocated to the U.S. credit card
and unsecured consumer lending portfolios in CBB, purchased credit-impaired loans and the non-U.S. credit card portfolio in All Other.
(7)
Net charge-offs exclude $810 million, $2.3 billion and $2.8 billion of write-offs in the purchased credit-impaired loan portfolio for 2014, 2013 and 2012, respectively. These write-offs decreased the purchased
credit-impaired valuation allowance included as part of the allowance for loan and lease losses. For more information on purchased credit-impaired write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 78.
(8)
There were no write-offs of PCI loans in 2011 and 2010.
(9)
On January
1, 2014, the Basel 3 rules became effective, subject to transition provisions primarily related to regulatory deductions and adjustments impacting Common equity tier 1 capital and Tier 1 capital. We reported under Basel 1 (which included the Market Risk Final Rules) at December 31, 2013. Basel 1 did not include the Basel 1 – 2013 Rules prior to 2013.
n/a = not applicable
n/m = not meaningful
Bank
of America 2014 30
Table
7
Five-year Summary of Selected Financial Data (continued)
(Dollars
in millions)
2014
2013
2012
2011
2010
Average balance sheet
Total
loans and leases
$
903,901
$
918,641
$
898,768
$
938,096
$
958,331
Total
assets
2,145,590
2,163,513
2,191,356
2,296,322
2,439,606
Total
deposits
1,124,207
1,089,735
1,047,782
1,035,802
988,586
Long-term
debt
253,607
263,417
316,393
421,229
490,497
Common
shareholders’ equity
223,066
218,468
216,996
211,709
212,686
Total
shareholders’ equity
238,476
233,947
235,677
229,095
233,235
Asset
quality (3)
Allowance
for credit losses (4)
$
14,947
$
17,912
$
24,692
$
34,497
$
43,073
Nonperforming
loans, leases and foreclosed properties (5)
12,629
17,772
23,555
27,708
32,664
Allowance
for loan and lease losses as a percentage of total loans and leases outstanding (5)
1.65
%
1.90
%
2.69
%
3.68
%
4.47
%
Allowance
for loan and lease losses as a percentage of total nonperforming loans and leases (5)
121
102
107
135
136
Allowance
for loan and lease losses as a percentage of total nonperforming loans and leases, excluding the PCI loan portfolio (5)
107
87
82
101
116
Amounts
included in allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases (6)
$
5,944
$
7,680
$
12,021
$
17,490
$
22,908
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 (5, 6)
71
%
57
%
54
%
65
%
62
%
Net
charge-offs (7)
$
4,383
$
7,897
$
14,908
$
20,833
$
34,334
Net
charge-offs as a percentage of average loans and leases outstanding (5, 7)
0.49
%
0.87
%
1.67
%
2.24
%
3.60
%
Net
charge-offs as a percentage of average loans and leases outstanding, excluding the PCI loan portfolio (5)
0.50
0.90
1.73
2.32
3.73
Net
charge-offs and PCI write-offs as a percentage of average loans and leases outstanding (5, 8)
0.58
1.13
1.99
2.24
3.60
Nonperforming
loans and leases as a percentage of total loans and leases outstanding (5)
1.37
1.87
2.52
2.74
3.27
Nonperforming
loans, leases and foreclosed properties as a percentage of total loans, leases and foreclosed properties (5)
1.45
1.93
2.62
3.01
3.48
Ratio
of the allowance for loan and lease losses at December 31 to net charge-offs (7)
3.29
2.21
1.62
1.62
1.22
Ratio
of the allowance for loan and lease losses at December 31 to net charge-offs, excluding the PCI loan portfolio
2.91
1.89
1.25
1.22
1.04
Ratio
of the allowance for loan and lease losses at December 31 to net charge-offs and PCI write-offs (8)
2.78
1.70
1.36
1.62
1.22
Capital
ratios at year end (9)
Risk-based
capital:
Common
equity tier 1 capital
12.3
%
n/a
n/a
n/a
n/a
Tier 1
common capital
n/a
10.9
%
10.8
%
9.7
%
8.5
%
Tier 1
capital
13.4
12.2
12.7
12.2
11.1
Total
capital
16.5
15.1
16.1
16.6
15.7
Tier 1
leverage
8.2
7.7
7.2
7.4
7.1
Tangible
equity (2)
8.4
7.9
7.6
7.5
6.8
Tangible
common equity (2)
7.5
7.2
6.7
6.6
6.0
For
footnotes see page 30.
31 Bank of America 2014
Supplemental Financial Data
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. We believe managing the business
with net interest income on an FTE basis provides a more accurate picture of the interest margin for comparative purposes. To derive the FTE basis, net interest income is adjusted to reflect tax-exempt income on an equivalent before-tax basis with a corresponding increase in income tax expense. For purposes of this calculation, we use the federal statutory tax rate of 35 percent. This measure ensures comparability of net interest income arising from taxable and tax-exempt sources.
Certain performance measures including the efficiency ratio and net interest yield utilize net interest income (and thus total revenue) on an FTE basis. The efficiency ratio measures the costs expended to generate a dollar of revenue, and net interest yield measures the bps we earn over the cost of funds.
We also evaluate our business based on certain ratios that utilize tangible equity, a non-GAAP financial
measure. Tangible equity represents an adjusted shareholders’ equity or common shareholders’ equity amount which has been reduced by goodwill and intangible assets (excluding mortgage servicing rights (MSRs)), net of related deferred tax liabilities. These measures are used to evaluate our use of equity. In addition, profitability, relationship and investment models use both return on average tangible common shareholders’ equity and return on average tangible shareholders’ equity as key measures to support our overall growth goals. These ratios are as follows:
Ÿ
Return on average tangible common shareholders’ equity measures our earnings contribution as a percentage of adjusted common shareholders’ equity. The tangible common equity ratio represents adjusted
ending common shareholders’ equity divided by total assets less goodwill and intangible assets (excluding MSRs), net of related deferred tax liabilities.
Ÿ
Return on average tangible shareholders’ equity measures our earnings contribution as a percentage of adjusted average total shareholders’ equity. The tangible equity ratio represents adjusted ending shareholders’ equity divided by total assets less goodwill and intangible assets (excluding MSRs), net of related deferred tax liabilities.
Ÿ
Tangible
book value per common share represents adjusted ending common shareholders’ equity divided by ending common shares outstanding.
The aforementioned supplemental data and performance measures are presented in Table 7 and Statistical Table XII. In addition, in Table 8, we have excluded the impact of goodwill impairment charges of $3.2 billion and $12.4 billion recorded in 2011 and 2010 when presenting certain of these metrics. Accordingly, these are non-GAAP financial measures.
We evaluate our business segment results based on measures that utilize average allocated capital. Return
on average allocated capital is calculated as net income adjusted for cost of funds and earnings credits and certain expenses related to intangibles, divided by average allocated capital. Allocated capital and the related return both represent non-GAAP financial measures. In addition, 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. For additional information, see Business Segment Operations on page 34 and Note 8 – Goodwill and Intangible Assets to the Consolidated Financial Statements.
Statistical Tables XV, XVI and
XVII on pages 134, 135 and 136 provide reconciliations of these non-GAAP financial measures to GAAP financial measures. We believe the use of these non-GAAP financial measures provides additional clarity in assessing the results of the Corporation and our segments. Other companies may define or calculate these measures and ratios differently.
Table
8
Five-year Supplemental Financial Data
(Dollars
in millions, except per share information)
Return
on average tangible common shareholders’ equity
2.46
7.03
Return on average tangible shareholders’ equity
3.08
7.11
(1)
Beginning
in 2014, interest-bearing deposits placed with the Federal Reserve and certain non-U.S. central banks are included in earning assets. In prior periods, these balances were included with cash and due from banks in the cash and cash equivalents line, consistent with the Consolidated Balance Sheet presentation. Prior periods have been reclassified to conform to current period presentation.
(2)
Performance ratios are calculated excluding the impact of goodwill impairment charges of $3.2 billion and $12.4 billion recorded in 2011 and 2010.
Bank
of America 2014 32
Net Interest Income Excluding Trading-related Net Interest Income
We manage net interest income on an FTE basis and excluding the impact of trading-related activities. As discussed in Global Markets on page 46, we evaluate our sales and trading results and strategies on a total market-based revenue approach by combining net interest income and noninterest income for Global Markets. An analysis of net interest income, average earning assets and net interest yield on earning assets, all of which adjust
for the impact of trading-related net interest income from reported net interest income on an FTE basis, is shown below. We believe the use of this non-GAAP presentation in Table 9 provides additional clarity in assessing our results.
Table
9
Net Interest Income Excluding Trading-related Net Interest Income
(Dollars in millions)
2014
2013
Net interest income (FTE basis)
As
reported
$
40,821
$
43,124
Impact of trading-related net interest income
(3,615
)
(3,852
)
Net
interest income excluding trading-related net interest income (1)
$
37,206
$
39,272
Average earning assets (2)
As
reported
$
1,814,930
$
1,819,548
Impact of trading-related earning assets
(445,760
)
(468,999
)
Average
earning assets excluding trading-related earning assets (1)
$
1,369,170
$
1,350,549
Net interest yield contribution (FTE basis) (2)
As
reported
2.25
%
2.37
%
Impact of trading-related activities
0.47
0.54
Net interest yield on earning assets excluding
trading-related activities (1)
2.72
%
2.91
%
(1)
Represents a non-GAAP financial measure.
(2)
Beginning
in 2014, interest-bearing deposits placed with the Federal Reserve and certain non-U.S. central banks are included in earning assets. In prior periods, these balances were included with cash and due from banks in the cash and cash equivalents line, consistent with the Consolidated Balance Sheet presentation. Prior periods have been reclassified to conform to current period presentation.
Net interest income excluding trading-related net interest income decreased $2.1 billion to $37.2 billion for 2014 compared to 2013. The decline
was primarily due to the impact of market-related premium amortization as lower long-term interest rates shortened the expected lives of the securities, lower loan yields and consumer loan balances, and lower net interest income from the ALM portfolio. Market-related premium amortization was an expense of $1.2 billion in 2014 compared to a benefit of $784 million in 2013. Partially offsetting the decline were reductions in funding yields, lower long-term debt balances and commercial loan growth. For more information on the impact of interest rates, see Interest Rate Risk Management for Non-trading Activities on page 105. For more information on market-related premium amortization, see
Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
Average earning assets excluding trading-related earning assets increased $18.6 billion to $1,369.2 billion for 2014 compared to 2013. The increase was primarily in interest-bearing deposits with the Federal Reserve and commercial loans, partially offset by declines in consumer loans and other earning assets.
Net interest yield on earning assets excluding trading-related activities decreased 19 bps
to 2.72 percent for 2014 compared to 2013 due to the same factors as described above.
33 Bank of America 2014
Business Segment Operations
Segment Description and Basis of Presentation
We
report the results of our operations through five business segments: CBB, CRES, GWIM, Global Banking and Global Markets, with the remaining operations recorded in All Other. The primary activities, products or businesses of the business segments and All Other as of December 31, 2014 are shown below. For additional detailed information, see the business segment and All Other discussions which follow.
Effective January 1, 2015, to align the segments with how we manage the businesses
in 2015, the Corporation changed its basis of segment presentation as follows: the Home Loans subsegment within CRES was moved to CBB, and Legacy Assets & Servicing became a separate segment. Also, a portion of the Business Banking business, based on the size of the client relationship, was moved from CBB to Global Banking. Prior periods will be restated to conform to the new segment alignment.
Bank of America
2014 34
We prepare and evaluate segment results using certain non-GAAP measures. For additional information, see Supplemental Financial Data on page 32. Table 10 provides selected summary financial data for our business segments and All Other for 2014 and 2013.
Table
10
Business Segment Results
Total
Revenue (1)
Provision for Credit Losses
Noninterest Expense
Net Income (Loss)
(Dollars in millions)
2014
2013
2014
2013
2014
2013
2014
2013
Consumer
& Business Banking
$
29,862
$
29,864
$
2,633
$
3,107
$
15,911
$
16,260
$
7,096
$
6,647
Consumer
Real Estate Services
4,848
7,715
160
(156
)
23,226
15,815
(13,395
)
(5,031
)
Global
Wealth & Investment Management
18,404
17,790
14
56
13,647
13,033
2,974
2,977
Global
Banking
16,598
16,479
336
1,075
7,681
7,551
5,435
4,973
Global
Markets
16,119
15,390
110
140
11,771
11,996
2,719
1,153
All
Other
(715
)
2,563
(978
)
(666
)
2,881
4,559
4
712
Total
FTE basis
85,116
89,801
2,275
3,556
75,117
69,214
4,833
11,431
FTE
adjustment
(869
)
(859
)
—
—
—
—
—
—
Total
Consolidated
$
84,247
$
88,942
$
2,275
$
3,556
$
75,117
$
69,214
$
4,833
$
11,431
(1)
Total
revenue is net of interest expense and is on an FTE basis which for consolidated revenue is a non-GAAP financial measure. For more information on this measure, see Supplemental Financial Data on page 32, and for a corresponding reconciliation to a GAAP financial measure, see Statistical Table XV.
The Corporation periodically reviews capital allocated to its businesses and allocates 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. The Corporation’s 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 55. The capital allocated to the business segments is referred to as allocated capital, which represents a non-GAAP financial measure. 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. For additional information, see Note 8 – Goodwill and Intangible Assets to the Consolidated Financial Statements.
During 2014, we made
refinements to the amount of capital allocated to each of our businesses based on multiple considerations that included, but were not limited to, Basel 3 Standardized and Advanced risk-weighted assets, business segment exposures and risk profile, and strategic plans. As a result of this process, in 2014, we adjusted the amount of capital being allocated to our business segments. This change resulted in a reduction of unallocated capital, which is included in All Other, and an aggregate increase in the amount of capital being allocated to the business segments, primarily Global Banking and Global Markets.
For more information on the business segments and reconciliations to consolidated total revenue, net income and year-end total assets, see Note 24 – Business
Segment Information to the Consolidated Financial Statements.
35 Bank of America 2014
Consumer & Business Banking
Deposits
Consumer
Lending
Total
Consumer &
Business Banking
(Dollars in millions)
2014
2013
2014
2013
2014
2013
%
Change
Net interest income (FTE basis)
$
10,259
$
9,807
$
9,426
$
10,243
$
19,685
$
20,050
(2
)%
Noninterest
income:
Card income
68
60
4,834
4,744
4,902
4,804
2
Service
charges
4,364
4,206
1
1
4,365
4,207
4
All
other income
552
509
358
294
910
803
13
Total
noninterest income
4,984
4,775
5,193
5,039
10,177
9,814
4
Total
revenue, net of interest expense (FTE basis)
15,243
14,582
14,619
15,282
29,862
29,864
—
Provision
for credit losses
254
299
2,379
2,808
2,633
3,107
(15
)
Noninterest
expense
10,448
10,930
5,463
5,330
15,911
16,260
(2
)
Income
before income taxes (FTE basis)
4,541
3,353
6,777
7,144
11,318
10,497
8
Income
tax expense (FTE basis)
1,694
1,230
2,528
2,620
4,222
3,850
10
Net
income
$
2,847
$
2,123
$
4,249
$
4,524
$
7,096
$
6,647
7
Net
interest yield (FTE basis)
1.87
%
1.88
%
6.77
%
7.18
%
3.48
%
3.72
%
Return
on average allocated capital
17
14
33
31
24
22
Efficiency
ratio (FTE basis)
68.54
74.95
37.38
34.88
53.28
54.44
Balance
Sheet
Average
Total
loans and leases
$
22,388
$
22,445
$
138,721
$
142,129
$
161,109
$
164,574
(2
)
Total
earning assets (1)
548,096
522,938
139,145
142,721
565,700
539,241
5
Total
assets (1)
580,857
555,687
148,579
151,434
607,895
580,703
5
Total
deposits
542,589
518,407
n/m
n/m
543,441
518,904
5
Allocated
capital
16,500
15,400
13,000
14,600
29,500
30,000
(2
)
Year
end
Total loans and leases
$
22,284
$
22,578
$
141,132
$
142,516
$
163,416
$
165,094
(1
)
Total
earning assets (1)
560,130
535,061
141,216
143,917
579,283
550,698
5
Total
assets (1)
593,485
567,918
150,956
153,376
622,378
593,014
5
Total
deposits
555,539
530,860
n/m
n/m
556,568
531,608
5
(1)
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 CBB.
n/m = not meaningful
CBB, which is comprised of Deposits and Consumer Lending, offers a diversified range of credit, banking and investment products and services to consumers and businesses. Our customers and clients have access to a franchise network that stretches coast to coast through 32
states and the District of Columbia. The franchise network includes approximately 4,800 banking centers, 15,800 ATMs, nationwide call centers, and online and mobile platforms.
CBB Results
Net income for CBB increased $449 million to $7.1 billion in 2014 compared to 2013 primarily driven by lower provision for credit losses, higher noninterest
income and lower noninterest expense, partially offset by lower net interest income. Net interest income decreased $365 million to $19.7 billion due to lower average loan balances and card yields, partially offset by the beneficial impact of an increase in investable assets as a result of higher deposit balances. Noninterest income increased $363 million to $10.2 billion primarily due to portfolio divestiture gains, higher service charges and higher card income, partially offset by lower revenue from consumer protection products.
The provision for credit losses decreased $474
million to $2.6 billion in 2014 primarily as a result of improvements in credit
quality. Noninterest expense decreased $349 million to $15.9 billion primarily driven by lower operating, litigation and Federal Deposit Insurance Corporation (FDIC) expenses.
The return on average allocated capital was 24 percent, up from 22 percent, reflecting an increase in net income combined with a small decrease in allocated capital. For more information
on capital allocated to the business segments, see Business Segment Operations on page 34.
Deposits
Deposits includes the results of consumer deposit activities which consist of a comprehensive range of products provided to consumers and small businesses. Our deposit products include traditional savings accounts, money market savings accounts, CDs and IRAs, noninterest- and interest-bearing checking accounts, as well as investment accounts and products. The revenue 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
Bank of America 2014 36
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 banking centers and ATMs.
Business Banking within Deposits provides a wide range of lending-related products and services, integrated working capital management and treasury solutions to clients through our network of offices and client relationship teams along with various product partners. Our clients include U.S.-based companies generally with annual sales of $1 million to $50 million. Our lending products and services include commercial loans, lines of credit and real estate lending. Our capital management and treasury solutions include treasury management, foreign exchange and short-term investing options. Deposits also includes the results
of our merchant services joint venture.
Deposits includes the net impact of migrating customers and their related deposit balances between Deposits and GWIM as well as other client-managed businesses. For more information on the migration of customer balances to or from GWIM, see GWIM on page 42.
Net income for Deposits increased $724 million to $2.8 billion in 2014 driven by higher revenue and a decrease in noninterest expense. Net interest income increased
$452 million to $10.3 billion primarily driven by a combination of pricing discipline and the beneficial impact of an increase in investable assets as a result of higher deposit balances. Noninterest income increased $209 million to $5.0 billion primarily due to higher deposit service charges.
The provision for credit losses decreased $45 million to $254 million as a result of improvement in credit quality. Noninterest expense decreased $482 million to
$10.4 billion due to lower operating expenses, driven in part by a reduction in banking centers as customers migrate to self-service touchpoints, in addition to lower FDIC and litigation expense.
Average deposits increased $24.2 billion to $542.6 billion in 2014 driven by a continuing customer shift to more liquid products in the low rate environment. Growth in checking, traditional savings and money market savings of $34.7 billion was partially offset by a decline in time deposits of $10.5 billion. As a result of our continued pricing discipline and the shift in the mix of deposits, the rate paid on average deposits declined by five bps to six bps.
Key
Statistics – Deposits
2014
2013
Total deposit spreads (excludes noninterest
costs)
1.59
%
1.52
%
Year end
Client
brokerage assets (in millions)
$
113,763
$
96,048
Online banking active accounts (units in thousands)
30,904
29,950
Mobile
banking active accounts (units in thousands)
16,539
14,395
Banking centers
4,855
5,151
ATMs
15,838
16,259
Client
brokerage assets increased $17.7 billion in 2014 driven by new accounts, increased account flows and higher market valuations. Mobile banking active accounts increased 2.1 million reflecting continuing changes in our customers’ banking preferences. The number of banking centers declined 296 and ATMs declined 421 as we continue to optimize our consumer banking network and improve our cost-to-serve.
Consumer
Lending
Consumer Lending is one of the leading issuers of credit and debit cards to consumers and small businesses in the U.S. Our lending products and services also include direct and indirect consumer loans such as automotive, marine, aircraft, 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 as well as annual credit card fees and other miscellaneous fees.
Consumer Lending includes the net impact of migrating customers and their related credit card loan balances between Consumer Lending and GWIM. For more information on the migration of customer balances to or from GWIM, see GWIM
on page 42.
Net income for Consumer Lending decreased $275 million to $4.2 billion in 2014 primarily due to lower net interest income and higher noninterest expense, partially offset by lower provision for credit losses and higher noninterest income. Net interest income decreased $817 million to $9.4 billion driven by the impact of lower average loan balances and card yields. Noninterest income increased $154 million to $5.2 billion
driven by portfolio divestiture gains and higher card income, partially offset by lower revenue from consumer protection products.
The provision for credit losses decreased $429 million to $2.4 billion in 2014 as a result of continued improvement in credit quality, due in part to lower delinquencies. Noninterest expense increased $133 million to $5.5 billion driven by higher operating expenses, partially offset by lower litigation expense.
Average loans decreased $3.4 billion
to $138.7 billion in 2014 primarily driven by the net migration of credit card loan balances to GWIM as described above, continued run-off of non-core portfolios and portfolio divestitures, partially offset by an increase in small business lending and consumer auto loans.
Key
Statistics – Consumer Lending
(Dollars in millions)
2014
2013
Total
U.S. credit card (1)
Gross interest yield
9.34
%
9.73
%
Risk-adjusted margin
9.44
8.68
New
accounts (in thousands)
4,541
3,911
Purchase volumes
$
212,088
$
205,914
Debit
card purchase volumes
$
272,576
$
267,087
(1)
Total U.S. credit card includes portfolios in CBB and GWIM.
During
2014, the total U.S. credit card risk-adjusted margin increased 76 bps due to an improvement in credit quality and portfolio divestiture gains. Total U.S. credit card purchase volumes increased $6.2 billion to $212.1 billion and debit card purchase volumes increased $5.5 billion to $272.6 billion, reflecting higher levels of consumer spending.
37 Bank
of America 2014
Consumer Real Estate Services
Home
Loans
Legacy Assets & Servicing
Total Consumer Real Estate Services
(Dollars in millions)
2014
2013
2014
2013
2014
2013
%
Change
Net interest income (FTE basis)
$
1,315
$
1,349
$
1,516
$
1,541
$
2,831
$
2,890
(2
)%
Noninterest
income:
Mortgage banking income
813
1,916
1,053
2,669
1,866
4,585
(59
)
All
other income (loss)
40
(6
)
111
246
151
240
(37
)
Total
noninterest income
853
1,910
1,164
2,915
2,017
4,825
(58
)
Total
revenue, net of interest expense (FTE basis)
2,168
3,259
2,680
4,456
4,848
7,715
(37
)
Provision
for credit losses
33
127
127
(283
)
160
(156
)
n/m
Noninterest
expense
2,587
3,334
20,639
12,481
23,226
15,815
47
Loss
before income taxes (FTE basis)
(452
)
(202
)
(18,086
)
(7,742
)
(18,538
)
(7,944
)
133
Income
tax benefit (FTE basis)
(169
)
(74
)
(4,974
)
(2,839
)
(5,143
)
(2,913
)
77
Net
loss
$
(283
)
$
(128
)
$
(13,112
)
$
(4,903
)
$
(13,395
)
$
(5,031
)
n/m
Net
interest yield (FTE basis)
2.40
%
2.54
%
4.03
%
3.19
%
3.06
%
2.85
%
Balance
Sheet
Average
Total
loans and leases
$
52,336
$
47,675
$
35,941
$
42,603
$
88,277
$
90,278
(2
)
Total
earning assets
54,778
53,148
37,593
48,272
92,371
101,420
(9
)
Total
assets
54,751
53,426
52,134
67,130
106,885
120,556
(11
)
Allocated
capital
6,000
6,000
17,000
18,000
23,000
24,000
(4
)
Year
end
Total loans and leases
$
54,917
$
51,021
$
33,055
$
38,732
$
87,972
$
89,753
(2
)
Total
earning assets
57,881
54,071
33,922
43,092
91,803
97,163
(6
)
Total
assets
57,772
53,933
45,958
59,458
103,730
113,391
(9
)
n/m
= not meaningful
CRES operations include Home Loans and Legacy Assets & Servicing. Home Loans is responsible for ongoing residential first mortgage and home equity loan production activities and the CRES home equity loan portfolio not selected for inclusion in the Legacy Assets & Servicing owned portfolio. Legacy Assets & Servicing is responsible for our mortgage servicing activities related to loans serviced for others and loans held by the Corporation, including loans that have been designated as the Legacy Assets & Servicing Portfolios. The Legacy Assets & Servicing Portfolios (both owned and serviced), herein referred to as the Legacy Owned and Legacy Serviced Portfolios, respectively (together, the Legacy Portfolios), and as further defined below, include those loans originated prior to January
1, 2011 that would not have been originated under our established underwriting standards as of December 31, 2010. For more information on our Legacy Portfolios, see page 39. In addition, Legacy Assets & Servicing is responsible for managing legacy exposures related to CRES (e.g., litigation, representations and warranties). This alignment allows CRES management to lead the ongoing Home Loans business while also providing focus on legacy mortgage issues and servicing activities.
CRES, primarily through its Home Loans operations, generates revenue by providing an extensive line of consumer real estate products and services to customers
nationwide. CRES products offered by Home Loans include fixed- and adjustable-rate first-lien mortgage loans for home purchase and refinancing needs, home equity lines of credit (HELOCs) and home equity loans. First mortgage products are generally either sold into the secondary mortgage market to investors, while we retain MSRs (which are on the balance sheet of Legacy Assets & Servicing) and the Bank
of America customer relationships, or are held on the balance sheet in Home Loans or in All Other for ALM purposes.
Home Loans is compensated for loans held for ALM purposes on a management accounting basis with the corresponding offset in All Other. Newly originated HELOCs and home equity loans are retained on the CRES balance sheet in Home Loans.
CRES includes the impact of migrating certain customers and their related loan balances from GWIM to CRES. For more information on the migration of customer balances to or from GWIM, see GWIM on page 42.
CRES Results
The
net loss for CRES increased $8.4 billion to a net loss of $13.4 billion for 2014 compared to 2013 primarily driven by higher litigation expense, which is included in noninterest expense, as a result of the settlements with the DoJ and FHFA, a lower tax benefit rate resulting from the non-deductible treatment of a portion of the settlement with the DoJ, lower mortgage banking income and higher provision for credit losses.
Mortgage banking income decreased
$2.7 billion due to both lower servicing income and core production revenue, partially offset by a lower representations and warranties provision. The provision for credit losses increased $316 million to $160 million driven by additional costs associated with the consumer relief portion of the settlement with the DoJ, partially offset by the continued improvement in portfolio trends including increased home prices. Noninterest expense increased $7.4 billion primarily due to a $11.4 billion increase in litigation expense as a result of the settlements with the DoJ and FHFA. Excluding litigation,
Bank
of America 2014 38
noninterest expense decreased $4.0 billion to $8.0 billion driven by a decline in default-related servicing expenses, including mortgage-related assessments, waivers and similar costs related to foreclosure delays in Legacy Assets & Servicing and a decline in personnel expense resulting from lower loan originations in Home Loans.
Home Loans
Home Loans products are available to our customers through our retail network, direct telephone and online access delivered by a sales force of nearly 2,500 mortgage loan officers, including 1,500 banking center mortgage loan officers covering 2,600 banking centers, and a nearly
700-person centralized sales force based in five call centers.
The net loss for Home Loans increased $155 million to a net loss of $283 million driven by lower mortgage banking income, partially offset by lower noninterest expense and lower provision for credit losses. Mortgage banking income decreased $1.1 billion due to a decline in core production revenue as a result of lower first mortgage origination volumes, and to a lesser extent, industry-wide margin compression. The provision for credit losses decreased $94 million reflecting continued improvement in portfolio trends including increased
home prices. Noninterest expense decreased $747 million primarily due to lower personnel expense resulting from lower loan originations.
Legacy Assets & Servicing
Legacy Assets & Servicing is responsible for all of our in-house servicing activities related to the residential mortgage and home equity loan portfolios, including owned loans and loans serviced for others (collectively, the mortgage serviced portfolio). A portion of this portfolio has been designated as the Legacy Serviced Portfolio, which represented 26 percent, 30 percent and 39 percent of the total mortgage serviced portfolio, as measured by unpaid principal balance, at December 31, 2014, 2013 and 2012, respectively.
In addition, Legacy Assets & Servicing is responsible for managing subservicing agreements.
Legacy Assets & Servicing results reflect the net cost of legacy exposures that are included in the results of CRES, including representations and warranties provision, litigation expense, financial results of the CRES home equity portfolio selected as part of the Legacy Owned Portfolio, the financial results of the servicing operations and the results of MSR activities, including net hedge results. The financial results of the servicing operations reflect certain revenues and expenses on loans serviced for others, including owned loans serviced for Home Loans, GWIM and All Other.
Servicing activities include collecting
cash for principal, interest and escrow payments from borrowers, disbursing customer draws for lines of credit, accounting for and remitting principal and interest payments to investors and escrow payments to third parties, and responding to customer inquiries. Our home retention efforts, including single point of contact resources, are also part of our servicing activities, along with supervision of
foreclosures and property dispositions. Prior to foreclosure, Legacy Assets & Servicing evaluates various workout options in an effort to help our customers avoid foreclosure. For more information on our servicing activities, including the impact of foreclosure delays, see Off-Balance Sheet Arrangements and Contractual Obligations – Servicing, Foreclosure and Other Mortgage Matters
on page 53.
The net loss for Legacy Assets & Servicing increased $8.2 billion to a net loss of $13.1 billion driven by higher litigation expense, which is included in noninterest expense, a lower tax benefit rate resulting from the non-deductible treatment of a portion of the settlement with the DoJ, lower mortgage banking income and higher provision for credit losses.
Mortgage banking income decreased $1.6 billion primarily driven by a decline in servicing income due to a smaller servicing portfolio
combined with less favorable MSR net-of-hedge performance. The provision for credit losses increased $410 million primarily due to additional costs associated with the consumer relief portion of the settlement with the DoJ.
Noninterest expense increased $8.2 billion due to higher litigation expense as a result of the settlements with the DoJ and FHFA. Excluding litigation, noninterest expense decreased $3.3 billion to $5.4 billion driven by a decrease in default-related servicing expenses, including mortgage-related assessments, waivers and similar costs related to foreclosure delays. We expect that noninterest expense in Legacy Assets & Servicing, excluding litigation expense, will decline to approximately $800
million per quarter by the end of 2015.
Legacy Portfolios
The Legacy Portfolios (both owned and serviced) include those loans originated prior to January 1, 2011 that would not have been originated under our established underwriting standards in place as of December 31, 2010. The purchased credit-impaired (PCI) portfolio, as well as certain loans that met a pre-defined delinquency status or probability of default threshold as of January 1, 2011, are also included in the Legacy Portfolios. Since determining the pool of loans to be included in the Legacy Portfolios as of January 1, 2011, the criteria have not changed for these portfolios, but will continue to be
evaluated over time.
Legacy Owned Portfolio
The Legacy Owned Portfolio includes those loans that met the criteria as described above and are on the balance sheet of the Corporation. The home equity loan portfolio is held on the balance sheet of Legacy Assets & Servicing, and the residential mortgage loan portfolio is held on the balance sheet of All Other. The financial results of the on-balance sheet loans are reported in the segment that owns the loans or in All Other. Total loans in the Legacy Owned Portfolio decreased $22.2 billion in 2014 to $89.9 billion at December 31,
2014, of which $33.1 billion were held on the Legacy Assets & Servicing balance sheet and the remainder was held on the balance sheet of All Other. The decrease was primarily related to paydowns, loan sales, PCI write-offs and charge-offs.
39 Bank of America 2014
Legacy
Serviced Portfolio
The Legacy Serviced Portfolio includes loans serviced by Legacy Assets & Servicing in both the Legacy Owned Portfolio and those loans serviced for outside investors that met the criteria as described above. The table below summarizes the balances of the residential mortgage loans included in the Legacy Serviced Portfolio (the Legacy Residential Mortgage Serviced Portfolio) representing 24 percent, 28 percent and 38 percent of the total residential mortgage serviced portfolio of $609 billion, $719 billion and $1.2 trillion, as measured by unpaid principal balance, at December 31, 2014, 2013 and 2012, respectively. The decline in the Legacy Residential Mortgage Serviced Portfolio was primarily due to MSR sales,
loan sales and other servicing transfers, paydowns and payoffs.
Legacy
Residential Mortgage Serviced Portfolio, a subset of the Residential Mortgage Serviced Portfolio (1)
December 31
(Dollars in billions)
2014
2013
2012
Unpaid
principal balance
Residential mortgage loans
Total
$
148
$
203
$
467
60
days or more past due
25
49
137
Number
of loans serviced (in thousands)
Residential mortgage loans
Total
794
1,083
2,542
60
days or more past due
135
258
649
(1)
Excludes $34 billion,
$39 billion and $52 billion of home equity loans and HELOCs at December 31, 2014, 2013 and 2012, respectively.
Non-Legacy Portfolio
As previously discussed, Legacy Assets & Servicing is responsible for all of our servicing activities. The table below summarizes the balances of the residential mortgage loans that are not included in the Legacy Serviced Portfolio (the Non-Legacy Residential Mortgage Serviced Portfolio) representing 76 percent, 72 percent and 62 percent of the total residential mortgage serviced portfolio, as measured by unpaid principal balance, at December 31,
2014, 2013 and 2012, respectively. The decline in the Non-Legacy Residential Mortgage Serviced Portfolio was primarily due to MSR sales and other servicing transfers, paydowns and payoffs.
Non-Legacy
Residential Mortgage Serviced Portfolio, a subset of the Residential Mortgage Serviced Portfolio (1)
December 31
(Dollars in billions)
2014
2013
2012
Unpaid
principal balance
Residential mortgage loans
Total
$
461
$
516
$
755
60
days or more past due
9
12
22
Number
of loans serviced (in thousands)
Residential mortgage loans
Total
2,951
3,267
4,764
60
days or more past due
54
67
124
(1)
Excludes $50 billion,
$52 billion and $58 billion of home equity loans and HELOCs at December 31, 2014, 2013 and 2012, respectively.
Mortgage Banking Income
CRES mortgage banking income is categorized into production and servicing income. Core production income is comprised primarily of revenue from the fair value gains and losses recognized on our interest rate lock commitments (IRLCs) and LHFS, the related secondary market execution and costs related to representations and warranties
in the sales transactions along with other obligations incurred in the sales of mortgage loans. Ongoing costs related to representations and warranties and other obligations that were incurred in the sales of mortgage loans in prior periods are also included in production income.
Servicing income includes income earned in connection with servicing activities and MSR valuation adjustments, net of results from risk management activities used to hedge certain market risks of the MSRs. The costs associated with our servicing activities are included in noninterest expense.
The table below summarizes the components of mortgage banking income.
Mortgage
Banking Income
(Dollars in millions)
2014
2013
Production income:
Core
production revenue
$
1,181
$
2,543
Representations and warranties provision
(683
)
(840
)
Total
production income
498
1,703
Servicing income:
Servicing fees
1,884
3,030
Amortization
of expected cash flows (1)
(818
)
(1,043
)
Fair value changes of MSRs, net of risk management activities used to hedge certain market risks (2)
294
867
Other
servicing-related revenue
8
28
Total net servicing income
1,368
2,882
Total CRES mortgage
banking income
1,866
4,585
Eliminations (3)
(303
)
(711
)
Total consolidated mortgage banking
income
$
1,563
$
3,874
(1)
Represents the net change in fair value of the MSR asset due to the recognition of modeled cash flows.
(2)
Includes
gains (losses) on sales of MSRs.
(3)
Includes the effect of transfers of mortgage loans from CRES to the ALM portfolio included in All Other and intercompany allocations of servicing costs.
Core production revenue decreased $1.4 billion to $1.2 billion in 2014 due to lower first mortgage origination volumes as described below, and to a lesser extent, industry-wide margin compression.
The representations and warranties provision decreased $157 million to $683 million and was primarily related to non-government-sponsored enterprises exposures, partially offset by lower exposure to mortgage insurance companies as a result of settlements in 2014.
Net servicing income decreased $1.5 billion to $1.4 billion driven by lower servicing fees due to a smaller servicing portfolio and less favorable MSR net-of-hedge performance, partially offset by lower amortization of expected cash flows. The decline in the size of our servicing portfolio was driven by strategic sales of MSRs during
2014 and 2013 as well as loan prepayment activity, which exceeded new originations primarily due to our exit from non-retail channels.
Bank of America 2014 40
Key
Statistics
(Dollars in millions, except as noted)
2014
2013
Loan
production (1)
Total (2):
First
mortgage
$
43,290
$
83,421
Home equity
11,233
6,361
CRES:
First
mortgage
$
32,340
$
66,913
Home equity
10,286
5,498
Year
end
Mortgage serviced portfolio (in billions) (1, 3)
$
693
$
810
Mortgage
loans serviced for investors (in billions) (1)
474
550
Mortgage servicing rights:
Balance
(4)
3,271
5,042
Capitalized mortgage servicing rights
(% of loans serviced for investors)
69
bps
92
bps
(1)
The
above loan production and year-end servicing portfolio and mortgage loans serviced for investors represent the unpaid principal balance of loans.
(2)
In addition to loan production in CRES, the remaining first mortgage and home equity loan production is primarily in GWIM.
(3)
Servicing of residential mortgage loans, HELOCs and home equity loans by Legacy Assets & Servicing.
(4)
At
December 31, 2014, excludes $259 million of certain non-U.S. residential mortgage MSR balances that are recorded in Global Markets.
First mortgage loan originations in CRES and for the total Corporation declined in 2014 compared to 2013 reflecting a decline in the overall mortgage market as higher interest rates throughout most of 2014 drove a decrease in refinances.
During 2014, 60 percent of the total Corporation first mortgage production
volume was for refinance originations and 40 percent was for purchase originations compared to 82 percent and 18
percent in 2013. Home Affordable Refinance Program (HARP) refinance originations were six percent of all refinance originations compared to 23 percent in 2013. Making Home Affordable non-HARP refinance originations were 17 percent of all refinance originations compared to 19 percent in 2013. The remaining 77 percent of refinance originations was conventional refinances compared to 58 percent in 2013.
Home equity production for the total Corporation was $11.2
billion for 2014 compared to $6.4 billion for 2013, with the increase due to a higher demand in the market based on improving housing trends, and increased market share driven by improved banking center engagement with customers and more competitive pricing.
Mortgage Servicing Rights
At December 31, 2014, the balance of consumer MSRs managed within CRES, which excludes $259 million of certain non-U.S. residential mortgage MSRs recorded in Global Markets, was $3.3
billion, which represented 69 bps of the related unpaid principal balance compared to $5.0 billion, or 92 bps of the related unpaid principal balance at December 31, 2013. The consumer MSR balance managed within CRES decreased $1.8 billion during 2014 primarily driven by a decrease in value due to lower mortgage rates at December 31, 2014 compared to December 31,
2013, which resulted in higher forecasted prepayment speeds, and the recognition of modeled cash flows, partially offset by additions to the portfolio. For more information on our servicing activities, see Off-Balance Sheet Arrangements and Contractual Obligations – Servicing, Foreclosure and Other Mortgage Matters on page 53. For more information on MSRs, see Note 23 – Mortgage Servicing Rights to the Consolidated Financial Statements.
41 Bank
of America 2014
Global Wealth & Investment Management
(Dollars
in millions)
2014
2013
% Change
Net interest income (FTE basis)
$
5,836
$
6,064
(4
)%
Noninterest
income:
Investment and brokerage services
10,722
9,709
10
All
other income
1,846
2,017
(8
)
Total noninterest income
12,568
11,726
7
Total
revenue, net of interest expense (FTE basis)
18,404
17,790
3
Provision
for credit losses
14
56
(75
)
Noninterest expense
13,647
13,033
5
Income
before income taxes (FTE basis)
4,743
4,701
1
Income tax expense (FTE basis)
1,769
1,724
3
Net
income
$
2,974
$
2,977
—
Net
interest yield (FTE basis)
2.33
%
2.41
%
Return on average allocated capital
25
30
Efficiency
ratio (FTE basis)
74.15
73.26
Balance
Sheet
Average
Total
loans and leases
$
119,775
$
111,023
8
Total earning assets
250,747
251,395
—
Total
assets
269,279
270,789
(1
)
Total deposits
240,242
242,161
(1
)
Allocated
capital
12,000
10,000
20
Year
end
Total loans and leases
$
125,431
$
115,846
8
Total
earning assets
258,219
254,031
2
Total assets
276,587
274,113
1
Total
deposits
245,391
244,901
—
GWIM consists of two primary businesses: Merrill Lynch Global Wealth Management (MLGWM) and U.S. Trust, Bank of America Private Wealth Management (U.S. Trust).
MLGWM’s advisory business
provides a high-touch client experience through a network of financial advisors focused on clients with over $250,000 in total investable assets. MLGWM provides tailored solutions to meet our clients’ needs through a full set of brokerage, banking and retirement products.
U.S. Trust, together with MLGWM’s Private Banking & Investments Group, provides comprehensive wealth management solutions targeted to high net worth and ultra high net worth clients, as well as customized solutions to meet clients’ wealth structuring, investment management, trust and banking needs, including specialty asset management services.
Net income remained relatively unchanged in 2014 compared to 2013 as an increase in noninterest income and lower credit costs were offset by lower
net interest income and higher noninterest expense.
Net interest income decreased $228 million to $5.8 billion as a result of the low rate environment, partially offset by the impact of loan growth. Noninterest income, primarily investment and brokerage services, increased $842 million to $12.6 billion driven by increased asset management fees due to the impact of long-term AUM flows and higher market levels, partially offset by lower transactional revenue. Noninterest expense increased $614 million
to $13.6 billion primarily due to higher revenue-related incentive compensation and support expenses, partially offset by lower other expenses.
Return on average allocated capital was 25 percent, down from 30 percent due to an increase in capital allocations. For more information on capital allocated to the business segments, see Business Segment Operations on page 34.
Revenue by Business
The table below summarizes revenue for MLGWM, U.S. Trust and other
GWIM businesses.
Revenue by Business
(Dollars
in millions)
2014
2013
Merrill Lynch Global Wealth Management
$
15,256
$
14,771
U.S. Trust
3,084
2,953
Other
(1)
64
66
Total revenue, net of interest expense (FTE basis)
$
18,404
$
17,790
(1)
Other
includes the results of BofA Global Capital Management and other administrative items.
In 2014, revenue from MLGWM was $15.3 billion, up three percent, driven by increased asset management fees due to the impact of long-term AUM flows and higher market levels, partially offset by the impact of the low rate environment on net interest income and lower transactional revenue. In 2014, revenue from U.S. Trust was $3.1 billion, up four percent, driven by increased asset management fees due to the impact of higher market levels and long-term
AUM flows.
Bank of America 2014 42
Client Balances
The table below presents client balances which consist of AUM, brokerage assets, assets in custody, deposits, and loans and leases.
Client
Balances by Type
December 31
(Dollars in millions)
2014
2013
Assets
under management
$
902,872
$
821,449
Brokerage assets
1,081,434
1,045,122
Assets
in custody
139,555
136,190
Deposits
245,391
244,901
Loans and leases (1)
128,745
118,776
Total
client balances
$
2,497,997
$
2,366,438
(1)
Includes margin receivables which are classified in customer and other receivables on the Consolidated Balance Sheet.
The increase
of $131.6 billion, or six percent, in client balances was driven by higher market levels and long-term AUM flows.
Net Migration Summary
GWIM results are impacted by the net migration of clients and their corresponding deposit, loan and brokerage balances to or from CBB, Global Banking and CRES, as presented in the table below. Migrations result from the movement of clients between business segments to better align with client needs. In addition to business-as-usual migration during 2013, GWIM
identified and transferred a client population with deposit balances of $23.3 billion to CBB and home equity loan balances of $4.5 billion to CRES, while CBB transferred credit card loan balances of $3.2 billion to GWIM.
Net
Migration Summary
(Dollars in millions)
2014
2013
Total deposits, net – GWIM from
(to) CBB and Global Banking
$
1,350
$
(20,974
)
Total loans, net – GWIM from (to) CBB and CRES
(61
)
(1,356
)
Total
brokerage, net – GWIM from (to) CBB and Global Banking
(2,710
)
(1,251
)
43 Bank of America 2014
Global
Banking
(Dollars in millions)
2014
2013
%
Change
Net interest income (FTE basis)
$
8,999
$
8,914
1
%
Noninterest income:
Service
charges
2,717
2,787
(3
)
Investment banking fees
3,213
3,234
(1
)
All
other income
1,669
1,544
8
Total noninterest income
7,599
7,565
—
Total
revenue, net of interest expense (FTE basis)
16,598
16,479
1
Provision
for credit losses
336
1,075
(69
)
Noninterest expense
7,681
7,551
2
Income
before income taxes (FTE basis)
8,581
7,853
9
Income tax expense (FTE basis)
3,146
2,880
9
Net
income
$
5,435
$
4,973
9
Net
interest yield (FTE basis)
2.57
%
2.97
%
Return on average allocated capital
18
22
Efficiency
ratio (FTE basis)
46.28
45.82
Balance
Sheet
Average
Total
loans and leases
$
270,164
$
257,249
5
Total earning assets
350,668
300,511
17
Total
assets
393,721
342,772
15
Total deposits
261,312
236,765
10
Allocated
capital
31,000
23,000
35
Year
end
Total loans and leases
$
272,572
$
269,469
1
Total
earning assets
336,776
336,606
—
Total assets
379,513
378,659
—
Total
deposits
251,344
265,171
(5
)
Global Banking, which includes Global Corporate and Global Commercial Banking, and Investment Banking, provides a wide range of lending-related products and services, integrated working capital management and treasury solutions to clients, 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, 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, auto dealerships and not-for-profit companies. Global Corporate Banking includes large global corporations, financial institutions and leasing clients.
Net income for Global Banking increased $462 million to $5.4 billion in 2014 compared to 2013 primarily driven by
a reduction in the provision for credit losses and, to a lesser degree, an increase in revenue, partially offset by higher noninterest expense. Revenue increased $119 million to $16.6 billion in 2014 primarily from higher net interest income.
The provision for credit losses decreased $739 million to $336 million in 2014 driven by improved credit quality in the
current year, and the prior year included increased reserves from loan growth. Noninterest expense increased $130 million to $7.7 billion in 2014 primarily from additional client-facing personnel expense and higher litigation expense.
Return on average allocated capital was 18 percent in 2014, down from 22 percent in 2013 as growth in earnings was more than offset by increased capital allocations. For more information on capital allocated to the business segments, see Business
Segment Operations on page 34.
Bank of America 2014 44
Global Corporate and Global Commercial Banking
Global Corporate and Global Commercial Banking each include Business Lending
and Global Transaction Services (formerly Global Treasury 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 and custody solutions to corporate and commercial banking clients.
The table below presents a summary of Global Corporate and Global Commercial Banking results, which exclude certain capital markets activity in Global Banking.
Global
Corporate and Global Commercial Banking
Global
Corporate Banking
Global Commercial Banking
Total
(Dollars in millions)
2014
2013
2014
2013
2014
2013
Revenue
Business
Lending
$
3,421
$
3,432
$
3,936
$
3,967
$
7,357
$
7,399
Global
Transaction Services
3,027
2,804
2,893
2,939
5,920
5,743
Total
revenue, net of interest expense
$
6,448
$
6,236
$
6,829
$
6,906
$
13,277
$
13,142
Balance
Sheet
Average
Total
loans and leases
$
129,610
$
126,630
$
140,539
$
130,606
$
270,149
$
257,236
Total
deposits
143,649
128,198
117,664
108,532
261,313
236,730
Year
end
Total loans and leases
$
131,019
$
130,066
$
141,555
$
139,401
$
272,574
$
269,467
Total
deposits
130,557
144,312
120,787
120,860
251,344
265,172
Business
Lending revenue in Global Corporate Banking and Global Commercial Banking remained relatively unchanged in 2014 compared to 2013 as the impact of growth in average loan balances was offset by spread compression.
Global Transaction Services revenue in Global Corporate Banking increased $223 million in 2014 driven by the impact of growth in U.S. and non-U.S. deposit balances. Global Transaction Services revenue in Global Commercial Banking remained relatively unchanged as the impact of higher deposit balances was more than offset by spread compression.
Average loans and leases in Global Corporate and Global Commercial Banking increased
five percent in 2014 driven by growth in the commercial and industrial and commercial real estate portfolios. Average deposits in Global Corporate and Global Commercial Banking increased 10 percent in 2014 due to client liquidity and international growth.
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 most investment banking and underwriting activities are shared primarily between Global Banking and Global Markets
based on the activities performed by each segment. To provide a complete discussion of
our consolidated investment banking fees, the table below presents total Corporation investment banking fees including the portion attributable to Global Banking.
Investment
Banking Fees
Global Banking
Total
Corporation
(Dollars in millions)
2014
2013
2014
2013
Products
Advisory
$
1,098
$
1,019
$
1,207
$
1,125
Debt
issuance
1,532
1,620
3,583
3,804
Equity issuance
583
595
1,490
1,472
Gross
investment banking fees
3,213
3,234
6,280
6,401
Self-led deals
(91
)
(92
)
(215
)
(275
)
Total
investment banking fees
$
3,122
$
3,142
$
6,065
$
6,126
Total
Corporation investment banking fees of $6.1 billion, excluding self-led deals, included within Global Banking and Global Markets, remained relatively unchanged in 2014 compared to 2013 as strong investment-grade underwriting and advisory fees were offset by lower underwriting fees for other debt products.
45 Bank of America 2014
Global
Markets
(Dollars in millions)
2014
2013
%
Change
Net interest income (FTE basis)
$
3,986
$
4,224
(6
)%
Noninterest income:
Investment
and brokerage services
2,163
2,046
6
Investment banking fees
2,743
2,724
1
Trading
account profits
5,997
6,734
(11
)
All other income (loss)
1,230
(338
)
n/m
Total
noninterest income
12,133
11,166
9
Total revenue, net of interest expense (FTE basis)
16,119
15,390
5
Provision
for credit losses
110
140
(21
)
Noninterest expense
11,771
11,996
(2
)
Income
before income taxes (FTE basis)
4,238
3,254
30
Income tax expense (FTE basis)
1,519
2,101
(28
)
Net
income
$
2,719
$
1,153
136
Return
on average allocated capital
8
%
4
%
Efficiency ratio (FTE basis)
73.03
77.94
Balance
Sheet
Average
Total
trading-related assets (1)
$
449,814
$
468,934
(4
)
Total loans and leases
62,064
60,057
3
Total
earning assets (1)
461,179
481,433
(4
)
Total assets
607,538
632,681
(4
)
Allocated
capital
34,000
30,000
13
Year
end
Total trading-related assets (1)
$
418,860
$
411,080
2
Total
loans and leases
59,388
67,381
(12
)
Total earning assets (1)
421,799
432,807
(3
)
Total
assets
579,514
575,472
1
(1)
Trading-related assets include derivative assets, which are considered non-earning assets.
n/m
= not meaningful
Global Markets offers sales and trading services, including research, to institutional clients across fixed-income, credit, currency, commodity and equity businesses. Global Markets product coverage includes securities and derivative products in both the primary and secondary markets. Global Markets provides market-making, financing, securities clearing, settlement and custody services globally to our institutional investor clients in support of their investing and trading activities. We also work with our commercial and corporate clients to provide
risk management products using interest rate, equity, credit, currency and commodity derivatives, foreign exchange, fixed-income and mortgage-related products. As a result of our market-making activities in these products, we may be required to manage risk in a broad range of financial products including government securities, equity and equity-linked securities, high-grade and high-yield corporate debt securities, syndicated loans, MBS, commodities and asset-backed securities (ABS). In addition, the economics of most investment banking and underwriting activities are shared primarily between Global Markets and Global Banking based on the activities performed by each segment. Global Banking
originates certain deal-related transactions with our corporate and commercial clients that are executed and distributed by Global Markets. For more information on investment banking fees on a consolidated basis, see page 45.
Net income for Global Markets increased $1.6 billion to $2.7 billion in 2014 compared to 2013. In 2014, we adopted a funding valuation adjustment into our valuation estimates primarily to include funding costs on uncollateralized
derivatives and derivatives where we are not permitted to use the collateral we receive. This change in estimate resulted in a net FVA pretax charge of $497 million. Excluding net DVA/FVA and charges in 2013 related to the U.K. corporate income tax rate reduction, net income decreased $140 million to $2.9 billion primarily driven by lower trading account profits and net interest income, partially offset by a decrease in noninterest expense, a $240 million gain in 2014 related to the initial public offering (IPO) of an equity investment and higher investment and brokerage services income. Results for 2013 included a $450 million write-down of a monoline receivable due to the settlement of a legacy matter. Net DVA/FVA losses were $240
million compared to losses of $1.2 billion in 2013. Noninterest expense decreased $225 million to $11.8 billion due to lower litigation expense and revenue-related incentives, partially offset by higher technology costs and investments in infrastructure.
Average earning assets decreased $20.3 billion to $461.2 billion in 2014 largely driven by a decrease in trading assets to further optimize the balance sheet.
Bank
of America 2014 46
Year-end loans and leases decreased $8.0 billion in 2014 due to a decrease in low-margin prime brokerage loans.
The return on average allocated capital was eight percent, up from four percent, largely driven by higher net income, partially offset by an increase in allocated capital. Excluding net DVA/FVA and charges in 2013 related to the U.K. corporate income tax rate reduction,
the return on average allocated capital was eight percent, a decrease from 10 percent, driven by lower net income, excluding net DVA/FVA and the tax change, and an increase in allocated capital.
Sales and Trading Revenue
Sales and trading revenue includes unrealized and realized gains and losses on trading and other assets, net interest income, and fees primarily from commissions on equity securities. Sales and trading revenue is segregated into fixed income (government debt obligations, investment and non-investment grade corporate debt obligations, commercial mortgage-backed securities, residential mortgage-backed securities (RMBS), collateralized loan obligations (CLOs), interest rate and credit derivative contracts),
currencies (interest rate and foreign exchange contracts), commodities (primarily futures, forwards, swaps and options) and equities (equity-linked derivatives and cash equity activity). The following table and related discussion present sales and trading revenue, substantially all of which is in Global Markets, with the remainder in Global Banking. In addition, the following table and related discussion present sales and trading revenue excluding the impact of net DVA/FVA, which is a non-GAAP financial measure. We believe the use of this non-GAAP financial measure provides clarity in assessing the underlying performance of these businesses.
Sales
and Trading Revenue (1, 2)
(Dollars in millions)
2014
2013
Sales and trading revenue
Fixed
income, currencies and commodities
$
8,706
$
8,231
Equities
4,215
4,180
Total
sales and trading revenue
$
12,921
$
12,411
Sales and trading revenue, excluding net DVA/FVA (3)
Fixed
income, currencies and commodities
$
9,013
$
9,345
Equities
4,148
4,224
Total
sales and trading revenue, excluding net DVA/FVA
$
13,161
$
13,569
(1)
Includes FTE adjustments of $181 million and $180 million for 2014
and 2013. For more information on sales and trading revenue, see Note 2 – Derivatives to the Consolidated Financial Statements.
(2)
Includes Global Banking sales and trading revenue of $382 million and $385 million for 2014 and 2013.
(3)
FICC
and Equities sales and trading revenue, excluding the impact of net DVA and FVA, is a non-GAAP financial measure. FICC net DVA/FVA losses were $307 million for 2014 compared to net DVA losses of $1.1 billion in 2013. Equities net DVA/FVA gains were $67 million for 2014 compared to net DVA losses of $44 million in 2013.
Fixed-income, currency
and commodities (FICC) revenue, excluding net DVA/FVA, decreased $332 million to $9.0 billion driven by declines in the rates and credit-related businesses due to both lower market volumes and volatility, partially offset by improvement in the commodities business. The prior year included a $450 million write-down of a monoline receivable related to the settlement of a legacy matter. Equities revenue, excluding net DVA/FVA, decreased $76 million to $4.1 billion due to financing additional liquid asset buffers, pursuant to current regulatory requirements, primarily in our broker-dealer entities, which also negatively impacted FICC results.
47 Bank
of America 2014
All Other
(Dollars
in millions)
2014
2013
% Change
Net interest income (FTE basis)
$
(516
)
$
982
n/m
Noninterest
income:
Card income
356
328
9
%
Equity
investment income
601
2,610
(77
)
Gains on sales of debt securities
1,311
1,230
7
All
other loss
(2,467
)
(2,587
)
(5
)
Total noninterest income
(199
)
1,581
n/m
Total
revenue, net of interest expense (FTE basis)
(715
)
2,563
n/m
Provision
(benefit) for credit losses
(978
)
(666
)
47
Noninterest expense
2,881
4,559
(37
)
Loss
before income taxes (FTE basis)
(2,618
)
(1,330
)
97
Income tax benefit (FTE basis)
(2,622
)
(2,042
)
28
Net
income
$
4
$
712
(99
)
Balance
Sheet
Average
Loans
and leases:
Residential mortgage
$
180,249
$
208,535
(14
)
Non-U.S.
credit card
11,511
10,861
6
Other
10,752
16,064
(33
)
Total
loans and leases
202,512
235,460
(14
)
Total assets (1)
160,272
216,012
(26
)
Total
deposits
30,255
34,919
(13
)
Year
end
Loans and leases:
Residential mortgage
$
155,595
$
197,061
(21
)
Non-U.S.
credit card
10,465
11,541
(9
)
Other
6,552
12,088
(46
)
Total
loans and leases
172,612
220,690
(22
)
Total assets (1)
142,812
167,624
(15
)
Total
deposits
18,898
27,912
(32
)
(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. Such allocated assets were $595.2 billion and $538.8 billion for 2014 and 2013, and $589.9 billion and $569.8 billion at December 31, 2014 and 2013.
n/m = not meaningful
All Other consists
of ALM activities, equity investments, the international consumer card business, liquidating businesses, residual expense allocations and other. ALM activities encompass the whole-loan residential mortgage portfolio and investment securities, interest rate and foreign currency risk management activities including the residual net interest income allocation, the impact of certain allocation methodologies and accounting hedge ineffectiveness. Additionally, certain residential mortgage loans that are managed by Legacy Assets & Servicing are held in All Other. The results of certain ALM activities are allocated to our business segments. For more information on our ALM activities, see Interest
Rate Risk Management for Non-trading Activities on page 105. Equity investments include GPI which is comprised of a portfolio of equity, real estate and other alternative investments. These investments are made either directly in a company or held through a fund with related income recorded in equity investment income. In connection with our strategy to focus on our core businesses and to conform with the Volcker Rule, the GPI portfolio has been actively winding down over the last several years through a series of portfolio and individual asset sale transactions.
Net income for All Other decreased $708 million to
$4 million in 2014 primarily due to the negative impact on net interest income of market-related premium amortization expense on debt securities of $1.2 billion compared to a benefit of $784 million in 2013 as lower long-term interest rates shortened the expected lives of the securities, a decrease of $2.0 billion in equity investment income and a $363 million increase in U.K. PPI costs. Partially offsetting these decreases were gains related to the sales of residential mortgage loans, a $312 million improvement in the provision (benefit) for credit losses and a decrease of $1.7 billion in noninterest expense. The provision (benefit) for
credit losses improved $312 million to a benefit of $978 million in 2014 primarily driven by the impact of recoveries related to nonperforming and delinquent loan sales, partially offset by a slower pace of credit quality improvement related to the residential mortgage portfolio. Noninterest expense decreased $1.7 billion to $2.9 billion primarily due to a decline in litigation expense, lower net occupancy expense and a decline in professional fees. Also offsetting the decrease was a $580 million increase in the income tax benefit. For more information on the U.K. PPI costs, see Note 12 – Commitments and Contingencies
to the Consolidated Financial Statements.
Bank of America 2014 48
The income tax benefit was $2.6 billion in 2014
compared to a benefit of $2.0 billion in 2013 with the increase driven by the increase in the pretax loss in All Other and the resolution of several tax examinations, partially offset by a decrease in benefits from non-U.S. restructurings.
Equity Investment Activity
The following tables present the components of equity investments in All Other at December 31, 2014 and 2013, and also a reconciliation to the total consolidated equity investment income for 2014
and 2013.
Equity Investments
December
31
(Dollars in millions)
2014
2013
Global Principal Investments
$
912
$
1,604
Strategic
and other investments
858
822
Total equity investments included in All Other
$
1,770
$
2,426
Equity
investments included in All Other decreased $656 million to $1.8 billion during 2014, with the decrease primarily due to sales resulting from the continued wind down of the GPI portfolio. GPI had unfunded equity commitments of $31 million and $127 million at December 31, 2014 and 2013.
Equity
Investment Income
(Dollars in millions)
2014
2013
Global Principal Investments
$
(46
)
$
379
Strategic
and other investments
647
2,231
Total equity investment income included in All Other
601
2,610
Total equity
investment income included in the business segments
529
291
Total consolidated equity investment income
$
1,130
$
2,901
Equity
investment income decreased $1.8 billion primarily due to a $753 million gain related to the sale of our remaining investment in China Construction Bank Corporation (CCB) in 2013, lower gains on sales of portions of an equity investment compared to 2013, and lower GPI results. These declines were partially offset by a gain in 2014 related to the IPO of an equity investment.
49 Bank of America 2014
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. Other long-term liabilities include our contractual
funding obligations related to the Qualified Pension Plans, Non-U.S. Pension Plans, Nonqualified and Other Pension Plans, and Postretirement Health and Life Plans (collectively, the Plans). Obligations to the Plans are based on the current and projected obligations of the Plans, performance of the Plans’ assets and any participant contributions, if applicable.
During 2014 and 2013, we contributed $234 million and $290 million to the Plans, and we expect to make $244 million of contributions during 2015. The Plans are more fully discussed in Note
17 – Employee Benefit Plans to the Consolidated Financial Statements.
Debt, lease, equity and other obligations are more fully discussed in Note 11 – Long-term Debt and Note 12 – Commitments and Contingencies to the Consolidated Financial Statements.
We enter into commitments to extend credit such as loan commitments, standby letters of credit (SBLCs) and commercial letters of credit to meet the financing needs of our customers. For a summary of the total unfunded, or off-balance sheet, credit extension commitment amounts by expiration date, see Credit Extension Commitments in Note 12 – Commitments and Contingencies to
the Consolidated Financial Statements.
Table 11 includes certain contractual obligations at December 31, 2014.
Estimated
interest expense on long-term debt and time deposits (1)
5,036
10,511
7,665
12,323
35,535
Total
contractual obligations
$
117,464
$
105,078
$
62,225
$
102,932
$
387,699
(1)
Represents forecasted net interest expense on long-term debt and time deposits. Forecasts are based on the contractual maturity dates of each liability, and are net of derivative hedges, where applicable.
Representations and Warranties
We securitize first-lien residential mortgage loans generally in the form of RMBS guaranteed by the government-sponsored enterprises (GSEs) or by the Government National Mortgage Association (GNMA) in the case of Federal Housing Administration (FHA)-insured, U.S. Department of Veterans Affairs (VA)-guaranteed and Rural Housing Service-guaranteed mortgage loans, and
sell 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 (in certain of these securitizations, monoline insurers or other financial guarantee providers insured all or some of the securities) or in the form of whole loans. In connection with these transactions, we or certain of our subsidiaries or legacy companies make or 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 other remedies to the GSEs, U.S. Department of Housing
and Urban Development (HUD) with respect to FHA-insured loans, VA, whole-loan investors, securitization trusts, monoline insurers or other financial guarantors (collectively, repurchases). In all such cases, subsequent to repurchasing the loan, we would be exposed to any credit loss on the repurchased mortgage loans, after
accounting for any mortgage insurance (MI) or mortgage guarantee payments that we may receive.
We have vigorously contested any request for repurchase when we conclude that a valid basis for repurchase does not exist and will continue to do so in the future. However, in an effort to resolve these legacy mortgage-related issues, we have reached settlements, certain of which have been for significant amounts, in lieu of a loan-by-loan review process, including with
the GSEs, four monoline insurers and Bank of New York Mellon (BNY Mellon), as trustee. The settlement with BNY Mellon (BNY Mellon Settlement) remains subject to final court approval and certain other conditions. It is not currently possible to predict the ultimate outcome or timing of the court approval process, which includes appeals and could take a substantial period of time. If final court approval is not obtained, or if we and Countrywide Financial Corporation (Countrywide) withdraw from the BNY Mellon Settlement in accordance with its terms, our future representations and warranties losses could be substantially different from existing accruals and the estimated range of possible loss over existing accruals.
For more information on accounting for representations and warranties, repurchase claims and exposures, including a summary of the larger bulk settlements, see Note 7 – Representations and
Warranties Obligations and Corporate Guarantees and Note 12 – Commitments and Contingencies to the
Bank of America 2014 50
Consolidated Financial Statements and Item 1A. Risk Factors of this Annual
Report on Form 10-K.
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, MI or mortgage guarantee payments. Claims received from a counterparty remain outstanding until the underlying loan is repurchased, the claim is rescinded by the counterparty or the representations and warranties claims with respect to the applicable trust are settled, and fully and finally released. When a claim is denied and the Corporation does not receive a response from the counterparty, the claim remains
in the unresolved repurchase claims balance until resolution.
At December 31, 2014, we had $22.4 billion of unresolved repurchase claims, net of duplicate claims, compared to $18.7 billion at December 31, 2013. These repurchase claims relate primarily to private-label securitizations and include claims in the amount of $4.7 billion, net of duplicate claims, where we believe the statute of limitations has expired under current law. For additional information, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees to
the Consolidated Financial Statements.
The continued increase in the notional amount of unresolved repurchase claims during 2014 is primarily due to: (1) continued submission of claims by private-label securitization trustees, (2) the level of detail, support and analysis accompanying such claims, which impact overall claim quality and, therefore, claims resolution, (3) the lack of an established process to resolve disputes related to these claims, (4) the submission of claims where we believe the statute of limitations has expired under current law and (5) the submission of duplicate claims, often in multiple submissions, on the same loan. For example, claims submitted without individual file reviews generally lack the level of detail and analysis of individual loans found in other claims that is necessary to support a claim. Absent any settlements, the
Corporation expects unresolved repurchase claims related to private-label securitizations to increase as such claims continue to be submitted and there is not an established process for the ultimate resolution of such claims on which there is a disagreement.
In addition to unresolved repurchase claims, we have received notifications pertaining to loans for which we have not received a repurchase request from sponsors of third-party securitizations with whom we engaged in whole-loan transactions and that we may owe indemnity obligations. These notifications totaled $2.0 billion and $737 million at December 31, 2014 and 2013.
We also from time
to time receive correspondence purporting to raise representations and warranties breach issues from entities that do not have contractual standing or ability to bring such claims. We believe such communications to be procedurally and/or substantively invalid, and generally do not respond to such correspondence.
The presence of repurchase claims on a given trust, receipt of notices of indemnification obligations and other communication, as discussed above, are all factors that inform our estimated liability for obligations under representations and warranties and the corresponding estimated range of possible loss.
Representations and Warranties Liability
The liability for representations and warranties and corporate guarantees is included
in accrued expenses and other liabilities on the Consolidated Balance Sheet and the related provision is included in mortgage banking income in the Consolidated Statement of Income. For more information on the representations and warranties liability and the corresponding estimated range of possible loss, see Off-Balance Sheet Arrangements and Contractual Obligations – Estimated Range of Possible Loss on page 53.
At December 31, 2014 and 2013, the liability for representations and warranties was $12.1 billion and $13.3 billion. For 2014,
the representations and warranties provision was $683 million compared to $840 million for 2013.
Our estimated liability at December 31, 2014 for obligations under representations and warranties is necessarily dependent on, and limited by a number of factors including for private-label securitizations the implied repurchase experience based on the BNY Mellon Settlement, as well as certain other assumptions and judgmental factors. Accordingly, future provisions associated with obligations under representations and warranties may be materially impacted if actual experiences are different from historical experience or our understandings, interpretations or assumptions. Although we have not
recorded any representations and warranties liability for certain potential private-label securitization and whole-loan exposures where we have had little to no claim activity, or where the applicable statute of limitations has expired under current law, these exposures are included in the estimated range of possible loss.
Experience with Government-sponsored Enterprises
As a result of various settlements with the GSEs, we have resolved substantially all outstanding and potential representations and warranties repurchase claims on whole loans sold by legacy Bank of America and Countrywide to Fannie Mae (FNMA) and Freddie Mac (FHLMC) through June 30, 2012 and December 31, 2009, respectively. For additional information, see Note 7 – Representations and Warranties
Obligations and Corporate Guarantees to the Consolidated Financial Statements.
Experience with Investors Other than Government-sponsored Enterprises
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 to investors other than GSEs (although the GSEs are investors in certain private-label securitizations). Such loans originated from 2004 through 2008 had an original principal balance of $970 billion, including $786 billion
sold to private-label and whole-loan investors without monoline insurance and $185 billion with monoline insurance. Of the $970 billion, $574 billion in principal has been paid, $201 billion in principal has defaulted, $44 billion in principal was severely delinquent, and $151 billion in principal was current or less than 180 days past due at December 31, 2014 as summarized in Table 12. Of the original principal balance of $716 billion for Countrywide, $409 billion
is included in the BNY Mellon Settlement and, of this amount, $109 billion was defaulted or severely delinquent at December 31, 2014.
51 Bank of America 2014
Table
12
Overview of Non-Agency Securitization and Whole-loan Balances from 2004 to 2008
Excludes
transactions sponsored by Bank of America and Merrill Lynch where no representations or warranties were made.
(2)
Includes exposures on third-party sponsored transactions related to legacy entity originations.
As it relates to private-label securitizations, we believe a contractual liability to repurchase mortgage loans generally arises if there is a breach of representations and warranties that materially and adversely affects the interest of the investor or all the investors in a securitization trust or of the monoline insurer or other financial guarantor (as applicable). We believe many of the loan defaults observed in these
securitizations and whole-loan transactions were driven by external factors like the substantial depreciation in home prices experienced after the economic downturn, persistently high unemployment and other negative economic trends, diminishing the likelihood that any loan defect, to the extent any exists, was the cause of a loan’s default.
Experience with Private-label Securitization and Whole Loan Investors
Legacy entities, and to a lesser extent Bank of America, sold loans to investors via private-label securitizations or as whole loans. The majority of the loans sold were included in private-label securitizations, including third-party sponsored transactions. We provided representations and warranties to the whole-loan investors and these investors may retain those rights even when the whole loans were aggregated with other collateral into private-label securitizations sponsored
by the whole-loan investors. Loans originated between 2004 and 2008 and sold without monoline insurance had an original total principal balance of $786 billion included in Table 12. Of the $786 billion, $469 billion have been paid in full and $193 billion were defaulted or severely delinquent at December 31, 2014. At least 25 payments have been made on approximately 64 percent of the defaulted and severely delinquent loans.
We
have received approximately $33 billion of representations and warranties repurchase claims related to these vintages, including $24 billion from private-label securitization trustees and a financial guarantee provider, $8 billion from whole-loan investors and $815 million from one private-label securitization counterparty. Continued high levels of new private-label claims are primarily related to repurchase requests received from trustees for private-label securitization transactions not included in the BNY Mellon Settlement. We have resolved $9 billion of these claims with losses of $2 billion. The majority of these resolved claims were from third-party whole-loan investors. Approximately
$4 billion of these claims were resolved through repurchase or indemnification, $5 billion were rescinded by the investor and $336 million were resolved through settlements. As of December 31, 2014, 15 percent of the whole-loan claims for loans originated between 2004 and 2008 that we initially denied have subsequently been resolved through repurchase or make-whole payments and 45 percent have been resolved through rescission of the claim by the counterparty or repayment in full by the borrower. At December 31, 2014, for loans originated between
2004 and 2008, the notional amount of unresolved repurchase claims submitted by private-label securitization trustees, whole-loan investors, including third-party securitization sponsors and others was $24 billion, including $3 billion of duplicate claims primarily submitted without a loan file review. We have performed an initial review with respect to substantially all of these claims and although we do not believe a valid basis for repurchase has been established by the claimant, we consider claims activity in the computation of our liability for representations and warranties. Until we receive a repurchase claim, we generally do not review loan files related to private-label securitizations and believe we are not required by the governing documents to do so.
Bank
of America 2014 52
Experience with Monoline Insurers
During 2014, we had limited loan-level representations and warranties repurchase claims experience with the monoline insurers due to settlements and ongoing litigation with a single monoline insurer. For more information related to the monolines, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees and Note 12 – Commitments and Contingencies to the Consolidated Financial Statements.
Estimated
Range of Possible Loss
We currently estimate that the range of possible loss for representations and warranties exposures could be up to $4 billion over existing accruals at December 31, 2014. The estimated range of possible loss reflects principally non-GSE exposures. It represents a reasonably possible loss, but does not represent a probable loss, and is based on currently available information, significant judgment and a number of assumptions that are subject to change.
For more information on the methodology used to estimate the representations and warranties liability, the corresponding estimated range of possible loss and the types of losses not considered in such estimates, see Item 1A. Risk Factors of this
Annual Report on Form 10-K and Note 7 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements and, for more information related to the sensitivity of the assumptions used to estimate our liability for obligations under representations and warranties, see Complex Accounting Estimates – Representations and Warranties Liability on page 113.
Department of Justice Settlement
On August 20, 2014, we reached a comprehensive settlement with the DoJ and certain federal and state agencies (DoJ Settlement). The DoJ Settlement included releases for securitization, origination,
sale and other specified conduct relating to RMBS and collateralized debt obligations (CDOs), and an origination release on specified populations of residential mortgage loans sold to GSEs and private-label RMBS trusts. The DoJ Settlement resolved certain actual and potential civil claims by the DoJ, the Securities and Exchange Commission and State Attorneys General from six states, the FHA and GNMA, as well as all pending RMBS claims against Bank of America entities brought by the FDIC. For FHA-insured loans originated on or after May 1, 2009, we also received a release of origination liability for loans only if an insurance claim had been submitted to the FHA prior to January 1, 2014. If a claim had not been submitted by that date, we did not receive a release and we may be exposed to losses on such loans. For more information on FHA-insured loans originated on or before
April 30, 2009, see Off-Balance Sheet Arrangements and Contractual Obligations – National Mortgage Settlement on page 54.
As part of the DoJ Settlement, we paid civil monetary penalties and compensatory remediation payments totaling $9.65 billion in 2014 and agreed to provide $7.0 billion worth of creditable consumer relief activities primarily in the form of mortgage modifications, including first-lien principal forgiveness and forbearance modifications and second- and junior-lien extinguishments, low- to moderate-income mortgage originations, and community reinvestment and neighborhood stabilization efforts, with initiatives focused on communities experiencing, or
at
risk of, blight. In addition, we recorded $400 million of provision for credit losses for additional costs associated with the consumer relief portion of the settlement. Also, we will support the expansion of available affordable rental housing. We have committed to complete delivery of the consumer relief by no later than August 31, 2018. The consumer relief requirements are subject to oversight by an independent monitor.
Servicing, Foreclosure and Other Mortgage Matters
We service a large portion of the loans we or our subsidiaries have securitized and also service loans on behalf of third-party securitization vehicles and other investors. Our servicing obligations are set forth in servicing agreements with the applicable counterparty. These
obligations may include, but are not limited to, loan repurchase requirements in certain circumstances, indemnifications, payment of fees, advances for foreclosure costs that are not reimbursable, or responsibility for losses in excess of partial guarantees for VA loans.
Servicing agreements with the GSEs generally provide the GSEs with broader rights relative to the servicer than are found in servicing agreements with private investors. For example, the GSEs claim that they have the contractual right to demand indemnification or loan repurchase for certain servicing breaches. In addition, the GSEs’ first-lien mortgage seller/servicer guides provide timelines to resolve delinquent loans through workout efforts or liquidation, if necessary, and purport to require the imposition of compensatory fees if those deadlines are not satisfied except for reasons beyond the control of the servicer. In addition, many non-agency RMBS and
whole-loan servicing agreements state that the servicer may be liable for failure to perform its servicing obligations in keeping with industry standards or for acts or omissions that involve willful malfeasance, bad faith or gross negligence in the performance of, or reckless disregard of, the servicer’s duties.
It is not possible to reasonably estimate our liability with respect to certain potential servicing-related claims. While we have recorded certain accruals for servicing-related claims, the amount of potential liability in excess of existing accruals could be material to the Corporation’s results of operations or cash flows for any particular reporting period.
2013 IFR Acceleration Agreement
On January 7, 2013, we and other mortgage servicing institutions entered into an agreement
in principle with the Office of the Comptroller of the Currency (OCC) and the Federal Reserve to cease the Independent Foreclosure Review (IFR) that had commenced pursuant to consent orders entered into by Bank of America with the Federal Reserve (2011 FRB Consent Order) and the 2011 OCC Consent Order entered into between BANA and the OCC and replaced it with an accelerated remediation process (2013 IFR Acceleration Agreement). The 2013 IFR Acceleration Agreement requires us to provide $1.8 billion of borrower assistance in the form of loan modifications and other foreclosure prevention actions, and in addition, we made a cash payment of $1.1 billion into a qualified settlement fund in 2013. The borrower assistance program is not expected to result in any incremental credit provision, as we believe that the existing allowance for credit losses is adequate to absorb any costs
that have not already been recorded as charge-offs.
53 Bank of America 2014
National Mortgage Settlement
In March 2012, we entered into settlement agreements (collectively, the National Mortgage Settlement) with the U.S. Department of Justice,
49 State Attorneys General and certain federal agencies. The National Mortgage Settlement provided for the establishment of certain uniform servicing standards, upfront cash payments of approximately $1.9 billion to the state and federal governments and for borrower restitution, an upfront cash payment of $500 million to settle certain claims related to FHA-insured loans, approximately $7.6 billion worth of borrower assistance in the form of credits earned for, among other things, principal reduction, and approximately $1.0 billion of credits earned for interest rate reduction modifications. The resulting interest rate reductions, which were not accounted for as troubled debt restructurings, resulted in an estimated decrease in fair value of the modified loans of approximately $740 million
and a reduction in annual interest income of approximately $120 million.
The parties to the National Mortgage Settlement agreed to release us from further liability for certain alleged residential mortgage origination, servicing and foreclosure deficiencies. For FHA-guaranteed loans originated on or before April 30, 2009, we also received (1) a release of origination liability for loans where an insurance claim had been submitted to the FHA prior to January 1, 2012 and (2) a release of multiple damages and penalties, but not administrative indemnification claims for single damages, for loans where no insurance claim had been submitted by January 1, 2012.
The independent monitor appointed
as a result of the National Mortgage Settlement to review and certify compliance with its provisions has confirmed that we have substantially fulfilled all commitments for borrower assistance, including principal reductions, and interest rate reductions.
Mortgage Electronic Registration Systems, Inc.
We are subject to certain legal and contractual requirements for how we hold, transfer, use or enforce promissory notes, security instruments and other documents for residential mortgage loans that we service. In recent years, challenges have been raised to whether we have adhered to these requirements, and whether, as a result in some instances, the loans can be enforced as local law otherwise would permit. Additionally, we currently use the MERS system for approximately half of the residential mortgage loans that remain in our servicing portfolio, but individuals and certain local
governments have contended that the use of MERS is improper or otherwise adversely affects the security interest. If documentation requirements were not met, or if the use of MERS or the MERS system is found not valid or effective, we could be obligated to, or choose to, take remedial actions and may be subject to additional costs or losses.
Impact of Foreclosure Delays
Foreclosure delays that impact our default-related servicing costs, which include mortgage-related assessments, waivers and similar costs, peaked in mid-2013 and have declined throughout 2014 as delinquencies declined. However, unexpected foreclosure delays could impact the rate of decline. In 2014, we recorded $14 million of mortgage-related assessments, waivers and similar costs related to foreclosure delays compared
to $514 million in 2013.
Other Mortgage-related Matters
We continue to be subject to additional borrower and non-borrower litigation and governmental and regulatory scrutiny related to our past and current origination, servicing, transfer of servicing and servicing rights, and foreclosure activities, including those claims not covered by the National Mortgage Settlement or the DoJ Settlement. This scrutiny may extend beyond our pending foreclosure matters to issues arising out of alleged irregularities with respect to previously completed foreclosure activities. The ongoing environment of additional regulation, increased regulatory compliance obligations, and enhanced regulatory enforcement,
combined with ongoing uncertainty related to the continuing evolution of the regulatory environment, has resulted in operational and compliance costs and may limit our ability to continue providing certain products and services. For more information on management’s estimate of the aggregate range of possible loss and on regulatory investigations, see Note 12 – Commitments and Contingencies to the Consolidated Financial Statements.
Mortgage-related Settlements – Servicing Matters
In connection with the BNY Mellon Settlement, BANA has agreed to implement certain servicing changes related to loss mitigation activities. BANA also agreed to transfer the servicing rights related to certain high-risk loans to qualified subservicers on a schedule that began with the signing of the BNY Mellon
Settlement. This servicing transfer protocol has reduced the servicing fees payable to BANA. Upon final court approval of the BNY Mellon Settlement, failure to meet the established benchmarking standards for loans not in subservicing arrangements can trigger payment of agreed-upon fees. Additionally, we and Countrywide have agreed to work to resolve with the Trustee certain mortgage documentation issues related to the enforceability of mortgages in foreclosure and to reimburse the related Covered Trust for any loss if BANA is unable to foreclose on the mortgage and the Covered Trust is not made whole by a title policy because of these issues. These agreements will terminate if final court approval of the BNY Mellon Settlement is not obtained, although we could still have exposure under the pooling and servicing agreements related to the mortgages in the Covered Trusts for these issues.
BANA has agreed to implement uniform
servicing standards established under the National Mortgage Settlement. These standards are intended to strengthen procedural safeguards and documentation requirements associated with foreclosure, bankruptcy and loss mitigation activities, as well as addressing the imposition of fees and the integrity of documentation, with a goal of ensuring greater transparency for borrowers. These uniform servicing standards also obligate us to implement compliance processes reasonably designed to provide assurance of the achievement of these objectives. Compliance with the uniform servicing standards is subject to ongoing review by the independent monitor. Implementation of these uniform servicing standards has contributed to elevated costs associated with the servicing process, but is not expected to result in material delays or dislocation in the performance of our mortgage servicing obligations, including the completion of foreclosures.
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of America 2014 54
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. The seven types of risk faced by Bank of America are strategic, credit, market, liquidity, compliance, operational and reputational risks.
Strategic risk is the risk resulting from incorrect assumptions about external
or internal factors, inappropriate business plans, ineffective business strategy execution, or failure to respond in a timely manner to changes in the regulatory, macroeconomic or competitive environments. 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 potential inability to meet contractual or contingent financial obligations, either on- or off-balance sheet, as they come due. Compliance risk is the risk of legal or regulatory sanctions or penalties arising from the failure of the Corporation to comply with requirements of applicable laws, rules and regulations. Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Reputational risk
is the potential that negative perceptions of the Corporation’s conduct or business practices may adversely impact its profitability or operations through an inability to establish new or maintain existing customer/client relationships. Reputational risk is evaluated along with all of the risk categories and throughout the risk management process and, as such, is not discussed separately herein. The following sections, Strategic Risk Management on page 58, Capital Management on page 59 Liquidity Risk on page 65, Credit Risk Management on page 70, Market Risk Management
on page 99, Compliance Risk Management on page 108 and Operational Risk Management on page 109, address in more detail the specific procedures, measures and analyses of the major categories of risk. This discussion of managing risk focuses on the Risk Framework that, as part of its annual review process, was approved by the Corporation’s Board of Directors (the Board) and its Enterprise Risk Committee (ERC) in January 2015. The key enhancements from the 2014 Risk Framework include further increasing the focus on our strong risk culture and ensuring consistency with recent regulatory guidance. It continues to recognize the same seven key risk types as discussed above, and the five components of our risk management approach as outlined
below.
A strong risk culture is fundamental to our core values and operating principles. It requires us to focus on risk in all activities and encourages the necessary mindset and behavior to enable effective risk management, and promotes sound risk taking within our risk appetite. Sustaining a strong risk culture throughout the organization is critical to the success of the Corporation and is a clear expectation of our executive management team and the Board.
Our Risk Framework is the foundation for comprehensive management of the risks facing the Corporation. It outlines clear responsibilities and accountabilities for managing risk. The Risk Framework sets forth roles and responsibilities for the
management of risk by front line units
(FLUs), independent risk management, control functions and Corporate Audit, each of which is described below in Managing Risk – Risk Management Governance, 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. It describes the five components of our risk management approach (risk culture, risk appetite, risk management processes, risk data aggregation and reporting, and risk governance) and the seven key types of risk we face.
Executive management assesses, with Board oversight, the risk-adjusted returns of each business. Management reviews and approves strategic and financial operating plans, and recommends a financial plan 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 34.
Our Risk Appetite Statement is intended to ensure that the Corporation maintains an acceptable risk profile by providing a common framework and a comparable set of measures for senior management and the Board to clearly indicate the level of risk the Corporation is willing to accept. The Risk Appetite Statement includes both quantitative limits and qualitative
components. Risk appetite is set at least annually in conjunction with the strategic, capital and financial operating plans to align risk appetite with the Corporation’s strategy and financial resources. Line of business strategies and risk appetite are also aligned. As part of its annual review, the Board approved the Risk Appetite Statement in January 2015.
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 times and take advantage of organic growth opportunities. Therefore, we set objectives and targets for capital and liquidity that are intended to permit the Corporation to continue to operate in a safe and sound manner at all times, including during periods of stress.
Each of our lines of business operates within their credit, market and
operational risk appetite limits. These limits are based on analyses of risk and reward within each line of business. Executive management is responsible for tracking and reporting performance measurements as well as any exceptions to guidelines or limits. The Board, and its committees when appropriate, oversees financial performance, execution of the strategic and financial operating plans, adherence to risk appetite limits and the adequacy of internal controls.
Risk Management Governance
The Risk Framework includes 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.
55 Bank
of America 2014
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. This chart reflects the revised Risk Framework approved by the Board in January 2015.
(1) This presentation does not include committees for other legal entities.
(2) Reports
to the CEO and CFO with oversight by the Audit Committee.
Board of Directors and Board Committees
The Board, which consists of a substantial majority of independent directors, 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 appropriate inquiries of, and receive reports from management on risk-related matters to determine whether there are scope or resource limitations that impede the ability of independent risk management and/or Corporate Audit to execute its responsibilities. The following Board committees have the principal responsibility for enterprise-wide oversight of our risk management activities. These committees and other Board committees, as applicable, regularly report to the Board on risk-related matters. Through
these activities, the Board and applicable committees are provided with thorough information on the Corporation’s risk profile, and challenge executive management to appropriately address key risks facing the Corporation. 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, thorough insight about our management of enterprise-wide risks.
Enterprise Risk Committee
The Enterprise Risk Committee (ERC) has primary responsibility for oversight of the Corporation’s Risk Framework and material risks facing the Corporation. 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, measure-ment, monitoring and control of all key risks facing the Corporation. The ERC may consult with other Board committees on risk-related matters.
Audit Committee
The Audit Committee oversees the qualifications, performance and independence of the Independent Registered Public Accounting Firm, the performance of the Corporation’s corporate audit function, the integrity of the Corporation’s consolidated financial statements, compliance by the Corporation with legal and regulatory requirements, and makes inquiries of management or the Corporate General Auditor (CGA) to determine whether there are scope or resource limitations that impede the ability
of Corporate Audit to execute its responsibilities. The Audit Committee is also responsible for overseeing compliance risk pursuant to the New York Stock Exchange listing standards.
Credit Committee
The Credit Committee provides additional oversight of senior management’s responsibilities for the identification and management of corporation-wide credit exposures. Our Credit Committee oversees, among other things, the identification and management of our credit exposures on an enterprise-wide basis, our responses to trends affecting those exposures, the adequacy of the allowance for credit losses and our credit-related policies.
Other Board Committees
Our Corporate Governance Committee oversees our Board’s governance processes, identifies and reviews the qualifications of potential Board members,
recommends nominees for election to our Board and recommends committee appointments for Board approval.
Our Compensation and Benefits Committee oversees establishing, maintaining and administering our compensation programs and employee benefit plans, including approving and recommending our Chief Executive Officer’s (CEO) compensation to our Board for further approval by all independent directors, and reviewing and approving all of our executive officers’ compensation.
Bank of America 2014 56
Management
Committees
Management committees may receive their authority from the Board, a Board committee, another management committee or from one or more executive officers. The primary management-level risk committee for the Corporation is the Management Risk Committee (MRC). Subject to Board oversight, the MRC is responsible for management oversight of all key risks facing the Corporation. The MRC provides management oversight of the Corporation’s credit portfolio, 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 banks and their nonbank affiliates pursuant to Federal Reserve rules and regulations. The MRC is responsible for holistic risk management, including an integrated evaluation of risk, earnings, capital and liquidity,
and it reports on these matters to the Board or Board committees.
Lines of Defense
In addition to the role of Executive Officers in managing risk, we have clear ownership and accountability across the three lines of defense: FLUs, independent risk management and Corporate Audit. The Corporation also has control functions outside of FLUs and independent risk management (e.g., Legal and Global Human Resources). The three lines of defense are integrated into our management-level governance structure. Each of these is described in more detail below.
Executive Officers
Executive officers lead various functions representing the functional roles. Authority for functional roles may be delegated to executive officers from the Board, Board committees or management-level committees. Executive officers,
in turn, may further delegate responsibilities, as appropriate, to management-level committees, management routines or individuals. Executive officers review the Corporation’s activities for consistency with our Risk Framework, Risk Appetite Statement, and applicable strategic, capital and financial operating plans, as well as applicable policies, standards, procedures and processes. Executive officers and other employees make decisions individually on a day-to-day basis, consistent with the authority they have been delegated. Executive officers and other employees may also serve on committees and participate in committee decisions.
Front Line Units
FLUs include the lines of business and two organizational units, the Global Technology and Operations Group and Strategic Initiatives. FLUs are held accountable by the CEO and the Board for appropriately assessing and effectively managing
all of the risks associated with their activities.
Two organizational units that include FLU and control function activities, but are not part of independent risk management are the Chief Financial Officer (CFO) Group and Global Marketing and Corporate Affairs (GM&CA).
Independent Risk Management
Independent risk management (IRM) is part of our control functions and includes Global Risk Management and Global Compliance. We have other control functions that are not part of IRM (other control functions may also provide oversight to FLU activities), including Legal, Global Human Resources and certain activities
within the CFO Group, and GM&CA. IRM, led by the 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 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 enterprise risk teams and FLU risk teams that work collaboratively in executing their respective duties.
Within IRM, Global Compliance independently assesses compliance risk, and evaluates adherence to applicable laws, rules and regulations, including identifying compliance issues and risks, performing monitoring and testing, and reporting on the
state of compliance activities across the Corporation. Additionally, Global Compliance works with FLUs and control functions so that day-to-day activities operate in a compliant manner.
Corporate Audit
Corporate Audit and the CGA maintain their independence from the FLUs, IRM and other control functions by reporting directly to the Audit Committee. The CGA administratively reports to the CEO. Corporate Audit provides independent assessment and validation through testing of key processes and controls across the Corporation. Corporate Audit includes Credit Review which periodically tests and examines credit portfolios and processes.
Risk Management Processes
The Corporation’s Risk Framework requires that strong risk management practices are integrated in key strategic, capital and financial planning
processes and day-to-day business processes across the Corporation, with a goal of ensuring risks are appropriately considered, evaluated and responded to in a timely manner.
We employ a risk management process, referred to as IMMC: 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 all key risks inherent in our business activities and risks that may arise from business initiatives or external factors. Risk identification is an ongoing process occurring at both the individual transaction and portfolio level. Each employee is expected to identify and escalate risks promptly.
Measure – Once
a risk is identified, it must be measured. Risk is measured at various levels including, but not limited to, risk type, FLU, legal entity and on an aggregate basis. These metrics help us assess our risk profile and adherence to our risk appetite.
Monitor – We monitor risk levels regularly to track adherence to risk appetites, policies, standards, procedures and processes. 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 immediate requests for approval to managers
57 Bank
of America 2014
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.
Among the key tools in the risk management process are the Risk and Control Self Assessments (RCSAs). The RCSA process, consistent with IMMC, is one of our primary methods for capturing the identification and assessment of operational risk exposures, including inherent and residual operational risk ratings, and control effectiveness ratings. The end-to-end RCSA process incorporates risk identification and assessment of the control environment; monitoring, reporting and escalating risk; quality assurance and data validation; and integration with the risk appetite. This results in a comprehensive risk management view that enables understanding of and action on operational risks and controls for our processes, products, activities and systems.
The formal processes used to manage risk represent a part
of our overall risk management process. Corporate culture and the actions of our employees are also critical to effective risk management. Through our Code of Conduct, we set a high standard for our employees. The Code of Conduct provides a framework for all of our employees to conduct themselves with the highest integrity. We instill a strong and comprehensive risk management culture through communications, training, policies, procedures, and organizational roles and responsibilities. Additionally, we continue to strengthen the link between the employee performance management process and individual compensation to encourage employees to work toward enterprise-wide risk goals.
Corporation-wide Stress Testing
As a part of our core risk management practices, we conduct corporation-wide stress tests on a periodic basis to better understand balance sheet, earnings, capital and liquidity
sensitivities to certain economic and business scenarios, including economic and market conditions that are more severe than anticipated. These corporation-wide stress tests provide illustrative hypothetical potential impacts from our risk profile on our balance sheet, earnings, capital and liquidity and serve as a key component of our capital, liquidity and risk management practices. Scenarios are recommended by the MRC and approved by the CFO and the CRO. Impacts to each business from each scenario are then determined and analyzed, primarily by leveraging the models and processes utilized in everyday management routines. Impacts are assessed along with potential mitigating actions that may be taken. Analysis from such stress scenarios is compiled for and reviewed by the MRC and ERC.
Contingency Planning Routines
We have developed and maintain contingency plans that are designed
to prepare us in advance to respond in the event of potential adverse outcomes and scenarios. These contingency planning routines include capital contingency planning, liquidity
contingency funding plans, recovery planning and enterprise resiliency, and provide monitoring, escalation routines and response plans. Contingency response plans are designed to enable us to increase capital, access funding sources and reduce risk through consideration of potential actions that include asset sales, business sales, capital or debt issuances, and other de-risking strategies.
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. It is the risk that results from incorrect assumptions, unsuitable business plans, ineffective strategy execution, or failure to respond in a timely manner to changes in the regulatory, macroeconomic and competitive environments, customer preferences, and technology developments in the geographic locations in which we operate. We face significant strategic risk due to the changing regulatory environment and the fast-paced development of new products and technologies in the financial services industries. Our appetite for strategic risk is assessed based on the strategic plan, with strategic risks selectively and carefully considered against the backdrop of the evolving marketplace. Strategic risk is managed in the context of our overall financial condition, risk appetite and stress test results, among other considerations. The CEO and executive management team manage and act on significant
strategic actions, such as divestitures, consolidation of legal entities or capital actions subsequent to required review and approval by the Board.
Executive management develops and approves a strategic plan each year, which is reviewed and approved by the Board. Annually, executive management develops a financial operating plan, which is reviewed and approved by the Board, that implements the strategic goals for that year. With oversight by the Board, executive management ensures that consistency is applied while executing the Corporation’s strategic plan, core operating tenets and risk appetite. The following are assessed in the executive reviews: forecasted earnings and returns on capital, the current risk profile, current capital and liquidity requirements, staffing levels and changes required to support the plan, stress testing results, and other qualitative factors such as market growth rates and peer analysis. At the
business level, as we introduce new products, we monitor their performance relative to expectations (e.g., for earnings and returns on capital). 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.
We use proprietary models 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 exposures. 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. For more information on how this measure is calculated, see Supplemental Financial Data on page 32.
Bank of America 2014 58
Capital Management
The Corporation manages
its capital position to maintain sufficient capital to support its business activities and maintain capital, risk and risk appetite commensurate with one another. Additionally, we seek to maintain safety and soundness at all times even under adverse scenarios, take advantage of organic growth opportunities, 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 set goals for capital ratios to meet key stakeholder expectations, including investors, regulators and rating agencies, and to achieve our financial performance
objectives and strategic goals, while maintaining adequate capital, including during periods of stress. We assess capital adequacy at least on a quarterly basis to operate in a safe and sound manner and maintain adequate capital in relation to the risks associated with our business activities and strategy.
We conduct an Internal Capital Adequacy Assessment Process (ICAAP) on a quarterly 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 quarterly 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 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.
The Corporation periodically reviews capital allocated to its businesses and allocates capital annually during the strategic and capital planning processes. For more information, see Business Segment Operations on page 34.
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. The CCAR capital plan is the central element of the Federal Reserve’s
approach to ensure that large BHCs have adequate capital and robust processes for managing their capital.
On October 17, 2014, the Federal Reserve released 2015 CCAR instructions as well as an update to the capital plan and stress test rules. The revised rules shift the dates of the annual stress testing cycle by approximately three months to April, beginning with 2016 CCAR capital plans.
In January 2015, we submitted our 2015 CCAR capital plan and related supervisory stress tests. The Federal Reserve has announced that it will release summary results, including supervisory projections of capital ratios, losses and revenues under stress scenarios, and publish the results of stress tests
conducted
under the supervisory adverse and supervisory severely adverse scenarios in March 2015.
In January 2014, we submitted our 2014 CCAR capital plan and received results in March 2014. Based on the information in our January 2014 submission, the Federal Reserve advised that it did not object to our 2014 capital actions. In April 2014, we announced the revision of certain regulatory capital amounts and ratios that had previously been reported, and suspended our previously announced 2014 capital actions stating that we would resubmit information pursuant to the 2014 CCAR to the Federal Reserve. In May 2014, we submitted our revised 2014 CCAR capital plan, and in August 2014, the Federal Reserve informed us that it did not object to our revised 2014 CCAR capital plan. The requested capital actions included an increase in the quarterly common stock dividend to $0.05 per share from $0.01 per share, but no additional common stock repurchases.
Regulatory
Capital
As a financial services holding company, we are subject to regulatory capital rules issued by U.S. banking regulators. On January 1, 2014, we became subject to the Basel 3 rules, which include certain transition provisions through January 1, 2019 (Basel 3 Standardized – Transition). Basel 3 generally continues to be subject to interpretation and clarification by U.S. banking regulators. Basel 3 also expands and modifies the risk-sensitive calculation of risk-weighted assets (defined in the Basel 1 – 2013 Rules) for credit and market risk (applicable to banks that meet the definition as advanced approaches); and introduces a Standardized approach for the calculation of risk-weighted assets, which serves as a minimum. The Corporation
and its primary affiliated banking entity, BANA, meet the definition of an advanced approaches bank and measure regulatory capital adequacy based on the Basel 3 rules. Through December 31, 2013, we were subject to the Basel 1 general risk-based capital rules which included new measures of market risk including a charge related to stressed Value-at-Risk (VaR), an incremental risk charge and the comprehensive risk measure (CRM), as well as other technical modifications to Basel 1 (the Basel 1 – 2013 Rules).
The risk-sensitive approach for calculating risk-weighted assets under Basel 3 replaces the approach under the Basel 1 – 2013 Rules. Risk-weighted assets are calculated for credit risk for all on- and off-balance sheet credit exposures
and for market risk on trading assets and liabilities, including derivative exposures. Credit risk-weighted assets are calculated by assigning a prescribed risk weight to all on-balance sheet assets and to the credit equivalent amount of certain off-balance sheet exposures. Off-balance sheet exposures include financial guarantees, unfunded lending commitments, letters of credit and derivatives. Market risk-weighted assets are calculated using risk models for trading account positions, including all foreign exchange and commodity positions regardless of the applicable accounting guidance. Any assets that are a direct deduction from the computation of capital are excluded from risk-weighted assets and adjusted average total assets, consistent with regulatory guidance.
For more information on the regulatory capital amounts and calculations, see Basel 3 below.
59 Bank
of America 2014
Basel 3
Basel 3 materially changes Tier 1 and Total capital calculations and formally establishes a Common equity tier 1 capital ratio. Basel 3 introduces new minimum capital ratios and buffer requirements and a supplementary leverage ratio (SLR); changes the composition of regulatory capital; and revises the adequately capitalized minimum requirements under the Prompt Corrective Action (PCA) framework. Changes to the composition of regulatory capital under Basel 3, as compared to the Basel 1 – 2013 Rules, are subject to a transition period
as described below. The new minimum capital ratio requirements and related buffers will be phased in from January 1, 2014 through January 1, 2019. For more information on the SLR, see Capital Management – Other Regulatory Capital Matters on page 64.
As an advanced approaches bank, under Basel 3, we are required to complete a qualification period (parallel run) to demonstrate compliance with the final Basel 3 rules to the satisfaction of U.S. banking regulators. Upon notification of approval by U.S. banking regulators to exit our parallel run, we will be required to calculate regulatory capital ratios and risk-weighted assets under both the Standardized and Advanced approaches. The approach that yields the lower ratio is to be used
to assess capital adequacy including under the PCA framework. Prior to receipt of notification of approval, we are required to assess our capital adequacy under the Standardized approach only.
Effective January 1, 2015, the PCA framework was amended to reflect the new capital requirements under Basel 3. The PCA framework establishes categories of capitalization, including “well
capitalized,” based on 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. Effective January 1, 2015, Common equity tier
1 capital is included in the measurement of “well capitalized.”
Regulatory Capital Composition – Transition
Important differences in determining the composition of regulatory capital between the Basel 1 – 2013 Rules and Basel 3 include changes in capital deductions related to our MSRs, deferred tax assets and defined benefit pension assets, and the inclusion of unrealized gains and losses on AFS debt and certain marketable equity securities recorded in accumulated OCI. These changes will be impacted by, among other things, future changes in interest rates, overall earnings performance and corporate actions. Changes to the composition of regulatory capital under Basel 3, as compared to the Basel 1 – 2013 Rules, are recognized in 20
percent annual increments, and will be fully recognized as of January 1, 2018. When presented on a fully phased-in basis, capital, risk-weighted assets and the capital ratios assume all regulatory capital adjustments and deductions are fully recognized.
Table 13 summarizes how certain regulatory capital deductions and adjustments have been or will be transitioned from 2014 through 2018 for Common equity tier 1 and Tier 1 capital.
Table
13
Summary of Certain Basel 3 Regulatory Capital Transition Provisions
Beginning
on January 1 of each year
2014
2015
2016
2017
2018
Common equity tier 1 capital
Percent
of total amount deducted from Common equity tier 1 capital includes:
20%
40%
60%
80%
100%
Deferred tax assets arising from net operating loss and tax credit carryforwards; intangibles, other than mortgage servicing rights and goodwill; defined benefit pension fund net assets; net unrealized cumulative gains (losses)
related to changes in own credit risk on liabilities, including derivatives, measured at fair value; direct and indirect investments in own Common equity tier 1 capital instruments; certain amounts exceeding the threshold by 10 percent individually and 15 percent in aggregate
Percent of total amount used to adjust Common equity tier 1 capital includes (1):
80%
60%
40%
20%
0%
Net
unrealized gains (losses) on AFS debt and certain marketable equity securities recorded in accumulated OCI; employee benefit plan adjustments recorded in accumulated OCI
Tier 1 capital
Percent of total amount deducted from Tier 1
capital includes:
80%
60%
40%
20%
0%
Deferred tax assets arising from net operating loss and tax credit carryforwards; defined benefit pension fund net assets; net unrealized cumulative gains (losses) related to changes in own credit risk on liabilities, including derivatives, measured at fair value
(1)
Represents
the phase-out percentage of the exclusion by year (e.g., 20 percent of net unrealized gains (losses) on AFS debt and certain marketable equity securities recorded in accumulated OCI will be included in 2014).
Additionally, Basel 3 revised the regulatory capital treatment for Trust Securities, requiring them to be partially transitioned from Tier 1 capital into Tier 2 capital in 2014 and 2015, until fully excluded from Tier 1 capital in 2016, and partially transitioned from Tier 2 capital beginning in 2016 with the full amount excluded in 2022. As of December 31, 2014, our qualifying Trust Securities were $2.9 billion (approximately 23 bps of the Tier 1 capital
ratio).
Standardized Approach
Under the Basel 3 Standardized approach, exposures subject to market risk are measured on a basis generally consistent with how market risk-weighted assets were measured under the Basel 1 – 2013 Rules. Credit risk-weighted assets are measured by applying fixed risk weights to each exposure, determined based on the characteristics of the exposure, such as type of obligor,
Organization for Economic Cooperation and Development (OECD) country risk code and maturity, among others. Under the Standardized approach, no distinction is made for variations in credit quality for corporate exposures, and the economic benefit of collateral is restricted to a limited list of
eligible securities and cash. We estimate our Common equity tier 1 capital ratio under the Basel 3 Standardized approach, on a fully phased-in basis, would have been 10.0 percent at December 31, 2014. As of December 31, 2014, we estimate that our Basel 3 Standardized Common equity tier 1 capital would have been $141.2 billion and total risk-weighted assets would have been $1,415 billion, on a fully phased-in basis. For a reconciliation of Basel 3 Standardized – Transition to Basel 3 Standardized estimates on a fully phased-in basis for Common equity tier 1 capital and risk-weighted assets,
see Table 16. Our estimates under the Basel 3 Standardized approach may be refined over time as a result of further rulemaking
Bank of America 2014 60
or clarification by U.S. banking regulators or as our understanding and interpretation of the rules evolve. Actual results could differ from
those estimates and assumptions.
Advanced Approaches
In addition to the exposures calculated under the Basel 3 Standardized approach, the Basel 3 Advanced approaches include measures of operational risk and risks related to the credit valuation adjustment (CVA) for over-the-counter (OTC) derivative exposures. The Advanced approaches rely on internal analytical models to measure risk weights for credit risk exposures and allow the use of models to estimate the exposure at default (EAD) for certain exposure types. Market risk capital measurements are consistent with the Standardized approach, except for securitization exposures, where the Supervisory Formula Approach is also permitted. Credit risk exposures are measured using internal ratings-based models to determine the applicable risk weight by estimating the probability of default, loss-given default (LGD) and, in certain instances,
EAD. The internal analytical models primarily rely on internal historical default and loss experience. Operational risk is measured using internal analytical models which rely on both internal and external operational loss experience and data. The calculations under Basel 3 require management to make estimates, assumptions and interpretations, including with respect to the probability of future events based on historical experience. Actual results could differ from those estimates and assumptions.
The Basel 3 Advanced approaches require approval by the U.S. banking regulators of our internal analytical models used to
calculate risk-weighted assets. We estimate our Common equity tier 1 capital ratio under the Basel 3 Advanced approaches, on a fully phased-in basis, would have been
9.6 percent at December 31, 2014. As of December 31, 2014, we estimate that our Basel 3 Advanced Common equity tier 1 capital would have been $141.2 billion and total risk-weighted assets would have been $1,465 billion, on a fully phased-in basis. These estimates assume approval by U.S. banking regulators of our internal analytical models, and do not include the benefit of the removal of the surcharge applicable to the CRM. Our estimates under the Basel 3 Advanced approaches may be refined over time as a result of further rulemaking or clarification by U.S. banking regulators or as our understanding and interpretation of the rules evolve.
We are currently working with the U.S. banking regulators to obtain approval of certain internal analytical models including the wholesale (e.g., commercial) and other credit models in order to exit parallel run. The U.S. banking regulators have indicated that they will require modifications to these models which would likely result in a material increase in our risk-weighted assets resulting in a decrease in our capital ratios.
Capital Composition and Ratios
Table 14 presents Bank of America Corporation’s capital ratios and related information in accordance with Basel 3 Standardized – Transition as measured at December 31, 2014
and the Basel 1 – 2013 Rules at December 31, 2013.
Table
14
Bank of America Corporation Regulatory Capital
December
31
2014
2013
Basel 3 Transition
Basel 1
(Dollars in billions)
Ratio
Minimum Required (1)
Ratio
Minimum Required
(1)
Common equity tier 1 capital ratio (2, 3)
12.3
%
4.0
%
n/a
n/a
Tier
1 common capital ratio
n/a
n/a
10.9
%
n/a
Tier 1 capital ratio
13.4
6.0
12.2
6.0
%
Total
capital ratio
16.5
10.0
15.1
10.0
Tier 1 leverage ratio
8.2
5.0
7.7
5.0
Risk-weighted
assets (3)
$
1,262
n/a
$
1,298
n/a
Adjusted
quarterly average total assets (4)
2,060
n/a
2,052
n/a
(1)
Percent
required to meet guidelines to be considered “well capitalized” under the Prompt Corrective Action framework, except for Common equity tier 1 capital which reflects capital adequacy minimum requirements as an advanced approaches bank under Basel 3 during a transition period in 2014.
(2)
When presented on a fully phased-in basis, beginning January 1, 2019, the minimum Basel 3 Common equity tier 1 capital ratio requirement for the Corporation is expected to significantly increase and will be comprised of the minimum ratio of the then-applicable 4.5 percent, plus a capital conservation buffer and the GSIB buffer.
(3)
On
a pro-forma basis, under Basel 3 Standardized – Transition, the December 31, 2013 Common equity tier 1 capital ratio would have been 11.6 percent and risk-weighted assets would have been $1,316 billion.
(4)
Reflects adjusted average total assets for the three months ended December 31, 2014 and 2013.
n/a = not applicable
Common
equity tier 1 capital under Basel 3 Standardized – Transition was $155.4 billion at December 31, 2014, an increase of $13.8 billion from Tier 1 common capital under the Basel 1 – 2013 Rules at December 31, 2013. The increase was largely attributable to the impact of certain transition provisions under Basel 3 Standardized – Transition, particularly in regard to deferred tax assets and earnings. For
more information on Basel 3 transition provisions, see Table 13. During 2014, Total capital increased
$12.1 billion primarily driven by the increase in Common equity tier 1 capital, partially offset by the impact of certain transition provisions under Basel 3 Standardized – Transition, particularly in regard to long-term debt that qualifies as Tier 2 capital. The Tier 1 leverage ratio increased 52 bps during 2014 primarily driven by an increase
in Tier 1 capital. For additional information, see Tables 14 and 15.
61 Bank of America 2014
At December 31, 2014,
an increase or decrease in our Common equity tier 1, Tier 1 or Total capital ratios by one bp would require a change of $126 million in Common equity tier 1, Tier 1 or Total capital. We could also increase our Common equity tier 1, Tier 1 or Total capital ratios by one bp on such date by a reduction in risk-weighted assets of $1.0 billion, $941 million and $762 million, respectively. An increase in our Tier 1 leverage ratio by one bp on such date would require $206 million of additional Tier 1 capital or a reduction of $2.5 billion in adjusted average assets.
Risk-weighted assets decreased $36 billion during 2014 to $1,262 billion primarily
due to decreases in market risk, and residential mortgage and consumer credit card balances, partially offset by the impact of certain transition provisions under Basel 3 Standardized – Transition, and an increase in commercial loans.
Table 15 presents the capital composition as measured under Basel 3 Standardized – Transition at December 31, 2014 and the Basel 1 – 2013 Rules at December 31, 2013.
Table
15
Capital Composition
December 31
2014
2013
(Dollars
in millions)
Basel 3 Transition
Basel 1
Total common shareholders’ equity
$
224,162
$
219,333
Goodwill
(69,234
)
(69,844
)
Intangibles,
other than mortgage servicing rights and goodwill
(639
)
—
Nonqualifying intangible assets (includes core deposit intangibles, affinity relationships, customer relationships and other intangibles)
—
(4,263
)
Net
unrealized gains (losses) on AFS debt securities and net losses on derivatives recorded in accumulated OCI, net-of-tax
573
5,538
Unamortized net periodic benefit costs recorded in accumulated OCI, net-of-tax
2,680
2,407
DVA
related to liabilities and derivatives (1)
231
2,188
Deferred tax assets arising from net operating loss and tax credit carryforwards (2)
(2,226
)
(15,391
)
Other
(186
)
1,554
Common
equity tier 1 capital (3)
155,361
141,522
Qualifying preferred stock, net of issuance cost
19,308
10,435
Deferred
tax assets arising from net operating loss and tax credit carryforwards under transition
(8,905
)
—
DVA related to liabilities and derivatives under transition
925
—
Defined
benefit pension fund assets
(599
)
—
Trust preferred securities
2,893
5,785
Other
(10
)
—
Total
Tier 1 capital
168,973
157,742
Long-term debt qualifying as Tier 2 capital
17,953
21,175
Nonqualifying trust preferred
securities subject to phase out from Tier 2 capital
3,881
—
Allowance for loan and lease losses
14,419
17,428
Reserve
for unfunded lending commitments
528
484
Allowance for loan and lease losses exceeding 1.25 percent of risk-weighted assets
(313
)
(1,637
)
Other
3,229
1,375
Total
capital
$
208,670
$
196,567
(1)
Represents loss on structured liabilities and derivatives, net-of-tax, that is excluded from Common equity tier 1, Tier 1 and Total capital for regulatory capital purposes.
(2)
December 31,
2014 amount represents phase-in portion under Basel 3 Standardized – Transition. The December 31, 2013 amount represents the full Basel 1 deferred tax asset disallowance.
(3)
Tier 1 common capital under the Basel 1 – 2013 Rules at December 31, 2013.
Bank
of America 2014 62
Table 16 presents reconciliations of our Common equity tier 1 capital and risk-weighted assets in accordance with the Basel 1 – 2013 Rules and Basel 3 Standardized – Transition to the Basel 3 Standardized approach fully phased-in estimates and Basel 3 Advanced approaches fully phased-in estimates at December 31,
2014 and 2013.
Basel 3 regulatory capital ratios on a fully phased-in basis are considered non-GAAP financial measures until the end of the transition period on January 1, 2019 when adopted and required by U.S. banking regulators.
Table
16
Regulatory Capital Reconciliations (1, 2)
December 31 2013
(Dollars
in millions)
Basel 1
Regulatory capital – Basel 1 to Basel 3 (fully phased-in)
Basel 1 Tier 1 capital
$
157,742
Deduction
of qualifying preferred stock and trust preferred securities
(16,220
)
Basel 1 Tier 1 common capital
141,522
Deduction of defined benefit pension assets
(829
)
Deferred
tax assets and threshold deductions (deferred tax asset temporary differences, MSRs and significant investments)
(5,459
)
Net unrealized losses in accumulated OCI on AFS debt and certain marketable equity securities, and employee benefit plans
(5,664
)
Other
deductions, net
(1,624
)
Basel 3 Common equity tier 1 capital (fully phased-in)
$
127,946
December 31
2014
Basel 3 Transition
Regulatory capital – Basel 3 transition to fully phased-in
Common equity tier 1 capital (transition)
$
155,361
Deferred
tax assets arising from net operating loss and tax credit carryforwards phased in during transition
(8,905
)
DVA related to liabilities and derivatives phased in during transition
925
Defined benefit pension fund assets phased in during transition
(599
)
Other
adjustments and deductions phased in during transition
(5,565
)
Common equity tier 1 capital (fully phased-in)
$
141,217
December
31
2014
2013
Basel 3 Transition
Basel 1
Risk-weighted assets – As reported to Basel 3 (fully phased-in)
As
reported risk-weighted assets
$
1,261,544
$
1,297,593
Changes in risk-weighted assets from reported to fully phased-in
Fully
phased-in Basel 3 estimates are based on our current understanding of the Standardized and Advanced approaches under the Basel 3 rules. The Advanced approaches estimates assume approval by U.S. banking regulators of our internal analytical models, and do not include the benefit of the removal of the surcharge applicable to the CRM.
(2)
On January 1, 2014, we became subject to the Basel 3 rules, which include certain transition provisions primarily related to regulatory deductions and adjustments impacting Common equity tier 1 capital and Tier 1 capital. We reported under the Basel 1 – 2013 Rules at December
31, 2013.
(3)
We are currently working with the U.S. banking regulators to obtain approval of certain internal analytical models including the wholesale (e.g., commercial) and other credit models in order to exit parallel run. The U.S. banking regulators have indicated that they will require modifications to these models which would likely result in a material increase in our risk-weighted assets resulting in a decrease in our capital ratios.
n/a = not applicable
63 Bank
of America 2014
Bank of America, N.A. Regulatory Capital
Prior to October 1, 2014, we operated our banking activities primarily under two charters: BANA and, to a lesser extent, FIA.
Percent
required to meet guidelines to be considered “well capitalized” under the Prompt Corrective Action framework, except for Common equity tier 1 capital which reflects capital adequacy minimum requirements as an advanced approaches bank under Basel 3 during a transition period in 2014.
(2)
When presented on a fully phased-in basis, beginning January 1, 2019, the minimum Basel 3 Common equity tier 1 capital ratio requirement for BANA is expected to significantly increase and will be comprised of the minimum ratio of the then-applicable 4.5 percent, plus a capital conservation buffer and the GSIB buffer.
n/a
= not applicable
BANA’s Tier 1 capital ratio under Basel 3 Standardized – Transition was 13.1 percent at December 31, 2014, an increase of 80 bps from December 31, 2013. The increase was largely attributable to the merger of FIA into BANA in 2014. The Total capital ratio increased 79 bps to 14.6 percent at December 31,
2014 compared to December 31, 2013. The Tier 1 leverage ratio increased 42 bps to 9.6 percent. The increase in the Total capital ratio was driven by the same factors as the Tier 1 capital ratio. The increase in the Tier 1 leverage ratio was driven by an increase in Tier 1 capital, partially offset by an increase in adjusted quarterly average total assets. Further, the merger with FIA positively impacted these ratios.
Other Regulatory Capital Matters
Supplementary Leverage Ratio
Basel
3 also will require the calculation of a supplementary leverage ratio (SLR). The SLR is determined by dividing Tier 1 capital, using quarter-end Basel 3 Tier 1 capital on a fully phased-in basis, by supplementary leverage exposure calculated as the daily average of the sum of on-balance sheet as well as the simple average of certain off-balance sheet exposures at the end of each month in the quarter. Supplementary leverage exposure is comprised of all on-balance sheet assets, plus a measure of certain off-balance sheet exposures, including among other items, lending commitments, letters of credit, OTC derivatives, repo-style transactions and margin loan commitments. We are required to disclose our SLR effective January 1, 2015. Effective January 1, 2018, the Corporation will be required to maintain a minimum SLR of 3.0 percent, plus a supplementary leverage buffer of 2.0
percent, for a total SLR of 5.0 percent. If the Corporation’s supplementary leverage buffer is not greater than or equal to 2.0 percent, then the Corporation will be subject to mandatory limits on its ability to make distributions of capital to shareholders, whether through dividends, stock repurchases or otherwise. In addition, the insured depository institutions of such BHCs, which for the Corporation is primarily BANA, will be required to maintain a minimum 6.0 percent SLR to be considered “well capitalized.”
On September 3, 2014, U.S. banking regulators adopted a final rule to revise the definition and scope of the denominator of the SLR. The final rule prescribes the calculation of total leverage exposure, the frequency of calculation and required disclosures. The definition of total leverage exposure is revised to include the
effective
notional principal amount of credit derivatives and other similar instruments through which credit protection is sold. Calculations of the components of total leverage exposure for derivative and repo-style transactions are modified. The credit conversion factors (CCF) applied to certain off-balance sheet exposures are conformed to the graduated CCF used by the Standardized approach, subject to the minimum 10 percent credit conversion factor.
As of December 31, 2014, we estimate the Corporation’s SLR would have been approximately 5.9 percent, which exceeds the 5.0 percent threshold that represents the minimum plus the supplementary leverage buffer for BHCs. The estimated SLR for BANA was approximately 7.0 percent, which exceeds the
6.0 percent “well capitalized” level for insured depository institutions of BHCs.
Global Systemically Important Bank Surcharge
In November 2011, the Basel Committee on Banking Supervision (Basel Committee) published a methodology to identify global systemically important banks (GSIBs) and impose an additional loss absorbency requirement through the introduction of a surcharge of up to 3.5 percent, which must be satisfied with Common equity tier 1 capital. The assessment methodology relies on an indicator-based measurement approach to determine a score relative to the global banking industry. The chosen indicators are size, complexity, cross-jurisdictional activity, inter-connectedness and substitutability/financial institution infrastructure. Institutions with the highest scores are designated as GSIBs and are assigned to one
of four loss absorbency buckets from 1.0 percent to 2.5 percent, in 0.5 percent increments based on each institution’s relative score and supervisory judgment. The fifth loss absorbency bucket of 3.5 percent is currently empty and serves to discourage banks from becoming more systemically important. Also in November 2011, the Financial Stability Board (FSB) published an integrated set of policy measures and identified an initial group of GSIBs, which included the Corporation.
In July 2013, the Basel Committee updated the November 2011 methodology to recalibrate the substitutability/financial institution infrastructure indicator by introducing a cap on the weighting of that component, and requiring the annual publication by the FSB of
key information necessary to permit each GSIB to calculate its score and observe its position within the buckets and relative to the industry total for each indicator. Every three years,
Bank of America 2014 64
beginning on January 1, 2016, the Basel Committee will reconsider and recalibrate
the bucket thresholds. The Basel Committee and FSB expect banks to change their behavior in response to the incentives of the GSIB framework, as well as other aspects of Basel 3 and jurisdiction-specific regulations.
In November 2014, the Basel Committee published an updated list of GSIBs and their respective loss absorbency buckets. As of December 31, 2014, we estimated our surcharge at 1.5 percent based on the Basel 3 information and considering the FSB’s report, “2014 update of list of global systemically important banks (GSIBs).” Our surcharge could change each year based on our actions and those of our peers, as the scoring methods utilize data from the Corporation in combination with the industry. If our score were to increase, we could be subject to a higher GSIB surcharge.
In December 2014, a U.S. banking regulator proposed a regulation that would implement GSIB surcharge requirements for the largest U.S. BHCs. Under the proposal, assignment to loss absorbency buckets would be determined by the higher score as calculated according to two methods. Method 1 is substantially similar to the Basel Committee’s methodology, whereas Method 2 replaces the substitutability/financial institution infrastructure indicator with a measure of short-term wholesale funding and then multiplies the overall score by two. The Federal Reserve estimates that Method 2 will yield a higher surcharge, currently ranging from 1.0 percent to 4.5 percent.
Under the proposed U.S. rules, the GSIB surcharge requirement will begin to phase in effective January 2016, with full implementation in January 2019. Data from the original five indicators, measured as of December
31, 2014, combined with short-term wholesale funding data covering the third quarter of 2015, is proposed to be used to determine the GSIB surcharge that will be effective for us in 2016.
Broker-dealer Regulatory Capital and Securities Regulation
The Corporation’s principal U.S. broker-dealer subsidiaries are Merrill Lynch, Pierce, Fenner & Smith (MLPF&S) and Merrill Lynch Professional Clearing Corp (MLPCC). MLPCC is a fully-guaranteed subsidiary of MLPF&S and provides clearing and settlement services. Both entities are subject to the net capital requirements of SEC Rule 15c3-1. Both entities are also registered as futures commission merchants and are subject to the Commodity Futures Trading Commission Regulation 1.17.
MLPF&S
has elected to compute the minimum capital requirement in accordance with the Alternative Net Capital Requirement as permitted by SEC Rule 15c3-1. At December 31, 2014, MLPF&S’s regulatory net capital as defined by Rule 15c3-1 was $9.7 billion and exceeded the minimum requirement of $1.3 billion by $8.4 billion. MLPCC’s net capital of $3.4 billion exceeded the minimum requirement of $508 million by $2.9 billion.
In accordance with the Alternative Net Capital Requirements, MLPF&S is required to maintain tentative net capital in excess of $1.0 billion, net capital in excess of $500 million and notify the SEC in the event its tentative net capital is less than $5.0 billion. At December 31, 2014, MLPF&S had tentative net capital
and net capital in excess of the minimum and notification requirements.
Merrill Lynch International (MLI), a U.K. investment firm, is regulated by the Prudential Regulation Authority and the Financial Conduct Authority, and is subject to certain regulatory capital requirements. At December 31, 2014, MLI’s capital resources
were $32.3 billion which exceeded the minimum requirement of $17.9 billion.
Common Stock Dividends
For a summary of our declared quarterly cash dividends on common stock during 2014 and through February 25,
2015, see Note 13 – Shareholders’ Equity to the Consolidated Financial Statements.
Liquidity Risk
Funding and Liquidity Risk Management
We define liquidity risk as the potential inability to meet our contractual and contingent financial obligations, on- or off-balance sheet, as they come due. Our primary liquidity objective is to provide adequate funding for our businesses throughout market cycles, including periods of financial stress. To achieve that objective, we analyze and monitor our liquidity risk, maintain excess liquidity and access diverse funding sources including our stable deposit base. We define excess liquidity as readily available assets,
limited to cash and high-quality, liquid, unencumbered securities that we can use to meet our funding requirements as those obligations arise.
Global funding and primary liquidity risk management activities are centralized within Corporate Treasury. We believe that a centralized approach to funding and liquidity risk 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 the Corporation’s liquidity policy and the ERC approves the contingency funding plan, including establishing liquidity risk tolerance levels. The MRC monitors our liquidity position and reviews the impact of strategic decisions on our liquidity. The MRC is responsible for overseeing liquidity risks and maintaining exposures within the established tolerance levels. MRC
reviews and monitors our liquidity position, cash flow forecasts, stress testing scenarios and results, and implements our liquidity limits and guidelines. For additional information, see Managing Risk on page 55. Under this governance framework, we have developed certain funding and liquidity risk management practices which include: maintaining excess liquidity at the parent company and selected subsidiaries, including our bank subsidiaries and other regulated entities; determining what amounts of excess 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.
Global Excess Liquidity Sources and Other Unencumbered Assets
We maintain excess liquidity available to Bank of America Corporation, or the parent company and selected subsidiaries in the form of cash and high-quality, liquid, unencumbered securities. These assets, which we call our Global Excess Liquidity Sources, serve as our primary means of liquidity risk mitigation. Our cash is primarily on deposit with the Federal Reserve and, to a lesser extent, central banks outside of the U.S. We limit the composition of high-quality, liquid, unencumbered securities to U.S. government securities, U.S. agency securities, U.S. agency MBS and a select
65 Bank
of America 2014
group of non-U.S. government and supranational securities. We believe we can quickly obtain cash for these securities, even in stressed market conditions, through repurchase agreements or outright sales. We hold our Global Excess Liquidity Sources 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. Our Global Excess Liquidity Sources are substantially the same in composition to what qualifies as High Quality Liquid Assets (HQLA) under the final LCR rules. For more information on the final rules, see Liquidity
Risk – Basel 3 Liquidity Standards on page 67.
Our Global Excess Liquidity Sources were $439 billion and $376 billion at December 31, 2014 and 2013, and were maintained as presented in Table 18.
As
shown in Table 18, parent company Global Excess Liquidity Sources totaled $98 billion and $95 billion at December 31, 2014 and 2013. The increase in parent company liquidity was primarily due to bank subsidiary inflows, partially offset by payments in connection with litigation settlements. Typically, parent company excess liquidity is in the form of cash deposited with BANA.
Global Excess Liquidity Sources available to our bank subsidiaries totaled $306 billion
and $249 billion at December 31, 2014 and 2013. The increase in bank subsidiaries’ liquidity was primarily due to a shift from less liquid mortgage loans into more liquid securities, partially offset by dividends and returns of capital to the parent company. Global Excess Liquidity Sources at bank subsidiaries exclude the cash deposited by the parent company. Our bank subsidiaries can also generate incremental liquidity by pledging a range of other unencumbered loans
and securities to certain Federal Home Loan Banks (FHLBs) and the Federal Reserve Discount Window. The cash we could have obtained by borrowing against this pool of specifically-identified eligible assets was approximately $214 billion and $218 billion at December 31, 2014 and 2013. We have established operational procedures to enable us to borrow against these assets, including regularly monitoring our total pool of eligible loan and securities collateral. Eligibility is defined by guidelines outlined by 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 can only be transferred to the parent company or nonbank subsidiaries with prior regulatory approval.
Global Excess Liquidity Sources available to our other regulated entities, comprised primarily of broker-dealer subsidiaries, totaled $35 billion and $32 billion at December 31, 2014 and 2013. Our other regulated entities also held other unencumbered investment-grade securities and equities that we believe could be used to
generate
additional liquidity. Liquidity held in an other regulated entity is primarily available to meet the obligations of that entity and transfers to the parent company or to any other subsidiary may be subject to prior regulatory approval due to regulatory restrictions and minimum requirements.
Table 19 presents the composition of Global Excess Liquidity Sources at December 31, 2014 and 2013.
Table
19
Global Excess Liquidity Sources Composition
December 31
(Dollars in billions)
2014
2013
Cash on
deposit
$
97
$
90
U.S. Treasury securities
74
20
U.S.
agency securities and mortgage-backed securities
252
245
Non-U.S. government and supranational securities
16
21
Total
Global Excess Liquidity Sources
$
439
$
376
Time-to-required Funding and Stress Modeling
We use a variety of metrics to determine the appropriate amounts of excess liquidity to maintain at the parent company, our bank subsidiaries and other regulated entities. One metric we use to evaluate the appropriate level
of excess liquidity at the parent company is “time-to-required funding.” This debt coverage measure indicates the number of months that the parent company can continue to meet its unsecured contractual obligations as they come due using only its Global Excess Liquidity Sources without issuing any new debt or accessing any additional liquidity sources. We define unsecured contractual obligations for purposes of this metric as maturities of senior or subordinated debt issued or guaranteed by Bank of America Corporation. These include certain unsecured debt instruments, primarily structured liabilities, which we may be required to settle for cash prior to maturity. Our time-to-required funding was 39 months at December 31, 2014. For purposes of calculating time-to-required funding, at December 31,
2014, we have included in the amount of unsecured contractual obligations $8.6 billion related to the BNY Mellon Settlement. The BNY Mellon Settlement is subject to final court approval and certain other conditions, and the timing of payment is not certain.
We utilize liquidity stress models to assist us in determining the appropriate amounts of excess liquidity to maintain at the parent company, our bank subsidiaries and other regulated entities. These models are risk sensitive and have become increasingly important in analyzing our potential contractual and contingent cash outflows beyond those outflows considered in the time-to-required funding analysis. We evaluate the liquidity requirements under a range of scenarios with varying levels of severity and time horizons. The scenarios we consider and utilize
incorporate market-wide and Corporation-specific events, including potential credit rating downgrades for the parent company and our subsidiaries, and are based on historical experience, 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
Bank
of America 2014 66
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-liability profile and establish limits and guidelines on certain funding sources and businesses.
Basel 3 Liquidity
Standards
The Basel Committee has issued two liquidity risk-related standards that are considered part of the Basel 3 liquidity standards: the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). 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. As with other Basel Committee standards, the Basel Committee’s liquidity risk-related standards do not directly apply to U.S. financial institutions, but require adoption by U.S. banking regulators as described below.
In 2014, the U.S. banking regulators finalized LCR requirements for the largest U.S. financial institutions on a consolidated basis and for their subsidiary depository institutions with total assets greater than $10 billion.
Under the final rule, an initial minimum LCR of 80 percent is required in January 2015, and will increase thereafter in 10 percentage point increments annually through January 2017. These minimum requirements are applicable to the Corporation on a consolidated basis and to our insured depository institutions. As of December 31, 2014, we estimate the consolidated Corporation to be in compliance with LCR on a fully phased-in basis. For more information on our balance sheet actions to reduce risk and increase liquidity related to LCR, see Executive Summary – Balance Sheet Overview on page 27.
In 2014, the Basel Committee issued a final standard for the NSFR, the standard that is intended to reduce funding risk over a longer time horizon.
The NSFR is designed to ensure an appropriate amount of stable funding, generally capital and liabilities maturing beyond one year, given the mix of assets and off-balance sheet items. The final standard aligns the NSFR to the LCR and gives more credit to a wider range of funding. The final standard also includes adjustments to the stable funding required for certain types of assets, some of which reduce the stable funding requirement and some of which increase it. The U.S. banking regulators are expected to propose a similar NSFR regulation in the near future. We expect to meet the NSFR requirement within the regulatory timeline.
Diversified Funding Sources
We fund our assets primarily with a mix of deposits and secured and unsecured liabilities through a centralized, globally
coordinated
funding strategy. We diversify our funding globally across products, programs, markets, currencies and investor groups.
The primary benefits of our centralized funding strategy 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 $1.12 trillion at both December
31, 2014 and 2013. Deposits are primarily generated by our CBB, 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 GSEs, the FHA and private-label investors, as well as FHLB loans. During 2014,
$4.1 billion of new senior debt was issued to third-party investors from the credit card securitization trusts.
Our trading activities in other regulated entities are primarily funded on a secured basis through securities lending and repurchase agreements and these amounts will vary based on customer activity and market conditions. We believe funding these activities in the secured financing markets is more cost-efficient and less sensitive to changes in our credit ratings than unsecured financing. Repurchase agreements are generally short-term and often overnight. Disruptions in secured financing markets for financial institutions have occurred in prior market cycles which resulted in adverse changes in terms or significant reductions in the availability of such financing. We manage the liquidity risks arising from secured funding by sourcing funding globally from a diverse
group of counterparties, providing a range of securities collateral and pursuing longer durations, when appropriate. For more information on secured financing agreements, see Note 10 – Federal Funds Sold or Purchased, Securities Financing Agreements and Short-term Borrowings to the Consolidated Financial Statements.
We issue long-term unsecured debt in a variety of maturities and currencies to achieve cost-efficient funding and to maintain an appropriate maturity profile. During 2014, we issued $32.7 billion of long-term unsecured debt, including structured note issuance of $2.8 billion, a majority of which was issued by the parent company. We also issued $3.3 billion of unsecured long-term debt through BANA. 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.
67 Bank of America 2014
Table 20 presents our long-term debt by major currency
at December 31, 2014 and 2013.
Table 20
Long-term
Debt by Major Currency
December 31
(Dollars in millions)
2014
2013
U.S. Dollar
$
191,264
$
176,294
Euro
30,687
46,029
British
Pound
7,881
9,772
Japanese Yen
6,058
9,115
Australian Dollar
2,135
1,870
Canadian
Dollar
1,779
2,402
Swiss Franc
897
1,274
Other
2,438
2,918
Total
long-term debt
$
243,139
$
249,674
Total long-term debt decreased $6.5 billion, or three percent, in 2014, primarily driven by maturities outpacing new issuances. We may, from time to time, purchase outstanding debt instruments in various transactions,
depending on prevailing market conditions, liquidity and other factors. In addition, our other regulated entities may make markets in our debt instruments to provide liquidity for investors. For more information on long-term debt funding, see Note 11 – Long-term Debt to the Consolidated Financial Statements.
We use derivative transactions to manage the duration, interest rate and currency risks of our borrowings, considering the characteristics of the assets they are funding. For further details on our ALM activities, see Interest Rate Risk Management for Non-trading Activities on page 105.
We may also issue unsecured debt in the form of structured notes for client purposes. Structured notes
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 derivative positions 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 liability 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. We had outstanding structured liabilities with a carrying value of $38.8 billion and $48.4 billion at December 31, 2014 and 2013.
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.
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 OTC derivatives. Thus, it is our objective
to maintain high-quality credit ratings, and management maintains an active dialogue with the rating agencies.
Credit ratings and outlooks are opinions expressed by rating agencies on our creditworthiness and that of our obligations or securities, including long-term debt, short-term borrowings, preferred stock and other securities, including asset securitizations. Our credit ratings are subject to ongoing review by the rating agencies and they consider a number of factors, including our own financial strength, performance, prospects and operations as well as factors not under our control. The rating agencies could make adjustments to our ratings at any time and 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, the sovereign credit ratings of the U.S. government, our mortgage exposures (including litigation), our relative positions in the markets in which we compete, reputation, liquidity position, diversity of funding sources, funding costs, the level and volatility of earnings, corporate governance and risk management policies, capital position, capital management practices, and current or future regulatory and legislative initiatives.
All three agencies have indicated that, as a systemically important financial institution, the senior credit ratings of the Corporation and Bank of America, N.A. (or in the case of Moody’s Investors Service, Inc. (Moody’s), only the ratings of Bank of America, N.A.) currently reflect the expectation that, if necessary, we would receive significant support from the U.S. government, and that
they will continue to assess such support in the context of sovereign financial strength and regulatory and legislative developments.
On December 2, 2014, Standard & Poor’s Ratings Services (S&P) affirmed the ratings of Bank of America, and revised the outlook on our core operating subsidiaries, including Bank of America, N.A., MLPF&S, and MLI, to stable from negative. The negative outlook on the ratings of Bank of America Corporation reflects S&P’s ongoing evaluation of whether to continue to include uplift for extraordinary U.S. government support in the ratings of systemically-important BHCs. On November 25, 2014, Fitch Ratings (Fitch) concluded their periodic review of 12 large, complex securities trading and universal
banks, including Bank of America Corporation. As a result of this review, Fitch affirmed all of the Corporation’s credit ratings and retained a negative outlook. The negative outlook reflects Fitch’s expectation that the probability of the U.S. government providing support to a systemically important financial institution during a crisis is likely to decline due to the
Bank of America 2014 68
orderly
liquidation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. On November 14, 2013, Moody’s concluded its review of the ratings for Bank of America and certain other systemically important U.S. BHCs, affirming our current ratings and noting that those ratings no longer incorporate any uplift for U.S. government support. Concurrently, Moody’s upgraded Bank of America, N.A.’s senior debt and stand-alone
ratings by one notch, citing a number of positive developments at Bank of America. Moody’s also moved its outlook for all of our ratings to stable.
Table 21 presents the Corporation’s current long-term/short-term senior debt ratings and outlooks expressed by the rating agencies.
Table
21
Senior Debt Ratings
Moody’s
Investors Service
Standard & Poor’s
Fitch Ratings
Long-term
Short-term
Outlook
Long-term
Short-term
Outlook
Long-term
Short-term
Outlook
Bank
of America Corporation
Baa2
P-2
Stable
A-
A-2
Negative
A
F1
Negative
Bank
of America, N.A.
A2
P-1
Stable
A
A-1
Stable
A
F1
Negative
Merrill
Lynch, Pierce, Fenner & Smith
NR
NR
NR
A
A-1
Stable
A
F1
Negative
Merrill
Lynch International
NR
NR
NR
A
A-1
Stable
A
F1
Negative
NR
= not rated
A reduction in certain of our credit ratings or the ratings of certain asset-backed securitizations may have a material adverse effect on our liquidity, potential loss of access to credit markets, the related cost of funds, our businesses and on certain trading revenues, particularly in those businesses where counterparty creditworthiness is critical. In addition, under the terms of certain OTC derivative contracts and other trading agreements, in the event of downgrades of our or our rated subsidiaries’ credit ratings, the counterparties to those agreements may require us to provide additional collateral, or to terminate these contracts
or agreements, which could cause us to sustain losses and/or adversely impact our liquidity. If the short-term credit ratings of our parent company, bank or broker-dealer subsidiaries were downgraded by one or more levels, the potential loss of access to short-term funding sources such as repo financing and the effect on our incremental cost of funds could be material.
Table 22 presents the amount of additional collateral that would have been contractually required by derivative contracts and other trading agreements at December 31, 2014 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.
Table 22
Additional
Collateral Required to be Posted Upon Downgrade
Included
in Bank of America Corporation collateral requirements in this table.
Table 23 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, 2014, 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.
Table
23
Derivative Liabilities Subject to Unilateral Termination Upon Downgrade
While
certain potential impacts are contractual and quantifiable, the full scope of the consequences of a credit rating downgrade to a financial institution is inherently uncertain, as it depends upon numerous dynamic, complex and inter-related factors and assumptions, including whether any downgrade of a company’s long-term credit ratings precipitates downgrades to its short-term credit ratings, and assumptions about the potential behaviors of various customers, investors and counterparties. For more information on potential impacts of credit rating downgrades, see Liquidity Risk – Time-to-required Funding and Stress Modeling on page 66.
For more information on the additional collateral and termination payments that could be required in connection with certain OTC derivative contracts
and other trading agreements as a result of such a credit rating downgrade, see Note 2 – Derivatives to the Consolidated Financial Statements.
On June 6, 2014, S&P affirmed its AA+ long-term and A-1+ short-term sovereign credit rating on the U.S. government with a stable outlook. On March 21, 2014, Fitch affirmed its AAA long-term and F1+ short-term sovereign credit rating on the U.S. government with a stable outlook. This resolved the rating watch negative that was placed on the ratings on October 15, 2013. On July 18, 2013, Moody’s revised its outlook on the U.S. government to stable from negative and affirmed its Aaa long-term
sovereign credit rating on the U.S. government.
69 Bank of America 2014
Credit Risk Management
Credit quality improved during 2014 due in part to improving economic conditions. In addition, our proactive credit risk management activities positively
impacted the credit portfolio as charge-offs and delinquencies continued to improve. For additional information, see Executive Summary – 2014 Economic and Business Environment on page 23.
Credit risk is the risk of loss arising from the inability or failure of a borrower or counterparty to meet its obligations. Credit risk can also arise from operational failures that result in an erroneous advance, commitment or investment of funds. We define the credit exposure to a borrower or counterparty as the loss potential arising from all product classifications including loans and leases, deposit overdrafts, derivatives, assets held-for-sale and unfunded lending commitments which include loan commitments, letters of credit and financial guarantees. Derivative positions are recorded at fair value and assets held-for-sale are recorded at
either fair value or the lower of cost or fair value. Certain loans and unfunded commitments are accounted for under the fair value option. Credit risk for categories of assets carried at fair value is not accounted for as part of the allowance for credit losses but as part of the fair value adjustments recorded in earnings. For derivative positions, our credit risk is measured as the net cost in the event the counterparties with contracts in which we are in a gain position fail to perform under the terms of those contracts. We use the current fair value to represent credit exposure without giving consideration to future mark-to-market changes. The credit risk amounts take into consideration the effects of legally enforceable master netting agreements and cash collateral. Our consumer and commercial
credit extension and review procedures encompass funded and unfunded credit exposures. For more information on derivatives and credit extension commitments, see Note 2 – Derivatives and Note 12 – Commitments and Contingencies to the Consolidated Financial Statements.
We manage credit risk based on the risk profile of the borrower or counterparty, repayment sources, the nature of underlying collateral, and other support given current events, conditions and expectations. We classify our portfolios as either consumer or commercial and monitor credit risk in each as discussed below.
We proactively refine our underwriting and credit management practices as well as credit standards to meet the changing economic environment. To actively 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.
We have non-U.S. exposure largely in Europe and Asia Pacific. For more information on our exposures and related risks in non-U.S. countries, see Non-U.S. Portfolio on page 93 and Item 1A. Risk Factors of this Annual Report on Form 10-K.
For more information
on our credit risk management activities, see Consumer Portfolio Credit Risk Management on page 70, Commercial Portfolio Credit Risk Management on page 84, Non-U.S. Portfolio on page 93, Provision for Credit Losses on page 95 and Allowance for Credit Losses on page 95, Note 1 – Summary of Significant Accounting Principles, Note 4 – Outstanding Loans and Leases and Note 5 – Allowance
for Credit Losses to the Consolidated Financial Statements.
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. These models are a component of our consumer credit risk management process and 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.
During 2014, we completed approximately 71,600 customer loan modifications with a total unpaid principal balance of approximately $13 billion, including approximately 33,400 permanent modifications, under the U.S. government’s Making Home Affordable Program. Of the loan modifications completed in 2014, in terms of both the volume of modifications and the unpaid principal balance associated with the underlying loans, approximately half were in
the Corporation’s held-for-investment (HFI) portfolio. For modified loans on our balance sheet, these modification types are generally considered troubled debt restructurings (TDRs). For more information on TDRs and portfolio impacts, see Consumer Portfolio Credit Risk Management – Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity on page 82 and Note 4 – Outstanding Loans and Leases to the Consolidated Financial Statements.
Consumer Credit Portfolio
Improvement in the U.S. economy, labor markets and home prices continued during 2014 resulting in improved credit quality and lower credit losses across all consumer portfolios
compared to 2013. Consumer loans 30 days or more past due and 90 days or more past due declined during 2014 across all consumer portfolios as a result of improved delinquency trends. Although home prices have shown steady improvement since the beginning of 2012, they have not fully recovered to their 2006 levels.
Improved credit quality, increased home prices and continued loan balance run-off across the consumer portfolio drove a $3.4 billion decrease in the consumer allowance for loan and lease losses in 2014 to $10.0 billion at December 31, 2014.
For more information, see Allowance for Credit Losses on page 95.
In connection with the 2013 settlement with FNMA, we repurchased certain residential mortgage loans that had previously been sold to FNMA, which we have valued at less than the purchase price. As of December 31, 2014, these loans had an unpaid principal balance of $4.4 billion and a carrying value of $3.8 billion, of which $4.1 billion of unpaid principal balance and $3.5 billion of carrying value were classified as PCI loans. All of these loans are included in the Legacy Assets & Servicing portfolio in Table 27. For more information on PCI loans, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio
on page 78 and Note 4 – Outstanding Loans and Leases to the Consolidated Financial Statements.
For more information on our accounting policies regarding delinquencies, nonperforming status, charge-offs and TDRs for the
Bank of America 2014 70
consumer
portfolio, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements. For more information on representations and warranties related to our residential mortgage and home equity portfolios, see Off-Balance Sheet Arrangements and Contractual Obligations – Representations and Warranties on page 50 and Note 7 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements.
Table 24 presents our outstanding consumer loans and leases, and the PCI loan portfolio. In addition to being included in the
“Outstandings”
columns in Table 24, PCI loans are also shown separately, net of purchase accounting adjustments, in the “Purchased Credit-impaired Loan Portfolio” columns. The impact of the PCI loan portfolio on certain credit statistics is reported where appropriate. For more information on PCI loans, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 78 and Note 4 – Outstanding Loans and Leases to the Consolidated Financial Statements.
Table
24
Consumer Loans and Leases
December
31
Outstandings
Purchased Credit-impaired Loan Portfolio
(Dollars in millions)
2014
2013
2014
2013
Residential
mortgage (1)
$
216,197
$
248,066
$
15,152
$
18,672
Home
equity
85,725
93,672
5,617
6,593
U.S. credit card
91,879
92,338
n/a
n/a
Non-U.S.
credit card
10,465
11,541
n/a
n/a
Direct/Indirect consumer (2)
80,381
82,192
n/a
n/a
Other
consumer (3)
1,846
1,977
n/a
n/a
Consumer loans excluding loans accounted for under
the fair value option
486,493
529,786
20,769
25,265
Loans accounted for under the fair value option (4)
2,077
2,164
n/a
n/a
Total
consumer loans and leases
$
488,570
$
531,950
$
20,769
$
25,265
(1)
Outstandings
include pay option loans of $3.2 billion and $4.4 billion at December 31, 2014 and 2013. We no longer originate pay option loans.
(2)
Outstandings include dealer financial services loans of $37.7 billion and $38.5 billion, unsecured consumer lending loans of $1.5 billion and $2.7 billion, U.S.
securities-based lending loans of $35.8 billion and $31.2 billion, non-U.S. consumer loans of $4.0 billion and $4.7 billion, student loans of $632 million and $4.1 billion and other consumer loans of $761 million and $1.0 billion at December 31, 2014 and 2013.
(3)
Outstandings
include consumer finance loans of $676 million and $1.2 billion, consumer leases of $1.0 billion and $606 million, consumer overdrafts of $162 million and $176 million and other non-U.S. consumer loans of $3 million and $5 million at December 31, 2014 and 2013.
(4)
Consumer
loans accounted for under the fair value option include residential mortgage loans of $1.9 billion and $2.0 billion and home equity loans of $196 million and $147 million at December 31, 2014 and 2013. For more information on the fair value option, see Consumer Portfolio Credit Risk Management – Consumer Loans Accounted for Under the Fair Value Option on page 82 and Note 21 – Fair Value Option to the Consolidated Financial Statements.
n/a
= not applicable
71 Bank of America 2014
Table 25 presents consumer nonperforming loans and accruing consumer loans past due 90 days or more. Nonperforming loans do not include past due consumer credit card loans, other unsecured loans and in general, consumer non-real estate-secured loans (loans discharged in Chapter 7 bankruptcy are included) as these loans are typically charged off no later
than the end of the month in which the loan becomes 180 days past due. Real estate-secured past due consumer loans that are insured by the FHA or individually insured under long-term standby agreements with
FNMA and FHLMC (collectively, the fully-insured loan portfolio) are reported as accruing as opposed to nonperforming since the principal repayment is insured. Fully-insured loans included in accruing past due 90 days or more are primarily from our repurchases of delinquent FHA loans pursuant to our servicing agreements with GNMA. Additionally, nonperforming loans and accruing balances past due 90 days or more do not include the PCI loan portfolio or loans accounted for under the fair value option even though the customer may be contractually past due.
Table
25
Consumer Credit Quality
December
31
Nonperforming
Accruing Past Due 90 Days or More
(Dollars in millions)
2014
2013
2014
2013
Residential
mortgage (1)
$
6,889
$
11,712
$
11,407
$
16,961
Home
equity
3,901
4,075
—
—
U.S. credit card
n/a
n/a
866
1,053
Non-U.S.
credit card
n/a
n/a
95
131
Direct/Indirect consumer
28
35
64
408
Other
consumer
1
18
1
2
Total (2)
$
10,819
$
15,840
$
12,433
$
18,555
Consumer
loans and leases as a percentage of outstanding consumer loans and leases (2)
2.22
%
2.99
%
2.56
%
3.50
%
Consumer
loans and leases as a percentage of outstanding loans and leases, excluding PCI and fully-insured loan portfolios (2)
2.70
3.80
0.26
0.38
(1)
Residential
mortgage loans accruing past due 90 days or more are fully-insured loans. At December 31, 2014 and 2013, residential mortgage included $7.3 billion and $13.0 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 $4.1 billion and $4.0 billion of loans on which interest was still accruing.
(2)
Balances
exclude consumer loans accounted for under the fair value option. At December 31, 2014 and 2013, $392 million and $445 million of loans accounted for under the fair value option were past due 90 days or more and not accruing interest.
n/a = not applicable
Table 26 presents net charge-offs and related ratios for consumer loans and leases.
Table
26
Consumer Net Charge-offs and Related Ratios
Net
Charge-offs (1)
Net Charge-off Ratios (1, 2)
(Dollars in millions)
2014
2013
2014
2013
Residential
mortgage
$
(114
)
$
1,084
(0.05
)%
0.42
%
Home equity
907
1,803
1.01
1.80
U.S.
credit card
2,638
3,376
2.96
3.74
Non-U.S. credit card
242
399
2.10
3.68
Direct/Indirect
consumer
169
345
0.20
0.42
Other consumer
229
234
11.27
12.96
Total
$
4,071
$
7,241
0.80
1.34
(1)
Net
charge-offs exclude write-offs in the PCI loan portfolio of $545 million in residential mortgage and $265 million in home equity in 2014 compared to $1.1 billion in residential mortgage and $1.2 billion in home equity in 2013. These write-offs decreased the PCI valuation allowance included as part of the allowance for loan and lease losses. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 78.
(2)
Net
charge-off ratios are calculated as net charge-offs divided by average outstanding loans and leases excluding loans accounted for under the fair value option.
Net charge-off ratios, excluding the PCI and fully-insured loan portfolios, were (0.08) percent and 0.74 percent for residential mortgage, 1.09 percent and 1.94 percent for home equity and 1.00 percent and 1.71 percent for the total consumer portfolio for 2014 and 2013, respectively. These are the only product classifications that include PCI and fully-insured loans.
Net charge-offs exclude
write-offs in the PCI loan portfolio of $545 million and $1.1 billion in residential mortgage and $265 million and $1.2 billion in home equity for 2014 and 2013,
respectively. These write-offs decreased the PCI valuation allowance included as part of the allowance for loan and lease losses. Net charge-off ratios including the PCI write-offs were 0.18 percent and 0.85 percent for residential mortgage and 1.31 percent and 3.05 percent for home equity in 2014 and 2013,
respectively. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 78.
Bank of America 2014 72
Table 27 presents outstandings, nonperforming balances, net charge-offs, allowance for
loan and lease losses and provision for loan and lease losses for the Core portfolio and the Legacy Assets & Servicing portfolio within the home loans portfolio. For more information on Legacy Assets & Servicing, see CRES on page 38.
Table
27
Home Loans Portfolio (1)
December
31
Outstandings
Nonperforming
Net Charge-offs (2)
(Dollars in millions)
2014
2013
2014
2013
2014
2013
Core
portfolio
Residential
mortgage
$
162,220
$
177,336
$
2,398
$
3,316
$
140
$
274
Home
equity
51,887
54,499
1,496
1,431
275
439
Total
Core portfolio
214,107
231,835
3,894
4,747
415
713
Legacy
Assets & Servicing portfolio
Residential
mortgage
53,977
70,730
4,491
8,396
(254
)
810
Home
equity
33,838
39,173
2,405
2,644
632
1,364
Total
Legacy Assets & Servicing portfolio
87,815
109,903
6,896
11,040
378
2,174
Home
loans portfolio
Residential
mortgage
216,197
248,066
6,889
11,712
(114
)
1,084
Home
equity
85,725
93,672
3,901
4,075
907
1,803
Total
home loans portfolio
$
301,922
$
341,738
$
10,790
$
15,787
$
793
$
2,887
December
31
Allowance for Loan
and Lease Losses
Provision
for Loan
and Lease Losses
2014
2013
2014
2013
Core
portfolio
Residential mortgage
$
593
$
728
$
(47
)
$
166
Home
equity
702
965
3
119
Total
Core portfolio
1,295
1,693
(44
)
285
Legacy
Assets & Servicing portfolio
Residential
mortgage
2,307
3,356
(696
)
(979
)
Home
equity
2,333
3,469
(236
)
(430
)
Total
Legacy Assets & Servicing portfolio
4,640
6,825
(932
)
(1,409
)
Home
loans portfolio
Residential
mortgage
2,900
4,084
(743
)
(813
)
Home
equity
3,035
4,434
(233
)
(311
)
Total
home loans portfolio
$
5,935
$
8,518
$
(976
)
$
(1,124
)
(1)
Outstandings
and nonperforming amounts exclude loans accounted for under the fair value option. Consumer loans accounted for under the fair value option include residential mortgage loans of $1.9 billion and $2.0 billion and home equity loans of $196 million and $147 million at December 31, 2014 and 2013. For more information on the fair value option, see Consumer Portfolio Credit Risk Management – Consumer Loans Accounted for Under the Fair Value Option on page 82 and Note 21 – Fair Value Option to
the Consolidated Financial Statements.
(2)
Net charge-offs exclude write-offs in the PCI loan portfolio of $545 million in residential mortgage and $265 million in home equity in 2014, which are included in the Legacy Assets & Servicing portfolio, compared to $1.1 billion in residential mortgage and $1.2 billion in home equity in 2013. Write-offs in the PCI loan portfolio decrease the PCI valuation allowance
included as part of the allowance for loan and lease losses. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 78.
We believe that the presentation of information adjusted to exclude the impact of the PCI loan portfolio, the fully-insured loan portfolio and loans accounted for under the fair value option is more representative of the ongoing operations and credit quality of the business. As a result, in the following discussions of the residential mortgage and home equity portfolios, we provide information that excludes the impact of the PCI loan portfolio, the fully-insured loan portfolio and loans accounted for under the fair value option in certain credit quality statistics. We separately disclose
information on the PCI loan portfolio on page 78.
Residential Mortgage
The residential mortgage portfolio makes up the largest percentage of our consumer loan portfolio at 44 percent of consumer loans and leases at December 31, 2014. Approximately 24 percent of the residential mortgage portfolio is in GWIM and represents residential mortgages that are originated for the home purchase and refinancing needs of our wealth management clients. The remaining portion of the portfolio is primarily in All Other and is comprised of originated loans, purchased loans used
in
our overall ALM activities, delinquent FHA loans repurchased pursuant to our servicing agreements with GNMA as well as loans repurchased related to our representations and warranties.
Outstanding balances in the residential mortgage portfolio, excluding loans accounted for under the fair value option, decreased $31.9 billion during 2014 due to paydowns, sales, charge-offs and transfers to foreclosed properties. Of the decline, more than 50 percent was due to the sale of $10.7 billion of loans with standby insurance agreements and $6.7 billion of nonperforming and other delinquent loan sales. These were partially offset by new origination volume retained on our balance sheet, as well as repurchases of delinquent loans pursuant to our servicing agreements with
GNMA, which are part of our mortgage banking activities.
At December 31, 2014 and 2013, the residential mortgage portfolio included $65.0 billion and $87.2 billion of outstanding fully-insured loans. On this portion of the residential mortgage portfolio, we are protected against principal loss as a result of either FHA insurance or long-term standby agreements with FNMA and FHLMC. At December 31, 2014 and 2013, $47.8 billion and
73 Bank
of America 2014
$59.0 billion had FHA insurance with the remainder protected by long-term standby agreements. At December 31, 2014 and 2013, $15.9 billion and $22.5 billion of the FHA-insured loan population were repurchases of delinquent FHA loans pursuant to our servicing agreements with GNMA. All of these loans are individually insured and therefore the Corporation does not record a significant allowance for loan and lease losses with respect to these loans.
The long-term standby agreements with FNMA and FHLMC reduce
our regulatory risk-weighted assets due to the transfer of a portion of our credit risk to unaffiliated parties. At December 31, 2014, these programs had the cumulative effect of reducing our risk-weighted assets by $5.2 billion, increasing both our Tier 1 capital ratio and Common equity tier 1 capital ratio by five bps under the Basel 3 Standardized – Transition. This compared to reducing our risk-weighted assets by $8.4 billion, increasing our Tier 1 capital ratio by eight bps and increasing our Tier 1 common capital ratio by seven bps at December 31, 2013 under Basel 1 (which included the Market Risk Final Rules).
In addition to the long-term standby agreements with FNMA and FHLMC,
we have mitigated a portion of our credit risk on the residential mortgage portfolio through the use of synthetic securitization vehicles. These vehicles issue long-term notes to investors, the proceeds of which are held as cash collateral. We pay a premium to the vehicles to purchase mezzanine loss protection on a portfolio of residential mortgage loans HFI. Cash held in the vehicles is used to reimburse us in the event that losses on the mortgage portfolio exceed 10 bps of the original pool balance, up to the remaining amount of purchased loss protection of $270 million and $339 million at December 31, 2014 and 2013.
Amounts
due from the vehicles are recorded in other income (loss) in the Consolidated Statement of Income when we recognize a reimbursable loss. Amounts are collected when reimbursable losses are realized through the sale of the underlying collateral. At December 31, 2014 and 2013, the synthetic securitization vehicles referenced principal balances of $7.0 billion and $12.5 billion of residential mortgage loans and we had a receivable of $146 million and $198 million from these vehicles for reimbursement of losses. We record an allowance for loan and lease losses on loans referenced by the synthetic securitization vehicles without regard to
the existence of the purchased loss protection as the protection does not represent a guarantee of individual loans. The reported net charge-offs for the residential mortgage portfolio do not include the benefit of amounts reimbursable from these vehicles.
Table 28 presents certain residential mortgage key credit statistics on both a reported basis excluding loans accounted for under the fair value option, and excluding the PCI loan portfolio, our fully-insured loan portfolio and loans accounted for under the fair value option. Additionally, in the “Reported Basis” columns in the table below, accruing balances past due and nonperforming loans do not include the PCI loan portfolio, in accordance with our accounting policies, even though the customer may be contractually past due. As such, the following discussion presents the residential mortgage portfolio excluding the PCI loan portfolio, the
fully-insured loan portfolio and loans accounted for under the fair value option. For more information on the PCI loan portfolio, see page 78.
Table
28
Residential Mortgage – Key Credit Statistics
December
31
Reported Basis (1)
Excluding Purchased Credit-impaired and Fully-insured Loans
(Dollars in millions)
2014
2013
2014
2013
Outstandings
$
216,197
$
248,066
$
136,075
$
142,147
Accruing
past due 30 days or more
16,485
23,052
1,868
2,371
Accruing past due 90 days or more
11,407
16,961
—
—
Nonperforming
loans
6,889
11,712
6,889
11,712
Percent of portfolio
Refreshed
LTV greater than 90 but less than or equal to 100 (2)
9
%
11
%
6
%
8
%
Refreshed LTV greater than
100 (2)
12
17
7
11
Refreshed FICO below 620
16
20
8
11
2006
and 2007 vintages (3)
19
21
22
27
Net charge-off ratio (4)
(0.05
)
0.42
(0.08
)
0.74
(1)
Outstandings,
accruing past due, nonperforming loans and percentages of portfolio exclude loans accounted for under the fair value option. There were $1.9 billion and $2.0 billion of residential mortgage loans accounted for under the fair value option at December 31, 2014 and 2013. For more information on the fair value option, see Consumer Portfolio Credit Risk Management – Consumer Loans Accounted for Under the Fair Value Option on page 82 and Note 21 – Fair Value Option to the Consolidated Financial Statements.
(2)
Effective
December 31, 2014, with the exception of high-value properties, underlying values for LTV ratios are primarily determined using automated valuation models. For high-value properties, generally with an original value of $1 million or more, estimated property values are determined using the CoreLogic Case-Shiller Index. Prior-period values have been updated to reflect this change. Previously reported values were primarily determined through an index-based approach.
(3)
These vintages of loans account for $2.8 billion, or 41 percent, and $6.2 billion, or 53 percent, of nonperforming
residential mortgage loans at December 31, 2014 and 2013. Additionally, these vintages contributed net recoveries of $233 million to residential mortgage net recoveries in 2014 and $653 million, or 60 percent, of total residential mortgage net charge-offs in 2013.
(4)
Net charge-off ratios are calculated as net charge-offs divided by average outstanding loans excluding loans accounted for under the fair value option.
Nonperforming
residential mortgage loans decreased $4.8 billion in 2014 as sales of $4.1 billion, paydowns, returns to performing status, charge-offs, and transfers to foreclosed properties and held-for-sale outpaced new inflows. Of the nonperforming residential mortgage loans at December 31, 2014, $1.8 billion, or 26 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, as well as loans that have not yet demonstrated a sustained period of payment
performance. In addition, $3.8 billion, or 55 percent of nonperforming residential mortgage 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 past due 30 days or more decreased $503 million in 2014.
Bank of America 2014 74
Net
charge-offs decreased $1.2 billion to a net recovery of $114 million in 2014, or (0.08) percent of total average residential mortgage loans, compared to net charge-offs of $1.1 billion, or 0.74 percent, in 2013. This decrease in net charge-offs was primarily driven by favorable portfolio trends and decreased write-downs on loans greater than 180 days past due, which were written down to the estimated fair value of the collateral, less costs to sell, due in part to improvement in home prices and the U.S. economy. In addition, net charge-offs declined
due to the impact of recoveries of $407 million related to nonperforming loan sales in 2014.
Residential mortgage loans with a greater than 90 percent but less than or equal to 100 percent refreshed loan-to-value (LTV) represented six percent and eight percent of the residential mortgage portfolio at December 31, 2014 and 2013. Loans with a refreshed LTV greater than 100 percent represented seven percent and 11 percent of the residential mortgage loan portfolio at December
31, 2014 and 2013. Of the loans with a refreshed LTV greater than 100 percent, 96 percent and 95 percent were performing at December 31, 2014 and 2013. Loans with a refreshed LTV greater than 100 percent reflect loans where the outstanding carrying value of the loan is greater than the most recent valuation of the property securing the loan. The majority of these loans have a refreshed LTV greater than 100 percent primarily due to home price deterioration since 2006, somewhat mitigated by subsequent appreciation. Loans to borrowers with refreshed FICO scores below 620 represented eight percent and 11 percent of the residential mortgage portfolio at December
31, 2014 and 2013.
Of the $136.1 billion in total residential mortgage loans outstanding at December 31, 2014, as shown in Table 29, 39 percent were originated as interest-only loans. The outstanding balance of interest-only residential mortgage loans that have entered the amortization period was $12.5 billion, or 23 percent
at December 31, 2014. 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, 2014, $256 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 $1.9 billion, or one percent for the entire residential mortgage portfolio. In addition, at December 31, 2014, $862 million, or seven percent of outstanding interest-only residential mortgages that had entered the amortization period were nonperforming, of which $441 million were contractually current, compared to $6.9 billion,
or five percent for the entire residential mortgage portfolio, of which $1.8 billion were contractually current. Loans in our interest-only residential mortgage portfolio have an interest-only period of three to ten years and more than 90 percent of these loans that have yet to enter the amortization period will not be required to make a fully-amortizing payment until 2016 or later.
Table 29 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 13 percent of outstandings at both December 31, 2014 and 2013. In 2014,
loans within this MSA contributed net recoveries of $81 million within the residential mortgage portfolio. In 2013, loans within this MSA contributed three percent of net charge-offs within the residential mortgage portfolio. In the New York area, the New York-Northern New Jersey-Long Island MSA made up 11 percent and 10 percent of outstandings at December 31, 2014 and 2013. In 2014, loans within this MSA contributed net charge-offs of $27 million within the residential mortgage portfolio. In 2013, loans within this MSA contributed 11 percent of net charge-offs within the residential mortgage portfolio.
Outstandings
and nonperforming amounts exclude loans accounted for under the fair value option. There were $1.9 billion and $2.0 billion of residential mortgage loans accounted for under the fair value option at December 31, 2014 and 2013. For more information on the fair value option, see Consumer Portfolio Credit Risk Management – Consumer Loans Accounted for Under the Fair Value Option on page 82 and Note 21 – Fair Value Option to the Consolidated Financial Statements.
(2)
Net
charge-offs exclude $545 million of write-offs in the residential mortgage PCI loan portfolio in 2014 compared to $1.1 billion in 2013. These write-offs decreased the PCI valuation allowance included as part of the allowance for loan and lease losses. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 78.
(3)
In these states, foreclosure requires a court
order following a legal proceeding (judicial states).
(4)
Amount excludes the PCI residential mortgage and fully-insured loan portfolios.
75 Bank of America 2014
The
Community Reinvestment Act (CRA) encourages banks to meet the credit needs of their communities for housing and other purposes, particularly in neighborhoods with low or moderate incomes. Our CRA portfolio was $9.0 billion and $10.3 billion at December 31, 2014 and 2013, or seven percent of the residential mortgage portfolio, at both December 31, 2014 and 2013. The CRA portfolio included $986 million and $1.7 billion of nonperforming loans at December 31, 2014 and 2013, representing 14 percent of total nonperforming residential mortgage
loans, at both December 31, 2014 and 2013. Net charge-offs in the CRA portfolio were $52 million compared to net recoveries of $114 million for the residential mortgage portfolio in 2014 and $260 million of the $1.1 billion total net charge-offs for the residential mortgage portfolio in 2013.
Home Equity
At December 31, 2014, the home equity portfolio made up 18 percent of the consumer
portfolio and is comprised of HELOCs, home equity loans and reverse mortgages.
At December 31, 2014, our HELOC portfolio had an outstanding balance of $74.2 billion, or 87 percent of the total home equity portfolio compared to $80.3 billion, or 86 percent, at December 31, 2013. HELOCs generally have an initial draw period of 10 years. During the initial draw period, the borrowers are only required to pay the interest due on the loans on a monthly basis. After the initial draw period ends, the loans generally convert to 15-year amortizing loans.
At December 31, 2014,
our home equity loan portfolio had an outstanding balance of $9.8 billion, or 11 percent of the total home equity portfolio compared to $12.0 billion, or 13 percent, at December 31, 2013. Home equity loans are almost all fixed-rate loans with amortizing payment terms of 10 to 30 years and of the $9.8 billion at December 31, 2014, 53 percent have 25- to 30-year terms. At December 31, 2014, our reverse mortgage portfolio had an outstanding balance, excluding loans accounted for under
the
fair value option, of $1.7 billion, or two percent of the total home equity portfolio compared to $1.4 billion, or one percent, at December 31, 2013. We no longer originate reverse mortgages.
At December 31, 2014, approximately 90 percent of the home equity portfolio was included in CRES while the remainder of the portfolio was primarily in GWIM. Outstanding balances in the home equity portfolio, excluding loans accounted for under the fair value option, decreased $7.9 billion in 2014
primarily due to paydowns and charge-offs outpacing new originations and draws on existing lines. Of the total home equity portfolio at December 31, 2014 and 2013, $20.6 billion and $20.7 billion, or 24 percent and 22 percent, were in first-lien positions (26 percent and 24 percent excluding the PCI home equity portfolio). At December 31, 2014, 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 $15.4 billion, or 19 percent of our total home equity portfolio excluding the PCI loan
portfolio.
Unused HELOCs totaled $53.7 billion and $56.8 billion at December 31, 2014 and 2013. The decrease was primarily due to customers choosing to close accounts, which more than offset customer paydowns of principal balances, as well as the impact of new production. The HELOC utilization rate was 58 percent and 59 percent at December 31, 2014 and 2013.
Table
30 presents certain home equity portfolio key credit statistics on both a reported basis excluding loans accounted for under the fair value option, and excluding the PCI loan portfolio and loans accounted for under the fair value option. Additionally, in the “Reported Basis” columns in the table below, accruing balances past due 30 days or more and nonperforming loans do not include the PCI loan portfolio, in accordance with our accounting policies, even though the customer may be contractually past due. As such, the following discussion presents the home equity portfolio excluding the PCI loan portfolio and loans accounted for under the fair value option. For more information on the PCI loan portfolio, see page 78.
Table
30
Home Equity – Key Credit Statistics
December 31
Reported
Basis (1)
Excluding Purchased Credit-impaired Loans
(Dollars in millions)
2014
2013
2014
2013
Outstandings
$
85,725
$
93,672
$
80,108
$
87,079
Accruing
past due 30 days or more (2)
640
901
640
901
Nonperforming loans (2)
3,901
4,075
3,901
4,075
Percent
of portfolio
Refreshed CLTV greater than 90 but less than or equal to 100 (3)
8
%
9
%
7
%
8
%
Refreshed
CLTV greater than 100 (3)
16
23
14
21
Refreshed FICO below 620
8
8
7
8
2006
and 2007 vintages (4)
46
48
43
45
Net charge-off ratio (5)
1.01
1.80
1.09
1.94
(1)
Outstandings,
accruing past due, nonperforming loans and percentages of the portfolio exclude loans accounted for under the fair value option. There were $196 million and $147 million of home equity loans accounted for under the fair value option at December 31, 2014 and 2013. For more information on the fair value option, see Consumer Portfolio Credit Risk Management – Consumer Loans Accounted for Under the Fair Value Option on page 82 and Note 21 – Fair Value Option to the Consolidated Financial Statements.
(2)
Accruing
past due 30 days or more includes $98 million and $131 million and nonperforming loans includes $505 million and $582 million of loans where we serviced the underlying first-lien at December 31, 2014 and 2013.
(3)
Effective December 31, 2014, with the exception of high-value properties, underlying values for LTV ratios are primarily determined
using automated valuation models. For high-value properties, generally with an original value of $1 million or more, estimated property values are determined using the CoreLogic Case-Shiller Index. Prior-period values have been updated to reflect this change. Previously reported values were primarily determined through an index-based approach.
(4)
These vintages of loans have higher refreshed combined LTV ratios and accounted for 47 percent and 50 percent of nonperforming home equity loans at December 31, 2014 and 2013,
and 59 percent and 63 percent of net charge-offs in 2014 and 2013.
(5)
Net charge-off ratios are calculated as net charge-offs divided by average outstanding loans excluding loans accounted for under the fair value option.
Bank
of America 2014 76
Nonperforming outstanding balances in the home equity portfolio decreased $174 million in 2014 primarily due to enhanced identification of the delinquency status on first-lien loans serviced by other financial institutions. This was partially offset by an increase in contractually current nonperforming loans where the loan has been modified in a TDR. Of the nonperforming home equity portfolio at December 31, 2014, $1.8 billion, 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 is 90 days or more past due, as well as loans that have not yet demonstrated a sustained period of payment performance. In addition, $1.4 billion, or 37 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. Outstanding balances accruing past due 30 days or more decreased $261 million in 2014.
In some cases, the junior-lien home equity outstanding balance that we hold is performing, but the underlying first-lien is not. For outstanding balances in the home equity portfolio on which we service the first-lien loan,
we are able to track whether the first-lien loan is in default. For loans where the first-lien is serviced by a third party, we utilize credit bureau data to estimate the delinquency status of the first-lien. Given that the credit bureau database we use does not include a property address for the mortgages, we are unable to identify with certainty whether a reported delinquent first-lien mortgage pertains to the same property for which we hold a junior-lien loan. We also utilize a third-party vendor to combine credit bureau and public record data to better link a junior-lien loan with the underlying first-lien mortgage. At December 31, 2014, we estimate that $1.7 billion of current and $217 million of 30 to 89 days past due junior-lien loans were behind a delinquent first-lien loan. We service the first-lien loans on $279 million of these combined amounts, with the remaining
$1.6 billion serviced by third parties. Of the $1.9 billion of current to 89 days past due junior-lien loans, based on available credit bureau data and our own internal servicing data, we estimate that $800 million had first-lien loans that were 90 days or more past due.
Net charge-offs decreased $896 million to $907 million, or 1.09 percent of the total average home equity portfolio in 2014, compared to $1.8 billion, or 1.94 percent, in 2013. The decrease in net charge-offs was primarily driven by
favorable portfolio trends due in part to improvement in home prices and the U.S. economy. The net charge-off ratios for 2014 and 2013 were also impacted by lower outstanding balances primarily as a result of paydowns and charge-offs outpacing new originations and draws on existing lines.
Outstanding balances in the home equity portfolio with greater than 90 percent but less than or equal to 100 percent refreshed combined loan-to-value (CLTVs) comprised seven percent and eight percent of the home equity portfolio at December 31, 2014 and 2013. Outstanding balances with refreshed CLTVs greater than
100
percent comprised 14 percent and 21 percent of the home equity portfolio at December 31, 2014 and 2013. Outstanding balances in the home equity portfolio with a refreshed CLTV greater than 100 percent reflect loans where the carrying value and available line of credit of the combined loans are equal to or greater than the most recent valuation of the property securing the loan. Depending on the value of the property, there may be collateral in excess of the first-lien that is available to reduce the severity of loss on the second-lien. Home price deterioration since 2006, partially mitigated by subsequent appreciation, has contributed to an increase in CLTV ratios. Of those outstanding balances with a refreshed CLTV greater than
100 percent, 97 percent of the customers were current on their home equity loan and 93 percent of second-lien loans with a refreshed CLTV greater than 100 percent were current on both their second-lien and underlying first-lien loans at December 31, 2014. Outstanding balances in the home equity portfolio to borrowers with a refreshed FICO score below 620 represented seven percent and eight percent of the home equity portfolio at December 31, 2014 and 2013.
Of the $80.1 billion in total home equity portfolio outstandings at December 31,
2014, as shown in Table 31, 75 percent were interest-only loans, almost all of which were HELOCs. The outstanding balance of HELOCs that have entered the amortization period was $5.3 billion, or seven percent of total HELOCs at December 31, 2014. The HELOCs that have entered the amortization period have experienced a higher percentage of early stage delinquencies and nonperforming status when compared to the HELOC portfolio as a whole. At December 31, 2014, $135 million, or three percent of outstanding HELOCs that had entered the amortization period were accruing past due 30 days or more compared to $581 million, or one percent for the entire HELOC portfolio. In addition, at December 31,
2014, $817 million, or 15 percent of outstanding HELOCs that had entered the amortization period were nonperforming, of which $373 million were contractually current, compared to $3.5 billion, or five percent for the entire HELOC portfolio, of which $1.5 billion were contractually current. Loans in our HELOC portfolio generally have an initial draw period of 10 years and more than 75 percent of these loans that have yet to enter the amortization period will not be required to make a fully-amortizing payment until 2016 or later. 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 (i.e., customers may draw on and repay their line of credit, but are generally only required to pay interest on a monthly basis). During 2014, approximately 41 percent of these customers with an outstanding balance did not pay any principal on their HELOCs.
77 Bank of America 2014
Table
31 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 12 percent of the outstanding home equity portfolio at both December 31, 2014 and 2013. Loans within this MSA contributed 14 percent and nine percent of net
charge-offs in 2014 and 2013 within the home equity portfolio. The Los Angeles-Long Beach-Santa Ana MSA within California made up 12 percent of the outstanding home equity portfolio at both December
31, 2014 and 2013. Loans within this MSA contributed four percent and nine percent of net charge-offs in 2014 and 2013 within the home equity portfolio.
Table
31
Home Equity State Concentrations
December
31
Outstandings (1)
Nonperforming (1)
Net Charge-offs (2)
(Dollars in millions)
2014
2013
2014
2013
2014
2013
California
$
23,250
$
25,061
$
1,012
$
1,047
$
118
$
509
Florida
(3)
9,633
10,604
574
643
170
315
New
Jersey (3)
5,883
6,153
299
304
68
93
New
York (3)
5,671
6,035
387
405
81
110
Massachusetts
3,655
3,881
148
144
30
42
Other
U.S./Non-U.S.
32,016
35,345
1,481
1,532
440
734
Home
equity loans (4)
$
80,108
$
87,079
$
3,901
$
4,075
$
907
$
1,803
Purchased
credit-impaired home equity portfolio
5,617
6,593
Total
home equity loan portfolio
$
85,725
$
93,672
(1)
Outstandings
and nonperforming amounts exclude loans accounted for under the fair value option. There were $196 million and $147 million of home equity loans accounted for under the fair value option at December 31, 2014 and 2013. For more information on the fair value option, see Consumer Portfolio Credit Risk Management – Consumer Loans Accounted for Under the Fair Value Option on page 82 and Note 21 – Fair Value Option to the Consolidated Financial Statements.
(2)
Net
charge-offs exclude $265 million of write-offs in the home equity PCI loan portfolio in 2014 compared to $1.2 billion in 2013. These write-offs decreased the PCI valuation allowance included as part of the allowance for loan and lease losses. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 78.
(3)
In these states, foreclosure requires a court order
following a legal proceeding (judicial states).
(4)
Amount excludes the PCI home equity portfolio.
Purchased Credit-impaired Loan Portfolio
Loans acquired with evidence of credit quality deterioration since origination and for which it is probable at purchase that we will be unable to collect all contractually required payments are accounted for under the accounting guidance for PCI loans, which addresses accounting for differences between contractual and expected cash flows to be collected from the purchaser’s initial
investment in loans if those differences are attributable, at least in part, to credit quality. For more information on PCI loans, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
As of December 31, 2014, loans repurchased in connection with the settlement with FNMA had an unpaid principal balance of $4.4 billion and a carrying value of $3.8 billion, of which $4.1 billion of unpaid principal balance and $3.5 billion of carrying value were classified as PCI loans. For additional information, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees to
the Consolidated Financial Statements.
Table 32 presents the unpaid principal balance, carrying value, related valuation allowance and the net carrying value as a percentage of the unpaid principal balance for the PCI loan portfolio.
The
total PCI unpaid principal balance decreased $4.8 billion, or 18 percent, in 2014 primarily driven by sales, payoffs, paydowns and write-offs. During 2014, we sold PCI loans with a carrying value of $1.9 billion compared to sales of $1.3 billion in 2013.
Of the unpaid principal balance of $21.3 billion at December 31, 2014, $17.0 billion, or 80 percent, was current
based
on the contractual terms, $1.5 billion, or seven percent, was in early stage delinquency, and $2.2 billion was 180 days or more past due, including $2.1 billion of first-lien mortgages and $94 million of home equity loans.
Bank of America 2014 78
During 2014, we recorded a provision benefit
of $31 million for the PCI loan portfolio including $21 million for residential mortgage and $10 million for home equity. This compared to a total provision benefit of $707 million in 2013. The provision benefit in 2014 was primarily driven by changes in liquidation assumptions and improved macro-economic conditions.
The PCI valuation allowance declined $841 million during 2014 due to write-offs in the PCI loan portfolio of $545 million in residential
mortgage and $265 million in home equity, and a provision benefit of $31 million.
The PCI residential mortgage loan portfolio represented 73 percent of the total PCI loan portfolio at December 31, 2014. Those loans to borrowers with a refreshed FICO score below 620 represented 40 percent of the PCI residential mortgage loan portfolio at December 31, 2014. Loans with a refreshed LTV greater than 90 percent, after consideration of purchase
accounting adjustments and the related valuation allowance, represented 34 percent of the PCI residential mortgage loan portfolio and 46 percent based on the unpaid principal balance at December 31, 2014. Table 33 presents outstandings net of purchase accounting adjustments and before the related valuation allowance, by certain state concentrations.
Table
33
Outstanding Purchased Credit-impaired Loan Portfolio – Residential Mortgage State Concentrations
December 31
(Dollars in millions)
2014
2013
California
$
6,885
$
8,180
Florida
(1)
1,289
1,750
Virginia
640
760
Maryland
602
728
Texas
318
433
Other
U.S./Non-U.S.
5,418
6,821
Total
$
15,152
$
18,672
(1)
In
this state, foreclosure requires a court order following a legal proceeding (judicial state).
Pay option adjustable-rate mortgages (ARMs), which are included in the PCI residential mortgage portfolio, have interest rates that adjust monthly and minimum required payments that adjust annually, subject to resetting if minimum payments are made and deferred interest limits are reached. Annual payment adjustments are subject to a 7.5 percent maximum change. To ensure that contractual loan payments are adequate to repay a
loan, the fully-amortizing loan payment amount is re-established after the initial five- or ten-year period and again every five years thereafter. These payment adjustments are not subject to the 7.5 percent limit and may be substantial due to changes
in interest rates and the addition of unpaid interest to the loan balance. Payment advantage ARMs have interest rates that are fixed for an initial period of five years. Payments are subject to reset if the minimum payments are made and deferred interest limits are reached. If interest deferrals cause a loan’s principal balance to reach a certain level within the first 10 years of the life of the loan, the payment is reset to the interest-only payment; then at the 10-year point, the fully-amortizing payment is required.
The difference between the frequency of changes in a loan’s interest rates and payments along with a limitation on changes in the minimum monthly payments of 7.5 percent per year can result in payments that are not sufficient to pay all of the monthly interest charges (i.e., negative amortization). Unpaid interest is added to the loan balance until the loan balance increases to a specified limit, which can
be no more than 115 percent of the original loan amount, at which time a new monthly payment amount adequate to repay the loan over its remaining contractual life is established.
At December 31, 2014, the unpaid principal balance of pay option loans, which include pay option ARMs and payment advantage ARMs, was $3.3 billion, with a carrying value of $3.2 billion, including $2.8 billion of loans that were credit-impaired upon acquisition and, accordingly, the reserve is based on a life-of-loan loss estimate. The total unpaid principal balance of pay option loans with accumulated negative amortization was $1.1 billion, including $63 million of negative amortization. For those borrowers who are making payments in accordance with their contractual terms, one percent and five percent at December
31, 2014 and 2013 elected to make only the minimum payment on pay option loans. We believe the majority of borrowers are now making scheduled payments primarily because the low rate environment has caused the fully indexed rates to be affordable to more borrowers. We continue to evaluate our exposure to payment resets on the acquired negative-amortizing loans including the PCI pay option loan portfolio and have taken into consideration in the evaluation several assumptions including prepayment and default rates. Of the loans in the pay option portfolio at December 31, 2014 that have not already experienced a payment reset, two percent are expected to reset in 2015, 32 percent are expected to reset in 2016 and 11 percent are expected to reset thereafter. In addition, 18 percent are expected to prepay
and approximately 37 percent are expected to default prior to being reset, most of which were severely delinquent as of December 31, 2014. We no longer originate pay option loans.
79 Bank of America 2014
Purchased Credit-impaired Home Equity Loan Portfolio
The
PCI home equity portfolio represented 27 percent of the total PCI loan portfolio at December 31, 2014. Those loans with a refreshed FICO score below 620 represented 15 percent of the PCI home equity portfolio at December 31, 2014. Loans with a refreshed CLTV greater than 90 percent, after consideration of purchase accounting adjustments and the related valuation allowance, represented 64 percent of the PCI home equity portfolio and 68 percent based on the unpaid principal balance at December 31, 2014. Table 34 presents outstandings net of purchase accounting adjustments and before the
related valuation allowance, by certain state concentrations.
Table 34
Outstanding Purchased Credit-impaired Loan Portfolio – Home Equity State Concentrations
December
31
(Dollars in millions)
2014
2013
California
$
1,646
$
1,921
Florida
(1)
313
356
Virginia
265
310
Arizona
188
214
Colorado
151
199
Other
U.S./Non-U.S.
3,054
3,593
Total
$
5,617
$
6,593
(1)
In
this state, foreclosure requires a court order following a legal proceeding (judicial state).
U.S. Credit Card
At December 31, 2014, 96 percent of the U.S. credit card portfolio was managed in CBB with the remainder managed in GWIM. Outstandings in the U.S. credit card portfolio decreased $459
million in 2014 primarily due
to a portfolio divestiture. Net charge-offs decreased $738 million to $2.6 billion in 2014 due to improvements in delinquencies and bankruptcies as a result of an improved economic environment and the impact of higher credit quality originations. U.S. credit card loans 30 days or more past due and still accruing interest decreased $372 million while loans 90 days or more past due and still accruing interest decreased $187 million in 2014 as a result of the factors mentioned above that contributed to lower net charge-offs.
Table
35 presents certain key credit statistics for the U.S. credit card portfolio.
Table 35
U.S. Credit Card – Key Credit Statistics
December
31
(Dollars in millions)
2014
2013
Outstandings
$
91,879
$
92,338
Accruing
past due 30 days or more
1,701
2,073
Accruing past due 90 days or more
866
1,053
2014
2013
Net
charge-offs
$
2,638
$
3,376
Net charge-off ratios (1)
2.96
%
3.74
%
(1)
Net
charge-off ratios are calculated as net charge-offs divided by average outstanding loans.
Unused lines of credit for U.S. credit card totaled $305.9 billion and $315.1 billion at December 31, 2014 and 2013. The $9.2 billion decrease was driven by the closure of inactive accounts and a portfolio divestiture.
Table 36 presents certain state concentrations for the U.S. credit card portfolio.
Table
36
U.S. Credit Card State Concentrations
December
31
Outstandings
Accruing Past Due 90 Days or More
Net Charge-offs
(Dollars in millions)
2014
2013
2014
2013
2014
2013
California
$
13,682
$
13,689
$
127
$
162
$
414
$
562
Florida
7,530
7,339
89
105
278
359
Texas
6,586
6,405
58
72
177
217
New
York
5,655
5,624
59
70
174
219
New
Jersey
3,943
3,868
40
48
116
150
Other
U.S.
54,483
55,413
493
596
1,479
1,869
Total
U.S. credit card portfolio
$
91,879
$
92,338
$
866
$
1,053
$
2,638
$
3,376
Bank
of America 2014 80
Non-U.S. Credit Card
Outstandings in the non-U.S. credit card portfolio, which are recorded in All Other, decreased $1.1 billion in 2014 due to a portfolio divestiture and weakening of the British Pound against the U.S. Dollar. Net charge-offs decreased $157 million to $242 million in 2014 due to improvement in delinquencies as a result of higher
credit quality originations and an improved economic environment, as well as improved recovery rates on previously charged-off loans.
Unused lines of credit for non-U.S. credit card totaled $28.2 billion and $31.1 billion at December 31, 2014 and 2013. The $2.9 billion decrease was driven by weakening of the British Pound against the U.S. Dollar and a portfolio divestiture.
Table 37 presents certain key credit statistics for the non-U.S. credit card portfolio.
Table
37
Non-U.S. Credit Card – Key Credit Statistics
December 31
(Dollars in millions)
2014
2013
Outstandings
$
10,465
$
11,541
Accruing
past due 30 days or more
183
248
Accruing past due 90 days or more
95
131
2014
2013
Net
charge-offs
$
242
$
399
Net charge-off ratios (1)
2.10
%
3.68
%
(1)
Net
charge-off ratios are calculated as net charge-offs divided by average outstanding loans.
Direct/Indirect Consumer
At December 31, 2014, approximately 50 percent of the direct/indirect portfolio was included in GWIM (principally securities-based lending loans and other personal loans), 49 percent was included in CBB (consumer dealer financial services – automotive, marine, aircraft, recreational vehicle loans and consumer personal loans), and the remainder was primarily in All Other (student loans and the International Wealth
Management businesses).
Outstandings in the direct/indirect portfolio decreased $1.8 billion in 2014 as a transfer of the government-guaranteed portion of the student loan portfolio to LHFS and lower outstandings in the unsecured consumer lending and consumer dealer financial services portfolios were partially offset by growth in the securities-based lending portfolio.
Net charge-offs decreased $176 million to $169 million in 2014, or 0.20 percent of total average direct/indirect loans, compared to $345
million, or 0.42 percent, in 2013. This decrease in net charge-offs was primarily driven by improvements in delinquencies and bankruptcies in the unsecured consumer lending portfolio as a result of an improved economic environment as well as reduced outstandings in this portfolio.
Net charge-offs in the unsecured consumer lending portfolio decreased $143 million to $47 million in 2014, or 2.30 percent of total average unsecured consumer lending loans compared to 5.26 percent in 2013. Direct/indirect loans that were past due 30 days or more and still accruing interest declined $634 million to $379 million in 2014 due
primarily to the transfer of the government-guaranteed portion of the student loan portfolio to LHFS.
81 Bank of America 2014
Table 38 presents certain state concentrations for the direct/indirect consumer loan portfolio.
Table
38
Direct/Indirect State Concentrations
December
31
Outstandings
Accruing Past Due 90 Days or More
Net Charge-offs
(Dollars in millions)
2014
2013
2014
2013
2014
2013
California
$
9,770
$
10,041
$
5
$
57
$
18
$
42
Florida
7,930
7,634
5
25
27
41
Texas
7,741
7,850
5
66
19
32
New
York
4,458
4,611
2
33
9
20
New
Jersey
2,625
2,526
2
8
5
12
Other
U.S./Non-U.S.
47,857
49,530
45
219
91
198
Total
direct/indirect loan portfolio
$
80,381
$
82,192
$
64
$
408
$
169
$
345
Other
Consumer
At December 31, 2014, approximately 37 percent of the $1.8 billion other consumer portfolio was associated with certain consumer finance businesses that we previously exited. The remainder is primarily leases within the consumer dealer financial services portfolio included in CBB.
Consumer Loans Accounted for Under the Fair Value Option
Outstanding consumer loans accounted for under the fair value option totaled $2.1 billion at December 31, 2014
and were comprised of residential mortgage loans that were previously classified as held-for-sale, residential mortgage loans held in consolidated variable interest entities (VIEs) and repurchased home equity loans. The loans that were previously classified as held-for-sale were transferred to the residential mortgage portfolio in connection with the decision to retain the loans. The fair value option had been elected at the time of origination and the loans continue to be measured at fair value after the reclassification. In 2014, we recorded net losses of $13 million resulting from changes in the fair value of these loans, including losses of $45 million on loans held in consolidated VIEs that were offset by gains recorded on related long-term debt.
Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity
Table 39
presents nonperforming consumer loans, leases and foreclosed properties activity during 2014 and 2013. Nonperforming LHFS are excluded from nonperforming loans as they are recorded at either fair value or the lower of cost or fair value. Nonperforming loans do not include past due consumer credit card loans, other unsecured loans and in general, consumer non-real estate-secured loans (loans discharged in Chapter 7 bankruptcy are included) as these loans are typically charged off no later than the end of the month in which the loan becomes 180 days past due. The charge-offs on these loans have no impact on nonperforming activity and, accordingly, are excluded from this table. The fully-insured loan portfolio is not reported as nonperforming as principal repayment is insured. Additionally, nonperforming loans do not include the PCI loan portfolio or loans
accounted
for under the fair value option. For more information on nonperforming loans, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements. During 2014, nonperforming consumer loans declined $5.0 billion to $10.8 billion as outflows including the impact of loan sales, returns to performing status and charge-offs outpaced new inflows which continued to improve due to favorable delinquency trends.
The outstanding balance of a real estate-secured loan 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 repayment of the loan is fully insured. At December 31, 2014, $5.9 billion, or 51 percent of nonperforming consumer real estate loans and foreclosed properties had been written down to their estimated property value less costs to sell, including $5.2 billion of nonperforming loans 180 days or more past due and $630 million of foreclosed properties. In addition, at December 31, 2014, $3.6 billion, or 33 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 increased $97 million
in 2014 as additions outpaced liquidations. PCI loans are excluded from nonperforming loans as these loans were written down to fair value at the acquisition date; however, once the underlying real estate is acquired by the Corporation upon foreclosure of the delinquent PCI loan, it is included in foreclosed properties. PCI-related foreclosed properties increased $198 million in 2014. Not included in foreclosed properties at December 31, 2014 was $1.1 billion of real estate that was acquired upon foreclosure of delinquent FHA-insured loans. We exclude these amounts from our nonperforming loans and foreclosed properties activity as we expect we will be reimbursed once the property is conveyed to the FHA for principal and, up to certain limits, costs incurred during the foreclosure
process and interest incurred during the holding period. For more information on the review of our foreclosure processes, see Off-Balance Sheet Arrangements and Contractual Obligations – Servicing, Foreclosure and Other Mortgage Matters on page 53.
Bank of America 2014 82
Restructured
Loans
Nonperforming loans also include certain loans that have been modified in TDRs where economic concessions have been granted to borrowers experiencing financial difficulties. These concessions typically result from the Corporation’s loss mitigation activities and could include reductions in the interest rate, payment extensions,
forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructuring and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. Nonperforming TDRs, excluding those modified loans in the PCI loan portfolio, are included in Table 39.
Table
39
Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity (1)
(Dollars in millions)
2014
2013
Nonperforming loans
and leases, January 1
$
15,840
$
19,431
Additions to nonperforming loans and leases:
New nonperforming loans and leases
7,077
9,652
Reductions
to nonperforming loans and leases:
Paydowns and payoffs
(1,625
)
(2,782
)
Sales
(4,129
)
(1,528
)
Returns
to performing status (2)
(3,277
)
(4,273
)
Charge-offs
(2,187
)
(3,514
)
Transfers
to foreclosed properties (3)
(672
)
(483
)
Transfers to loans held-for-sale (4)
(208
)
(663
)
Total
net reductions to nonperforming loans and leases
(5,021
)
(3,591
)
Total nonperforming loans and leases, December 31 (5)
10,819
15,840
Foreclosed
properties, January 1
533
650
Additions to foreclosed properties:
New foreclosed properties (3)
1,011
936
Reductions
to foreclosed properties:
Sales
(829
)
(930
)
Write-downs
(85
)
(123
)
Total
net additions (reductions) to foreclosed properties
97
(117
)
Total foreclosed properties, December 31 (6)
630
533
Nonperforming
consumer loans, leases and foreclosed properties, December 31
$
11,449
$
16,373
Nonperforming consumer loans and leases as a percentage of outstanding consumer loans and leases (7)
2.22
%
2.99
%
Nonperforming
consumer loans, leases and foreclosed properties as a percentage of outstanding consumer loans, leases and foreclosed properties (7)
2.35
3.09
(1)
Balances do not include nonperforming LHFS of $7 million and $376 million
and nonaccruing TDRs removed from the PCI loan portfolio prior to January 1, 2010 of $102 million and $260 million at December 31, 2014 and 2013 as well as loans accruing past due 90 days or more as presented in Table 25 and Note 4 – Outstanding Loans and Leases to the Consolidated Financial Statements.
(2)
Consumer
loans may be returned to performing status when all principal and interest is current and full repayment of the remaining contractual principal and interest is expected, or when the loan otherwise becomes well-secured and is in the process of collection.
(3)
New foreclosed properties represents transfers of nonperforming loans to foreclosed properties net of charge-offs taken during the first 90 days after transfer of a loan to foreclosed properties. New foreclosed properties also includes properties obtained upon foreclosure of delinquent PCI loans, properties repurchased due to representations and warranties exposure and properties acquired with newly consolidated subsidiaries.
(4)
For
2014 and 2013, transfers to loans held-for-sale included $208 million and $273 million of loans that were sold prior to December 31, 2014 and 2013.
(5)
At December 31, 2014, 48 percent of nonperforming loans were 180 days or more past due and were written down through charge-offs to 66 percent
of their unpaid principal balance.
(6)
Foreclosed property balances do not include loans that are insured by the FHA and have entered foreclosure of $1.1 billion and $1.4 billion at December 31, 2014 and 2013.
(7)
Outstanding consumer
loans and leases exclude loans accounted for under the fair value option.
Our policy is to record any losses in the value of foreclosed properties as a reduction in the allowance for loan and lease losses during the first 90 days after transfer of a loan to foreclosed properties. Thereafter, further losses in value as well as gains and losses on sale are recorded in noninterest expense. New foreclosed properties included in Table 39 are net of $191 million and $190 million of charge-offs in 2014 and 2013, recorded during the first 90 days after transfer.
We classify junior-lien home equity
loans as nonperforming when the first-lien loan becomes 90 days past due even if the junior-lien loan is performing. At December 31, 2014 and 2013, $800 million and $1.2 billion of such junior-lien home equity loans were included in nonperforming loans and leases. This decline was driven by enhanced identification of the delinquency on first-lien loans serviced by other financial institutions.
83 Bank
of America 2014
Table 40 presents TDRs for the home loans portfolio. Performing TDR balances are excluded from nonperforming loans and leases in Table 39.
Table
40
Home Loans Troubled Debt Restructurings
December
31
2014
2013
(Dollars in millions)
Total
Nonperforming
Performing
Total
Nonperforming
Performing
Residential
mortgage (1, 2)
$
23,270
$
4,529
$
18,741
$
29,312
$
7,555
$
21,757
Home
equity (3)
2,358
1,595
763
2,146
1,389
757
Total
home loans troubled debt restructurings
$
25,628
$
6,124
$
19,504
$
31,458
$
8,944
$
22,514
(1)
Residential
mortgage TDRs deemed collateral dependent totaled $5.8 billion and $8.2 billion, and included $3.6 billion and $5.7 billion of loans classified as nonperforming and $2.2 billion and $2.5 billion of loans classified as performing at December 31, 2014 and 2013.
(2)
Residential mortgage performing
TDRs included $11.9 billion and $14.3 billion of loans that were fully-insured at December 31, 2014 and 2013.
(3)
Home equity TDRs deemed collateral dependent totaled $1.6 billion and $1.4 billion, and included $1.4 billion and $1.2 billion of loans classified as nonperforming and $178
million and $227 million of loans classified as performing at December 31, 2014 and 2013.
In addition to modifying home 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). In addition, the accounts of non-U.S. credit card customers who do not qualify for a fixed payment plan may have their interest rates reduced, as required
by certain local jurisdictions. These modifications, which are also TDRs, tend to experience higher payment default rates given that the borrowers may lack the ability to repay even with the interest rate reduction. In all cases, the customer’s available line of credit is canceled.
Modifications of credit card and other consumer loans are primarily made through internal renegotiation programs utilizing direct customer contact, but may also utilize external renegotiation programs. The renegotiated TDR portfolio is excluded in large part from Table 39 as substantially all of the loans remain on accrual status until either charged off or paid in full. At December 31, 2014 and 2013, our renegotiated TDR portfolio was $1.1
billion and $2.1 billion, of which $907 million and $1.6 billion were current or less than 30 days past due under the modified terms. The decline in the renegotiated TDR portfolio was primarily driven by paydowns and charge-offs as well as lower program enrollments. For more information on the renegotiated TDR portfolio, see Note 4 – Outstanding Loans and Leases to the Consolidated Financial Statements.
Commercial Portfolio Credit Risk Management
Credit risk management for the commercial portfolio begins with
an assessment of the credit risk profile of the borrower or counterparty based on an analysis of its financial position. As part of the overall credit risk assessment, our commercial credit exposures are assigned a risk rating and are subject to approval based on defined credit approval standards. Subsequent to loan origination, risk ratings are monitored on an ongoing basis, and if necessary, adjusted to reflect changes in the financial condition, cash flow, risk profile or outlook of a borrower or counterparty. In making credit decisions, we consider risk rating, collateral, country, industry and single name concentration limits while also balancing this with the total borrower or counterparty relationship. Our business and risk management personnel use a variety of tools to continuously monitor the ability of a borrower or counterparty to perform under its obligations. We use risk rating aggregations to measure and evaluate concentrations within portfolios. In
addition,
risk ratings are a factor in determining the level of allocated capital and the allowance for credit losses.
As part of our ongoing risk mitigation initiatives, we attempt to work with clients experiencing financial difficulty to modify their loans to terms that better align with their current ability to pay. In situations where an economic concession has been granted to a borrower experiencing financial difficulty, we identify these loans as TDRs. For more information on our accounting policies regarding delinquencies, nonperforming status and net charge-offs for the commercial portfolio, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
Management of Commercial Credit Risk Concentrations
Commercial
credit risk is evaluated and managed with the goal that concentrations of credit exposure do not result in undesirable levels of risk. We review, measure and manage concentrations of credit exposure by industry, product, geography, customer relationship and loan size. We also review, measure and manage commercial real estate loans by geographic location and property type. In addition, within our non-U.S. portfolio, we evaluate exposures by region and by country. Tables 45, 50, 57 and 58 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.
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 the Corporation’s 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 (loss).
Bank of America 2014 84
In addition, 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. For additional information, see Note 12 – Commitments and Contingencies to the Consolidated Financial Statements.
Commercial Credit Portfolio
During 2014, tightening of credit spreads, combined with improved commercial real estate pricing and higher equity markets, drove further improvements in commercial credit quality. Our focus on balance sheet optimization drove new originations to be weighted to higher rated investment-grade obligors.
Outstanding commercial loans and leases decreased $3.5 billion, primarily in non-U.S. commercial, partially offset by growth
in
U.S. commercial. Credit quality continued to show improvement with declines in reservable criticized balances and nonperforming loans, leases and foreclosed property balances during 2014. Nonperforming commercial loans and leases as a percentage of outstanding commercial loans and leases decreased during 2014 to 0.28 percent from 0.33 percent (0.29 percent from 0.34 percent excluding loans accounted for under the fair value option) at December 31, 2013. The allowance for loan and lease losses for the commercial portfolio increased $432
million to $4.4 billion at December 31, 2014 compared to December 31, 2013. For more information, see Allowance for Credit Losses on page 95.
Table 41 presents our commercial loans and leases portfolio, and related credit quality information at December 31, 2014 and 2013.
Table
41
Commercial Loans and Leases
December 31
Outstandings
Nonperforming
Accruing
Past Due
90 Days or More
(Dollars in millions)
2014
2013
2014
2013
2014
2013
U.S.
commercial
$
220,293
$
212,557
$
701
$
819
$
110
$
47
Commercial
real estate (1)
47,682
47,893
321
322
3
21
Commercial
lease financing
24,866
25,199
3
16
41
41
Non-U.S.
commercial
80,083
89,462
1
64
—
17
372,924
375,111
1,026
1,221
154
126
U.S.
small business commercial (2)
13,293
13,294
87
88
67
78
Commercial
loans excluding loans accounted for under the fair value option
386,217
388,405
1,113
1,309
221
204
Loans
accounted for under the fair value option (3)
6,604
7,878
—
2
—
—
Total
commercial loans and leases
$
392,821
$
396,283
$
1,113
$
1,311
$
221
$
204
(1)
Includes
U.S. commercial real estate loans of $45.2 billion and $46.3 billion and non-U.S. commercial real estate loans of $2.5 billion and $1.6 billion at December 31, 2014 and 2013.
(2)
Includes card-related products.
(3)
Commercial
loans accounted for under the fair value option include U.S. commercial loans of $1.9 billion and $1.5 billion and non-U.S. commercial loans of $4.7 billion and $6.4 billion at December 31, 2014 and 2013. For more information on the fair value option, see Note 21 – Fair Value Option to the Consolidated Financial Statements.
Table 42 presents net charge-offs and related ratios for our commercial loans and leases for 2014
and 2013. Improving trends across the portfolio drove lower charge-offs.
Table
42
Commercial Net Charge-offs and Related Ratios
Net Charge-offs
Net
Charge-off Ratios (1)
(Dollars in millions)
2014
2013
2014
2013
U.S. commercial
$
88
$
128
0.04
%
0.06
%
Commercial
real estate
(83
)
149
(0.18
)
0.35
Commercial lease financing
(9
)
(25
)
(0.04
)
(0.10
)
Non-U.S.
commercial
34
45
0.04
0.05
30
297
0.01
0.08
U.S.
small business commercial
282
359
2.10
2.84
Total commercial
$
312
$
656
0.08
0.18
(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.
85 Bank of America 2014
Table 43 presents commercial credit exposure by type for utilized, unfunded and total binding committed credit exposure. Commercial utilized credit
exposure includes SBLCs and financial guarantees, bankers’ acceptances and commercial letters of credit for which we are legally bound to advance funds under prescribed conditions, during a specified time period. Although funds have not yet been advanced, these exposure types are considered utilized for credit risk management purposes.
Total commercial utilized credit exposure decreased $852 million in 2014 primarily driven by loans and leases, SBLCs and financial guarantees, debt securities and other investments, partially offset by an increase in derivative assets. The utilization rate for loans and leases, SBLCs and financial guarantees, commercial letters of credit and bankers acceptances,
in the aggregate, was 57 percent and 58 percent at December 31, 2014 and 2013.
Table
43
Commercial Credit Exposure by Type
December 31
Commercial
Utilized (1)
Commercial
Unfunded (2, 3)
Total Commercial Committed
(Dollars in millions)
2014
2013
2014
2013
2014
2013
Loans
and leases
$
392,821
$
396,283
$
317,258
$
307,478
$
710,079
$
703,761
Derivative
assets (4)
52,682
47,495
—
—
52,682
47,495
Standby
letters of credit and financial guarantees
33,550
35,893
745
1,334
34,295
37,227
Debt
securities and other investments
17,301
18,505
5,315
6,903
22,616
25,408
Loans
held-for-sale
7,036
6,604
2,315
101
9,351
6,705
Commercial
letters of credit
2,037
2,054
126
515
2,163
2,569
Bankers’
acceptances
255
246
—
—
255
246
Foreclosed
properties and other
960
414
—
—
960
414
Total
$
506,642
$
507,494
$
325,759
$
316,331
$
832,401
$
823,825
(1)
Total
commercial utilized exposure includes loans of $6.6 billion and $7.9 billion and issued letters of credit accounted for under the fair value option with a notional amount of $535 million and $503 million at December 31, 2014 and 2013.
(2)
Total commercial unfunded exposure includes loan commitments accounted for under the fair value option with a notional amount of $9.4
billion and $12.5 billion at December 31, 2014 and 2013.
(3)
Excludes unused business card lines which are not legally binding.
(4)
Derivative assets are carried at fair value, reflect the effects of legally enforceable master netting agreements and have
been reduced by cash collateral of $47.3 billion at both December 31, 2014 and 2013. Not reflected in utilized and committed exposure is additional derivative collateral held of $24.0 billion and $17.1 billion which consists primarily of other marketable securities.
Table 44 presents commercial utilized reservable criticized exposure by loan type. Criticized exposure corresponds to the Special Mention, Substandard and Doubtful asset categories as defined by regulatory authorities. Total commercial utilized reservable criticized exposure decreased
$1.3 billion, or 10
percent, in 2014 throughout most of the commercial portfolio driven largely by paydowns, upgrades and charge-offs outpacing downgrades. Approximately 87 percent and 84 percent of commercial utilized reservable criticized exposure was secured at December 31, 2014 and 2013.
Total commercial utilized reservable criticized exposure
$
11,570
2.74
$
12,861
3.02
(1)
Total
commercial utilized reservable criticized exposure includes loans and leases of $10.2 billion and $11.5 billion and commercial letters of credit of $1.3 billion and $1.4 billion at December 31, 2014 and 2013.
(2)
Percentages are calculated as commercial utilized reservable criticized exposure divided by total commercial utilized reservable exposure for each exposure category.
U.S.
Commercial
At December 31, 2014, 63 percent of the U.S. commercial loan portfolio, excluding small business, was managed in Global Banking, 16 percent in Global Markets, 10 percent in GWIM (generally business-purpose loans for high net worth clients) and the remainder primarily in CBB. U.S. commercial loans, excluding
loans accounted for under the fair value option, increased $7.7 billion, or four
percent, during 2014 with growth primarily from middle-market and corporate clients. Nonperforming loans and leases decreased $118 million, or 14 percent, in 2014. Net charge-offs decreased $40 million to $88 million during 2014.
Bank
of America 2014 86
Commercial Real Estate
Commercial real estate primarily includes commercial loans and leases secured by non-owner-occupied real estate and is dependent on the sale or lease of the real estate as the primary source of repayment. The portfolio remains diversified across property types and geographic regions. California represented the largest state concentration at 22 percent of the commercial real estate loans and leases portfolio at both December 31, 2014 and 2013. The commercial real
estate portfolio is predominantly managed in Global Banking and consists of loans made primarily to public and private developers, and commercial real estate firms. Outstanding loans decreased $211 million during 2014 primarily due to portfolio sales.
During 2014, we continued to see improvements in credit quality in both the residential and non-residential portfolios. We
use a number of proactive risk mitigation initiatives to reduce adversely rated exposure in the commercial real estate portfolio including transfers of deteriorating exposures
to management by independent special asset officers and the pursuit of loan restructurings or asset sales to achieve the best results for our customers and the Corporation.
Nonperforming commercial real estate loans and foreclosed properties decreased $24 million, or six percent, and reservable criticized balances decreased $344 million, or 24 percent, in 2014. Net charge-offs declined $232 million to a net recovery of $83 million in 2014.
Table 45 presents outstanding commercial real estate loans by geographic region, based on the geographic location of the collateral, and by property type.
Table 45
Outstanding
Commercial Real Estate Loans
December 31
(Dollars in millions)
2014
2013
By
Geographic Region
California
$
10,352
$
10,358
Northeast
8,781
9,487
Southwest
6,570
6,913
Southeast
5,495
5,314
Midwest
2,867
3,109
Illinois
2,785
2,319
Florida
2,520
3,030
Northwest
2,151
2,037
Midsouth
1,724
2,013
Non-U.S.
2,494
1,582
Other (1)
1,943
1,731
Total
outstanding commercial real estate loans
$
47,682
$
47,893
By Property Type
Non-residential
Office
$
13,306
$
12,799
Multi-family
rental
8,382
8,559
Shopping centers/retail
7,969
7,470
Industrial/warehouse
4,550
4,522
Hotels/motels
3,578
3,926
Multi-use
1,943
1,960
Land
and land development
490
855
Other
5,754
6,283
Total non-residential
45,972
46,374
Residential
1,710
1,519
Total
outstanding commercial real estate loans
$
47,682
$
47,893
(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.
87 Bank of America 2014
Tables 46 and 47 present commercial real estate credit quality data by non-residential and residential property types. The residential portfolio presented in Tables 45, 46
and 47 includes condominiums and other residential real estate. Other property
types in Tables 45, 46 and 47 primarily include special purpose, nursing/retirement homes, medical facilities and restaurants, as well as unsecured loans to borrowers whose primary business is commercial real estate.
Table
46
Commercial Real Estate Credit Quality Data
December 31
Nonperforming
Loans and
Foreclosed Properties (1)
Utilized Reservable
Criticized Exposure (2)
(Dollars in millions)
2014
2013
2014
2013
Non-residential
Office
$
177
$
96
$
235
$
367
Multi-family
rental
21
15
125
234
Shopping centers/retail
46
57
350
144
Industrial/warehouse
42
22
67
119
Hotels/motels
3
5
26
38
Multi-use
11
19
55
157
Land
and land development
51
73
63
92
Other
15
23
159
173
Total
non-residential
366
310
1,080
1,324
Residential
22
102
28
128
Total
commercial real estate
$
388
$
412
$
1,108
$
1,452
(1)
Includes
commercial foreclosed properties of $67 million and $90 million at December 31, 2014 and 2013.
(2)
Includes loans, SBLCs and bankers’ acceptances and excludes loans accounted for under the fair value option.
Table
47
Commercial Real Estate Net Charge-offs and Related Ratios
Net
Charge-offs
Net Charge-off Ratios (1)
(Dollars in millions)
2014
2013
2014
2013
Non-residential
Office
$
(4
)
$
42
(0.04
)%
0.39
%
Multi-family
rental
(22
)
2
(0.25
)
0.02
Shopping centers/retail
4
12
0.06
0.18
Industrial/warehouse
(1
)
23
(0.03
)
0.55
Hotels/motels
(3
)
18
(0.07
)
0.52
Multi-use
(9
)
5
(0.49
)
0.26
Land
and land development
(2
)
23
(0.31
)
2.35
Other
(38
)
(23
)
(0.64
)
(0.41
)
Total
non-residential
(75
)
102
(0.16
)
0.25
Residential
(8
)
47
(0.47
)
3.04
Total
commercial real estate
$
(83
)
$
149
(0.18
)
0.35
(1)
Net
charge-off ratios are calculated as net charge-offs divided by average outstanding loans excluding loans accounted for under the fair value option.
At December 31, 2014, total committed non-residential exposure was $67.7 billion compared to $68.6 billion at December 31, 2013, of which $46.0 billion and $46.4 billion were funded secured loans. Non-residential nonperforming loans and foreclosed properties increased $56 million, or 18 percent, to $366 million at December 31,
2014 compared to December 31, 2013, which represented 0.79 percent and 0.67 percent of total non-residential loans and foreclosed properties. The increase in nonperforming loans and foreclosed properties in the non-residential portfolio was primarily in the office property type. Non-residential utilized reservable criticized exposure decreased $244 million, or 18 percent, to $1.1 billion at December 31, 2014 compared to December 31, 2013,
which represented 2.27 percent and 2.75 percent of non-residential utilized reservable exposure. For the non-residential portfolio, net charge-offs decreased $177 million to a net recovery of $75 million in 2014 primarily due to lower levels of criticized and nonperforming assets as well as recoveries of prior-period charge-offs.
At December 31, 2014, total committed residential exposure was $3.6 billion compared to $3.1 billion at December 31, 2013,
of which $1.7 billion and $1.5 billion were funded secured loans. In 2014, residential nonperforming loans and foreclosed properties decreased $80 million, or 78 percent, and residential utilized reservable criticized exposure decreased $100 million, or 78 percent, due to repayments, sales and loan restructurings. The nonperforming loans, leases and foreclosed properties and the utilized reservable criticized ratios for the residential portfolio were 1.28 percent and 1.51 percent at December 31, 2014 compared to 6.65 percent and 7.81 percent at December 31,
2013. Residential portfolio net charge-offs decreased $55 million to a net recovery of $8 million in 2014.
At December 31, 2014 and 2013, the commercial real estate loan portfolio included $6.7 billion and $7.0 billion of funded construction and land development loans that were originated to fund the construction and/or rehabilitation of commercial properties. Reservable criticized construction and land
Bank
of America 2014 88
development loans totaled $164 million and $431 million, and nonperforming construction and land development loans and foreclosed properties totaled $80 million and $100 million at December 31, 2014 and 2013. During a property’s construction phase, interest income is typically paid from interest reserves that are established at the inception of the loan. As construction is completed and the property is put into service, these interest reserves are depleted and interest payments from operating cash flows begin. We do not recognize interest income on nonperforming loans regardless
of the existence of an interest reserve.
Non-U.S. Commercial
At December 31, 2014, 77 percent of the non-U.S. commercial loan portfolio was managed in Global Banking and 23 percent in Global Markets. Outstanding loans, excluding loans accounted for under the fair value option, decreased $9.4 billion in 2014 primarily due to client financing activity including prime brokerage loans. Net charge-offs decreased $11 million to $34 million
in 2014. For more information on the non-U.S. commercial portfolio, see Non-U.S. Portfolio on page 93.
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 CBB. Credit card-related products were 43 percent of the U.S. small business commercial portfolio at both December 31, 2014 and 2013. Net charge-offs decreased $77 million
to $282 million in 2014 driven by an improvement in credit quality, including lower delinquencies as a result of an improved economic environment, and the impact of higher credit quality originations. Of the U.S. small business commercial net charge-offs, 73 percent were credit card-related products in both 2014 and 2013.
Commercial Loans Accounted for Under the Fair Value Option
The portfolio of commercial loans accounted for under the fair value option is held primarily in Global Markets and Global Banking. Outstanding commercial loans accounted for
under the fair value
option decreased $1.3 billion to an aggregate fair value of $6.6 billion at December 31, 2014 primarily due to decreased corporate borrowings under bank credit facilities. We recorded net losses of $11 million in 2014 compared to net gains of $88 million in 2013 from changes in the fair value of this loan portfolio. These amounts were primarily attributable to changes in instrument-specific
credit risk, were recorded in other income (loss) and do not reflect the results of hedging activities.
In addition, unfunded lending commitments and letters of credit accounted for under the fair value option had an aggregate fair value of $405 million and $354 million at December 31, 2014 and 2013, which was recorded in accrued expenses and other liabilities. The associated aggregate notional amount of unfunded lending commitments and letters of credit accounted for under the fair value option was $9.9 billion and $13.0 billion at December 31,
2014 and 2013. We recorded net losses of $64 million from changes in the fair value of commitments and letters of credit during 2014 compared to net gains of $180 million in 2013. These amounts were primarily attributable to changes in instrument-specific credit risk, were recorded in other income (loss) and do not reflect the results of hedging activities.
Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity
Table 48 presents the nonperforming commercial loans, leases and foreclosed
properties activity during 2014 and 2013. Nonperforming loans do not include loans accounted for under the fair value option. During 2014, nonperforming commercial loans and leases decreased $196 million to $1.1 billion driven by paydowns, charge-offs and returns to performing status outpacing new nonperforming loans. Approximately 98 percent of commercial nonperforming loans, leases and foreclosed properties were secured and approximately 45 percent were contractually current. Commercial nonperforming loans were carried at approximately 79 percent of their unpaid principal balance before consideration of the allowance for loan and lease losses as the carrying value of these loans has
been reduced to the estimated property value less costs to sell.
89 Bank of America 2014
Table
48
Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity (1, 2)
(Dollars in millions)
2014
2013
Nonperforming
loans and leases, January 1
$
1,309
$
3,224
Additions to nonperforming loans and leases:
New
nonperforming loans and leases
1,228
1,112
Advances
48
30
Reductions to nonperforming loans and leases:
Paydowns
(717
)
(1,342
)
Sales
(149
)
(498
)
Returns
to performing status (3)
(261
)
(588
)
Charge-offs
(332
)
(549
)
Transfers to
foreclosed properties (4)
(13
)
(54
)
Transfers to loans held-for-sale
—
(26
)
Total
net reductions to nonperforming loans and leases
(196
)
(1,915
)
Total nonperforming loans and leases, December 31
1,113
1,309
Foreclosed
properties, January 1
90
250
Additions to foreclosed properties:
New foreclosed properties (4)
11
38
Reductions
to foreclosed properties:
Sales
(26
)
(169
)
Write-downs
(8
)
(29
)
Total
net reductions to foreclosed properties
(23
)
(160
)
Total foreclosed properties, December 31
67
90
Nonperforming commercial
loans, leases and foreclosed properties, December 31
$
1,180
$
1,399
Nonperforming commercial loans and leases as a percentage of outstanding commercial loans and leases (5)
0.29
%
0.34
%
Nonperforming
commercial loans, leases and foreclosed properties as a percentage of outstanding commercial loans, leases and foreclosed properties (5)
0.31
0.36
(1)
Balances do not include nonperforming LHFS of $212 million and $296 million at December 31, 2014
and 2013.
(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)
New foreclosed properties represents transfers of nonperforming loans to foreclosed properties net of charge-offs recorded during the first 90 days after transfer of a loan to foreclosed properties.
(5)
Outstanding commercial loans exclude loans accounted for under the fair value option.
Table
49 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 are not classified as nonperforming as they are charged off no later than
the end of the month in which the loan becomes 180 days past due. For more information on TDRs, see Note 4 – Outstanding Loans and Leases to the Consolidated Financial Statements.
Table
49
Commercial Troubled Debt Restructurings
December 31
2014
2013
(Dollars
in millions)
Total
Nonperforming
Performing
Total
Nonperforming
Performing
U.S. commercial
$
1,096
$
308
$
788
$
1,318
$
298
$
1,020
Commercial
real estate
456
234
222
835
198
637
Non-U.S.
commercial
43
—
43
48
38
10
U.S.
small business commercial
35
—
35
88
—
88
Total
commercial troubled debt restructurings
$
1,630
$
542
$
1,088
$
2,289
$
534
$
1,755
Industry
Concentrations
Table 50 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 credit exposure increased $8.6 billion in 2014 to $832.4 billion. The increase in commercial committed exposure was concentrated in energy, food, beverage and tobacco, retailing, and health care equipment and services, partially offset by lower exposure in diversified financials and telecommunications services.
Industry limits are used internally to manage industry concentrations and are based
on committed exposures and capital
usage that are 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. Management oversight of industry concentrations, including industry limits, is the responsibility of a subcommittee of the MRC.
Diversified financials, our largest industry concentration with committed exposure of $103.5 billion, decreased $14.6 billion, or 12 percent, in 2014. The decrease
primarily reflected lower margin loans and consumer finance exposure.
Real estate, our second largest industry concentration with committed exposure of $76.2 billion, decreased $265 million in 2014. The decrease was largely driven by portfolio sales, and a combination of prepayments and paydowns due to favorable
Bank
of America 2014 90
market liquidity, and lower levels of originations. Real estate construction and land development exposure represented 13 percent and 14 percent of the total real estate industry committed exposure at December 31, 2014 and 2013. For more information on commercial real estate and related portfolios, see Commercial Portfolio Credit Risk Management – Commercial Real Estate on page 87.
The following changes in our industry concentration occurred
during 2014. Committed exposure to the energy industry increased $6.5 billion, or 16 percent, driven by higher exposure in the oil and gas refining and marketing, exploration and production, and equipment and services sectors. The latter two sectors include bridge financing, a significant portion of which was subsequently distributed. Food, beverage and tobacco committed exposure increased $3.9 billion, or 13 percent, primarily reflecting bridge financing in the beverage sector. Retailing industry committed exposure increased $3.4 billion, or
six percent, driven by higher exposure to internet retail and wholesale food and beverage sectors. The healthcare equipment and services industry increased $3.4 billion, or seven percent, primarily driven by bridge financing for acquisitions. Telecommunications services committed exposure decreased $2.1 billion, or 19 percent, primarily reflecting broadly distributed commitment reductions and paydowns.
The significant decline in oil prices since June 2014 has impacted and may continue to impact the
financial performance of energy producers as well as energy equipment and service providers. While we did not experience material asset quality deterioration in our energy portfolio through December 31, 2014, the magnitude of the impact over time will depend upon the level and duration of future oil prices.
Our committed state and municipal exposure of $38.5 billion at December 31, 2014 consisted of $31.7 billion of commercial utilized exposure (including $19.1 billion of funded loans, $6.3 billion of SBLCs and $2.4 billion of derivative assets) and $6.8 billion of unfunded commercial exposure (primarily unfunded loan commitments and letters of credit) and is reported in the government and public education industry in Table 50. With
the U.S. economy gradually strengthening, most state and local governments are experiencing improved fiscal conditions and continue to honor debt obligations as agreed. While historical default rates have been low, as part of our overall and ongoing risk management processes, we continually monitor these exposures through a rigorous review process. Additionally, internal communications are regularly circulated such that exposure levels are maintained in compliance with established concentration guidelines.
Table
50
Commercial Credit Exposure by Industry (1)
December 31
Commercial
Utilized
Total Commercial Committed
(Dollars in millions)
2014
2013
2014
2013
Diversified financials
$
63,306
$
76,673
$
103,528
$
118,092
Real
estate (2)
53,834
54,336
76,153
76,418
Retailing
33,683
32,859
58,043
54,616
Capital
goods
29,028
28,016
54,653
52,849
Healthcare equipment and services
32,923
30,828
52,450
49,063
Government
and public education
42,095
40,253
49,937
48,322
Banking
42,330
41,399
48,353
48,078
Energy
23,830
19,739
47,667
41,156
Materials
23,664
22,384
45,821
42,699
Food,
beverage and tobacco
16,131
14,437
34,465
30,541
Consumer services
21,657
21,080
33,269
34,217
Commercial
services and supplies
17,997
19,770
30,451
32,007
Utilities
9,399
9,253
25,235
25,243
Transportation
17,538
15,280
24,541
22,595
Media
11,128
13,070
21,502
22,655
Individuals
and trusts
16,749
14,864
21,195
18,681
Software and services
5,927
6,814
14,071
14,172
Pharmaceuticals
and biotechnology
5,707
6,455
13,493
13,986
Technology hardware and equipment
5,489
6,166
12,350
12,733
Insurance,
including monolines
5,204
5,926
11,252
12,203
Consumer durables and apparel
6,111
5,427
10,613
9,757
Automobiles
and components
4,114
3,165
9,683
8,424
Telecommunication services
3,814
4,541
9,295
11,423
Food
and staples retailing
3,848
3,950
7,418
7,909
Religious and social organizations
4,881
5,452
6,548
7,677
Other
6,255
5,357
10,415
8,309
Total commercial credit exposure by industry
$
506,642
$
507,494
$
832,401
$
823,825
Net
credit default protection purchased on total commitments (3)
$
(7,302
)
$
(8,085
)
(1)
Includes
U.S. small business commercial exposure.
(2)
Industries are viewed from a variety of perspectives to best isolate the perceived risks. For purposes of this table, the real estate industry is defined based on the borrowers’ or counterparties’ primary business activity using operating cash flows and primary source of repayment as key factors.
(3)
Represents net notional credit protection purchased. For additional information, see Commercial Portfolio
Credit Risk Management – Risk Mitigation on page 92.
91 Bank of America 2014
Monoline Exposure
Monoline exposure is reported in the insurance industry and managed under insurance portfolio industry limits. We have indirect exposure to monolines primarily in the form of guarantees supporting
our loans, investment portfolios, securitizations and credit-enhanced securities as part of our public finance business, and other selected products. Such indirect exposure exists when we purchase credit protection from monolines to hedge all or a portion of the credit risk on certain credit exposures including loans and CDOs. We underwrite our public finance exposure by evaluating the underlying securities.
We also have indirect exposure to monolines in the form of guarantees supporting our mortgage and other loan sales. Indirect exposure may exist when credit protection was purchased from monolines to hedge all or a portion of the credit risk on certain mortgage and other loan exposures. A loss may occur when we are required to repurchase a loan due to a breach of the representations and warranties, and the market value of the loan has declined, or we are required to indemnify or provide recourse for a guarantor’s loss.
For more information regarding our exposure to representations and warranties, see Off-Balance Sheet Arrangements and Contractual Obligations – Representations and Warranties on page 50 and Note 7 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements.
Table 51 presents the notional amount of our monoline derivative credit exposure, mark-to-market adjustment and the counterparty CVA. The notional amount of monoline exposure decreased $2.9 billion in 2014 due to terminations, paydowns and maturities
of monoline contracts.
Table 51
Monoline Derivative Credit Exposures
December
31
(Dollars in millions)
2014
2013
Notional amount of monoline exposure
$
7,720
$
10,631
Mark-to-market
$
49
$
97
Counterparty
credit valuation adjustment
(6
)
(15
)
Net mark-to-market
$
43
$
82
2014
2013
Gains
(losses) from credit valuation changes
$
(2
)
$
73
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, 2014 and 2013, 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 $7.3 billion and $8.1 billion. We recorded net losses of $50 million and $356 million in 2014 and 2013 on these positions. The gains and losses on these instruments were offset by gains and losses on the related exposures. The VaR results for these exposures are included in the fair value option portfolio information in Table
61. For more information, see Trading Risk Management on page 100.
Tables 52 and 53 present the maturity profiles and the credit exposure debt ratings of the net credit default protection portfolio at December 31, 2014 and 2013.
Table
52
Net Credit Default Protection by Maturity
December 31
2014
2013
Less
than or equal to one year
43
%
35
%
Greater than one year and less than or equal to five years
55
63
Greater than five years
2
2
Total
net credit default protection
100
%
100
%
Table
53
Net Credit Default Protection by Credit Exposure Debt Rating
December 31
2014
2013
(Dollars
in millions)
Net
Notional (1)
Percent of
Total
Net
Notional (1)
Percent of
Total
Ratings (2,
3)
AA
$
—
—
%
$
(7
)
0.1
%
A
(1,310
)
17.9
(2,560
)
31.7
BBB
(4,207
)
57.6
(3,880
)
48.0
BB
(1,001
)
13.7
(1,137
)
14.1
B
(643
)
8.8
(452
)
5.6
CCC
and below
(131
)
1.8
(115
)
1.4
NR (4)
(10
)
0.2
66
(0.9
)
Total
net credit default protection
$
(7,302
)
100.0
%
$
(8,085
)
100.0
%
(1)
Represents
net credit default protection (purchased) sold.
(2)
Ratings are refreshed on a quarterly basis.
(3)
Ratings of BBB- or higher are considered to meet the definition of investment grade.
(4)
NR is comprised of index positions
held and any names that have not been rated.
In addition to our net notional credit default protection purchased to cover the funded and unfunded portion of certain credit exposures, credit derivatives are used for market-making activities for clients and establishing positions intended to profit from directional or relative value changes. We execute the majority of our credit derivative trades in the OTC market with large, multinational financial institutions, including broker-dealers and, to a lesser degree, with a variety of other investors. Because these transactions are executed in the OTC market, we are subject to settlement risk. We are also subject to credit risk in the event that these counterparties fail to perform under the terms of these contracts. In most cases, credit derivative transactions are executed
on a daily margin basis. Therefore, events such as a credit downgrade, depending on the ultimate rating level, or a breach of credit covenants would typically require an increase in the amount of collateral required by the counterparty, where applicable, and/or allow us to take additional protective measures such as early termination of all trades.
Table 54 presents the total contract/notional amount of credit derivatives outstanding and includes both purchased and written credit derivatives. The credit risk amounts are measured as net asset exposure by counterparty, taking into consideration all contracts with the counterparty. For more information on our written credit derivatives, see Note 2 – Derivatives
to the Consolidated Financial Statements.
Bank of America 2014 92
The credit risk amounts discussed above and presented in Table 54 take into consideration the effects of legally enforceable master netting agreements, while amounts disclosed in Note 2 – Derivatives
to the Consolidated Financial Statements are shown
on a gross basis. Credit risk reflects the potential benefit from offsetting exposure to non-credit derivative products with the same counterparties that may be netted upon the occurrence of certain events, thereby reducing our overall exposure.
We record counterparty credit risk valuation adjustments on certain derivative assets, including our credit default protection purchased, in order to properly reflect the credit risk of the counterparty, as presented in Table 55. We calculate CVA based on a modeled expected exposure that incorporates current market risk factors including changes in market spreads and non-credit related market factors that affect the value of a derivative. The exposure also takes into consideration credit mitigants such as legally enforceable master netting agreements and collateral. For additional information, see Note 2 – Derivatives to the Consolidated Financial Statements.
Table
55
Credit Valuation Gains and Losses
Gains (Losses)
2014
2013
(Dollars
in millions)
Gross
Hedge
Net
Gross
Hedge
Net
Credit valuation
$
(22
)
$
213
$
191
$
738
$
(834
)
$
(96
)
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. Management oversight of country risk, including cross-border risk, is the responsibility of a subcommittee of the MRC. 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
56 presents our total non-U.S. exposure by region at December 31, 2014 and 2013. 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. The risk assignments by country can be adjusted for external guarantees and certain collateral types. Exposures that are subject to external guarantees are reported under the country of the guarantor. Exposures with tangible collateral are reflected in the country where the collateral is held. For securities received, other than cross-border resale agreements, outstandings are assigned to the domicile of the issuer of the securities.
Table
56
Total Non-U.S. Exposure by Region
December 31
2014
2013
(Dollars
in millions)
Amount
Percent of
Total
Amount
Percent of
Total
Europe
$
129,573
49
%
$
133,303
53
%
Asia
Pacific
78,792
30
69,266
27
Latin America
23,403
9
21,723
9
Middle
East and Africa
10,801
4
8,691
3
Other (1)
22,701
8
20,866
8
Total
$
265,270
100
%
$
253,849
100
%
(1)
Other
includes Canada exposure of $20.4 billion and $19.8 billion at December 31, 2014 and 2013.
Our total non-U.S. exposure was $265.3 billion at December 31, 2014, an increase of $11.4 billion from December 31, 2013. The increase in non-U.S. exposure was driven by growth in Asia Pacific and
Latin America exposures, partially offset by a reduction in Europe. Our non-U.S. exposure remained concentrated in Europe which accounted for $129.6 billion, or 49 percent of total non-U.S. exposure. The European exposure was mostly in Western Europe and was distributed across a variety of industries.
93 Bank of America 2014
Table
57 presents our 20 largest non-U.S. country exposures. These exposures accounted for 88 percent of our total non-U.S. exposure at both December 31, 2014 and 2013. Net country exposure for these 20 countries increased $13.6 billion in 2014 driven by higher funded and unfunded loans and loan equivalents exposure in Japan and Hong Kong, increased derivatives exposure in the United Kingdom, Japan, Hong Kong and Germany, and increased trading securities exposure in the United Kingdom, Italy and India. These increases were partially offset by reductions in funded and unfunded
loans and loan equivalents exposure in Russia, the United Kingdom, Australia and Italy, and decreases in securities exposure in Germany and Japan.
Funded loans and loan equivalents include loans, leases, and other extensions of credit and funds, including letters of credit and due from placements, which have not been reduced by collateral, hedges or credit default protection. Funded loans and loan equivalents are reported net of charge-offs but prior to any allowance for loan and lease losses. 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. Derivatives exposures are presented net of collateral, which is predominantly cash, pledged under legally enforceable master netting agreements. Secured financing transaction exposures are presented net of eligible cash or securities pledged as collateral.
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 (i.e., negative issuer exposures are reported as zero). Other investments include our GPI portfolio and strategic investments.
Net country exposure represents country exposure less hedges and credit default protection purchased, net of credit default protection sold. We hedge certain of our country exposures with credit default protection primarily in the form
of single-name, as well as indexed and tranched CDS. The exposures associated with these hedges represent the amount that would be realized upon the isolated default of an individual issuer in the relevant country assuming a zero recovery rate for that individual issuer, and are calculated based on the CDS notional amount adjusted for any fair value receivable or payable. Changes in the assumption of an isolated default can produce different results in a particular tranche.
Table
57
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 2014
Hedges
and Credit Default Protection
Net Country Exposure at December 31 2014
Increase (Decrease) from December 31 2013
United Kingdom
$
23,727
$
11,921
$
6,373
$
7,769
$
49,790
$
(4,243
)
$
45,547
$
1,961
Canada
6,388
6,847
1,950
5,173
20,358
(1,818
)
18,540
129
Japan
12,518
506
3,589
1,453
18,066
(1,332
)
16,734
8,619
Brazil
9,923
727
511
4,183
15,344
(360
)
14,984
1,352
Germany
5,341
5,840
3,477
1,489
16,147
(3,588
)
12,559
(159
)
China
10,238
725
556
1,483
13,002
(710
)
12,292
(629
)
India
5,631
507
496
4,126
10,760
(174
)
10,586
335
France
3,246
5,117
1,495
5,038
14,896
(4,458
)
10,438
275
Hong
Kong
6,413
616
924
691
8,644
(36
)
8,608
3,251
Netherlands
2,928
3,392
675
2,275
9,270
(1,135
)
8,135
500
Australia
3,237
1,908
826
2,235
8,206
(533
)
7,673
(324
)
Switzerland
2,493
3,663
1,018
622
7,796
(1,265
)
6,531
985
South
Korea
3,559
707
534
2,327
7,127
(678
)
6,449
14
Italy
2,545
1,596
2,484
1,752
8,377
(2,978
)
5,399
197
Mexico
3,038
807
245
566
4,656
(385
)
4,271
272
Singapore
1,984
203
673
1,206
4,066
(62
)
4,004
175
Taiwan
2,248
—
437
1,180
3,865
—
3,865
(207
)
Spain
2,296
994
296
1,022
4,608
(992
)
3,616
213
Russia
4,124
80
732
66
5,002
(1,393
)
3,609
(3,113
)
Turkey
2,695
75
15
185
2,970
(482
)
2,488
(205
)
Total
top 20 non-U.S. countries exposure
$
114,572
$
46,231
$
27,306
$
44,841
$
232,950
$
(26,622
)
$
206,328
$
13,641
Russian
intervention in Ukraine during 2014 significantly increased regional geopolitical tensions. The Russian economy is slowing due to the negative impacts of weak oil prices, ongoing economic sanctions and high interest rates resulting from Russian central bank actions taken to counter ruble depreciation. Net exposure to Russia was reduced to $3.6 billion at December 31, 2014, concentrated in oil and gas companies and commercial banks. Our exposure to Ukraine at December 31, 2014 was minimal. In response to Russian actions, U.S. and European governments have imposed sanctions on a limited number of Russian individuals and business entities. Geopolitical and
economic
conditions remain fluid with potential for further escalation of tensions, severity of sanctions against Russian interests, sustained low oil prices and rating agency downgrades.
Certain European countries, including Italy, Spain, Ireland, Greece and Portugal, have experienced varying degrees of financial stress in recent years. While market conditions have improved in Europe, policymakers continue to address fundamental challenges of competitiveness, growth, deflation and high unemployment. A return of political stress or financial instability in these countries could disrupt financial markets and have a detrimental impact on global economic conditions and sovereign and non-sovereign debt
Bank
of America 2014 94
in these countries. Net exposure at December 31, 2014 to Italy and Spain was $5.4 billion and $3.6 billion as presented in Table 57. For the remaining three countries noted above, net exposure at December 31, 2014 was $2.1 billion which primarily relates to Ireland. We expect to continue to support client activities in the region and our exposures may vary over time as we monitor the situation and manage our risk profile.
Table 58 presents countries where total
cross-border exposure exceeded one percent of our total assets. At December 31, 2014, the United Kingdom and France were the only countries where total cross-border exposure exceeded one percent of our total assets. At December 31, 2014, Germany had total cross-border exposure of $15.9 billion representing 0.76 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, 2014.
Cross-border
exposures in Table 58 are calculated using Federal Financial Institutions Examination Council (FFIEC) guidelines and not our internal risk management view; therefore, exposures are not comparable between Tables 57 and 58. Exposure includes cross-border claims by our non-U.S. offices including loans, acceptances, time deposits placed, trading account assets, securities, derivative assets, other interest-earning investments and other monetary assets. Amounts also include unfunded commitments, letters of credit and financial guarantees, and the notional amount of cash loaned under secured financing transactions. Sector definitions are consistent with FFIEC reporting requirements for preparing the Country Exposure Report.
Table
58
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
2014
$
11
$
2,056
$
34,595
$
36,662
1.74
%
2013
6
7,027
32,466
39,499
1.88
France
(1)
2014
4,479
2,631
14,368
21,478
1.02
(1)
At
December 31, 2013, total cross-border exposure for France was $17.8 billion, representing 0.85 percent of total assets.
Provision for Credit Losses
The provision for credit losses decreased $1.3 billion to $2.3 billion in 2014 compared to 2013. The provision for credit losses was $2.1 billion lower than net charge-offs for 2014,
resulting in a reduction in the allowance for credit losses. This compared to a reduction of $4.3 billion in the allowance for credit losses for 2013. We expect reserve releases in 2015 to moderate when compared to 2014.
The provision for credit losses for the consumer portfolio decreased $533 million to $1.5 billion in 2014 compared to 2013. The decrease was primarily due to continued improvement in the home loans portfolios as a result of increased home prices, improved delinquencies and continued loan balance run-off, as well as improvement in the credit card portfolios primarily driven by
lower unemployment levels. These were partially offset by a lower provision benefit related to the PCI loan portfolio of $31 million in 2014 compared to a benefit of $707 million in 2013. Also offsetting the improvement was $400 million of additional costs associated with the consumer relief portion of the DoJ Settlement. For more information on the DoJ Settlement, see Off-Balance Sheet Arrangements and Contractual Obligations – Servicing, Foreclosure and Other Mortgage Matters on page 53.
The provision for credit losses for the commercial portfolio,
including unfunded lending commitments, decreased $748 million to $793 million in 2014 compared to 2013 driven by improved asset quality in 2014.
Allowance for Credit Losses
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is comprised of two components. The first component covers nonperforming commercial loans and TDRs.
The second component covers loans and leases on which there are incurred losses that are not yet individually identifiable, as well as incurred losses that may not be represented in the loss forecast models. We evaluate the adequacy of the allowance for loan and lease losses based on the total of these two components, each of which is described in more detail below. The allowance for loan and lease losses excludes LHFS and loans accounted for under the fair value option as the fair value reflects a credit risk component.
The first component of the allowance for loan and lease losses covers both nonperforming commercial loans and all TDRs within the consumer and commercial portfolios. These loans are subject to impairment measurement based on the present value of projected future cash flows discounted at the loan’s original effective interest rate, or in certain circumstances, impairment may also be based upon the collateral
value or the loan’s observable market price if available. Impairment measurement for the renegotiated consumer credit card, small business credit card and unsecured consumer TDR portfolios is based on the present value of projected cash flows discounted using the average portfolio contractual interest rate, excluding promotionally priced loans, in effect prior to restructuring. For purposes of computing this specific loss component of the allowance, larger impaired loans are evaluated individually and smaller impaired loans are evaluated as a pool using historical experience for the respective product types and risk ratings of the loans.
95 Bank of America 2014
The
second component of the allowance for loan and lease losses covers the remaining consumer and commercial loans and leases that have incurred losses that are not yet individually identifiable. The allowance for consumer and certain homogeneous commercial loan and lease products is based on aggregated portfolio evaluations, generally by product type. Loss forecast models are utilized that consider a variety of factors including, but not limited to, historical loss experience, estimated defaults or foreclosures based on portfolio trends, delinquencies, economic trends and credit scores. Our consumer real estate loss forecast model estimates the portion of loans that will default based on individual loan attributes, the most significant of which are refreshed LTV or CLTV, and borrower credit score as well as vintage and geography, all of which are further broken down into current delinquency status. Additionally, we incorporate the delinquency status of underlying first-lien
loans on our junior-lien home equity portfolio in our allowance process. Incorporating refreshed LTV and CLTV into our probability of default allows us to factor the impact of changes in home prices into our allowance for loan and lease losses. These loss forecast models are updated on a quarterly basis to incorporate information reflecting the current economic environment. As of December 31, 2014, the loss forecast process resulted in reductions in the allowance for all major consumer portfolios compared to December 31, 2013.
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. 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 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,
2014, the allowance increased for all major commercial portfolios compared to December 31, 2013.
Also included within the second component of the allowance for loan and lease losses are reserves to cover losses that are incurred but, in our assessment, may not be adequately represented in the historical loss data used in the loss forecast models. For example, factors that we consider include, among others, changes in lending policies and procedures, changes in economic and business conditions, changes in the nature and size of the portfolio, changes in portfolio concentrations, changes in the volume and severity of past due loans and nonaccrual loans, the effect of external factors such as competition, and legal and regulatory requirements. We also consider factors that are applicable to unique portfolio
segments. For example, we consider the risk of uncertainty in our loss forecasting models related to junior-lien home equity loans that are current, but have first-lien
loans that we do not service that are 30 days or more past due. In addition, we consider the increased risk of default associated with our interest-only loans that have yet to enter the amortization period. Further, we consider the inherent uncertainty in mathematical models that are built upon historical data.
During 2014, the factors that impacted the allowance for loan and lease losses included overall improvements in the credit quality of the portfolios driven by continuing improvements in the U.S. economy and housing and labor markets, continuing proactive credit
risk management initiatives and the impact of recent higher credit quality originations. Additionally, the resolution of uncertainties through current recognition of net charge-offs has impacted the amount of reserve needed in certain portfolios. Evidencing the improvements in the U.S. economy and housing and labor markets are modest growth in consumer spending, improvements in unemployment levels, a decrease in the absolute level and our share of national consumer bankruptcy filings, and a rise in both residential building activity and overall home prices. In addition to these improvements, paydowns, charge-offs, sales, returns to performing status and upgrades out of criticized continued to outpace new nonaccrual loans and reservable criticized commercial loans.
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.
Additions to, or reductions of, the allowance for loan and lease losses generally are recorded through charges or credits to the provision for credit losses. Credit exposures deemed to be uncollectible are charged against the allowance for loan and lease losses. Recoveries of previously charged off amounts are credited to the allowance for loan and lease losses.
The allowance for loan and lease losses for the consumer portfolio, as presented in Table 60, was $10.0 billion at December 31, 2014, a decrease of $3.4 billion
from December 31, 2013. The decrease was primarily in the residential mortgage and home equity portfolios due to increased home prices, as evidenced by improving LTV statistics as presented in Tables 28 and 30, improved delinquencies and a decrease in consumer loan balances. Further, the residential mortgage and home equity allowance declined due to write-offs in our PCI loan portfolio. These write-offs decreased the PCI valuation allowance included as part of the allowance for loan and lease losses.
The decrease in the allowance related to the U.S. credit card and unsecured consumer lending portfolios in CBB was primarily due to improvement
in delinquencies and bankruptcies. For example, in the U.S. credit card portfolio, accruing loans 30 days or more past due decreased to $1.7 billion at December 31, 2014 from $2.1 billion (to 1.85 percent from 2.25 percent of outstanding U.S. credit card loans) at December 31, 2013, and accruing loans 90 days or more past due decreased to $866 million at December 31, 2014
from $1.1 billion (to 0.94 percent from 1.14 percent of outstanding U.S. credit card loans) at December 31, 2013. See Tables 25, 26, 35 and 37 for additional details on key credit statistics for the credit card and other unsecured consumer lending portfolios.
Bank
of America 2014 96
The allowance for loan and lease losses for the commercial portfolio, as presented in Table 60, was $4.4 billion at December 31, 2014, an increase of $432 million from December 31, 2013. The commercial utilized reservable criticized exposure decreased to $11.6 billion at December 31,
2014 from $12.9 billion (to 2.74 percent from 3.02 percent of total commercial utilized reservable exposure) at December 31, 2013. Nonperforming commercial loans decreased $196 million from December 31, 2013 to $1.1 billion (to 0.29 percent from 0.34 percent of outstanding commercial loans) at December 31,
2014. See Tables 41, 42 and 44 for additional details on key commercial credit statistics.
The allowance for loan and lease losses as a percentage of total loans and leases outstanding was 1.65 percent at
December 31, 2014 compared to 1.90 percent at December 31, 2013. The decrease in the ratio was primarily
due to improved credit quality driven by improved economic conditions and write-offs in the PCI loan portfolio. The December 31, 2014 and 2013 ratios above include the PCI loan portfolio. Excluding the PCI loan portfolio, the allowance for loan and lease losses as a percentage of total loans and leases outstanding was 1.50 percent and 1.67 percent at December 31, 2014 and 2013.
Table 59 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 2014 and 2013.
Table 59
Allowance
for Credit Losses
(Dollars in millions)
2014
2013
Allowance
for loan and lease losses, January 1
$
17,428
$
24,179
Loans and leases charged off
Residential mortgage
(855
)
(1,508
)
Home
equity
(1,364
)
(2,258
)
U.S. credit card
(3,068
)
(4,004
)
Non-U.S. credit card
(357
)
(508
)
Direct/Indirect
consumer
(456
)
(710
)
Other consumer
(268
)
(273
)
Total consumer charge-offs
(6,368
)
(9,261
)
U.S.
commercial (1)
(584
)
(774
)
Commercial real estate
(29
)
(251
)
Commercial lease
financing
(10
)
(4
)
Non-U.S. commercial
(35
)
(79
)
Total commercial charge-offs
(658
)
(1,108
)
Total
loans and leases charged off
(7,026
)
(10,369
)
Recoveries of loans and leases previously charged off
Residential mortgage
969
424
Home
equity
457
455
U.S. credit card
430
628
Non-U.S. credit card
115
109
Direct/Indirect
consumer
287
365
Other consumer
39
39
Total consumer recoveries
2,297
2,020
U.S.
commercial (2)
214
287
Commercial real estate
112
102
Commercial
lease financing
19
29
Non-U.S. commercial
1
34
Total commercial recoveries
346
452
Total
recoveries of loans and leases previously charged off
2,643
2,472
Net charge-offs
(4,383
)
(7,897
)
Write-offs of PCI
loans
(810
)
(2,336
)
Provision for loan and lease losses
2,231
3,574
Other (3)
(47
)
(92
)
Allowance
for loan and lease losses, December 31
14,419
17,428
Reserve for unfunded lending commitments, January 1
484
513
Provision
for unfunded lending commitments
44
(18
)
Other
—
(11
)
Reserve for unfunded lending commitments, December 31
528
484
Allowance
for credit losses, December 31
$
14,947
$
17,912
(1)
Includes U.S. small business commercial charge-offs of $345 million and $457 million in 2014
and 2013.
(2)
Includes U.S. small business commercial recoveries of $63 million and $98 million in 2014 and 2013.
(3)
Primarily represents the net impact of portfolio sales, consolidations and deconsolidations, and foreign currency translation
adjustments.
97 Bank of America 2014
Table
59
Allowance for Credit Losses (continued)
(Dollars in millions)
2014
2013
Loan
and allowance ratios:
Loans and leases outstanding at December 31 (4)
$
872,710
$
918,191
Allowance
for loan and lease losses as a percentage of total loans and leases outstanding at December 31 (4)
1.65
%
1.90
%
Consumer allowance for loan and lease losses as a percentage of total consumer loans and leases outstanding at December 31 (5)
2.05
2.53
Commercial
allowance for loan and lease losses as a percentage of total commercial loans and leases outstanding at December 31 (6)
1.15
1.03
Average loans and leases outstanding (4)
$
894,001
$
909,127
Net
charge-offs as a percentage of average loans and leases outstanding (4, 7)
0.49
%
0.87
%
Net charge-offs and PCI write-offs as a percentage of average loans and leases outstanding (4)
0.58
1.13
Allowance
for loan and lease losses as a percentage of total nonperforming loans and leases at December 31 (4, 8)
121
102
Ratio of the allowance for loan and lease losses at December 31 to net charge-offs (7)
3.29
2.21
Ratio
of the allowance for loan and lease losses at December 31 to net charge-offs and PCI write-offs
2.78
1.70
Amounts included in allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases at December 31 (9)
$
5,944
$
7,680
Allowance
for loan and lease losses as a percentage of total nonperforming loans and leases, excluding the allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases at December 31 (4, 9)
71
%
57
%
Loan and allowance ratios excluding PCI loans and the related valuation allowance: (10)
Allowance
for loan and lease losses as a percentage of total loans and leases outstanding at December 31 (4)
1.50
%
1.67
%
Consumer allowance for loan and lease losses as a percentage of total consumer loans and leases outstanding at December 31 (5)
1.79
2.17
Net
charge-offs as a percentage of average loans and leases outstanding (4)
0.50
0.90
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases at December 31 (4, 8)
107
87
Ratio
of the allowance for loan and lease losses at December 31 to net charge-offs
2.91
1.89
(4)
Outstanding loan and lease balances and ratios do not include loans accounted for under the fair value option of $8.7 billion and $10.0 billion at December
31, 2014 and 2013. Average loans accounted for under the fair value option were $9.9 billion and $9.5 billion in 2014 and 2013.
(5)
Excludes consumer loans accounted for under the fair value option of $2.1 billion and $2.2 billion at December 31, 2014 and 2013.
(6)
Excludes
commercial loans accounted for under the fair value option of $6.6 billion and $7.9 billion at December 31, 2014 and 2013.
(7)
Net charge-offs exclude $810 million and $2.3 billion of write-offs in the PCI loan portfolio in 2014 and 2013. These write-offs decreased the PCI valuation allowance
included as part of the allowance for loan and lease losses. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 78.
(8)
For more information on our definition of nonperforming loans, see pages 82 and 89.
(9)
Primarily
includes amounts allocated to U.S. credit card and unsecured consumer lending portfolios in CBB, PCI loans and the non-U.S. credit card portfolio in All Other.
(10)
For more information on the PCI loan portfolio and the valuation allowance for PCI loans, see Note 4 – Outstanding Loans and Leases and Note 5 – Allowance for Credit Losses to the Consolidated Financial Statements.
For reporting purposes, we allocate the allowance
for credit losses across products. However, the allowance is generally available to absorb any credit losses without restriction. Table 60 presents our allocation by product type.
Table
60
Allocation of the Allowance for Credit Losses by Product Type
Ratios
are calculated as allowance for loan and lease losses as a percentage of loans and leases outstanding excluding loans accounted for under the fair value option. Consumer loans accounted for under the fair value option included residential mortgage loans of $1.9 billion and $2.0 billion and home equity loans of $196 million and $147 million at December 31, 2014 and 2013. Commercial loans accounted for under the fair value option included U.S. commercial loans of $1.9 billion and $1.5 billion and non-U.S. commercial loans of $4.7
billion and $6.4 billion at December 31, 2014 and 2013.
(2)
Includes allowance for loan and lease losses for U.S. small business commercial loans of $536 million and $462 million at December 31, 2014 and 2013.
(3)
Includes
allowance for loan and lease losses for impaired commercial loans of $159 million and $277 million at December 31, 2014 and 2013.
(4)
Includes $1.7 billion and $2.5 billion of valuation allowance presented with the allowance for loan and lease losses related to PCI loans at December 31, 2014 and 2013.
Bank
of America 2014 98
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 the Corporation’s
historical experience are applied to the unfunded commitments to estimate the funded 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 $528 million at December 31, 2014, an increase of $44 million from December 31, 2013. The increase was driven by increases in expected loss.
Market
Risk Management
Market risk is the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions. 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 the results of the Corporation. For additional information, see Interest Rate Risk Management for Non-trading Activities on page 105.
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.
A subcommittee has been designated by the MRC as the primary risk governance authority for Global Markets (Global Markets, or GM subcommittee). The GM subcommittee’s focus is to take a forward-looking view of the primary credit, market and operational risks impacting Global Markets and prioritize those that need a proactive risk mitigation strategy.
Global Markets Risk Management is responsible for providing senior management with a clear and comprehensive understanding of the trading risks to which
the Corporation is exposed. These responsibilities include ownership of market risk policy, developing and maintaining quantitative risk models, calculating aggregated risk measures, establishing and monitoring position limits consistent with risk appetite, conducting daily reviews and analysis of trading inventory, approving material risk exposures and fulfilling regulatory requirements. Market risks that impact businesses outside of Global Markets are monitored and governed by their respective governance functions.
Quantitative risk models, such as VaR, are an essential component in evaluating the market risks within a portfolio. A subcommittee of the MRC is responsible for providing management oversight and approval of model risk management and governance (Risk Management, or RM subcommittee). The RM subcommittee defines model risk standards, consistent with the Corporation’s
risk framework and risk appetite, prevailing regulatory guidance and industry best practice. Models must meet certain validation criteria, including effective challenge of the model development process and a sufficient demonstration of developmental evidence incorporating a comparison of alternative theories and approaches. The RM subcommittee ensures model standards are consistent with model risk requirements and monitors the effective challenge in the model validation process across the Corporation. In addition, the relevant stakeholders must agree on any required actions or restrictions to the models and maintain a stringent monitoring process to ensure continued compliance.
For more information on the fair value of certain financial assets and liabilities, see Note 20 – Fair Value Measurements to the Consolidated Financial Statements.
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
99 Bank
of America 2014
several forms. First, we trade and engage in market-making activities in a variety of mortgage securities including whole loans, pass-through certificates, commercial mortgages and collateralized mortgage obligations including CDOs using mortgages as underlying collateral. Second, we originate a variety of MBS which involves the accumulation of mortgage-related loans in anticipation of eventual securitization. Third, we may hold positions in mortgage securities and residential mortgage loans as part of the ALM portfolio. Fourth, we create MSRs as part of our mortgage origination activities. For more information on MSRs, see Note 1 – Summary of Significant Accounting Principles
and Note 23 – Mortgage Servicing Rights to the Consolidated Financial Statements. Hedging instruments used to mitigate this risk include derivatives such as options, swaps, futures and forwards. For additional information, see Mortgage Banking Risk Management on page 108.
Equity Market Risk
Equity market risk represents exposures to securities that represent an ownership interest in a corporation in the form of domestic and foreign common stock or other equity-linked instruments. Instruments that would lead to this exposure include, but are not limited to, the following: common stock, exchange-traded funds, American Depositary Receipts, convertible bonds, listed equity options (puts and calls),
OTC equity options, equity total return swaps, equity index futures and other equity derivative products. Hedging instruments used to mitigate this risk include options, futures, swaps, convertible bonds and cash positions.
Commodity Risk
Commodity risk represents exposures to instruments traded in the petroleum, natural gas, power and metals markets. These instruments consist primarily of futures, forwards, swaps and options. Hedging instruments used to mitigate this risk include options, futures and swaps in the same or similar commodity product, as well as cash positions.
Issuer Credit Risk
Issuer credit risk represents exposures to changes in the creditworthiness of individual issuers or groups of issuers. Our portfolio is exposed to issuer credit risk where the value of an asset may be adversely
impacted by changes in the levels of credit spreads, by credit migration or by defaults. Hedging instruments used to mitigate this risk include bonds, CDS and other credit fixed-income instruments.
Market Liquidity Risk
Market liquidity risk represents the risk that the level of expected market activity changes dramatically and, in certain cases, may even cease. This exposes us to the risk that we will not be able to transact business and execute trades in an orderly manner which may impact our results. This impact could be further exacerbated if expected hedging or pricing correlations are compromised by disproportionate demand or lack of demand for certain instruments. We utilize various risk mitigating techniques as discussed in more detail in Trading Risk Management.
Trading
Risk Management
To evaluate risk in our trading activities, we focus on the actual and potential volatility of revenues generated by individual positions as well as portfolios of positions. Various techniques and procedures are utilized to enable the most complete understanding of these risks. Quantitative measures of market risk are evaluated on a daily basis from a single position to the portfolio of the Corporation. These measures include sensitivities of positions to various market risk factors, such as the potential impact on revenue from a one basis point change in interest rates, and statistical measures utilizing both actual and hypothetical market moves, such as VaR and stress testing. Periods of extreme market stress influence the reliability of these techniques to varying degrees. Qualitative evaluations of market risk utilize the suite of quantitative risk measures while understanding each of their respective limitations.
Additionally, risk managers independently evaluate the risk of the portfolios under the current market environment and potential future environments.
VaR is a common statistic used to measure market risk as it allows the aggregation of market risk factors, including the effects of portfolio diversification. A VaR model simulates the value of a portfolio under a range of scenarios in order to generate a distribution of potential gains and losses. VaR represents the loss a portfolio is not expected to exceed more than a certain number of times per period, based on a specified holding period, confidence level and window of historical data. We use one VaR model consistently across the trading portfolios and it uses a historical simulation approach based on a three-year window of historical data. Our primary VaR statistic is equivalent to a 99 percent confidence level. This means that for a VaR with a one-day holding period, there
should not be losses in excess of VaR, on average, 99 out of 100 trading days.
Within any VaR model, there are significant and numerous assumptions that will differ from company to company. The accuracy of a VaR model depends on the availability and quality of historical data for each of the risk factors in the portfolio. A VaR model may require additional modeling assumptions for new products that do not have the necessary historical market data or for less liquid positions for which accurate daily prices are not consistently available. For positions with insufficient historical data for the VaR calculation, the process for establishing an appropriate proxy is based on fundamental and statistical analysis of the new product or less liquid position. This analysis identifies reasonable alternatives that replicate both the expected volatility and correlation to other market risk factors that the missing data would be expected
to experience.
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 relatively minor portion of risks related to our trading positions are not included in VaR. These risks are reviewed as part of our ICAAP.
Bank
of America 2014 100
Global Markets 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 monitored on a daily basis. These trading limits are independently set by Global Markets Risk Management and reviewed on a regular basis to ensure they 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 ensure 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 and the MRC has given authority to the GM subcommittee to approve changes to trading limits throughout the year. 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 monitored on a daily basis and are approved at least annually by the ERC and the Board.
In periods of market stress, the GM subcommittee members communicate daily to discuss losses, key risk positions and any limit excesses. As a result of this process, the businesses may selectively
reduce risk.
Market risk VaR for trading activities as presented in Table 61 differs from VaR used for regulatory capital calculations (regulatory VaR). The VaR disclosed in Table 61 excludes both CVA, which are adjustments to the mark-to-market value of our derivative exposures to reflect the impact of the credit quality of counterparties on our derivative assets, and the corresponding hedges. Current regulatory standards require that regulatory VaR
only exclude CVA but include the corresponding hedges. The holding period for regulatory VaR for capital calculations is 10 days, while for the market risk VaR presented below, it is one day. Except for the differences between regulatory and
market risk VaR regarding the inclusion of CVA hedges and the holding period, both measures utilize the same process and methodology.
To provide visibility of market risks to which the Corporation is exposed, Table 61 presents the total market-based trading portfolio VaR which includes our total covered positions trading portfolio and the impact from less liquid trading exposures. Covered positions are defined by regulatory standards as trading assets and liabilities, both on- and off-balance sheet, that meet a defined set of specifications. These specifications identify the most liquid trading positions which are intended to be held for a short-term horizon and where the Corporation is 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 we choose to exclude with prior regulatory approval. Certain positions related to our CVA and corresponding hedges are considered covered positions; however, these are excluded from the VaR results presented in Table 61. In addition, Table 61 presents our fair value option portfolio, which includes the funded and unfunded exposures for which we elect the fair value option, and their corresponding hedges. The fair value option portfolio combined with the total market-based trading portfolio VaR represents the Corporation’s total market-based portfolio VaR. This population is consistent with the risk appetite limits set by the ERC and the Board.
The market risk across all business
segments to which the Corporation is exposed is included in the total market-based portfolio VaR results. The majority of this portfolio is within the Global Markets segment.
101 Bank of America 2014
Table 61 presents year-end, average, high and low daily trading VaR for 2014
and 2013 using a 99 percent confidence level.
Table
61
Market Risk VaR for Trading Activities
2014
2013
(Dollars
in millions)
Year End
Average
High (1)
Low (1)
Year End
Average
High (1)
Low (1)
Foreign
exchange
$
13
$
16
$
24
$
8
$
15
$
19
$
41
$
11
Interest
rate
24
34
60
19
34
32
61
20
Credit
43
52
82
32
61
58
86
41
Equities
16
17
32
11
23
28
57
16
Commodities
8
8
10
6
6
13
20
6
Portfolio
diversification
(56
)
(78
)
—
—
(68
)
(85
)
—
—
Total
covered positions trading portfolio
48
49
86
33
71
65
117
39
Impact
from less liquid exposures
7
7
—
—
20
4
—
—
Total
market-based trading portfolio
55
56
101
38
91
69
115
44
Fair
value option loans
35
31
40
21
33
42
55
29
Fair
value option hedges
21
14
23
8
15
19
31
12
Fair
value option portfolio diversification
(37
)
(24
)
—
—
(25
)
(32
)
—
—
Total
fair value option portfolio
19
21
28
15
23
29
39
21
Portfolio
diversification
(7
)
(12
)
—
—
(1
)
(13
)
—
—
Total
market-based portfolio
$
67
$
65
$
120
$
44
$
113
$
85
$
127
$
60
(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, are not relevant.
The year-end and the average total market-based trading portfolio VaR decreased during 2014 due to elevated market volatility experienced during the 2011 roll-out of the three-year window of historical data used in the VaR calculation. Additionally, a smaller impact to the reduction in total market-based trading
portfolio
VaR was due to an overall reduction from portfolio changes.
The graph below presents the daily total market-based trading portfolio VaR for 2014, corresponding to the data in Table 61.
Bank of America 2014 102
Additional
VaR statistics produced within the Corporation’s single VaR model are provided in Table 62 at the same level of detail as in Table 61. 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 62 presents average trading VaR statistics for 99 percent and 95 percent confidence levels for 2014 and 2013.
Table
62
Average Market Risk VaR for Trading Activities – 99 percent and 95 percent VaR Statistics
2014
2013
(Dollars
in millions)
99 percent
95 percent
99 percent
95 percent
Foreign exchange
$
16
$
9
$
19
$
12
Interest
rate
34
21
32
19
Credit
52
26
58
33
Equities
17
9
28
15
Commodities
8
4
13
8
Portfolio
diversification
(78
)
(43
)
(85
)
(51
)
Total covered positions trading portfolio
49
26
65
36
Impact
from less liquid exposures
7
3
4
3
Total market-based trading portfolio
56
29
69
39
Fair
value option loans
31
15
42
21
Fair value option hedges
14
9
19
13
Fair
value option portfolio diversification
(24
)
(14
)
(32
)
(19
)
Total fair value
option portfolio
21
10
29
15
Portfolio diversification
(12
)
(8
)
(13
)
(9
)
Total
market-based portfolio
$
65
$
31
$
85
$
45
Backtesting
The
accuracy of the VaR methodology is evaluated by backtesting, which compares the daily VaR results, utilizing a one-day holding period, against a comparable subset of trading revenue. A backtesting excess occurs when a trading loss exceeds the VaR for the corresponding day. These excesses are evaluated to understand the positions and market moves that produced the trading loss and to ensure that the VaR methodology accurately represents those losses. As our primary VaR statistic used for backtesting is based on a 99 percent confidence level and a one-day holding period, 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.
We conduct daily backtesting on our portfolios, ranging from the total market-based portfolio to individual trading areas. Additionally, we conduct daily backtesting on our regulatory VaR results 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.
The trading revenue used for backtesting is defined by regulatory agencies in order to most closely align with the VaR component of the regulatory capital calculation. This revenue differs from total trading-related revenue in that it excludes revenue from trading activities that either do not generate market risk or the market risk cannot be included in VaR. Some examples of the
types
of revenue excluded for backtesting are fees, commissions, reserves, net interest income and intraday trading revenues. In addition, CVA is not included in the VaR component of the regulatory capital calculation and is therefore not included in the revenue used for backtesting of the regulatory VaR results.
During 2014, there were no days in which there was a backtesting excess for our total market-based portfolio, utilizing a one-day holding period. There were three backtesting excesses for our regulatory VaR results, utilizing a one-day holding period, due to increased volatility during the three months ended December 31, 2014.
Total Trading Revenue
Total trading-related revenue, excluding
brokerage fees, represents the total amount earned from trading positions, including market-based net interest income, which are taken in a diverse range of financial instruments and markets. Trading account assets and liabilities are reported at fair value. For more information on fair value, see Note 20 – Fair Value Measurements to the Consolidated Financial Statements. Trading-related revenues can be volatile and are largely driven by general market conditions and customer demand. Also, trading-related revenues are 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 revenues by business are monitored and the primary drivers of these are reviewed. When it is deemed material, an explanation of these revenues is provided to
the GM subcommittee.
103 Bank of America 2014
The histogram below is a graphic depiction of trading volatility and illustrates the daily level of trading-related revenue for 2014 and 2013. During 2014, positive
trading-related revenue was recorded for 95 percent of the trading days, of which 72 percent were daily trading gains of over $25 million and the largest loss
was $17 million. This compares to 2013 where positive trading-related revenue was recorded for 96 percent of the trading days, of which 74 percent were daily trading gains of over $25 million and the largest loss was $54 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 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 10-business day window or longer representing the most severe point during a crisis is selected for each historical scenario. Hypothetical scenarios provide simulations of the estimated portfolio impact 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 adhoc scenarios are developed to address specific potential market events. For example, a stress test was conducted to estimate the impact of a significant increase in global interest rates and the corresponding impact across other asset classes. 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. A process is in place to promote consistency between the scenarios used for the trading portfolio and those used for enterprise-wide stress testing. The 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 additional information, see Managing Risk – Corporation-wide Stress Testing on page 58.
Bank of America 2014 104
Interest
Rate Risk Management for Nontrading Activities
The following discussion presents net interest income excluding the impact of trading-related activities.
Interest rate risk represents the most significant market risk exposure to our non-trading balance sheet. Interest rate risk is measured as the potential change in net interest income caused by movements in market interest rates. Client-facing activities, primarily lending and deposit-taking, create interest rate sensitive positions on our balance sheet.
We prepare forward-looking forecasts of net interest income. The baseline forecast takes into consideration expected future business growth, ALM positioning and the direction of interest rate movements as implied by the market-based forward curve. We then measure and evaluate the impact that alternative interest rate scenarios have on
the baseline forecast in order to assess interest rate sensitivity under varied conditions. The net interest income forecast is frequently updated for changing assumptions and differing outlooks based on economic trends, market conditions and business strategies. Thus, we continually monitor our balance sheet position in order to maintain an acceptable level of exposure to interest rate changes.
The interest rate scenarios that we analyze incorporate balance sheet assumptions such as loan and deposit growth and pricing, changes in funding mix, product repricing and maturity characteristics. Our overall goal is to manage interest rate risk so that movements in interest rates do not significantly adversely affect earnings and capital.
Table 63 presents the spot and 12-month forward rates used in our baseline forecasts at December
31, 2014 and 2013.
Table
64 shows the pretax dollar impact to forecasted net interest income over the next 12 months from December 31, 2014 and 2013, resulting from instantaneous parallel and non-parallel shocks to the market-based forward curve. Periodically, we evaluate the scenarios presented to ensure that they are meaningful in the context of the current rate environment. For more
information on net interest income excluding the impact of trading-related activities, see page 33.
We continue to be asset-sensitive to both a parallel move in interest rates and a long-end led steepening of
the yield curve. Additionally, rising interest rates impact the fair value of debt securities and, accordingly, for debt securities classified as AFS, may adversely affect accumulated OCI and thus capital levels under the Basel 3 capital rules. Under instantaneous upward parallel shifts, the near term adverse impact to accumulated OCI and Basel 3 capital is reduced over time by offsetting positive impacts to net interest income. For more information on the phase-in provisions of Basel 3 including accumulated OCI, see Capital Management – Regulatory Capital on page 59.
Table
64
Estimated Net Interest Income Excluding Trading-related Net Interest Income
(Dollars in millions)
Short
Rate (bps)
Long
Rate (bps)
December 31
Curve Change
2014
2013
Parallel Shifts
+100 bps
instantaneous shift
+100
+100
$
3,685
$
3,229
-50 bps
instantaneous
shift
-50
-50
(3,043
)
(1,616
)
Flatteners
Short-end
instantaneous change
+100
—
1,966
2,210
Long-end
instantaneous change
—
-50
(1,772
)
(641
)
Steepeners
Short-end
instantaneous change
-50
—
(1,261
)
(937
)
Long-end
instantaneous
change
—
+100
1,782
1,066
The sensitivity analysis in Table 64 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, residential mortgages, and interest rate and foreign exchange derivatives in managing interest rate sensitivity.
The behavior of our deposit portfolio in the baseline forecast and in alternate interest rate scenarios is a key assumption in our projected estimates of net interest income. The sensitivity analysis in Table 64 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 the Corporation’s benefit in those scenarios.
105 Bank
of America 2014
Securities
The securities portfolio is an integral part of our interest rate risk management, which includes our ALM positioning, and is primarily comprised of debt securities including MBS and U.S. Treasury securities. As part of the ALM positioning, we use derivatives to hedge interest rate and duration risk. At December 31, 2014 and 2013, our debt securities portfolio had a carrying value of $380.5 billion
and $323.9 billion.
During 2014 and 2013, we purchased debt securities of $293.8 billion and $190.4 billion, sold $157.7 billion and $117.7 billion, and had maturities and received paydowns of $87.6 billion and $94.0 billion, respectively. We realized $1.4 billion and $1.3 billion in net gains on sales of AFS debt securities.
At December 31,
2014, accumulated OCI included after-tax net unrealized gains of $1.3 billion on AFS debt securities and after-tax net unrealized gains of $17 million on AFS marketable equity securities compared to after-tax net unrealized losses of $3.3 billion and after-tax net unrealized losses of $4 million at December 31, 2013. For more information on accumulated OCI, see Note 14 – Accumulated Other Comprehensive Income (Loss) to the Consolidated Financial Statements. The pretax
net amounts in accumulated OCI related to AFS debt securities increased $7.4 billion during 2014 to a $2.2 billion net unrealized gain primarily due to the impact of interest rates. For more information on our securities portfolio, see Note 3 – Securities to the Consolidated Financial Statements.
We recognized $16 million of other-than-temporary impairment (OTTI) losses in earnings on AFS debt securities in 2014 compared to losses of $20 million in 2013.
OTTI losses during 2014 and 2013 were on non-agency RMBS and were recorded in other income on the Consolidated Statement of Income. The recognition of OTTI losses is based on a variety of factors, including the length of time and extent to which the market value has been less than amortized cost, the financial condition of the issuer of the security including credit ratings and any specific events affecting the operations of the issuer, underlying assets that collateralize the debt security, other industry and macroeconomic conditions, and our intent and ability to hold the security to recovery.
Residential Mortgage Portfolio
At December 31, 2014 and 2013,
our residential mortgage portfolio was $216.2 billion and $248.1 billion excluding $1.9 billion and $2.0 billion of consumer residential mortgage loans accounted for under the fair value option at each period end. For more information on consumer fair value option loans, see Consumer Portfolio Credit Risk Management – Consumer Loans
Accounted for Under the Fair Value Option on page 82. The $31.9 billion decrease in 2014
was primarily due to paydowns, sales, charge-offs and transfers to foreclosed properties. Of the decline, more than 50 percent was due to the sale of $10.7 billion of loans with standby insurance agreements and $6.7 billion of nonperforming and other delinquent loan sales. These were partially offset by new origination volume retained on our balance sheet, as well as repurchases of delinquent loans pursuant to our servicing agreements with GNMA, which are part of our mortgage banking activities.
During 2014, CRES and GWIM originated $23.2 billion of first-lien mortgages that we retained compared to $44.5 billion in 2013. We received paydowns of $37.8 billion in 2014
compared to $53.0 billion in 2013. We repurchased $5.0 billion of loans pursuant to our servicing agreements with GNMA and redelivered $3.6 billion, primarily FHA-insured loans, compared to repurchases of $10.4 billion and redeliveries of $5.0 billion in 2013. Sales of loans, excluding redelivered FHA-insured loans, during 2014 were $17.4 billion compared to $4.0 billion in 2013. Gains recognized on the sales of residential mortgage loans during 2014 were $668 million compared to $75 million in 2013.
Interest Rate and Foreign Exchange Derivative Contracts
Interest
rate and foreign exchange derivative contracts are utilized in our ALM activities and serve as an efficient tool to manage our interest rate and foreign exchange risk. We use derivatives to hedge the variability in cash flows or changes in fair value on our balance sheet due to interest rate and foreign exchange components. For more information on our hedging activities, see Note 2 – Derivatives to the Consolidated Financial Statements.
Our interest rate contracts are generally non-leveraged generic interest rate and foreign exchange basis swaps, options, futures and forwards. In addition, we use foreign exchange contracts,
including cross-currency interest rate swaps, foreign currency futures contracts, foreign currency forward contracts and options to mitigate the foreign exchange risk associated with foreign currency-denominated assets and liabilities.
Changes to the composition of our derivatives portfolio during 2014 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.
Bank
of America 2014 106
Table 65 presents derivatives utilized in our ALM activities including those designated as accounting and economic hedging instruments and shows the notional amount, fair value, weighted-average receive-fixed and pay-fixed rates, expected maturity and average estimated durations of our open ALM derivatives at December 31, 2014 and 2013. These amounts do not include derivative hedges on our MSRs.
Table
65
Asset and Liability Management Interest Rate and Foreign Exchange Contracts
The
receive-fixed interest rate swap notional amounts that represent forward starting swaps and which will not be effective until their respective contractual start dates totaled $600 million at December 31, 2013. There were no forward starting receive-fixed interest rate swap positions at December 31, 2014. There were no forward starting pay-fixed swap positions at December 31, 2014 compared to $1.1 billion at December 31, 2013.
(2)
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.
(3)
At December 31, 2014 and 2013, the notional amount of same-currency basis swaps was comprised of $94.4 billion and $145.2 billion in both foreign currency and U.S. Dollar-denominated basis swaps in which both sides of the swap are
in the same currency.
(4)
The change in the fair value for foreign exchange basis swaps was primarily driven by the weakening of foreign currencies against the U.S. Dollar throughout 2014 compared to 2013.
(5)
Foreign exchange basis swaps consisted of cross-currency variable interest rate swaps used separately or in conjunction with receive-fixed interest rate swaps.
(6)
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.
(7)
The notional amount of option products of $980 million at December 31, 2014 was comprised of $974 million in foreign exchange options, $16 million in purchased caps/floors and $(10) million in swaptions. Option products of $(641) million
at December 31, 2013 were comprised of $(2.0) billion in swaptions, $1.4 billion in foreign exchange options and $19 million in purchased caps/floors.
(8)
Reflects the net of long and short positions. Amounts shown as negative reflect a net short position.
(9)
The
notional amount of foreign exchange contracts of $(22.6) billion at December 31, 2014 was comprised of $21.0 billion in foreign currency-denominated and cross-currency receive-fixed swaps, $(36.4) billion in net foreign currency forward rate contracts, $(8.3) billion in foreign currency-denominated pay-fixed swaps and $1.1 billion in net foreign currency futures contracts.
Foreign exchange contracts of $(19.5) billion at December 31, 2013 were comprised of $36.1 billion in foreign currency-denominated and cross-currency receive-fixed swaps, $(49.3) billion in net foreign currency forward rate contracts, $(10.3) billion in foreign currency-denominated pay-fixed swaps and $4.0 billion in foreign currency futures contracts.
107 Bank
of America 2014
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 $2.7 billion and $3.6 billion, on a pretax basis, at December 31, 2014 and 2013.
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, 2014, the pretax net losses are expected to be reclassified into earnings as follows: $803 million, or 30 percent within the next year, 46 percent in years two through five, and 16 percent in years six through ten, with the remaining eight percent thereafter. For more information on derivatives designated as cash flow hedges, see Note 2 – 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, 2014.
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 HFI 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. Fluctuations in interest rates drive consumer demand for new mortgages and the level of refinancing activity, which in turn affects total origination and servicing income. Hedging the various sources of interest rate risk in mortgage banking is a complex process that requires complex modeling and ongoing monitoring. Typically, an increase in mortgage interest rates will lead to a decrease in mortgage originations and related fees. IRLCs and the related residential first mortgage LHFS are subject to interest rate risk between the date of the IRLC and the date the loans are sold to the secondary market, as an increase in mortgage interest rates will typically lead to a decrease
in the value of these instruments.
MSRs are nonfinancial assets created when the underlying mortgage loan is sold to investors and we retain the right to service the loan. Typically, an increase in mortgage rates will lead to an increase in the value of the MSRs driven by lower prepayment expectations. This increase in value from increases in mortgage rates is opposite of, and therefore offsets, the risk described for IRLCs and LHFS. Previously we hedged MSRs separately from the IRLCs and first mortgage LHFS assets. Because the interest rate risks of these two hedged items offset, we decided to combine them into one overall hedged item with one combined economic hedge portfolio.
Beginning in the fourth quarter of 2014, interest rate and certain market risks of IRLCs and residential
mortgage LHFS were economically hedged in combination with MSRs. To hedge these combined assets, we use certain derivatives such as interest rate options, interest rate swaps, forward sale commitments, eurodollar and U.S. Treasury futures, and mortgage TBAs, as well as other securities including agency MBS, principal-only and interest-only MBS and U.S. Treasury securities. The fair value and notional amounts of the derivative contracts and the fair value of securities hedging the combined MSRs, IRLCs and residential first mortgage LHFS were $(3.6) billion, $1.1 trillion and $558 million at December 31, 2014. The fair value and notional amounts of the derivative contracts and the fair value of securities
hedging the MSRs at December 31, 2013 were $(2.9) billion, $1.8 trillion and $2.5 billion. The notional amount of derivatives economically hedging only the IRLCs and residential first mortgage LHFS at December 31, 2013 were $7.9 billion. In 2014, we recorded in mortgage banking income gains of $1.6 billion related to the change in fair value of the derivative contracts and other securities used to hedge the market risks of the MSRs compared to losses of $1.1 billion for 2013. For more information on MSRs, see Note 23 – Mortgage Servicing Rights
to the Consolidated Financial Statements and for more information on mortgage banking income, see CRES on page 38.
Compliance Risk Management
Compliance risk is the risk of legal or regulatory sanctions, material financial loss or damage to the reputation of the Corporation in the event of the failure of the Corporation to comply with the requirements of applicable laws, rules, regulations, related self-regulatory organization standards and codes of conduct (collectively, applicable laws, rules and regulations). Global Compliance independently assesses compliance risk, and evaluates adherence to applicable laws, rules and regulations, including identifying compliance issues
and risks, performing monitoring and testing, and reporting on the state of compliance activities across the Corporation. Additionally, Global Compliance works with FLUs and control functions so that day-to-day activities operate in a compliant manner. For more information on FLUs and control functions, see Managing Risk on page 55.
The Corporation’s approach to the management of compliance risk is further described in the Global Compliance Policy, which outlines the requirements of the Corporation’s global compliance program, and defines roles and responsibilities related to the implementation, execution and management of the compliance program by Global Compliance. The requirements work together to drive a comprehensive risk-based approach for the proactive identification, management and escalation of compliance risks throughout
the Corporation.
The Global Compliance Policy sets the requirements for reporting compliance risk information to executive management as well as the Board or appropriate Board-level committees with an outline for conducting objective oversight of the Corporation’s compliance risk management activities. The Board provides oversight of compliance risks through its Audit Committee and ERC.
Bank of America 2014 108
Operational
Risk Management
The Corporation defines operational risk as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk may occur anywhere in the Corporation, including outsourced business processes, and is not limited to operations functions. Its effects may extend beyond financial losses. Operational risk includes legal risk. Successful operational risk management is particularly important to diversified financial services companies because of the nature, volume and complexity of the financial services business. Operational risk is a significant component in the calculation of total risk-weighted assets used in the Basel 3 capital estimate under the Advanced approaches. For more information on Basel 3 Advanced approaches, see Capital Management – Advanced Approaches on page 61.
We approach operational risk management from two perspectives within the structure of the Corporation: (1) at the enterprise level to provide independent, integrated management of operational risk across the organization, and (2) at the business and control function levels to address operational risk in revenue producing and non-revenue producing units. The Operational Risk Management Program addresses the overarching processes for identifying, measuring, monitoring and controlling operational risk, and reporting operational risk information to management and the Board. A sound internal governance structure enhances the effectiveness of the Corporation’s Operational Risk Management Program and is accomplished at the enterprise level through formal oversight by the Board, the ERC, the CRO and a variety of management committees and risk oversight groups aligned to the Corporation’s overall risk governance framework and practices.
Of these, the MRC oversees the Corporation’s policies and processes for sound operational risk management. The MRC also serves as an escalation point for critical operational risk matters within the Corporation. The MRC reports operational risk activities to the ERC. The independent operational risk management teams oversee the businesses and control functions to monitor adherence to the Operational Risk Management Program and advise and challenge operational risk exposures.
Within the Global Risk Management organization, the Corporate Operational Risk team develops and guides the strategies, enterprise-wide policies, practices, controls and monitoring tools for assessing and managing operational risks across the organization and reports results to businesses, control functions, senior management, governance committees and the ERC and the Board.
The businesses and control functions
are responsible for assessing, monitoring and managing all the risks within their units, including operational risks. In addition to enterprise risk management tools such as loss reporting, scenario analysis and RCSAs, operational risk executives, working in conjunction with senior business executives, have developed key tools to help identify, measure, monitor and control risk in each business and control function. Examples of these include personnel management practices; data reconciliation processes; fraud management units; cybersecurity controls, processes and systems; transaction processing, monitoring and analysis; business recovery planning; and new product introduction processes. The business and control functions are also responsible for consistently implementing and monitoring adherence to corporate practices.
Business and control function management uses the enterprise RCSA process to capture the identification
and
assessment of operational risk exposures and evaluate the status of risk and control issues including mitigation plans, as appropriate. The goals of this process are to assess changing market and business conditions, evaluate key risks impacting each business and control function, and assess the controls in place to mitigate the risks. Key operational risk indicators for these risks have been developed and are used to assist in identifying trends and issues on an enterprise, business and control function level. Independent review and challenge to the Corporation’s overall operational risk management framework is performed by the Corporate Operational Risk Program Adherence Team and reported through the operational risk governance committees and management routines.
Where appropriate,
insurance policies are purchased to mitigate the impact of operational losses. These insurance policies are explicitly incorporated in the structural features of operational risk evaluation. As insurance recoveries, especially given recent market events, are subject to legal and financial uncertainty, the inclusion of these insurance policies is subject to reductions in their expected mitigating benefits.
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 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.
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 losses inherent in the Corporation’s loan portfolio excluding those loans accounted for under the fair value option. Our process for determining the allowance for credit losses is discussed in Note 1 – Summary of Significant Accounting Principles to
the Consolidated Financial Statements. We evaluate our allowance at the portfolio segment level and our portfolio segments are Home Loans, Credit Card and Other Consumer, and Commercial. Due to the variability in the drivers of the assumptions used in this
109 Bank of America 2014
process, estimates of the portfolio’s inherent risks and overall collectability change with changes
in the economy, individual industries, countries, and borrowers’ ability and willingness to repay their obligations. The degree to which any particular assumption affects the allowance for credit losses depends on the severity of the change and its relationship to the other assumptions.
Key judgments used in determining the allowance for credit losses include risk ratings for pools of commercial loans and leases, market and collateral values and discount rates for individually evaluated loans, product type classifications for consumer and commercial loans and leases, loss rates used for consumer and commercial loans and leases, adjustments made to address current events and conditions, considerations regarding domestic and global economic uncertainty, and overall credit conditions.
Our estimate for the allowance for loan and lease losses is sensitive to the loss rates and expected
cash flows from our Home Loans 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 Home Loans portfolio segment, excluding PCI loans, 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, 2014 would have increased by $84 million. PCI loans within our Home Loans portfolio segment are initially recorded at fair value. Applicable accounting guidance prohibits carry-over or creation of valuation allowances in the initial accounting. However, subsequent decreases in the expected cash flows from the date of acquisition result
in a charge to the provision for credit losses and a corresponding increase to the allowance for loan and lease losses. We subject our PCI portfolio to stress scenarios to evaluate the potential impact given certain events. A one percent decrease in the expected cash flows could result in a $169 million impairment of the portfolio. For each one percent increase in the loss rates on loans collectively evaluated for impairment within our Credit Card and Other Consumer portfolio segment and U.S. small business commercial card portfolio, coupled with a one percent decrease in the expected cash flows on those loans individually evaluated for impairment within the Credit Card and Other Consumer portfolio segment and the U.S. small business commercial card portfolio, the allowance for loan and lease losses at December 31, 2014 would have increased by $45 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 risk-rated Doubtful as defined by regulatory authorities, the allowance for loan and lease losses would have increased by $2.0 billion at December 31, 2014.
The allowance for loan and lease losses as a percentage of total loans and leases at December 31, 2014 was 1.65 percent and these hypothetical increases in the allowance would raise the ratio to 1.90 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.
For more information on the Financial Accounting
Standards Board’s proposed standard on accounting for credit losses, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.
Mortgage Servicing Rights
MSRs are nonfinancial assets that are created when a mortgage loan is sold and we retain the right to service the loan. We account for consumer MSRs, including residential mortgage and home equity MSRs, at fair value with changes in fair value recorded in mortgage banking income in the Consolidated Statement of Income.
We determine the fair value of our consumer MSRs using a valuation model that calculates the present value of estimated future net servicing income. The model incorporates key economic assumptions including estimates of prepayment rates
and resultant weighted-average lives of the MSRs, and the option-adjusted spread levels. These variables can, and generally do, change from quarter to quarter as market conditions and projected interest rates change. These assumptions are subjective in nature and changes in these assumptions could materially affect our operating results. For example, increasing the prepayment rate assumption used in the valuation of our consumer MSRs by 10 percent while keeping all other assumptions unchanged could have resulted in an estimated decrease of $208 million in both MSRs and mortgage banking income for 2014. This impact does not reflect any hedge strategies that may be undertaken to mitigate such risk.
We manage potential changes in the fair value of MSRs through a comprehensive risk management program. The intent is to mitigate the effects
of changes in the fair value of MSRs through the use of risk management instruments. To reduce the sensitivity of earnings to interest rate and market value fluctuations, securities including MBS and U.S. Treasury securities, as well as certain derivatives such as options and interest rate swaps, may be used to hedge certain market risks of the MSRs, but are not designated as accounting hedges. These instruments are carried at fair value with changes in fair value recognized in mortgage banking income. For additional information, see Mortgage Banking Risk Management on page 108.
For more information on MSRs, including the sensitivity of weighted-average lives and the fair value of MSRs to changes in modeled assumptions, see Note 23 – Mortgage Servicing Rights to
the Consolidated Financial Statements.
Fair Value of Financial Instruments
We classify the fair values of financial instruments based on the fair value hierarchy established under applicable accounting guidance which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Applicable accounting guidance establishes three levels of inputs used to measure fair value. We carry trading account assets and liabilities, derivative assets and liabilities, AFS debt and equity securities, other debt securities,
Bank
of America 2014 110
consumer MSRs and certain other assets at fair value. Also, we account for certain loans and loan commitments, LHFS, short-term borrowings, securities financing agreements, asset-backed secured financings, long-term deposits and long-term debt under the fair value option.
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. Similarly, broker quotes that are executable are given a higher level of reliance than indicative broker quotes, which are not executable. These processes and controls are performed independently of the business. For additional information, see Note 20 – Fair Value Measurements and Note 21 – Fair Value Option to the Consolidated Financial Statements.
In 2014, we adopted an FVA into valuation
estimates primarily to include funding costs on uncollateralized derivatives and derivatives where we are not permitted to use the collateral received. This change resulted in a pretax net FVA charge of $497 million. Significant judgment is required in modeling expected exposure profiles and in discounting for the funding risk premium inherent in these derivatives.
Level 3 Assets and Liabilities
Financial assets and liabilities 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 guidance. The Level 3 financial assets and liabilities include certain loans, MBS, ABS, CDOs, CLOs and structured liabilities, as well as highly structured, complex
or long-dated derivative contracts, private equity investments and consumer MSRs. The fair value of these Level 3 financial assets and liabilities 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.
Table
66
Recurring Level 3 Asset and Liability Summary
December 31
2014
2013
(Dollars
in millions)
Level 3
Fair Value
As a % of Total Level 3
Assets
As a % of Total
Assets
Level 3
Fair Value
As a % of Total Level 3
Assets
As
a % of Total
Assets
Trading account assets
$
6,259
28.12
%
0.30
%
$
9,044
28.46
%
0.43
%
Derivative
assets
6,851
30.77
0.33
7,277
22.90
0.35
AFS
debt securities
2,555
11.48
0.12
4,760
14.98
0.23
All
other Level 3 assets at fair value
6,597
29.63
0.31
10,697
33.66
0.50
Total
Level 3 assets at fair value (1)
$
22,262
100.00
%
1.06
%
$
31,778
100.00
%
1.51
%
Level
3
Fair Value
As a % of Total Level 3
Liabilities
As a % of Total
Liabilities
Level 3
Fair Value
As a % of Total Level 3
Liabilities
As
a % of Total
Liabilities
Derivative liabilities
$
7,771
76.34
%
0.42
%
$
7,501
78.66
%
0.40
%
Long-term
debt
2,362
23.20
0.13
1,990
20.87
0.11
All
other Level 3 liabilities at fair value
46
0.46
—
45
0.47
—
Total
Level 3 liabilities at fair value (1)
$
10,179
100.00
%
0.55
%
$
9,536
100.00
%
0.51
%
(1)
Level 3
total assets and liabilities are shown before the impact of cash collateral and counterparty netting related to our derivative positions.
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 resources. 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. These transfers are considered to be effective as of the beginning of the quarter in which they occur. For more information on the significant transfers into and out of Level 3
111 Bank of America 2014
during 2014, see Note
20 – Fair Value Measurements to the Consolidated Financial Statements.
Accrued Income Taxes and Deferred Tax Assets
Accrued income taxes, reported as a component of either other assets or accrued expenses and other liabilities on the Consolidated Balance Sheet, represent the net amount of current income taxes we expect to pay to or receive from various taxing jurisdictions attributable to our operations to date. We currently file income tax returns in more than 100 jurisdictions and consider many factors, including statutory, judicial and regulatory guidance, in estimating the appropriate accrued income taxes for each jurisdiction.
Consistent with the applicable accounting
guidance, we monitor relevant tax authorities and change our estimate of accrued income taxes due to changes in income tax laws and their interpretation by the courts and regulatory authorities. These revisions of our estimate of accrued income taxes, which also may result from our income tax planning and from the resolution of income tax controversies, may be material to our operating results for any given period.
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.
While we have established valuation allowances for certain state and non-U.S. deferred tax assets, we have concluded that no valuation allowance was necessary with respect to all U.S. federal and U.K. deferred tax assets, including NOL and tax credit carryforwards, that are not subject to any special limitations (such as change-in-control limitations) prior to any expiration. Management’s conclusion is supported by financial results and forecasts, the reorganization of certain business activities and the indefinite period to carry forward NOLs. The majority of 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. However, significant changes to our estimates, such as changes that would be caused by substantial and prolonged worsening of the condition of Europe’s capital markets, or to applicable tax laws, such as laws affecting the realizability of NOLs or other deferred tax assets, could lead management to reassess its U.K. valuation allowance conclusions. See Note 19 – Income Taxes to the Consolidated Financial Statements for a table of significant tax attributes and additional information. For more information, see page 15 under Item 1A. Risk Factors of this Annual Report on Form 10-K.
Goodwill and Intangible Assets
Background
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. Goodwill is reviewed for potential impairment at the reporting unit level on an annual basis, which for the Corporation is as of June 30, and in interim periods if events or circumstances indicate a potential impairment. A reporting unit is an operating segment or one level below. As reporting units are determined after an acquisition or evolve with changes in business strategy, goodwill is assigned to reporting units and it no longer retains its association with a particular acquisition. All of the revenue streams and related activities of a reporting unit, whether acquired or organic, are available to support the
value of the goodwill.
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. The goodwill impairment test involves comparing the fair value of each reporting unit with its carrying value, including goodwill, as measured by allocated equity. During 2014, the Corporation made refinements to the amount of capital allocated to each of its businesses based on multiple considerations that included, but were not limited to, risk-weighted assets measured under the Basel 3 Standardized and Advanced approaches, business segment exposures and risk profile, and strategic plans. As a result of this process, in 2014, the Corporation adjusted the amount of capital being allocated
to its business segments. This change resulted in a reduction of the unallocated capital, which is reflected in All Other, and an aggregate increase to the amount of capital being allocated to the business segments. An increase in allocated capital in the business segments generally results in a reduction of the excess of the fair value over the carrying value and a reduction to the estimated fair value as a percentage of allocated carrying value for an individual reporting unit.
The Corporation’s common stock price improved during 2014; however, its market capitalization remained below its recorded book value. We estimate that the fair value of all reporting units with assigned goodwill in aggregate as of the June 30, 2014 annual goodwill
impairment test was $307.1 billion and the aggregate carrying value of all reporting units with assigned goodwill, as measured by allocated equity, was $175.7 billion. The common stock capitalization of the Corporation as of June 30, 2014 was $161.6 billion ($188.1 billion at December 31, 2014). As none of our reporting units are publicly traded, individual reporting unit fair value determinations do not directly correlate to the Corporation’s stock price. Although we believe it is reasonable to conclude that market capitalization could be an indicator of fair value over time, we do not believe that our current market capitalization reflects the aggregate fair value of our individual
reporting units.
Bank of America 2014 112
Estimating the fair value of reporting units is a subjective process that involves the use of estimates and judgments, particularly related to cash flows, the appropriate discount rates and an applicable control premium. We determined the fair values of the reporting units using a combination of valuation techniques consistent with the market approach and the
income approach and also utilized independent valuation specialists.
The market approach we used estimates the fair value of the individual reporting units by incorporating any combination of the tangible capital, book capital and earnings multiples from comparable publicly-traded companies in industries similar to that of the reporting unit. The relative weight assigned to these multiples varies among the reporting units based on qualitative and quantitative characteristics, primarily the size and relative profitability of the reporting unit as compared to the comparable publicly-traded companies. Since the fair values determined under the market approach are representative of a noncontrolling interest, we added a control premium to arrive at the reporting units’ estimated fair values on a controlling basis.
For purposes of the income approach, we calculated discounted cash flows
by taking the net present value of estimated future cash flows and an appropriate terminal value. Our discounted cash flow analysis employs a capital asset pricing model in estimating the discount rate (i.e., cost of equity financing) for each reporting unit. The inputs to this model include the risk-free rate of return, beta, which is a measure of the level of non-diversifiable risk associated with comparable companies for each specific reporting unit, size premium to reflect the historical incremental return on stocks, market equity risk premium and in certain cases an unsystematic (company-specific) risk factor. The unsystematic risk factor is the input that specifically addresses uncertainty related to our projections of earnings and growth, including the uncertainty related to loss expectations. We utilized discount rates that we believe adequately reflect the risk and uncertainty in the financial markets generally and specifically in our internally developed forecasts.
We estimated expected rates of equity returns based on historical market returns and risk/return rates for similar industries of each reporting unit. We use our internal forecasts to estimate future cash flows and actual results may differ from forecasted results.
2014 Annual Impairment Test
During the three months ended September 30, 2014, we completed our annual goodwill impairment test as of June 30, 2014 for all of our reporting units that had goodwill. In performing the first step of the annual goodwill impairment analysis, we compared the fair value of each reporting unit to its estimated carrying value as measured by allocated equity, which includes goodwill.
During our 2014 annual goodwill impairment test, we also evaluated the U.K. Card business within All Other, as the U.K. Card business comprises the majority of the goodwill included in All Other. To determine fair value, we utilized a combination of the market approach and the income approach. Under the market approach, we compared earnings and equity multiples of the individual reporting units to multiples of public companies comparable to the individual reporting units. The control premium used in the June 30, 2014 annual goodwill impairment test was 30 percent for all reporting units. Under the income approach, we updated our assumptions to reflect the current market environment. The discount rates used in the June
30, 2014 annual goodwill impairment test ranged from 10.5 percent to 13 percent depending on the relative risk of a reporting unit. Growth rates
developed by management for individual revenue and expense items in each reporting unit ranged from (2.9) percent to 8.5 percent.
Based on the results of step one of the annual goodwill impairment test, we determined that step two was not required for any of the reporting units as their fair value exceeded their carrying value indicating there was no impairment.
The fair value for Card Services as of June 30, 2014 no longer considers the negative
impact of a July 31, 2013 court ruling regarding the Federal Reserve’s rules on debit card interchange fees, which would have required the Federal Reserve to reconsider the cap on debit card interchange fees. The fair value as of June 30, 2013 considered that potential negative impact contributing to an estimated fair value as a percent of allocated carrying value of 120.3 percent. The U.S. Supreme Court indicated in January 2015 that it would not hear the challenge to the Federal Reserve’s debit card interchange fee rules.
2013 Annual Impairment Tests
During the three months ended September 30, 2013, we completed our annual goodwill impairment test as of June 30,
2013 for all of our reporting units which had goodwill. Additionally, we also evaluated the U.K. Card business within All Other as the U.K. Card business comprises the majority of the goodwill included in All Other.
Based on the results of step one of the annual goodwill impairment test, we determined that step two was not required for any of the reporting units as their respective fair values exceeded their carrying values indicating there was no impairment.
Representations and Warranties Liability
The methodology used to estimate the liability for obligations under representations and warranties related to transfers of residential mortgage loans is a function of the representations and warranties
given and considers a variety of factors. Depending upon the counterparty, these factors include actual defaults, estimated future defaults, historical loss experience, estimated home prices, other economic conditions, estimated probability that we will receive a repurchase request, number of payments made by the borrower prior to default and estimated probability that we will be required to repurchase a loan. It also considers other relevant facts and circumstances, such as bulk settlements and identity of the counterparty or type of counterparty, as appropriate. The estimate of the liability for obligations under representations and warranties is based upon currently available information, significant judgment, and a number of factors, including those set forth above, that are subject to change. Changes to any one of these factors could significantly impact the estimate of our liability.
The representations and warranties
provision may vary significantly each period as the methodology used to estimate the expense continues to be refined based on the level and type of repurchase requests presented, defects identified, the latest experience gained on repurchase requests and other relevant facts and circumstances. The estimate of the liability for representations and warranties is sensitive to future defaults, loss severity and the net repurchase rate. An assumed simultaneous increase or decrease of 10 percent in estimated future defaults, loss severity and the net repurchase rate would result in an increase or decrease of approximately $400 million in the representations and warranties liability as of December 31, 2014. These sensitivities are hypothetical and are intended to provide an indication
of the
113 Bank of America 2014
impact of a significant change in these key assumptions on the representations and warranties liability. In reality, changes in one assumption may result in changes in other assumptions, which may or may not counteract the sensitivity.
For more information on representations and warranties exposure and the corresponding estimated
range of possible loss, see Off-Balance Sheet Arrangements and Contractual Obligations – Representations and Warranties on page 50, as well as Note 7 – Representations and Warranties Obligations and Corporate Guarantees and Note 12 – Commitments and Contingencies to the Consolidated Financial Statements.
Litigation Reserve
For a limited number of the matters disclosed in Note 12 – Commitments and Contingencies to the Consolidated Financial Statements for which a loss is probable or reasonably possible in future periods, whether in excess of a related
accrued liability or where there is no accrued liability, we are able to estimate a range of possible loss. In determining whether it is possible to provide an estimate of loss or range of possible loss, the Corporation reviews and evaluates its material litigation and regulatory matters on an ongoing basis, in conjunction with any outside counsel handling the matter, in light of potentially relevant factual and legal developments. These may include information learned through the discovery process, rulings on dispositive motions, settlement discussions, and other rulings by courts, arbitrators or others. In cases in which the Corporation possesses sufficient information to develop an estimate of loss or range of possible loss, that estimate is aggregated and disclosed in Note 12 – Commitments and Contingencies to the Consolidated Financial Statements. For other disclosed
matters for which a loss is probable or reasonably possible, such an estimate is not possible. Those matters for which an estimate is not possible are not included within this estimated range. Therefore, the estimated range of possible loss represents what we believe to be an estimate of possible loss only for certain matters meeting these criteria. It does not represent the Corporation’s maximum loss exposure. Information is provided in Note 12 – Commitments and Contingencies to the Consolidated Financial Statements regarding the nature of all of these contingencies and, where specified, the amount of the claim associated with these loss contingencies.
Consolidation and Accounting for Variable Interest Entities
In accordance with applicable accounting guidance, an entity that has a controlling
financial interest in a VIE is referred to as the primary beneficiary and consolidates the VIE. The Corporation is deemed to have a controlling financial interest and is the primary beneficiary of 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.
Determining whether an entity has a controlling financial interest in a VIE requires significant judgment. An entity must assess the purpose and design of the VIE, including explicit and implicit contractual arrangements, and the entity’s involvement in both the design of the VIE and its ongoing activities. The entity must then determine which activities have the most significant impact on the economic performance of the VIE and whether the entity has the power to direct such activities.
For VIEs that hold financial assets, the party that services the assets or makes
investment management decisions may have the power to direct the most significant activities of a VIE. Alternatively, a third party that has the unilateral right to replace the servicer or investment manager or to liquidate the VIE may be deemed to be the party with power. If there are no significant ongoing activities, the party that was responsible for the design of the VIE may be deemed to have power. If the entity determines that it has the power to direct the most significant activities of the VIE, then the entity must determine if it has either an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Such economic interests may include investments in debt or equity instruments issued
by the VIE, liquidity commitments, and explicit and implicit guarantees.
On a quarterly basis, we reassess whether we have a controlling financial interest and are the primary beneficiary of a VIE. The quarterly reassessment process considers whether we have acquired or divested the power to direct the activities of the VIE through changes in governing documents or other circumstances. The reassessment also considers whether we have acquired or disposed of a financial interest that could be significant to the VIE, or whether an interest in the VIE has become significant or is no longer significant. The consolidation status of the VIEs with which we are involved may change as a result of such reassessments. Changes in consolidation status are applied prospectively, with assets and liabilities of a newly consolidated VIE initially recorded at fair value. A gain or loss may be recognized upon deconsolidation of a VIE depending
on the carrying values of deconsolidated assets and liabilities compared to the fair value of retained interests and ongoing contractual arrangements.
2013 Compared to 2012
The following discussion and analysis provide a comparison of our results of operations for 2013 and 2012. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes. Tables 7 and 8 contain financial data to supplement this discussion.
Overview
Net
Income
Net income was $11.4 billion in 2013 compared to $4.2 billion in 2012. Including preferred stock dividends, net income applicable to common shareholders was $10.1 billion, or $0.90 per diluted share for 2013 and $2.8 billion, or $0.25 per diluted share for 2012.
Net Interest Income
Net interest income on an FTE basis was $43.1 billion for 2013,
an increase of $1.6 billion compared to 2012. The increase was primarily due to reductions in long-term debt balances, higher yields on debt securities including the impact of market-related premium amortization expense, lower rates paid on deposits, higher commercial loan balances and increased trading-related net interest income, partially offset by lower consumer loan balances as well as lower asset yields and the low rate environment. The net interest yield on an FTE basis was 2.37 percent for 2013, an increase of 13 bps compared to 2012 due to the same factors as described above.
Bank
of America 2014 114
Noninterest Income
Noninterest income was $46.7 billion in 2013, an increase of $4.0 billion compared to 2012.
Ÿ
Card income decreased $295 million primarily driven by lower revenue from consumer protection products.
Ÿ
Investment
and brokerage services income increased $889 million primarily driven by the impact of long-term AUM inflows and higher market levels.
Ÿ
Investment banking income increased $827 million primarily due to strong equity issuance fees attributable to a significant increase in global equity capital markets volume and higher debt issuance fees, primarily within leveraged finance and investment-grade underwriting.
Ÿ
Equity investment income increased $831 million. The results for 2013 included $753 million of gains related
to the sale of our remaining investment in CCB and gains of $1.4 billion on the sales of a portion of an equity investment. The results for 2012 included $1.6 billion of gains related to sales of certain equity and strategic investments.
Ÿ
Trading account profits increased $1.2 billion. Net debit valuation adjustment (DVA) losses on derivatives were $509 million in 2013 compared to losses of $2.5 billion in 2012. Excluding net DVA, trading account profits decreased $782 million due to decreases in our FICC businesses driven by a challenging trading environment, partially offset by an increase in our equities businesses.
Ÿ
Mortgage
banking income decreased $876 million primarily driven by lower servicing income and lower core production revenue, partially offset by lower representations and warranties provision.
Ÿ
Other income (loss) improved $2.0 billion due to lower negative fair value adjustments on our structured liabilities of $649 million compared to negative fair value adjustments of $5.1 billion in 2012. The prior year included gains of $1.6 billion related to debt repurchases and exchanges of trust preferred securities.
Provision for Credit Losses
The provision for credit losses was $3.6 billion for 2013,
a decrease of $4.6 billion compared to 2012. The provision for credit losses was $4.3 billion lower than net charge-offs for 2013, resulting in a reduction in the allowance for credit losses due to continued improvement in the home loans and credit card portfolios. This compared to a $6.7 billion reduction in the allowance for credit losses in 2012.
Net charge-offs totaled $7.9 billion, or 0.87 percent of average loans and leases for 2013 compared to $14.9 billion, or 1.67 percent for 2012. The decrease in net charge-offs was primarily driven by credit quality improvement across all major portfolios. Also, included in 2012 were charge-offs
associated with the National Mortgage Settlement and loans discharged in Chapter 7 bankruptcy due to the implementation of regulatory guidance.
Noninterest Expense
Noninterest expense was $69.2 billion for 2013, a decrease of $2.9 billion compared to 2012. The decrease was primarily driven by a $967 million decline in other general operating expense largely due to a provision of $1.1 billion in 2012 for the 2013 Independent Foreclosure Review (IFR) Acceleration Agreement, lower FDIC expense, and lower default-related servicing expenses in Legacy Assets & Servicing and mortgage-related assessments,
waivers and similar costs related to foreclosure delays. Partially offsetting these declines was a $1.9 billion increase in litigation expense to $6.1 billion in 2013. Personnel expense decreased $929 million in 2013 as we continued to streamline processes and achieve cost savings. Professional fees decreased $690 million due in part to reduced default-related management activities in Legacy Assets & Servicing.
Income Tax Expense
The income tax expense was $4.7 billion on pretax income of $16.2 billion for 2013 compared to an income tax benefit of $1.1 billion on the pretax income of $3.1 billion for 2012.
The effective tax rate for 2013 was driven by our recurring tax preference items and by tax benefits related to non-U.S. restructurings. These benefits were partially offset by the $1.1 billion charge to reduce the carrying value of certain U.K deferred tax assets due to the U.K corporate income tax rate reduction in 2013. The negative effective tax rate for 2012 included a $1.7 billion tax benefit attributable to the excess of foreign tax credits recognized in the U.S. upon repatriation of the earnings of certain subsidiaries over the related U.S. tax liability. Partially offsetting the benefit was a $788 million charge to reduce the carrying value of certain U.K. deferred tax assets due to the U.K. corporate income tax rate reduction enacted in 2012.
Business
Segment Operations
Consumer & Business Banking
CBB recorded net income of $6.6 billion in 2013 compared to $5.6 billion in 2012 with the increase primarily due to lower provision for credit losses and noninterest expense. Net interest income remained relatively unchanged as the impact of higher deposit balances was offset by the impact of lower average loan balances. Noninterest income of $9.8 billion remained relatively unchanged as the allocation of certain card revenue to GWIM for clients with a credit card, and lower deposit service charges were offset by the net impact
of consumer protection products primarily due to changes in 2012. The provision for credit losses decreased $1.0 billion to $3.1 billion in 2013 primarily as a result of improvements in credit quality. Noninterest expense decreased $661 million to $16.3 billion primarily due to lower operating, personnel and FDIC expenses.
115 Bank of America 2014
Consumer
Real Estate Services
CRES recorded a net loss of $5.0 billion in 2013 compared to a net loss of $6.3 billion in 2012 with the decrease in the net loss primarily driven by lower provision for credit losses and lower noninterest expense, partially offset by lower mortgage banking income. Mortgage banking income decreased $968 million due to both lower servicing income and lower core production revenue, partially offset by a $3.1 billion decrease in representations and warranties provision as 2012 included provision related to the January 2013 settlement with FNMA. The provision for credit losses improved $1.6 billion to
a benefit of $156 million due to improved delinquencies, increased home prices and continued loan balance run-off. Noninterest expense decreased $1.2 billion to $15.8 billion due to lower operating expenses in Legacy Assets & Servicing, partially offset by higher litigation expense.
Global Wealth & Investment Management
GWIM recorded net income of $3.0 billion in 2013 compared to $2.2 billion in 2012 with the increase driven by higher revenue and lower provision for credit losses, partially offset by higher noninterest
expense. Revenue increased $1.3 billion primarily driven by higher asset management fees. The provision for credit losses decreased $210 million to $56 million driven by continued improvement in the home equity portfolio. Noninterest expense increased $311 million to $13.0 billion due to higher volume-driven expenses and higher support costs, partially offset by lower other personnel costs.
Global Banking
Global Banking recorded net income of $5.0 billion in 2013 compared to $5.3 billion
in 2012 with the decrease primarily driven by an increase in the provision for credit losses, partially offset by higher revenue. Revenue increased $810 million to $16.5 billion in 2013 as higher net interest income due to the impact of loan growth, and higher investment banking fees were partially offset by lower other income due to gains on the liquidation of certain portfolios in 2012. The provision for credit losses increased $1.4 billion to $1.1 billion compared to a benefit of $342 million in
2012 primarily due to increased reserves as
a result of commercial loan growth. Noninterest expense remained relatively unchanged in 2013 primarily due to lower personnel expense largely offset by higher litigation expense.
Global Markets
Global Markets recorded net income of $1.2 billion in 2013 compared to a net loss of $2.0 billion in 2012. Excluding net DVA and charges of $1.1 billion related to the U.K. corporate income tax rate reduction in 2013 and $781 million in 2012, net income decreased $548 million to $3.0 billion primarily driven by lower FICC revenue due to a challenging trading environment, and higher noninterest expense, partially offset by an increase in equities revenue. Net DVA losses were $1.2
billion compared to losses of $7.6 billion in 2012. Noninterest expense increased $711 million to $12.0 billion due to an increase in litigation expense. Income tax expense for both years included a charge for remeasurement of certain deferred tax assets due to the decreases in the U.K. corporate tax rate.
All Other
All Other recorded net income of $712 million in 2013 compared to a net loss of $703 million in 2012 with the increase driven by improvement in the provision for credit losses, higher equity investment income and lower noninterest expense, partially offset by a
lower income tax benefit and lower gains on sales of debt securities. The provision for credit losses improved $3.3 billion to a benefit of $666 million in 2013 primarily driven by continued improvement in portfolio trends including increased home prices in the residential mortgage portfolio. Noninterest expense decreased $2.0 billion to $4.6 billion primarily due to lower litigation expense. The income tax benefit was $2.0 billion in 2013 compared to a benefit of $4.2 billion in 2012. The decrease was driven by the decline in the pretax loss in All Other and lower tax benefits as 2012 included a $1.7 billion tax benefit attributable to
the excess of foreign tax credits recognized in the U.S. upon repatriation of the earnings of certain subsidiaries over the related U.S. tax liability.
Table
I Average Balances and Interest Rates – FTE Basis
2014
2013
2012
(Dollars
in millions)
Average Balance
Interest Income/ Expense
Yield/ Rate
Average Balance
Interest Income/ Expense
Yield/ Rate
Average Balance
Interest Income/ Expense
Yield/ Rate
Earning
assets
Interest-bearing
deposits with the Federal Reserve and non-U.S. central banks (1)
$
113,999
$
308
0.27
%
$
72,574
$
182
0.25
%
$
81,741
$
190
0.23
%
Time
deposits placed and other short-term investments
11,032
170
1.54
16,066
187
1.16
22,888
236
1.03
Federal
funds sold and securities borrowed or purchased under agreements to resell
222,483
1,039
0.47
224,331
1,229
0.55
236,042
1,502
0.64
Trading
account assets
145,686
4,716
3.24
168,998
4,879
2.89
170,647
5,306
3.11
Debt
securities (2)
351,702
8,062
2.28
337,953
9,779
2.89
353,577
8,931
2.53
Loans
and leases (3):
Residential
mortgage (4)
237,270
8,462
3.57
256,535
9,317
3.63
264,164
9,845
3.73
Home
equity
89,705
3,340
3.72
100,263
3,835
3.82
117,339
4,426
3.77
U.S.
credit card
88,962
8,313
9.34
90,369
8,792
9.73
94,863
9,504
10.02
Non-U.S.
credit card
11,511
1,200
10.42
10,861
1,271
11.70
13,549
1,572
11.60
Direct/Indirect
consumer (5)
82,410
2,099
2.55
82,907
2,370
2.86
84,424
2,900
3.44
Other
consumer (6)
2,028
139
6.86
1,807
72
4.02
2,359
140
5.95
Total
consumer
511,886
23,553
4.60
542,742
25,657
4.73
576,698
28,387
4.92
U.S.
commercial
230,175
6,630
2.88
218,874
6,809
3.11
201,352
6,979
3.47
Commercial
real estate (7)
47,524
1,411
2.97
42,346
1,391
3.29
37,982
1,332
3.51
Commercial
lease financing
24,423
837
3.43
23,863
851
3.56
21,879
874
4.00
Non-U.S.
commercial
89,893
2,218
2.47
90,816
2,083
2.29
60,857
1,594
2.62
Total
commercial
392,015
11,096
2.83
375,899
11,134
2.96
322,070
10,779
3.35
Total
loans and leases
903,901
34,649
3.83
918,641
36,791
4.00
898,768
39,166
4.36
Other
earning assets
66,127
2,811
4.25
80,985
2,832
3.50
88,047
2,970
3.36
Total
earning assets (8)
1,814,930
51,755
2.85
1,819,548
55,879
3.07
1,851,710
58,301
3.15
Cash
and due from banks (1)
27,079
36,440
33,998
Other
assets, less allowance for loan and lease losses
303,581
307,525
305,648
Total
assets
$
2,145,590
$
2,163,513
$
2,191,356
Interest-bearing
liabilities
U.S.
interest-bearing deposits:
Savings
$
46,270
$
3
0.01
%
$
43,868
$
22
0.05
%
$
41,453
$
45
0.11
%
NOW
and money market deposit accounts
518,894
316
0.06
506,082
413
0.08
466,096
693
0.15
Consumer
CDs and IRAs
66,798
264
0.40
79,914
471
0.59
95,559
693
0.73
Negotiable
CDs, public funds and other deposits
31,502
106
0.33
26,553
116
0.43
20,928
128
0.61
Total
U.S. interest-bearing deposits
663,464
689
0.10
656,417
1,022
0.16
624,036
1,559
0.25
Non-U.S.
interest-bearing deposits:
Banks
located in non-U.S. countries
8,744
74
0.84
12,432
80
0.64
14,737
94
0.64
Governments
and official institutions
1,740
3
0.15
1,584
3
0.18
1,019
4
0.35
Time,
savings and other
60,732
314
0.52
55,628
291
0.52
53,318
333
0.63
Total
non-U.S. interest-bearing deposits
71,216
391
0.55
69,644
374
0.54
69,074
431
0.62
Total
interest-bearing deposits
734,680
1,080
0.15
726,061
1,396
0.19
693,110
1,990
0.29
Federal
funds purchased, securities loaned or sold under agreements to repurchase and short-term borrowings
257,678
2,578
1.00
301,416
2,923
0.97
318,400
3,572
1.12
Trading
account liabilities
87,151
1,576
1.81
88,323
1,638
1.85
78,554
1,763
2.24
Long-term
debt
253,607
5,700
2.25
263,417
6,798
2.58
316,393
9,419
2.98
Total
interest-bearing liabilities (8)
1,333,116
10,934
0.82
1,379,217
12,755
0.92
1,406,457
16,744
1.19
Noninterest-bearing
sources:
Noninterest-bearing
deposits
389,527
363,674
354,672
Other
liabilities
184,471
186,675
194,550
Shareholders’
equity
238,476
233,947
235,677
Total
liabilities and shareholders’ equity
$
2,145,590
$
2,163,513
$
2,191,356
Net
interest spread
2.03
%
2.15
%
1.96
%
Impact
of noninterest-bearing sources
0.22
0.22
0.28
Net
interest income/yield on earning assets
$
40,821
2.25
%
$
43,124
2.37
%
$
41,557
2.24
%
(1)
Beginning
in 2014, interest-bearing deposits placed with the Federal Reserve and certain non-U.S. central banks are included in earning assets. In prior periods, these balances were included with cash and due from banks in the cash and cash equivalents line, consistent with the Consolidated Balance Sheet presentation. Prior periods have been reclassified to conform to current period presentation.
(2)
Beginning in 2014, yields on debt securities carried at fair value are calculated on the cost basis. Prior to 2014, yields on debt securities carried at fair value were calculated based on fair value rather than the cost basis. The use of fair value does not have a material impact on net interest yield.
(3)
Nonperforming
loans are included in the respective average loan balances. Income on these nonperforming loans is generally recognized on a cost recovery basis. PCI loans were recorded at fair value upon acquisition and accrete interest income over the remaining life of the loan.
(4)
Includes non-U.S. residential mortgage loans of $2 million, $79 million and $90 million in 2014, 2013 and 2012, respectively.
(5)
Includes
non-U.S. consumer loans of $4.4 billion, $6.7 billion and $7.8 billion in 2014, 2013 and 2012, respectively.
(6)
Includes consumer finance loans of $1.1 billion, $1.3 billion and $1.5 billion; consumer leases of $818 million, $351
million and $0; consumer overdrafts of $148 million, $153 million and $128 million; and other non-U.S. consumer loans of $3 million, $5 million and $699 million; and in 2014, 2013 and 2012, respectively.
(7)
Includes U.S. commercial
real estate loans of $46.0 billion, $40.7 billion and $36.4 billion, and non-U.S. commercial real estate loans of $1.6 billion, $1.6 billion and $1.6 billion in 2014, 2013 and 2012, respectively.
(8)
Interest income includes the impact of interest rate risk management contracts,
which decreased interest income on the underlying assets by $58 million, $205 million and $754 million in 2014, 2013 and 2012, respectively. Interest expense includes the impact of interest rate risk management contracts, which decreased interest expense on the underlying liabilities by $2.5 billion, $2.4 billion and $2.3 billion in 2014, 2013 and 2012,
respectively. For more information on interest rate contracts, see Interest Rate Risk Management for Non-trading Activities on page 105.
Bank of America 2014 118
Table
II Analysis of Changes in Net Interest Income – FTE Basis
From
2013 to 2014
From 2012 to 2013
Due to Change in (1)
Due to Change in (1)
(Dollars in millions)
Volume
Rate
Net
Change
Volume
Rate
Net Change
Increase (decrease) in interest income
Interest-bearing
deposits with the Federal Reserve and non-U.S. central banks (2)
$
103
$
23
$
126
$
(23
)
$
15
$
(8
)
Time
deposits placed and other short-term investments
(59
)
42
(17
)
(71
)
22
(49
)
Federal
funds sold and securities borrowed or purchased under agreements to resell
(5
)
(185
)
(190
)
(66
)
(207
)
(273
)
Trading
account assets
(669
)
506
(163
)
(50
)
(377
)
(427
)
Debt
securities
385
(2,102
)
(1,717
)
(381
)
1,229
848
Loans
and leases:
Residential
mortgage
(704
)
(151
)
(855
)
(276
)
(252
)
(528
)
Home
equity
(408
)
(87
)
(495
)
(646
)
55
(591
)
U.S.
credit card
(136
)
(343
)
(479
)
(449
)
(263
)
(712
)
Non-U.S.
credit card
76
(147
)
(71
)
(312
)
11
(301
)
Direct/Indirect
consumer
(13
)
(258
)
(271
)
(48
)
(482
)
(530
)
Other
consumer
10
57
67
(32
)
(36
)
(68
)
Total
consumer
(2,104
)
(2,730
)
U.S.
commercial
349
(528
)
(179
)
616
(786
)
(170
)
Commercial
real estate
173
(153
)
20
154
(95
)
59
Commercial
lease financing
18
(32
)
(14
)
81
(104
)
(23
)
Non-U.S.
commercial
(24
)
159
135
785
(296
)
489
Total
commercial
(38
)
355
Total
loans and leases
(2,142
)
(2,375
)
Other
earning assets
(518
)
497
(21
)
(249
)
111
(138
)
Total
interest income
$
(4,124
)
$
(2,422
)
Increase
(decrease) in interest expense
U.S.
interest-bearing deposits:
Savings
$
1
$
(20
)
$
(19
)
$
3
$
(26
)
$
(23
)
NOW
and money market deposit accounts
2
(99
)
(97
)
66
(346
)
(280
)
Consumer
CDs and IRAs
(77
)
(130
)
(207
)
(110
)
(112
)
(222
)
Negotiable
CDs, public funds and other deposits
19
(29
)
(10
)
34
(46
)
(12
)
Total
U.S. interest-bearing deposits
(333
)
(537
)
Non-U.S.
interest-bearing deposits:
Banks
located in non-U.S. countries
(24
)
18
(6
)
(14
)
—
(14
)
Governments
and official institutions
—
—
—
2
(3
)
(1
)
Time,
savings and other
25
(2
)
23
17
(59
)
(42
)
Total
non-U.S. interest-bearing deposits
17
(57
)
Total
interest-bearing deposits
(316
)
(594
)
Federal
funds purchased, securities loaned or sold under agreements to repurchase and short-term borrowings
(424
)
79
(345
)
(196
)
(453
)
(649
)
Trading
account liabilities
(26
)
(36
)
(62
)
215
(340
)
(125
)
Long-term
debt
(255
)
(843
)
(1,098
)
(1,569
)
(1,052
)
(2,621
)
Total
interest expense
(1,821
)
(3,989
)
Net
increase (decrease) in net interest income
$
(2,303
)
$
1,567
(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)
Beginning in 2014, interest-bearing deposits placed with the Federal Reserve and certain non-U.S. central banks are included in earning assets. In prior periods, these balances were included with cash and due from banks in the cash and cash equivalents line, consistent with the Consolidated Balance Sheet presentation. Prior periods have been reclassified to conform to current period presentation.
119 Bank
of America 2014
Table III
Preferred Stock Cash Dividend Summary (1)
Dividends
per depositary share, each representing a 1/1,200th interest in a share of preferred stock.
121 Bank of America 2014
Table IV
Outstanding Loans and Leases
December 31
(Dollars
in millions)
2014
2013
2012
2011
2010
Consumer
Residential
mortgage (1)
$
216,197
$
248,066
$
252,929
$
273,228
$
270,901
Home
equity
85,725
93,672
108,140
124,856
138,161
U.S.
credit card
91,879
92,338
94,835
102,291
113,785
Non-U.S.
credit card
10,465
11,541
11,697
14,418
27,465
Direct/Indirect
consumer (2)
80,381
82,192
83,205
89,713
90,308
Other
consumer (3)
1,846
1,977
1,628
2,688
2,830
Total
consumer loans excluding loans accounted for under the fair value option
486,493
529,786
552,434
607,194
643,450
Consumer
loans accounted for under the fair value option (4)
2,077
2,164
1,005
2,190
—
Total
consumer
488,570
531,950
553,439
609,384
643,450
Commercial
U.S.
commercial (5)
233,586
225,851
209,719
193,199
190,305
Commercial
real estate (6)
47,682
47,893
38,637
39,596
49,393
Commercial
lease financing
24,866
25,199
23,843
21,989
21,942
Non-U.S.
commercial
80,083
89,462
74,184
55,418
32,029
Total
commercial loans excluding loans accounted for under the fair value option
386,217
388,405
346,383
310,202
293,669
Commercial
loans accounted for under the fair value option (4)
6,604
7,878
7,997
6,614
3,321
Total
commercial
392,821
396,283
354,380
316,816
296,990
Total
loans and leases
$
881,391
$
928,233
$
907,819
$
926,200
$
940,440
(1)
Includes
pay option loans of $3.2 billion, $4.4 billion, $6.7 billion, $9.9 billion and $11.8 billion and non-U.S. residential mortgage loans of $2 million, $0, $93 million, $85 million and $90 million at December 31, 2014, 2013, 2012, 2011 and 2010,
respectively. The Corporation no longer originates pay option loans.
(2)
Includes dealer financial services loans of $37.7 billion, $38.5 billion, $35.9 billion, $43.0 billion and $43.3 billion, unsecured consumer lending loans of $1.5 billion, $2.7 billion, $4.7 billion, $8.0 billion and $12.4
billion, U.S. securities-based lending loans of $35.8 billion, $31.2 billion, $28.3 billion, $23.6 billion and $16.6 billion, non-U.S. consumer loans of $4.0 billion, $4.7 billion, $8.3 billion, $7.6 billion and $8.0 billion, student loans of $632 million, $4.1 billion, $4.8 billion, $6.0 billion
and $6.8 billion, and other consumer loans of $761 million, $1.0 billion, $1.2 billion, $1.5 billion and $3.2 billion at December 31, 2014, 2013, 2012, 2011 and 2010, respectively.
(3)
Includes
consumer finance loans of $676 million, $1.2 billion, $1.4 billion, $1.7 billion and $1.9 billion, consumer leases of $1.0 billion, $606 million, $34 million, $0 and $0, consumer overdrafts of $162 million, $176 million, $177 million, $103 million and $88 million,
and other non-U.S. consumer loans of $3 million, $5 million, $5 million, $929 million and $803 million at December 31, 2014, 2013, 2012, 2011 and 2010, respectively.
(4)
Consumer loans accounted for
under the fair value option were residential mortgage loans of $1.9 billion, $2.0 billion, $1.0 billion and $2.2 billion, and home equity loans of $196 million, $147 million, $0 and $0 at December 31, 2014, 2013, 2012 and 2011, respectively. There were no consumer loans accounted for under the fair value option prior to 2011. Commercial loans accounted
for under the fair value option were U.S. commercial loans of $1.9 billion, $1.5 billion, $2.3 billion, $2.2 billion and $1.6 billion, commercial real estate loans of $0, $0, $0, $0 and $79 million, and non-U.S. commercial loans of $4.7 billion, $6.4 billion, $5.7 billion, $4.4 billion and $1.7
billion at December 31, 2014, 2013, 2012, 2011 and 2010, respectively.
(5)
Includes U.S. small business commercial loans, including card-related products, of $13.3 billion, $13.3 billion, $12.6 billion, $13.3 billion and
$14.7 billion at December 31, 2014, 2013, 2012, 2011 and 2010, respectively.
(6)
Includes U.S. commercial real estate loans of $45.2 billion, $46.3 billion, $37.2 billion, $37.8 billion and $46.9
billion, and non-U.S. commercial real estate loans of $2.5 billion, $1.6 billion, $1.5 billion, $1.8 billion and $2.5 billion at December 31, 2014, 2013, 2012, 2011 and 2010, respectively.
Bank
of America 2014 122
Table
V Nonperforming Loans, Leases and Foreclosed Properties (1)
December 31
(Dollars
in millions)
2014
2013
2012
2011
2010
Consumer
Residential
mortgage
$
6,889
$
11,712
$
15,055
$
16,259
$
18,020
Home
equity
3,901
4,075
4,282
2,454
2,696
Direct/Indirect
consumer
28
35
92
40
90
Other
consumer
1
18
2
15
48
Total
consumer (2)
10,819
15,840
19,431
18,768
20,854
Commercial
U.S.
commercial
701
819
1,484
2,174
3,453
Commercial
real estate
321
322
1,513
3,880
5,829
Commercial
lease financing
3
16
44
26
117
Non-U.S.
commercial
1
64
68
143
233
1,026
1,221
3,109
6,223
9,632
U.S.
small business commercial
87
88
115
114
204
Total
commercial (3)
1,113
1,309
3,224
6,337
9,836
Total
nonperforming loans and leases
11,932
17,149
22,655
25,105
30,690
Foreclosed
properties
697
623
900
2,603
1,974
Total
nonperforming loans, leases and foreclosed properties
$
12,629
$
17,772
$
23,555
$
27,708
$
32,664
(1)
Balances
do not include PCI loans even though the customer may be contractually past due. PCI loans were recorded at fair value upon acquisition and accrete interest income over the remaining life of the loan. In addition, balances do not include foreclosed properties that are insured by the FHA and have entered foreclosure of $1.1 billion, $1.4 billion, $2.5 billion and $1.4 billion at December 31, 2014, 2013, 2012 and 2011, respectively.
(2)
In
2014, $1.8 billion in interest income was estimated to be contractually due on $10.8 billion of consumer loans and leases classified as nonperforming, at December 31, 2104, as presented in the table above, plus $20.6 billion of TDRs classified as performing at December 31, 2014. Approximately $960 million of the estimated $1.8 billion in contractual interest was received and included in interest income for 2014.
(3)
In
2014, $110 million in interest income was estimated to be contractually due on $1.1 billion of commercial loans and leases classified as nonperforming, at December 31, 2014, as presented in the table above, plus $1.1 billion of TDRs classified as performing at December 31, 2014. Approximately $66 million of the estimated $110 million in contractual interest was received and included in interest income for 2014.
123 Bank
of America 2014
Table
VI Accruing Loans and Leases Past Due 90 Days or More (1)
December
31
(Dollars in millions)
2014
2013
2012
2011
2010
Consumer
Residential
mortgage (2)
$
11,407
$
16,961
$
22,157
$
21,164
$
16,768
U.S.
credit card
866
1,053
1,437
2,070
3,320
Non-U.S.
credit card
95
131
212
342
599
Direct/Indirect
consumer
64
408
545
746
1,058
Other
consumer
1
2
2
2
2
Total
consumer
12,433
18,555
24,353
24,324
21,747
Commercial
U.S.
commercial
110
47
65
75
236
Commercial
real estate
3
21
29
7
47
Commercial
lease financing
41
41
15
14
18
Non-U.S.
commercial
—
17
—
—
6
154
126
109
96
307
U.S.
small business commercial
67
78
120
216
325
Total
commercial
221
204
229
312
632
Total
accruing loans and leases past due 90 days or more (3)
$
12,654
$
18,759
$
24,582
$
24,636
$
22,379
(1)
Our
policy is to classify consumer real estate-secured loans as nonperforming at 90 days past due, except the PCI loan portfolio, the fully-insured loan portfolio and loans accounted for under the fair value option as referenced in footnote 3.
(2)
Balances are fully-insured loans.
(3)
Balances exclude loans accounted for under the fair value option. At December 31, 2014 and 2013,
$5 million and $8 million of loans accounted for under the fair value option were past due 90 days or more and still accruing interest. At December 31, 2012, 2011 and 2010, there were no loans accounted for under the fair value option that were past due 90 days or more and still accruing interest.
Bank of America 2014 124
Table
VII Allowance for Credit Losses
(Dollars in millions)
2014
2013
2012
2011
2010
Allowance
for loan and lease losses, January 1 (1)
$
17,428
$
24,179
$
33,783
$
41,885
$
47,988
Loans
and leases charged off
Residential mortgage
(855
)
(1,508
)
(3,276
)
(4,294
)
(3,843
)
Home
equity
(1,364
)
(2,258
)
(4,573
)
(4,997
)
(7,072
)
U.S.
credit card
(3,068
)
(4,004
)
(5,360
)
(8,114
)
(13,818
)
Non-U.S.
credit card
(357
)
(508
)
(835
)
(1,691
)
(2,424
)
Direct/Indirect
consumer
(456
)
(710
)
(1,258
)
(2,190
)
(4,303
)
Other
consumer
(268
)
(273
)
(274
)
(252
)
(320
)
Total
consumer charge-offs
(6,368
)
(9,261
)
(15,576
)
(21,538
)
(31,780
)
U.S.
commercial (2)
(584
)
(774
)
(1,309
)
(1,690
)
(3,190
)
Commercial
real estate
(29
)
(251
)
(719
)
(1,298
)
(2,185
)
Commercial
lease financing
(10
)
(4
)
(32
)
(61
)
(96
)
Non-U.S.
commercial
(35
)
(79
)
(36
)
(155
)
(139
)
Total
commercial charge-offs
(658
)
(1,108
)
(2,096
)
(3,204
)
(5,610
)
Total
loans and leases charged off
(7,026
)
(10,369
)
(17,672
)
(24,742
)
(37,390
)
Recoveries
of loans and leases previously charged off
Residential mortgage
969
424
165
377
117
Home
equity
457
455
331
517
279
U.S.
credit card
430
628
728
838
791
Non-U.S.
credit card
115
109
254
522
217
Direct/Indirect
consumer
287
365
495
714
967
Other
consumer
39
39
42
50
59
Total
consumer recoveries
2,297
2,020
2,015
3,018
2,430
U.S.
commercial (3)
214
287
368
500
391
Commercial
real estate
112
102
335
351
168
Commercial
lease financing
19
29
38
37
39
Non-U.S.
commercial
1
34
8
3
28
Total
commercial recoveries
346
452
749
891
626
Total
recoveries of loans and leases previously charged off
2,643
2,472
2,764
3,909
3,056
Net
charge-offs
(4,383
)
(7,897
)
(14,908
)
(20,833
)
(34,334
)
Write-offs
of PCI loans
(810
)
(2,336
)
(2,820
)
—
—
Provision
for loan and lease losses
2,231
3,574
8,310
13,629
28,195
Other (4)
(47
)
(92
)
(186
)
(898
)
36
Allowance
for loan and lease losses, December 31
14,419
17,428
24,179
33,783
41,885
Reserve
for unfunded lending commitments, January 1
484
513
714
1,188
1,487
Provision
for unfunded lending commitments
44
(18
)
(141
)
(219
)
240
Other (5)
—
(11
)
(60
)
(255
)
(539
)
Reserve
for unfunded lending commitments, December 31
528
484
513
714
1,188
Allowance
for credit losses, December 31
$
14,947
$
17,912
$
24,692
$
34,497
$
43,073
(1)
The
2010 balance includes $10.8 billion of allowance for loan and lease losses related to the adoption of consolidation guidance that was effective January 1, 2010.
(2)
Includes U.S. small business commercial charge-offs of $345 million, $457 million, $799 million, $1.1 billion and $2.0 billion in 2014, 2013,
2012, 2011 and 2010, respectively.
(3)
Includes U.S. small business commercial recoveries of $63 million, $98 million, $100 million, $106 million and $107 million in 2014, 2013, 2012, 2011
and 2010, respectively.
(4)
The 2014, 2013, 2012 and 2011 amounts primarily represent the net impact of portfolio sales, consolidations and deconsolidations, and foreign currency translation adjustments. In addition, the 2011 amount includes a $449 million reduction in the allowance for loan and lease losses related to Canadian consumer card loans that were transferred to LHFS.
(5)
Primarily
represents accretion of the Merrill Lynch purchase accounting adjustment and the impact of funding previously unfunded positions.
125 Bank of America 2014
Table
VII Allowance for Credit Losses (continued)
(Dollars in millions)
2014
2013
2012
2011
2010
Loan
and allowance ratios:
Loans and leases outstanding at December 31 (6)
$
872,710
$
918,191
$
898,817
$
917,396
$
937,119
Allowance
for loan and lease losses as a percentage of total loans and leases outstanding at December 31 (6)
1.65
%
1.90
%
2.69
%
3.68
%
4.47
%
Consumer
allowance for loan and lease losses as a percentage of total consumer loans and leases outstanding at December 31 (7)
2.05
2.53
3.81
4.88
5.40
Commercial
allowance for loan and lease losses as a percentage of total commercial loans and leases outstanding at December 31 (8)
1.15
1.03
0.90
1.33
2.44
Average
loans and leases outstanding (6)
$
894,001
$
909,127
$
890,337
$
929,661
$
954,278
Net
charge-offs as a percentage of average loans and leases outstanding (6, 9)
0.49
%
0.87
%
1.67
%
2.24
%
3.60
%
Net
charge-offs and PCI write-offs as a percentage of average loans and leases outstanding (6, 10)
0.58
1.13
1.99
2.24
3.60
Allowance
for loan and lease losses as a percentage of total nonperforming loans and leases at December 31 (6, 11)
121
102
107
135
136
Ratio
of the allowance for loan and lease losses at December 31 to net charge-offs (9)
3.29
2.21
1.62
1.62
1.22
Ratio
of the allowance for loan and lease losses at December 31 to net charge-offs and PCI write-offs (10)
2.78
1.70
1.36
1.62
1.22
Amounts
included in allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases at December 31 (12)
$
5,944
$
7,680
$
12,021
$
17,490
$
22,908
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 (6, 12)
71
%
57
%
54
%
65
%
62
%
Loan
and allowance ratios excluding PCI loans and the related valuation allowance: (13)
Allowance for loan and lease losses as a percentage of total loans and
leases outstanding at December 31 (6)
1.50
%
1.67
%
2.14
%
2.86
%
3.94
%
Consumer
allowance for loan and lease losses as a percentage of total consumer loans and leases outstanding at December 31 (7)
1.79
2.17
2.95
3.68
4.66
Net
charge-offs as a percentage of average loans and leases outstanding (6)
0.50
0.90
1.73
2.32
3.73
Allowance
for loan and lease losses as a percentage of total nonperforming loans and leases at December 31 (6, 11)
107
87
82
101
116
Ratio
of the allowance for loan and lease losses at December 31 to net charge-offs
2.91
1.89
1.25
1.22
1.04
(6)
Outstanding
loan and lease balances and ratios do not include loans accounted for under the fair value option of $8.7 billion, $10.0 billion, $9.0 billion, $8.8 billion and $3.3 billion at December 31, 2014, 2013, 2012, 2011 and 2010, respectively. Average loans accounted for under the fair value option were $9.9 billion, $9.5 billion, $8.4 billion, $8.4 billion and $4.1 billion in 2014, 2013, 2012,
2011 and 2010, respectively.
(7)
Excludes consumer loans accounted for under the fair value option of $2.1 billion, $2.2 billion, $1.0 billion and $2.2 billion at December 31, 2014, 2013, 2012 and 2011. There were no consumer loans accounted for under the fair value option prior to 2011.
(8)
Excludes
commercial loans accounted for under the fair value option of $6.6 billion, $7.9 billion, $8.0 billion, $6.6 billion and $3.3 billion at December 31, 2014, 2013, 2012, 2011 and 2010, respectively.
(9)
Net charge-offs exclude $810 million, $2.3 billion
and $2.8 billion of write-offs in the PCI loan portfolio in 2014, 2013 and 2012. These write-offs decreased the PCI valuation allowance included as part of the allowance for loan and lease losses. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 78.
(10)
There were no write-offs of PCI loans in 2011 and 2010.
(11)
For
more information on our definition of nonperforming loans, see pages 82 and 89.
(12)
Primarily includes amounts allocated to U.S. credit card and unsecured lending portfolios in CBB, PCI loans and the non-U.S. credit portfolio in All Other.
(13)
For more information on the PCI loan
portfolio and the valuation allowance for PCI loans, see Note 4 – Outstanding Loans and Leases and Note 5 – Allowance for Credit Losses to the Consolidated Financial Statements.
Bank of America 2014 126
Table VIII
Allocation of the Allowance for Credit Losses by Product Type
December 31
2014
2013
2012
2011
2010
(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
$
2,900
20.11
%
$
4,084
23.43
%
$
7,088
29.31
%
$
7,985
23.64
%
$
6,365
15.20
%
Home
equity
3,035
21.05
4,434
25.44
7,845
32.45
13,094
38.76
12,887
30.77
U.S.
credit card
3,320
23.03
3,930
22.55
4,718
19.51
6,322
18.71
10,876
25.97
Non-U.S.
credit card
369
2.56
459
2.63
600
2.48
946
2.80
2,045
4.88
Direct/Indirect
consumer
299
2.07
417
2.39
718
2.97
1,153
3.41
2,381
5.68
Other
consumer
59
0.41
99
0.58
104
0.43
148
0.44
161
0.38
Total
consumer
9,982
69.23
13,423
77.02
21,073
87.15
29,648
87.76
34,715
82.88
U.S.
commercial (1)
2,619
18.16
2,394
13.74
1,885
7.80
2,441
7.23
3,576
8.54
Commercial
real estate
1,016
7.05
917
5.26
846
3.50
1,349
3.99
3,137
7.49
Commercial
lease financing
153
1.06
118
0.68
78
0.32
92
0.27
126
0.30
Non-U.S.
commercial
649
4.50
576
3.30
297
1.23
253
0.75
331
0.79
Total
commercial (2)
4,437
30.77
4,005
22.98
3,106
12.85
4,135
12.24
7,170
17.12
Allowance
for loan and lease losses (3)
14,419
100.00
%
17,428
100.00
%
24,179
100.00
%
33,783
100.00
%
41,885
100.00
%
Reserve
for unfunded lending commitments
528
484
513
714
1,188
Allowance
for credit losses
$
14,947
$
17,912
$
24,692
$
34,497
$
43,073
(1)
Includes
allowance for loan and lease losses for U.S. small business commercial loans of $536 million, $462 million, $642 million, $893 million and $1.5 billion at December 31, 2014, 2013, 2012, 2011 and 2010, respectively.
(2)
Includes
allowance for loan and lease losses for impaired commercial loans of $159 million, $277 million, $475 million, $545 million and $1.1 billion at December 31, 2014, 2013, 2012, 2011 and 2010, respectively.
(3)
Includes
$1.7 billion, $2.5 billion, $5.5 billion, $8.5 billion and $6.4 billion of valuation allowance presented with the allowance for loan and lease losses related to PCI loans at December 31, 2014, 2013, 2012, 2011 and 2010, respectively.
Net
income (loss) applicable to common shareholders
2,738
(470
)
2,035
(514
)
3,183
2,218
3,571
1,110
Average
common shares issued and outstanding
10,516
10,516
10,519
10,561
10,633
10,719
10,776
10,799
Average
diluted common shares issued and outstanding (1)
11,274
10,516
11,265
10,561
11,404
11,482
11,525
11,155
Performance
ratios
Return
on average assets
0.57
%
n/m
0.42
%
n/m
0.64
%
0.47
%
0.74
%
0.27
%
Four
quarter trailing return on average assets (2)
0.23
0.24
%
0.37
0.45
%
0.53
0.40
0.30
0.23
Return
on average common shareholders’ equity
4.84
n/m
3.68
n/m
5.74
4.06
6.55
2.06
Return
on average tangible common shareholders’ equity (3)
7.15
n/m
5.47
n/m
8.61
6.15
9.88
3.12
Return
on average tangible shareholders’ equity (3)
7.08
n/m
5.64
n/m
8.53
6.32
9.98
3.69
Total
ending equity to total ending assets
11.57
11.24
10.94
10.79
11.07
10.92
10.88
10.91
Total
average equity to total average assets
11.39
11.14
10.87
11.06
10.93
10.85
10.76
10.71
Dividend
payout
19.21
n/m
5.16
n/m
3.33
4.82
3.01
9.75
Per
common share data
Earnings
(loss)
$
0.26
$
(0.04
)
$
0.19
$
(0.05
)
$
0.30
$
0.21
$
0.33
$
0.10
Diluted
earnings (loss) (1)
0.25
(0.04
)
0.19
(0.05
)
0.29
0.20
0.32
0.10
Dividends
paid
0.05
0.05
0.01
0.01
0.01
0.01
0.01
0.01
Book
value
21.32
20.99
21.16
20.75
20.71
20.50
20.18
20.19
Tangible
book value (3)
14.43
14.09
14.24
13.81
13.79
13.62
13.32
13.36
Market
price per share of common stock
Closing
$
17.89
$
17.05
$
15.37
$
17.20
$
15.57
$
13.80
$
12.86
$
12.18
High
closing
18.13
17.18
17.34
17.92
15.88
14.95
13.83
12.78
Low
closing
15.76
14.98
14.51
16.10
13.69
12.83
11.44
11.03
Market
capitalization
$
188,141
$
179,296
$
161,628
$
181,117
$
164,914
$
147,429
$
138,156
$
131,817
(1)
The
diluted earnings (loss) per common share excluded the effect of any equity instruments that are antidilutive to earnings per share. There were no potential common shares that were dilutive in the third and first quarters of 2014 because of the net loss applicable to common shareholders.
(2)
Calculated as total net income (loss) for four consecutive quarters divided by annualized average assets for four consecutive quarters.
(3)
Tangible equity ratios and tangible book
value per share of common stock are non-GAAP financial measures. Other companies may define or calculate these measures differently. For more information on these ratios, see Supplemental Financial Data on page 32, and for corresponding reconciliations to GAAP financial measures, see Statistical Table XVII.
(4)
For more information on the impact of the purchased credit-impaired loan portfolio on asset quality, see Consumer Portfolio Credit Risk Management on page 70.
(5)
Includes
the allowance for loan and lease losses and the reserve for unfunded lending commitments.
(6)
Balances and ratios do not include loans accounted for under the fair value option. For additional exclusions from nonperforming loans, leases and foreclosed properties, see Consumer Portfolio Credit Risk Management – Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity on page 82 and corresponding Table 39, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity
on page 89 and corresponding Table 48.
(7)
Primarily includes amounts allocated to the U.S. credit card and unsecured consumer lending portfolios in CBB, purchased credit-impaired loans and the non-U.S. credit card portfolio in All Other.
(8)
Net charge-offs exclude $13
million, $246 million, $160 million and $391 million of write-offs in the purchased credit-impaired loan portfolio in the fourth, third, second and first quarters of 2014, respectively, and $741 million, $443 million, $313 million and $839 million in the fourth, third, second and first quarters of 2013, respectively. These write-offs decreased the purchased credit-impaired valuation allowance included as part of the allowance for loan and lease losses. For more information on purchased credit-impaired write-offs, see Consumer
Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 78.
(9)
On January 1, 2014, the Basel 3 rules became effective, subject to transition provisions primarily related to regulatory deductions and adjustments impacting Common equity tier 1 capital and Tier 1 capital. We reported under Basel 1 (which included the Market Risk Final Rules) for 2013.
n/a = not applicable
n/m = not meaningful
129 Bank
of America 2014
Table
XII Selected Quarterly Financial Data (continued)
2014
Quarters
2013 Quarters
(Dollars in millions)
Fourth
Third
Second
First
Fourth
Third
Second
First
Average
balance sheet
Total
loans and leases
$
884,733
$
899,241
$
912,580
$
919,482
$
929,777
$
923,978
$
914,234
$
906,259
Total
assets
2,137,551
2,136,109
2,169,555
2,139,266
2,134,875
2,123,430
2,184,610
2,212,430
Total
deposits
1,122,514
1,127,488
1,128,563
1,118,178
1,112,674
1,090,611
1,079,956
1,075,280
Long-term
debt
249,221
251,772
259,825
253,678
251,055
258,717
270,198
273,999
Common
shareholders’ equity
224,473
222,368
222,215
223,201
220,088
216,766
218,790
218,225
Total
shareholders’ equity
243,448
238,034
235,797
236,553
233,415
230,392
235,063
236,995
Asset
quality (4)
Allowance
for credit losses (5)
$
14,947
$
15,635
$
16,314
$
17,127
$
17,912
$
19,912
$
21,709
$
22,927
Nonperforming
loans, leases and foreclosed properties (6)
12,629
14,232
15,300
17,732
17,772
20,028
21,280
22,842
Allowance
for loan and lease losses as a percentage of total loans and leases outstanding (6)
1.65
%
1.71
%
1.75
%
1.84
%
1.90
%
2.10
%
2.33
%
2.49
%
Allowance
for loan and lease losses as a percentage of total nonperforming loans and leases (6)
121
112
108
97
102
100
103
102
Allowance
for loan and lease losses as a percentage of total nonperforming loans and leases, excluding the PCI loan portfolio (6)
107
100
95
85
87
84
84
82
Amounts
included in allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases (7)
$
5,944
$
6,013
$
6,488
$
7,143
$
7,680
$
8,972
$
9,919
$
10,690
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 (6, 7)
71
%
67
%
64
%
55
%
57
%
54
%
55
%
53
%
Net
charge-offs (8)
$
879
$
1,043
$
1,073
$
1,388
$
1,582
$
1,687
$
2,111
$
2,517
Annualized
net charge-offs as a percentage of average loans and leases outstanding (6, 8)
0.40
%
0.46
%
0.48
%
0.62
%
0.68
%
0.73
%
0.94
%
1.14
%
Annualized
net charge-offs as a percentage of average loans and leases outstanding, excluding the PCI loan portfolio (6)
0.41
0.48
0.49
0.64
0.70
0.75
0.97
1.18
Annualized
net charge-offs and PCI write-offs as a percentage of average loans and leases outstanding (6)
0.40
0.57
0.55
0.79
1.00
0.92
1.07
1.52
Nonperforming
loans and leases as a percentage of total loans and leases outstanding (6)
1.37
1.53
1.63
1.89
1.87
2.10
2.26
2.44
Nonperforming
loans, leases and foreclosed properties as a percentage of total loans, leases and foreclosed properties (6)
1.45
1.61
1.70
1.96
1.93
2.17
2.33
2.53
Ratio
of the allowance for loan and lease losses at period end to annualized net charge-offs (8)
4.14
3.65
3.67
2.95
2.78
2.90
2.51
2.20
Ratio
of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the PCI loan portfolio
3.66
3.27
3.25
2.58
2.38
2.42
2.04
1.76
Ratio
of the allowance for loan and lease losses at period end to annualized net charge-offs and PCI write-offs
4.08
2.95
3.20
2.30
1.89
2.30
2.18
1.65
Capital
ratios at period end (9)
Risk-based
capital:
Common
equity tier 1 capital
12.3
%
12.0
%
12.0
%
11.8
%
n/a
n/a
n/a
n/a
Tier 1
common capital
n/a
n/a
n/a
n/a
10.9
%
10.8
%
10.6
%
10.3
%
Tier 1
capital
13.4
12.8
12.5
11.9
12.2
12.1
11.9
12.0
Total
capital
16.5
15.8
15.3
14.8
15.1
15.1
15.1
15.3
Tier 1
leverage
8.2
7.9
7.7
7.4
7.7
7.6
7.4
7.4
Tangible
equity (3)
8.4
8.1
7.9
7.7
7.9
7.7
7.7
7.8
Tangible
common equity (3)
7.5
7.2
7.1
7.0
7.2
7.1
7.0
6.9
For
footnotes see page 129.
Bank of America 2014 130
Table
XIII Quarterly Average Balances and Interest Rates – FTE Basis
Fourth
Quarter 2014
Third Quarter 2014
(Dollars in millions)
Average
Balance
Interest Income/
Expense
Yield/
Rate
Average
Balance
Interest Income/
Expense
Yield/
Rate
Earning
assets
Interest-bearing
deposits with the Federal Reserve and non-U.S. central banks (1)
$
109,042
$
74
0.27
%
$
110,876
$
77
0.28
%
Time
deposits placed and other short-term investments
9,339
41
1.73
10,457
41
1.54
Federal
funds sold and securities borrowed or purchased under agreements to resell
217,982
238
0.43
223,978
239
0.42
Trading
account assets
144,147
1,141
3.15
143,282
1,148
3.18
Debt
securities (2)
371,014
1,687
1.82
359,653
2,236
2.48
Loans
and leases (3):
Residential
mortgage (4)
223,132
1,946
3.49
235,271
2,083
3.54
Home
equity
86,825
809
3.70
88,590
836
3.76
U.S.
credit card
89,381
2,086
9.26
88,866
2,093
9.34
Non-U.S.
credit card
10,950
280
10.14
11,784
304
10.25
Direct/Indirect
consumer (5)
83,121
522
2.49
82,669
523
2.51
Other
consumer (6)
2,031
85
16.75
2,111
19
3.44
Total
consumer
495,440
5,728
4.60
509,291
5,858
4.58
U.S.
commercial
231,217
1,648
2.83
230,891
1,658
2.85
Commercial
real estate (7)
46,993
342
2.89
46,071
344
2.96
Commercial
lease financing
24,238
198
3.28
24,325
212
3.48
Non-U.S.
commercial
86,845
546
2.49
88,663
560
2.51
Total
commercial
389,293
2,734
2.79
389,950
2,774
2.83
Total
loans and leases
884,733
8,462
3.80
899,241
8,632
3.82
Other
earning assets
65,864
739
4.46
65,995
710
4.27
Total
earning assets (8)
1,802,121
12,382
2.74
1,813,482
13,083
2.87
Cash
and due from banks (1)
27,590
25,120
Other
assets, less allowance for loan and lease losses
307,840
297,507
Total
assets
$
2,137,551
$
2,136,109
Interest-bearing
liabilities
U.S.
interest-bearing deposits:
Savings
$
45,621
$
1
0.01
%
$
46,803
$
1
0.01
%
NOW
and money market deposit accounts
515,995
76
0.06
517,043
78
0.06
Consumer
CDs and IRAs
61,880
51
0.33
65,579
59
0.35
Negotiable
CDs, public funds and other deposits
30,951
23
0.29
31,806
27
0.34
Total
U.S. interest-bearing deposits
654,447
151
0.09
661,231
165
0.10
Non-U.S.
interest-bearing deposits:
Banks
located in non-U.S. countries
5,413
12
0.88
8,022
22
1.10
Governments
and official institutions
1,647
1
0.15
1,706
1
0.15
Time,
savings and other
57,030
73
0.51
61,331
82
0.54
Total
non-U.S. interest-bearing deposits
64,090
86
0.53
71,059
105
0.59
Total
interest-bearing deposits
718,537
237
0.13
732,290
270
0.15
Federal
funds purchased, securities loaned or sold under agreements to repurchase and short-term borrowings
251,432
615
0.97
255,111
591
0.92
Trading
account liabilities
78,173
351
1.78
84,988
392
1.83
Long-term
debt
249,221
1,314
2.10
251,772
1,386
2.19
Total
interest-bearing liabilities (8)
1,297,363
2,517
0.77
1,324,161
2,639
0.79
Noninterest-bearing
sources:
Noninterest-bearing
deposits
403,977
395,198
Other
liabilities
192,763
178,716
Shareholders’
equity
243,448
238,034
Total
liabilities and shareholders’ equity
$
2,137,551
$
2,136,109
Net
interest spread
1.97
%
2.08
%
Impact
of noninterest-bearing sources
0.21
0.21
Net
interest income/yield on earning assets
$
9,865
2.18
%
$
10,444
2.29
%
(1)
Beginning
in 2014, interest-bearing deposits placed with the Federal Reserve and certain non-U.S. central banks are included in earning assets. In prior periods, these balances were included with cash and due from banks in the cash and cash equivalents line, consistent with the Consolidated Balance Sheet presentation. Prior periods have been reclassified to conform to current period presentation.
(2)
Beginning in 2014, yields on debt securities carried at fair value are calculated on the cost basis. Prior to 2014, yields on debt securities carried at fair value were calculated based on fair value rather than the cost basis. The use of fair value did not have a material impact on net interest yield.
(3)
Nonperforming
loans are included in the respective average loan balances. Income on these nonperforming loans is generally recognized on a cost recovery basis. Purchased credit-impaired loans were recorded at fair value upon acquisition and accrete interest income over the remaining life of the loan.
(4)
Includes non-U.S. residential mortgage loans of $3 million, $3 million, $2 million and $0 million in the fourth, third, second and first quarters of 2014, and $56 million
in the fourth quarter of 2013, respectively.
(5)
Includes non-U.S. consumer loans of $4.2 billion, $4.3 billion, $4.4 billion and $4.6 billion in the fourth, third, second and first quarters of 2014, and $5.1 billion in the fourth quarter of 2013, respectively.
(6)
Includes
consumer finance loans of $907 million, $1.1 billion, $1.1 billion and $1.2 billion in the fourth, third, second and first quarters of 2014, and $1.2 billion in the fourth quarter of 2013, respectively; consumer leases of $965 million, $887 million, $762 million and $656 million in the fourth, third, second and first quarters of 2014, and $549 million in
the fourth quarter of 2013, respectively; consumer overdrafts of $156 million, $161 million, $137 million and $140 million in the fourth, third, second and first quarters of 2014, and $163 million in the fourth quarter of 2013, respectively; and other non-U.S. consumer loans of $3 million for each of the quarters of 2014, and $2 million in the fourth quarter of 2013.
(7)
Includes
U.S. commercial real estate loans of $45.1 billion, $45.0 billion, $46.7 billion and $47.0 billion in the fourth, third, second and first quarters of 2014, and $44.5 billion in the fourth quarter of 2013, respectively; and non-U.S. commercial real estate loans of $1.9 billion, $1.0 billion, $1.6 billion and $1.8 billion in the fourth, third, second and first quarters of 2014, and $1.8
billion in the fourth quarter of 2013, respectively.
(8)
Interest income includes the impact of interest rate risk management contracts, which decreased interest income on the underlying assets by $10 million, $30 million, $13 million and $5 million in the fourth, third, second and first quarters of 2014, and $0
million in the fourth quarter of 2013, respectively. Interest expense includes the impact of interest rate risk management contracts, which decreased interest expense on the underlying liabilities by $659 million, $602 million, $621 million and $592 million in the fourth, third, second and first quarters of 2014, and $588 million in the fourth quarter of 2013, respectively. For more information on interest rate contracts,
see Interest Rate Risk Management for Non-trading Activities on page 105.
131 Bank of America 2014
Table
XIII Quarterly Average Balances and Interest Rates – FTE Basis (continued)
Second
Quarter 2014
First Quarter 2014
Fourth Quarter 2013
(Dollars in millions)
Average
Balance
Interest Income/
Expense
Yield/
Rate
Average
Balance
Interest Income/
Expense
Yield/
Rate
Average
Balance
Interest Income/
Expense
Yield/
Rate
Earning
assets
Interest-bearing
deposits with the Federal Reserve and non-U.S. central banks (1)
$
123,582
$
85
0.28
%
$
112,570
$
72
0.26
%
$
90,196
$
59
0.26
%
Time
deposits placed and other short-term investments
10,509
39
1.51
13,880
49
1.43
15,782
48
1.21
Federal
funds sold and securities borrowed or purchased under agreements to resell
235,393
297
0.51
212,504
265
0.51
203,415
304
0.59
Trading
account assets
147,798
1,214
3.29
147,583
1,213
3.32
156,194
1,182
3.01
Debt
securities (2)
345,889
2,134
2.46
329,711
2,005
2.41
325,119
2,454
3.02
Loans
and leases (3):
Residential
mortgage (4)
243,405
2,195
3.61
247,561
2,238
3.62
253,988
2,373
3.74
Home
equity
90,729
842
3.72
92,754
853
3.71
95,374
954
3.98
U.S.
credit card
88,058
2,042
9.30
89,545
2,092
9.48
90,057
2,125
9.36
Non-U.S.
credit card
11,759
308
10.51
11,554
308
10.79
11,171
310
11.01
Direct/Indirect
consumer (5)
82,102
524
2.56
81,728
530
2.63
82,990
565
2.70
Other
consumer (6)
2,012
17
3.60
1,962
18
3.66
1,929
17
3.73
Total
consumer
518,065
5,928
4.58
525,104
6,039
4.64
535,509
6,344
4.72
U.S.
commercial
230,486
1,673
2.91
228,058
1,651
2.93
225,596
1,700
2.99
Commercial
real estate (7)
48,315
357
2.97
48,753
368
3.06
46,341
373
3.20
Commercial
lease financing
24,409
193
3.16
24,727
234
3.78
24,468
206
3.37
Non-U.S.
commercial
91,305
569
2.50
92,840
543
2.37
97,863
544
2.21
Total
commercial
394,515
2,792
2.84
394,378
2,796
2.87
394,268
2,823
2.84
Total
loans and leases
912,580
8,720
3.83
919,482
8,835
3.88
929,777
9,167
3.92
Other
earning assets
65,099
665
4.09
67,568
697
4.18
78,214
711
3.61
Total
earning assets (8)
1,840,850
13,154
2.86
1,803,298
13,136
2.93
1,798,697
13,925
3.08
Cash
and cash equivalents (1)
27,377
28,258
35,063
Other
assets, less allowance for loan and lease losses
301,328
307,710
301,115
Total
assets
$
2,169,555
$
2,139,266
$
2,134,875
Interest-bearing
liabilities
U.S.
interest-bearing deposits:
Savings
$
47,450
$
—
—
%
$
45,196
$
1
0.01
%
$
43,665
$
5
0.05
%
NOW
and money market deposit accounts
519,399
79
0.06
523,237
83
0.06
514,220
89
0.07
Consumer
CDs and IRAs
68,706
70
0.41
71,141
84
0.48
74,635
96
0.51
Negotiable
CDs, public funds and other deposits
33,412
29
0.35
29,826
27
0.37
29,060
29
0.39
Total
U.S. interest-bearing deposits
668,967
178
0.11
669,400
195
0.12
661,580
219
0.13
Non-U.S.
interest-bearing deposits:
Banks
located in non-U.S. countries
10,538
19
0.72
11,071
21
0.75
13,902
22
0.62
Governments
and official institutions
1,754
—
0.14
1,857
1
0.14
1,734
1
0.18
Time,
savings and other
64,091
85
0.53
60,506
74
0.50
58,529
72
0.49
Total
non-U.S. interest-bearing deposits
76,383
104
0.55
73,434
96
0.53
74,165
95
0.51
Total
interest-bearing deposits
745,350
282
0.15
742,834
291
0.16
735,745
314
0.17
Federal
funds purchased, securities loaned or sold under agreements to repurchase and short-term borrowings
271,247
763
1.13
252,971
609
0.98
271,538
682
1.00
Trading
account liabilities
95,153
398
1.68
90,448
435
1.95
82,393
364
1.75
Long-term
debt
259,825
1,485
2.29
253,678
1,515
2.41
251,055
1,566
2.48
Total
interest-bearing liabilities (8)
1,371,575
2,928
0.86
1,339,931
2,850
0.86
1,340,731
2,926
0.87
Noninterest-bearing
sources:
Noninterest-bearing
deposits
383,213
375,344
376,929
Other
liabilities
178,970
187,438
183,800
Shareholders’
equity
235,797
236,553
233,415
Total
liabilities and shareholders’ equity
$
2,169,555
$
2,139,266
$
2,134,875
Net
interest spread
2.00
%
2.07
%
2.21
%
Impact
of noninterest-bearing sources
0.22
0.22
0.23
Net
interest income/yield on earning assets
$
10,226
2.22
%
$
10,286
2.29
%
$
10,999
2.44
%
For
footnotes see page 131.
Bank of America 2014 132
Table
XIV Quarterly Supplemental Financial Data
2014
Quarters
2013 Quarters
(Dollars in millions, except per share information)
Fourth
Third
Second
First
Fourth
Third
Second
First
Fully
taxable-equivalent basis data (1)
Net
interest income (2)
$
9,865
$
10,444
$
10,226
$
10,286
$
10,999
$
10,479
$
10,771
$
10,875
Total
revenue, net of interest expense
18,955
21,434
21,960
22,767
21,701
21,743
22,949
23,408
Net
interest yield (2)
2.18
%
2.29
%
2.22
%
2.29
%
2.44
%
2.33
%
2.35
%
2.36
%
Efficiency
ratio
74.90
93.97
84.43
97.68
79.75
75.38
69.80
83.31
(1)
FTE
basis is a non-GAAP financial measure. FTE basis is a performance measure used by management in operating the business that management believes provides investors with a more accurate picture of the interest margin for comparative purposes. For more information on these performance measures and ratios, see Supplemental Financial Data on page 32 and for corresponding reconciliations to GAAP financial measures, see Statistical Table XVII.
(2)
Beginning in 2014, interest-bearing deposits placed with the Federal Reserve and certain non-U.S. central banks are included in earning assets. Prior period yields have been reclassified
to conform to current period presentation.
133 Bank of America 2014
Table
XV Five-year Reconciliations to GAAP Financial Measures (1)
(Dollars in millions, shares in thousands)
2014
2013
2012
2011
2010
Reconciliation
of net interest income to net interest income on a fully taxable-equivalent basis
Net
interest income
$
39,952
$
42,265
$
40,656
$
44,616
$
51,523
Fully
taxable-equivalent adjustment
869
859
901
972
1,170
Net
interest income on a fully taxable-equivalent basis
$
40,821
$
43,124
$
41,557
$
45,588
$
52,693
Reconciliation
of total revenue, net of interest expense to total revenue, net of interest expense on a fully taxable-equivalent basis
Total
revenue, net of interest expense
$
84,247
$
88,942
$
83,334
$
93,454
$
110,220
Fully
taxable-equivalent adjustment
869
859
901
972
1,170
Total
revenue, net of interest expense on a fully taxable-equivalent basis
$
85,116
$
89,801
$
84,235
$
94,426
$
111,390
Reconciliation
of total noninterest expense to total noninterest expense, excluding goodwill impairment charges
Total
noninterest expense
$
75,117
$
69,214
$
72,093
$
80,274
$
83,108
Goodwill
impairment charges
—
—
—
(3,184
)
(12,400
)
Total
noninterest expense, excluding goodwill impairment charges
$
75,117
$
69,214
$
72,093
$
77,090
$
70,708
Reconciliation
of income tax expense (benefit) to income tax expense (benefit) on a fully taxable-equivalent basis
Income
tax expense (benefit)
$
2,022
$
4,741
$
(1,116
)
$
(1,676
)
$
915
Fully
taxable-equivalent adjustment
869
859
901
972
1,170
Income
tax expense (benefit) on a fully taxable-equivalent basis
$
2,891
$
5,600
$
(215
)
$
(704
)
$
2,085
Reconciliation
of net income (loss) to net income, excluding goodwill impairment charges
Net
income (loss)
$
4,833
$
11,431
$
4,188
$
1,446
$
(2,238
)
Goodwill
impairment charges
—
—
—
3,184
12,400
Net
income, excluding goodwill impairment charges
$
4,833
$
11,431
$
4,188
$
4,630
$
10,162
Reconciliation
of net income (loss) applicable to common shareholders to net income applicable to common shareholders, excluding goodwill impairment charges
Net
income (loss) applicable to common shareholders
$
3,789
$
10,082
$
2,760
$
85
$
(3,595
)
Goodwill
impairment charges
—
—
—
3,184
12,400
Net
income applicable to common shareholders, excluding goodwill impairment charges
$
3,789
$
10,082
$
2,760
$
3,269
$
8,805
Reconciliation
of average common shareholders’ equity to average tangible common shareholders’ equity
Common
shareholders’ equity
$
223,066
$
218,468
$
216,996
$
211,709
$
212,686
Common
Equivalent Securities
—
—
—
—
2,900
Goodwill
(69,809
)
(69,910
)
(69,974
)
(72,334
)
(82,600
)
Intangible
assets (excluding MSRs)
(5,109
)
(6,132
)
(7,366
)
(9,180
)
(10,985
)
Related
deferred tax liabilities
2,090
2,328
2,593
2,898
3,306
Tangible
common shareholders’ equity
$
150,238
$
144,754
$
142,249
$
133,093
$
125,307
Reconciliation
of average shareholders’ equity to average tangible shareholders’ equity
Shareholders’
equity
$
238,476
$
233,947
$
235,677
$
229,095
$
233,235
Goodwill
(69,809
)
(69,910
)
(69,974
)
(72,334
)
(82,600
)
Intangible
assets (excluding MSRs)
(5,109
)
(6,132
)
(7,366
)
(9,180
)
(10,985
)
Related
deferred tax liabilities
2,090
2,328
2,593
2,898
3,306
Tangible
shareholders’ equity
$
165,648
$
160,233
$
160,930
$
150,479
$
142,956
Reconciliation
of year-end common shareholders’ equity to year-end tangible common shareholders’ equity
Common
shareholders’ equity
$
224,162
$
219,333
$
218,188
$
211,704
$
211,686
Goodwill
(69,777
)
(69,844
)
(69,976
)
(69,967
)
(73,861
)
Intangible
assets (excluding MSRs)
(4,612
)
(5,574
)
(6,684
)
(8,021
)
(9,923
)
Related
deferred tax liabilities
1,960
2,166
2,428
2,702
3,036
Tangible
common shareholders’ equity
$
151,733
$
146,081
$
143,956
$
136,418
$
130,938
Reconciliation
of year-end shareholders’ equity to year-end tangible shareholders’ equity
Shareholders’
equity
$
243,471
$
232,685
$
236,956
$
230,101
$
228,248
Goodwill
(69,777
)
(69,844
)
(69,976
)
(69,967
)
(73,861
)
Intangible
assets (excluding MSRs)
(4,612
)
(5,574
)
(6,684
)
(8,021
)
(9,923
)
Related
deferred tax liabilities
1,960
2,166
2,428
2,702
3,036
Tangible
shareholders’ equity
$
171,042
$
159,433
$
162,724
$
154,815
$
147,500
Reconciliation
of year-end assets to year-end tangible assets
Assets
$
2,104,534
$
2,102,273
$
2,209,974
$
2,129,046
$
2,264,909
Goodwill
(69,777
)
(69,844
)
(69,976
)
(69,967
)
(73,861
)
Intangible
assets (excluding MSRs)
(4,612
)
(5,574
)
(6,684
)
(8,021
)
(9,923
)
Related
deferred tax liabilities
1,960
2,166
2,428
2,702
3,036
Tangible
assets
$
2,032,105
$
2,029,021
$
2,135,742
$
2,053,760
$
2,184,161
(1)
Presents
reconciliations of non-GAAP financial measures to GAAP financial measures. We believe the use of these non-GAAP financial measures provides additional clarity in assessing the results of the Corporation. Other companies may define or calculate these measures differently. 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 32.
Bank of America
2014 134
Table XVI Two-year Reconciliations to GAAP Financial Measures (1, 2)
(Dollars
in millions)
2014
2013
Consumer & Business Banking
Reported net income
$
7,096
$
6,647
Adjustment
related to intangibles (3)
4
7
Adjusted net income
$
7,100
$
6,654
Average
allocated equity (4)
$
61,449
$
62,037
Adjustment related to goodwill and a percentage of intangibles
(31,949
)
(32,037
)
Average
allocated capital
$
29,500
$
30,000
Deposits
Reported
net income
$
2,847
$
2,123
Adjustment related to intangibles (3)
—
1
Adjusted
net income
$
2,847
$
2,124
Average allocated equity (4)
$
36,484
$
35,392
Adjustment
related to goodwill and a percentage of intangibles
(19,984
)
(19,992
)
Average allocated capital
$
16,500
$
15,400
Consumer
Lending
Reported net income
$
4,249
$
4,524
Adjustment related to intangibles (3)
4
7
Adjusted
net income
$
4,253
$
4,531
Average allocated equity (4)
$
24,965
$
26,644
Adjustment
related to goodwill and a percentage of intangibles
(11,965
)
(12,044
)
Average allocated capital
$
13,000
$
14,600
Global
Wealth & Investment Management
Reported net income
$
2,974
$
2,977
Adjustment related to intangibles (3)
13
16
Adjusted
net income
$
2,987
$
2,993
Average allocated equity (4)
$
22,214
$
20,292
Adjustment
related to goodwill and a percentage of intangibles
(10,214
)
(10,292
)
Average allocated capital
$
12,000
$
10,000
Global
Banking
Reported net income
$
5,435
$
4,973
Adjustment related to intangibles (3)
2
3
Adjusted
net income
$
5,437
$
4,976
Average allocated equity (4)
$
53,404
$
45,412
Adjustment
related to goodwill and a percentage of intangibles
(22,404
)
(22,412
)
Average allocated capital
$
31,000
$
23,000
Global
Markets
Reported net income
$
2,719
$
1,153
Adjustment related to intangibles (3)
9
9
Adjusted
net income
$
2,728
$
1,162
Average allocated equity (4)
$
39,374
$
35,370
Adjustment
related to goodwill and a percentage of intangibles
(5,374
)
(5,370
)
Average allocated capital
$
34,000
$
30,000
(1)
Presents
reconciliations of non-GAAP financial measures to GAAP financial measures. We believe the use of these non-GAAP financial measures provides additional clarity in assessing the results of the Corporation and our segments. Other companies may define or calculate these measures differently. 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 32.
(2)
There are no adjustments to reported net income (loss) or average allocated equity for CRES.
(3)
Represents
cost of funds, earnings credits and certain expenses related to intangibles.
(4)
Average allocated equity is comprised of average allocated capital plus capital for the portion of goodwill and intangibles specifically assigned to the business segment. For more information on allocated capital, see Business Segment Operations on page 34 and Note 8 – Goodwill and Intangible Assets to the Consolidated Financial Statements.
135 Bank
of America 2014
Table
XVII Quarterly Reconciliations to GAAP Financial Measures (1)
2014
Quarters
2013 Quarters
(Dollars in millions)
Fourth
Third
Second
First
Fourth
Third
Second
First
Reconciliation
of net interest income to net interest income on a fully taxable-equivalent basis
Net
interest income
$
9,635
$
10,219
$
10,013
$
10,085
$
10,786
$
10,266
$
10,549
$
10,664
Fully
taxable-equivalent adjustment
230
225
213
201
213
213
222
211
Net
interest income on a fully taxable-equivalent basis
$
9,865
$
10,444
$
10,226
$
10,286
$
10,999
$
10,479
$
10,771
$
10,875
Reconciliation
of total revenue, net of interest expense to total revenue, net of interest expense on a fully taxable-equivalent basis
Total
revenue, net of interest expense
$
18,725
$
21,209
$
21,747
$
22,566
$
21,488
$
21,530
$
22,727
$
23,197
Fully
taxable-equivalent adjustment
230
225
213
201
213
213
222
211
Total
revenue, net of interest expense on a fully taxable-equivalent basis
$
18,955
$
21,434
$
21,960
$
22,767
$
21,701
$
21,743
$
22,949
$
23,408
Reconciliation
of income tax expense (benefit) to income tax expense (benefit) on a fully taxable-equivalent basis
Income
tax expense (benefit)
$
1,260
$
663
$
504
$
(405
)
$
406
$
2,348
$
1,486
$
501
Fully
taxable-equivalent adjustment
230
225
213
201
213
213
222
211
Income
tax expense (benefit) on a fully taxable-equivalent basis
$
1,490
$
888
$
717
$
(204
)
$
619
$
2,561
$
1,708
$
712
Reconciliation
of average common shareholders’ equity to average tangible common shareholders’ equity
Common
shareholders’ equity
$
224,473
$
222,368
$
222,215
$
223,201
$
220,088
$
216,766
$
218,790
$
218,225
Goodwill
(69,782
)
(69,792
)
(69,822
)
(69,842
)
(69,864
)
(69,903
)
(69,930
)
(69,945
)
Intangible
assets (excluding MSRs)
(4,747
)
(4,992
)
(5,235
)
(5,474
)
(5,725
)
(5,993
)
(6,270
)
(6,549
)
Related
deferred tax liabilities
2,019
2,077
2,100
2,165
2,231
2,296
2,360
2,425
Tangible
common shareholders’ equity
$
151,963
$
149,661
$
149,258
$
150,050
$
146,730
$
143,166
$
144,950
$
144,156
Reconciliation
of average shareholders’ equity to average tangible shareholders’ equity
Shareholders’
equity
$
243,448
$
238,034
$
235,797
$
236,553
$
233,415
$
230,392
$
235,063
$
236,995
Goodwill
(69,782
)
(69,792
)
(69,822
)
(69,842
)
(69,864
)
(69,903
)
(69,930
)
(69,945
)
Intangible
assets (excluding MSRs)
(4,747
)
(4,992
)
(5,235
)
(5,474
)
(5,725
)
(5,993
)
(6,270
)
(6,549
)
Related
deferred tax liabilities
2,019
2,077
2,100
2,165
2,231
2,296
2,360
2,425
Tangible
shareholders’ equity
$
170,938
$
165,327
$
162,840
$
163,402
$
160,057
$
156,792
$
161,223
$
162,926
Reconciliation
of period-end common shareholders’ equity to period-end tangible common shareholders’ equity
Common
shareholders’ equity
$
224,162
$
220,768
$
222,565
$
218,536
$
219,333
$
218,967
$
216,791
$
218,513
Goodwill
(69,777
)
(69,784
)
(69,810
)
(69,842
)
(69,844
)
(69,891
)
(69,930
)
(69,930
)
Intangible
assets (excluding MSRs)
(4,612
)
(4,849
)
(5,099
)
(5,337
)
(5,574
)
(5,843
)
(6,104
)
(6,379
)
Related
deferred tax liabilities
1,960
2,019
2,078
2,100
2,166
2,231
2,297
2,363
Tangible
common shareholders’ equity
$
151,733
$
148,154
$
149,734
$
145,457
$
146,081
$
145,464
$
143,054
$
144,567
Reconciliation
of period-end shareholders’ equity to period-end tangible shareholders’ equity
Shareholders’
equity
$
243,471
$
238,681
$
237,411
$
231,888
$
232,685
$
232,282
$
231,032
$
237,293
Goodwill
(69,777
)
(69,784
)
(69,810
)
(69,842
)
(69,844
)
(69,891
)
(69,930
)
(69,930
)
Intangible
assets (excluding MSRs)
(4,612
)
(4,849
)
(5,099
)
(5,337
)
(5,574
)
(5,843
)
(6,104
)
(6,379
)
Related
deferred tax liabilities
1,960
2,019
2,078
2,100
2,166
2,231
2,297
2,363
Tangible
shareholders’ equity
$
171,042
$
166,067
$
164,580
$
158,809
$
159,433
$
158,779
$
157,295
$
163,347
Reconciliation
of period-end assets to period-end tangible assets
Assets
$
2,104,534
$
2,123,613
$
2,170,557
$
2,149,851
$
2,102,273
$
2,126,653
$
2,123,320
$
2,174,819
Goodwill
(69,777
)
(69,784
)
(69,810
)
(69,842
)
(69,844
)
(69,891
)
(69,930
)
(69,930
)
Intangible
assets (excluding MSRs)
(4,612
)
(4,849
)
(5,099
)
(5,337
)
(5,574
)
(5,843
)
(6,104
)
(6,379
)
Related
deferred tax liabilities
1,960
2,019
2,078
2,100
2,166
2,231
2,297
2,363
Tangible
assets
$
2,032,105
$
2,050,999
$
2,097,726
$
2,076,772
$
2,029,021
$
2,053,150
$
2,049,583
$
2,100,873
(1)
Presents
reconciliations of non-GAAP financial measures to GAAP financial measures. We believe the use of these non-GAAP financial measures provides additional clarity in assessing the results of the Corporation. Other companies may define or calculate these measures differently. 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 32.
Bank of America
2014 136
Glossary
Alt-A Mortgage – A type of U.S. mortgage that, for various reasons, is considered riskier than A-paper, or “prime,” and less risky than “subprime,” the riskiest category. Alt-A interest rates, which are determined by credit risk, therefore tend to be between those of prime and subprime home loans. Typically, Alt-A mortgages are characterized by borrowers with less than full documentation, lower credit scores and higher LTVs.
Assets in Custody – Consist largely of custodial and non-discretionary trust assets excluding brokerage assets administered for clients.
Trust assets encompass a broad range of asset types including real estate, private company ownership interest, personal property and investments.
Assets Under Management (AUM) – The total market value of assets under the investment advisory and 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. AUM is classified in two categories, Liquidity AUM and Long-term AUM. Liquidity AUM are assets under advisory and discretion of GWIM in which the investment strategy seeks to maximize income while maintaining
liquidity and capital preservation. The duration of these strategies is primarily less than one year. Long-term AUM are assets under advisory and discretion of GWIM in which the duration of investment strategy is longer than one year.
Carrying Value (with respect to loans) – The amount at which a loan is recorded on the balance sheet. For loans recorded at amortized cost, carrying value is the unpaid principal balance net of unamortized deferred loan origination fees and costs, and unamortized purchase premium or discount. For loans that are or have been on nonaccrual status, the carrying value is also reduced by any net charge-offs that have been recorded and the amount of interest payments applied as a reduction of principal under the cost recovery method. For PCI loans, the carrying value equals fair value upon acquisition adjusted
for subsequent cash collections and yield accreted to date. For credit card loans, the carrying value also includes interest that has been billed to the customer. For loans classified as held-for-sale, carrying value is the lower of carrying value as described in the sentences above, or fair value. For loans for which we have elected the fair value option, the carrying value is fair value.
Client Brokerage Assets – Include client assets which are held in brokerage accounts. This includes non-discretionary brokerage and fee-based assets which generate brokerage income and asset management fee revenue.
Committed Credit Exposure – Includes 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 credit event on one or more referenced
obligations. The nature of a credit event is established by the protection purchaser and protection seller at the inception of the transaction, and such events generally include bankruptcy or insolvency of the referenced credit entity, failure to meet payment obligations when due, as well as acceleration of indebtedness and payment repudiation or moratorium. The purchaser of the credit derivative pays a periodic fee in return for a payment by the protection seller upon the occurrence, if any, of such a credit event. A credit default swap is a type of a credit derivative.
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, including interest rate and price, 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 that is reported in terms of ending and average LTV. Ending LTV is calculated as the outstanding carrying value of the loan at the end of the period divided by the estimated value of the property securing the loan. An additional metric related to LTV is combined loan-to-value (CLTV) which is similar to the LTV
metric, yet combines the outstanding balance on the residential mortgage loan and the outstanding carrying value on the home equity loan or available line of credit, both of which are secured by the same property, divided by the estimated value of the property. A LTV of 100 percent reflects a loan that is currently secured by a property valued at an amount exactly equal to the carrying value or available line of the loan. Estimated property values are generally determined through the use of automated valuation models (AVMs) or the CoreLogic Case-Shiller Index. An AVM is a tool that estimates the value of a property by reference to large volumes of market data including sales of comparable properties and price trends specific to the MSA in which the property being valued is located. CoreLogic Case-Shiller is a widely used index based on data from repeat sales of single family homes. CoreLogic Case-Shiller indexed-based values are reported on a three-month or one-quarter
lag.
Margin Receivable – An extension of credit secured by eligible securities in certain brokerage accounts.
137 Bank of America 2014
Matched Book – Repurchase and resale agreements and securities
borrowed and loaned transactions entered into to accommodate customers and earn interest rate spreads.
Mortgage Servicing Right (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 (TDRs). Loans accounted for under the fair value option, PCI loans and LHFS are not reported as nonperforming loans and leases. Consumer credit card loans, business card loans, consumer loans secured by personal property (except for certain secured consumer loans, including those that have been modified in a TDR), and consumer loans secured by real estate that are insured by the FHA or through long-term credit protection agreements with FNMA and FHLMC (fully-insured loan portfolio) are not placed on nonaccrual status and are, therefore, not reported as nonperforming loans and leases.
Purchased Credit-impaired (PCI) Loan – A loan purchased as an individual loan, in a portfolio of loans or in a business combination with evidence of deterioration in credit quality since origination for which it is probable, upon acquisition, that the investor will be unable to collect
all contractually required payments. These loans are recorded at fair value upon acquisition.
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, including individuals with one or a combination of high credit risk factors, such as low FICO scores, high debt to income ratios and inferior payment history.
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. 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, loans discharged in bankruptcy or other actions intended to maximize collection. 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 from bankruptcy. TDRs are generally reported as nonperforming loans and leases while on nonaccrual status. Nonperforming TDRs may be returned to accrual status when, among other criteria, payment in full of all amounts due under the restructured terms is expected and the borrower has demonstrated a sustained period of repayment performance, generally six months. TDRs that are on accrual status are reported as performing TDRs through the end of the calendar year in which the restructuring occurred or
the year in which they are returned to accrual status. In addition, if accruing TDRs bear less than a market rate of interest at the time of modification, they are reported as performing TDRs throughout their remaining lives unless and until they cease to perform in accordance with their modified contractual terms, at which time they would be placed on nonaccrual status and reported as nonperforming 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 2014 138
Acronyms
ABS
Asset-backed securities
AFS
Available-for-sale
ALM
Asset and liability management
ARM
Adjustable-rate
mortgage
AUM
Assets under management
BHC
Bank holding company
CCAR
Comprehensive Capital Analysis and Review
CDO
Collateralized debt obligation
CGA
Corporate General Auditor
CLO
Collateralized
loan obligation
CRA
Community Reinvestment Act
CVA
Credit valuation adjustment
DVA
Debit valuation adjustment
EAD
Exposure at default
ERC
Enterprise Risk Committee
FDIC
Federal
Deposit Insurance Corporation
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
GM&CA
Global
Marketing and Corporate Affairs
GNMA
Government National Mortgage Association
GSE
Government-sponsored enterprise
HELOC
Home equity lines of credit
HFI
Held-for-investment
HUD
U.S.
Department of Housing and Urban Development
IRM
Independent risk management
LCR
Liquidity Coverage Ratio
LGD
Loss-given default
LHFS
Loans held-for-sale
LIBOR
London InterBank Offered Rate
LTV
Loan-to-value
MD&A
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
MI
Mortgage insurance
MRC
Management Risk Committee
MSA
Metropolitan statistical area
MSR
Mortgage servicing right
NSFR
Net Stable Funding Ratio
OCC
Office
of the Comptroller of the Currency
OCI
Other comprehensive income
OTC
Over-the-counter
OTTI
Other-than-temporary impairment
PCI
Purchased credit-impaired
PPI
Payment protection insurance
RCSAs
Risk
and Control Self Assessments
RMBS
Residential mortgage-backed securities
SBLCs
Standby letters of credit
SEC
Securities and Exchange Commission
SLR
Supplementary leverage ratio
TDR
Troubled debt restructurings
VIE
Variable
interest entity
139 Bank of America 2014
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See Market Risk Management on page 99
in the MD&A and the sections referenced therein for Quantitative and Qualitative Disclosures about Market Risk.
Item 8. Financial Statements and Supplementary Data
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,
2014
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, 2014, the Corporation’s internal control over financial reporting is effective based on the criteria established in Internal Control – Integrated Framework (2013).
The Corporation’s internal control over financial reporting as of December 31, 2014
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, 2014.
Report of Independent Registered Public Accounting Firm
To
the Board of Directors and Shareholders of Bank of America Corporation:
In our opinion, the accompanying Consolidated Balance Sheet and the related Consolidated Statement of Income, Consolidated Statement of Comprehensive Income, Consolidated Statement of Changes in Shareholders’ Equity and Consolidated Statement of Cash Flows present fairly, in all material respects, the financial position of Bank of America Corporation and its subsidiaries at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014
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, 2014, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Corporation’s management is responsible for these 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 these financial statements and on the Corporation’s
internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. 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.
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.
Interest-bearing deposits with the Federal Reserve and non-U.S. central banks
105,471
94,470
Cash
and cash equivalents
138,589
131,322
Time deposits placed and other short-term investments
7,510
11,540
Federal funds sold and securities
borrowed or purchased under agreements to resell (includes $62,182 and $68,656 measured at fair value)
191,823
190,328
Trading account assets (includes $110,923 and $111,817 pledged as collateral)
191,785
200,993
Derivative
assets
52,682
47,495
Debt securities:
Carried at fair value (includes $46,976 and
$52,283 pledged as collateral)
320,695
268,795
Held-to-maturity, at cost (fair value – $59,641 and $52,430; $17,124 and $20,869 pledged as collateral)
59,766
55,150
Total
debt securities
380,461
323,945
Loans and leases (includes $8,681 and $10,042 measured at fair value and $52,959 and $71,579 pledged as collateral)
881,391
928,233
Allowance
for loan and lease losses
(14,419
)
(17,428
)
Loans and leases, net of allowance
866,972
910,805
Premises and equipment, net
10,049
10,475
Mortgage
servicing rights (includes $3,530 and $5,042 measured at fair value)
3,530
5,052
Goodwill
69,777
69,844
Intangible
assets
4,612
5,574
Loans held-for-sale (includes $6,801 and $6,656 measured at fair value)
12,836
11,362
Customer
and other receivables
61,845
59,448
Other assets (includes $13,873 and $18,055 measured at fair value)
112,063
124,090
Total
assets
$
2,104,534
$
2,102,273
Assets
of consolidated variable interest entities included in total assets above (isolated to settle the liabilities of the variable interest entities)
Trading account assets
$
6,890
$
8,412
Derivative assets
6
185
Loans
and leases
95,187
109,118
Allowance for loan and lease losses
(1,968
)
(2,674
)
Loans and leases, net of allowance
93,219
106,444
Loans
held-for-sale
1,822
1,384
All other assets
2,763
4,577
Total assets of consolidated variable interest entities
$
104,700
$
121,002
See
accompanying Notes to Consolidated Financial Statements.
Interest-bearing
(includes $1,469 and $1,899 measured at fair value)
660,161
667,714
Deposits in non-U.S. offices:
Noninterest-bearing
7,542
8,255
Interest-bearing
58,443
70,232
Total
deposits
1,118,936
1,119,271
Federal funds purchased and securities loaned or sold under agreements to repurchase (includes $35,357 and $26,500 measured at fair value)
201,277
198,106
Trading
account liabilities
74,192
83,469
Derivative liabilities
46,909
37,407
Short-term borrowings (includes $2,697 and
$1,520 measured at fair value)
31,172
45,999
Accrued expenses and other liabilities (includes $12,055 and $11,233 measured at fair value and $528 and $484 of reserve for unfunded lending commitments)
145,438
135,662
Long-term
debt (includes $36,404 and $47,035 measured at fair value)
243,139
249,674
Total liabilities
1,861,063
1,869,588
Commitments
and contingencies (Note 6 – Securitizations and Other Variable Interest Entities, Note 7 – Representations and Warranties Obligations and Corporate Guarantees and Note 12 – Commitments and Contingencies)
Shareholders’ equity
Preferred
stock, $0.01 par value; authorized – 100,000,000 shares; issued and outstanding – 3,647,790 and 3,407,790 shares
19,309
13,352
Common stock and additional paid-in capital, $0.01 par value; authorized – 12,800,000,000 shares; issued and outstanding – 10,516,542,476 and 10,591,808,296 shares
153,458
155,293
Retained
earnings
75,024
72,497
Accumulated other comprehensive income (loss)
(4,320
)
(8,457
)
Total shareholders’ equity
243,471
232,685
Total
liabilities and shareholders’ equity
$
2,104,534
$
2,102,273
Liabilities of consolidated variable interest entities included in total liabilities above
Short-term
borrowings (includes $0 and $77 of non-recourse borrowings)
$
1,032
$
1,150
Long-term debt (includes $11,943 and $16,209 of non-recourse debt)
13,307
19,448
All
other liabilities (includes $84 and $138 of non-recourse liabilities)
138
253
Total liabilities of consolidated variable interest entities
$
14,477
$
20,851
See
accompanying Notes to Consolidated Financial Statements.
NOTE 1 Summary of Significant Accounting Principles
Bank of America Corporation (together with its consolidated subsidiaries, the Corporation), a bank holding company (BHC) 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.
The Corporation conducts its activities through banking and nonbank subsidiaries. Prior to October 1, 2014, the Corporation operated its banking activities primarily under two charters: Bank of America, National Association (Bank of America, N.A. or BANA) and, to a lesser extent, FIA Card Services,
National Association (FIA Card Services, N.A. or FIA). On October 1, 2014, FIA was merged into BANA.
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 equity investment 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. Realized results could differ from those estimates and assumptions.
The Corporation evaluates subsequent events through the date of filing with the Securities and Exchange Commission (SEC). Certain prior-period amounts have been reclassified to conform
to current period presentation.
New Accounting Pronouncements
In August 2014, the Financial Accounting Standards Board (FASB) issued new accounting guidance on classification and measurement of foreclosed mortgage loans that are government guaranteed. This new guidance states that such foreclosed properties should be classified as other assets and measured based on the amount of the loan balance expected to be recovered
from the guarantor. The new guidance is effective beginning on January 1, 2015 using either a prospective or modified retrospective transition method. This new guidance will not have a material impact on the Corporation’s consolidated financial position or results of operations.
In
August 2014, the FASB issued new accounting guidance that provides a measurement alternative for entities that consolidate a collateralized financing entity (CFE). The new guidance allows an entity to measure both the financial assets and financial liabilities of a CFE using the fair value of either the financial assets or financial liabilities, whichever is more observable. This alternative is available for CFEs where the financial assets and financial liabilities are carried at fair value and changes in fair value are reported in earnings. The new guidance is effective beginning on January 1, 2016. This new guidance will not have a material impact on the Corporation’s consolidated financial position or results of operations.
In June 2014, the FASB issued new guidance on accounting and disclosure of repurchase-to-maturity (RTM) transactions and repurchase financings (repos).
Under this new accounting guidance, RTMs will be accounted for as secured borrowings rather than sales of an asset, and transfers of financial assets with a contemporaneous repo will no longer be evaluated to determine whether they should be accounted for on a combined basis as forward contracts. The new guidance also prescribes additional disclosures particularly on the nature of collateral pledged in repos accounted for as secured borrowings. The new guidance is effective beginning on January 1, 2015. This new guidance will not have a material impact on the Corporation’s consolidated financial position or results of operations.
In May 2014, the FASB issued new accounting guidance to clarify the principles for recognizing revenue from contracts
with customers. The new accounting guidance, which does not apply to financial instruments, is effective on a retrospective basis beginning on January 1, 2017. The Corporation does not expect the new guidance to have a material impact on its consolidated financial position or results of operations.
In January 2014, the FASB issued new guidance on accounting for qualified affordable housing projects which permits entities to make an accounting policy election to apply the proportional amortization method when specific conditions are met. The new accounting guidance is effective on a retrospective basis beginning on January 1, 2015 with early adoption permitted. The Corporation is currently assessing whether it will adopt the proportional amortization method. If adopted, the Corporation does not expect it to have a material impact
on its consolidated financial position or results of operations.
In December 2012, the FASB issued a proposed standard on accounting for credit losses. It would replace multiple existing impairment models, including an “incurred loss” model for loans, with an “expected loss” model. The FASB has not yet established an effective date but a final standard is expected to be issued in the second half of 2015. The final standard may materially reduce retained earnings in the period of adoption.
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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.
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 the amounts at which the securities were acquired or sold 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 trading account profits in the Consolidated Statement of Income. For more information on securities financing agreements that the Corporation accounts for under the fair value option, see Note 21 – Fair Value Option.
The Corporation’s policy is to obtain possession of collateral with a market value equal to or in excess of the principal amount loaned under resale agreements. To ensure that the market value of the underlying collateral remains sufficient, collateral is generally valued daily and the Corporation may require counterparties to deposit additional collateral or may return collateral pledged when appropriate. Securities financing agreements give rise to negligible credit risk as a result of these collateral provisions
and, accordingly, no allowance for loan losses is considered necessary.
Substantially all repurchase and resale activities are transacted under legally enforceable master repurchase 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 repurchase and resale 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.
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.
In repurchase transactions, typically, the termination date for a repurchase agreement is before the maturity date of the underlying security. However, in certain situations, the Corporation may enter into repurchase agreements where the termination date of the repurchase transaction is the same as the maturity date of the underlying security and these transactions are referred to as “repo-to-maturity” (RTM) transactions. In accordance with applicable accounting guidance, the Corporation accounts for RTM transactions as sales and purchases when the transferred securities are highly liquid. In instances where securities are considered sold or purchased, the Corporation removes the securities from or recognizes the securities on the Consolidated Balance Sheet and, in the case of sales, recognizes a gain or loss,
where
applicable, in the Consolidated Statement of Income. At December 31, 2014 and 2013, the Corporation had no outstanding RTM transactions that had been accounted for as sales and an immaterial amount of transactions that had been accounted for as purchases.
Collateral
The Corporation accepts securities as collateral that it is permitted by contract or custom to sell or repledge. At December 31, 2014 and 2013, the fair value of this collateral was $519.2 billion
and $575.3 billion, of which $424.5 billion and $430.4 billion was 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 or quoted market prices for 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 trading account profits.
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). Derivatives utilized by the Corporation include swaps, financial futures and forward settlement contracts, and option contracts. A swap agreement is a contract between two parties to exchange cash flows based on specified underlying notional amounts, assets and/or indices. Financial futures and forward settlement contracts
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are agreements to buy or sell a quantity of a financial instrument (including another derivative financial instrument), index, currency or commodity at a predetermined rate or price during a period or at a date in the future. Option agreements can be transacted on organized exchanges or directly between parties.
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 trading account profits.
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 a qualifying accounting hedge relationship 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 mortgage loans held-for-sale (LHFS) that are originated
by the Corporation are recorded in mortgage banking income. Changes in the fair value of derivatives that serve to mitigate interest rate risk and foreign currency risk are included in other income (loss). 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 other income (loss).
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 a hedging
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.
The Corporation uses its accounting hedges as either fair value hedges, cash flow hedges or hedges of net investments in foreign operations. The Corporation manages interest rate and foreign currency exchange rate sensitivity predominantly through the use of derivatives. 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. Cash flow hedges are used primarily to minimize the variability in cash flows of assets or liabilities, or forecasted transactions caused by interest rate or foreign exchange fluctuations. For terminated cash flow hedges, the maximum length of time over which forecasted transactions are hedged is approximately 25 years, with a substantial portion of the hedged transactions being less than 10 years. For open or future cash flow hedges, the maximum length of time over which forecasted transactions are or will be hedged is less than seven years.
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. Changes in the fair value of derivatives designated as 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. Hedge ineffectiveness and gains and losses on the excluded component of a derivative in assessing hedge effectiveness are recorded in earnings in the same income statement line item. The Corporation records changes in the fair value of derivatives used as hedges of the net investment in foreign operations, to the extent effective, as a component of accumulated OCI.
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. If a derivative instrument in a cash flow hedge is terminated or the hedge designation is removed, related amounts in accumulated OCI are reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings. If it becomes probable that a forecasted transaction will not occur, any related amounts in accumulated OCI are reclassified into earnings in that period.
Interest Rate Lock Commitments
The Corporation enters into IRLCs in connection with its mortgage banking activities to fund residential mortgage loans at specified times in the future. IRLCs that relate to the origination of mortgage loans
that will be classified as held-for-sale are considered derivative instruments under applicable accounting guidance. As such, these IRLCs are recorded at fair value with changes in fair value recorded in mortgage banking income, typically resulting in recognition of a gain when the Corporation enters into IRLCs.
In estimating the fair value of an IRLC, the Corporation assigns a probability that the loan commitment will be exercised and the loan will be funded. The fair value of the commitments is derived from the fair value of related mortgage loans which is based on observable market data and includes the expected net future cash
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flows related to servicing of the loans. Changes in the fair value of IRLCs are recognized based on interest rate changes, changes in the probability that the commitment will be exercised and the passage of time. Changes from the expected future cash flows related to the customer relationship are excluded from the valuation of IRLCs.
Outstanding IRLCs expose the Corporation to the risk that the price of the loans underlying the commitments might decline from inception of the rate lock to funding of the loan. To manage this risk, the Corporation utilizes forward loan sales commitments and other derivative instruments, including interest rate swaps and
options, to economically hedge the risk of potential changes in the value of the loans that would result from the commitments. The changes in the fair value of these derivatives are recorded in mortgage banking income.
Securities
Debt securities are recorded on the Consolidated Balance Sheet as of their trade date. Debt securities bought principally with the intent to buy and sell in the short term as part of the Corporation’s trading activities are reported at fair value in trading account assets with unrealized gains and losses included in trading account profits. Debt securities purchased for longer term investment purposes, as part of asset and liability management (ALM) and other strategic activities are generally reported at fair value as available-for-sale (AFS) securities with net unrealized gains and losses net-of-tax included in accumulated OCI. Certain other debt securities
purchased for ALM and other strategic purposes are reported at fair value with unrealized gains and losses reported in other income (loss). These are referred to as other debt securities carried at fair value. AFS securities and other debt securities carried at fair value are reported in debt securities on the Consolidated Balance Sheet. The Corporation may hedge these other debt securities with risk management derivatives with the unrealized gains and losses also reported in other income (loss). The debt securities are carried at fair value with unrealized gains and losses reported in other income (loss) to mitigate accounting asymmetry with the risk management derivatives and to achieve operational simplifications. Debt securities which management has the intent and ability to hold to maturity are reported at amortized cost. Certain debt securities purchased for use in other risk management activities, such as hedging certain market risks related to MSRs, are reported
in other assets at fair value with unrealized gains and losses reported in the same line item as the item being hedged.
The Corporation regularly evaluates each AFS and held-to-maturity (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. If the impairment of the AFS or HTM debt security is credit-related, an other-than-temporary impairment (OTTI) loss is recorded in earnings. For AFS debt securities, the non-credit-related
impairment loss is recognized in accumulated OCI. If the Corporation intends to sell an AFS debt security or believes it will
more-likely-than-not be required to sell a security, the Corporation records the full amount of the impairment loss 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 to interest income over the estimated lives of the securities. Prepayment experience, which is primarily driven by interest rates, is continually evaluated to determine the estimated lives of the securities. When a change is made to the estimated lives of the securities, the related premium or discount is adjusted, with a corresponding charge or credit to interest income,
to the appropriate amount had the current estimated lives been applied since the acquisition of the securities. Realized gains and losses from the sales of debt securities are determined using the specific identification method.
Marketable equity securities are classified based on management’s intention on the date of purchase and recorded on the Consolidated Balance Sheet as of the trade date. Marketable equity securities that are bought and held principally for the purpose of resale in the near term are classified as trading and are carried at fair value with unrealized gains and losses included in trading account profits. Other marketable equity securities are accounted for as AFS and classified in other assets. All AFS marketable equity securities are carried at fair value with net unrealized gains and losses included in accumulated OCI on an after-tax basis. If there is an other-than-temporary decline in the fair value
of any individual AFS marketable equity security, the cost basis is reduced and the Corporation reclassifies the associated net unrealized loss out of accumulated OCI with a corresponding charge to equity investment income. Dividend income on AFS marketable equity securities is included in equity investment income. Realized gains and losses on the sale of all AFS marketable equity securities, which are recorded in equity investment income, are determined using the specific identification method.
Certain equity investments held by Global Principal Investments (GPI), the Corporation’s diversified equity investor in private equity, real estate and other alternative investments, are subject to investment company accounting under applicable accounting guidance and, accordingly, are carried at fair value with changes in fair value reported in equity investment income. These investments are included in other assets. Initially, the
transaction price of the investment is generally considered to be the best indicator of fair value. Thereafter, valuation of direct investments is based on an assessment of each individual investment using methodologies that include publicly-traded comparables derived by multiplying a key performance metric of the portfolio company by the relevant valuation multiple observed for comparable companies, acquisition comparables, entry level multiples and discounted cash flow analyses, and are subject to appropriate discounts for lack of liquidity or marketability. For fund investments, the Corporation generally records the fair value of its proportionate interest in the fund’s capital as reported by the respective fund managers.
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
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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 changes in fair value reported in other income (loss).
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 Home Loans, Credit Card and Other Consumer, and Commercial. The classes within the Home Loans portfolio segment
are core portfolio residential mortgage, Legacy Assets & Servicing residential mortgage, core portfolio home equity and Legacy Assets & Servicing home equity. The classes within the Credit Card and Other Consumer portfolio segment are U.S. credit card, non-U.S. credit card, direct/indirect consumer and other consumer. The classes within the Commercial portfolio segment are U.S. commercial, commercial real estate, commercial lease financing, non-U.S. commercial and U.S. small business commercial.
Purchased Credit-impaired Loans
The Corporation purchases loans with and without evidence of credit quality deterioration since origination. Evidence of credit quality deterioration as of the purchase date may include statistics such as past due status, refreshed borrower credit scores and refreshed loan-to-value (LTV) ratios, some
of which are not immediately available as of the purchase date. Purchased loans with evidence of credit quality deterioration for which it is probable that the Corporation will not receive all contractually required payments receivable are accounted for as purchased credit- impaired (PCI) loans. The excess of the cash flows expected to be collected on PCI loans, measured as of the acquisition date, over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan using a level yield methodology. The difference between contractually required payments as of the acquisition date and the cash flows expected to be collected is referred to as the nonaccretable difference. PCI loans that have similar risk characteristics, primarily credit risk, collateral type and interest rate risk, are pooled and accounted for as a single asset with a single composite interest rate and an aggregate expectation of
cash flows. Once a pool is assembled, it is treated as if it was one loan for purposes of applying the accounting guidance for PCI loans. An individual loan is removed from a PCI loan pool if it is sold, foreclosed, forgiven or the expectation of any future proceeds is remote. When a loan is removed from a PCI loan pool and the foreclosure or recovery value of the loan is less than the loan’s carrying value, the difference is first applied against the PCI pool’s nonaccretable difference. If the nonaccretable difference has been fully utilized, only then is the PCI pool’s basis applicable to that loan written-off against its valuation reserve; however, the integrity of the pool is maintained and it continues to be accounted for as if it was one loan.
The Corporation continues to estimate cash flows expected to be collected over
the life of the PCI loans using internal credit risk, interest rate and prepayment risk models that incorporate management’s best estimate of current key assumptions such as default rates, loss severity and prepayment speeds. If, upon subsequent evaluation, the Corporation determines it is probable that the present value of the expected cash flows has decreased, the PCI loan is considered to be further impaired resulting in a charge to the provision for credit losses and a corresponding increase to a valuation allowance included in the allowance for loan and lease losses. The present value of the expected cash flows is then recalculated each period, which may result in additional impairment or a reduction of the valuation allowance. If there is no valuation allowance and it is probable that there is a significant increase in the present value of the expected cash flows, the Corporation recalculates the amount of accretable yield as the excess of the revised expected
cash flows over the current carrying value resulting in a reclassification from nonaccretable difference to accretable yield. Reclassifications from nonaccretable difference can also occur if there is a change in the expected lives of the loans. The present value of the expected cash flows is determined using the PCI loans’ effective interest rate, adjusted for changes in the PCI loans’ interest rate indices.
Leases
The Corporation provides equipment financing to its customers through a variety of lease arrangements. Direct financing leases are carried at the aggregate of lease payments receivable plus estimated residual value of the leased property less unearned income. Leveraged leases, which are a form of financing leases, are reported net of non-recourse debt. Unearned income on leveraged and direct financing leases is accreted to interest income over the lease terms using methods
that approximate the interest method.
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 losses inherent in the Corporation’s lending activities. The allowance for loan and lease losses and the reserve for unfunded lending commitments exclude amounts for loans and unfunded lending commitments accounted for under the fair value option as the fair values of these instruments reflect a credit component. The allowance for loan and lease losses does not include amounts related to accrued interest receivable, other than billed interest and fees on credit card receivables, as accrued interest receivable is reversed when a loan is placed on nonaccrual status. 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 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. Write-offs on PCI loans on which there is a valuation allowance are written-off against the valuation allowance. For additional information, see Purchased Credit-impaired Loans in this Note. Cash recovered on previously charged-off amounts is recorded as a recovery to these accounts.
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Management evaluates the adequacy of the allowance for credit losses based on the combined total of the allowance for loan and lease losses and the reserve for unfunded lending commitments.
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 within the Home Loans 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 and credit scores.
The Corporation’s Home Loans portfolio segment is comprised primarily of large groups of homogeneous consumer loans secured by residential real estate. The amount of losses incurred in the homogeneous loan pools is estimated based on the number of loans that will default and the loss in the event of default. Using modeling methodologies, the Corporation estimates the number of homogeneous loans that will default based on the individual loans’ 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 LTV or, in the case of a subordinated lien, refreshed combined LTV, borrower credit score, months since origination (referred to as vintage) and geography, all of which are further broken down by present collection status (whether the loan is current, delinquent, in default or in bankruptcy). This estimate is based on the Corporation’s historical experience with the loan portfolio. The estimate is 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 on a loan is based on an analysis of the movement of loans with the measured attributes from either current or any of the delinquency categories to default over a 12-month period. 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 reserves 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.
The
remaining portfolios, including nonperforming commercial loans, as well as consumer and commercial loans modified in a troubled debt restructuring (TDR), are reviewed in accordance with applicable accounting guidance on impaired loans and TDRs. If necessary, a specific allowance is established for these loans if they are deemed to be impaired. A loan is considered impaired when, based on current information and events, it is probable that
the Corporation will be unable to collect all amounts due, including principal and/or interest, in accordance with the contractual terms of the agreement, or the loan has been modified in a TDR. Once a loan has been identified as impaired, management measures impairment primarily based on the present value of payments expected to be received,
discounted at the loans’ original effective contractual interest rates, or 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 a component of the allowance for loan and lease losses unless these are secured consumer loans that are solely dependent on the collateral for repayment, in which case the amount that exceeds the fair value of the collateral is charged off.
Generally, when determining the fair value of the collateral securing consumer real estate-secured loans that are solely dependent on the collateral for repayment,
prior to performing a detailed property valuation including a walk-through of a property, the Corporation initially estimates the fair value of the collateral securing these consumer loans using an automated valuation method (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 and financial guarantees, and binding unfunded loan commitments. The reserve for unfunded lending commitments excludes commitments accounted for under the fair value option. 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, including nonaccruing loans whose contractual terms have been restructured in a manner that grants a concession to a borrower
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experiencing financial difficulties. Loans accounted for under the fair value option, PCI loans 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 or through individually insured long-term standby agreements with Fannie Mae or Freddie Mac (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. Accrued interest receivable is reversed when a consumer loan is placed on nonaccrual status. Interest collections on nonaccruing consumer loans for which the ultimate collectability of principal is uncertain are generally applied as principal reductions; otherwise, such collections are credited to interest income when received. These loans 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, or when the loan otherwise becomes well-secured and is in the process of collection. 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. The estimated property value less costs to sell is determined using the same process as described for impaired loans in Allowance for Credit Losses in this Note.
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 property-secured 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, for loans in bankruptcy, 60 days past
due. Credit card and other unsecured consumer loans are charged off no later than the end of the month in which the account becomes 180 days past due or within 60 days after receipt of notification of death or bankruptcy.
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.
Accrued interest receivable is reversed when commercial loans and leases are placed on nonaccrual status. Interest collections on nonaccruing commercial
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. Commercial 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, or when the loan otherwise becomes well-secured and is in the process of collection. Business card loans are charged off no later than the end of the month in which the
account becomes 180 days past due or 60 days after receipt of notification of death or bankruptcy. These loans are not placed on nonaccrual status prior to charge-off and, therefore, are not reported
as nonperforming 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.
PCI loans are recorded at fair value at the acquisition date. Although the PCI loans may be contractually delinquent, the Corporation does not classify these loans as nonperforming as the loans were written down to fair value at the acquisition date and the accretable yield is recognized in interest income over the remaining life of the loan. In addition, reported net charge-offs exclude write-offs
on PCI loans as the fair value already considers the estimated credit losses.
Troubled Debt Restructurings
Consumer loans 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. 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. Consumer real estate-secured loans for which a binding offer to restructure has been extended are also classified as TDRs. Loans classified as TDRs are considered impaired loans. Loans that are carried
at fair value, LHFS and PCI loans are not classified as TDRs.
Secured consumer loans whose contractual terms have been modified in a TDR and are current at the time of restructuring generally 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 the fully-insured loans, until there is sustained repayment performance for a reasonable period, generally six months. If accruing consumer TDRs cease to perform in accordance with their modified contractual terms, they are placed on nonaccrual status and reported as nonperforming TDRs. Consumer TDRs that bear a below-market rate of interest are generally reported as TDRs throughout their remaining lives. Secured consumer loans that have been discharged
in Chapter 7 bankruptcy 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. Credit card and other unsecured consumer loans that have been renegotiated in a TDR are not placed on nonaccrual status. Credit card and other unsecured consumer loans that have been renegotiated and placed on a fixed payment plan after July 1, 2012 are generally charged off no later than the end of the month in which the account becomes 120 days past due.
155 Bank
of America 2014
Commercial loans and leases whose contractual terms have been modified in a TDR are typically placed on nonaccrual status and reported as nonperforming until the loans or leases have performed for an adequate period of time under the restructured agreement, generally six months. If the borrower had demonstrated performance under the previous terms and the underwriting process shows the capacity to continue to perform under the modified terms, the loan may remain on accrual status. Accruing commercial TDRs are reported as performing TDRs through the end of the calendar year in which the loans are returned to accrual status. In addition, if accruing
commercial TDRs bear less than a market rate of interest at the time of modification, they are reported as performing TDRs throughout their remaining lives unless and until they cease to perform in accordance with their modified contractual terms, at which time they are placed on nonaccrual status and reported as nonperforming TDRs.
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 are intended to be sold 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. 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.
The Corporation capitalizes the costs associated with certain computer hardware, software and internally developed software, and amortizes the costs over the expected useful life. Direct project costs of internally developed software are capitalized when it is probable that the project will be completed and the software will be used for its intended function.
Mortgage Servicing Rights
The Corporation accounts for consumer MSRs, including residential mortgage and home equity MSRs, at fair value with changes in fair value recorded in mortgage banking income. To reduce
the volatility of earnings related to interest rate and market value fluctuations, U.S. Treasury securities, mortgage-backed securities and derivatives such as options and interest rate swaps
may be used to hedge certain market risks of the MSRs. Such derivatives are not designated as qualifying accounting hedges. These instruments are carried at fair value with changes in fair value recognized in mortgage banking income.
The Corporation estimates the fair value of consumer MSRs using a valuation model that calculates the present value of estimated future net servicing income and, when available, quoted prices from independent parties. The present value calculation is based on an option-adjusted spread (OAS) valuation approach that factors in prepayment risk. This approach consists
of projecting servicing cash flows under multiple interest rate scenarios and discounting these cash flows using risk-adjusted discount rates. The key economic assumptions used in MSR valuations include weighted-average lives of the MSRs and the OAS levels. The OAS represents the spread that is added to the discount rate so that the sum of the discounted cash flows equals the market price; therefore, it is a measure of the extra yield over the reference discount factor that the Corporation expects to earn by holding the asset.
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 unit level. A reporting unit, as defined under applicable accounting
guidance, is a business segment or one level below a business segment. The goodwill impairment analysis is a two-step test. The first step of the goodwill impairment test involves comparing the fair value of each reporting unit with its carrying value, including goodwill, as measured by allocated equity. In certain circumstances, the first step may be performed using a qualitative assessment. 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, the second step must be performed to measure potential impairment.
The second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated possible impairment. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business
combination, 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. Measurement of the fair values of the assets and liabilities of a reporting unit is consistent with the requirements of the fair value measurements accounting guidance, as described in Fair Value in this Note. The adjustments to measure the assets, liabilities and intangibles at fair value are for the purpose of measuring the implied fair value of goodwill and such adjustments are not reflected on the Consolidated Balance Sheet. 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.
Bank of America 2014 156
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.
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 entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and consolidates the VIE. The Corporation is deemed to have a controlling financial interest and is the primary beneficiary of 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 whether it has a controlling financial interest in and is the primary beneficiary of a VIE. The quarterly reassessment process considers whether the Corporation has acquired or divested the power to direct the activities of the VIE through changes in governing documents or other circumstances. The reassessment also considers whether the Corporation has acquired or disposed of a financial interest that could be significant to the VIE, or whether an interest in the VIE has become significant or is no longer significant. The consolidation status of the VIEs with which the Corporation is involved may change as a result of such reassessments. Changes in consolidation status are applied prospectively, with assets and liabilities of a newly consolidated VIE initially recorded at fair value. A gain or loss may be recognized upon deconsolidation of a VIE depending on the carrying values of deconsolidated
assets and liabilities compared to the fair value of retained interests and ongoing contractual arrangements.
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 such that the assets are legally isolated from the creditors of the Corporation. Assets held in a trust can only be used to settle obligations of the trust. The creditors of these trusts typically have no recourse to the Corporation except in accordance with the Corporation’s obligations under standard representations and warranties.
When the Corporation is the servicer of whole loans held in a securitization trust, including non-agency residential mortgages, home equity loans, credit cards, automobile loans and student 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 the assets of the CDO, 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 held-to-maturity 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. This may require management to estimate credit losses, prepayment
speeds, forward interest yield curves, discount rates and other factors that impact the value of retained interests. Retained residual interests in unconsolidated securitization trusts are classified in trading account assets or other assets with changes in fair value recorded in earnings. The Corporation may also enter into derivatives with unconsolidated VIEs, which are carried at fair value with changes in fair value recorded in earnings.
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. A three-level hierarchy, provided in the applicable accounting guidance, for inputs is utilized in measuring fair value which maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be
used to determine the exit price when available. Under applicable accounting guidance, the Corporation categorizes its financial
157 Bank of America 2014
instruments, based on the priority of inputs to the valuation technique, into this three-level hierarchy, as described below. Trading account assets and liabilities, derivative assets and liabilities, AFS debt and equity securities, other debt securities
carried at fair value, consumer MSRs and certain other assets are carried at fair value in accordance with applicable accounting guidance. The Corporation has also elected to account for certain assets and liabilities under the fair value option, including certain commercial and consumer loans and loan commitments, LHFS, short-term borrowings, securities financing agreements, long-term deposits and long-term debt. The following describes the 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 and asset-backed securities, 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, market comparables, 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 certain private equity investments and other principal investments, retained residual interests in securitizations, consumer MSRs, certain asset-backed securities, 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.
Retirement Benefits
The Corporation has retirement plans covering substantially all full-time and certain part-time employees. Pension expense under these plans is charged to current operations and consists of several components of net pension cost based on various actuarial assumptions regarding future experience under the plans.
In addition, the Corporation has unfunded supplemental
benefit plans and supplemental executive retirement plans (SERPs) for selected officers of the Corporation and its subsidiaries that provide benefits that cannot be paid from a qualified retirement plan due to Internal Revenue Code restrictions. The Corporation’s current executive officers do not earn additional retirement income under SERPs. These plans are nonqualified under the Internal Revenue Code and assets used to fund benefit payments are not segregated from other assets of the Corporation; therefore, in general, a participant’s or beneficiary’s claim to benefits under these plans is as a general creditor. In addition, the Corporation has several postretirement healthcare and life insurance benefit plans.
Accumulated Other Comprehensive Income
The Corporation records unrealized gains
and losses on AFS debt and marketable equity securities, gains and losses on cash flow accounting hedges, certain employee benefit plan adjustments, foreign currency translation adjustments and related hedges of net investments in foreign operations, and the cumulative adjustment related to certain accounting changes in accumulated OCI, net-of-tax. Unrealized gains and losses on AFS debt and marketable equity securities are reclassified to earnings as the gains or losses are realized upon sale of the securities. Unrealized losses on AFS securities deemed to represent OTTI are reclassified to earnings at the time of the impairment charge. For AFS debt securities that the Corporation does not intend to sell or it is not more-likely-than-not that it will be required to sell, only the credit component of an unrealized loss is reclassified to earnings. Gains or losses on derivatives accounted for as cash flow hedges are reclassified to earnings when the hedged transaction
affects earnings. Translation gains or losses on foreign currency translation adjustments are reclassified to earnings upon the substantial sale or liquidation of investments in foreign operations.
Bank of America 2014 158
Revenue Recognition
The following summarizes the Corporation’s revenue recognition policies
as they relate to certain noninterest income line items in the Consolidated Statement of Income.
Card income is derived from fees such as interchange, cash advance, annual, late, over-limit and other miscellaneous fees, which are recorded as revenue when earned, primarily on an accrual basis. Uncollected fees are included in the customer card receivables balances with an amount recorded in the allowance for loan and lease losses for estimated uncollectible card receivables. Uncollected fees are written off when a card receivable reaches 180 days past due.
Service charges include fees for insufficient funds, overdrafts and other banking services and are recorded as revenue when earned. Uncollected fees are included in outstanding loan balances with an amount recorded for estimated uncollectible service fees receivable. Uncollected fees
are written off when a fee receivable reaches 60 days past due.
Investment and brokerage services revenue consists primarily of asset management fees and brokerage income that are recognized over the period the services are provided or when commissions are earned. Asset management fees consist primarily of fees for investment management and trust services and are generally based on the dollar amount of the assets being managed. Brokerage income is generally derived from commissions and fees earned on the sale of various financial products.
Investment banking income consists primarily of advisory and underwriting fees that are recognized in income as the services are provided and no contingencies exist. Revenues are generally recognized net of any direct expenses. Non-reimbursed expenses are recorded as noninterest expense.
Earnings
Per Common Share
Earnings per common share (EPS) is computed by dividing net income (loss) allocated to common shareholders by the weighted-average common shares outstanding, except that it does not include unvested common shares subject to repurchase or cancellation. Net income (loss) allocated to common shareholders represents net income (loss) applicable to common shareholders which is net income (loss) 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 (see below for more information). Diluted EPS is computed by dividing income (loss) 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, outstanding warrants and the dilution resulting from the conversion of convertible preferred stock, if applicable.
Unvested share-based payment awards that contain nonforfeitable rights to dividends are participating securities that are included in computing EPS using the two-class method. The two-class method is an earnings allocation formula under which
EPS is calculated for common stock and participating securities according to dividends declared and participating rights in undistributed earnings. Under this method, all earnings, distributed and undistributed, are
allocated to participating securities and common shares based on their respective rights to receive dividends.
In an exchange of non-convertible preferred stock, income allocated to common shareholders is adjusted for the difference between the carrying value of the preferred stock and the fair value of the consideration exchanged. In an induced conversion of convertible preferred stock, income allocated to common shareholders is reduced by the excess of the fair value of the consideration exchanged over the fair value of the common stock that would have been issued under the original conversion terms.
Foreign Currency Translation
Assets, liabilities and operations of foreign branches and subsidiaries are recorded based on the functional currency
of each entity. For certain of the foreign operations, the functional currency is the local currency, in which case 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 or losses, as well as gains and losses from certain hedges, are reported as a component of accumulated OCI, net-of-tax. When the foreign entity’s functional currency is determined to be the U.S. Dollar, the resulting remeasurement gains or losses on foreign currency-denominated assets or liabilities are included in earnings.
Credit Card and Deposit Arrangements
Endorsing Organization Agreements
The Corporation contracts
with other organizations to obtain their endorsement of the Corporation’s loan and deposit products. This endorsement may provide to the Corporation exclusive rights to market to the organization’s members or to customers on behalf of the Corporation. These organizations endorse the Corporation’s loan and deposit products and provide the Corporation with their mailing lists and marketing activities. These agreements generally have terms that range from two to five years. The Corporation typically pays royalties in exchange for the endorsement. Compensation costs related to the credit card agreements are recorded as contra-revenue in card income.
Cardholder Reward Agreements
The Corporation offers reward programs that allow its cardholders to earn points that can be redeemed for a broad
range of rewards including cash, travel and gift cards. The Corporation establishes a rewards liability based upon the points earned that are expected to be redeemed and the average cost per point redeemed. 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 estimated cost of the rewards programs is recorded as contra-revenue in card income.
159 Bank of America 2014
NOTE 2 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, 2014 and 2013. 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 the cash collateral received or paid.
Represents
the total contract/notional amount of derivative assets and liabilities outstanding.
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 Offsetting of Derivatives table presents derivative instruments included in derivative assets and liabilities on the Consolidated Balance Sheet at December 31, 2014 and 2013 by primary risk (e.g., interest rate risk) and the platform, where applicable, on which these derivatives are transacted. Exchange-traded derivatives include listed options transacted on an exchange. Over-the-counter (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. 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 includes reducing the balance for counterparty netting and cash collateral received or paid.
Other gross derivative assets and liabilities in the table represent derivatives entered into under master netting agreements where uncertainty exists as to the enforceability of these agreements under bankruptcy laws in some countries or industries and, accordingly, receivables and payables with counterparties in these countries or industries are reported on a gross basis.
Also included in the table is financial instrument collateral related to legally enforceable master netting agreements that represents securities collateral received
or pledged and customer cash collateral held at third-party custodians. These amounts are not offset on the Consolidated Balance Sheet but are shown as a reduction to total derivative assets and liabilities in the table to derive net derivative assets and liabilities.
For more information on offsetting of securities financing agreements, see Note 10 – Federal Funds Sold or Purchased, Securities Financing Agreements and Short-term Borrowings.
Total gross derivative assets/liabilities, before netting
Over-the-counter
580.1
571.9
535.2
513.7
Exchange-traded
16.1
15.6
12.1
13.0
Over-the-counter
cleared
372.8
376.1
357.0
362.4
Less: Legally enforceable master netting agreements and cash collateral received/paid
Over-the-counter
(545.7
)
(545.5
)
(505.0
)
(495.4
)
Exchange-traded
(13.9
)
(13.9
)
(11.2
)
(11.2
)
Over-the-counter
cleared
(372.5
)
(375.5
)
(356.6
)
(362.4
)
Derivative assets/liabilities, after netting
36.9
28.7
31.5
20.1
Other
gross derivative assets/liabilities
15.8
18.2
16.0
17.3
Total derivative assets/liabilities
52.7
46.9
47.5
37.4
Less:
Financial instruments collateral (1)
(13.3
)
(8.9
)
(10.1
)
(4.6
)
Total net derivative assets/liabilities
$
39.4
$
38.0
$
37.4
$
32.8
(1)
These
amounts are limited to the derivative asset/liability balance and, accordingly, do not include excess collateral received/pledged.
ALM and Risk Management Derivatives
The Corporation’s asset and liability management (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 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 mortgage servicing rights (MSRs). For more information on MSRs, see Note 23 – Mortgage Servicing Rights.
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. Foreign exchange contracts, which include spot and forward contracts, represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date. Exposure to loss on these contracts will increase or decrease over their respective lives as currency exchange and interest rates fluctuate.
The Corporation enters into derivative
commodity contracts such as futures, swaps, options and forwards as well as non-derivative commodity contracts to provide price risk management services to customers or to manage price risk associated with its physical and financial commodity positions. The non-derivative commodity contracts and physical inventories of commodities expose the Corporation to earnings volatility. Cash flow and fair value accounting hedges provide a method to mitigate a portion of this earnings volatility.
Bank
of America 2014 162
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 (loss).
Derivatives Designated as Accounting Hedges
The Corporation uses various types of interest rate, commodity and foreign exchange derivative contracts to protect against changes in the
fair value of its assets and liabilities due to fluctuations in interest rates, commodity prices and exchange rates (fair value hedges). The Corporation also uses these types of contracts and equity derivatives 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).
Fair
Value Hedges
The table below summarizes information related to fair value hedges for 2014, 2013 and 2012, including hedges of interest rate risk on long-term debt that were acquired as part of a business combination and redesignated. At redesignation, the fair value of the derivatives was positive. As the derivatives mature, the fair value will approach zero. As a result, ineffectiveness will occur and the fair value changes in the derivatives and the long-term debt being hedged may be directionally the same in certain scenarios. Based on a regression analysis, the derivatives continue to be highly effective at offsetting changes in the fair value of the long-term debt attributable to interest rate risk.
Derivatives
Designated as Fair Value Hedges
Gains (Losses)
2014
(Dollars
in millions)
Derivative
Hedged
Item
Hedge
Ineffectiveness
Interest rate risk on long-term debt (1)
$
2,144
$
(2,935
)
$
(791
)
Interest
rate and foreign currency risk on long-term debt (1)
(2,212
)
2,120
(92
)
Interest rate risk on available-for-sale securities (2)
(35
)
3
(32
)
Price
risk on commodity inventory (3)
21
(15
)
6
Total
$
(82
)
$
(827
)
$
(909
)
2013
Interest
rate risk on long-term debt (1)
$
(4,704
)
$
3,925
$
(779
)
Interest rate and foreign currency risk on long-term debt (1)
(1,291
)
1,085
(206
)
Interest
rate risk on available-for-sale securities (2)
839
(840
)
(1
)
Price risk on commodity inventory (3)
(13
)
11
(2
)
Total
$
(5,169
)
$
4,181
$
(988
)
2012
Interest
rate risk on long-term debt (1)
$
(195
)
$
(770
)
$
(965
)
Interest rate and foreign currency risk on long-term debt (1)
(1,482
)
1,225
(257
)
Interest
rate risk on available-for-sale securities (2)
(4
)
91
87
Price risk on commodity inventory (3)
(6
)
6
—
Total
$
(1,687
)
$
552
$
(1,135
)
(1)
Amounts
are recorded in interest expense on long-term debt and in other income (loss).
(2)
Amounts are recorded in interest income on debt securities.
(3)
Amounts relating to commodity inventory are recorded in trading account profits.
163 Bank
of America 2014
Cash Flow and Net Investment Hedges
The table below summarizes certain information related to cash flow hedges and net investment hedges for 2014, 2013 and 2012. Of the $1.7 billion net loss (after-tax) on derivatives in accumulated other comprehensive income (OCI) for 2014, $803 million ($502
million after-tax) 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. Amounts related to price risk on restricted stock awards reclassified from accumulated OCI are recorded in personnel expense.
Derivatives
Designated as Cash Flow and Net Investment Hedges
2014
(Dollars
in millions, amounts pretax)
Gains (Losses) Recognized in Accumulated OCI
on Derivatives
Gains (Losses) in Income Reclassified from
Accumulated OCI
Hedge Ineffectiveness and Amounts Excluded from Effectiveness
Testing (1)
Cash flow hedges
Interest
rate risk on variable-rate portfolios
$
68
$
(1,119
)
$
(4
)
Price risk on restricted stock awards
127
359
—
Total
$
195
$
(760
)
$
(4
)
Net
investment hedges
Foreign exchange risk
$
3,021
$
21
$
(503
)
2013
Cash
flow hedges
Interest rate risk on variable-rate portfolios
$
(321
)
$
(1,102
)
$
—
Price
risk on restricted stock awards
477
329
—
Total
$
156
$
(773
)
$
—
Net
investment hedges
Foreign exchange risk
$
1,024
$
(355
)
$
(134
)
2012
Cash
flow hedges
Interest rate risk on variable-rate portfolios
$
10
$
(957
)
$
—
Price
risk on restricted stock awards
420
(78
)
—
Total
$
430
$
(1,035
)
$
—
Net
investment hedges
Foreign exchange risk
$
(771
)
$
(26
)
$
(269
)
(1)
Amounts
related to derivatives designated as cash flow hedges represent hedge ineffectiveness and amounts related to net investment hedges represent amounts excluded from effectiveness testing.
Bank of America 2014 164
Other Risk Management Derivatives
Other risk management derivatives are used by the
Corporation to reduce certain risk exposures. These derivatives are not qualifying accounting hedges because either they did not qualify for or were not designated as accounting hedges. The table below presents gains (losses) on these derivatives for 2014, 2013 and
2012. These gains (losses) are largely offset by the income or expense that is recorded on the hedged item. The change in the impact of interest rate and foreign currency risk on ALM activities was primarily driven by decreasing interest rates and foreign currency weakening against the U.S. Dollar throughout 2014 compared to strengthening during 2013.
Other
Risk Management Derivatives
Gains (Losses)
(Dollars
in millions)
2014
2013
2012
Interest rate risk on mortgage banking income (1)
$
1,017
$
(619
)
$
1,324
Credit
risk on loans (2)
16
(47
)
(95
)
Interest rate and foreign currency risk on ALM activities (3)
(3,683
)
2,501
424
Price
risk on restricted stock awards (4)
600
865
1,008
Other
(9
)
(19
)
58
(1)
Net
gains (losses) on these derivatives are recorded in mortgage banking income as they are used to mitigate the interest rate risk related to MSRs, interest rate lock commitments and mortgage loans held-for-sale, all of which are measured at fair value with changes in fair value recorded in mortgage banking income. The net gains on interest rate lock commitments related to the origination of mortgage loans that are held-for-sale, which are not included in the table but are considered derivative instruments, were $776 million, $927 million and $3.0 billion for 2014, 2013 and 2012, respectively.
(2)
Net
gains (losses) on these derivatives are recorded in other income (loss).
(3)
Primarily related to hedges of debt securities carried at fair value and hedges of foreign currency-denominated debt. Gains (losses) on these derivatives and the related hedged items are recorded in other income (loss).
(4)
Gains (losses) on these derivatives are recorded in personnel expense.
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 trading account profits and net interest income as well as other revenue categories. However, the majority of income related to derivative instruments is recorded in trading account profits.
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 trading account profits. For debt securities, revenue, with the exception of interest associated with the debt securities, is typically included in trading account profits. 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 trading account profits as part of the initial mark to fair value. For derivatives, the majority of revenue is included in trading account profits. In transactions where the Corporation acts as agent, which include exchange-traded futures and options, fees are recorded in other income (loss).
Gains (losses) on certain instruments, primarily loans, that the Global Markets business segment shares with Global Banking are not considered trading instruments and are excluded from sales and trading revenue in their entirety.
165 Bank
of America 2014
The table below, 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 2014, 2013 and 2012. The difference between total trading account profits in the table below and in the Consolidated Statement of Income represents trading
activities
in business segments other than Global Markets. This table includes debit valuation adjustment (DVA) gains (losses), net of hedges, and funding valuation adjustment (FVA) 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
2014
(Dollars
in millions)
Trading Account Profits
Net Interest Income
Other (1)
Total
Interest rate risk
$
952
$
1,169
$
363
$
2,484
Foreign
exchange risk
1,177
8
(128
)
1,057
Equity risk
1,954
(70
)
2,318
4,202
Credit
risk
1,410
2,682
614
4,706
Other risk
504
(319
)
106
291
Total
sales and trading revenue
$
5,997
$
3,470
$
3,273
$
12,740
2013
Interest
rate risk
$
1,120
$
1,104
$
(333
)
$
1,891
Foreign
exchange risk
1,170
5
(103
)
1,072
Equity risk
1,994
111
2,075
4,180
Credit
risk
2,083
2,710
78
4,871
Other risk
367
(219
)
69
217
Total
sales and trading revenue
$
6,734
$
3,711
$
1,786
$
12,231
2012
Interest
rate risk
$
(2,875
)
$
1,039
$
(4
)
$
(1,840
)
Foreign
exchange risk
909
5
5
919
Equity risk
259
(57
)
1,891
2,093
Credit
risk
2,514
2,321
961
5,796
Other risk
4,899
(227
)
(5,148
)
(476
)
Total
sales and trading revenue
$
5,706
$
3,081
$
(2,295
)
$
6,492
(1)
Represents
amounts in investment and brokerage services and other income (loss) that are recorded in Global Markets and included in the definition of sales and trading revenue. Includes investment and brokerage services revenue of $2.2 billion, $2.0 billion and $1.8 billion for 2014, 2013 and 2012, 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 pre-defined 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.
Bank
of America 2014 166
Credit derivative instruments where the Corporation is the seller of credit protection and their expiration at December 31, 2014 and 2013 are summarized in the table below. These instruments 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-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.
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 to help ensure that certain credit risk-related losses occur
within acceptable, predefined limits.
The Corporation manages its market risk exposure to credit derivatives by entering into a variety of offsetting derivative contracts and security positions. For example, in certain instances, the Corporation may purchase credit protection with identical underlying referenced names to offset its exposure. The carrying value and notional amount of written credit derivatives for which the Corporation held purchased credit derivatives with identical underlying referenced names and terms were $5.7 billion and $880.6 billion at December 31, 2014 and $8.1 billion and
$1.0 trillion at December 31, 2013.
Credit-related notes in the table on page 167 include investments in securities issued by collateralized debt obligation (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. Substantially all 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 take additional protective measures such as early termination of all trades. Further, as previously discussed on page 160, the Corporation enters into legally enforceable master netting agreements which reduce risk by permitting the closeout and netting of transactions with the same counterparty upon the occurrence of certain events.
A majority 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, 2014 and 2013, the Corporation held cash and securities collateral of $82.0 billion and $74.4 billion,
and posted
cash and securities collateral of $67.9 billion and $56.1 billion in the normal course of business under derivative agreements.
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, 2014, 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 approximately $1.4 billion, including $670 million for Bank of America, N.A. (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, 2014, the current liability recorded for these derivative contracts was $84 million, against which the Corporation and certain subsidiaries had posted approximately $54 million of collateral.
The table below presents the amount of additional collateral that would have been contractually required
by derivative contracts and other trading agreements at December 31, 2014 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
Included in Bank of America Corporation collateral requirements in this table.
The table below 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, 2014 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
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 rate and
currency changes 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 currency and interest rate swaps. Since the components of the valuation adjustments on derivatives move independently and the Corporation may not hedge all of the market-driven exposures, the
effect
of a hedge may increase the gains or losses relating to valuation adjustments on derivatives or may result in a gross gain from valuation adjustments on derivatives becoming a negative adjustment (or the reverse).
In 2014, the Corporation adopted FVA into valuation estimates primarily to include funding costs on uncollateralized derivatives and derivatives where the Corporation is not permitted to use the collateral it receives. The change in estimate resulted in a net pretax FVA charge of $497 million including a charge of $632 million related to funding costs associated with derivative asset exposures, partially offset by a funding benefit of $135 million related to derivative liability exposures. The net FVA charge was recorded as a reduction to sales and trading revenue in Global
Markets. The Corporation calculated this valuation adjustment based on modeled expected exposure profiles discounted for the funding risk premium inherent in these derivatives. FVA related to derivative assets and liabilities is the effect of funding costs on the fair value of these derivatives.
The table below presents CVA, DVA and FVA gains (losses) on derivatives, which are recorded in trading account profits, on a gross and net of hedge basis for 2014, 2013 and 2012. 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.
Valuation
Adjustments on Derivatives
Gains (Losses)
2014
2013
2012
(Dollars
in millions)
Gross
Net
Gross
Net
Gross
Net
Derivative assets (CVA) (1)
$
(22
)
$
191
$
738
$
(96
)
$
1,022
$
291
Derivative
assets (FVA) (2)
(632
)
(632
)
n/a
n/a
n/a
n/a
Derivative
liabilities (DVA) (3)
(28
)
(150
)
(39
)
(75
)
(2,212
)
(2,477
)
Derivative
liabilities (FVA) (2)
135
135
n/a
n/a
n/a
n/a
(1)
At
December 31, 2014, 2013 and 2012, the cumulative CVA reduced the derivative assets balance by $1.6 billion, $1.6 billion and $2.4 billion, respectively.
(2)
FVA was adopted in 2014 and the cumulative FVA reduced the net derivatives balance by $497 million.
(3)
At
December 31, 2014, 2013 and 2012, the cumulative DVA reduced the derivative liabilities balance by $0.8 billion, $0.8 billion and $0.8 billion, respectively.
n/a = not applicable
169 Bank of America 2014
NOTE 3 Securities
The
table below presents the amortized cost, gross unrealized gains and losses, and fair value of available-for-sale (AFS) debt securities, other debt securities carried at fair value, HTM debt securities and AFS marketable equity securities at December 31, 2014 and 2013.
Debt
Securities and Available-for-Sale Marketable Equity Securities
At
December 31, 2014 and 2013, the underlying collateral type included approximately 76 percent and 89 percent prime, 14 percent and seven percent Alt-A, and 10 percent and four percent subprime.
(2)
Classified in other assets on the Consolidated Balance Sheet.
At
December 31, 2014, the accumulated net unrealized gain on AFS debt securities included in accumulated OCI was $1.3 billion, net of the related income taxes of $823 million. At December 31, 2014 and 2013, the Corporation had nonperforming AFS debt securities of $161 million and $103 million.
Bank
of America 2014 170
The table below presents the components of other debt securities carried at fair value where the changes in fair value are reported in other income. In 2014, the Corporation recorded unrealized mark-to-market net gains in other income of $1.2 billion and realized gains of $275 million on other debt securities carried at fair value, which exclude the impact of certain hedges, the results of which are also reported in other
income, compared to unrealized mark-to-market net losses of $1.3 billion and realized losses of $963 million in 2013.
Other
Debt Securities Carried at Fair Value
December 31
(Dollars in millions)
2014
2013
U.S. Treasury and agency securities
$
1,541
$
4,062
Mortgage-backed
securities:
Agency
15,704
16,500
Agency-collateralized mortgage obligations
—
218
Non-agency
residential
3,745
—
Commercial
—
749
Non-U.S. securities (1)
15,132
11,315
Other
taxable securities, substantially all asset-backed securities
299
—
Total
$
36,421
$
32,844
(1)
These
securities are primarily used to satisfy certain international regulatory liquidity requirements.
The table below presents gross realized gains and losses on sales of AFS debt securities for 2014, 2013 and 2012.
Gains
and Losses on Sales of AFS Debt Securities
(Dollars in millions)
2014
2013
2012
Gross
gains
$
1,366
$
1,302
$
2,128
Gross losses
(12
)
(31
)
(466
)
Net
gains on sales of AFS debt securities
$
1,354
$
1,271
$
1,662
Income tax expense attributable to realized net gains on sales of AFS debt securities
$
515
$
470
$
615
The
table below presents the amortized cost and fair value of the Corporation’s debt securities carried at fair value and HTM debt securities from Fannie Mae (FNMA), the Government National Mortgage Association (GNMA), U.S. Treasury and Freddie Mac (FHLMC), where the investment exceeded 10 percent of consolidated shareholders’ equity at December 31, 2014 and 2013.
Selected
Securities Exceeding 10 Percent of Shareholders’ Equity
December 31
2014
2013
(Dollars
in millions)
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Fannie Mae
$
130,725
$
131,418
$
123,813
$
118,708
Government
National Mortgage Association
98,278
98,633
118,700
115,314
U.S. Treasury
68,481
68,801
10,533
10,428
Freddie
Mac
28,288
28,556
24,908
24,075
171 Bank
of America 2014
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, 2014 and 2013.
Temporarily
Impaired and Other-than-temporarily Impaired AFS Debt Securities
Total
temporarily impaired and other-than-temporarily impaired
available-for-sale debt securities
$
154,358
$
(5,791
)
$
14,839
$
(760
)
$
169,197
$
(6,551
)
(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.
Bank of America 2014 172
The Corporation recorded other-than-temporary impairment (OTTI) losses on AFS debt securities in 2014, 2013
and 2012 as presented in the Net Impairment Losses Recognized in Earnings table. Substantially all OTTI losses in 2014, 2013 and 2012 consisted of credit losses on non-agency residential mortgage-backed securities (RMBS) and were recorded in other income in the Consolidated Statement of Income. A debt security is impaired when its fair value is less than its amortized cost. If the Corporation intends or will more-likely-than-not be required to sell a debt security prior to recovery, the entire impairment loss is recorded in the Consolidated Statement of Income. For AFS debt securities the Corporation does not intend or will not more-likely-than-not be required to sell, an analysis is performed to determine if any of the impairment is due to credit or whether it is due to other factors
(e.g., interest rate). Credit losses are considered unrecoverable and are recorded in the Consolidated Statement of Income with the remaining unrealized losses recorded in OCI. In certain instances, the credit loss on a debt security may exceed the total
impairment, in which case, the excess of the credit loss over the total impairment is recorded as an unrealized gain in OCI.
Net
Impairment Losses Recognized in Earnings
(Dollars in millions)
2014
2013
2012
Total
OTTI losses (unrealized and realized)
$
(30
)
$
(21
)
$
(57
)
Unrealized OTTI losses recognized in OCI
14
1
4
Net
impairment losses recognized in earnings
$
(16
)
$
(20
)
$
(53
)
The table below presents a rollforward of the credit losses recognized in earnings in 2014,
2013 and 2012 on AFS debt securities that the Corporation does not have the intent to sell or will not more-likely-than-not be required to sell.
Rollforward
of Credit Losses Recognized
(Dollars in millions)
2014
2013
2012
Balance,
January 1
$
184
$
243
$
310
Additions for credit losses recognized on AFS debt securities that had no previous impairment losses
14
6
7
Additions
for credit losses recognized on AFS debt securities that had previously incurred impairment losses
2
14
46
Reductions for AFS debt securities matured, sold or intended to be sold
—
(79
)
(120
)
Balance,
December 31
$
200
$
184
$
243
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 mortgage-backed securities (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 RMBS were as follows at December 31, 2014.
Significant
Assumptions
Range (1)
Weighted- average
10th
Percentile (2)
90th
Percentile (2)
Prepayment speed
15.3
%
3.1
%
29.9
%
Loss
severity
35.2
11.8
44.7
Life default rate
39.6
1.5
98.6
(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 loan-to-value (LTV), creditworthiness of borrowers as measured using FICO scores, and geographic concentrations. The weighted-average severity by collateral type was 31.0 percent for prime, 34.1 percent for Alt-A and 45.0 percent for subprime
at December 31, 2014. Additionally, 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 24.5 percent for prime, 42.4 percent for Alt-A and 42.0 percent for subprime at December 31, 2014.
173 Bank
of America 2014
The expected maturity distribution of the Corporation’s MBS, the contractual maturity distribution of the Corporation’s other debt securities carried at fair value and HTM debt securities, and the yields on the Corporation’s debt securities carried at fair value and HTM debt securities at December 31, 2014 are summarized in the table below. Actual maturities may differ from the contractual or expected maturities since borrowers may have the right to prepay obligations with or without prepayment penalties.
Maturities
of Debt Securities Carried at Fair Value and Held-to-maturity Debt Securities
Amortized
cost of debt securities carried at fair value
U.S.
Treasury and agency securities
$
577
0.41
%
$
51,153
1.60
%
$
17,535
2.10
%
$
1,480
3.00
%
$
70,745
1.78
%
Mortgage-backed
securities:
Agency
28
4.60
24,283
2.70
152,950
2.80
2,175
3.00
179,436
2.80
Agency-collateralized
mortgage obligations
794
0.40
2,874
2.00
10,488
2.80
19
0.60
14,175
2.50
Non-agency
residential
517
5.09
1,834
5.39
1,236
4.78
4,443
10.61
8,030
8.15
Commercial
188
9.69
590
2.32
3,150
2.80
3
2.83
3,931
3.07
Non-U.S.
securities
18,991
0.98
2,261
3.83
68
6.23
—
—
21,320
1.30
Corporate/Agency
bonds
59
1.79
112
3.77
94
3.74
96
0.63
361
2.43
Other
taxable securities, substantially all asset-backed securities
3,199
1.34
5,707
1.22
1,376
1.81
796
4.36
11,078
1.59
Total
taxable securities
24,353
1.16
88,814
2.07
186,897
2.80
9,012
6.86
309,076
2.56
Tax-exempt
securities
929
0.97
3,768
1.13
3,082
1.15
1,777
0.86
9,556
1.14
Total
amortized cost of debt securities carried at fair value
$
25,282
1.16
$
92,582
2.03
$
189,979
2.77
$
10,789
5.87
$
318,632
2.51
Amortized
cost of held-to-maturity debt securities (2)
$
108
0.84
$
19,513
2.40
$
39,917
2.30
$
228
3.31
$
59,766
2.40
Debt
securities carried at fair value
U.S.
Treasury and agency securities
$
577
$
51,383
$
17,633
$
1,543
$
71,136
Mortgage-backed
securities:
Agency
29
24,859
153,649
2,206
180,743
Agency-collateralized
mortgage obligations
795
2,838
10,596
19
14,248
Non-agency
residential
521
1,849
1,316
4,513
8,199
Commercial
191
594
3,212
3
4,000
Non-U.S.
securities
18,982
2,309
71
—
21,362
Corporate/Agency
bonds
60
117
96
95
368
Other
taxable securities, substantially all asset-backed securities
3,202
5,699
1,399
790
11,090
Total
taxable securities
24,357
89,648
187,972
9,169
311,146
Tax-exempt
securities
929
3,770
3,078
1,772
9,549
Total
debt securities carried at fair value
$
25,286
$
93,418
$
191,050
$
10,941
$
320,695
Fair
value of held-to-maturity debt securities (2)
$
108
$
19,762
$
39,538
$
233
$
59,641
(1)
Average
yield is computed using the effective yield of each security at the end of the period, weighted based on the amortized cost of each security. The effective yield considers the contractual coupon, amortization of premiums and accretion of discounts, and excludes the effect of related hedging derivatives.
(2)
Substantially all U.S. agency MBS.
Certain Corporate and Strategic Investments
The Corporation’s 49 percent investment in a merchant services joint venture, which is recorded in other assets on the Consolidated Balance Sheet and in
Consumer & Business Banking, had a carrying value of $3.1 billion and $3.2 billion at December 31, 2014 and 2013. For additional information, see Note 12 – Commitments and Contingencies.
In 2013, the Corporation sold its remaining investment in China Construction Bank Corporation (CCB) and realized a pretax gain of $753 million in All Other reported
in equity investment income in the Consolidated Statement of Income. The strategic assistance agreement between the Corporation and CCB, which includes cooperation in specific business areas, extends through 2016.
Bank of America 2014 174
NOTE 4 Outstanding Loans and Leases
The
following tables present total outstanding loans and leases and an aging analysis for the Corporation’s Home Loans, Credit Card and Other Consumer, and Commercial portfolio segments, by class of financing receivables, at December 31, 2014 and 2013.
Consumer
loans accounted for under the fair value option (8)
$
2,077
2,077
Total
consumer loans and leases
5,246
2,492
19,012
26,750
438,974
20,769
2,077
488,570
Commercial
U.S.
commercial
320
151
318
789
219,504
220,293
Commercial
real estate (9)
138
16
288
442
47,240
47,682
Commercial
lease financing
121
41
42
204
24,662
24,866
Non-U.S.
commercial
5
4
—
9
80,074
80,083
U.S.
small business commercial
88
45
94
227
13,066
13,293
Total
commercial
672
257
742
1,671
384,546
386,217
Commercial
loans accounted for under the fair value option (8)
6,604
6,604
Total
commercial loans and leases
672
257
742
1,671
384,546
6,604
392,821
Total
loans and leases
$
5,918
$
2,749
$
19,754
$
28,421
$
823,520
$
20,769
$
8,681
$
881,391
Percentage
of outstandings
0.67
%
0.31
%
2.24
%
3.22
%
93.44
%
2.36
%
0.98
%
100.00
%
(1)
Home
loans 30-59 days past due includes fully-insured loans of $2.1 billion and nonperforming loans of $392 million. Home loans 60-89 days past due includes fully-insured loans of $1.1 billion and nonperforming loans of $332 million.
(2)
Home loans includes fully-insured loans of $11.4 billion.
(3)
Home
loans includes $3.6 billion and direct/indirect consumer includes $27 million of nonperforming loans.
(4)
PCI loan amounts are shown gross of the valuation allowance.
(5)
Total outstandings includes pay option loans of $3.2 billion. The Corporation no longer originates this product.
(6)
Total
outstandings includes dealer financial services loans of $37.7 billion, unsecured consumer lending loans of $1.5 billion, U.S. securities-based lending loans of $35.8 billion, non-U.S. consumer loans of $4.0 billion, student loans of $632 million and other consumer loans of $761 million.
(7)
Total outstandings includes consumer finance loans of $676 million, consumer leases of $1.0
billion, consumer overdrafts of $162 million and other non-U.S. consumer loans of $3 million.
(8)
Consumer loans accounted for under the fair value option were residential mortgage loans of $1.9 billion and home equity loans of $196 million. Commercial loans accounted for under the fair value option were U.S. commercial loans of $1.9 billion and non-U.S. commercial loans of $4.7 billion. For additional information,
see Note 20 – Fair Value Measurements and Note 21 – Fair Value Option.
(9)
Total outstandings includes U.S. commercial real estate loans of $45.2 billion and non-U.S. commercial real estate loans of $2.5 billion.
Consumer
loans accounted for under the fair value option (8)
$
2,164
2,164
Total
consumer loans and leases
6,712
3,159
27,533
37,404
467,117
25,265
2,164
531,950
Commercial
U.S.
commercial
363
151
309
823
211,734
212,557
Commercial
real estate (9)
30
29
243
302
47,591
47,893
Commercial
lease financing
110
37
48
195
25,004
25,199
Non-U.S.
commercial
103
8
17
128
89,334
89,462
U.S.
small business commercial
87
55
113
255
13,039
13,294
Total
commercial
693
280
730
1,703
386,702
388,405
Commercial
loans accounted for under the fair value option (8)
7,878
7,878
Total
commercial loans and leases
693
280
730
1,703
386,702
7,878
396,283
Total
loans and leases
$
7,405
$
3,439
$
28,263
$
39,107
$
853,819
$
25,265
$
10,042
$
928,233
Percentage
of outstandings
0.80
%
0.37
%
3.04
%
4.21
%
91.99
%
2.72
%
1.08
%
100.00
%
(1)
Home
loans 30-59 days past due includes fully-insured loans of $2.5 billion and nonperforming loans of $623 million. Home loans 60-89 days past due includes fully-insured loans of $1.2 billion and nonperforming loans of $410 million.
(2)
Home loans includes fully-insured loans of $17.0 billion.
(3)
Home
loans includes $5.9 billion and direct/indirect consumer includes $33 million of nonperforming loans.
(4)
PCI loan amounts are shown gross of the valuation allowance.
(5)
Total outstandings includes pay option loans of $4.4 billion. The Corporation no longer originates this product.
(6)
Total
outstandings includes dealer financial services loans of $38.5 billion, unsecured consumer lending loans of $2.7 billion, U.S. securities-based lending loans of $31.2 billion, non-U.S. consumer loans of $4.7 billion, student loans of $4.1 billion and other consumer loans of $1.0 billion.
(7)
Total outstandings includes consumer finance loans of $1.2 billion, consumer leases of $606
million, consumer overdrafts of $176 million and other non-U.S. consumer loans of $5 million.
(8)
Consumer loans accounted for under the fair value option were residential mortgage loans of $2.0 billion and home equity loans of $147 million. Commercial loans accounted for under the fair value option were U.S. commercial loans of $1.5 billion and non-U.S. commercial loans of $6.4 billion. For additional information,
see Note 20 – Fair Value Measurements and Note 21 – Fair Value Option.
(9)
Total outstandings includes U.S. commercial real estate loans of $46.3 billion and non-U.S. commercial real estate loans of $1.6 billion.
The Corporation has entered into long-term credit protection agreements with FNMA and FHLMC on loans totaling $17.2 billion and $28.2 billion
at December 31, 2014 and 2013, 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.
Nonperforming Loans and Leases
The Corporation classifies junior-lien home equity loans as nonperforming when the first-lien loan becomes 90 days past due even if the junior-lien loan is performing. At December 31, 2014 and 2013, $800 million
and $1.2 billion of such junior-lien home equity loans were included in nonperforming loans.
The Corporation classifies consumer real estate loans that have been discharged in Chapter 7 bankruptcy and not reaffirmed by the borrower as troubled debt restructurings (TDRs), irrespective of payment history or delinquency status, even if the repayment terms for the loan have not been otherwise modified. The
Corporation continues to have a lien on the underlying collateral. At December 31, 2014, nonperforming loans discharged in Chapter 7 bankruptcy with no change in repayment terms were $1.4 billion
of which $901 million were current on their contractual payments, while $395 million were 90 days or more past due. Of the contractually current nonperforming loans, more than 80 percent were discharged in Chapter 7 bankruptcy more than 12 months ago, and more than 60 percent were discharged 24 months or more ago. As subsequent cash payments are received on the loans that are contractually current, the interest component of the payments is generally recorded as interest income on a cash basis and the principal component is recorded as a reduction in the carrying value of the loan.
Excluding purchased credit-impaired (PCI) loans, the Corporation sold nonperforming and other delinquent consumer
loans with a carrying value, excluding the related allowance, of $4.8 billion and $2.0 billion, and recognized gains of $247 million and $58 million recorded in noninterest income, during 2014 and 2013.
Bank of America 2014 176
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, 2014 and 2013. Nonperforming loans held-for-sale (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
December 31
Nonperforming
Loans and Leases (1)
Accruing Past Due
90 Days or More
(Dollars in millions)
2014
2013
2014
2013
Home loans
Core
portfolio
Residential mortgage (2)
$
2,398
$
3,316
$
3,942
$
5,137
Home
equity
1,496
1,431
—
—
Legacy Assets & Servicing portfolio
Residential
mortgage (2)
4,491
8,396
7,465
11,824
Home equity
2,405
2,644
—
—
Credit
card and other consumer
U.S. credit card
n/a
n/a
866
1,053
Non-U.S.
credit card
n/a
n/a
95
131
Direct/Indirect consumer
28
35
64
408
Other
consumer
1
18
1
2
Total consumer
10,819
15,840
12,433
18,555
Commercial
U.S.
commercial
701
819
110
47
Commercial real estate
321
322
3
21
Commercial
lease financing
3
16
41
41
Non-U.S. commercial
1
64
—
17
U.S.
small business commercial
87
88
67
78
Total commercial
1,113
1,309
221
204
Total
loans and leases
$
11,932
$
17,149
$
12,654
$
18,759
(1)
Nonperforming
loan balances do not include nonaccruing TDRs removed from the PCI loan portfolio prior to January 1, 2010 of $102 million and $260 million at December 31, 2014 and 2013.
(2)
Residential mortgage loans in the Core and Legacy Assets & Servicing portfolios accruing past due 90 days or more are fully-insured loans. At December
31, 2014 and 2013, residential mortgage includes $7.3 billion and $13.0 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 $4.1 billion and $4.0 billion of loans on which interest is still accruing.
n/a = not applicable
Credit Quality Indicators
The Corporation monitors credit quality within its Home Loans, 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 Home Loans 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 combined loan-to-value (CLTV) which measures the carrying value of the combined loans that have liens against the property and the available line of credit 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.
At a minimum, FICO scores are refreshed quarterly, and in many cases, more frequently. 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.
177 Bank of America 2014
The following tables present certain credit quality indicators for the Corporation’s Home Loans, Credit Card and Other Consumer, and Commercial portfolio segments, by class of financing receivables, at December 31, 2014 and 2013.
Greater
than 90 percent but less than or equal to 100 percent
4,958
3,081
2,005
2,442
3,272
1,048
Greater
than 100 percent
4,017
5,265
3,175
4,031
7,496
2,523
Fully-insured
loans (6)
52,990
11,980
—
—
—
—
Total
home loans
$
162,220
$
38,825
$
15,152
$
51,887
$
28,221
$
5,617
Refreshed
FICO score
Less than 620
$
4,184
$
6,313
$
6,109
$
2,169
$
3,470
$
864
Greater
than or equal to 620 and less than 680
6,272
4,032
3,014
3,683
4,529
995
Greater
than or equal to 680 and less than 740
21,946
6,463
3,310
10,231
7,905
1,651
Greater
than or equal to 740
76,828
10,037
2,719
35,804
12,317
2,107
Fully-insured
loans (6)
52,990
11,980
—
—
—
—
Total
home loans
$
162,220
$
38,825
$
15,152
$
51,887
$
28,221
$
5,617
(1)
Excludes
$2.1 billion of loans accounted for under the fair value option.
(2)
Excludes PCI loans.
(3)
Includes $2.8 billion of pay option loans. The Corporation no longer originates this product.
(4)
Refreshed
LTV percentages for PCI loans are calculated using the carrying value net of the related valuation allowance.
(5)
Effective December 31, 2014, with the exception of high-value properties, underlying values for LTV ratios are primarily determined using automated valuation models. For high-value properties, generally with an original value of $1 million or more, estimated property values are determined using the CoreLogic Case-Shiller Index. Prior-period values have been updated to reflect this change. Previously reported values were primarily determined through an index-based
approach.
(6)
Credit quality indicators are not reported for fully-insured loans as principal repayment is insured.
Credit
Card and Other Consumer – Credit Quality Indicators
Thirty-seven
percent of the other consumer portfolio is associated with portfolios from certain consumer finance businesses that the Corporation previously exited.
(2)
Other internal credit metrics may include delinquency status, geography or other factors.
(3)
Direct/indirect consumer includes $39.7 billion of securities-based lending which is overcollateralized and therefore has minimal credit risk and $632
million of loans the Corporation no longer originates.
(4)
Non-U.S. credit card represents the U.K. credit card portfolio which is evaluated using internal credit metrics, including delinquency status. At December 31, 2014, 98 percent of this portfolio was current or less than 30 days past due, one percent was 30-89 days past due and one percent was 90 days or more past due.
Excludes
$6.6 billion of loans accounted for under the fair value option.
(2)
U.S. small business commercial includes $762 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. At December 31, 2014, 98 percent of the balances where internal credit metrics are used was current or less than 30 days past due.
(3)
Refreshed
FICO score and other internal credit metrics are applicable only to the U.S. small business commercial portfolio.
(4)
Other internal credit metrics may include delinquency status, application scores, geography or other factors.
Greater
than 90 percent but less than or equal to 100 percent
7,013
4,216
2,638
3,178
3,948
1,121
Greater
than 100 percent
6,356
8,720
5,429
6,429
11,626
3,874
Fully-insured
loans (6)
69,712
17,535
—
—
—
—
Total
home loans
$
177,336
$
52,058
$
18,672
$
54,499
$
32,580
$
6,593
Refreshed
FICO score
Less
than 620
$
5,334
$
9,955
$
9,129
$
2,415
$
4,259
$
1,045
Greater
than or equal to 620 and less than 680
7,164
5,276
3,349
4,211
5,133
1,172
Greater
than or equal to 680 and less than 740
22,617
7,639
3,211
11,726
9,143
1,936
Greater
than or equal to 740
72,509
11,653
2,983
36,147
14,045
2,440
Fully-insured
loans (6)
69,712
17,535
—
—
—
—
Total
home loans
$
177,336
$
52,058
$
18,672
$
54,499
$
32,580
$
6,593
(1)
Excludes
$2.2 billion of loans accounted for under the fair value option.
(2)
Excludes PCI loans.
(3)
Includes $4.0 billion of pay option loans. The Corporation no longer originates this product.
(4)
Refreshed
LTV percentages for PCI loans are calculated using the carrying value net of the related valuation allowance.
(5)
Effective December 31, 2014, with the exception of high-value properties, underlying values for LTV ratios are primarily determined using automated valuation models. For high-value properties, generally with an original value of $1 million or more, estimated property values are determined using the CoreLogic Case-Shiller Index. Prior-period values have been updated to reflect this change. Previously reported values were primarily determined through an index-based approach.
(6)
Credit
quality indicators are not reported for fully-insured loans as principal repayment is insured.
Credit
Card and Other Consumer – Credit Quality Indicators
Sixty
percent of the other consumer portfolio is associated with portfolios from certain consumer finance businesses that the Corporation previously exited.
(2)
Other internal credit metrics may include delinquency status, geography or other factors.
(3)
Direct/indirect consumer includes $35.8 billion of securities-based lending which is overcollateralized and therefore has minimal credit risk and $4.1
billion of loans the Corporation no longer originates.
(4)
Non-U.S. credit card represents the U.K. credit card portfolio which is evaluated using internal credit metrics, including delinquency status. At December 31, 2013, 98 percent of this portfolio was current or less than 30 days past due, one percent was 30-89 days past due and one percent was 90 days or more past due.
Excludes
$7.9 billion of loans accounted for under the fair value option.
(2)
U.S. small business commercial includes $289 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. At December 31, 2013, 99 percent of the balances where internal credit metrics are used was current or less than 30 days past due.
(3)
Refreshed
FICO score and other internal credit metrics are applicable only to the U.S. small business commercial portfolio.
(4)
Other internal credit metrics may include delinquency status, application scores, geography or other factors.
179 Bank of America 2014
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. Impaired loans include nonperforming commercial loans and all consumer and commercial TDRs. Impaired loans exclude nonperforming consumer loans and nonperforming commercial leases unless they are classified as TDRs. Loans accounted for under the fair value option are also excluded. PCI loans are excluded and reported separately on page 189. For additional information, see Note 1 – Summary of Significant Accounting Principles.
Home Loans
Impaired home loans within the Home Loans portfolio segment
consist entirely of TDRs. Excluding PCI loans, most modifications of home loans meet the definition of TDRs when a binding offer is extended to a borrower. Modifications of home loans are done in accordance with the government’s Making Home Affordable Program (modifications under government programs) or the Corporation’s proprietary programs (modifications under 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. During 2013 and 2012, the Corporation provided interest rate modifications to qualified borrowers pursuant to the 2012 National Mortgage Settlement and these interest rate modifications are not considered to be TDRs.
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.
Home loans that have been discharged in Chapter 7 bankruptcy with no change in repayment terms of $2.4 billion were included in TDRs at December 31, 2014, of which
$1.4 billion were classified as nonperforming and $1.0 billion were loans fully-insured by the Federal Housing Administration (FHA). For more information on loans discharged in Chapter 7 bankruptcy, see Nonperforming Loans and Leases in this Note.
A home loan, excluding PCI loans which are reported separately, is not classified as impaired unless it is a TDR. Once such a loan has been designated as a TDR, it is then individually assessed for
impairment. Home loan TDRs are measured primarily based on the net present value of the estimated cash flows discounted at the loan’s original effective interest rate, as discussed in the following paragraph. 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, home loan TDRs that are considered to be dependent solely on the collateral for repayment (e.g., due to the lack of income verification or as a result of being discharged in Chapter 7 bankruptcy) 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. Home 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 home 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.
The net present value of the estimated cash flows used to measure impairment is based on model-driven estimates of projected payments, prepayments, defaults and loss-given-default (LGD). Using statistical modeling methodologies, the Corporation estimates the probability that a loan will default prior to maturity based on the attributes of each loan. The factors that are most relevant to the probability of default are the refreshed LTV, or in the case of a subordinated lien, refreshed CLTV, borrower credit score, months since origination
(i.e., vintage) and geography. Each of these factors is further broken down by present collection status (whether the loan is current, delinquent, in default or in bankruptcy). Severity (or LGD) is estimated based on the refreshed LTV for first mortgages or CLTV for subordinated liens. The estimates are based on the Corporation’s historical experience as adjusted to reflect an assessment of environmental factors that may not be reflected in the historical data, 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 redefaults subsequent to modification, a loan’s default history prior to modification and the change in borrower payments post-modification.
At December 31, 2014 and
2013, remaining commitments to lend additional funds to debtors whose terms have been modified in a home loan TDR were immaterial. Home loan foreclosed properties totaled $630 million and $533 million at December 31, 2014 and 2013.
Bank
of America 2014 180
The table below provides the unpaid principal balance, carrying value and related allowance at December 31, 2014 and 2013, and the average carrying value and interest income recognized for 2014, 2013 and 2012 for impaired loans in the Corporation’s Home Loans portfolio segment and includes primarily loans
managed
by Legacy Assets & Servicing. Certain impaired home 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.
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 following table presents the December 31, 2014, 2013 and 2012 unpaid principal balance, carrying value, and average pre- and post-modification interest rates on home loans that were modified in TDRs during 2014, 2013 and 2012, and net charge-offs recorded during the period in which the modification occurred.
The following Home Loans 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. These TDRs are primarily managed by Legacy Assets & Servicing.
181 Bank of America 2014
Home
Loans – TDRs Entered into During 2014, 2013 and 2012 (1)
TDRs
entered into during 2014 include modifications with principal forgiveness of $53 million related to residential mortgage and $1 million related to home equity. TDRs entered into during 2013 include residential mortgage modifications with principal forgiveness of $467 million. TDRs entered into during 2012 include modifications with principal forgiveness of $778 million related to residential mortgage and $9 million related to home equity.
(2)
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.
(3)
Net charge-offs include amounts recorded on loans modified during the period that are no longer held by the Corporation at December 31, 2014, 2013 and 2012 due to sales and other dispositions.
Bank
of America 2014 182
The table below presents the December 31, 2014, 2013 and 2012 carrying value for home loans that were modified in a TDR during 2014, 2013 and 2012, by type of modification.
Home
Loans – Modification Programs
TDRs Entered into During 2014
(Dollars in millions)
Residential Mortgage
Home
Equity
Total Carrying Value
Modifications
under government programs
Contractual interest rate reduction
$
643
$
56
$
699
Principal
and/or interest forbearance
16
18
34
Other modifications (1)
98
1
99
Total
modifications under government programs
757
75
832
Modifications under proprietary programs
Contractual
interest rate reduction
244
22
266
Capitalization of past due amounts
71
2
73
Principal
and/or interest forbearance
66
75
141
Other modifications (1)
40
47
87
Total
modifications under proprietary programs
421
146
567
Trial modifications
3,421
182
3,603
Loans
discharged in Chapter 7 bankruptcy (2)
521
189
710
Total modifications
$
5,120
$
592
$
5,712
TDRs
Entered into During 2013
Modifications under government programs
Contractual interest rate reduction
$
1,815
$
48
$
1,863
Principal
and/or interest forbearance
35
24
59
Other modifications (1)
100
—
100
Total
modifications under government programs
1,950
72
2,022
Modifications under proprietary programs
Contractual
interest rate reduction
2,799
40
2,839
Capitalization of past due amounts
132
2
134
Principal
and/or interest forbearance
469
17
486
Other modifications (1)
105
25
130
Total
modifications under proprietary programs
3,505
84
3,589
Trial modifications
3,410
87
3,497
Loans
discharged in Chapter 7 bankruptcy (2)
1,151
278
1,429
Total modifications
$
10,016
$
521
$
10,537
TDRs
Entered into During 2012
Modifications under government programs
Contractual interest rate reduction
$
642
$
78
$
720
Principal
and/or interest forbearance
51
31
82
Other modifications (1)
37
1
38
Total
modifications under government programs
730
110
840
Modifications under proprietary programs
Contractual
interest rate reduction
3,350
44
3,394
Capitalization of past due amounts
144
—
144
Principal
and/or interest forbearance
424
16
440
Other modifications (1)
97
21
118
Total
modifications under proprietary programs
4,015
81
4,096
Trial modifications
4,547
69
4,616
Loans
discharged in Chapter 7 bankruptcy (2)
2,936
598
3,534
Total modifications
$
12,228
$
858
$
13,086
(1)
Includes
other modifications such as term or payment extensions and repayment plans.
(2)
Includes loans discharged in Chapter 7 bankruptcy with no change in repayment terms that are classified as TDRs.
183 Bank of America 2014
The
table below presents the carrying value of loans that entered into payment default during 2014, 2013 and 2012 that were modified in a TDR during the 12 months preceding payment default. Total carrying value includes loans with a carrying value of $2.0 billion, $2.4 billion and $667 million that entered into payment default during 2014, 2013 and 2012 but were no longer held by the Corporation as of December 31, 2014, 2013
and 2012
due to sales and other dispositions. A payment default for home loan TDRs is recognized when a borrower has missed three monthly payments (not necessarily consecutively) since modification. Payment defaults on a trial modification where the borrower has not yet met the terms of the agreement are included in the table below if the borrower is 90 days or more past due three months after the offer to modify is made.
Home
Loans – TDRs Entering Payment Default That Were Modified During the Preceding 12 Months
2014
(Dollars in millions)
Residential Mortgage
Home
Equity
Total Carrying Value (1)
Modifications
under government programs
$
696
$
4
$
700
Modifications under proprietary programs
714
12
726
Loans
discharged in Chapter 7 bankruptcy (2)
481
70
551
Trial modifications
2,231
56
2,287
Total
modifications
$
4,122
$
142
$
4,264
2013
Modifications
under government programs
$
454
$
2
$
456
Modifications under proprietary programs
1,117
4
1,121
Loans
discharged in Chapter 7 bankruptcy (2)
964
30
994
Trial modifications
4,376
14
4,390
Total
modifications
$
6,911
$
50
$
6,961
2012
Modifications
under government programs
$
202
$
8
$
210
Modifications under proprietary programs
942
14
956
Loans
discharged in Chapter 7 bankruptcy (2)
1,228
53
1,281
Trial modifications
2,351
20
2,371
Total
modifications
$
4,723
$
95
$
4,818
(1)
Total
carrying value includes loans with a carrying value of $2.0 billion, $2.4 billion and $667 million that entered into payment default during 2014, 2013 and 2012 but were no longer held by the Corporation as of December 31, 2014, 2013 and 2012 due to sales and other dispositions.
(2)
Includes
loans discharged in Chapter 7 bankruptcy with no change in repayment terms that are classified as TDRs.
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 renegotiated credit card and other consumer TDR portfolio, collectively referred to as the renegotiated TDR portfolio). The Corporation seeks to assist customers that are experiencing financial difficulty by modifying loans while ensuring compliance with federal, local and international laws and guidelines. Credit card and other consumer loan modifications generally involve reducing the interest rate on the account and placing the customer on a fixed payment plan not exceeding 60
months, all of which are considered TDRs. In addition, the accounts of non-U.S. credit card customers who do not qualify for a fixed payment plan may have their interest rates reduced, as required by certain local jurisdictions. These modifications, which are also TDRs, tend to experience higher payment default rates given that the borrowers may lack the ability to repay even with the interest rate reduction. In all cases, the customer’s available line of credit is canceled. 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.
All credit card and substantially all other consumer loans that have been modified in TDRs 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 generally at 120 days past due for a loan that was placed on a fixed payment plan after July 1, 2012.
The allowance for impaired credit card and substantially all
other consumer loans is based on the present value of projected cash flows, which incorporates the Corporation’s historical payment default and loss experience on modified loans, discounted using the portfolio’s average contractual interest rate, excluding promotionally priced loans, in effect prior to restructuring. Credit card and other consumer loans are included in homogeneous pools which are collectively evaluated for impairment. For these portfolios, loss forecast models are utilized that consider a variety of factors including, but not limited to, historical loss experience, delinquency status, economic trends and credit scores.
Bank
of America 2014 184
The table below provides the unpaid principal balance, carrying value and related allowance at December 31, 2014 and 2013, and the average carrying value and interest income recognized for 2014, 2013 and 2012 on the Corporation’s renegotiated TDR portfolio in the Credit Card and Other Consumer portfolio segment.
Impaired
Loans – Credit Card and Other Consumer – Renegotiated TDRs
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 provides information on the Corporation’s primary modification programs for the renegotiated TDR portfolio at December 31, 2014 and 2013.
Credit
Card and Other Consumer – Renegotiated TDRs by Program Type
December 31
Internal
Programs
External Programs
Other (1)
Total
Percent of Balances Current or Less Than 30 Days Past Due
(Dollars in millions)
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
U.S.
credit card
$
450
$
842
$
397
$
607
$
9
$
16
$
856
$
1,465
84.99
%
82.77
%
Non-U.S.
credit card
41
71
16
26
111
143
168
240
47.56
49.01
Direct/Indirect
consumer
50
170
34
106
33
38
117
314
85.21
84.29
Other
consumer
—
60
—
—
—
—
—
60
—
71.08
Total
renegotiated TDRs
$
541
$
1,143
$
447
$
739
$
153
$
197
$
1,141
$
2,079
79.51
78.77
(1)
Other
TDRs for non-U.S. credit card include modifications of accounts that are ineligible for a fixed payment plan.
185 Bank of America 2014
The table below provides information on the Corporation’s renegotiated TDR portfolio including the December 31, 2014, 2013 and 2012
unpaid principal balance, carrying value and average pre- and post-modification interest rates of loans that were modified in TDRs during 2014, 2013 and 2012, and net charge-offs recorded during the period in which the modification occurred.
Credit
Card and Other Consumer – Renegotiated TDRs Entered into During 2014, 2013 and 2012
The table below provides information on the Corporation’s primary modification programs for the renegotiated TDR portfolio for loans that were modified in TDRs during 2014, 2013 and 2012.
Credit
Card and Other Consumer – Renegotiated TDRs Entered into During the Period by Program Type
2014
(Dollars in millions)
Internal Programs
External Programs
Other (1)
Total
U.S.
credit card
$
196
$
105
$
—
$
301
Non-U.S.
credit card
6
6
94
106
Direct/Indirect consumer
4
2
13
19
Total
renegotiated TDRs
$
206
$
113
$
107
$
426
2013
U.S.
credit card
$
192
$
137
$
—
$
329
Non-U.S.
credit card
16
9
122
147
Direct/Indirect consumer
15
8
15
38
Other
consumer
8
—
—
8
Total renegotiated TDRs
$
231
$
154
$
137
$
522
2012
U.S.
credit card
$
248
$
152
$
—
$
400
Non-U.S.
credit card
38
14
154
206
Direct/Indirect consumer
36
19
58
113
Other
consumer
9
—
—
9
Total renegotiated TDRs
$
331
$
185
$
212
$
728
(1)
Other
TDRs for non-U.S. credit card include modifications of accounts that are ineligible for a fixed payment plan.
Bank of America 2014 186
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 U.S. credit card TDRs, 81 percent of new non-U.S. credit card TDRs and 12 percent of new direct/indirect consumer TDRs may be in payment default within 12 months after modification. Loans that entered into payment default during 2014, 2013 and 2012 that had been modified in a TDR during the preceding 12 months were $56 million, $61 million and $203 million
for U.S. credit card, $200 million, $236 million and $298 million for non-U.S. credit card, and $5 million, $12 million and $35 million for direct/indirect consumer, respectively.
Commercial Loans
Impaired commercial loans, which include nonperforming loans and TDRs (both performing and nonperforming), are primarily measured based on the present value of payments expected to be received, discounted at the loan’s original effective interest rate. Commercial impaired loans 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 collateral, less costs to sell. If the carrying value of a loan exceeds this amount, a specific allowance is recorded as a component of the allowance for loan and lease losses.
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, 2014 and 2013, remaining commitments to lend additional funds to debtors whose terms have been modified in a commercial loan TDR were immaterial. Commercial foreclosed properties totaled $67 million and $90 million at December 31, 2014 and 2013.
187 Bank
of America 2014
The table below provides the unpaid principal balance, carrying value and related allowance at December 31, 2014 and 2013, and the average carrying value and interest income recognized for 2014, 2013 and 2012 for impaired loans in the Corporation’s Commercial loan portfolio segment. Certain impaired commercial loans do not have a related allowance as the valuation of these impaired loans exceeded the carrying value, which is net of previously
recorded charge-offs.
Includes
U.S. small business commercial renegotiated TDR loans and related allowance.
(2)
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.
Bank of America
2014 188
The table below presents the December 31, 2014, 2013 and 2012 unpaid principal balance and carrying value of commercial loans that were modified as TDRs during 2014, 2013 and 2012, and net charge-offs recorded during the period in which the modification occurred. The table below includes 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.
Commercial – TDRs Entered into During 2014, 2013 and 2012
U.S.
small business commercial TDRs are comprised of renegotiated small business card loans.
A commercial TDR is generally deemed to be in payment default when the loan is 90 days or more past due, including delinquencies that were not resolved as part of the modification. U.S. small business commercial TDRs 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, along with observable market prices or fair value of collateral when measuring the allowance for loan and lease losses. TDRs that were in payment default had a carrying value of $103 million, $55 million and $130 million
for U.S. commercial and $211 million, $128 million and $455 million for commercial real estate at December 31, 2014, 2013 and 2012, respectively.
Purchased Credit-impaired Loans
PCI loans are acquired loans with evidence of credit quality deterioration since origination for which it is probable at purchase date that the Corporation will be unable to collect all contractually required payments. The following table presents PCI loans acquired in connection with the 2013 settlement with FNMA.
Purchased
Loans at Acquisition Date
(Dollars in millions)
Contractually required payments including interest
$
8,274
Less: Nonaccretable difference
2,159
Cash
flows expected to be collected (1)
6,115
Less: Accretable yield
1,125
Fair value of loans acquired
$
4,990
(1)
Represents
undiscounted expected principal and interest cash flows at acquisition.
The table below shows activity for the accretable yield on PCI loans, which includes the Countrywide Financial Corporation (Countrywide) portfolio and loans repurchased in connection with the settlement with FNMA. For more information on the settlement with FNMA, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees. The amount of accretable yield is affected by changes in credit outlooks, including metrics such as default rates and loss severities, prepayment speeds, which can change the amount and period of time over which interest payments are expected to be received, and the interest rates on variable rate loans. The reclassifications from nonaccretable difference during 2014 and 2013
were due to lower expected loss rates and a decrease in forecasted prepayment speeds. Changes in the prepayment assumption affect the expected remaining life of the portfolio which results in a change to the amount of future interest cash flows.
During 2014, the Corporation sold PCI loans with a carrying value of $1.9 billion, which excludes the related allowance of $317 million. For more information on PCI loans, see Note 1 – Summary of
Significant Accounting Principles, and for the carrying value and valuation allowance for PCI loans, see Note 5 – Allowance for Credit Losses.
Loans Held-for-sale
The Corporation had LHFS of $12.8 billion and $11.4 billion at December 31, 2014 and 2013. Cash and non-cash proceeds from sales and paydowns of loans originally classified as LHFS were $40.1 billion, $81.0 billion and $58.0 billion for 2014,
2013 and 2012, respectively. Cash used for originations and purchases of LHFS totaled $40.1 billion, $65.7 billion and $59.5 billion for 2014, 2013 and 2012, respectively.
189 Bank of America 2014
NOTE 5 Allowance
for Credit Losses
The table below summarizes the changes in the allowance for credit losses by portfolio segment for 2014, 2013 and 2012.
2014
(Dollars
in millions)
Home
Loans
Credit Card
and Other
Consumer
Commercial
Total
Allowance
Allowance for loan and lease losses, January 1
$
8,518
$
4,905
$
4,005
$
17,428
Loans
and leases charged off
(2,219
)
(4,149
)
(658
)
(7,026
)
Recoveries of loans and leases previously charged off
1,426
871
346
2,643
Net
charge-offs
(793
)
(3,278
)
(312
)
(4,383
)
Write-offs of PCI loans
(810
)
—
—
(810
)
Provision
for loan and lease losses
(976
)
2,458
749
2,231
Other (1)
(4
)
(38
)
(5
)
(47
)
Allowance
for loan and lease losses, December 31
5,935
4,047
4,437
14,419
Reserve for unfunded lending commitments, January 1
—
—
484
484
Provision
for unfunded lending commitments
—
—
44
44
Reserve for unfunded lending commitments, December 31
—
—
528
528
Allowance
for credit losses, December 31
$
5,935
$
4,047
$
4,965
$
14,947
2013
Allowance
for loan and lease losses, January 1
$
14,933
$
6,140
$
3,106
$
24,179
Loans
and leases charged off
(3,766
)
(5,495
)
(1,108
)
(10,369
)
Recoveries of loans and leases previously charged off
879
1,141
452
2,472
Net
charge-offs
(2,887
)
(4,354
)
(656
)
(7,897
)
Write-offs of PCI loans
(2,336
)
—
—
(2,336
)
Provision
for loan and lease losses
(1,124
)
3,139
1,559
3,574
Other (1)
(68
)
(20
)
(4
)
(92
)
Allowance
for loan and lease losses, December 31
8,518
4,905
4,005
17,428
Reserve for unfunded lending commitments, January 1
—
—
513
513
Provision
for unfunded lending commitments
—
—
(18
)
(18
)
Other
—
—
(11
)
(11
)
Reserve
for unfunded lending commitments, December 31
—
—
484
484
Allowance for credit losses, December 31
$
8,518
$
4,905
$
4,489
$
17,912
2012
Allowance
for loan and lease losses, January 1
$
21,079
$
8,569
$
4,135
$
33,783
Loans
and leases charged off
(7,849
)
(7,727
)
(2,096
)
(17,672
)
Recoveries of loans and leases previously charged off
496
1,519
749
2,764
Net
charge-offs
(7,353
)
(6,208
)
(1,347
)
(14,908
)
Write-offs of PCI loans
(2,820
)
—
—
(2,820
)
Provision
for loan and lease losses
4,073
3,899
338
8,310
Other (1)
(46
)
(120
)
(20
)
(186
)
Allowance
for loan and lease losses, December 31
14,933
6,140
3,106
24,179
Reserve for unfunded lending commitments, January 1
—
—
714
714
Provision
for unfunded lending commitments
—
—
(141
)
(141
)
Other
—
—
(60
)
(60
)
Reserve
for unfunded lending commitments, December 31
—
—
513
513
Allowance for credit losses, December 31
$
14,933
$
6,140
$
3,619
$
24,692
(1)
Primarily
represents the net impact of portfolio sales, consolidations and deconsolidations, and foreign currency translation adjustments.
In 2014, 2013 and 2012, for the PCI loan portfolio, the Corporation recorded a benefit of $31 million, $707 million and $103 million, respectively in the provision for credit losses with a corresponding decrease in the valuation allowance included as part of the allowance for loan and lease losses. Write-offs in the PCI loan portfolio totaled $810 million, $2.3
billion and $2.8 billion with a corresponding decrease in the PCI valuation allowance during 2014, 2013 and 2012, respectively. Write-offs in 2013
included certain PCI loans that were ineligible for the National Mortgage Settlement, but had characteristics similar to the eligible loans and the expectation of future cash proceeds was considered remote. Write-offs of PCI loans in 2012 primarily related to the National Mortgage Settlement. The valuation allowance associated with the PCI loan portfolio was $1.7 billion, $2.5 billion
and $5.5 billion at December 31, 2014, 2013 and 2012, respectively.
Bank of America 2014 190
The
table below presents the allowance and the carrying value of outstanding loans and leases by portfolio segment at December 31, 2014 and 2013.
Impaired loans and troubled debt restructurings (1)
Allowance
for loan and lease losses (2)
$
1,231
$
579
$
277
$
2,087
Carrying
value (3)
31,458
2,079
3,048
36,585
Allowance as a percentage of carrying value
3.91
%
27.85
%
9.09
%
5.70
%
Loans
collectively evaluated for impairment
Allowance for loan and lease losses
$
4,794
$
4,326
$
3,728
$
12,848
Carrying
value (3, 4)
285,015
185,969
385,357
856,341
Allowance as a percentage of carrying value (4)
1.68
%
2.33
%
0.97
%
1.50
%
Purchased
credit-impaired loans
Valuation allowance
$
2,493
n/a
n/a
$
2,493
Carrying
value gross of valuation allowance
25,265
n/a
n/a
25,265
Valuation allowance as a percentage of carrying value
9.87
%
n/a
n/a
9.87
%
Total
Allowance
for loan and lease losses
$
8,518
$
4,905
$
4,005
$
17,428
Carrying
value (3, 4)
341,738
188,048
388,405
918,191
Allowance as a percentage of carrying value (4)
2.49
%
2.61
%
1.03
%
1.90
%
(1)
Impaired
loans include nonperforming commercial loans and 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)
Allowance for loan and lease losses includes $35 million and $36 million related to impaired U.S. small business commercial at December 31, 2014 and 2013.
(3)
Amounts
are presented gross of the allowance for loan and lease losses.
(4)
Outstanding loan and lease balances and ratios do not include loans accounted for under the fair value option of $8.7 billion and $10.0 billion at December 31, 2014 and 2013.
n/a = not applicable
191 Bank
of America 2014
NOTE 6 Securitizations and Other Variable Interest Entities
The Corporation utilizes variable interest entities (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 utilization 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, 2014 and 2013, 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, 2014 and 2013 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 asset-backed securities (ABS) issued by third-party VIEs with which it has no other form of involvement. These securities are included in Note 3 – Securities and Note 20 – Fair Value Measurements. In addition, the
Corporation uses VIEs such as trust preferred securities trusts in connection with its funding activities. For additional information, see Note 11 – Long-term Debt. The Corporation also uses VIEs in the form of synthetic securitization vehicles to mitigate a portion of the credit risk on its residential mortgage loan portfolio, as described in Note 4 – Outstanding Loans and Leases. The Corporation
uses VIEs, such as cash funds managed within Global Wealth & Investment Management (GWIM), to provide investment opportunities for clients. These VIEs, which are not consolidated by the Corporation, are not included in the tables in this Note.
Except as described below, the Corporation did not provide financial support to consolidated or unconsolidated VIEs during 2014 or 2013 that it was not previously contractually required to provide, nor does it intend to do so.
Mortgage-related Securitizations
First-lien Mortgages
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 government-sponsored enterprises, FNMA and FHLMC (collectively the GSEs), or 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. In addition, the Corporation may, from time to time, securitize commercial mortgages it originates 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 below and in Note 7 – Representations and Warranties Obligations and Corporate Guarantees, 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 2014 and 2013.
First-lien
Mortgage Securitizations
Residential
Mortgage
Agency
Non-agency - Subprime
Commercial Mortgage
(Dollars in millions)
2014
2013
2014
2013
2014
2013
Cash
proceeds from new securitizations (1)
$
36,905
$
49,888
$
809
$
—
$
5,710
$
5,326
Gain
on securitizations (2)
371
81
49
—
68
119
(1)
The
Corporation transfers residential mortgage loans to securitizations sponsored by the GSEs or GNMA in the normal course of business and receives RMBS in exchange which may then be sold into the market to third-party investors for cash proceeds.
(2)
Substantially all of the first-lien residential and commercial mortgage loans securitized are initially classified as LHFS and accounted for under the fair value option. As such, gains are recognized on these LHFS prior to securitization. The Corporation recognized $715 million and $2.0 billion of gains, net of hedges, on loans securitized during 2014
and 2013.
In addition to cash proceeds as reported in the table above, the Corporation received securities with an initial fair value of $5.4 billion and $3.3 billion in connection with first-lien mortgage securitizations in 2014 and 2013. All of these securities were initially classified as Level 2 assets within the fair value hierarchy. During 2014 and 2013, there were no changes to the initial classification.
The Corporation recognizes consumer MSRs from the sale or securitization of first-lien mortgage
loans. Servicing fee and ancillary fee income on consumer mortgage loans serviced, including securitizations where the Corporation has continuing involvement, were $1.8 billion and $2.9 billion in 2014 and 2013.
Servicing advances on consumer mortgage loans, including securitizations where the Corporation has continuing involvement, were $10.4 billion and $14.1 billion at December 31, 2014 and 2013.
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. During 2014 and 2013, $5.2 billion and $10.8 billion of loans were repurchased from first-lien securitization trusts primarily as a result of loan delinquencies or to perform modifications. The majority of these loans repurchased were FHA-insured mortgages collateralizing GNMA securities. For more information on MSRs, see Note 23 – Mortgage Servicing Rights.
Bank
of America 2014 192
The table below summarizes select information related to first-lien mortgage securitization trusts in which the Corporation held a variable interest at December 31, 2014 and 2013.
First-lien
Mortgage VIEs
Residential
Mortgage
Non-agency
Agency
Prime
Subprime
Alt-A
Commercial
Mortgage
December 31
December 31
December 31
(Dollars in millions)
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
Unconsolidated
VIEs
Maximum
loss exposure (1)
$
14,918
$
21,140
$
1,288
$
1,527
$
3,167
$
591
$
710
$
437
$
352
$
432
On-balance
sheet assets
Senior
securities held (2):
Trading
account assets
$
584
$
650
$
3
$
—
$
14
$
1
$
81
$
3
$
54
$
14
Debt
securities carried at fair value
13,473
19,451
816
988
2,811
220
383
109
76
306
Held-to-maturity
securities
837
1,012
—
—
—
—
—
—
42
—
Subordinate
securities held (2):
Trading
account assets
—
—
—
—
—
8
1
—
58
13
Debt
securities carried at fair value
—
—
12
15
5
6
—
—
58
53
Held-to-maturity
securities
—
—
—
—
—
—
—
—
15
—
Residual
interests held
—
—
10
13
—
—
—
—
22
16
All
other assets (3)
24
27
56
71
1
1
245
325
—
—
Total
retained positions
$
14,918
$
21,140
$
897
$
1,087
$
2,831
$
236
$
710
$
437
$
325
$
402
Principal
balance outstanding (4)
$
397,055
$
437,765
$
20,167
$
25,104
$
32,592
$
36,854
$
50,054
$
56,454
$
20,593
$
19,730
Consolidated
VIEs
Maximum
loss exposure (1)
$
38,345
$
42,420
$
77
$
79
$
206
$
183
$
—
$
—
$
—
$
—
On-balance
sheet assets
Trading
account assets
$
1,538
$
1,640
$
—
$
—
$
30
$
—
$
—
$
—
$
—
$
—
Loans
and leases
36,187
40,316
130
140
768
803
—
—
—
—
Allowance
for loan and lease losses
(2
)
(3
)
—
—
—
—
—
—
—
—
All
other assets
623
474
6
—
15
7
—
—
—
—
Total
assets
$
38,346
$
42,427
$
136
$
140
$
813
$
810
$
—
$
—
$
—
$
—
On-balance
sheet liabilities
Long-term
debt
$
1
$
7
$
56
$
61
$
770
$
803
$
—
$
—
$
—
$
—
All
other liabilities
—
—
3
—
13
7
—
—
—
—
Total
liabilities
$
1
$
7
$
59
$
61
$
783
$
810
$
—
$
—
$
—
$
—
(1)
Maximum
loss exposure excludes the liability for representations and warranties obligations and corporate guarantees and also excludes servicing advances and other servicing rights and obligations. For additional information, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees and Note 23 – Mortgage Servicing Rights.
(2)
As a holder of these securities, the Corporation receives scheduled principal and interest payments. During 2014 and 2013, there were no OTTI losses recorded on those
securities classified as AFS debt securities.
(3)
Not included in the table above are all other assets of $635 million and $1.6 billion, representing the unpaid principal balance of mortgage loans eligible for repurchase from unconsolidated residential mortgage securitization vehicles, principally guaranteed by GNMA, and all other liabilities of $635 million and $1.6 billion, representing the principal amount that would be payable to the securitization vehicles if the Corporation was to exercise the repurchase option, at December 31,
2014 and 2013.
(4)
Principal balance outstanding includes loans the Corporation transferred with which it has continuing involvement, which may include servicing the loans.
Home Equity Loans
The Corporation retains interests in home equity securitization trusts to which it transferred home equity loans. These retained interests include senior and subordinate securities and residual interests. In addition, the Corporation may be obligated to provide subordinate
funding to the trusts during a rapid amortization event. The Corporation typically services the loans in the trusts. Except
as described below and in Note 7 – Representations and Warranties Obligations and Corporate Guarantees, the Corporation does not provide guarantees or recourse to the securitization trusts other than standard representations and warranties. There were no securitizations of home equity loans during 2014 and 2013, and all of the home equity trusts that hold revolving home equity lines of credit (HELOCs) have entered the rapid amortization phase.
193 Bank
of America 2014
The table below summarizes select information related to home equity loan securitization trusts in which the Corporation held a variable interest at December 31, 2014 and 2013.
Home
Equity Loan VIEs
December 31
2014
2013
(Dollars
in millions)
Consolidated
VIEs
Unconsolidated
VIEs
Total
Consolidated
VIEs
Unconsolidated
VIEs
Total
Maximum
loss exposure (1)
$
991
$
5,224
$
6,215
$
1,269
$
6,217
$
7,486
On-balance
sheet assets
Trading
account assets
$
—
$
14
$
14
$
—
$
12
$
12
Debt
securities carried at fair value
—
39
39
—
25
25
Loans
and leases
1,014
—
1,014
1,329
—
1,329
Allowance
for loan and lease losses
(56
)
—
(56
)
(80
)
—
(80
)
All
other assets
33
—
33
20
—
20
Total
$
991
$
53
$
1,044
$
1,269
$
37
$
1,306
On-balance
sheet liabilities
Long-term
debt
$
1,076
$
—
$
1,076
$
1,450
$
—
$
1,450
All
other liabilities
—
—
—
90
—
90
Total
$
1,076
$
—
$
1,076
$
1,540
$
—
$
1,540
Principal
balance outstanding
$
1,014
$
6,362
$
7,376
$
1,329
$
7,542
$
8,871
(1)
For
unconsolidated VIEs, the maximum loss exposure includes outstanding trust certificates issued by trusts in rapid amortization, net of recorded reserves, and excludes the liability for representations and warranties obligations and corporate guarantees.
The maximum loss exposure in the table above includes the Corporation’s obligation to provide subordinated funding to the consolidated and unconsolidated home equity loan securitizations that have entered a rapid amortization period. During this period, cash payments from borrowers are accumulated to repay outstanding debt securities and the Corporation continues to make advances to borrowers when they draw on their lines of credit. At December 31, 2014 and 2013,
home equity loan securitizations in rapid amortization for which the Corporation has a subordinated funding obligation, including both consolidated and unconsolidated trusts, had $6.3 billion and $7.6 billion of trust certificates outstanding. This amount is significantly greater than the amount the Corporation expects to fund. The charges that will
ultimately be recorded as a result of the rapid amortization events depend on the undrawn available credit on the home equity lines, which totaled $39 million and $82 million at December 31, 2014
and 2013, as well as performance of the loans, the amount of subsequent draws and the timing of related cash flows.
During 2013, the Corporation transferred servicing for consolidated home equity securitization trusts with total assets of $475 million and total liabilities of $616 million to a third party. As the Corporation no longer services the underlying loans, these trusts were deconsolidated, resulting in a gain of $141 million that was recorded in other income (loss) in the Consolidated Statement of Income.
Bank
of America 2014 194
Credit Card Securitizations
The Corporation securitizes originated and purchased credit card loans. The Corporation’s continuing involvement with the U.S. securitization trust includes servicing the receivables, retaining an undivided interest (seller’s interest) in the receivables, and holding certain retained interests including senior and subordinate securities, subordinate interests in accrued interest and fees on the securitized receivables, and cash reserve accounts. The
seller’s interest in the U.S. trust, which
is pari passu to the investors’ interest, is classified in loans and leases. All debt issued from the U.K. securitization trust has matured and the credit card receivables were reconveyed to the Corporation during 2014.
The table below summarizes select information related to consolidated credit card securitization trusts in which the Corporation held a variable interest at December 31, 2014 and 2013.
Credit
Card VIEs
December 31
(Dollars in millions)
2014
2013
Consolidated VIEs
Maximum
loss exposure
$
43,139
$
49,621
On-balance sheet assets
Derivative
assets
$
1
$
182
Loans and leases (1)
53,068
61,241
Allowance
for loan and lease losses
(1,904
)
(2,585
)
Loans held-for-sale
—
386
All other assets (2)
391
2,281
Total
$
51,556
$
61,505
On-balance
sheet liabilities
Long-term debt
$
8,401
$
11,822
All
other liabilities
16
62
Total
$
8,417
$
11,884
(1)
At
December 31, 2014 and 2013, loans and leases included $36.9 billion and $41.2 billion of seller’s interest.
(2)
At December 31, 2014 and 2013, all other assets included restricted cash, certain short-term investments, and unbilled accrued
interest and fees.
During 2014, $4.1 billion of new senior debt securities were issued to third-party investors from the U.S. credit card securitization trust and none were issued during 2013.
The Corporation held subordinate securities issued by credit card securitization trusts with a notional principal amount of $7.4
billion and $7.9 billion at December 31,
2014 and 2013. These securities serve as a form of credit enhancement to the senior debt securities and have a stated interest rate of zero percent. There were $662 million of these subordinate securities issued during 2014 and none issued during 2013.
195 Bank
of America 2014
Other Asset-backed Securitizations
Other asset-backed securitizations include resecuritization trusts, municipal bond trusts, and automobile and other securitization trusts. The table below summarizes select information related to other asset-backed securitizations in which the Corporation held a variable interest at December 31, 2014 and 2013.
Other
Asset-backed VIEs
Resecuritization
Trusts
Municipal Bond Trusts
Automobile and Other
Securitization Trusts
December 31
December 31
December 31
(Dollars in millions)
2014
2013
2014
2013
2014
2013
Unconsolidated
VIEs
Maximum
loss exposure
$
8,569
$
11,913
$
2,100
$
2,192
$
77
$
81
On-balance
sheet assets
Senior
securities held (1, 2):
Trading
account assets
$
767
$
971
$
25
$
53
$
6
$
1
Debt
securities carried at fair value
6,945
10,866
—
—
61
70
Held-to-maturity
securities
740
—
—
—
—
—
Subordinate
securities held (1, 2):
Trading
account assets
37
—
—
—
—
—
Debt
securities carried at fair value
73
71
—
—
—
—
Residual
interests held (3)
7
5
—
—
—
—
All
other assets
—
—
—
—
10
10
Total
retained positions
$
8,569
$
11,913
$
25
$
53
$
77
$
81
Total
assets of VIEs (4)
$
28,065
$
40,924
$
3,314
$
3,643
$
1,276
$
1,788
Consolidated
VIEs
Maximum
loss exposure
$
654
$
164
$
2,440
$
2,667
$
92
$
94
On-balance
sheet assets
Trading
account assets
$
1,295
$
319
$
2,452
$
2,684
$
—
$
—
Loans
and leases
—
—
—
—
—
680
Loans
held-for-sale
—
—
—
—
555
—
All
other assets
—
—
—
—
54
61
Total
assets
$
1,295
$
319
$
2,452
$
2,684
$
609
$
741
On-balance
sheet liabilities
Short-term
borrowings
$
—
$
—
$
1,032
$
1,073
$
—
$
—
Long-term
debt
641
155
12
17
516
646
All
other liabilities
—
—
—
—
1
1
Total
liabilities
$
641
$
155
$
1,044
$
1,090
$
517
$
647
(1)
As
a holder of these securities, the Corporation receives scheduled principal and interest payments. During 2014 and 2013, there were no OTTI losses recorded on those securities classified as AFS debt securities.
(2)
The retained senior and subordinate securities were valued using quoted market prices or observable market inputs (Level 2 of the fair value hierarchy).
(3)
The retained
residual interests are carried at fair value which was derived using model valuations (Level 2 of the fair value hierarchy).
(4)
Total assets include loans the Corporation transferred with which the Corporation has continuing involvement, which may include servicing the loan.
Resecuritization Trusts
The Corporation transfers existing securities, typically MBS, into resecuritization vehicles at the request of customers seeking securities with specific characteristics. The Corporation may also resecuritize securities within its investment portfolio for purposes of improving liquidity
and capital, and managing credit or interest rate risk. 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 $14.4 billion and $26.5 billion of securities in 2014 and 2013. Resecuritizations in 2014 included $1.5 billion of AFS securities, and gains on sale of $71 million were recorded. Other securities transferred into resecuritization vehicles during 2014 and 2013
were classified as trading account assets. As such, changes in fair value were recorded in trading account profits prior to the resecuritization and no gain or loss on sale was recorded.
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 may transfer assets into the trusts and may also serve as remarketing agent and/or liquidity provider for the trusts. The floating-rate investors have the right to tender the certificates at specified dates. Should the Corporation be unable to remarket the tendered certificates, it may be obligated to purchase
them at par under standby liquidity facilities. The Corporation also provides credit enhancement to investors in certain municipal bond trusts whereby the Corporation guarantees the payment of interest and principal on floating-rate certificates issued by these trusts in the event of default by the issuer of the underlying municipal bond.
Bank of America 2014 196
The
Corporation’s liquidity commitments to unconsolidated municipal bond trusts, including those for which the Corporation was transferor, totaled $2.1 billion at both December 31, 2014 and 2013. The weighted-average remaining life of bonds held in the trusts at December 31, 2014 was 7.2 years. There were no material write-downs or downgrades of assets or issuers during 2014 and 2013.
Automobile and Other Securitization Trusts
The
Corporation transfers automobile and other loans into securitization trusts, typically to improve liquidity or manage credit risk. At December 31, 2014 and 2013, the Corporation serviced
assets or otherwise had continuing involvement with automobile and other securitization trusts with outstanding balances of $1.9 billion and $2.5 billion, including trusts collateralized by automobile loans of $400 million and $877 million, student loans of $609
million and $741 million, and other loans of $876 million and $911 million.
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, 2014 and 2013.
Other
VIEs
December 31
2014
2013
(Dollars
in millions)
Consolidated
Unconsolidated
Total
Consolidated
Unconsolidated
Total
Maximum loss exposure
$
7,981
$
12,391
$
20,372
$
9,716
$
12,523
$
22,239
On-balance
sheet assets
Trading
account assets
$
1,575
$
355
$
1,930
$
3,769
$
1,420
$
5,189
Derivative
assets
5
284
289
3
739
742
Debt
securities carried at fair value
—
483
483
—
1,944
1,944
Loans
and leases
4,020
2,693
6,713
4,609
270
4,879
Allowance
for loan and lease losses
(6
)
—
(6
)
(6
)
—
(6
)
Loans
held-for-sale
1,267
814
2,081
998
85
1,083
All
other assets
1,641
6,374
8,015
1,734
6,167
7,901
Total
$
8,502
$
11,003
$
19,505
$
11,107
$
10,625
$
21,732
On-balance
sheet liabilities
Short-term
borrowings
$
—
$
—
$
—
$
77
$
—
$
77
Long-term
debt (1)
1,834
—
1,834
4,487
—
4,487
All
other liabilities
105
2,643
2,748
93
2,538
2,631
Total
$
1,939
$
2,643
$
4,582
$
4,657
$
2,538
$
7,195
Total
assets of VIEs
$
8,502
$
41,467
$
49,969
$
11,107
$
38,505
$
49,612
(1)
Includes
$584 million, $0 and $780 million of long-term debt at December 31, 2014 and $1.2 billion, $1.3 billion and $780 million of long-term debt at December 31, 2013 issued by consolidated customer vehicles, CDO vehicles and investment vehicles, respectively, which has recourse to the general credit of the Corporation.
Customer Vehicles
Customer vehicles include
credit-linked, equity-linked and commodity-linked note vehicles, repackaging vehicles, and asset acquisition vehicles, 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 may transfer assets to and invest in securities issued by these vehicles. The Corporation typically enters into credit, equity, interest rate, commodity or foreign currency derivatives to synthetically create or alter the investment profile of the issued securities.
The Corporation’s maximum loss exposure to consolidated and unconsolidated customer vehicles totaled $4.7 billion and $5.9 billion at December 31, 2014 and 2013,
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 vehicles. The maximum loss exposure has not been reduced to reflect the benefit of offsetting swaps with the customers or collateral arrangements. The Corporation also had liquidity commitments, including written
put options and collateral value guarantees, with certain unconsolidated vehicles of $658 million and $748 million at December 31, 2014 and 2013,
that are included in the table above.
Collateralized Debt Obligation Vehicles
The Corporation receives fees for structuring CDO vehicles, which hold diversified pools of fixed-income securities, typically corporate debt or ABS, which they fund by issuing multiple tranches of debt and equity securities. Synthetic CDOs enter into a portfolio of CDS to synthetically create exposure to fixed-income securities. CLOs, which are a subset of CDOs, hold pools of loans, typically corporate loans. CDOs are typically 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, including a CDS counterparty for synthetic CDOs. The Corporation has also entered into total return swaps with certain CDOs whereby the Corporation absorbs the economic returns generated by specified
assets held by the CDO.
197 Bank of America 2014
The Corporation’s maximum loss exposure to consolidated and unconsolidated CDOs totaled $780 million and $2.1 billion at December 31,
2014 and 2013. This exposure is calculated on a gross basis and does not reflect any benefit from insurance purchased from third parties.
At December 31, 2014, the Corporation had $1.2 billion of aggregate liquidity exposure, included in the Other VIEs table net of previously recorded losses, to unconsolidated CDOs which hold senior CDO debt securities or other debt securities on the Corporation’s behalf. For additional information, see Note 12 – Commitments and Contingencies.
Investment Vehicles
The Corporation sponsors,
invests in or provides financing, which may be in connection with the sale of assets, to a variety of investment vehicles 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, 2014 and 2013, the Corporation’s consolidated investment vehicles had total assets of $1.1 billion and $1.2 billion. The Corporation also held investments in unconsolidated vehicles with total assets of $11.2 billion and $5.5 billion at December 31,
2014 and 2013. The Corporation’s maximum loss exposure associated with both consolidated and unconsolidated investment vehicles totaled $5.1 billion and $4.2 billion at December 31, 2014 and 2013 comprised primarily of on-balance sheet assets less non-recourse liabilities.
The Corporation transferred servicing advance receivables to independent third parties in connection with the sale of MSRs. Portions of the receivables were transferred into unconsolidated securitization trusts. The Corporation retained senior
interests in such receivables with a maximum loss exposure and funding obligation of $660 million and $2.5 billion, including a funded balance of $431 million and $1.9 billion at December 31, 2014 and 2013, which were classified in other debt securities carried at fair value.
Leveraged Lease Trusts
The Corporation’s net investment in consolidated leveraged lease trusts totaled $3.3 billion and $3.8 billion
at December 31, 2014 and 2013. 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.
Real Estate Vehicles
The Corporation held investments in unconsolidated real estate vehicles of $6.2 billion and $5.8 billion
at December 31, 2014 and 2013, which primarily consisted of investments in unconsolidated limited partnerships that finance the construction and rehabilitation of affordable rental housing and commercial real estate. An unrelated third party is typically the general partner and has control over the significant activities of the partnership. The Corporation earns a return primarily through the receipt of tax credits allocated to the real estate projects. The Corporation’s risk of loss is mitigated by policies requiring that the project qualify for the expected tax credits prior to making its investment. The
Corporation may from time
to time be asked to invest additional amounts to support a troubled project. Such additional investments have not been and are not expected to be significant.
Other Asset-backed Financing Arrangements
The Corporation transferred pools of financial assets to certain independent third parties and provided financing for up to 75 percent of the purchase price under asset-backed financing arrangements. At December 31, 2014 and 2013, the Corporation’s maximum loss exposure under these financing arrangements was $77 million and $1.1 billion, substantially
all of which is classified in loans and leases. All principal and interest payments have been received when due in accordance with their contractual terms. These arrangements are not included in the Other VIEs table because the purchasers are not VIEs.
NOTE 7 Representations and Warranties Obligations and Corporate Guarantees
Background
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 (in certain of these securitizations, monoline insurers or other financial guarantee providers insured all or some of the securities) or in the form of whole loans. In connection with these transactions, the Corporation or certain of its subsidiaries or legacy companies make or have made various representations and warranties. These representations and warranties, as set forth in the agreements, related to, among other things, the ownership of the loan, the validity of the lien securing the loan, the absence of delinquent taxes or liens against the property securing the loan, the process used to select the loan for inclusion in a transaction, the loan’s compliance with any applicable loan criteria, including underwriting standards, and the loan’s compliance with applicable
federal, state and local laws. 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 other remedies to the GSEs, U.S. Department of Housing and Urban Development (HUD) with respect to FHA-insured loans, VA, whole-loan investors, securitization trusts, monoline insurers or other financial guarantors (collectively, repurchases). In all such cases, subsequent to repurchasing the loan, the Corporation would be exposed to any credit loss on the repurchased mortgage loans after accounting for any mortgage insurance (MI) or mortgage guarantee payments that it may receive.
Subject to the requirements and limitations of the applicable sales and securitization agreements, these representations and warranties can be enforced by the GSEs, HUD, VA, the whole-loan investor, the securitization trustee or others as
governed by the applicable agreement or, in certain first-lien and home equity securitizations where monoline insurers or other financial guarantee providers have insured all or some of the securities issued, by the monoline insurer or other financial guarantor, where the contract so provides. In the case of private-label securitizations, the applicable agreements may permit investors,
Bank of America 2014 198
which
may include the GSEs, with sufficient holdings to direct or influence action by the securitization trustee. In the case of loans sold to parties other than the GSEs or GNMA, the Corporation believes the contractual liability to repurchase typically arises only if there is a breach of the representations and warranties that materially and adversely affects the interest of the investor, or investors, or of the monoline insurer or other financial guarantor (as applicable) in the loan. Contracts with the GSEs do not contain equivalent language. Currently, the volume of unresolved repurchase claims from the FHA and VA for loans in GNMA-guaranteed securities is not significant because the claims are typically resolved promptly. The Corporation believes that the longer a loan performs prior to default, the less likely it is that an alleged underwriting breach of representations and warranties
would have a material impact on the loan’s performance.
The estimate of the liability for representations and warranties exposures and the corresponding estimated range of possible loss is based upon currently available information, significant judgment, and a number of factors and assumptions, including those discussed in Liability for Representations and Warranties and Corporate Guarantees in this Note, that are subject to change. Changes to any one of these factors could significantly impact the estimate of the liability and could have a material adverse impact on the Corporation’s results of operations for any particular period. Given that these factors vary by counterparty, the Corporation analyzes representations and warranties obligations based on the specific counterparty, or type of counterparty, with whom the sale was made.
Settlement Actions
The
Corporation has vigorously contested any request for repurchase when it concludes that a valid basis for repurchase does not exist and will continue to do so in the future. However, in an effort to resolve these legacy mortgage-related issues, the Corporation has reached bulk settlements, including various settlements with the GSEs, including settlement amounts which have been significant, with counterparties in lieu of a loan-by-loan review process. The Corporation may reach other settlements in the future if opportunities arise on terms it believes to be advantageous. However, 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. These bulk settlements generally did not cover all transactions with the relevant counterparties or all potential claims that may arise, including in some instances securities law, fraud and servicing claims.
The Corporation’s liability in connection with the transactions and claims not covered by these settlements could be material to the Corporation’s results of operations or cash flows for any particular reporting period. The following provides a summary of the larger bulk settlement actions during the past few years.
FHFA Settlement
On March 25, 2014, the Corporation entered into a settlement with the Federal Housing Finance Agency (FHFA) as conservator of FNMA and Freddie Mac (FHLMC) to resolve (1) all outstanding RMBS litigation between FHFA, FNMA and FHLMC, and the Corporation and its affiliates, and (2) other legacy contract claims related to representations and warranties (collectively, the FHFA Settlement). In connection with the FHFA Settlement,
on April 1, 2014, the Corporation paid FNMA and FHLMC, collectively $9.5
billion and received from them RMBS with a fair market value of approximately $3.2 billion, for a net cost of $6.3 billion.
Freddie Mac Settlement
On November 27, 2013, the Corporation entered into an agreement with FHLMC under which the Corporation paid FHLMC a total of $391 million to resolve all outstanding and potential mortgage repurchase and make-whole claims arising out of
any alleged breach of selling representations and warranties related to loans that had been sold directly to FHLMC by entities related to Bank of America, N.A. from January 1, 2000 to December 31, 2009, subject to certain exceptions which the Corporation does not expect to be material, and to compensate FHLMC for certain past losses and potential future losses relating to denials, rescissions and cancellations of MI.
Fannie Mae Settlement
On January 6, 2013, the Corporation entered into an agreement with FNMA to resolve substantially all outstanding and potential repurchase and certain other claims related to the origination, sale and delivery of residential mortgage loans originated from January
1, 2000 through December 31, 2008 and sold directly to FNMA by entities related to Countrywide and BANA.
This agreement covers loans with an aggregate original principal balance of approximately $1.4 trillion and an aggregate outstanding principal balance of approximately $300 billion. Unresolved repurchase claims submitted by FNMA for alleged breaches of selling representations and warranties with respect to these loans totaled $12.2 billion of unpaid principal balance at December 31, 2012. This agreement extinguished substantially all of those unresolved repurchase claims, as well as any future representations and warranties repurchase claims associated with such loans, subject
to certain exceptions which the Corporation does not expect to be material.
In January 2013, the Corporation made a cash payment to FNMA of $3.6 billion and also repurchased for $6.6 billion certain residential mortgage loans that had previously been sold to FNMA, which the Corporation has valued at less than the purchase price.
This agreement also clarified the parties’ obligations with respect to MI including establishing timeframes for certain payments and other actions, setting parameters for potential bulk settlements and providing for cooperation in future dealings with mortgage insurers. For additional information, see Open Mortgage Insurance Rescission Notices in this Note.
In addition, pursuant to a separate agreement, the Corporation
settled substantially all of FNMA’s outstanding and future claims for compensatory fees arising out of foreclosure delays through December 31, 2012. Collectively, these agreements are referred to herein as the FNMA Settlement.
Monoline Settlements
FGIC Settlement
On April 7, 2014, the Corporation entered into a settlement with Financial Guaranty Insurance Company (FGIC) for certain second-lien RMBS trusts for which FGIC provided financial guarantee insurance. In addition, on April 11, 2014, separate settlements were entered into with the Bank of New York Mellon (BNY Mellon) as trustee with respect to seven of those trusts; settlements on two
additional trusts with BNY Mellon as trustee were entered into on May 15, 2014 and May 28, 2014. The agreements resolved
199 Bank of America 2014
all outstanding litigation between FGIC and the Corporation, as well as outstanding and potential claims by FGIC and the trustee related to alleged representations
and warranties breaches and other claims involving certain second-lien RMBS trusts for which FGIC provided financial guarantee insurance. The Corporation made payments totaling $950 million under the FGIC and trust settlements.
MBIA Settlement
On May 7, 2013, the Corporation entered into a comprehensive settlement with MBIA Inc. and certain of its affiliates (the MBIA Settlement) which resolved all outstanding litigation between the parties, as well as other claims between the parties, including outstanding and potential claims from MBIA related to alleged representations and warranties breaches and other claims involving certain first- and second-lien RMBS trusts for which MBIA provided financial guarantee insurance, certain of which claims were the subject of litigation. At the time
of the settlement, the mortgages (first- and second-lien) in RMBS trusts covered by the MBIA Settlement had an original principal balance of $54.8 billion and an unpaid principal balance of $19.1 billion.
Under the MBIA Settlement, all pending litigation between the parties was dismissed and each party received a global release of those claims. The Corporation made a settlement payment to MBIA of $1.6 billion in cash and transferred to MBIA approximately $95 million in fair market value of notes issued by MBIA and previously held by the Corporation. In addition, MBIA issued to the Corporation warrants to purchase up to approximately 4.9 percent of MBIA’s currently outstanding common stock,
at an exercise price of $9.59 per share, which may be exercised at any time prior to May 2018. In addition, the Corporation provided a senior secured $500 million credit facility to an affiliate of MBIA, which has since been repaid and terminated.
The parties also terminated various CDS transactions entered into between the Corporation and an MBIA-affiliate, LaCrosse Financial Products, LLC, and guaranteed by MBIA, which constituted all of the outstanding CDS protection agreements purchased by the Corporation from MBIA on commercial mortgage-backed securities. Collectively, those CDS transactions had a notional amount of $7.4 billion and a fair value of $813 million as of March 31, 2013.
The parties also terminated certain other trades in order to close out positions between the parties. The termination of these trades did not have a material impact on the Corporation’s financial statements.
Syncora Settlement
On July 17, 2012, the Corporation entered into a settlement with a monoline insurer, Syncora Guarantee Inc. and Syncora Holdings, Ltd. (Syncora), to resolve all of Syncora’s outstanding and potential claims related to alleged representations and warranties breaches involving eight first- and six second-lien private-label securitization trusts where it provided financial guarantee insurance. The settlement covered private-label securitization trusts that had an original principal balance of first-lien mortgages of
approximately $9.6 billion and second-lien mortgages of approximately $7.7 billion. The settlement provided for a cash payment of $375 million to Syncora and other transactions to terminate certain other relationships among the parties.
Settlement with the Bank of New York Mellon, as Trustee
On June 28, 2011, the Corporation, BAC Home Loans Servicing, LP (BAC HLS, which was subsequently merged with and into BANA in July 2011), and its Countrywide affiliates entered into a settlement agreement with BNY Mellon as trustee (the Trustee), to resolve all outstanding and potential claims related to
alleged representations and warranties breaches (including repurchase claims), substantially all historical loan servicing claims and certain other historical claims with respect to 525 Countrywide first-lien and five second-lien non-GSE residential mortgage-backed securitization trusts (the Covered Trusts) containing loans principally originated between 2004 and 2008 for which BNY Mellon acts as trustee or indenture trustee (BNY Mellon Settlement). The Covered Trusts had an original principal balance of approximately $424 billion, of which $409 billion was originated between 2004
and 2008, and total outstanding principal and unpaid principal balance of loans that had defaulted (collectively, unpaid principal balance) of approximately $220 billion at June 28, 2011, of which $217 billion was originated between 2004 and 2008. The BNY Mellon Settlement is supported by a group of 22 institutional investors (the Investor Group) and is subject to final court approval and certain other conditions.
The BNY Mellon Settlement provides for a cash payment of $8.5 billion (the Settlement Payment) to the Trustee for distribution to the
Covered Trusts after final court approval of the BNY Mellon Settlement. In addition to the Settlement Payment, the Corporation is obligated to pay attorneys’ fees and costs to the Investor Group’s counsel as well as all fees and expenses incurred by the Trustee related to obtaining final court approval of the BNY Mellon Settlement and certain tax rulings.
The BNY Mellon Settlement does not cover a small number of Countrywide-issued first-lien non-GSE RMBS transactions with loans originated principally between 2004 and 2008 for various reasons, including for example, six Countrywide-issued first-lien non-GSE RMBS transactions in which BNY Mellon is not the trustee. The BNY Mellon Settlement also does not cover Countrywide-issued second-lien securitization transactions in which a monoline
insurer or other financial guarantor provides financial guaranty insurance. In addition, because the settlement is with the Trustee on behalf of the Covered Trusts and releases rights under the governing agreements for the Covered Trusts, the settlement does not release investors’ securities law or fraud claims based upon disclosures made in connection with their decision to purchase, sell or hold securities issued by the Covered Trusts. To date, various investors are pursuing securities law or fraud claims related to one or more of the Covered Trusts. The Corporation is not able to determine whether any additional securities law or fraud claims will be made by investors in the Covered Trusts. For information about mortgage-related securities law or fraud claims, see Litigation and Regulatory Matters in Note 12 – Commitments and Contingencies. For those Covered Trusts where a monoline insurer or other financial guarantor
has an independent right to assert repurchase claims directly, the BNY Mellon Settlement does not release such insurer’s or guarantor’s repurchase claims.
Bank of America 2014 200
On January 31, 2014, the court issued a decision, order and judgment approving the BNY Mellon Settlement. The court overruled the objections to the settlement, holding that the
Trustee, BNY Mellon, acted in good faith, within its discretion and within the bounds of reasonableness in determining that the settlement agreement was in the best interests of the covered trusts. The court declined to approve the Trustee’s conduct only with respect to the Trustee’s consideration of a potential claim that a loan must be repurchased if the servicer modifies its terms. On February 21, 2014, final judgment was entered and the Trustee filed a notice of appeal regarding the court’s ruling on loan modification claims in the settlement. Certain objectors to the settlement filed cross-appeals appealing the court’s approval of the settlement, some of whom subsequently withdrew their objections. All appeals were fully briefed by September 22, 2014, and oral argument was held on October 23, 2014. The court’s January
31, 2014 decision, order and judgment remain subject to these appeals and it is not possible at this time to predict when the court approval process will be completed.
Although the Corporation is not a party to the proceeding, certain of its rights and obligations under the settlement agreement are conditioned on final court approval of the settlement. There can be no assurance final court approval will be obtained, that all conditions to the BNY Mellon Settlement will be satisfied, or if certain conditions to the BNY Mellon Settlement permitting withdrawal are met, that the Corporation and Countrywide will not withdraw from the settlement.
If final court approval is not obtained by December 31, 2015, the Corporation and Countrywide may withdraw from the BNY Mellon Settlement, if the Trustee consents. The BNY Mellon Settlement
also provides that if Covered Trusts holding loans with an unpaid principal balance exceeding a specified amount are excluded from the final BNY Mellon Settlement, based on investor objections or otherwise, the Corporation and Countrywide have the option to withdraw from the BNY Mellon Settlement pursuant to the terms of the BNY Mellon Settlement agreement. If final court approval is not obtained or if the Corporation and Countrywide withdraw from the BNY Mellon Settlement in accordance with its terms, the Corporation’s future representations and warranties losses could be substantially different from existing accruals and the estimated range of possible loss over existing accruals described under Private-label Securitizations and Whole-loan Sales Experience in this Note.
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, MI or mortgage guarantee payments. Claims received from a counterparty remain outstanding until the underlying loan is repurchased, the claim is rescinded by the counterparty or the representations and warranties claims with respect to the applicable trust are settled, and fully and finally released. When a claim is denied and the Corporation does not receive a response from the counterparty, the claim remains in the unresolved repurchase claims balance until resolution. Certain of the claims the Corporation receives are duplicate claims which represent more than one claim outstanding related to a particular loan,
typically as the result of bulk claims submitted without individual file reviews.
The table below presents unresolved repurchase claims at December 31, 2014 and 2013. The unresolved repurchase claims include only claims where the Corporation believes that the counterparty has the contractual right to submit claims. For additional information, see Private-label Securitizations and Whole-loan Sales Experience in this Note and Note 12 – Commitments and Contingencies.
Unresolved
Repurchase Claims by Counterparty and Product Type
December 31
(Dollars in millions)
2014
2013
By counterparty
Private-label
securitization trustees, whole-loan investors, including third-party securitization sponsors and other (1, 2)
$
24,489
$
17,953
Monolines (3)
1,087
1,532
GSEs
59
170
Total gross claims
25,635
19,655
Duplicate claims (4)
(3,213
)
(961
)
Total
unresolved repurchase claims by counterparty, net of duplicate claims (2)
$
22,422
$
18,694
By product type
Prime
loans
$
587
$
623
Alt-A
2,397
2,259
Home
equity
2,221
1,905
Pay option
6,294
5,780
Subprime
13,928
8,928
Other
208
160
Total
25,635
19,655
Duplicate
claims (4)
(3,213
)
(961
)
Total unresolved repurchase claims by product type, net of duplicate claims (2)
$
22,422
$
18,694
(1)
The
total notional amount of unresolved repurchase claims does not include repurchase claims related to the trusts covered by the BNY Mellon Settlement.
(2)
Includes $14.1 billion and $13.8 billion of claims based on individual file reviews and $10.4 billion and $4.1 billion of claims submitted without individual file reviews at December 31, 2014 and 2013.
(3)
At
December 31, 2014, substantially all of the unresolved monoline claims pertain to second-lien loans and are currently the subject of litigation with a single monoline insurer.
(4)
Represents more than one claim outstanding related to a particular loan, typically as the result of bulk claims submitted without individual file reviews. The December 31, 2014 amount includes approximately $2.9 billion of duplicate claims related to private-label
investors submitted without individual loan file reviews.
During 2014, the Corporation received $7.6 billion in new repurchase claims, including $6.3 billion of claims submitted without individual loan file reviews and $730 million of claims based on individual loan file reviews submitted by private-label securitization trustees and a financial guarantee provider, $347 million submitted by the GSEs for both Countrywide and legacy Bank of America originations not covered by the bulk settlements with the GSEs, and $265 million submitted by whole-loan investors. During 2014, $2.0
billion in claims were resolved. Of the claims resolved, $856 million were resolved through settlement, $535 million were resolved through rescissions and $594 million were resolved through mortgage repurchases and make-whole payments to GSEs, private-label securitization trusts and whole-loan investors.
The continued increase in the notional amount of unresolved repurchase claims during 2014 is primarily due to: (1) continued submission of claims by private-label securitization trustees, (2) the level of detail, support and analysis accompanying such claims, which impacts overall claim quality and, therefore, claims
201 Bank
of America 2014
resolution, (3) the lack of an established process to resolve disputes related to these claims, (4) the submission of claims where the Corporation believes the statute of limitations has expired under current law and (5) the submission of duplicate claims, often in multiple submissions, on the same loan. For example, claims submitted without individual file reviews generally lack the level of detail and analysis of individual loans found in other claims that is necessary to support a claim. Absent any settlements, the Corporation expects unresolved repurchase claims related to private-label securitizations to increase as such claims continue to be submitted and there is not an established process
for the ultimate resolution of such claims on which there is a disagreement.
In addition to the unresolved repurchase claims in the Unresolved Repurchase Claims by Counterparty and Product Type table, the Corporation has received notifications pertaining to loans for which the Corporation has not received a repurchase request from sponsors of third-party securitizations with whom the Corporation engaged in whole-loan transactions and that the Corporation may owe indemnity obligations. These notifications totaled $2.0 billion and $737 million at December 31, 2014 and 2013.
The Corporation also from time to time receives correspondence purporting
to raise representations and warranties breach issues from entities that do not have contractual standing or ability to bring such claims. The Corporation believes such communications to be procedurally and/or substantively invalid, and generally does not respond to such correspondence.
The presence of repurchase claims on a given trust, receipt of notices of indemnification obligations and other communication, as discussed above, are all factors that inform the Corporation’s estimated liability for obligations under representations and warranties and the corresponding estimated range of possible loss.
Legacy companies sold $184.5 billion of loans originated between 2004 and 2008 into monoline-insured securitizations. At December
31, 2014 and 2013, for loans originated between 2004 and 2008, the unpaid principal balance of loans related to unresolved monoline repurchase claims was $1.1 billion and $1.5 billion. Substantially all of the remaining unresolved monoline claims pertain to second-lien loans and are currently the subject of litigation with a single monoline insurer. There may be additional claims or file requests in the future.
As a result of various settlements with the GSEs, the Corporation has resolved substantially all outstanding and potential representations and warranties repurchase claims on whole loans sold by legacy Bank of America and Countrywide to FNMA and FHLMC
through June 30, 2012 and December 31, 2009, respectively. After these settlements, the Corporation’s exposure to representations and warranties liability for loans originated prior to 2009 and sold to the GSEs is limited to loans with an original principal balance of $18.3 billion and loans with certain defects excluded from the settlements that the Corporation does not believe will be material, such as certain specified violations of the GSEs’ charters, fraud and title defects. As of December 31, 2014, of the $18.3 billion, approximately $15.8 billion in principal has been paid and $956 million
in principal has defaulted or was severely delinquent. The notional amount of unresolved repurchase claims submitted by the GSEs was $48 million related to these vintages.
Liability for Representations and Warranties and Corporate Guarantees
The liability for representations and warranties and corporate guarantees is included in accrued expenses and other liabilities on the Consolidated Balance Sheet and the related provision is included in mortgage banking income in the Consolidated Statement of Income. The liability for representations and warranties is established when those obligations are both probable and reasonably estimable.
The Corporation’s estimated liability at December 31,
2014 for obligations under representations and warranties given to the GSEs and the corresponding estimated range of possible loss considers, and is necessarily dependent on, and limited by, a number of factors, including the Corporation’s experience related to actual defaults, projected future defaults, historical loss experience, estimated home prices and other economic conditions. The methodology also considers such factors as the number of payments made by the borrower prior to default as well as certain other assumptions and judgmental factors.
The Corporation’s estimate of the non-GSE representations and warranties liability and the corresponding estimated range of possible loss at December 31, 2014 considers, among other things, implied repurchase experience based on the BNY Mellon Settlement,
adjusted to reflect differences between the Covered Trusts and the remainder of the population of private-label securitizations, and assumes that the conditions to the BNY Mellon Settlement will be met. Since the non-GSE securitization trusts that were included in the BNY Mellon Settlement differ from those that were not included in the BNY Mellon Settlement, the Corporation adjusted the repurchase experience implied in the settlement in order to determine the estimated non-GSE representations and warranties liability and the corresponding estimated range of possible loss. The judgmental adjustments made include consideration of the differences in the mix of products in the subject securitizations, loan originator, likelihood of claims expected, the differences in the number of payments that the borrower has made prior to default and the sponsor of the securitizations. Where relevant, the Corporation also takes into account more recent experience, such as increased claim
activity, notification of potential indemnification obligations, its experience with various counterparties, recent court decisions related to the statute of limitations as summarized below and other facts and circumstances, such as bulk settlements, as the Corporation believes appropriate.
A factor that impacts the non-GSE representations and warranties liability and the portion of the estimated range of possible loss corresponding to non-GSE representations and warranties exposures is the likelihood that claims will be presented, which is impacted by a number of factors, including contractual provisions that investors meet certain presentation thresholds under the non-GSE securitization agreements. A securitization trustee may investigate or demand repurchase on its own action, and most agreements contain a presentation threshold, for example 25 percent of the voting rights
per trust, that allows investors to declare a servicing event of default under certain circumstances or to request certain action, such as requesting loan files, that the trustee may choose to accept and follow, exempt from liability, provided the trustee is acting in good faith. If there is an uncured servicing event of default and the trustee fails to bring suit during a 60-day period, then, under most agreements, investors may file suit. In addition to this, most agreements allow investors to direct the securitization trustee to
Bank of America 2014 202
investigate
loan files or demand the repurchase of loans if security holders hold a specified percentage, for example, 25 percent, of the voting rights of each tranche of the outstanding securities. However, in certain circumstances the Corporation believes that trustees have presented repurchase claims without requiring investors to meet contractual voting rights thresholds. The population of private-label securitizations included in the BNY Mellon Settlement encompasses almost all Countrywide first-lien private-label securitizations including loans originated principally between 2004 and 2008. For the remainder of the population of private-label securitizations, claimants have come forward on certain securitizations and the Corporation believes it is probable that other claimants may continue to come forward with claims that meet the contractual
requirements of other securitizations. Although the Corporation has not recorded any representations and warranties liability for certain potential private-label securitization and whole-loan exposures where the Corporation has had little to no claim activity, or where the applicable statute of limitations has expired, these exposures are included in the estimated range of possible loss. For more information on the representations and warranties liability and the corresponding estimated range of possible loss, see Estimated Range of Possible Loss in this Note.
The table below presents a rollforward of the liability for representations and warranties and corporate guarantees.
Representations
and Warranties and Corporate Guarantees
(Dollars in millions)
2014
2013
Liability for representations and warranties and corporate guarantees, January 1
$
13,282
$
19,021
Additions
for new sales
8
36
Net reductions
(1,892
)
(6,615
)
Provision
683
840
Liability
for representations and warranties and corporate guarantees, December 31
$
12,081
$
13,282
The representations and warranties liability represents the Corporation’s best estimate of probable incurred losses as of December 31, 2014. However, it is reasonably possible that future representations and warranties losses may occur in excess of the amounts
recorded for these exposures. Although the Corporation has not recorded any representations and warranties liability for certain potential private-label securitization and whole-loan exposures where it has had little to no claim activity or where the applicable statute of limitations has expired, these exposures are included in the estimated range of possible loss.
Government-sponsored Enterprises Experience
Settlements with the GSEs have resolved substantially all outstanding and potential mortgage repurchase and make-whole claims relating to the origination, sale and delivery of residential mortgage loans that were sold directly to FNMA through June 30, 2012 and to FHLMC through December 31, 2009, subject to certain exclusions, which the Corporation does not expect will be material.
Private-label
Securitizations and Whole-loan Sales Experience
In private-label securitizations, the applicable contracts contain provisions that investors meet certain presentation thresholds to direct a trustee to assert repurchase claims. However, in certain circumstances, the Corporation believes that trustees have presented repurchase claims without requiring investors to meet contractual voting rights thresholds. Continued high levels of new private-label claims are primarily the result of repurchase requests received from trustees for private-label securitization transactions not included in the BNY Mellon Settlement.
A December 2013 decision by the New York intermediate appellate court held that, under New York law, which governs many RMBS trusts, the six-year statute of limitations starts to run
at the time the representations and warranties are made, not the date when the repurchase demand was denied. That decision has been applied by the state and federal courts in several RMBS lawsuits in which the Corporation is not a party, resulting in the dismissal as untimely of claims involving representations and warranties made more than six years prior to the initiation of the lawsuit. Unless overturned by New York’s highest appellate court, which has taken the case for review, this decision would apply to representations and warranties claims and lawsuits brought against the Corporation where New York law governs. A significant amount of representations and warranties claims and/or lawsuits the Corporation has received or may receive involve representations and warranties claims where the statute of limitations has expired under this ruling and has not been tolled by agreement and which the Corporation therefore believes would be untimely. The Corporation believes
this ruling may have had an influence on requests for tolling agreements and the pace of lawsuits filed by private-label securitization trustees prior to the expiration of the statute of limitations. In addition, it is possible that in response to the statute of limitations rulings, parties seeking to pursue representations and warranties claims and/or lawsuits with respect to trusts where the statute of limitations for representations and warranties claims against the sponsor and/or issuer has run, may pursue alternate legal theories of recovery and/or assert claims against other contractual parties. For example, in 2014, institutional investors filed lawsuits against trustees alleging failure to pursue representations and warranties claims and servicer defaults based upon alleged contractual, statutory and tort theories of liability. The impact on the Corporation, if any, of such alternative legal theories or assertions is unclear.
The
private-label securitization agreements generally require that counterparties have the ability to both assert a representations and warranties claim and to actually prove that a loan has an actionable defect under the applicable contracts. While the Corporation believes the agreements for private-label securitizations generally contain less rigorous representations and warranties and place higher burdens on claimants seeking repurchases than the express provisions of comparable agreements with the GSEs, without regard to any variations that may have arisen as a result of dealings with the GSEs, the agreements generally include a representation that underwriting practices were prudent and customary. In the case of private-label securitization trustees and third-party sponsors, there is currently no established process in place for the parties to reach a conclusion on an individual
loan if there is a disagreement on the resolution of the claim. Private-label securitization investors generally do not have the contractual right to demand repurchase
203 Bank of America 2014
of loans directly or the right to access loan files directly. For more information on repurchase demands, see Unresolved Repurchase Claims in this Note.
Certain
whole-loan investors have engaged with the Corporation in a consistent repurchase process and the Corporation has used that and other experience to record a liability related to existing and future claims from such counterparties. The BNY Mellon Settlement and subsequent activity with certain counterparties led to the determination that the Corporation had sufficient experience to record a liability related to its exposure on certain private-label securitizations, including certain private-label securitizations sponsored by third-party whole-loan investors, however, it did not provide sufficient experience to record a liability related to other private-label securitizations sponsored by third-party whole-loan investors. As it relates to the other private-label securitizations sponsored by third-party whole-loan investors and certain other whole-loan sales, as well as certain private-label securitizations impacted by recent court rulings on the statute of limitations,
it is not possible to determine whether a loss has occurred or is probable and, therefore, no representations and warranties liability has been recorded in connection with these transactions. The Corporation’s estimated range of possible loss related to representations and warranties exposures as of December 31, 2014 included possible losses related to these whole-loan sales and private-label securitizations.
The majority of the repurchase claims that the Corporation has received and resolved outside of those from the GSEs and monolines are from third-party whole-loan investors. The Corporation provided representations and warranties in connection with the sale of whole loans and the whole-loan investors may retain the right to make repurchase claims even when the loans were aggregated with other collateral into private-label
securitizations sponsored by the whole-loan investors; in other third-party securitizations, the whole-loan investor’s rights to enforce the representations and warranties were transferred to the securitization trustees. The Corporation reviews properly presented repurchase claims for these whole loans on a loan-by-loan basis. If, after the Corporation’s review, it does not believe a claim is valid, it will deny the claim and generally indicate a reason for the denial. When the whole-loan investor agrees with the Corporation’s denial of the claim, the whole-loan investor may rescind the claim. When there is disagreement as to the resolution of the claim, meaningful dialogue and negotiation between the parties are generally necessary to reach a resolution on an individual claim. Generally, a whole-loan investor is engaged in the repurchase process and the Corporation and the whole-loan investor reach resolution, either through loan-by-loan negotiation or at times, through
a bulk settlement. Although the timeline for resolution varies, if the Corporation agrees that there is a breach that meets contractual requirements for repurchase, the claim is generally resolved promptly. When a claim has been denied and the Corporation does not hear from the counterparty for six months, the Corporation views these claims as inactive; however, they remain in the outstanding claims balance until resolution.
At December 31, 2014, for loans originated between 2004 and 2008, the notional amount of unresolved repurchase claims submitted by private-label securitization trustees, whole-loan investors, including third-party securitization sponsors, and others was $24.5
billion, including $3.2 billion of duplicate claims primarily submitted without a loan file review. These repurchase claims include claims in the amount of $4.7 billion, net of duplicate claims, where the Corporation believes the statute of limitations
has expired under current law. The Corporation has performed an initial review with respect to substantially all of these claims and although the Corporation does not believe a valid basis for repurchase has been established by the claimant, it considers claims activity in the computation of its liability for representations and warranties.
Monoline Insurers Experience
During
2014, the Corporation had limited loan-level representations and warranties repurchase claims experience with the monoline insurers due to settlements with several monoline insurers and ongoing litigation with a single monoline insurer. To the extent the Corporation received repurchase claims from the monolines that were properly presented, it generally reviewed them on a loan-by-loan basis. Where the Corporation agrees that there has been a breach of representations and warranties given by the Corporation or subsidiaries or legacy companies that meets contractual requirements for repurchase, settlement is generally reached as to that loan within 60 to 90 days. For more information related to the monolines, see Note 12 – Commitments and Contingencies.
Open
Mortgage Insurance Rescission Notices
In addition to repurchase claims, the Corporation receives notices from mortgage insurance companies of claim denials, cancellations or coverage rescission (collectively, MI rescission notices).
For loans sold to the GSEs or private-label securitization trusts (including those wrapped by the monoline insurers), MI rescission notices may give rise to a claim for breach of representations and warranties, depending on the terms of governing contracts. If the governing contract requires the Corporation to repurchase the affected loan or indemnify the investor for the related loss due to MI rescissions, the Corporation may realize the loss without the benefit of MI. In
addition, mortgage insurance companies have in some cases asserted the ability to curtail MI payments as a result of alleged foreclosure delays thus reducing the MI proceeds available to offset the loss on the loan.
In certain settlements with the GSEs, the Corporation has generally agreed to pay the amount of MI coverage to the GSEs for loans that are the subject of MI rescission notices. Depending on the terms of settlement agreements or lack thereof with the mortgage insurance companies, the Corporation may collect only a portion of the amounts paid to the GSEs from the mortgage insurance companies.
The Corporation had approximately 65,000 open MI rescission notices at December 31, 2014 compared to 101,000
at December 31, 2013. The decline results primarily from settlements with certain MI companies that have been approved by the GSEs. Open MI rescission notices at December 31, 2014 included approximately 17,000 pertaining principally to first-lien mortgages sold to the GSEs and other investors as well as loans held-for-investment. At December 31, 2014, the Corporation also had approximately 48,000 open MI rescission notices pertaining to second-lien mortgages which are implicated in ongoing litigation with a mortgage insurance company where no loan-level review is currently contemplated
nor required to preserve the Corporation’s legal rights. In this litigation, the litigating mortgage insurance company is also seeking bulk rescission of certain policies, separate and apart from loan-by-loan denials or rescissions.
Bank of America 2014 204
Estimated Range of Possible Loss
The Corporation currently estimates that the range of possible loss for
representations and warranties exposures could be up to $4 billion over existing accruals at December 31, 2014. The estimated range of possible loss reflects principally non-GSE exposures. It represents a reasonably possible loss, but does not represent a probable loss, and is based on currently available information, significant judgment and a number of assumptions that are subject to change.
The liability for representations and warranties exposures and the corresponding estimated range of possible loss do not consider losses related to servicing (except as such losses are included as potential costs of the BNY Mellon Settlement), including foreclosure and related costs, fraud, indemnity, or claims (including for RMBS) related to securities law or monoline insurance litigations.
Losses with respect to one or more of these matters could be material to the Corporation’s results of operations or cash flows for any particular reporting period.
Future provisions and/or ranges of possible loss for representations and warranties may be significantly impacted if actual experiences are different from the Corporation’s assumptions in predictive models, including, without limitation, ultimate resolution of the BNY Mellon Settlement, estimated repurchase rates, estimated MI rescission rates, economic conditions, estimated home prices, consumer and counterparty behavior, the applicable statute of limitations and a variety of other judgmental factors. Adverse developments with respect to one or more of the assumptions underlying the liability for representations and warranties and the corresponding estimated range of possible loss could result in significant increases to future provisions and/or the estimated range
of possible loss. Finally, although the Corporation believes that the representations and warranties
typically given in non-GSE transactions are less rigorous than those given in GSE transactions, the Corporation does not have significant experience resolving loan-level claims in non-GSE transactions to measure the impact of these differences on the probability that a loan will be required to be repurchased.
Cash Payments
The Loan Repurchases and Indemnification Payments table presents first-lien and home equity loan repurchases and indemnification payments made by the Corporation to reimburse the investor or securitization trust for losses they incurred, and to resolve repurchase claims. Cash paid for loan repurchases includes the unpaid
principal balance of the loan plus past due interest. The amount of loss for loan repurchases is reduced by the fair value of the underlying loan collateral. The repurchase of loans and indemnification payments related to first-lien and home equity repurchase claims generally resulted from material breaches of representations and warranties related to the loans’ material compliance with the applicable underwriting standards, including borrower misrepresentation, credit exceptions without sufficient compensating factors and non-compliance with underwriting procedures. The actual representations and warranties made in a sales transaction and the resulting repurchase and indemnification activity can vary by transaction or investor. A direct relationship between the type of defect that causes the breach of representations and warranties and the severity of the realized loss has not been observed. Loan repurchases or indemnification payments related to first-lien residential
mortgages primarily involved the GSEs while repurchases or indemnification payments related to home equity loans primarily involved the monoline insurers.
Loan
Repurchases and Indemnification Payments (excluding cash payments for settlements)
December 31
2014
2013
(Dollars
in millions)
Unpaid Principal Balance
Cash Paid
for Repurchases
Loss
Unpaid Principal Balance
Cash Paid
for Repurchases
Loss
First-lien
Repurchases
$
211
$
241
$
79
$
746
$
784
$
149
Indemnification
payments
624
233
233
661
383
383
Total
first-lien
835
474
312
1,407
1,167
532
Home
equity, indemnification payments
22
22
22
74
77
77
Total
first-lien and home equity
$
857
$
496
$
334
$
1,481
$
1,244
$
609
The
amounts in the table above exclude payments made in connection with the FHFA Settlement, the 2013 settlements with FHLMC and FNMA, and amounts paid in monoline settlements
during 2014 and 2013, including payments made directly to securitization trusts.
205 Bank of America 2014
NOTE 8 Goodwill
and Intangible Assets
Goodwill
The table below presents goodwill balances by business segment at December 31, 2014 and 2013. The reporting units utilized for goodwill impairment testing are the operating segments or one level below.
Goodwill
December
31
(Dollars in millions)
2014
2013
Consumer & Business Banking
$
31,681
$
31,681
Global
Wealth & Investment Management
9,698
9,698
Global Banking
22,377
22,377
Global Markets
5,197
5,197
All
Other
824
891
Total goodwill
$
69,777
$
69,844
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. The goodwill impairment test involves comparing the fair value of each reporting unit with its carrying value, including goodwill, as measured by allocated equity. During 2014, the Corporation made refinements to the amount of capital allocated to each of its businesses based
on multiple considerations that included, but were not limited to, risk-weighted assets measured under the Basel 3 Standardized and Advanced approaches, business segment exposures and risk profile, and strategic plans. As a result of this process,
in 2014, the Corporation adjusted the amount of capital being allocated to its business segments. This change resulted in a reduction of the unallocated capital, which is reflected in All Other, and an aggregate increase to the amount of capital being allocated to the business segments. An increase in allocated capital in the business segments generally results in a reduction of the excess of the fair value over the carrying value and a reduction to the estimated fair value as a percentage of allocated carrying value for an individual reporting unit.
There was no goodwill in Consumer Real Estate Services at December 31, 2014 and 2013.
Annual
Impairment Tests
During the three months ended September 30, 2014 and 2013, the Corporation completed its annual goodwill impairment test as of June 30 for all applicable reporting units. Based on the results of the annual goodwill impairment test, the Corporation determined there was no impairment.
Intangible Assets
The table below presents the gross carrying value and accumulated amortization for intangible assets at December 31, 2014 and 2013.
The table below presents intangible asset amortization expense for 2014, 2013 and 2012.
Amortization
Expense
(Dollars in millions)
2014
2013
2012
Purchased
credit card and Affinity relationships
$
415
$
475
$
556
Core deposit intangibles
140
197
254
Customer
relationships
355
371
391
Other intangibles
26
43
63
Total
amortization expense
$
936
$
1,086
$
1,264
Bank
of America 2014 206
The table below presents estimated future intangible asset amortization expense at December 31, 2014.
Estimated
Future Amortization Expense
(Dollars
in millions)
2015
2016
2017
2018
2019
Purchased credit card and Affinity relationships
$
358
$
299
$
239
$
180
$
121
Core
deposit intangibles
122
105
91
80
7
Customer
relationships
340
325
310
302
286
Other
intangibles
16
9
6
3
1
Total
estimated future amortization expense
$
836
$
738
$
646
$
565
$
415
NOTE 9 Deposits
The
Corporation had U.S. certificates of deposit and other U.S. time deposits of $100 thousand or more totaling $32.4 billion and $38.3 billion at December 31, 2014 and 2013. Non-U.S. certificates of deposit and other non-U.S. time deposits of $100 thousand or more totaled $14.0 billion and $26.2 billion at December 31, 2014 and 2013. The table below presents the contractual maturities for time deposits
of $100 thousand or more at December 31, 2014.
Time
Deposits of $100 Thousand or More
(Dollars
in millions)
Three Months
or Less
Over Three Months to
Twelve Months
Thereafter
Total
U.S. certificates of deposit and other time deposits
$
15,327
$
14,134
$
2,948
$
32,409
Non-U.S.
certificates of deposit and other time deposits
12,446
1,308
253
14,007
The scheduled contractual maturities for total time deposits at
December 31, 2014 are presented in the table below.
Contractual
Maturities of Total Time Deposits
(Dollars in millions)
U.S.
Non-U.S.
Total
Due
in 2015
$
61,439
$
14,165
$
75,604
Due in 2016
4,119
176
4,295
Due
in 2017
1,532
38
1,570
Due in 2018
775
—
775
Due
in 2019
830
35
865
Thereafter
1,734
—
1,734
Total
time deposits
$
70,429
$
14,414
$
84,843
207 Bank
of America 2014
NOTE 10 Federal Funds Sold or Purchased, Securities Financing Agreements and Short-term Borrowings
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.
2014
2013
2012
(Dollars
in millions)
Amount
Rate
Amount
Rate
Amount
Rate
Federal funds sold
At
December 31
$
—
—
%
$
—
—
%
$
600
0.54
%
Average
during year
3
0.90
7
0.69
351
0.43
Maximum
month-end balance during year
12
n/a
35
n/a
600
n/a
Securities
borrowed or purchased under agreements to resell
At December 31
191,823
0.47
190,328
0.60
219,324
0.92
Average
during year
222,480
0.47
224,324
0.55
235,691
0.64
Maximum
month-end balance during year
240,110
n/a
249,791
n/a
252,985
n/a
Federal
funds purchased
At
December 31
14
—
186
—
1,151
0.17
Average
during year
147
0.05
191
0.06
384
0.11
Maximum
month-end balance during year
213
n/a
195
n/a
1,211
n/a
Securities
loaned or sold under agreements to repurchase
At
December 31
201,263
0.98
197,920
0.92
292,108
1.11
Average
during year
215,645
0.99
257,409
0.81
281,516
0.98
Maximum
month-end balance during year
239,984
n/a
319,608
n/a
319,401
n/a
Short-term
borrowings
At
December 31
31,172
1.47
45,999
1.55
30,731
3.08
Average
during year
41,886
1.08
43,816
1.89
36,500
2.22
Maximum
month-end balance during year
51,409
n/a
48,387
n/a
40,129
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 $14.6 billion and $15.1 billion at December 31, 2014 and 2013. These short-term bank notes, along with Federal Home Loan Bank (FHLB) 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
Substantially all of the Corporation’s repurchase and resale activities are transacted under legally enforceable master repurchase 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 repurchase and resale 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.
Substantially all securities borrowing and lending activities are transacted under 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 borrowing and lending 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, 2014 and 2013.
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 2 – Derivatives.
The “Other” amount in the table, which is included on the Consolidated Balance Sheet in accrued expenses and other liabilities, relates to transactions where the Corporation acts as the lender in a securities lending agreement and receives securities that can be pledged or sold as collateral. 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.
Gross assets and liabilities in
the table include activity where uncertainty exists as to the enforceability of certain master netting agreements under bankruptcy laws in some countries or industries and, accordingly, these are reported on a gross basis.
Bank of America 2014 208
The column titled “Financial Instruments”
in the table 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 the
net balance sheet amount in this table to derive a net asset or liability. Securities collateral received or pledged where the legal enforceability of the master netting agreements is not certain is not included.
Securities borrowed or purchased under agreements to resell (1)
$
272,296
$
(81,968
)
$
190,328
$
(157,132
)
$
33,196
Securities
loaned or sold under agreements to repurchase
$
279,888
$
(81,968
)
$
197,920
$
(160,111
)
$
37,809
Other
10,871
—
10,871
(10,871
)
—
Total
$
290,759
$
(81,968
)
$
208,791
$
(170,982
)
$
37,809
(1)
Excludes
repurchase activity of $5.6 billion and $4.1 billion reported in Loans and leases at December 31, 2014 and 2013.
209 Bank of America 2014
NOTE 11 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, 2014 and 2013, and the related contractual rates and maturity dates as of December 31, 2014.
December 31
(Dollars
in millions)
2014
2013
Notes issued by Bank of America Corporation
Senior notes:
Fixed,
with a weighted-average rate of 4.67%, ranging from 1.25% to 8.83%, due 2015 to 2044
$
113,069
$
109,845
Floating, with a weighted-average rate of 1.32%, ranging from 0.09% to 4.98%, due 2015 to 2044
14,559
22,268
Senior
structured notes
22,168
30,575
Subordinated notes:
Fixed, with a weighted-average rate of 4.91%, ranging from 0.80% to 10.20%, due
2015 to 2038
26,995
22,379
Floating, with a weighted-average rate of 0.97%, ranging from 0.01% to 3.16%, due 2016 to 2026
1,705
1,798
Junior
subordinated notes (related to trust preferred securities):
Fixed, with a weighted-average rate of 6.78%, ranging from 5.25% to 8.05%, due 2027 to perpetual
6,722
6,685
Floating,
with a weighted-average rate of 0.92%, ranging from 0.78% to 1.24%, due 2027 to 2056
553
553
Total notes issued by Bank of America Corporation
185,771
194,103
Notes
issued by Bank of America, N.A. (1)
Senior notes:
Fixed, with a weighted-average
rate of 1.98%, ranging from 0.08% to 7.72%, due 2015 to 2187
2,893
1,670
Floating, with a weighted-average rate of 0.60%, ranging from 0.36% to 0.70%, due 2015 to 2041
5,686
3,684
Subordinated
notes:
Fixed, with a weighted-average rate of 5.68%, ranging from 5.30% to 6.10%, due 2016 to 2036
4,921
4,876
Floating, with a
weighted-average rate of 0.53%, ranging from 0.26% to 0.54%, due 2016 to 2019
1,401
1,401
Advances from Federal Home Loan Banks:
Fixed, with a weighted-average rate of 5.34%, ranging from 0.01% to 7.72%, due 2015 to 2034
183
1,441
Floating,
with a weighted-average rate of 0.26%, ranging from 0.24% to 0.30%, due 2015 to 2016
10,500
3,001
Securitizations and other BANA VIEs
9,882
13,367
Total
notes issued by Bank of America, N.A.
35,466
29,440
Other debt
Senior notes:
Fixed,
with a rate of 5.50%, due 2017 to 2021
1
194
Floating, with a rate of 1.88%, due 2015
21
115
Structured liabilities
15,971
16,913
Junior
subordinated notes (related to trust preferred securities):
Fixed, with a weighted-average rate of 7.14%, ranging from 7.00% to 7.28%, perpetual
339
340
Floating, with a rate of 0.86%, due 2027
66
66
Nonbank
VIEs
3,425
6,081
Other
2,079
2,422
Total other debt
21,902
26,131
Total
long-term debt
$
243,139
$
249,674
(1)
On October 1, 2014, FIA Card Services, N.A. was merged into Bank of America, N.A.
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, 2014 and 2013, the amount of foreign currency-denominated debt translated into U.S. Dollars included in total long-term debt was $51.9 billion and $73.4 billion. Foreign currency contracts may be used to convert certain foreign currency-denominated debt into U.S. Dollars.
At December 31,
2014, long-term debt of consolidated VIEs in the table above included debt of credit card, home equity and all other VIEs of $8.4 billion, $1.1 billion and $3.8 billion, respectively. Long-term debt of VIEs is collateralized by the assets of the VIEs. For additional information, see Note 6 – Securitizations and Other Variable Interest Entities.
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 4.06 percent, 4.65 percent and 0.84 percent, respectively, at
December 31, 2014 and 4.37 percent, 5.14 percent and 0.92 percent, respectively, at December 31,
2013. 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.
Certain senior structured notes are accounted for under the fair value option. For more information on these senior structured notes, see Note 21 – Fair Value Option.
The table below shows the carrying value for aggregate annual contractual maturities of long-term debt as of December 31, 2014. 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
Bank of America 2014 210
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.
During 2014, the Corporation had total long-term debt maturities and purchases of $53.7 billion consisting of $33.9 billion for Bank of America Corporation, $8.9 billion for Bank of America, N.A. and $10.9 billion of other debt. During 2013, the
Corporation had total long-term debt maturities and purchases of $65.6 billion
consisting of $39.3 billion for Bank of America Corporation, $16.0 billion for Bank of America, N.A. and $10.3 billion of other debt. In 2013, in a combination of tender offers, calls and open-market transactions, the Corporation purchased senior and subordinated long-term debt with a carrying value of $9.2 billion and recorded net losses of $59 million in connection with these transactions.
Long-term
Debt by Maturity
(Dollars
in millions)
2015
2016
2017
2018
2019
Thereafter
Total
Bank
of America Corporation
Senior
notes
$
14,905
$
17,373
$
18,935
$
20,006
$
16,206
$
40,203
$
127,628
Senior
structured notes
5,558
2,825
1,791
1,885
1,526
8,583
22,168
Subordinated
notes
1,221
5,074
5,219
2,951
1,580
12,655
28,700
Junior
subordinated notes
—
—
—
—
—
7,275
7,275
Total
Bank of America Corporation
21,684
25,272
25,945
24,842
19,312
68,716
185,771
Bank
of America, N.A. (1)
Senior
notes
777
2,498
5,162
—
19
123
8,579
Subordinated
notes
—
1,069
3,553
—
1
1,699
6,322
Advances
from Federal Home Loan Banks
4,503
6,003
10
10
16
141
10,683
Securitizations
and other Bank VIEs (2)
1,151
1,298
3,554
—
2,450
1,429
9,882
Total
Bank of America, N.A.
6,431
10,868
12,279
10
2,486
3,392
35,466
Other
debt
Senior
notes
21
—
1
—
—
—
22
Structured
liabilities
2,314
2,133
2,296
1,281
1,027
6,920
15,971
Junior
subordinated notes
—
—
—
—
—
405
405
Nonbank
VIEs (2)
20
348
255
102
27
2,673
3,425
Other
254
927
429
45
4
420
2,079
Total
other debt
2,609
3,408
2,981
1,428
1,058
10,418
21,902
Total
long-term debt
$
30,724
$
39,548
$
41,205
$
26,280
$
22,856
$
82,526
$
243,139
(1)
On
October 1, 2014, FIA Card Services, N.A. was merged into Bank of America, N.A.
(2)
Represents the total long-term debt included in the liabilities of consolidated VIEs on the Consolidated Balance Sheet.
Trust Preferred and Hybrid Securities
Trust preferred securities (Trust Securities) are primarily issued by trust companies (the Trusts) that are not consolidated. These Trust Securities are mandatorily redeemable preferred security obligations of the Trusts. The sole assets of the Trusts generally are junior subordinated deferrable
interest notes of the Corporation or its subsidiaries (the Notes). The Trusts generally are 100 percent-owned finance subsidiaries of the Corporation. Obligations associated with the Notes are included in the long-term debt table on page 210.
Certain of the Trust Securities were issued at a discount and may be redeemed prior to maturity at the option of the Corporation. The Trusts generally have invested the proceeds of such Trust Securities in the Notes. Each issue of the Notes has an interest rate equal to the corresponding Trust Securities distribution rate. The Corporation has the right to defer payment of interest on the Notes at any time or from
time to time for a period not exceeding five years provided that no extension period may extend beyond the stated maturity of the relevant Notes. During any such extension period, distributions on the Trust Securities will also be deferred and the Corporation’s ability to pay dividends on its common and preferred stock will be restricted.
The Trust Securities generally are subject to mandatory redemption upon repayment of the related Notes at their stated maturity dates or their earlier redemption at a redemption price equal to their liquidation amount plus accrued distributions to the date fixed for redemption and the premium, if any, paid by the Corporation upon concurrent repayment of the related Notes.
Periodic cash payments and payments upon liquidation or redemption with respect
to Trust Securities are guaranteed by the Corporation or its subsidiaries to the extent of funds held by the Trusts (the Preferred Securities Guarantee). The Preferred Securities Guarantee, when taken together with the Corporation’s other obligations including its obligations under the Notes, generally will constitute a full and unconditional guarantee, on a subordinated basis, by the Corporation of payments due on the Trust Securities.
In 2013, the Corporation entered into various agreements with certain Trust Securities holders pursuant to which the Corporation paid $933 million in cash in exchange for $934 million aggregate liquidation amount of previously issued Trust Securities. Upon the
exchange, the Corporation immediately surrendered the Trust Securities to the unconsolidated Trusts for cancellation, resulting in the cancellation of an equal amount of junior subordinated notes that had a carrying value of $934 million, resulting in an insignificant gain.
211 Bank of America 2014
The Trust Securities Summary
table details the outstanding Trust Securities and the related Notes previously issued which remained outstanding at December 31, 2014. For more information on Trust Securities for regulatory capital purposes, see Note 16 – Regulatory Requirements and Restrictions.
Notes
are denominated in British Pound. Presentation currency is U.S. Dollar.
Bank of America 2014 212
NOTE 12 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, standby letters of credit (SBLCs) and commercial letters of credit to meet the financing needs of its customers. The table below includes the notional amount of unfunded legally binding lending commitments net of amounts distributed (e.g., syndicated) to other financial institutions of $15.7 billion and $21.9 billion at December 31, 2014 and 2013.
At December 31, 2014, the carrying value of these commitments,
excluding commitments accounted for under the fair value option, was $546 million, including deferred revenue of $18 million and a reserve for unfunded lending commitments of $528 million. At December 31, 2013, the comparable amounts were $503 million, $19 million and $484 million, respectively.
The carrying value of these commitments is classified in accrued expenses and other liabilities on the Consolidated Balance Sheet.
The table below also includes the notional amount of commitments of $9.9 billion and $13.0 billion at December 31, 2014 and 2013 that are accounted for under the fair value option. However, the table below excludes cumulative net fair value adjustments of $405 million and $354 million on these commitments, which are 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 21 – Fair Value Option.
Standby
letters of credit and financial guarantees (1)
21,994
8,843
2,876
3,967
37,680
Letters
of credit
1,263
899
4
403
2,569
Legally
binding commitments
108,636
131,772
157,244
40,535
438,187
Credit
card lines (2)
377,846
—
—
—
377,846
Total
credit extension commitments
$
486,482
$
131,772
$
157,244
$
40,535
$
816,033
(1)
The notional amounts of SBLCs and financial guarantees classified as investment grade and non-investment grade based on the credit quality of the underlying reference name within the instrument were $26.1 billion and $8.2 billion at December 31, 2014, and $27.6 billion and $9.6 billion at December 31, 2013. Amounts include consumer SBLCs of $396 million and $453 million at December 31,
2014 and 2013.
(2)
Includes business card unused lines of credit.
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.
Other Commitments
At December 31, 2014
and 2013, the Corporation had commitments to purchase loans (e.g., residential mortgage and commercial real estate) of $1.8 billion and $1.5 billion, which upon settlement will be included in loans or LHFS.
At December 31, 2014 and 2013, the Corporation had commitments to enter into forward-dated resale and securities
borrowing agreements of $73.2 billion and $75.5 billion,
and commitments to enter into forward-dated repurchase and securities lending agreements of $55.8 billion and $38.3 billion. These commitments expire within the next 12 months.
The Corporation is a party to operating leases for certain of its premises and equipment. Commitments under these leases are approximately $2.6 billion, $2.3 billion, $1.9 billion, $1.5 billion and $1.2 billion for 2015 through 2019, respectively, and $4.9 billion in the aggregate
for all years thereafter.
At December 31, 2014 and 2013, the Corporation had unfunded equity investment commitments of $57 million and $195 million.
213 Bank of America 2014
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. The book value protection is provided on portfolios of intermediate investment-grade fixed-income securities and is intended to cover any shortfall in the event that policyholders surrender their policies and market value is below book value. These guarantees are recorded as derivatives and carried at fair value in the trading portfolio. At December 31, 2014 and 2013, the notional amount of these guarantees totaled $13.6 billion and $13.4 billion
and the Corporation’s maximum exposure related to these guarantees totaled $3.1 billion and $3.0 billion with estimated maturity dates between 2031 and 2039. The net fair value including the fee receivable associated with these guarantees was $25 million and $39 million at December 31, 2014 and 2013, and reflects the probability of surrender as well as the multiple structural protection features in the contracts.
Employee Retirement Protection
The Corporation
sells products that offer book value protection primarily to plan sponsors of the Employee Retirement Income Security Act of 1974 (ERISA) governed pension plans, such as 401(k) plans and 457 plans. The book value protection is provided on portfolios of intermediate/short-term investment-grade fixed-income securities and is intended to cover any shortfall in the event that plan participants continue to make qualified withdrawals after all securities have been liquidated and there is remaining book value. The Corporation retains the option to exit the contract at any time. If the Corporation exercises its option, the investment manager will either terminate the contract or convert the portfolio into a high-quality fixed-income portfolio, typically all government or government-backed agency securities,
with the proceeds of the liquidated assets to assure the return of principal. To manage its exposure, the Corporation imposes restrictions and constraints on the timing of the withdrawals, the manner in which the portfolio is liquidated and the funds are accessed, and the investment parameters of the underlying portfolio. These constraints, combined with significant structural protections, are designed to provide adequate buffers and guard against payments even under extreme stress scenarios. These guarantees are recorded as derivatives and carried in the trading portfolio at fair value, which was insignificant at December 31, 2014. At December 31, 2014 and 2013, the notional amount of these guarantees totaled $500
million and $4.6 billion with estimated maturity dates up to 2019 if the exit option is exercised on all deals. The decline in notional amount in 2014 was primarily the result of plan sponsors terminating contracts pursuant to exit options. As of December 31, 2014, the Corporation had not made a payment under these products.
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 the early termination clause. 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. In connection with these services, a liability may arise in the event of a billing dispute between the merchant and a cardholder that is ultimately resolved in the cardholder’s favor. If the merchant defaults on its obligation to reimburse the cardholder, the cardholder, through its issuing bank, generally has until six months after the date of the transaction to present a chargeback to the merchant processor, which is primarily liable for any losses
on covered transactions. However, if the merchant processor fails to meet its obligation to reimburse the cardholder for disputed transactions, then the Corporation, as the sponsor, could be held liable for the disputed amount. In 2014 and 2013, the sponsored entities processed and settled $647.1 billion and $623.7 billion of transactions and recorded losses of $16 million and $15 million. A significant portion of this activity was processed by a joint venture in which the Corporation holds a 49 percent ownership. At December 31, 2014 and 2013,
the sponsored merchant processing servicers held as collateral $130 million and $203 million of merchant escrow deposits which may be used to offset amounts due from the individual merchants.
The Corporation believes the maximum potential exposure for chargebacks would not exceed the total amount of merchant transactions processed through Visa and MasterCard for the last six months, which represents the claim period for the cardholder, plus any outstanding delayed-delivery transactions. As of December 31, 2014 and 2013, the maximum potential exposure for sponsored transactions totaled $269.3 billion and $258.5 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.
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;
Bank of America 2014 214
however, the potential for the Corporation to be required to make these payments is remote.
Prime Brokerage and Securities Clearing Services
In
connection with its prime brokerage and clearing businesses, the Corporation performs securities clearance and settlement services on behalf of its clients with other brokerage firms and clearinghouses. 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 firm 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.
The
Corporation funds selected assets, including securities issued by CDOs and CLOs, through derivative contracts, typically total return swaps, with third parties and VIEs that are not consolidated by the Corporation. The total notional amount of these derivative contracts was $527 million and $1.8 billion with commercial banks and $1.2 billion and $1.3 billion with VIEs at December 31, 2014 and 2013. The underlying securities are senior securities and substantially
all of the Corporation’s exposures are insured. Accordingly, the Corporation’s exposure to loss consists principally of counterparty risk to the insurers. In certain circumstances, generally as a result of ratings downgrades, the Corporation may be required to purchase the underlying assets, which would not result in additional gain or loss to the Corporation as such exposure is already reflected in the fair value of the derivative contracts.
Other Guarantees
The Corporation has entered into additional guarantee agreements and commitments, including sold risk participation swaps, liquidity facilities, lease-end obligation agreements, partial credit guarantees on certain leases, real estate joint venture guarantees, divested business commitments and sold put options that require gross settlement.
The maximum potential future payment under these agreements was approximately $6.2 billion and $6.9 billion at December 31, 2014 and 2013. The estimated maturity dates of these obligations extend up to 2033. The Corporation has made no material payments under these guarantees.
In the normal course of business, the Corporation periodically guarantees the obligations of its affiliates in a variety of transactions including ISDA-related transactions and non-ISDA related transactions such as commodities trading, repurchase agreements, prime brokerage agreements and other transactions.
Payment Protection Insurance Claims Matter
In
the U.K., the Corporation previously sold payment protection insurance (PPI) through its international card services business to credit card customers and consumer loan customers. PPI covers a consumer’s loan or debt repayment if certain events occur such as loss of job or illness. In response to an elevated level of customer complaints across the industry, heightened media coverage and pressure from consumer advocacy groups, the U.K. Financial Services Authority, which has subsequently been replaced by the Prudential Regulation Authority (PRA) and the
Financial Conduct Authority (FCA), investigated and raised concerns about the way some companies have handled complaints related to the sale of these insurance policies. In connection with this matter, the Corporation established a reserve for PPI. The reserve was $378
million and $381 million at December 31, 2014 and 2013. The Corporation recorded expense of $621 million and $258 million in 2014 and 2013. The increase in the provision was due primarily to the volume of new complaints not decreasing as expected. It is reasonably possible that the Corporation will incur additional expense related to PPI claims; however, the amount of such additional expense cannot be reasonably estimated.
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 actions and proceedings, including actions brought on behalf of various classes of claimants. These actions and proceedings are generally based on alleged violations of consumer protection, securities, environmental, banking, employment, contract and other laws. In some of these actions and proceedings, claims for substantial monetary damages are asserted against the Corporation and its subsidiaries.
In the ordinary course of business, the Corporation and its subsidiaries
are also subject to regulatory and governmental examinations, information gathering requests, inquiries, investigations, and threatened legal actions and proceedings. For example, certain subsidiaries of the Corporation are registered broker-dealers or investment advisors and are subject to regulation by the SEC, the Financial Industry Regulatory Authority, the European Commission, the PRA, the FCA and other international, federal and state securities regulators. In connection with formal and informal inquiries, the Corporation and its subsidiaries receive numerous requests, subpoenas and orders for documents, testimony and information in connection with various aspects of the Corporation’s regulated activities.
In view of the inherent difficulty
of predicting the outcome of such litigation, regulatory and governmental matters, particularly where the claimants seek very large or indeterminate damages or where the matters present novel legal theories or involve a large number of parties, the Corporation generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be.
In accordance with applicable accounting guidance, the Corporation establishes an accrued liability for litigation, regulatory and governmental matters 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 litigation, regulatory or governmental 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. When a loss contingency is not both probable and estimable, the Corporation does not establish an accrued liability. If, at the time of evaluation, the loss contingency related to a litigation, regulatory or governmental matter is not both probable and estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and estimable. Once the loss contingency related to a litigation, regulatory or governmental matter is deemed to be both probable and
215 Bank of America 2014
estimable,
the Corporation will establish an accrued liability with respect to such loss contingency 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 or external legal service providers, litigation-related expense of $16.4 billion was recognized for 2014 compared to $6.1 billion for 2013.
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 material litigation, regulatory and governmental matters on an ongoing basis, in conjunction with any outside counsel handling the matter, in light of potentially relevant factual and legal developments. These may include information learned through the discovery process, rulings on dispositive motions, settlement discussions, and other rulings by courts, arbitrators or others. In cases in which the Corporation possesses sufficient appropriate information to estimate a range of possible loss, that estimate is aggregated and disclosed below. There may be other disclosed matters for which a loss is probable or reasonably possible but such an estimate of the range of possible loss may not be possible. For those matters where an estimate of the range of possible loss is possible, management currently estimates the aggregate range of possible
loss is $0 to $2.7 billion in excess of the accrued liability (if any) related to those matters. This estimated range of possible loss is based upon currently available information and is subject to significant judgment and a variety of assumptions, and known and unknown uncertainties. The matters underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate. Those matters for which an estimate is not possible are not included within this estimated range. Therefore, this estimated range of possible loss represents what the Corporation believes to be an estimate of possible loss only for certain matters meeting these criteria. It does not represent the Corporation’s maximum loss exposure.
Information is provided below regarding the nature of all of these contingencies
and, where specified, the amount of the claim associated with these loss contingencies. Based on current knowledge, management does not believe that loss contingencies arising from pending matters, including the matters described herein, will have a material adverse effect on the consolidated financial position or liquidity of the Corporation. However, in light of the inherent uncertainties involved in these matters, some of which are beyond the Corporation’s control, and the very large or indeterminate damages sought in some of these matters, an adverse outcome in one or more of these matters could be material to the Corporation’s results of operations or cash flows for any particular reporting period.
Bond Insurance Litigation
Ambac Countrywide Litigation
The Corporation, Countrywide and other Countrywide entities are named as defendants
in an action filed on September 29, 2010 and as amended on May 28, 2013, by Ambac Assurance Corporation and the Segregated Account of Ambac Assurance Corporation (together, Ambac), entitled Ambac Assurance
Corporation and The Segregated Account of Ambac Assurance Corporation v. Countrywide Home Loans, Inc., et al. This action, currently pending in New York Supreme Court, New York County, relates to bond insurance policies provided by Ambac on certain securitized pools of second-lien (and in one pool, first-lien) HELOCs, first-lien subprime home equity loans and fixed-rate second-lien mortgage loans. Plaintiffs allege that they have paid claims as a result of defaults in the underlying
loans and assert that the Countrywide defendants misrepresented the characteristics of the underlying loans and breached certain contractual representations and warranties regarding the underwriting and servicing of the loans. Plaintiffs also allege that the Corporation is liable based on successor liability theories. Damages claimed by Ambac are in excess of $2.2 billion and include the amount of payments for current and future claims it has paid or claims it will be obligated to pay under the policies, increasing over time as it pays claims under relevant policies, plus unspecified punitive damages.
On December 30, 2014, Ambac filed a second complaint in the same court against the same defendants, claiming fraudulent inducement against Countrywide and successor and vicarious liability against the Corporation relating to eight
partially Ambac-insured RMBS transactions that closed between 2005 and 2007, all backed by negative amortization pay option adjustable-rate mortgage (ARM) loans that were originated in whole or in part by Countrywide. Seven of the eight securitizations were issued and underwritten by non-parties to the litigation. Ambac claims damages in excess of $600 million consisting of all alleged past and future claims against its policies, plus other unspecified compensatory and punitive damages.
Also on December 30, 2014, Ambac filed a third action in Wisconsin Circuit Court, Dane County, against Countrywide Home Loans, Inc., claiming that it was fraudulently induced to insure portions of five
securitizations issued and underwritten in 2005 by a non-party that included Countrywide originated first-lien negative amortization pay option ARM loans. The complaint claims damages in excess of $350 million for all alleged past and future Ambac insured claims payment obligations plus other unspecified compensatory and punitive damages.
Ambac First Franklin Litigation
On April 16, 2012, Ambac sued First Franklin Financial Corp., BANA, MLPF&S, Merrill Lynch Mortgage Lending, Inc. (MLML), and Merrill Lynch Mortgage Investors, Inc. in New York Supreme Court, New York County. Plaintiffs’ claims relate to guaranty insurance Ambac provided on a First Franklin securitization (Franklin Mortgage Loan Trust, Series 2007-FFC). The securitization was sponsored by MLML, and certain certificates
in the securitization were insured by Ambac. The complaint alleges that defendants breached representations and warranties concerning the origination of the underlying mortgage loans and asserts claims for fraudulent inducement, breach of contract and indemnification. Plaintiffs also assert breach of contract claims against BANA based upon its servicing of the loans in the securitization. The complaint alleges that Ambac has paid hundreds of millions of dollars in claims and has accrued and continues to accrue tens of millions of dollars in additional claims, and Ambac seeks as damages the total claims it has paid and its projected claims payment obligations, as well as specific performance of defendants’ contractual repurchase obligations.
Bank
of America 2014 216
On July 19, 2013, the court denied defendants’ motion to dismiss Ambac’s contract and fraud causes of action but granted dismissal of Ambac’s indemnification cause of action. In addition, the court denied defendants’ motion to dismiss Ambac’s claims for attorneys’ fees and punitive damages.
European Commission – Credit Default Swaps Antitrust Investigation
On July 1, 2013, the European
Commission (Commission) announced that it had addressed a Statement of Objections (SO) to the Corporation, BANA and Banc of America Securities LLC (together, the Bank of America Entities), a number of other financial institutions, Markit Group Limited, and the International Swaps and Derivatives Association (together, the Parties). The SO sets forth the Commission’s preliminary conclusion that the Parties infringed European Union competition law by participating in alleged collusion to prevent exchange trading of CDS and futures. According to the SO, the conduct of the Bank of America Entities took place between August 2007 and April 2009. As part of the Commission’s procedures, the Parties have reviewed the evidence in the investigative file, responded to the Commission’s preliminary conclusions and attended a hearing before the Commission. If the Commission is satisfied that its preliminary conclusions are proved, the Commission has stated that it intends to impose
a fine and require appropriate remedial measures.
Fontainebleau Las Vegas Litigation
On June 9, 2009, Avenue CLO Fund Ltd., et al. v. Bank of America, N.A., Merrill Lynch Capital Corporation, et al. was filed in the U.S. District Court for the District of Nevada by certain Fontainebleau Las Vegas, LLC (FBLV) project lenders. Plaintiffs alleged that, among other things, BANA breached its duties as disbursement agent under the agreement governing the disbursement of loaned funds to FBLV, then a Chapter 11 debtor-in-possession. Plaintiffs seek monetary damages of more than $700 million, plus interest. This action was subsequently transferred by the U.S. Judicial Panel on Multidistrict Litigation (JPML) to the U.S. District Court for the
Southern District of Florida.
On March 19, 2012, the district court granted BANA’s motion for summary judgment on all causes of action against it in its capacity as disbursement agent and denied plaintiffs’ motion for summary judgment on those claims. On July 26, 2013, the U.S. Court of Appeals for the Eleventh Circuit affirmed in part and reversed in part the district court’s dismissal of the disbursement agent claims against BANA, holding that there were factual disputes that could not be resolved on a summary judgment motion, and remanded the case to the district court for further proceedings.
Dismissal of the other claims was affirmed on a separate appeal. On December 13, 2013, the JPML remanded the action to the District of Nevada
for trial.
The parties have settled the action for $300 million, an amount that was fully accrued as of December 31, 2014. Pursuant to the settlement, plaintiffs have stipulated to the voluntary dismissal of their remaining claims with prejudice.
In re Bank of America Securities, Derivative and Employee Retirement Income Security Act (ERISA) Litigation
Beginning in January 2009, the Corporation, as well as certain current and former officers and directors, among others, were named as defendants in a variety of actions filed in state and federal courts. The actions generally concern alleged material misrepresentations and/or omissions with respect
to certain securities filings by the Corporation. The securities filings contained information with respect to events that took place from September 2008 through January 2009 contemporaneous with the Corporation’s acquisition of Merrill Lynch & Co., Inc. (Merrill Lynch). Certain federal court actions were consolidated and/or coordinated in the U.S. District Court for the Southern District of New York (the District Court) under the caption In re Bank of America Securities, Derivative and Employee Retirement Income Security Act (ERISA) Litigation.
Plaintiffs in the consolidated securities class action (the Consolidated Securities Class Action) asserted claims under Sections 14(a), 10(b) and 20(a) of the Securities Exchange Act of 1934, and Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and asserted damages based on the drop in the stock price upon subsequent disclosures. On
April 5, 2013, the District Court granted final approval of the settlement of the Consolidated Securities Class Action. On November 5, 2014, the U.S. Court of Appeals for the Second Circuit affirmed the final approval of the settlement of the Consolidated Securities Class Action. On February 3, 2015, the deadline for filing a petition for writ of certiorari with the U.S. Supreme Court elapsed without any objector filing a petition.
Certain shareholders opted to pursue their claims apart from the Consolidated Securities Class Action. Following settlements in an aggregate amount that was fully accrued as of December 31, 2013, the District Court dismissed the claims of these plaintiffs with prejudice.
In
addition, on January 11, 2013, the District Court approved the settlement of claims filed by plaintiffs in a derivative action in the Consolidated Securities Class Action, which also resolved a consolidated derivative action filed in the Delaware Court of Chancery.
In addition, the District Court dismissed a complaint filed by plaintiffs in the ERISA actions in the Consolidated Securities Class Action on August 27, 2010, and the parties stipulated to the withdrawal of the appeal of that decision on January 14, 2013.
Interchange and Related 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 (Interchange), named Visa, MasterCard and several banks and bank holding companies (BHCs), including the Corporation, as defendants. Plaintiffs allege that defendants conspired to fix the level of default interchange rates and that certain rules of Visa and MasterCard related to merchant acceptance of payment cards at the point of sale were unreasonable restraints of trade. Plaintiffs sought unspecified damages and injunctive relief.
217 Bank
of America 2014
On October 19, 2012, defendants settled the matter. The settlement provides for, among other things, (i) payments by defendants to the class and individual plaintiffs totaling approximately $6.6 billion, allocated proportionately to each defendant based upon various loss-sharing agreements; (ii) distribution to class merchants of an amount equal to 10 bps of default interchange across all Visa and MasterCard credit card transactions for a period of eight
consecutive months, to begin by July 29, 2013, which otherwise would have been paid to issuers and which effectively reduces credit interchange for that period of time; and (iii) modifications to certain Visa and MasterCard rules regarding merchant point of sale practices.
The court granted final approval of the class settlement agreement on December 13, 2013. Several class members appealed to the U.S. Court of Appeals for the Second Circuit. In addition, a number of class members opted out of the settlement of their past damages claims. The cash portion of the settlement was adjusted downward as a result of these opt outs.
The Corporation is named in three of the opt-out suits, including one
brought by cardholders, and, as a result of various sharing agreements from the main Interchange litigation, the Corporation remains liable for any settlement or judgment in opt-out suits where it is not named as a defendant. All but one of the opt-out suits filed to date have been consolidated in the U.S. District Court for the Eastern District of New York. On July 18, 2014, the court denied defendants’ motion to dismiss opt-out complaints filed by merchants, and on November 26, 2014, the court granted defendants’ motion to dismiss the Sherman Act claim in the cardholder complaint.
LIBOR, Other Reference Rate and Foreign Exchange (FX) Inquiries and Litigation
The Corporation has received subpoenas and information requests from government
authorities in North America, Europe and the Asia Pacific region, including the DoJ, the U.S. Commodity Futures Trading Commission (CFTC) and the FCA, concerning submissions made by panel banks in connection with the setting of LIBOR and other reference rates. The Corporation is cooperating with these inquiries.
In addition, the Corporation and BANA have been named as defendants along with most of the other LIBOR panel banks in a series of individual and class actions in various U.S. federal and state courts relating to defendants’ LIBOR contributions. All cases naming the Corporation have been or are in the process of being consolidated for pre-trial purposes in the U.S. District Court for the Southern District of New York by the JPML. The Corporation expects that any future cases naming it will similarly be consolidated for pre-trial purposes. Plaintiffs allege that they held or transacted in U.S. Dollar LIBOR-based derivatives
or other financial instruments and sustained losses 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 and Racketeer Influenced and Corrupt Organizations (RICO), common law fraud, and breach of contract claims, and seek compensatory, treble and punitive damages, and injunctive relief.
In a series of rulings, the court dismissed antitrust, RICO and certain state law claims, while permitting the Commodity Exchange Act and other state law claims to proceed. As a result of a procedural ruling by the Supreme Court, plaintiffs are pursuing an immediate appeal of the dismissal of their antitrust claims. Further, based on the statute of limitations, the court has substantially
limited
the time period for which manipulation claims under the Commodity Exchange Act may be pursued. As to the Corporation and BANA, the court has also dismissed manipulation claims based on alleged trader conduct, and certain common law claims by plaintiffs who alleged no direct dealings with the Corporation or BANA. Other claims against the Corporation and BANA remain pending, however, and the court is continuing to consider motions regarding them, including the applicability of its prior rulings to subsequently filed actions.
Certain regulatory and government authorities in North America, Europe and the Asia Pacific region are conducting investigations and making inquiries of a significant number of FX market participants, including the Corporation, regarding FX market participants’ conduct and systems and controls over multiple years. The Corporation is cooperating with these investigations and inquiries, some of which are likely
to lead to regulatory or legal proceedings and expose the Corporation to material penalties, fines or losses, and could adversely affect its reputation.
In particular, in November 2014, the Corporation resolved a matter with the Office of the Comptroller of the Currency (OCC) by agreeing to the imposition of mandatory remedial measures and payment of $250 million in civil penalties associated with the Corporation’s FX business and its systems and controls.
The Corporation is in separate advanced discussions to resolve the regulatory matters of concern to another U.S. banking regulator involving the Corporation’s FX business and its systems and controls. There can be no assurances that these discussions will lead to a resolution, or of the amount or timing of any such resolution.
In addition,
in a consolidated amended complaint filed on March 31, 2014, the Corporation and BANA were named as defendants along with other FX market participants in a putative class action filed in the U.S. District Court for the Southern District of New York on behalf of plaintiffs and a putative class who allegedly transacted in FX and are domiciled in the U.S. or transacted in FX in the U.S. (the U.S. Action). On April 30, 2014, a substantively similar class action was filed against the Corporation and other FX market participants on behalf of a plaintiff and putative class allegedly located in Norway (the Foreign Action). The complaints allege that class members transacted with defendants at or around the time of the fixing of the WM/Reuters Closing Spot Rates or entered into transactions that settled in whole or in part based on the WM/Reuters Closing Spot Rates and that they
sustained losses as a result of the defendants’ alleged conspiracy to manipulate the WM/Reuters Closing Spot Rates. Plaintiffs in the U.S. Action assert a single claim for violations of Sections 1 and 3 of the Sherman Act, and plaintiff in the Foreign Action asserts claims for violations of the Sherman Act, as well as certain claims under New York statutory and common law. Plaintiffs seek compensatory and treble damages, and declaratory and injunctive relief.
On January 28, 2015, the court denied defendants’ motion to dismiss the U.S. Action, finding that plaintiffs had sufficiently pleaded the elements of an antitrust claim. In the same decision, the court granted with prejudice defendants’ motion to dismiss the Foreign Action, finding that the Sherman Act does not apply extraterritorially, except in limited circumstances not present in the case, and that plaintiff had failed
to plead an actionable state law claim.
Bank of America 2014 218
Montgomery
The Corporation, several current and former officers and directors, Banc of America Securities LLC (BAS), MLPF&S and other unaffiliated underwriters have been named as defendants in a putative class action filed in
the U.S. District Court for the Southern District of New York entitled Montgomery v. Bank of America, et al. Plaintiff filed an amended complaint on January 14, 2011. Plaintiff seeks to sue on behalf of all persons who acquired certain series of preferred stock offered by the Corporation pursuant to a shelf registration statement dated May 5, 2006. Plaintiff’s claims arise from three offerings dated January 24, 2008, January 28, 2008 and May 20, 2008, from which the Corporation allegedly received proceeds of $15.8 billion. The amended complaint asserts claims under Sections 11, 12(a)(2)
and 15 of the Securities Act of 1933, and alleges that the prospectus supplements associated with the offerings: (i) failed to disclose that the Corporation’s loans, leases, CDOs and commercial MBS were impaired to a greater extent than disclosed; (ii) misrepresented the extent of the impaired assets by failing to establish adequate reserves or properly record losses for its impaired assets; (iii) misrepresented the adequacy of the Corporation’s internal controls in light of the alleged impairment of its assets; (iv) misrepresented the Corporation’s capital base and Tier 1 leverage ratio for risk-based capital in light of the allegedly impaired assets; and (v) misrepresented the thoroughness and adequacy of the Corporation’s due diligence in connection with its acquisition of Countrywide. The amended complaint seeks rescission, compensatory and other damages. On March 16, 2012, the court granted defendants’ motion to
dismiss the first amended complaint. On December 3, 2013, the court denied plaintiffs’ motion to file a second amended complaint. On February 6, 2014, plaintiffs appealed the denial of their motion to amend to the U.S. Court of Appeals for the Second Circuit.
Mortgage-backed Securities Litigation
The Corporation and its affiliates, Countrywide entities and their affiliates, and Merrill Lynch entities and their affiliates have been named as defendants in a number of cases relating to their various roles as issuer, originator, seller, depositor, sponsor, underwriter and/or controlling entity in MBS offerings, pursuant to which the MBS investors were entitled to a portion of the cash flow from the underlying pools of mortgages. These cases generally include purported class action suits
and actions by individual MBS purchasers. Although the allegations vary by lawsuit, these cases generally allege that the registration statements, prospectuses and prospectus supplements for securities issued by securitization trusts contained material misrepresentations and omissions, in violation of the Securities Act of 1933 and/or state securities laws and other state statutory and common laws.
These cases generally involve allegations of false and misleading statements regarding: (i) the process by which the properties that served as collateral for the mortgage loans underlying the MBS were appraised; (ii) the percentage of equity that mortgage borrowers had in their homes; (iii) the borrowers’ ability to repay their mortgage loans; (iv) the underwriting practices by which those mortgage loans were originated; (v) the ratings given to the different tranches of MBS by rating agencies; and (vi) the validity of each issuing
trust’s title to the mortgage loans comprising the pool for that securitization (collectively, MBS Claims). Plaintiffs in these cases generally seek unspecified compensatory damages, unspecified costs and legal fees and, in some instances, seek rescission.
The Corporation, Countrywide, Merrill Lynch and/or their affiliates may have claims for and/or may be subject to claims for contractual indemnification in connection with their various roles in regard to MBS.
On August 15, 2011, the JPML ordered multiple federal court cases involving Countrywide MBS consolidated for pretrial purposes in the U.S. District Court for the Central District of California in a multi-district litigation entitled In re Countrywide Financial
Corp. Mortgage-Backed Securities Litigation (the Countrywide RMBS MDL).
Federal Home Loan Bank Litigation
On March 15, 2010, the Federal Home Loan Bank of San Francisco (FHLB San Francisco) filed an action in California Superior Court, San Francisco County, entitled Federal Home Loan Bank of San Francisco v. Credit Suisse Securities (USA) LLC, et al. FHLB San Francisco’s complaint asserts certain MBS Claims against BAS, Countrywide and several related entities in connection with its alleged purchase of 51 MBS offerings and one private placement issued and/or underwritten by those defendants between 2004 and 2007 and seeks rescission and unspecified damages. FHLB San
Francisco dismissed the federal claims with prejudice on August 11, 2011. On September 8, 2011, the court denied defendants’ motions to dismiss the state law claims. On December 20, 2013, FHLB San Francisco voluntarily dismissed its negligent misrepresentation claims with prejudice. On October 15, 2014, the court denied the parties’ cross-motions for summary judgment with respect to two Countrywide trusts that were to be part of a bellwether trial.
The parties have settled the action and other related actions for $420 million, as well as with respect to certain claims, additional consideration; all amounts were fully accrued as of December 31,
2014. Pursuant to the settlement, FHLB San Francisco has voluntarily dismissed its remaining claims with prejudice.
Luther Class Action Litigation and Related Actions
Beginning in 2007, a number of pension funds and other investors filed putative class action lawsuits alleging certain MBS Claims against Countrywide, several of its affiliates, MLPF&S, the Corporation, NB Holdings Corporation and certain other defendants. Those class action lawsuits concerned a total of 429 MBS offerings involving over $350 billion in securities issued by subsidiaries of Countrywide between 2005 and 2007. The actions, entitled Luther v. Countrywide Financial Corporation,
et al., Maine State Retirement System v. Countrywide Financial Corporation, et al., Western Conference of Teamsters Pension Trust Fund v. Countrywide Financial Corporation, et al., and Putnam Bank v. Countrywide Financial Corporation, et al., were all assigned to the Countrywide RMBS MDL court. On December 6, 2013, the court granted final approval to a settlement of these actions in the amount of $500 million. Beginning on January 14, 2014, a number of class members appealed to the U.S. Court of Appeals for the Ninth Circuit.
Prudential Insurance Litigation
On March 14,
2013, The Prudential Insurance Company of America and certain of its affiliates (collectively Prudential) filed a complaint in the U.S. District Court for the District of New Jersey, in a case entitled Prudential Insurance Company of America, et al. v. Bank of America, N.A., et al. Prudential has named the Corporation, Merrill
219 Bank of America 2014
Lynch
and a number of related entities as defendants. Prudential asserts certain MBS Claims pertaining to 54 MBS offerings from which Prudential alleges that it purchased securities between 2004 and 2007. Prudential seeks, among other relief, compensatory damages, rescission or a rescissory measure of damages, punitive damages and other unspecified relief. On April 17, 2014, the court granted in part and denied in part defendants’ motion to dismiss the complaint. Prudential thereafter split its claims into two separate complaints, filing an amended complaint in the original action and a complaint in a separate action entitled Prudential Portfolios 2, et al. v. Bank of America, N.A., et al. Both cases are pending in the U.S. District Court for the District of New Jersey. On February
5, 2015, the court granted in part and denied in part defendants’ motion to dismiss those complaints, granting plaintiff leave to replead in certain respects.
Mortgage Repurchase Litigation
U.S. Bank Litigation
On August 29, 2011, U.S. Bank, National Association (U.S. Bank), as trustee for the HarborView Mortgage Loan Trust 2005-10 (the Trust), a mortgage pool backed by loans originated by Countrywide Home Loans, Inc. (CHL), filed a complaint in New York Supreme Court, New York County, in a case entitled U.S. Bank National Association, as Trustee for HarborView Mortgage Loan Trust, Series 2005-10 v. Countrywide Home Loans, Inc. (dba Bank of America Home Loans), Bank of America Corporation, Countrywide Financial Corporation, Bank of America, N.A. and NB Holdings
Corporation. U.S. Bank asserts that, as a result of alleged misrepresentations by CHL in connection with its sale of the loans, defendants must repurchase all the loans in the pool, or in the alternative that it must repurchase a subset of those loans as to which U.S. Bank alleges that defendants have refused specific repurchase demands. U.S. Bank asserts claims for breach of contract and seeks specific performance of defendants’ alleged obligation to repurchase the entire pool of loans (alleged to have an original aggregate principal balance of $1.75 billion) or alternatively the aforementioned subset (alleged to have an aggregate principal balance of “over $100 million”), together with reimbursement of costs and expenses and other unspecified relief. On May
29, 2013, the New York Supreme Court dismissed U.S. Bank’s claim for repurchase of all the mortgage loans in the Trust. The court granted U.S. Bank leave to amend this claim. On June 18, 2013, U.S. Bank filed its second amended complaint seeking to replead its claim for repurchase of all loans in the Trust. On February 13, 2014, the court granted defendants’ motion to dismiss the repleaded claim seeking repurchase of all mortgage loans in the Trust; plaintiff has appealed that order.
On November 13, 2014, the court granted U.S. Bank’s motion for leave to amend the complaint; defendants have appealed that order. The amended complaint alleges breach of contract based upon defendants’ failure
to repurchase loans that were the subject of specific repurchase demands and also alleges breach of contract based upon defendants’ discovery, during origination and servicing, of loans with material breaches of representations and warranties.
U.S. Bank Summonses with Notice
On August 29, 2014, U.S. Bank, solely in its capacity as Trustee for seven securitization trusts (the Trusts), served seven summonses with notice commencing potential actions against First Franklin Financial Corporation, Merrill Lynch Mortgage
Lending,
Inc., Merrill Lynch Mortgage Investors, Inc., and Ownit Mortgage Solutions Inc. in New York Supreme Court, New York County. The summonses indicate that defendants may be subject to breach of contract claims alleging that they breached representations and warranties related to loans securitized in the Trusts. The summonses allege that defendants failed to repurchase breaching mortgage loans from the Trusts. The summonses seek specific performance of defendants’ alleged obligation to repurchase breaching loans, declaratory judgment, compensatory, rescissory and other damages, and indemnity. On February 5, 2015, defendants demanded complaints on three of the Trusts. Defendants currently have until March 3, 2015 to demand the complaint with
respect to one of the remaining Trusts, and until July 15, 2015 to demand complaints on the final three Trusts.
Ocala Investor Litigation
On November 25, 2009, BNP Paribas Mortgage Corporation (BNP) and Deutsche Bank AG each filed claims (the 2009 Actions) against BANA in the U.S. District Court for the Southern District of New York entitled BNP Paribas Mortgage Corporation v. Bank of America, N.A and Deutsche Bank AG v. Bank of America, N.A. Plaintiffs allege that BANA failed to properly perform its duties as indenture
trustee, collateral agent, custodian and depositary for Ocala Funding, LLC (Ocala), a home mortgage warehousing facility, resulting in the loss of plaintiffs’ investment in Ocala. Ocala was a wholly-owned subsidiary of Taylor, Bean & Whitaker Mortgage Corp. (TBW), a home mortgage originator and servicer which is alleged to have committed fraud that led to its eventual bankruptcy. Ocala provided funding for TBW’s mortgage origination activities by issuing notes, the proceeds of which were to be used by TBW to originate home mortgages. Such mortgages and other Ocala assets in turn were pledged to BANA, as collateral agent, to secure the notes. Plaintiffs lost most or all of their investment in Ocala when, as the result of the alleged fraud committed by TBW, Ocala was unable to repay the notes purchased by plaintiffs and there was insufficient collateral to satisfy Ocala’s debt obligations. Plaintiffs allege that BANA breached its contractual, fiduciary and other duties
to Ocala, thereby permitting TBW’s alleged fraud to go undetected. Plaintiffs seek compensatory damages and other relief from BANA, including interest and attorneys’ fees, in an unspecified amount, but which plaintiffs allege exceeds $1.6 billion.
On March 23, 2011, the court granted in part and denied in part BANA’s motions to dismiss the 2009 Actions. Plaintiffs filed amended complaints on October 1, 2012 that included additional contractual, tort and equitable claims. On June 6, 2013, the court granted BANA’s motion to dismiss plaintiffs’ claims for failure to sue, negligence, negligent misrepresentation and equitable relief.
On November
24, 2014, BANA moved for summary judgment and plaintiffs moved for partial summary judgment.
On February 19, 2015, BANA and BNP reached an agreement in principle to settle the 2009 actions for an amount not material to the Corporation’s results of operations, subject to the execution of a final settlement agreement.
O’Donnell Litigation
On February 24, 2012, Edward O’Donnell filed a sealed qui tam complaint under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) and the False Claims Act against the Corporation, individually, and as successor to Countrywide,
Bank
of America 2014 220
CHL and a Countrywide business division known as Full Spectrum Lending. On October 24, 2012, the DoJ filed a complaint-in-intervention to join the matter, adding BANA, Countrywide and CHL as defendants. The action is entitled United States of America, ex rel, Edward O’Donnell, appearing Qui Tam v. Bank of America Corp., et al., and was filed in the U.S. District Court for the Southern District of New York. The complaint-in-intervention asserted certain fraud claims in connection with the sale of loans to FNMA and FHLMC by Full Spectrum Lending and by the Corporation and BANA. On January
11, 2013, the government filed an amended complaint which added Countrywide Bank, FSB (CFSB) and a former officer of the Corporation as defendants. The court dismissed False Claims Act counts on May 8, 2013. On September 6, 2013, the government filed a second amended complaint alleging claims under FIRREA concerning allegedly fraudulent loan sales to the GSEs between August 2007 and May 2008. On September 24, 2013, the government dismissed the Corporation as a defendant.
Following a trial, on October 23, 2013, a verdict of liability was returned against CHL, CFSB and BANA. On July 30, 2014, the court imposed a civil penalty of $1.3 billion
on BANA. On February 3, 2015, the court denied the Corporation’s motions for judgment as a matter of law, or in the alternative, a new trial. The Corporation will appeal the verdict and judgment.
Pennsylvania Public School Employees’ Retirement System
The Corporation and several current and former officers were named as defendants in a putative class action filed in the U.S. District Court for the Southern District of New York entitled Pennsylvania Public School Employees’ Retirement System v. Bank of America, et al.
Following the filing of a complaint on February 2, 2011, plaintiff subsequently filed an amended complaint on September 23, 2011
in which plaintiff sought to sue on behalf of all persons who acquired the Corporation’s common stock between February 27, 2009 and October 19, 2010 and “Common Equivalent Securities” sold in a December 2009 offering. The amended complaint asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Sections 11 and 15 of the Securities Act of 1933, and alleged that the Corporation’s public statements: (i) concealed problems in the Corporation’s mortgage servicing business resulting from the widespread use of the Mortgage Electronic Recording System; (ii) failed to disclose the Corporation’s exposure to mortgage repurchase claims; (iii) misrepresented the adequacy of internal controls; and (iv) violated certain Generally Accepted Accounting Principles. The amended complaint sought unspecified damages.
On
July 11, 2012, the court granted in part and denied in part defendants’ motions to dismiss the amended complaint. All claims under the Securities Act were dismissed against all defendants, with prejudice. The motion to dismiss the claim against the Corporation under Section 10(b) of the Exchange Act was denied. All claims under the Exchange Act against the officers were dismissed, with leave to replead. Defendants moved to dismiss a second amended complaint in which plaintiff sought to replead claims against certain current and former officers under Sections 10(b) and 20(a). On April 17, 2013, the court granted in part and denied in part the motion to dismiss, sustaining Sections 10(b) and 20(a) claims against the current and former officers.
Policemen’s
Annuity Litigation
On April 11, 2012, the Policemen’s Annuity & Benefit Fund of the City of Chicago, on its own behalf and on behalf of a proposed class of purchasers of 41 RMBS trusts collateralized mostly by Washington Mutual-originated (WaMu) mortgages, filed a proposed class action complaint against BANA and other unrelated parties in the U.S. District Court for the Southern District of New York, entitled Policemen’s Annuity and Benefit Fund of the City of Chicago v. Bank of America, N.A. and U.S. Bank National Association. BANA and U.S. Bank are named as defendants in their capacities as trustees, with BANA (formerly LaSalle Bank National Association) having served as the original trustee and U.S. Bank having replaced BANA as trustee. Plaintiff asserted claims under the
federal Trust Indenture Act as well as state common law claims. Plaintiff alleged that, in light of the performance of the RMBS at issue, and in the wake of publicly-available information about the quality of loans originated by WaMu, the trustees were required to take certain steps to protect plaintiff’s interest in the value of the securities, and that plaintiff was damaged by defendants’ failures to notify it of deficiencies in the loans and of defaults under the relevant agreements, to ensure that the underlying mortgages could properly be foreclosed, and to enforce remedies available for loans that contained breaches of representations and warranties. Plaintiff sought unspecified compensatory damages and/or equitable relief, and costs and expenses. The court dismissed some of the common law claims, but allowed the Trust Indenture
Act claim and a claim for breach of contract to proceed. After the filing of two amended complaints and the consolidation of the case with a related matter filed on August 23, 2013, entitled Vermont Pension Investment Committee and the Washington State Investment Board v. Bank of America, N.A. and U.S. Bank National Association, 10 named plaintiffs filed a third amended complaint on October 31, 2013, on behalf of two proposed classes of purchasers of 35 trusts collateralized mostly by WaMu-originated mortgages (later reduced to 34
trusts).
On June 5, 2014, the parties informed the court that they had reached an agreement in principle to settle the case for an amount not material to the Corporation’s results of operations, subject to approval of plaintiffs’ boards. The settlement remains subject to final court approval and various conditions. On November 10, 2014, the court preliminarily approved the proposed settlement, and scheduled a final approval hearing for March 12, 2015.
Takefuji Litigation
In April 2010, Takefuji Corporation (Takefuji) filed a claim against Merrill Lynch International and Merrill Lynch Japan Securities (MLJS) in Tokyo District Court. The claim concerns Takefuji’s purchase in 2007 of credit-linked
notes structured and sold by defendants that resulted in a loss to Takefuji of approximately JPY29.0 billion (approximately $270 million) following an event of default. Takefuji alleges that defendants failed to meet certain disclosure obligations concerning the notes.
On July 19, 2013, the Tokyo District Court issued a judgment in defendants’ favor, a decision that Takefuji subsequently appealed to the Tokyo High Court. On August 27, 2014, the Tokyo High Court vacated the decision of the District Court and issued a judgment awarding Takefuji JPY14.5 billion (approximately $135 million) in damages, plus interest at a rate of five
percent from March 18, 2008. On September 10, 2014, defendants filed an appeal with the Japanese Supreme Court.
221 Bank of America 2014
NOTE 13 Shareholders’
Equity
Common Stock
Declared Quarterly Cash Dividends on Common Stock (1)
The Corporation repurchased and retired 101.1 million and 231.7 million shares of common stock, which reduced shareholders’ equity by $1.7 billion
and $3.2 billion in 2014 and 2013. In 2012, in connection with the exchanges described in Preferred Stock in this Note, the Corporation issued 50 million shares of its common stock.
At December 31, 2014, the Corporation had warrants outstanding and exercisable to purchase 121.8 million shares of common stock at an exercise price of $30.79 per share expiring on October 28, 2018, and warrants outstanding and exercisable to purchase 150.4
million shares of common stock at an exercise price of $13.24 per share expiring on January 16, 2019. These warrants were originally issued in connection with preferred stock issuances to the U.S. Department of the Treasury in 2009 and 2008, and are listed on the New York Stock Exchange. The terms of the warrants expiring on January 16, 2019 include a provision that requires an adjustment to the exercise price when the Corporation declares quarterly dividends at a level greater than $0.01 per common share. As a result of the Corporation’s third- and fourth-quarter 2014 dividends of $0.05 per common share, the exercise price of the warrants expiring on January
16, 2019 was adjusted from $13.30 to $13.24. The exercise price of these warrants is subject to continued adjustment each time the quarterly cash dividend is in excess of $0.01 per common share to compensate the shareholder for dilution resulting from an increased dividend, including as a result of the declaration of a quarterly common stock dividend of $0.05 per common share to be paid on March 27, 2015 to shareholders of record on March 6, 2015. The warrants expiring on October 18, 2018 also contain this anti-dilution provision except
the adjustment is triggered only when the Corporation declares quarterly dividends at a level greater than $0.32 per common share.
In connection with the issuance of the Corporation’s 6% Cumulative Perpetual Preferred Stock, Series T (the Series T Preferred Stock), the Corporation issued a warrant to purchase 700 million shares of the Corporation’s common stock. The warrant is exercisable at the holder’s option at any time, in whole or in part, until September 1, 2021, at an exercise price of $7.142857 per share of common stock. The warrant may be settled in cash or by exchanging all or a portion of the Series T Preferred Stock. For more information on the Series T Preferred Stock, see
Preferred Stock in this Note.
In connection with employee stock plans, in 2014, the Corporation issued approximately 43 million shares and repurchased approximately 17 million shares of its common stock to satisfy tax withholding obligations. At December 31, 2014, the Corporation had reserved 1.8 billion unissued shares of common
stock for future issuances under employee stock plans, common stock warrants, convertible notes and preferred stock.
Preferred
Stock
The cash dividends declared on preferred stock were $1.0 billion, $1.2 billion and $1.5 billion for 2014, 2013 and 2012.
On January 27, 2015, the Corporation issued 44,000 shares of its 6.500% Non-Cumulative Preferred Stock, Series Y for $1.1 billion. Dividends are paid quarterly commencing on April 27, 2015. Series Y Preferred Stock has a liquidation
preference of $25,000 per share and is subject to certain restrictions in the event that the Corporation fails to declare and pay full dividends.
At the Corporation’s annual meeting of stockholders on May 7, 2014, the stockholders approved an amendment to the Series T Preferred Stock such that it qualifies as Tier 1 capital, and the amendment became effective in the three months ended June 30, 2014. The more significant changes to the terms of the Series T Preferred Stock in the amendment were: (1) dividends are no longer cumulative; (2) the dividend rate is fixed at 6%; and (3) the Corporation may redeem the Series T Preferred Stock only after the fifth anniversary of the effective date of the amendment.
In
2014, the Corporation issued $6.0 billion of its Preferred Stock, Series V, X, W and Z. On June 17, 2014, the Corporation issued 60,000 shares of its Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series V for $1.5 billion. Dividends are paid semi-annually commencing on December 17, 2014. On September 5, 2014, the Corporation issued 80,000 shares of its Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series X for $2.0 billion. Dividends are paid semi-annually commencing on March
5, 2015. On September 9, 2014, the Corporation issued 44,000 shares of its 6.625% Non-Cumulative Preferred Stock, Series W for $1.1 billion. Dividends are paid quarterly commencing on December 9, 2014. On October 23, 2014, the Corporation issued 56,000 shares of its Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series Z for $1.4 billion. Dividends are paid semi-annually commencing on April 23, 2015. Series V, X, W and Z preferred stock have a liquidation preference of $25,000
per share and are subject to certain restrictions in the event that the Corporation fails to declare and pay full dividends.
In 2013, the Corporation redeemed for $6.6 billion its Non-Cumulative Preferred Stock, Series H, J, 6, 7 and 8. The $100 million difference between the carrying value of $6.5 billion and the redemption price of the preferred stock was recorded as a preferred stock dividend. In addition, the Corporation issued $1.0 billion of its Fixed-to-Floating Rate Semi-annual Non-Cumulative Preferred Stock, Series U.
In 2012, the Corporation entered into various agreements with certain
preferred stock and Trust Securities holders pursuant to which the Corporation and the holders of these securities agreed to exchange shares of various series of non-convertible preferred stock with a carrying value of $296 million and Trust Securities with a carrying value of $760 million for 50 million shares of the Corporation’s common stock with a fair value of $412 million, and $398 million in cash. The $246 million difference between the carrying value of the preferred stock and Trust Securities retired and the fair value of consideration issued was a $44 million reduction to preferred stock dividends recorded in retained earnings
and a $202 million gain recorded in noninterest income. In 2012, the Corporation issued shares of the Corporation’s Series F Preferred Stock and Series G Preferred Stock for $633 million under stock purchase contracts. For additional information, see the Preferred Stock Summary table in this Note.
Bank of America 2014 222
The
table below presents a summary of perpetual preferred stock outstanding at December 31, 2014.
Amounts
shown are before third-party issuance costs and certain purchase accounting adjustments of $196 million.
(2)
Series B Preferred Stock does not have early redemption/call rights.
(3)
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.
(4)
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.
(5)
Subject to 4.00% minimum rate per annum.
(6)
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 redemption date at which
time, it adjusts to a quarterly cash dividend, if and when declared, thereafter.
(7)
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.
(8)
Subject to 3.00% minimum rate per annum.
n/a = not applicable
223 Bank
of America 2014
Series L 7.25% Non-Cumulative Perpetual Convertible Preferred Stock (Series L Preferred Stock) listed in the Preferred Stock Summary table 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 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 subsequent to a dividend record date but prior to the dividend payment date, the Corporation will still pay any accrued dividends payable.
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 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 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.
Bank of America 2014 224
NOTE 14 Accumulated
Other Comprehensive Income (Loss)
The table below presents the changes in accumulated OCI after-tax for 2012, 2013 and 2014.
The
net change in fair value represents the impact of changes in spot foreign exchange rates on the Corporation’s net investment in non-U.S. operations, and related hedges.
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 before- and after-tax for 2014, 2013 and 2012.
Changes
in OCI Components Before- and After-tax
2014
2013
2012
(Dollars
in millions)
Before-tax
Tax effect
After-tax
Before-tax
Tax effect
After-tax
Before-tax
Tax
effect
After-tax
Available-for-sale debt securities:
Net
increase (decrease) in fair value
$
8,698
$
(3,268
)
$
5,430
$
(10,989
)
$
4,077
$
(6,912
)
$
3,676
$
(1,319
)
$
2,357
Net
realized gains reclassified into earnings
(1,338
)
508
(830
)
(1,251
)
463
(788
)
(1,609
)
595
(1,014
)
Net
change
7,360
(2,760
)
4,600
(12,240
)
4,540
(7,700
)
2,067
(724
)
1,343
Available-for-sale
marketable equity securities:
Net
increase in fair value
34
(13
)
21
32
(12
)
20
748
(277
)
471
Net
realized gains reclassified into earnings
—
—
—
(771
)
285
(486
)
(19
)
7
(12
)
Net
change
34
(13
)
21
(739
)
273
(466
)
729
(270
)
459
Derivatives:
Net
increase in fair value
195
(54
)
141
156
(51
)
105
430
(166
)
264
Net
realized losses reclassified into earnings
760
(285
)
475
773
(286
)
487
1,035
(383
)
652
Net
change
955
(339
)
616
929
(337
)
592
1,465
(549
)
916
Employee
benefit plans:
Net
increase (decrease) in fair value
(1,629
)
614
(1,015
)
2,985
(1,128
)
1,857
(1,891
)
660
(1,231
)
Net
realized losses reclassified into earnings
55
(23
)
32
237
(79
)
158
490
(192
)
298
Settlements,
curtailments and other
(1
)
41
40
46
(12
)
34
1,378
(510
)
868
Net
change
(1,575
)
632
(943
)
3,268
(1,219
)
2,049
(23
)
(42
)
(65
)
Foreign
currency:
Net
increase (decrease) in fair value
714
(879
)
(165
)
244
(384
)
(140
)
(226
)
233
7
Net
realized (gains) losses reclassified into earnings
20
(12
)
8
138
(133
)
5
(30
)
10
(20
)
Net
change
734
(891
)
(157
)
382
(517
)
(135
)
(256
)
243
(13
)
Total
other comprehensive income (loss)
$
7,508
$
(3,371
)
$
4,137
$
(8,400
)
$
2,740
$
(5,660
)
$
3,982
$
(1,342
)
$
2,640
225 Bank
of America 2014
The table below presents impacts on net income of significant amounts reclassified out of each component of accumulated OCI before- and after-tax for 2014, 2013 and 2012.
The calculation of earnings per common share (EPS) and diluted EPS for 2014, 2013 and 2012 is presented below. For more information on the calculation of EPS, see Note 1 – Summary of Significant Accounting Principles.
(Dollars
in millions, except per share information; shares in thousands)
2014
2013
2012
Earnings per common share
Net
income
$
4,833
$
11,431
$
4,188
Preferred stock dividends
(1,044
)
(1,349
)
(1,428
)
Net
income applicable to common shareholders
3,789
10,082
2,760
Dividends and undistributed earnings allocated to participating securities
—
(2
)
(2
)
Net
income allocated to common shareholders
$
3,789
$
10,080
$
2,758
Average common shares issued and outstanding
10,527,818
10,731,165
10,746,028
Earnings
per common share
$
0.36
$
0.94
$
0.26
Diluted
earnings per common share
Net income applicable to common shareholders
$
3,789
$
10,082
$
2,760
Add
preferred stock dividends due to assumed conversions
—
300
—
Dividends and undistributed earnings allocated to participating securities
—
(2
)
(2
)
Net
income allocated to common shareholders
$
3,789
$
10,380
$
2,758
Average common shares issued and outstanding
10,527,818
10,731,165
10,746,028
Dilutive
potential common shares (1)
56,717
760,253
94,826
Total diluted average common shares issued and outstanding
10,584,535
11,491,418
10,840,854
Diluted
earnings per common share
$
0.36
$
0.90
$
0.25
(1)
Includes
incremental dilutive shares from restricted stock units, restricted stock, stock options and warrants.
The Corporation previously issued a warrant to purchase 700 million shares of the Corporation’s common stock to the holder of the Series T Preferred Stock. The warrant may be exercised, at the option of the holder, through tendering the Series T Preferred Stock or paying cash. For 2014 and 2012, 700 million average dilutive potential common shares associated with the Series T Preferred Stock were not included in the diluted share count because the result would have been antidilutive under the “if-converted” method. For 2013, 700
million average dilutive potential common shares associated with the Series T Preferred Stock were included in the diluted share count under the “if-converted” method. For additional information, see Note 13 – Shareholders’ Equity.
For 2014, 2013 and 2012, 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 2014, 2013 and 2012, average options
to purchase 91 million, 126
million and 163 million shares of common stock, respectively, were outstanding but not included in the computation of EPS because the result would have been antidilutive under the treasury stock method. For 2014, 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 compared to 272 million shares for both 2013 and 2012.
For 2014, average warrants to purchase 150 million shares of common stock were included in the diluted EPS calculation under the treasury stock method.
In connection with the preferred stock actions described in Note 13 – Shareholders’ Equity, the Corporation recorded a $100 million non-cash preferred stock dividend in 2013 and a $44 million reduction to preferred stock dividends in 2012, both of which are included in the calculation of net income allocated to common shareholders.
227 Bank
of America 2014
NOTE 16 Regulatory Requirements and Restrictions
The Corporation manages its regulatory capital to comply with internal capital guidelines and regulatory standards of capital adequacy based on its current understanding of the rules and how they should be applied to its business as currently conducted.
The Federal Reserve, OCC and Federal Deposit Insurance Corporation (collectively, joint agencies) establish regulatory capital guidelines for U.S. banking organizations. Regulatory capital guidelines require that capital
be measured in relation to the credit and market risks of both on- and off-balance sheet items using various risk weights. On January 1, 2014, the Basel 3 rules became effective and include transition provisions through January 1, 2019. Under Basel 3, Total capital consists of two tiers of capital, Tier 1 and Tier 2. Tier 1 capital is further composed of Common equity tier 1 capital and additional tier 1 capital.
Common equity tier 1 capital primarily includes qualifying common shareholders’ equity, retained earnings, accumulated other comprehensive income and certain minority interests. Goodwill, disallowed intangible assets and certain disallowed deferred tax assets are excluded from Common equity tier 1 capital.
Additional tier 1 capital primarily includes qualifying non-cumulative
preferred stock, trust preferred securities (Trust Securities) subject to phase-out and certain minority interests. Certain deferred tax assets are also excluded.
Tier 2 capital primarily consists of qualifying subordinated debt, a limited portion of the allowance for loan and lease losses, Trust Securities subject to phase-out and reserves for unfunded lending commitments. The Corporation’s Total capital is the sum of Tier 1 capital plus Tier 2 capital.
To meet adequately capitalized regulatory requirements, an institution must maintain a Tier 1 capital ratio of 4.0 percent and a Total capital ratio of 8.0 percent. A “well-capitalized” institution must generally maintain capital
ratios 200 bps higher than the minimum guidelines. The risk-based capital rules have been further supplemented by a Tier 1 leverage ratio, defined as Tier 1 capital divided by quarterly average total assets, after certain adjustments. BHCs must have a minimum Tier 1 leverage ratio of at least 4.0 percent. National banks must maintain a Tier 1 leverage ratio of at least 5.0 percent to be classified as “well capitalized.” Failure to meet the capital requirements established by the joint agencies can lead to certain mandatory and discretionary actions by regulators that could have a material adverse effect on the Corporation’s financial position. At December 31, 2014, the Corporation’s Tier 1 capital, Total capital and Tier 1
leverage ratios were 13.4 percent, 16.5 percent and 8.2 percent, respectively. Effective January 1, 2015, to meet adequately capitalized regulatory requirements, the Tier 1 capital ratio increases from 4.0 percent to 6.0 percent. This increase reflects a transfer of 2.0 percent from Tier 2 capital to Tier 1 capital, as less Tier 2 capital is permitted and more Tier 1 capital is required. The minimum Total capital ratio of 8.0 percent remains unchanged.
The table below presents capital ratios and related information in accordance with Basel 3 –
Standardized Transition as measured at December 31, 2014 and the Basel 1 – 2013 Rules at December 31, 2013. Prior to October 1, 2014, the Corporation operated its banking activities primarily under two charters: BANA and, to a lesser extent, FIA. On October 1, 2014, FIA was merged into BANA.
Regulatory
Capital
December 31
2014
2013
Basel
3 Transition
Basel 1
(Dollars in millions)
Ratio
Amount
Minimum
Required (1)
Ratio
Amount
Minimum
Required
(1)
Common equity tier 1 capital
Bank
of America Corporation
12.3
%
$
155,361
4.0
%
n/a
n/a
n/a
Bank
of America, N.A.
13.1
145,150
4.0
n/a
n/a
n/a
Tier
1 common capital
Bank
of America Corporation
n/a
n/a
n/a
10.9
%
$
141,522
n/a
Tier
1 capital
Bank
of America Corporation
13.4
168,973
6.0
12.2
157,742
6.0
%
Bank
of America, N.A.
13.1
145,150
6.0
12.3
125,886
6.0
Total
capital
Bank
of America Corporation
16.5
208,670
10.0
15.1
196,567
10.0
Bank
of America, N.A.
14.6
161,623
10.0
13.8
141,232
10.0
Tier
1 leverage
Bank
of America Corporation
8.2
168,973
5.0
7.7
157,742
5.0
Bank
of America, N.A.
9.6
145,150
5.0
9.2
125,886
5.0
Risk-weighted
assets (in billions)
Bank of America Corporation
n/a
1,262
n/a
n/a
1,298
n/a
Bank
of America, N.A.
n/a
1,105
n/a
n/a
1,020
n/a
Adjusted
quarterly average total assets (in billions) (2)
Bank of America Corporation
n/a
2,060
n/a
n/a
2,052
n/a
Bank
of America, N.A.
n/a
1,509
n/a
n/a
1,368
n/a
(1)
Percent
required to meet guidelines to be considered "well capitalized" under the Prompt Corrective Action framework, except for Common equity tier 1 capital which reflects capital adequacy minimum requirements as an advanced approaches bank under Basel 3 during a transition period in 2014.
(2)
Reflects adjusted average total assets for the three months ended December 31, 2014 and 2013.
n/a = not applicable
Bank
of America 2014 228
Regulatory Capital
As a financial services holding company, the Corporation is subject to regulatory capital rules issued by U.S. banking regulators. On January 1, 2014, the Corporation became subject to the Basel 3 rules, which include certain transition provisions through 2018. Basel 3 generally continues to be subject to interpretation and clarification by U.S. banking regulators. Through December 31, 2013, the Corporation was subject to the Basel 1 general risk-based capital rules which included new measures of market risk including a charge related to stressed
Value-at-Risk (VaR), an incremental risk charge and the comprehensive risk measure (CRM), as well as other technical modifications to Basel 1 (the Basel 1 – 2013 Rules).
Regulatory Capital Composition – Transition
Important differences in determining the composition of regulatory capital between the Basel 1 – 2013 Rules and Basel 3 include changes in capital deductions related to the Corporation’s MSRs, deferred tax assets and defined benefit pension assets, and the inclusion of unrealized gains and losses on AFS debt and certain marketable equity securities recorded in accumulated OCI. These changes will be impacted by, among other things, future changes in interest rates, overall earnings performance and corporate actions. Changes to the
composition of regulatory capital under Basel 3, as compared to the Basel 1 – 2013 Rules, are recognized in 20 percent annual increments, and will be fully recognized as of January 1, 2018. When presented on a fully phased-in basis, capital, risk-weighted assets and the capital ratios assume all regulatory capital adjustments and deductions are fully recognized.
Additionally, Basel 3 revised the regulatory capital treatment for Trust Securities, requiring them to be partially transitioned from Tier 1 capital into Tier 2 capital in 2014 and 2015, until fully excluded from Tier 1 capital in 2016, and partially transitioned from Tier 2 capital beginning in 2016 with the full amount excluded in 2022.
Other Regulatory Matters
On
February 18, 2014, the Federal Reserve approved a final rule implementing certain enhanced supervisory and prudential
requirements established under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The final rule formalizes risk management requirements primarily related to governance and liquidity risk management and reiterates the provisions of previously issued final rules related to risk-based and leverage capital and stress test requirements. Also, a debt-to-equity limit may be enacted for an individual BHC if it is determined to pose a grave threat to the financial stability of the U.S. Such limit is at the discretion of the Financial Stability Oversight Council (FSOC) or the Federal Reserve on behalf of the FSOC.
The
Federal Reserve requires the Corporation’s banking subsidiaries to maintain reserve balances based on a percentage of certain deposits. Average daily reserve balance requirements for the Corporation by the Federal Reserve were $18.2 billion and $16.6 billion for 2014 and 2013. Currency and coin residing in branches and cash vaults (vault cash) are used to partially satisfy the reserve requirement. The average daily reserve balances, in excess of vault cash, held with the Federal Reserve amounted to $9.1 billion and $7.8 billion for 2014 and 2013.
As of December 31, 2014 and 2013, the Corporation had cash in the amount of $4.5 billion and $6.0 billion, and securities with a fair value of $13.1 billion and $8.4 billion that were segregated in compliance with securities regulations or deposited with clearing organizations.
The primary sources of funds for cash distributions by the Corporation to its shareholders are capital distributions received from its banking subsidiary, BANA. In 2014, the Corporation received $12.4
billion in dividends from BANA. Prior to its merger with BANA, FIA returned capital of $4.2 billion to the Corporation in 2014. In 2015, BANA can declare and pay dividends of $16.9 billion to the Corporation plus an additional amount equal to its retained net profits for 2015 up to the date of any such dividend declaration. Bank of America California, N.A. can pay dividends of $924 million in 2015 plus an additional amount equal to its retained net profits for 2015 up to the date of any such dividend declaration. The amount of dividends that each subsidiary bank may
declare in a calendar year 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.
229 Bank of America 2014
NOTE 17 Employee
Benefit Plans
Pension and Postretirement Plans
The Corporation sponsors noncontributory trusteed pension plans, a number of noncontributory nonqualified pension plans, and postretirement health and life plans that cover eligible employees. As discussed below, certain of the pension plans were amended, effective June 30, 2012, to freeze benefits earned. The pension plans provide defined benefits based on an employee’s compensation and years of service. The Bank of America Pension Plan (the Pension Plan) provides participants with compensation credits, generally based on years of service. In 2013, the Corporation merged a defined benefit pension plan, which covered eligible employees of certain legacy companies, into the Bank of America Pension Plan. This plan is referred to as the Qualified Pension Plan (Qualified Pension Plans prior
to this merger). For account balances based on compensation credits prior to January 1, 2008, the Pension Plan allows participants to select from various earnings measures, which are based on the returns of certain funds or common stock of the Corporation. The participant-selected earnings measures determine the earnings rate on the individual participant account balances in the Pension Plan. Participants may elect to modify earnings measure allocations on a periodic basis subject to the provisions of the Pension Plan. For account balances based on compensation credits subsequent to December 31, 2007, the account balance earnings rate is based on a benchmark rate. For eligible employees in the Pension Plan on or after January 1, 2008, the benefits become vested upon completion of three
years of service. It is the policy of the Corporation to fund no less than the minimum funding amount required by ERISA.
The Pension Plan has a balance guarantee feature for account balances with participant-selected earnings, 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.
As a result of acquisitions, the Corporation assumed the obligations related to the pension plans of certain legacy companies. The benefit structures under these acquired plans have not changed and remain intact in the merged plan. Certain benefit structures are substantially similar to the Pension Plan discussed above; however, certain of these structures do not allow participants to select various
earnings measures; rather the earnings rate is based on a benchmark rate. In addition, these structures include participants with benefits determined under formulas based on average or career compensation and years of service rather than by reference to a pension account. Certain of the other structures provide a participant’s retirement benefits based on the number of years of benefit service and a percentage of the participant’s average annual compensation during the five highest paid consecutive years of the last 10 years of employment.
The 2013 merger of the defined benefit pension plan into the Qualified Pension Plan required a remeasurement of the qualified pension obligations and plan assets at fair value as of the merger date in addition to the required December 31 remeasurement. The 2013 remeasurements resulted in an increase
in accumulated OCI of $2.0 billion, net-of-tax.
In 2012, in connection with a redesign of the Corporation’s retirement plans, the Compensation and Benefits Committee of the Corporation’s Board of Directors approved amendments to freeze benefits earned in the Qualified Pension Plans effective
June 30, 2012. As a result of freezing the Qualified Pension Plans, a curtailment was triggered and a remeasurement of the qualified pension obligations and plan assets occurred. As of the remeasurement date, the plan assets had increased in value from the prior measurement date resulting in an increase in the funded status of the plan and the curtailment impact reduced the projected benefit obligation.
The combined impact resulted in a $1.3 billion increase to the net pension assets recognized in other assets and a corresponding increase in accumulated OCI of $832 million, net-of-tax. The impact of the immediate recognition of the prior service cost of $58 million was recorded in personnel expense as a curtailment loss in 2012.
As a result of freezing the Qualified Pension Plans, the amortization period for actuarial gains and losses was changed from the average working life to the estimated average lifetime of benefits being paid.
The Corporation assumed the obligations related to the plans of Merrill Lynch. These plans include a terminated U.S. pension plan (the Other Pension Plan), non-U.S. pension plans, nonqualified pension plans
and postretirement plans. The non-U.S. pension plans vary based on the country and local practices.
The Corporation has an annuity contract, previously purchased by Merrill Lynch, that guarantees the payment of benefits vested under the 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 2014 or 2013. Contributions may be required in the future under this agreement.
The Corporation sponsors a number of noncontributory, nonqualified pension plans (the Nonqualified Pension Plans). As a result of acquisitions, the Corporation
assumed the obligations related to the noncontributory, nonqualified pension plans of certain legacy companies including Merrill Lynch. These plans, which are unfunded, provide defined pension benefits to certain employees.
In addition to retirement pension benefits, full-time, salaried employees and certain part-time employees may become eligible to continue participation as retirees in health care and/or life insurance plans sponsored by the Corporation. Based on the other provisions of the individual plans, certain retirees may also have the cost of these benefits partially paid by the Corporation. The obligations assumed as a result of acquisitions are substantially similar to the Corporation’s postretirement health and life plans, except for Countrywide which did not have a postretirement health and life plan. Collectively, 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, 2014 and 2013. Amounts recognized at December 31, 2014 and 2013 are reflected in other assets, and in accrued expenses and other liabilities on the Consolidated Balance Sheet. The estimation of the Corporation’s PBO associated with these plans considers various actuarial assumptions, including assumptions for mortality
rates and discount rates. As of December 31, 2014, the Corporation adopted mortality assumptions published by the Society of Actuaries in October 2014, adjusted to reflect observed and anticipated future mortality
Bank of America 2014 230
experience of the participants in the Corporation’s
U.S. plans. The adoption of the new mortality assumptions resulted in an increase to the PBO of approximately $580 million at December 31, 2014. 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 decrease in weighted-average discount rates in 2014 resulted in an increase to the PBO of
The
Corporation’s best 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 2015 is $56 million, $101 million and $87 million, respectively. The Corporation does not expect to make a contribution to the Qualified Pension Plan in 2015.
Pension
and Postretirement Plans
Qualified
Pension
Plan (1)
Non-U.S.
Pension Plans (1)
Nonqualified
and Other
Pension Plans (1)
Postretirement
Health and Life
Plans (1)
(Dollars
in millions)
2014
2013
2014
2013
2014
2013
2014
2013
Change
in fair value of plan assets
Fair
value, January 1
$
18,276
$
16,274
$
2,457
$
2,306
$
2,720
$
3,063
$
72
$
86
Actual
return on plan assets
1,261
2,873
256
146
336
(217
)
6
9
Company
contributions
—
—
84
131
97
98
53
61
Plan
participant contributions
—
—
1
1
—
—
129
138
Settlements
and curtailments
—
—
(5
)
(80
)
—
(7
)
—
—
Benefits
paid
(923
)
(871
)
(68
)
(80
)
(226
)
(217
)
(248
)
(237
)
Federal
subsidy on benefits paid
n/a
n/a
n/a
n/a
n/a
n/a
16
15
Foreign
currency exchange rate changes
n/a
n/a
(161
)
33
n/a
n/a
n/a
n/a
Fair
value, December 31
$
18,614
$
18,276
$
2,564
$
2,457
$
2,927
$
2,720
$
28
$
72
Change
in projected benefit obligation
Projected
benefit obligation, January 1
$
14,145
$
15,655
$
2,580
$
2,460
$
3,070
$
3,334
$
1,356
$
1,574
Service
cost
—
—
29
32
1
1
8
9
Interest
cost
665
623
109
98
133
120
58
54
Plan
participant contributions
—
—
1
1
—
—
129
138
Plan
amendments
—
—
1
2
—
—
—
—
Settlements
and curtailments
—
17
(6
)
(116
)
—
(7
)
—
—
Actuarial
loss (gain)
1,621
(1,279
)
208
156
351
(161
)
29
(197
)
Benefits
paid
(923
)
(871
)
(68
)
(80
)
(226
)
(217
)
(248
)
(237
)
Federal
subsidy on benefits paid
n/a
n/a
n/a
n/a
n/a
n/a
16
15
Foreign
currency exchange rate changes
n/a
n/a
(166
)
27
n/a
n/a
(2
)
—
Projected
benefit obligation, December 31
$
15,508
$
14,145
$
2,688
$
2,580
$
3,329
$
3,070
$
1,346
$
1,356
Amount
recognized, December 31
$
3,106
$
4,131
$
(124
)
$
(123
)
$
(402
)
$
(350
)
$
(1,318
)
$
(1,284
)
Funded
status, December 31
Accumulated
benefit obligation
$
15,508
$
14,145
$
2,582
$
2,463
$
3,329
$
3,067
n/a
n/a
Overfunded
(unfunded) status of ABO
3,106
4,131
(18
)
(6
)
(402
)
(347
)
n/a
n/a
Provision
for future salaries
—
—
106
117
—
3
n/a
n/a
Projected
benefit obligation
15,508
14,145
2,688
2,580
3,329
3,070
$
1,346
$
1,356
Weighted-average
assumptions, December 31
Discount
rate
4.12
%
4.85
%
3.56
%
4.30
%
3.80
%
4.55
%
3.75
%
4.50
%
Rate
of compensation increase
n/a
n/a
4.70
4.91
4.00
4.00
n/a
n/a
(1)
The
measurement date for the Qualified Pension Plan, Non-U.S. Pension Plans, Nonqualified and Other Pension Plans, and Postretirement Health and Life Plans was December 31 of each year reported.
n/a = not applicable
Amounts recognized on the Consolidated Balance Sheet at December 31, 2014 and 2013 are presented in the table below.
Amounts
Recognized on Consolidated Balance Sheet
Qualified
Pension
Plan
Non-U.S.
Pension Plans
Nonqualified
and Other
Pension Plans
Postretirement
Health and Life
Plans
(Dollars in millions)
2014
2013
2014
2013
2014
2013
2014
2013
Other
assets
$
3,106
$
4,131
$
252
$
205
$
786
$
777
$
—
$
—
Accrued
expenses and other liabilities
—
—
(376
)
(328
)
(1,188
)
(1,127
)
(1,318
)
(1,284
)
Net
amount recognized at December 31
$
3,106
$
4,131
$
(124
)
$
(123
)
$
(402
)
$
(350
)
$
(1,318
)
$
(1,284
)
231 Bank
of America 2014
Pension Plans with ABO and PBO in excess of plan assets as of December 31, 2014 and 2013 are presented in the table below. For the non-qualified plans not subject to ERISA or non-U.S. pension 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)
2014
2013
2014
2013
Plans with ABO in excess of
plan assets
PBO
$
583
$
617
$
1,190
$
1,129
ABO
563
606
1,190
1,126
Fair
value of plan assets
206
290
2
2
Plans with PBO in excess of plan assets
PBO
$
583
$
720
$
1,190
$
1,129
Fair
value of plan assets
206
392
2
2
Net periodic benefit cost of the Corporation’s plans for 2014,
2013 and 2012 included the following components.
Components
of Net Periodic Benefit Cost
Qualified
Pension Plan
Non-U.S. Pension Plans
(Dollars in millions)
2014
2013
2012
2014
2013
2012
Components
of net periodic benefit cost
Service
cost
$
—
$
—
$
236
$
29
$
32
$
40
Interest
cost
665
623
681
109
98
97
Expected
return on plan assets
(1,018
)
(1,024
)
(1,246
)
(137
)
(121
)
(137
)
Amortization
of prior service cost
—
—
9
1
—
—
Amortization
of net actuarial loss (gain)
111
242
469
3
2
(9
)
Recognized
loss (gain) due to settlements and curtailments
—
17
58
2
(7
)
—
Net
periodic benefit cost (income)
$
(242
)
$
(142
)
$
207
$
7
$
4
$
(9
)
Weighted-average
assumptions used to determine net cost for years ended December 31
Discount
rate
4.85
%
4.00
%
4.95
%
4.30
%
4.23
%
4.87
%
Expected
return on plan assets
6.00
6.50
8.00
5.52
5.50
6.65
Rate
of compensation increase
n/a
n/a
4.00
4.91
4.37
4.42
Nonqualified
and Other Pension Plans
Postretirement Health and Life Plans
(Dollars in millions)
2014
2013
2012
2014
2013
2012
Components
of net periodic benefit cost
Service
cost
$
1
$
1
$
1
$
8
$
9
$
13
Interest
cost
133
120
138
58
54
71
Expected
return on plan assets
(124
)
(109
)
(152
)
(4
)
(5
)
(8
)
Amortization
of transition obligation
—
—
—
—
—
32
Amortization
of prior service cost (credits)
—
—
(3
)
4
4
4
Amortization
of net actuarial loss (gain)
25
25
8
(89
)
(42
)
(38
)
Recognized
loss due to settlements and curtailments
—
2
—
—
6
—
Net
periodic benefit cost (income)
$
35
$
39
$
(8
)
$
(23
)
$
26
$
74
Weighted-average
assumptions used to determine net cost for years ended December 31
Discount
rate
4.55
%
3.65
%
4.65
%
4.50
%
3.65
%
4.65
%
Expected
return on plan assets
4.60
3.75
5.25
6.00
6.50
8.00
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 period 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.
Net periodic postretirement health and life expense was determined using the “projected unit credit” actuarial method. 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. For the Postretirement Health Care Plans, 50 percent of the unrecognized gain or loss at the beginning of the fiscal 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
Bank of America
2014 232
Postretirement Health and Life Plans is 7.00 percent for 2015 and 2016, reducing in steps to 5.00 percent in 2021 and later years. A one-percentage-point increase in assumed health care cost trend rates would have increased the service and interest costs, and the benefit obligation by $2 million and $47 million in 2014. A one-percentage-point decrease in assumed health care cost trend
rates would have lowered the service and interest costs, and the benefit obligation by $2 million and $41 million in 2014.
The Corporation’s net periodic benefit cost (income) recognized for the plans is sensitive to the discount rate and expected return on plan assets. With all other assumptions held constant, a 25 basis point (bp) decline in the discount rate and expected return on plan asset assumptions would have resulted in an increase in the net periodic benefit cost for the Qualified Pension Plan
recognized in 2014 of approximately $7 million
and $43 million, and to be recognized in 2015 of approximately $9 million and $44 million. For the Postretirement Health and Life Plans, a 25 bp decline in the discount rate would have resulted in an increase in the net periodic benefit cost recognized in 2014 of approximately $9 million, and to be recognized in 2015 of approximately $10 million. For the Non-U.S. Pension Plans and the Nonqualified and Other Pension Plans, a 25 bp decline in discount rates would not have a significant impact on the net periodic benefit cost for 2014 and 2015.
Pretax
amounts included in accumulated OCI for employee benefit plans at December 31, 2014 and 2013 are presented in the table below.
Pretax
Amounts included in Accumulated OCI
Qualified
Pension
Plan
Non-U.S.
Pension Plans
Nonqualified
and Other
Pension Plans
Postretirement
Health and
Life Plans
Total
(Dollars in millions)
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
Net
actuarial loss (gain)
$
4,061
$
2,794
$
355
$
271
$
968
$
855
$
(56
)
$
(171
)
$
5,328
$
3,749
Prior
service cost (credits)
—
—
(9
)
(9
)
—
—
20
24
11
15
Amounts
recognized in accumulated OCI
$
4,061
$
2,794
$
346
$
262
$
968
$
855
$
(36
)
$
(147
)
$
5,339
$
3,764
Pretax
amounts recognized in OCI for employee benefit plans in 2014 included the following components.
Pretax
Amounts Recognized in OCI in 2014
(Dollars
in millions)
Qualified
Pension Plan
Non-U.S.
Pension Plans
Nonqualified and Other
Pension Plans
Postretirement Health and
Life Plans
Total
Current
year actuarial loss
$
1,378
$
87
$
138
$
26
$
1,629
Amortization
of actuarial gain (loss)
(111
)
(3
)
(25
)
89
(50
)
Current
year prior service cost
—
1
—
—
1
Amortization
of prior service cost
—
(1
)
—
(4
)
(5
)
Amounts
recognized in OCI
$
1,267
$
84
$
113
$
111
$
1,575
The
estimated pretax amounts that will be amortized from accumulated OCI into expense in 2015 are presented in the table below.
Estimated
Pretax Amounts Amortized from Accumulated OCI into Period Cost in 2015
(Dollars in millions)
Qualified
Pension
Plan
Non-U.S.
Pension Plans
Nonqualified and Other
Pension Plans
Postretirement Health and
Life Plans
Total
Net actuarial loss (gain)
$
166
$
6
$
34
$
(34
)
$
172
Prior
service cost
—
1
—
4
5
Total
amounts amortized from accumulated OCI
$
166
$
7
$
34
$
(30
)
$
177
233 Bank
of America 2014
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 equity exposure of participant-selected earnings measures. For example, the common stock of the Corporation held in the trust is maintained as an offset to the exposure related to participants who elected to receive an earnings measure based on the return performance of common stock of the Corporation. No plan assets are expected to be returned to
the Corporation during 2015.
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 plan’s liabilities. The current investment strategy was set following an asset-liability study and advice from the trustee’s investment advisors. The selected asset allocation strategy is designed to achieve a higher return than the lowest risk strategy while maintaining a prudent approach to meeting the plan’s liabilities.
The expected return on asset 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 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 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 terminated Other U.S. 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 2015 by asset category for 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.
2015
Target Allocation
Percentage
Asset Category
Qualified
Pension Plan
Non-U.S.
Pension Plans
Nonqualified
and
Other
Pension Plans
Postretirement
Health and Life
Plans
Equity securities
30 - 60
10 - 35
0 - 5
0 - 20
Debt securities
40 - 70
40 - 80
95 - 100
70
- 100
Real estate
0 - 10
0 - 15
0 - 5
0 - 5
Other
0 - 5
0 - 15
0 - 5
0 - 5
Equity securities for the Qualified Pension Plan include common stock of the Corporation in the amounts of $215 million
(1.15 percent of total plan assets) and $200 million (1.10 percent of total plan assets) at December 31, 2014 and 2013.
Bank of America 2014 234
Fair
Value Measurements
For 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 20 – Fair Value Measurements.
Combined plan investment assets measured at fair value by level and in total at December 31, 2014 and 2013 are summarized in the Fair Value Measurements table.
Other
investments include interest rate swaps of $297 million and $435 million, participant loans of $78 million and $87 million, commodity and balanced funds of $178 million and $229 million and other various investments of $65 million and $46 million at December 31, 2014 and 2013.
235 Bank
of America 2014
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 2014, 2013 and 2012.
Level 3
Fair Value Measurements
2014
(Dollars
in millions)
Balance
January 1
Actual Return on Plan Assets Still Held at the
Reporting Date
Purchases
Sales and Settlements
Transfers into/
(out of) Level 3
Balance
December 31
Fixed
income
U.S.
government and government agency securities
$
12
$
—
$
—
$
(1
)
$
—
$
11
Non-U.S.
debt securities
6
—
—
(2
)
(4
)
—
Real
estate
Private
real estate
119
5
5
(2
)
—
127
Real
estate commingled/mutual funds
462
20
150
—
—
632
Limited
partnerships
145
5
3
(88
)
—
65
Other
investments
135
1
1
(10
)
—
127
Total
$
879
$
31
$
159
$
(103
)
$
(4
)
$
962
2013
Fixed
income
U.S.
government and government agency securities
$
13
$
—
$
—
$
(1
)
$
—
$
12
Non-U.S.
debt securities
10
(2
)
—
(2
)
—
6
Real
estate
Private
real estate
110
4
7
(2
)
—
119
Real
estate commingled/mutual funds
324
15
123
—
—
462
Limited
partnerships
231
8
23
(89
)
(28
)
145
Other
investments
129
(6
)
13
(1
)
—
135
Total
$
817
$
19
$
166
$
(95
)
$
(28
)
$
879
2012
Fixed
income
U.S. government and government agency securities
$
13
$
—
$
—
$
—
$
—
$
13
Non-U.S.
debt securities
10
(1
)
1
(1
)
1
10
Real
estate
Private real estate
113
(2
)
2
(3
)
—
110
Real
estate commingled/mutual funds
249
13
62
—
—
324
Limited
partnerships
232
8
11
(20
)
—
231
Other
investments
122
7
4
(4
)
—
129
Total
$
739
$
25
$
80
$
(28
)
$
1
$
817
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
Postretirement
Health and Life Plans
(Dollars in millions)
Qualified
Pension Plan (1)
Non-U.S.
Pension Plans (2)
Nonqualified
and Other
Pension Plans (2)
Net
Payments (3)
Medicare
Subsidy
2015
$
921
$
55
$
244
$
130
$
14
2016
908
58
241
126
14
2017
900
62
242
122
14
2018
899
65
239
117
13
2019
895
72
236
111
13
2020
– 2024
4,407
449
1,136
495
58
(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.
Bank
of America 2014 236
Defined Contribution Plans
The Corporation maintains qualified defined contribution retirement plans and nonqualified defined contribution retirement plans. The Corporation contributed $1.0 billion, $1.1 billion and $886 million in 2014, 2013 and 2012, respectively, to the qualified defined contribution plans. At December
31, 2014 and 2013, 238 million and 235 million shares of the Corporation’s common stock were held by these plans. Payments to the plans for dividends on common stock were $29 million, $10 million and $10 million in 2014, 2013 and 2012, respectively.
Certain non-U.S. employees are covered under defined contribution pension plans that are separately administered in accordance with local laws.
NOTE 18 Stock-based
Compensation Plans
The Corporation administers a number of equity compensation plans, with awards being granted predominantly from the Corporation’s Key Associate Stock Plan. Under the Key Associate Stock Plan, the Corporation grants stock-based awards, including stock options, restricted stock and restricted stock units (RSUs). Grants in 2014 included RSUs which generally vest in three equal annual installments beginning one year from the grant date, and awards which will vest subject to the attainment of specified performance goals.
For most awards, expense is generally recognized ratably over the vesting period net of estimated forfeitures, unless the employee meets certain retirement eligibility criteria. For awards to employees that
meet retirement eligibility criteria, the Corporation records the expense upon grant. For employees that become retirement eligible during the vesting period, the Corporation recognizes expense from the grant date to the date on which the employee becomes retirement eligible, net of estimated forfeitures. The compensation cost for the stock-based plans was $2.30 billion, $2.28 billion and $2.27 billion in 2014, 2013 and 2012, respectively. The related income tax benefit was $854 million, $842 million and $839 million for 2014,
2013 and 2012, respectively.
Key Associate Stock Plan
The Key Associate Stock Plan became effective January 1, 2003. It provides for different types of awards, including stock options, restricted stock and RSUs. As of December 31, 2014, the shareholders had authorized approximately 1.1 billion shares for grant under this plan. Additionally, any shares covered by awards under certain legacy plans that cancel, terminate, expire, lapse or settle in cash after a specified date may be re-granted under the Key Associate Stock Plan.
During
2014, the Corporation issued 133 million RSUs to certain employees under the Key Associate Stock Plan. Certain awards are earned based on the achievement of specified performance criteria. RSUs may be settled in cash or in shares of
common stock depending on the terms of the applicable award. In 2014, two million of these RSUs were authorized to be settled in shares of common stock with the remainder in cash. Certain awards contain clawback provisions which permit the Corporation to cancel all or a portion of the award under specified circumstances. The compensation cost for cash-settled awards and awards subject to certain clawback provisions,
which in the aggregate represented substantially all of the awards in 2014, is accrued over the vesting period and adjusted to fair value based upon changes in the share price of the Corporation’s common stock.
From time to time, the Corporation enters into equity total return swaps to hedge a portion of RSUs granted to certain employees as part of their compensation in prior periods to minimize the change in the expense to the Corporation driven by fluctuations in the fair value of the RSUs. Certain of these derivatives are designated as cash flow hedges of unrecognized unvested awards with the changes in fair value of the hedge recorded in accumulated OCI and reclassified into earnings in the same period as the RSUs affect earnings. The remaining derivatives are used to hedge the price risk of cash-settled awards with changes in fair value recorded in personnel expense. For
information on amounts recognized on equity total return swaps used to hedge the Corporation’s outstanding RSUs, see Note 2 – Derivatives.
Other Stock Plans
The Corporation assumed the obligations of certain stock compensation plans with the acquisition of Merrill Lynch. These plans are no longer active and no awards were granted in 2014, 2013 or 2012. At December 31, 2014, five million unvested RSUs remained outstanding under the Merrill Lynch Financial
Advisor Capital Accumulation Award Plan. These awards were granted in 2003 and thereafter and are generally payable eight years from the grant date in a fixed number of the Corporation’s common shares.
Restricted Stock/Units
The table below presents the status at December 31, 2014 of the share-settled restricted stock/units and changes during 2014.
At December 31, 2014, there was an estimated $1.5 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 1.6 years. The total fair value of restricted stock vested in 2014, 2013 and 2012 was $576
million, $1.0 billion and $2.9 billion, respectively. In 2014, 2013 and 2012, the amount of cash paid to settle equity-based awards for all equity compensation plans was $1.7 billion, $1.4 billion and $779 million, respectively.
Stock Options
The table below presents the status of all option plans at December 31, 2014 and changes during 2014.
Outstanding
options at December 31, 2014 included 79 million options under the Key Associate Stock Plan and nine million options to employees of predecessor company plans assumed in mergers. All options outstanding as of December 31, 2014 were vested and exercisable with a weighted-average remaining contractual term of 1.6 years and have no aggregate intrinsic value. No options have been granted since 2008.
NOTE 19 Income
Taxes
The components of income tax expense (benefit) for 2014, 2013 and 2012 are presented in the table below.
Income
Tax Expense (Benefit)
(Dollars in millions)
2014
2013
2012
Current
income tax expense
U.S. federal
$
443
$
180
$
458
U.S.
state and local
340
786
592
Non-U.S.
513
513
569
Total
current expense
1,296
1,479
1,619
Deferred income tax expense (benefit)
U.S.
federal
583
2,056
(3,433
)
U.S. state and local
85
(94
)
(55
)
Non-U.S.
58
1,300
753
Total
deferred expense (benefit)
726
3,262
(2,735
)
Total income tax expense (benefit)
$
2,022
$
4,741
$
(1,116
)
Total
income tax expense (benefit) does not reflect the deferred tax effects of unrealized gains and losses on AFS debt and marketable equity securities, foreign currency translation adjustments, derivatives and employee benefit plan adjustments that are included in accumulated OCI. These tax effects resulted in an expense of $3.4 billion in 2014 and $1.3 billion in 2012, and a benefit of $2.7 billion in 2013, recorded in accumulated OCI. In addition, total income tax expense (benefit) does not reflect tax effects associated with the Corporation’s employee stock plans which decreased common stock and additional paid-in capital $35 million, $128
million and $277 million in 2014, 2013 and 2012, respectively.
Bank of America 2014 238
Income tax expense (benefit) for 2014, 2013
and 2012 varied from the amount computed by applying the statutory income tax rate to income before income taxes. A reconciliation of the expected U.S. federal income tax expense, calculated by applying the federal statutory tax rate of 35 percent, to the Corporation’s actual income tax expense (benefit), and the effective tax rates for 2014, 2013 and 2012 are presented in the table below.
Reconciliation
of Income Tax Expense (Benefit)
2014
2013
2012
(Dollars
in millions)
Amount
Percent
Amount
Percent
Amount
Percent
Expected U.S. federal income tax expense
$
2,399
35.0
%
$
5,660
35.0
%
$
1,075
35.0
%
Increase
(decrease) in taxes resulting from:
(0.001
)%
(0.001
)%
(0.001
)%
State
tax expense, net of federal benefit
276
4.0
450
2.8
349
11.4
Affordable
housing credits/other credits
(950
)
(13.8
)
(863
)
(5.3
)
(783
)
(25.5
)
Changes
in prior period UTBs, including interest
(741
)
(10.8
)
(255
)
(1.6
)
(198
)
(6.4
)
Tax-exempt
income, including dividends
(533
)
(7.8
)
(524
)
(3.2
)
(576
)
(18.8
)
Non-U.S.
tax rate differential (1)
(507
)
(7.4
)
(940
)
(5.8
)
(1,968
)
(64.1
)
Nondeductible
expenses
1,982
28.9
104
0.6
231
7.5
Leveraged
lease tax differential
53
0.8
26
0.2
83
2.7
Non-U.S.
statutory rate reductions
—
—
1,133
7.0
788
25.7
Other
43
0.6
(50
)
(0.4
)
(117
)
(3.8
)
Total
income tax expense (benefit)
$
2,022
29.5
%
$
4,741
29.3
%
$
(1,116
)
(36.3
)%
(1)
Includes in 2012, a $1.7 billion income tax benefit attributable to the excess of foreign tax credits recognized in the U.S. upon repatriation of the earnings of certain non-U.S. subsidiaries over the related U.S. tax liability.
The reconciliation of the beginning unrecognized tax benefits (UTB) balance to the ending balance is presented in the table below.
Reconciliation
of the Change in Unrecognized Tax Benefits
(Dollars in millions)
2014
2013
2012
Balance,
January 1
$
3,068
$
3,677
$
4,203
Increases related to positions taken during the current year
75
98
352
Increases
related to positions taken during prior years (1)
519
254
142
Decreases related to positions taken during prior years (1)
(973
)
(508
)
(711
)
Settlements
(1,594
)
(448
)
(205
)
Expiration
of statute of limitations
(27
)
(5
)
(104
)
Balance, December 31
$
1,068
$
3,068
$
3,677
(1)
The
sum per year of positions taken during prior years differs from the $741 million, $255 million and $198 million in the Reconciliation of Income Tax Expense (Benefit) table due to temporary items, state items and jurisdictional offsets, as well as the inclusion of interest in the Reconciliation of Income Tax Expense (Benefit) table.
At December 31, 2014, 2013 and 2012, the balance of the Corporation’s UTBs which would, if recognized, affect the Corporation’s effective tax rate was $0.7 billion,
$2.5 billion and $3.1 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.
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 significant business operations examine tax returns periodically (continuously in some jurisdictions). The Tax Examination Status table summarizes the status of significant examinations
(U.S. federal unless otherwise noted) for the Corporation and various subsidiaries as of December 31, 2014.
Tax Examination Status
Years
under
Examination
Status at December 31 2014
U.S. (1)
2010 – 2011
IRS Appeals
U.S.
2012 – 2013
Field examination
New York
2008 – 2012
Field
examination
U.K.
2012
Field examination
(1)
Field examination completed during 2014. The Corporation filed a protest related to certain adjustments with the IRS administrative appeals division.
During 2014, the Corporation settled and effectively resolved the federal examinations related to years 2005 through 2009 and all open Merrill
Lynch years through 2008, as well as various state and local examinations for multiple years.
239 Bank of America 2014
It is reasonably possible that the UTB balance may decrease by as much as $0.4 billion during the next 12 months, since resolved items will be removed from the balance whether their resolution results in payment or recognition.
During
2014, 2013 and 2012, the Corporation recognized a benefit of $196 million and expense of $127 million and $99 million, respectively, for interest and penalties, net-of-tax, in income tax expense. At December 31, 2014 and 2013, the Corporation’s accrual for interest and penalties that related to income taxes, net of taxes and remittances, was $455 million and $888 million.
Significant components of the
Corporation’s net deferred tax assets and liabilities at December 31, 2014 and 2013 are presented in the table below.
Deferred Tax Assets and Liabilities
December
31
(Dollars in millions)
2014
2013
Deferred tax assets
Net operating loss carryforwards
$
9,787
$
10,967
Accrued
expenses
5,916
6,749
Tax credit carryforwards
5,614
9,689
Security, loan and debt valuations
5,190
4,264
Allowance
for credit losses
5,047
6,100
Employee compensation and retirement benefits
3,665
2,729
State income taxes
2,034
2,643
Available-for-sale
securities
—
1,918
Other
1,688
722
Gross deferred tax assets
38,941
45,781
Valuation
allowance
(1,111
)
(1,940
)
Total deferred tax assets, net of valuation allowance
37,830
43,841
Deferred
tax liabilities
Equipment lease financing
2,880
3,106
Intangibles
1,349
1,529
Mortgage
servicing rights
1,041
1,547
Available-for-sale securities
828
—
Fee income
816
798
Long-term
borrowings
587
3,033
Other
2,075
1,472
Gross deferred tax liabilities
9,576
11,485
Net
deferred tax assets
$
28,254
$
32,356
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, 2014.
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.
$
3,065
$
—
$
3,065
After
2027
Net operating losses – U.K.
6,276
—
6,276
None (1)
Net operating losses – other non-U.S.
446
(316
)
130
Various
Net
operating losses – U.S. states (2)
1,168
(460
)
708
Various
General business credits
3,383
—
3,383
After
2029
Foreign tax credits
2,231
(68
)
2,163
After 2022
(1)
The
U.K. net operating losses 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 $1.8 billion and $708 million.
Management concluded that no valuation allowance was necessary to reduce the U.K. NOL carryforwards and U.S. NOL and general business credit 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 and forecasts, the reorganization of certain business activities and the indefinite period to carry forward NOLs. However, significant changes to those estimates, such as changes that would be caused by a substantial and prolonged worsening of the condition of Europe’s capital markets, or a change in applicable laws, could lead management to reassess its U.K. valuation allowance conclusions.
At December 31, 2014, U.S. federal income taxes had not been provided on $17.2 billion of undistributed earnings of non-U.S. subsidiaries
that management has determined have been reinvested for an indefinite period of time. If the Corporation were to record a deferred tax liability associated with these undistributed earnings, the amount would be approximately $4.5 billion at December 31, 2014.
Bank of America 2014 240
NOTE 20 Fair
Value Measurements
Under applicable accounting guidance, 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 based on the fair value hierarchy established under applicable accounting guidance which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs used to measure fair value. The Corporation conducts a review of its 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 became unobservable or observable, respectively, in the current marketplace. These transfers are considered to be effective as of the beginning of the quarter in which they occur. 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 additional information, see Note 21 – Fair Value Option.
Valuation Processes and Techniques
The Corporation has various processes and controls in place to ensure that fair value is reasonably estimated. A model validation policy governs the use and control of valuation models used to
estimate fair value. This policy requires review and approval of models by personnel who are independent of the front office, and periodic reassessments of models to ensure that they are continuing to perform as designed. In addition, detailed reviews of trading gains and losses are conducted on a daily basis by personnel who are independent of the front office. A price verification group, which is also independent of the front office, utilizes available market information including executed trades, market prices and market-observable valuation model inputs to ensure that fair values are reasonably estimated. The Corporation performs due diligence procedures over third-party pricing service providers in order to support their use in the valuation process. Where market information is not available to support internal valuations, independent reviews of the valuations are performed and any material exposures are escalated through a management review process.
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 2014, except for the adoption of FVA, there were no changes to the valuation techniques that had, or are expected to have, a material impact on the Corporation’s consolidated financial position or results of operations.
Level 1, 2 and 3 Valuation Techniques
Financial instruments are considered Level 1 when the valuation is based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instruments are valued using quoted prices for similar assets or liabilities,
quoted prices in markets that are not active, or models using inputs that are observable or
can be corroborated by observable market data for substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques, and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation.
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, or positions within a market sector where trading activity has slowed significantly or ceased. Some of these instruments are valued using a discounted cash flow model, which estimates the fair value of the securities using internal credit risk, 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
241 Bank of America 2014
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 determined using models that rely on estimates of prepayment rates, the resultant weighted-average lives of the MSRs and the option-adjusted spread levels. For more information on MSRs, see Note 23 – Mortgage Servicing Rights.
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.
Private Equity Investments
Private equity investments consist
of direct investments and fund investments which are initially valued at their transaction price. Thereafter, the fair value of direct investments is based on an assessment of each individual investment using methodologies that include publicly-traded comparables derived by multiplying a key performance metric (e.g., earnings before interest, taxes, depreciation and amortization) of the portfolio company by the relevant valuation multiple observed for comparable companies, acquisition comparables, entry level multiples and discounted cash flow analyses, and are subject to appropriate discounts for lack of liquidity or marketability. After initial recognition, the fair value of fund investments is based on the Corporation’s proportionate interest in the fund’s capital as reported by the respective fund managers.
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, 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 spreads 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 spreads 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 2014 242
Recurring Fair Value
Assets and liabilities carried at fair value on a recurring basis at December 31, 2014 and 2013, including financial instruments which the Corporation accounts for under the fair value option, are summarized in the following tables.
Federal
funds sold and securities borrowed or purchased under agreements to resell
$
—
$
62,182
$
—
$
—
$
62,182
Trading
account assets:
U.S.
government and agency securities (2)
33,470
17,549
—
—
51,019
Corporate
securities, trading loans and other
243
31,699
3,270
—
35,212
Equity
securities
33,518
22,488
352
—
56,358
Non-U.S.
sovereign debt
20,348
15,332
574
—
36,254
Mortgage
trading loans and ABS
—
10,879
2,063
—
12,942
Total
trading account assets
87,579
97,947
6,259
—
191,785
Derivative
assets (3)
4,957
972,977
6,851
(932,103
)
52,682
AFS
debt securities:
U.S.
Treasury and agency securities
67,413
2,182
—
—
69,595
Mortgage-backed
securities:
Agency
—
165,039
—
—
165,039
Agency-collateralized
mortgage obligations
—
14,248
—
—
14,248
Non-agency
residential
—
4,175
279
—
4,454
Commercial
—
4,000
—
—
4,000
Non-U.S.
securities
3,191
3,029
10
—
6,230
Corporate/Agency
bonds
—
368
—
—
368
Other
taxable securities
20
9,104
1,667
—
10,791
Tax-exempt
securities
—
8,950
599
—
9,549
Total
AFS debt securities
70,624
211,095
2,555
—
284,274
Other
debt securities carried at fair value:
U.S. Treasury and agency securities
1,541
—
—
—
1,541
Mortgage-backed
securities:
Agency
—
15,704
—
—
15,704
Non-agency
residential
—
3,745
—
—
3,745
Non-U.S.
securities
13,270
1,862
—
—
15,132
Other
taxable securities
—
299
—
—
299
Total
other debt securities carried at fair value
14,811
21,610
—
—
36,421
Loans
and leases
—
6,698
1,983
—
8,681
Mortgage
servicing rights
—
—
3,530
—
3,530
Loans
held-for-sale
—
6,628
173
—
6,801
Other
assets
11,581
1,381
911
—
13,873
Total
assets (4)
$
189,552
$
1,380,518
$
22,262
$
(932,103
)
$
660,229
Liabilities
Interest-bearing
deposits in U.S. offices
$
—
$
1,469
$
—
$
—
$
1,469
Federal
funds purchased and securities loaned or sold under agreements to repurchase
—
35,357
—
—
35,357
Trading
account liabilities:
U.S.
government and agency securities
18,514
446
—
—
18,960
Equity
securities
24,679
3,670
—
—
28,349
Non-U.S.
sovereign debt
16,089
3,625
—
—
19,714
Corporate
securities and other
189
6,944
36
—
7,169
Total
trading account liabilities
59,471
14,685
36
—
74,192
Derivative
liabilities (3)
4,493
969,502
7,771
(934,857
)
46,909
Short-term
borrowings
—
2,697
—
—
2,697
Accrued
expenses and other liabilities
10,795
1,250
10
—
12,055
Long-term
debt
—
34,042
2,362
—
36,404
Total
liabilities (4)
$
74,759
$
1,059,002
$
10,179
$
(934,857
)
$
209,083
(1)
Amounts
represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.
(2)
Includes $17.2 billion of government-sponsored enterprise obligations.
(3)
For further disaggregation of derivative assets and liabilities, see Note 2 – Derivatives.
(4)
During
2014, the Corporation reclassified certain assets and liabilities within its fair value hierarchy based on a review of its inputs used to measure fair value. Accordingly, approximately $4.1 billion of assets related to U.S. government and agency securities, non-U.S. government securities and equity derivatives, and $570 million of liabilities related to equity derivatives were transferred from Level 1 to Level 2.
Federal
funds sold and securities borrowed or purchased under agreements to resell
$
—
$
68,656
$
—
$
—
$
68,656
Trading
account assets:
U.S.
government and agency securities (2)
34,222
14,625
—
—
48,847
Corporate
securities, trading loans and other
1,147
27,746
3,559
—
32,452
Equity
securities
41,324
22,741
386
—
64,451
Non-U.S.
sovereign debt
24,357
12,399
468
—
37,224
Mortgage
trading loans and ABS
—
13,388
4,631
—
18,019
Total
trading account assets
101,050
90,899
9,044
—
200,993
Derivative
assets (3)
2,374
910,602
7,277
(872,758
)
47,495
AFS
debt securities:
U.S.
Treasury and agency securities
6,591
2,363
—
—
8,954
Mortgage-backed
securities:
Agency
—
164,935
—
—
164,935
Agency-collateralized
mortgage obligations
—
22,492
—
—
22,492
Non-agency
residential
—
6,239
—
—
6,239
Commercial
—
2,480
—
—
2,480
Non-U.S.
securities
3,698
3,415
107
—
7,220
Corporate/Agency
bonds
—
873
—
—
873
Other
taxable securities
20
12,963
3,847
—
16,830
Tax-exempt
securities
—
5,122
806
—
5,928
Total
AFS debt securities
10,309
220,882
4,760
—
235,951
Other
debt securities carried at fair value:
U.S. Treasury and agency securities
4,062
—
—
—
4,062
Mortgage-backed
securities:
Agency
—
16,500
—
—
16,500
Agency-collateralized
mortgage obligations
—
218
—
—
218
Commercial
—
749
—
—
749
Non-U.S.
securities
7,457
3,858
—
—
11,315
Total
other debt securities carried at fair value
11,519
21,325
—
—
32,844
Loans
and leases
—
6,985
3,057
—
10,042
Mortgage
servicing rights
—
—
5,042
—
5,042
Loans
held-for-sale
—
5,727
929
—
6,656
Other
assets
14,474
1,912
1,669
—
18,055
Total
assets (4)
$
139,726
$
1,326,988
$
31,778
$
(872,758
)
$
625,734
Liabilities
Interest-bearing
deposits in U.S. offices
$
—
$
1,899
$
—
$
—
$
1,899
Federal
funds purchased and securities loaned or sold under agreements to repurchase
—
26,500
—
—
26,500
Trading
account liabilities:
U.S.
government and agency securities
26,915
348
—
—
27,263
Equity
securities
23,874
3,711
—
—
27,585
Non-U.S.
sovereign debt
20,755
1,387
—
—
22,142
Corporate
securities and other
518
5,926
35
—
6,479
Total
trading account liabilities
72,062
11,372
35
—
83,469
Derivative
liabilities (3)
1,968
896,907
7,501
(868,969
)
37,407
Short-term
borrowings
—
1,520
—
—
1,520
Accrued
expenses and other liabilities
10,130
1,093
10
—
11,233
Long-term
debt
—
45,045
1,990
—
47,035
Total
liabilities (4)
$
84,160
$
984,336
$
9,536
$
(868,969
)
$
209,063
(1)
Amounts
represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.
(2)
Includes $15.6 billion of government-sponsored enterprise obligations.
(3)
For further disaggregation of derivative assets and liabilities, see Note 2 – Derivatives.
(4)
During
2013, $500 million of other assets were transferred from Level 1 to Level 2 primarily due to a restriction that became effective for a private equity investment that was subsequently sold once the restriction was lifted.
Bank of America 2014 244
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 2014, 2013 and 2012, including net realized and unrealized gains (losses) included in earnings and accumulated OCI.
Level 3 –
Fair Value Measurements (1)
2014
Gross
(Dollars
in millions)
Balance
January 1
2014
Gains (Losses) in Earnings
Gains (Losses) in OCI
Purchases
Sales
Issuances
Settlements
Gross Transfers into
Level 3
Gross Transfers out
of
Level 3
Balance December 31 2014
Trading account assets:
U.S.
government and agency securities
$
—
$
—
$
—
$
87
$
(87
)
$
—
$
—
$
—
$
—
$
—
Corporate
securities, trading loans and other
3,559
180
—
1,675
(857
)
—
(938
)
1,275
(1,624
)
3,270
Equity
securities
386
—
—
104
(86
)
—
(16
)
146
(182
)
352
Non-U.S.
sovereign debt
468
30
—
120
(34
)
—
(19
)
11
(2
)
574
Mortgage
trading loans and ABS
4,631
199
—
1,643
(1,259
)
—
(585
)
39
(2,605
)
2,063
Total
trading account assets
9,044
409
—
3,629
(2,323
)
—
(1,558
)
1,471
(4,413
)
6,259
Net
derivative assets (2)
(224
)
463
—
823
(1,738
)
—
(432
)
28
160
(920
)
AFS
debt securities:
Non-agency
residential MBS
—
(2
)
—
11
—
—
—
270
—
279
Non-U.S.
securities
107
(7
)
(11
)
241
—
—
(147
)
—
(173
)
10
Corporate/Agency
bonds
—
—
—
—
—
—
—
93
(93
)
—
Other
taxable securities
3,847
9
(8
)
154
—
—
(1,381
)
—
(954
)
1,667
Tax-exempt
securities
806
8
—
—
(16
)
—
(235
)
36
—
599
Total
AFS debt securities
4,760
8
(19
)
406
(16
)
—
(1,763
)
399
(1,220
)
2,555
Loans
and leases (3, 4)
3,057
69
—
—
(3
)
699
(1,591
)
25
(273
)
1,983
Mortgage
servicing rights (4)
5,042
(1,231
)
—
—
(61
)
707
(927
)
—
—
3,530
Loans
held-for-sale (3)
929
45
—
59
(725
)
23
(216
)
83
(25
)
173
Other
assets (5)
1,669
(98
)
—
—
(430
)
—
(245
)
39
(24
)
911
Trading
account liabilities – Corporate securities and other
(35
)
1
—
10
(13
)
—
—
(9
)
10
(36
)
Accrued
expenses and other liabilities (3)
(10
)
2
—
—
—
(3
)
—
—
1
(10
)
Long-term
debt (3)
(1,990
)
49
—
169
—
(615
)
540
(1,581
)
1,066
(2,362
)
(1)
Assets
(liabilities). For assets, increase (decrease) to Level 3 and for liabilities, (increase) decrease to Level 3.
(2)
Net derivatives include derivative assets of $6.9 billion and derivative liabilities of $7.8 billion.
(3)
Amounts represent instruments that are accounted for under the fair value option.
(4)
Issuances
represent loan originations and mortgage servicing rights retained following securitizations or whole-loan sales.
(5)
Other assets is primarily comprised of private equity investments and certain long-term fixed-rate margin loans that are accounted for under the fair value option.
During 2014, the transfers into Level 3 included $1.5 billion of trading account assets, $399 million of AFS debt securities and $1.6 billion of long-term debt.
Transfers into Level 3 for trading account assets were primarily the result of decreased availability of third-party prices for certain corporate loans and securities. Transfers into Level 3 for AFS debt securities were primarily due to decreased price observability related to municipal auction rate securities (ARS). Transfers into Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities. Transfers occur on a regular basis for these 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.
During 2014, the transfers out of Level 3 included $4.4 billion
of trading account assets, $160 million of net derivative assets, $1.2 billion of AFS debt securities, $273 million of loans and leases and $1.1 billion of long-term debt. Transfers out of Level 3 for trading account assets were primarily the result of increased market liquidity and price observability on certain CLOs. Transfers out of Level 3 for net derivative assets were primarily due to increased price observability for certain equity derivatives. Transfers out of Level 3 for AFS debt securities were primarily due to increased price observability on certain CLOs. Transfers out of Level 3 for loans and leases were primarily due to increased price observability. Transfers out of Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the
value of certain structured liabilities.
245 Bank of America 2014
Level 3 –
Fair Value Measurements (1)
2013
Gross
(Dollars
in millions)
Balance January 1
2013
Gains (Losses) in Earnings
Gains (Losses) in OCI
Purchases
Sales
Issuances
Settlements
Gross Transfers into
Level 3
Gross Transfers out of
Level
3
Balance December 31
2013
Trading account assets:
Corporate
securities, trading loans and other
$
3,726
$
242
$
—
$
3,848
$
(3,110
)
$
59
$
(651
)
$
890
$
(1,445
)
$
3,559
Equity
securities
545
74
—
96
(175
)
—
(100
)
70
(124
)
386
Non-U.S.
sovereign debt
353
50
—
122
(18
)
—
(36
)
2
(5
)
468
Mortgage
trading loans and ABS
4,935
53
—
2,514
(1,993
)
—
(868
)
20
(30
)
4,631
Total
trading account assets
9,559
419
—
6,580
(5,296
)
59
(1,655
)
982
(1,604
)
9,044
Net
derivative assets (2)
1,468
(304
)
—
824
(1,467
)
—
(1,362
)
(10
)
627
(224
)
AFS
debt securities:
Commercial
MBS
10
—
—
—
—
—
(10
)
—
—
—
Non-U.S.
securities
—
5
2
1
(1
)
—
—
100
—
107
Corporate/Agency
bonds
92
—
4
—
—
—
—
—
(96
)
—
Other
taxable securities
3,928
9
15
1,055
—
—
(1,155
)
—
(5
)
3,847
Tax-exempt
securities
1,061
3
19
—
—
—
(109
)
—
(168
)
806
Total
AFS debt securities
5,091
17
40
1,056
(1
)
—
(1,274
)
100
(269
)
4,760
Loans
and leases (3, 4)
2,287
98
—
310
(128
)
1,252
(757
)
19
(24
)
3,057
Mortgage
servicing rights (4)
5,716
1,941
—
—
(2,044
)
472
(1,043
)
—
—
5,042
Loans
held-for-sale (3)
2,733
62
—
8
(402
)
4
(1,507
)
34
(3
)
929
Other
assets (5)
3,129
(288
)
—
46
(383
)
—
(1,019
)
239
(55
)
1,669
Trading
account liabilities – Corporate securities and other
(64
)
10
—
43
(54
)
(5
)
—
(9
)
44
(35
)
Accrued
expenses and other liabilities (3)
(15
)
30
—
—
—
(751
)
724
(1
)
3
(10
)
Long-term
debt (3)
(2,301
)
13
—
358
(4
)
(172
)
258
(1,331
)
1,189
(1,990
)
(1)
Assets
(liabilities). For assets, increase (decrease) to Level 3 and for liabilities, (increase) decrease to Level 3.
(2)
Net derivatives include derivative assets of $7.3 billion and derivative liabilities of $7.5 billion.
(3)
Amounts represent instruments that are accounted for under the fair value option.
(4)
Issuances
represent loan originations and mortgage servicing rights retained following securitizations or whole-loan sales.
(5)
Other assets is primarily comprised of private equity investments and certain long-term fixed-rate margin loans that are accounted for under the fair value option.
During 2013, the transfers into Level 3 included $982 million of trading account assets, $100 million of AFS debt securities, $239 million of other assets and
$1.3 billion of long-term debt. Transfers into Level 3 for trading account assets were primarily the result of decreased third-party prices available for certain corporate loans and securities. Transfers into Level 3 for AFS debt securities were primarily due to decreased price observability. Transfers into Level 3 for other assets were primarily due to a lack of independent pricing data for certain receivables. Transfers into Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities. Transfers occur on a regular basis for these 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.
During 2013,
the transfers out of Level 3 included $1.6 billion of trading account assets, $627 million of net derivative assets, $269 million of AFS debt securities and $1.2 billion of long-term debt. Transfers out of Level 3 for trading account assets were primarily the result of increased market liquidity and third-party prices available for certain corporate loans and securities. Transfers out of Level 3 for net derivative assets were primarily due to increased price observability (i.e., market comparables for the referenced instruments) for certain options. Transfers out of Level 3 for AFS debt securities were primarily due to increased market liquidity. Transfers out of Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain
structured liabilities.
Bank of America 2014 246
Level 3 –
Fair Value Measurements (1)
2012
Gross
(Dollars
in millions)
Balance January 1
2012
Gains (Losses)
in Earnings
Gains (Losses)
in OCI
Purchases
Sales
Issuances
Settlements
Gross Transfers
into
Level
3
Gross Transfers out of
Level 3
Balance December 31
2012
Trading account assets:
Corporate
securities, trading loans and other (2)
$
6,880
$
195
$
—
$
2,798
$
(4,556
)
$
—
$
(1,077
)
$
436
$
(950
)
$
3,726
Equity
securities
544
31
—
201
(271
)
—
27
90
(77
)
545
Non-U.S.
sovereign debt
342
8
—
388
(359
)
—
(5
)
—
(21
)
353
Mortgage
trading loans and ABS (2)
3,689
215
—
2,574
(1,536
)
—
(678
)
844
(173
)
4,935
Total
trading account assets
11,455
449
—
5,961
(6,722
)
—
(1,733
)
1,370
(1,221
)
9,559
Net
derivative assets (3)
5,866
(221
)
—
893
(1,012
)
—
(3,328
)
(269
)
(461
)
1,468
AFS
debt securities:
Mortgage-backed
securities:
Agency
37
—
—
—
—
—
(4
)
—
(33
)
—
Non-agency
residential
860
(69
)
19
—
(306
)
—
(2
)
—
(502
)
—
Non-agency
commercial
40
—
—
—
(24
)
—
(6
)
—
—
10
Corporate/Agency
bonds
162
(2
)
—
(2
)
—
—
(39
)
—
(27
)
92
Other
taxable securities
4,265
23
26
3,196
(28
)
—
(3,345
)
—
(209
)
3,928
Tax-exempt
securities
2,648
61
20
—
(133
)
—
(1,535
)
—
—
1,061
Total
AFS debt securities
8,012
13
65
3,194
(491
)
—
(4,931
)
—
(771
)
5,091
Loans
and leases (4, 5)
2,744
334
—
564
(1,520
)
—
(274
)
450
(11
)
2,287
Mortgage
servicing rights (5)
7,378
(430
)
—
—
(122
)
374
(1,484
)
—
—
5,716
Loans
held-for-sale (4)
3,387
352
—
794
(834
)
—
(414
)
80
(632
)
2,733
Other
assets (6)
4,235
(54
)
—
109
(1,039
)
270
(381
)
—
(11
)
3,129
Trading
account liabilities – Corporate securities and other
(114
)
4
—
116
(136
)
—
80
(68
)
54
(64
)
Short-term
borrowings (4)
—
—
—
—
—
(232
)
232
—
—
—
Accrued
expenses and other liabilities (4)
(14
)
(4
)
—
8
—
(9
)
—
—
4
(15
)
Long-term
debt (4)
(2,943
)
(307
)
—
290
(33
)
(259
)
1,239
(2,040
)
1,752
(2,301
)
(1)
Assets
(liabilities). For assets, increase (decrease) to Level 3 and for liabilities, (increase) decrease to Level 3.
(2)
During 2012, approximately $900 million was reclassified from Trading account assets – Corporate securities, trading loans and other to Trading account assets – Mortgage trading loans and ABS. In the table above, this reclassification is presented as a sale of Trading account assets – Corporate securities, trading loans and other and as a purchase of Trading account assets – Mortgage trading loans and ABS.
(3)
Net
derivatives include derivative assets of $8.1 billion and derivative liabilities of $6.6 billion.
(4)
Amounts represent instruments that are accounted for under the fair value option.
(5)
Issuances represent loan originations and mortgage servicing rights retained following securitizations or whole-loan sales.
(6)
Other
assets is primarily comprised of net monoline exposure to a single counterparty and private equity investments.
During 2012, the transfers into Level 3 included $1.4 billion of trading account assets, $269 million of net derivative assets, $450 million of loans and leases and $2.0 billion of long-term debt. Transfers into Level 3 for trading account assets were primarily the result of decreased market liquidity for certain corporate loans and updated information related to certain CLOs. Transfers into Level 3 for net derivative assets were primarily related to decreased price observability for certain long-dated equity derivative liabilities
due to a lack of independent pricing. Transfers into Level 3 for loans and leases were due to updated information related to certain commercial loans. Transfers into Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities. Transfers occur on a regular basis for these 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.
During 2012, the transfers out of Level 3 included $1.2 billion of trading account assets, $461 million of net derivative assets, $771 million
of AFS debt securities, $632 million of LHFS and $1.8 billion of long-term debt. Transfers out of Level 3 for trading account assets were primarily related to increased market liquidity for certain corporate and commercial real estate loans. Transfers out of Level 3 for net derivative assets were primarily related to increased price observability (i.e., market comparables for the referenced instruments) for certain total return swaps and foreign exchange swaps. Transfers out of Level 3 for AFS debt securities were primarily related to increased price observability for certain non-agency RMBS and ABS. Transfers out of Level 3 for LHFS were primarily related to increased observable inputs, primarily liquid comparables. Transfers out of Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities.
247 Bank
of America 2014
The following tables summarize gains (losses) due to changes in fair value, including both realized and unrealized gains (losses), recorded in earnings for Level 3 assets and liabilities during 2014, 2013 and 2012. These amounts include gains (losses) on loans, LHFS, loan commitments and structured liabilities that are accounted for under the fair value option.
Level 3 –
Total Realized and Unrealized Gains (Losses) Included in Earnings
2014
(Dollars in millions)
Trading Account Profits
(Losses)
Mortgage Banking Income
(Loss)
(1)
Other (2)
Total
Trading account assets:
Corporate
securities, trading loans and other
$
180
$
—
$
—
$
180
Non-U.S.
sovereign debt
30
—
—
30
Mortgage trading loans and ABS
199
—
—
199
Total
trading account assets
409
—
—
409
Net derivative assets
(475
)
834
104
463
AFS
debt securities:
Non-agency residential MBS
—
—
(2
)
(2
)
Non-U.S.
securities
—
—
(7
)
(7
)
Other taxable securities
—
—
9
9
Tax-exempt
securities
—
—
8
8
Total AFS debt securities
—
—
8
8
Loans
and leases (3)
—
—
69
69
Mortgage servicing rights
(6
)
(1,225
)
—
(1,231
)
Loans
held-for-sale (3)
(14
)
—
59
45
Other assets
—
(79
)
(19
)
(98
)
Trading
account liabilities – Corporate securities and other
1
—
—
1
Accrued expenses and other liabilities (3)
—
—
2
2
Long-term
debt (3)
78
—
(29
)
49
Total
$
(7
)
$
(470
)
$
194
$
(283
)
2013
Trading
account assets:
Corporate securities, trading loans and other
$
242
$
—
$
—
$
242
Equity
securities
74
—
—
74
Non-U.S. sovereign debt
50
—
—
50
Mortgage
trading loans and ABS
53
—
—
53
Total trading account assets
419
—
—
419
Net
derivative assets
(1,224
)
927
(7
)
(304
)
AFS debt securities:
Non-U.S.
securities
—
—
5
5
Other taxable securities
—
—
9
9
Tax-exempt
securities
—
—
3
3
Total AFS debt securities
—
—
17
17
Loans
and leases (3)
—
(38
)
136
98
Mortgage servicing rights
—
1,941
—
1,941
Loans
held-for-sale (3)
—
2
60
62
Other assets
—
122
(410
)
(288
)
Trading
account liabilities – Corporate securities and other
10
—
—
10
Accrued expenses and other liabilities (3)
—
30
—
30
Long-term
debt (3)
45
—
(32
)
13
Total
$
(750
)
$
2,984
$
(236
)
$
1,998
(1)
Mortgage
banking income (loss) does not reflect the impact of Level 1 and Level 2 hedges on MSRs.
(2)
Amounts included are primarily recorded in other income (loss). Equity investment gains of $86 million and $77 million recorded on net derivative assets and other assets were also included for 2014 and 2013.
(3)
Amounts
represent instruments that are accounted for under the fair value option.
Bank of America 2014 248
Level 3 –
Total Realized and Unrealized Gains (Losses) Included in Earnings (continued)
2012
(Dollars in millions)
Trading Account Profits
(Losses)
Mortgage Banking Income
(Loss) (1)
Other
(2)
Total
Trading account assets:
Corporate
securities, trading loans and other
$
195
$
—
$
—
$
195
Equity
securities
31
—
—
31
Non-U.S. sovereign debt
8
—
—
8
Mortgage
trading loans and ABS
215
—
—
215
Total trading account assets
449
—
—
449
Net
derivative assets
(3,208
)
2,987
—
(221
)
AFS debt securities:
Non-agency
residential MBS
—
—
(69
)
(69
)
Corporate/Agency bonds
—
—
(2
)
(2
)
Other
taxable securities
2
—
21
23
Tax-exempt securities
—
—
61
61
Total
AFS debt securities
2
—
11
13
Loans and leases (3)
—
—
334
334
Mortgage
servicing rights
—
(430
)
—
(430
)
Loans held-for-sale (3)
—
148
204
352
Other
assets
—
(74
)
20
(54
)
Trading account liabilities – Corporate securities and other
4
—
—
4
Accrued
expenses and other liabilities (3)
—
—
(4
)
(4
)
Long-term debt (3)
(133
)
—
(174
)
(307
)
Total
$
(2,886
)
$
2,631
$
391
$
136
(1)
Mortgage
banking income (loss) does not reflect the impact of Level 1 and Level 2 hedges on MSRs.
(2)
Amounts included are primarily recorded in other income (loss). Equity investment gains of $97 million recorded on other assets were also included for 2012.
(3)
Amounts represent instruments that are accounted for under the fair value option.
249 Bank
of America 2014
The table below summarizes changes in unrealized gains (losses) recorded in earnings during 2014, 2013 and 2012 for Level 3 assets and liabilities that were still held at December 31, 2014, 2013 and 2012. These amounts include changes in fair value on loans, LHFS, loan commitments and structured liabilities that are accounted for
under the fair value option.
Level 3 –
Changes in Unrealized Gains (Losses) Relating to Assets and Liabilities Still Held at Reporting Date
2014
(Dollars in millions)
Trading Account Profits
(Losses)
Mortgage Banking Income
(Loss) (1)
Other
(2)
Total
Trading account assets:
Corporate
securities, trading loans and other
$
69
$
—
$
—
$
69
Equity
securities
(8
)
—
—
(8
)
Non-U.S. sovereign debt
31
—
—
31
Mortgage
trading loans and ABS
79
—
—
79
Total trading account assets
171
—
—
171
Net
derivative assets
(276
)
85
104
(87
)
Loans and leases (3)
—
—
76
76
Mortgage
servicing rights
(6
)
(1,747
)
—
(1,753
)
Loans held-for-sale (3)
(14
)
—
10
(4
)
Other
assets
—
(50
)
102
52
Trading account liabilities – Corporate securities and other
1
—
—
1
Accrued
expenses and other liabilities (3)
—
—
1
1
Long-term debt (3)
29
—
(37
)
(8
)
Total
$
(95
)
$
(1,712
)
$
256
$
(1,551
)
2013
Trading
account assets:
Corporate securities, trading loans and other
$
(130
)
$
—
$
—
$
(130
)
Equity
securities
40
—
—
40
Non-U.S. sovereign debt
80
—
—
80
Mortgage
trading loans and ABS
(174
)
—
—
(174
)
Total trading account assets
(184
)
—
—
(184
)
Net
derivative assets
(1,375
)
42
(7
)
(1,340
)
Loans and leases (3)
—
(34
)
152
118
Mortgage
servicing rights
—
1,541
—
1,541
Loans held-for-sale (3)
—
6
57
63
Other
assets
—
166
14
180
Long-term debt (3)
(4
)
—
(32
)
(36
)
Total
$
(1,563
)
$
1,721
$
184
$
342
2012
Trading
account assets:
Corporate securities, trading loans and other
$
(19
)
$
—
$
—
$
(19
)
Equity
securities
17
—
—
17
Non-U.S. sovereign debt
20
—
—
20
Mortgage
trading loans and ABS
36
—
—
36
Total trading account assets
54
—
—
54
Net
derivative assets
(2,782
)
456
—
(2,326
)
AFS debt securities – Other taxable securities
2
—
—
2
Loans
and leases (3)
—
—
214
214
Mortgage servicing rights
—
(1,100
)
—
(1,100
)
Loans
held-for-sale (3)
—
112
168
280
Other assets
—
(71
)
50
(21
)
Trading
account liabilities – Corporate securities and other
4
—
—
4
Accrued expenses and other liabilities (3)
—
—
(2
)
(2
)
Long-term
debt (3)
(136
)
—
(173
)
(309
)
Total
$
(2,858
)
$
(603
)
$
257
$
(3,204
)
(1)
Mortgage
banking income (loss) does not reflect the impact of Level 1 and Level 2 hedges on MSRs.
(2)
Amounts included are primarily recorded in other income (loss). Equity investment gains of $170 million and $53 million recorded on net derivative assets and other assets were included for 2014 and 2013, and gains of $141 million recorded on other assets were included for 2012.
(3)
Amounts
represent instruments that are accounted for under the fair value option.
Bank of America 2014 250
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, 2014 and
2013.
Quantitative Information about Level 3 Fair Value Measurements at December 31,
2014
(Dollars in millions)
Inputs
Financial Instrument
Fair
Value
Valuation
Technique
Significant Unobservable
Inputs
Ranges of
Inputs
Weighted Average
Loans and Securities (1)
Instruments
backed by residential real estate assets
$
2,030
Discounted cash flow, Market comparables
Yield
0% to 25%
6
%
Trading account assets – Mortgage trading loans and ABS
483
Prepayment
speed
0% to 35% CPR
14
%
Loans and leases
1,374
Default rate
2% to 15% CDR
7
%
Loans held-for-sale
173
Loss
severity
26% to 100%
34
%
Commercial loans, debt securities and other
$
7,203
Discounted cash flow, Market comparables
Yield
0% to 40%
9
%
Trading
account assets – Corporate securities, trading loans and other
3,224
Enterprise value/EBITDA multiple
0x to 30x
6x
Trading account assets – Non-U.S. sovereign debt
574
Prepayment speed
1%
to 30%
12
%
Trading account assets – Mortgage trading loans and ABS
1,580
Default rate
1% to 5%
4
%
AFS debt securities – Other taxable securities
1,216
Loss
severity
25% to 40%
38
%
Loans and leases
609
Duration
0 years to 5 years
3 years
Price
$0
to $107
$76
Auction rate securities
$
1,096
Discounted cash flow, Market comparables
Price
$60 to $100
$95
Trading account assets – Corporate securities,
trading loans and other
46
AFS debt securities – Other taxable securities
451
AFS debt securities – Tax-exempt
securities
599
Structured liabilities
Long-term debt
$
(2,362
)
Industry
standard derivative pricing (2, 3)
Equity correlation
20% to 98%
65
%
Long-dated equity volatilities
6% to 69%
24
%
Long-dated
volatilities (IR)
0% to 2%
1
%
Net derivative assets
Credit derivatives
$
22
Discounted
cash flow, Stochastic recovery correlation model
Yield
0% to 25%
14
%
Upfront points
0 points to 100 points
65 points
Spread
to index
25 bps to 450 bps
119 bps
Credit correlation
24% to 99%
51
%
Prepayment
speed
3% to 20% CPR
11
%
Default rate
4% CDR
n/a
Loss
severity
35
%
n/a
Equity derivatives
$
(1,560
)
Industry standard derivative pricing (2)
Equity correlation
20% to 98%
65
%
Long-dated
equity volatilities
6% to 69%
24
%
Commodity derivatives
$
141
Discounted cash flow, Industry standard derivative pricing (2)
Natural gas forward price
$2/MMBtu to $7/MMBtu
$5/MMBtu
Correlation
82%
to 93%
90
%
Volatilities
16% to 98%
35
%
Interest rate derivatives
$
477
Industry
standard derivative pricing (3)
Correlation (IR/IR)
11% to 99%
55
%
Correlation (FX/IR)
-48% to 40%
-5
%
Long-dated
inflation rates
0% to 3%
1
%
Long-dated inflation volatilities
0% to 2%
1
%
Total net derivative assets
$
(920
)
(1)
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 245: Trading account assets – Corporate securities, trading loans and other of $3.3 billion, Trading account assets – Non-U.S. sovereign debt of $574 million, Trading account assets – Mortgage trading loans and ABS of $2.1 billion, AFS debt securities – Other taxable securities of $1.7 billion, AFS debt securities – Tax-exempt securities of $599 million, Loans and leases of $2.0 billion and LHFS of $173 million.
(2)
Includes
models such as Monte Carlo simulation and Black-Scholes.
(3)
Includes models such as Monte Carlo simulation, Black-Scholes and other methods that model the joint dynamics of interest, inflation and foreign exchange rates.
CPR = Constant Prepayment Rate
CDR = Constant Default Rate
EBITDA = Earnings before interest, taxes, depreciation and amortization
MMBtu = Million British thermal units
IR = Interest Rate
FX = Foreign Exchange
n/a
= not applicable
251 Bank of America 2014
Quantitative
Information about Level 3 Fair Value Measurements at December 31, 2013
(Dollars in millions)
Inputs
Financial Instrument
Fair Value
Valuation
Technique
Significant Unobservable Inputs
Ranges of Inputs
Weighted Average
Loans and Securities (1)
Instruments backed by residential real estate assets
$
3,443
Discounted
cash flow, Market comparables
Yield
2% to 25%
6
%
Trading account assets – Mortgage trading loans and ABS
363
Prepayment speed
0% to 35% CPR
9
%
Loans and leases
2,151
Default
rate
1% to 20% CDR
6
%
Loans held-for-sale
929
Loss severity
21% to 80%
35
%
Commercial loans, debt securities and other
$
12,135
Discounted
cash flow, Market comparables
Yield
0% to 45%
5
%
Trading account assets – Corporate securities, trading loans and other
3,462
Enterprise value/EBITDA multiple
0x to 24x
7x
Trading
account assets – Non-U.S. sovereign debt
468
Prepayment speed
5% to 40%
19
%
Trading account assets – Mortgage trading loans and ABS
4,268
Default rate
1% to 5%
4
%
AFS
debt securities – Other taxable securities
3,031
Loss severity
25% to 42%
36
%
Loans and leases
906
Duration
1 year to 5 years
4 years
Auction
rate securities
$
1,719
Discounted cash flow, Market comparables
Projected tender price/Refinancing level
60% to 100%
96
%
Trading account assets – Corporate securities, trading loans and other
97
AFS
debt securities – Other taxable securities
816
AFS debt securities – Tax-exempt securities
806
Structured liabilities
Long-term
debt
$
(1,990
)
Industry standard derivative pricing (2, 3)
Equity correlation
18% to 98%
70
%
Long-dated equity volatilities
4%
to 63%
27
%
Long-dated volatilities (IR)
0% to 2%
1
%
Net derivative assets
Credit
derivatives
$
808
Discounted cash flow, Stochastic recovery correlation model
Yield
3% to 25%
14
%
Upfront points
0 points to 100 points
63
points
Spread to index
-1,407 bps to 1,741 bps
91 bps
Credit correlation
14% to 99%
47
%
Prepayment
speed
3% to 40% CPR
13
%
Default rate
1% to 5% CDR
3
%
Loss severity
20% to 42%
35
%
Equity
derivatives
$
(1,596
)
Industry standard derivative pricing (2)
Equity correlation
18% to 98%
70
%
Long-dated equity volatilities
4%
to 63%
27
%
Commodity derivatives
$
6
Discounted cash flow, Industry standard derivative pricing (2)
Natural gas forward price
$3/MMBtu to $11/MMBtu
$6/MMBtu
Correlation
47%
to 89%
81
%
Volatilities
9% to 109%
30
%
Interest rate derivatives
$
558
Industry standard
derivative pricing (3)
Correlation (IR/IR)
24% to 99%
60
%
Correlation (FX/IR)
-30% to 40%
-4
%
Long-dated
inflation rates
0% to 3%
2
%
Long-dated inflation volatilities
0% to 2%
1
%
Total net derivative assets
$
(224
)
(1)
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 246: Trading account assets – Corporate securities, trading loans and other of $3.6 billion, Trading account assets – Non-U.S. sovereign debt of $468 million, Trading account assets – Mortgage trading loans and ABS of $4.6 billion, AFS debt securities – Other taxable securities of $3.8 billion, AFS debt securities – Tax-exempt securities of $806 million, Loans and leases of $3.1 billion and LHFS of $929 million.
(2)
Includes
models such as Monte Carlo simulation and Black-Scholes.
(3)
Includes models such as Monte Carlo simulation, Black-Scholes and other methods that model the joint dynamics of interest, inflation and foreign exchange rates.
CPR = Constant Prepayment Rate
CDR = Constant Default Rate
EBITDA = Earnings before interest, taxes, depreciation and amortization
MMBtu = Million British thermal units
IR = Interest Rate
FX = Foreign Exchange
Bank
of America 2014 252
In the tables above, instruments backed by residential real estate assets include RMBS, 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.
In addition to the instruments in the tables above, the Corporation held $347 million and $767 million of instruments at December
31, 2014 and 2013 consisting primarily of certain direct private equity investments and private equity funds that were classified as Level 3 and reported within other assets. Valuations of direct private equity investments are based on the most recent company financial information. Inputs generally include market and acquisition comparables, entry level multiples, as well as other variables. The Corporation selects a valuation methodology (e.g., market comparables) for each investment and, in certain instances, multiple inputs are weighted to derive the most representative value. Discounts are applied as appropriate to consider the lack of liquidity and marketability versus publicly-traded companies. For private equity funds, fair value is determined using the net asset value as provided by the individual fund’s general partner.
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. At December 31, 2014 and 2013, weighted averages are disclosed for all loans, securities, structured liabilities
and net derivative assets.
For more information on the inputs and techniques used in the valuation of MSRs, see Note 23 – Mortgage Servicing Rights.
Sensitivity of Fair Value Measurements to Changes in Unobservable Inputs
Loans and Securities
For instruments backed by residential real estate assets and commercial loans, debt securities and other, a significant increase
in market yields, default rates, loss severities or duration would result in a significantly lower fair value for long positions. Short positions would be impacted in a directionally opposite way. The impact of changes in prepayment speeds
would have differing impacts depending on the seniority of the instrument and, in the case of CLOs, whether prepayments can be reinvested.
For auction rate securities, a significant increase in price and/or projected tender price/refinancing levels would result in a significantly higher fair value.
Structured Liabilities and Derivatives
For credit derivatives, a significant increase in market yield, including spreads to indices, upfront points (i.e., a single upfront payment made by a protection buyer at inception), default rates or loss severities would result 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 differing impacts depending on the seniority of the instrument and, in the case of CLOs, whether prepayments can be reinvested.
Structured
credit derivatives, which include tranched portfolio CDS and derivatives with derivative product company (DPC) and monoline counterparties, are impacted by credit correlation, including default and wrong-way 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 result in a significantly higher fair value. Net short protection positions would be impacted in a directionally opposite way. Wrong-way correlation is a parameter that describes the probability that as exposure to a counterparty increases, the credit quality of the counterparty decreases. A significantly higher degree of wrong-way correlation between a DPC counterparty
and underlying derivative exposure would result in a significantly lower fair value.
For equity derivatives, interest rate derivatives and structured liabilities, a significant change in long-dated rates and volatilities and correlation inputs (e.g., the degree of correlation between an equity security and an index, between two different interest rates, or between interest rates and foreign exchange rates) would result in a significant impact to the fair value; however, the magnitude and direction of the impact depends on whether the Corporation is long or short the exposure.
Nonrecurring Fair Value
The Corporation
holds certain assets that are measured at fair value, but only in certain situations (e.g., impairment) and these measurements are referred to herein as nonrecurring. These assets primarily include LHFS, certain loans and leases, and foreclosed properties. The amounts below represent only balances measured at fair value during 2014, 2013 and 2012, and still held as of the reporting date.
Assets
Measured at Fair Value on a Nonrecurring Basis
December 31
2014
2013
(Dollars
in millions)
Level 2
Level 3
Level 2
Level 3
Assets
Loans
held-for-sale
$
156
$
30
$
2,138
$
115
Loans
and leases
5
4,636
18
5,240
Foreclosed properties (1)
—
1,197
12
1,258
Other
assets
13
—
88
—
Gains
(Losses)
2014
2013
2012
Assets
Loans
held-for-sale
$
(19
)
$
(71
)
$
(24
)
Loans and leases
(1,132
)
(1,104
)
(3,116
)
Foreclosed
properties (1)
(40
)
(39
)
(47
)
Other assets
(6
)
(20
)
(16
)
(1)
Amounts
are included in other assets on the Consolidated Balance Sheet and represent fair value of, and related losses on, foreclosed properties that were written down subsequent to their initial classification as foreclosed properties.
The table below presents information about significant unobservable inputs related to the Corporation’s nonrecurring Level 3 financial assets and liabilities at December 31, 2014 and 2013.
Quantitative
Information about Nonrecurring Level 3 Fair Value Measurements
Instruments backed by residential real estate assets
$
5,240
Market comparables
OREO discount
0% to 19%
8
%
Loans and leases
5,240
Cost
to sell
8
%
n/a
n/a = not applicable
Instruments backed by residential real estate assets represent residential mortgages where the loan has been written down to the fair value of the underlying collateral. In addition to the instruments disclosed in the table above, the Corporation holds foreclosed residential properties where the fair value is based on
unadjusted third-party appraisals or broker price opinions. Appraisals
are generally conducted every 90 days. Factors considered in determining the fair value include geographic sales trends, the value of comparable surrounding properties as well as the condition of the property.
253 Bank of America 2014
NOTE 21 Fair Value Option
Loans
and Loan Commitments
The Corporation elects to account for certain commercial loans and loan commitments that exceed the Corporation’s 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 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 with changes in fair value recorded in other income (loss). Electing 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, 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 credit derivatives at fair value. The Corporation also elected the fair value option for certain loans held in consolidated VIEs. Of the changes in fair value of these loans, gains of $32 million, $148 million and $527 million were attributable to changes in borrower-specific credit risk in 2014, 2013 and 2012.
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 with interest income on these LHFS recorded in other interest income. 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 with changes in fair value recorded in other income (loss). The changes in fair value of the loans are largely offset by changes in the fair value of the derivatives. Of the changes in fair value of these loans, gains of $84 million, $225 million and $425 million were attributable to changes in borrower-specific credit risk in 2014,
2013 and 2012. 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 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 risk-managed on a fair value basis under the fair value option. Of the changes in fair value of these loans, gains of $28 million and
$56 million were attributable to changes in borrower-specific credit risk in 2014 and 2013. An immaterial portion of the changes in fair value of these loans was attributable to changes in borrower-specific credit risk in 2012.
Other Assets
The Corporation elects to account for certain private equity investments that are not in an investment company under the fair value option as this measurement basis is consistent with applicable accounting guidance for similar investments that are in an investment company. The Corporation also 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 did not elect to carry other long-term deposits at fair value because they were 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.
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.
Bank
of America 2014 254
The table below provides 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, 2014 and 2013.
Fair
Value Option Elections
December
31
2014
2013
(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
Loans reported as trading account assets (1)
$
4,607
$
8,487
$
(3,880
)
$
2,406
$
4,541
$
(2,135
)
Trading
inventory – other
6,865
n/a
n/a
5,475
n/a
n/a
Consumer
and commercial loans
8,681
8,925
(244
)
10,042
10,423
(381
)
Loans
held-for-sale
6,801
6,920
(119
)
6,656
6,996
(340
)
Securities
financing agreements
97,539
97,234
305
95,156
94,890
266
Other
assets
253
270
(17
)
278
270
8
Long-term
deposits
1,469
1,361
108
1,899
1,797
102
Unfunded
loan commitments
405
n/a
n/a
354
n/a
n/a
Short-term
borrowings
2,697
2,697
—
1,520
1,520
—
Long-term
debt (2)
36,404
35,815
589
47,035
46,669
366
(1)
A
significant portion of the loans reported as trading account assets are distressed loans which trade and 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 $35.3 billion and contractual principal outstanding of $34.6 billion at December 31, 2014 compared to $40.7 billion and $39.7 billion at December 31,
2013.
n/a = not applicable
255 Bank of America 2014
The table below provides 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 2014,
2013 and 2012.
Gains
(Losses) Relating to Assets and Liabilities Accounted for Under the Fair Value Option
2014
(Dollars in millions)
Trading
Account Profits (Losses)
Mortgage Banking Income
(Loss)
Other
Income
(Loss)
Total
Loans reported as trading account assets
$
(87
)
$
—
$
—
$
(87
)
Trading
inventory – other (1)
1,091
—
—
1,091
Consumer
and commercial loans
(24
)
—
69
45
Loans held-for-sale (2)
(56
)
798
83
825
Securities
financing agreements
(110
)
—
—
(110
)
Long-term deposits
23
—
(26
)
(3
)
Unfunded
loan commitments
—
—
(64
)
(64
)
Short-term borrowings
52
—
—
52
Long-term
debt (3)
239
—
407
646
Total
$
1,128
$
798
$
469
$
2,395
2013
Loans
reported as trading account assets
$
83
$
—
$
—
$
83
Trading
inventory – other (1)
1,355
—
—
1,355
Consumer
and commercial loans
(28
)
(38
)
240
174
Loans held-for-sale (2)
7
966
75
1,048
Securities
financing agreements
(80
)
—
—
(80
)
Other assets
—
—
(77
)
(77
)
Long-term
deposits
30
—
84
114
Asset-backed secured financings
—
(91
)
—
(91
)
Unfunded
loan commitments
—
—
180
180
Short-term borrowings
(70
)
—
—
(70
)
Long-term
debt (3)
(602
)
—
(649
)
(1,251
)
Total
$
695
$
837
$
(147
)
$
1,385
2012
Loans
reported as trading account assets
$
232
$
—
$
—
$
232
Trading
inventory – other (1)
659
—
—
659
Consumer and commercial loans
17
—
542
559
Loans
held-for-sale (2)
75
3,048
190
3,313
Securities financing agreements
(90
)
—
—
(90
)
Other
assets
—
—
12
12
Long-term deposits
—
—
29
29
Asset-backed
secured financings
—
(180
)
—
(180
)
Unfunded loan commitments
—
—
704
704
Short-term
borrowings
1
—
—
1
Long-term debt (3)
(1,888
)
—
(5,107
)
(6,995
)
Total
$
(994
)
$
2,868
$
(3,630
)
$
(1,756
)
(1)
The gains (losses) in trading account profits (losses) are primarily offset by gains (losses) on trading liabilities that hedge these assets.
(2)
Includes the value of interest rate lock commitments on loans funded, including those sold during the period.
(3)
The majority of the net gains (losses) in trading account profits (losses) relate to the embedded derivative in structured liabilities and are
offset by gains (losses) on derivatives and securities that hedge these liabilities. The net gains (losses) in other income (loss) relate to the impact on structured liabilities of changes in the Corporation’s credit spreads.
NOTE 22 Fair Value of Financial Instruments
The fair values of financial instruments and their classifications within the fair value hierarchy have been derived using methodologies described in Note 20 – Fair Value Measurements. The following disclosures include financial instruments where only a portion of the ending balance at December 31, 2014 and 2013
was 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, time deposits placed and other short-term investments, federal funds sold and purchased, certain
resale and repurchase agreements, customer and other receivables, customer payables (within accrued expenses and other liabilities on the Consolidated Balance Sheet), 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 elected to
account 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 and Level 2. Federal
Bank of America 2014 256
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. Customer and other receivables primarily consist of margin loans, servicing advances and other accounts receivable and are classified as Level 2 and Level 3. Customer payables and short-term borrowings are classified as Level 2.
Held-to-maturity Debt Securities
HTM debt securities, which consist primarily of U.S. agency debt securities, are classified as Level 2 using the same methodologies as AFS U.S. agency debt securities. For more information on HTM debt securities, see Note 3 – Securities.
Loans
The fair values
for commercial and consumer loans are generally determined by discounting both principal and interest cash flows expected to be collected using a discount rate for similar instruments with adjustments that the Corporation believes a market participant would consider in determining fair value. The Corporation estimates the cash flows expected to be collected using internal credit risk, interest rate and prepayment risk models that incorporate the Corporation’s best estimate of current key assumptions, such as default rates, loss severity and prepayment speeds for the life of the loan. The carrying value of loans is presented net of the applicable allowance for loan losses and excludes leases. The Corporation accounts for certain commercial loans and residential mortgage loans under the fair value option.
Deposits
The fair value for certain deposits with stated maturities was determined
by discounting contractual cash flows using current market rates for instruments with similar maturities. The carrying value of non-U.S. time deposits approximates fair value. For deposits with no stated maturities, the carrying value was considered to approximate fair value and does not take into account the significant value of the cost advantage and stability of the Corporation’s long-term relationships with depositors. The Corporation accounts for certain long-term fixed-rate deposits under the fair value option.
Long-term Debt
The Corporation uses quoted market prices, when available, to estimate fair value for its long-term debt. When quoted market prices are not available, fair value is estimated based on current market interest rates and credit spreads for debt with similar terms
and
maturities. The Corporation accounts for certain structured liabilities under the fair value option.
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, 2014 and 2013 are presented in the table below.
Fair values were
generally determined using a discounted cash flow valuation approach which is applied using market-based CDS or internally developed benchmark credit curves. The Corporation accounts for certain loan commitments under the fair value option.
The carrying values and fair values of the Corporation’s commercial unfunded lending commitments were $932 million and $3.8 billion at December 31, 2014, and $830 million and $3.7 billion at December 31, 2013. Commercial unfunded lending commitments are primarily classified as Level 3. The carrying value of
these commitments is classified in accrued expenses and other liabilities.
The Corporation does not estimate the fair values 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 12 – Commitments and Contingencies.
257 Bank of America 2014
NOTE 23 Mortgage
Servicing Rights
The Corporation accounts for consumer MSRs at fair value with changes in fair value recorded in mortgage banking income in the Consolidated Statement of Income. The Corporation manages the risk in these MSRs with securities including MBS and U.S. Treasury securities, as well as certain derivatives such as options and interest rate swaps, which are not designated as accounting hedges. The securities used to manage the risk in the MSRs are classified in other assets with changes in the fair value of the securities and the related interest income recorded in mortgage banking income.
The table below presents activity for residential mortgage and home equity MSRs for 2014 and 2013. Residential reverse mortgage MSRs, which are carried at the lower of cost or fair value and
accounted for using the amortization method, totaled $10 million at December 31, 2013, and are not included in the tables below.
Rollforward of Mortgage Servicing Rights
(Dollars
in millions)
2014
2013
Balance, January 1
$
5,042
$
5,716
Additions
707
472
Sales
(61
)
(2,044
)
Amortization
of expected cash flows (1)
(927
)
(1,043
)
Impact of changes in interest rates and other market factors (2)
(1,191
)
1,524
Model
and other cash flow assumption changes: (3)
Projected cash flows, including changes in costs to service loans
(163
)
(27
)
Impact
of changes in the Home Price Index
(25
)
(398
)
Impact of changes to the prepayment model
243
609
Other model changes (4)
(95
)
233
Balance,
December 31 (5)
$
3,530
$
5,042
Mortgage loans serviced for investors (in billions)
$
490
$
550
(1)
Represents
the net change in fair value of the MSR asset due to the recognition of modeled cash flows.
(2)
These amounts reflect the changes in modeled MSR fair value primarily due to observed changes in interest rates, volatility, spreads and the shape of the forward swap curve.
(3)
These amounts reflect periodic adjustments to the valuation model to reflect changes in the modeled relationship between inputs and their impact on projected cash flows as well as changes in certain
cash flow assumptions such as cost to service and ancillary income per loan.
(4)
These amounts include the impact of periodic recalibrations of the model to reflect changes in the relationship between market interest rate spreads and projected cash flows. Also included is a decrease of $127 million for 2014 due to changes in option-adjusted spread rate assumptions.
(5)
At December 31,
2014, includes $3.3 billion of U.S. and $259 million of non-U.S. consumer MSR balances.
The Corporation primarily uses an option-adjusted spread (OAS) 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. In addition to updating the valuation model for interest, discount and prepayment rates, periodic adjustments are made to recalibrate the valuation model for factors used to project cash flows. The changes to the factors capture the effect of variances related to actual versus estimated servicing proceeds.
Significant
economic assumptions in estimating the fair value of MSRs at December 31, 2014 and 2013 are presented below. The change in fair value as a result of changes in OAS rates is included within “Model and other cash flow assumption changes” in the Rollforward of Mortgage Servicing Rights table. The weighted-average life is not an input in the valuation model but is a product of both changes in market rates of interest and changes in model and other cash flow assumptions. The weighted-average life represents the average period of time that the MSRs’ cash flows are expected to be received. Absent other changes, an increase (decrease) to the weighted-average life would generally result in an increase (decrease) in the fair value of the MSRs.
Significant
Economic Assumptions
December 31
2014
2013
Fixed
Adjustable
Fixed
Adjustable
Weighted-average
OAS
4.52
%
7.61
%
3.97
%
7.61
%
Weighted-average life, in years
4.53
2.95
5.70
2.86
The
table below presents the sensitivity of the weighted-average lives and fair value of MSRs to changes in modeled assumptions. These sensitivities are hypothetical and should be used with caution. As the amounts indicate, changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of MSRs that continue to be held by the Corporation is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. The below sensitivities do not reflect any hedge strategies that may be undertaken to mitigate such risk.
The Corporation reports the results of its operations through five business segments: Consumer & Business Banking (CBB), Consumer Real Estate Services (CRES), Global Wealth & Investment Management (GWIM), Global Banking and Global Markets, with the remaining operations recorded in All Other. Effective January
1, 2015, to align the segments with how the Corporation manages the businesses in 2015, the Corporation changed its basis of segment presentation as follows: the Home Loans subsegment within CRES was moved to CBB, and Legacy Assets & Servicing became a separate segment. Also, a portion of the Business Banking business, based on the size of the client relationship, was moved from CBB to Global Banking. Prior periods will be restated to conform to the new segment alignment.
Consumer & Business Banking
CBB offers a diversified range of credit, banking and investment products and services to consumers and businesses.
CBB product offerings include traditional savings accounts, money market savings accounts, CDs and IRAs, noninterest- and interest-bearing checking accounts, investment accounts and products, as well as credit and debit cards to consumers and small businesses in the U.S. Customers and clients have access to a franchise network that stretches coast to coast through 32 states and the District of Columbia. The franchise network includes approximately 4,800 banking centers, 15,800 ATMs, nationwide call centers, and online and mobile platforms. CBB
also offers a wide range of lending-related products and services, integrated working capital management and treasury solutions to clients through a network of offices and client relationship teams along with various product partners to U.S.-based companies generally with annual sales of $1 million to $50 million.
Consumer Real Estate Services
CRES provides an extensive line of consumer real estate products and services to customers nationwide. CRES products include fixed- and adjustable-rate first-lien
mortgage loans for home purchase and refinancing needs, home equity lines of credit (HELOCs) and home equity loans. First mortgage products are generally either sold into the secondary mortgage market to investors, while retaining MSRs and the Bank of America customer relationships, or are held on the balance sheet in Home Loans or in All Other for ALM purposes. Newly originated HELOCs and home equity loans are retained on the CRES balance sheet. CRES services mortgage loans, including those loans it owns, loans owned by other business segments and All Other, and loans
owned by outside investors.
The financial results of the on-balance sheet loans are reported in the segment that owns the loans or in All Other. CRES is not impacted by the Corporation’s first mortgage production retention decisions as CRES is compensated for loans held for ALM purposes on a management accounting basis, with a corresponding offset recorded in All Other, and for servicing loans owned by other business segments and All Other.
Global Wealth & Investment Management
GWIM
provides comprehensive wealth management solutions to a broad base of clients from emerging affluent to ultra high net worth. These services include investment and brokerage services, estate and financial planning, fiduciary portfolio management, cash and liability management, and specialty asset management. GWIM also provides retirement and benefit plan services, philanthropic management and asset management to individual and institutional clients.
Global Banking
Global Banking provides a wide range of lending-related products and services, integrated working capital management and treasury solutions to clients, and underwriting and advisory services through the Corporation’s network of offices and client relationship teams.
Global Banking’s lending products and services include commercial loans, leases, commitment facilities, trade finance, real estate lending and asset-based lending. Global Banking’s treasury solutions business includes treasury management, foreign exchange and short-term investing options. Global Banking also provides investment banking products to clients such as debt and equity underwriting and distribution, and merger-related and other advisory services. The economics of most investment banking and underwriting activities are shared primarily between Global Banking and Global Markets
based on the activities performed by each segment. Global Banking clients generally include middle-market companies, commercial real estate firms, auto dealerships, not-for-profit companies, large global corporations, financial institutions and leasing clients.
Global Markets
Global Markets offers sales and trading services, including research, to institutional clients across fixed-income, credit, currency, commodity and equity businesses. Global Markets product coverage includes securities and derivative
products in both the primary and secondary markets. Global Markets provides market-making, financing, securities clearing, settlement and custody services globally to institutional investor clients in support of their investing and trading activities. Global Markets also works with 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 market-making activities in these products, Global Markets 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 ABS. In addition, the economics of most investment banking and underwriting activities are shared primarily between Global Markets and Global Banking based on the activities performed by each segment.
259 Bank of America 2014
All
Other
All Other consists of ALM activities, equity investments, the international consumer card business, liquidating businesses, residual expense allocations and other. ALM activities encompass the whole-loan residential mortgage portfolio and investment securities, interest rate and foreign currency risk management activities including the residual net interest income allocation, the impact of certain allocation methodologies and accounting hedge ineffectiveness. Additionally, certain residential mortgage loans that are managed by CRES are held in All Other. The results of certain ALM activities are allocated to the
business segments.
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. In addition, the business segments are impacted by the migration of customers and clients and their deposit, loan and brokerage balances between client-managed businesses. Subsequent to the date of migration, the associated net interest income, noninterest income and noninterest expense are recorded in the business
to which the customers or clients migrated.
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 a majority 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 most significant of these expenses include data and item processing costs and certain centralized or shared functions. Data processing costs are allocated to the segments based on equipment usage. Item processing costs are allocated to the segments based on the volume of items processed for each segment. The costs of certain other centralized or shared functions are allocated based on methodologies that reflect utilization.
Bank of America 2014 260
The
table below presents net income (loss) and the components thereto (with net interest income on an FTE basis) for 2014, 2013 and 2012, and total assets at December 31, 2014 and 2013 for each business segment, as well as All Other.
Business
Segments
At
and for the Year Ended December 31
Total Corporation (1)
Consumer & Business Banking
Consumer Real Estate Services
(Dollars in millions)
2014
2013
2012
2014
2013
2012
2014
2013
2012
Net
interest income (FTE basis)
$
40,821
$
43,124
$
41,557
$
19,685
$
20,050
$
19,853
$
2,831
$
2,890
$
2,928
Noninterest
income
44,295
46,677
42,678
10,177
9,814
9,932
2,017
4,825
5,821
Total
revenue, net of interest expense (FTE basis)
85,116
89,801
84,235
29,862
29,864
29,785
4,848
7,715
8,749
Provision
for credit losses
2,275
3,556
8,169
2,633
3,107
4,148
160
(156
)
1,442
Amortization
of intangibles
936
1,086
1,264
398
505
626
—
—
—
Other
noninterest expense
74,181
68,128
70,829
15,513
15,755
16,295
23,226
15,815
16,968
Income
(loss) before income taxes (FTE basis)
7,724
17,031
3,973
11,318
10,497
8,716
(18,538
)
(7,944
)
(9,661
)
Income
tax expense (benefit) (FTE basis)
2,891
5,600
(215
)
4,222
3,850
3,126
(5,143
)
(2,913
)
(3,360
)
Net
income (loss)
$
4,833
$
11,431
$
4,188
$
7,096
$
6,647
$
5,590
$
(13,395
)
$
(5,031
)
$
(6,301
)
Year-end
total assets
$
2,104,534
$
2,102,273
$
622,378
$
593,014
$
103,730
$
113,391
Global
Wealth & Investment Management
Global Banking
2014
2013
2012
2014
2013
2012
Net
interest income (FTE basis)
$
5,836
$
6,064
$
5,827
$
8,999
$
8,914
$
8,131
Noninterest
income
12,568
11,726
10,691
7,599
7,565
7,538
Total
revenue, net of interest expense (FTE basis)
18,404
17,790
16,518
16,598
16,479
15,669
Provision
for credit losses
14
56
266
336
1,075
(342
)
Amortization
of intangibles
367
387
410
45
62
79
Other
noninterest expense
13,280
12,646
12,312
7,636
7,489
7,538
Income
before income taxes (FTE basis)
4,743
4,701
3,530
8,581
7,853
8,394
Income
tax expense (FTE basis)
1,769
1,724
1,286
3,146
2,880
3,052
Net
income
$
2,974
$
2,977
$
2,244
$
5,435
$
4,973
$
5,342
Year-end
total assets
$
276,587
$
274,113
$
379,513
$
378,659
Global
Markets
All Other
2014
2013
2012
2014
2013
2012
Net
interest income (FTE basis)
$
3,986
$
4,224
$
3,667
$
(516
)
$
982
$
1,151
Noninterest
income
12,133
11,166
5,507
(199
)
1,581
3,189
Total
revenue, net of interest expense (FTE basis)
16,119
15,390
9,174
(715
)
2,563
4,340
Provision
for credit losses
110
140
34
(978
)
(666
)
2,621
Amortization
of intangibles
65
65
64
61
67
85
Other
noninterest expense
11,706
11,931
11,221
2,820
4,492
6,495
Income
(loss) before income taxes (FTE basis)
4,238
3,254
(2,145
)
(2,618
)
(1,330
)
(4,861
)
Income
tax expense (benefit) (FTE basis)
1,519
2,101
(161
)
(2,622
)
(2,042
)
(4,158
)
Net
income (loss)
$
2,719
$
1,153
$
(1,984
)
$
4
$
712
$
(703
)
Year-end
total assets
$
579,514
$
575,472
$
142,812
$
167,624
(1)
There
were no material intersegment revenues.
261 Bank of America 2014
The table below presents a reconciliation of the five business segments’ total revenue, net of interest expense, on an FTE basis, and net income to the Consolidated Statement of Income, and total assets to the Consolidated Balance Sheet. The adjustments presented
in the table below include consolidated income, expense and asset amounts not specifically allocated to individual business segments.
Business
Segment Reconciliations
(Dollars in millions)
2014
2013
2012
Segments’
total revenue, net of interest expense (FTE basis)
$
85,831
$
87,238
$
79,895
Adjustments:
ALM
activities
(804
)
(545
)
2,266
Equity investment income
601
2,610
1,136
Liquidating
businesses and other
(512
)
498
938
FTE basis adjustment
(869
)
(859
)
(901
)
Consolidated
revenue, net of interest expense
$
84,247
$
88,942
$
83,334
Segments’ total net income
$
4,829
$
10,719
$
4,891
Adjustments,
net of taxes:
ALM activities
(343
)
(929
)
(1,144
)
Equity
investment income
376
1,644
716
Liquidating businesses and other
(29
)
(3
)
(275
)
Consolidated
net income
$
4,833
$
11,431
$
4,188
December 31
2014
2013
Segments’
total assets
$
1,961,722
$
1,934,649
Adjustments:
ALM
activities, including securities portfolio
658,319
664,530
Equity investments
1,770
2,426
Liquidating
businesses and other
72,638
70,470
Elimination of segment asset allocations to match liabilities
(589,915
)
(569,802
)
Consolidated
total assets
$
2,104,534
$
2,102,273
Bank
of America 2014 262
NOTE 25 Parent Company Information
The following tables present the Parent Company-only financial information. This financial information is presented in accordance with bank regulatory reporting requirements and, accordingly, the information for 2012 has not been restated for the 2013 merger of Merrill Lynch & Co., Inc. into Bank of America Corporation.
Since the Corporation’s operations are highly integrated, certain asset, liability, income and expense amounts must be allocated to arrive at total assets, total revenue, net of interest expense, income before income taxes and net income (loss) by geographic area. 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.
December
31
Year Ended December 31
(Dollars in millions)
Year
Total Assets (1)
Total Revenue, Net of Interest Expense (2)
Income Before Income Taxes
Net
Income (Loss)
U.S. (3)
2014
$
1,792,719
$
72,960
$
4,643
$
3,305
2013
1,803,243
76,612
13,221
10,588
2012
72,175
1,867
4,116
Asia (4)
2014
92,005
3,605
759
473
2013
98,605
4,442
1,382
887
2012
3,478
353
282
Europe,
Middle East and Africa
2014
190,365
6,409
1,098
813
2013
169,708
6,353
1,003
(403
)
2012
6,011
323
(543
)
Latin
America and the Caribbean
2014
29,445
1,273
355
242
2013
30,717
1,535
566
359
2012
1,670
529
333
Total
Non-U.S.
2014
311,815
11,287
2,212
1,528
2013
299,030
12,330
2,951
843
2012
11,159
1,205
72
Total
Consolidated
2014
$
2,104,534
$
84,247
$
6,855
$
4,833
2013
2,102,273
88,942
16,172
11,431
2012
83,334
3,072
4,188
(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.
(4)
Amounts
include pretax gains of $753 million ($474 million net-of-tax) on the sale of common shares of CCB during 2013.
Bank of America 2014 264
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 (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, in recording, processing, summarizing and reporting information required to be disclosed by the Corporation in reports that it files or submits under the Exchange Act, within the time periods specified in the Securities and Exchange Commission’s rules and forms.
265 Bank of America 2014
Report
of Independent Registered Public Accounting Firm
To the Board of Directors of Bank of America Corporation:
We have examined, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, Bank of America Corporation’s (the “Corporation”) assertion, included under Item 9A, that the Corporation’s disclosure controls and procedures were effective as of December 31, 2014 (“Management’s Assertion”). Disclosure controls and procedures mean controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by an issuer in reports that it files or submits under
the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that information required to be disclosed by an issuer in reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. The Corporation’s management is responsible for maintaining effective disclosure controls and procedures and for Management’s Assertion of the effectiveness of its disclosure controls and procedures. Our responsibility is to express an opinion on Management’s Assertion based on our examination.
There are inherent limitations to disclosure controls and procedures. Because of these
inherent limitations, effective disclosure controls and procedures can only provide reasonable assurance of achieving the intended objectives. Disclosure controls and procedures may not prevent, or detect and correct, material misstatements, and they may not identify all information relating to the Corporation to be accumulated and communicated to the Corporation’s management to allow timely decisions regarding required disclosures. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that disclosure controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We conducted our examination in accordance with attestation standards established
by the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the examination to obtain reasonable assurance about whether effective disclosure controls and procedures were maintained in all material respects. Our examination included obtaining an understanding of the Corporation’s disclosure controls and procedures and testing and evaluating the design and operating effectiveness of the Corporation’s disclosure controls and procedures based on the assessed risk. Our examination also included performing such other procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion. Our examination was not conducted for the purpose of expressing an opinion, and accordingly we express no opinion, on the accuracy or completeness of the Corporation’s disclosures in its reports, or whether such disclosures comply with the rules and regulations adopted by
the Securities and Exchange Commission.
In our opinion, Management’s Assertion that the Corporation’s disclosure controls and procedures were effective as of December 31, 2014 is fairly stated, in all material respects, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Report of Management on Internal Control Over Financial Reporting
The Report of Management on Internal Control over Financial Reporting is set forth on page 141 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 page 142 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, 2014, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The name, age, position and office, and business experience during
the last five years of our current executive officers are:
Dean C. Athanasia (48) President, Preferred & Small Business Banking, and Co-Head - Consumer Banking since September 2014; Preferred and Small Business Banking Executive from April 2011 to September 2014; and Head of Global Banking and Merrill Edge from April 2009 to April 2011.
David C. Darnell (62) Vice Chairman, Global Wealth & Investment Management since September 2014; Co-chief Operating Officer from September 2011 to September 2014; and President, Global Commercial Banking from July 2005 to September 2011. Mr. Darnell joined the Corporation in 1979 and served in a number of senior leadership roles prior to July 2005.
Geoffrey
S. Greener (50) Chief Risk Officer since April 2014; Head of Enterprise Capital Management from April 2011 to April 2014; Head of Global Markets Portfolio Management, Chair of Global Markets Capital Committee and Global Markets Regulatory Reform Executive Committee from April 2010 to March 2011; and Head of Structured Portfolios Group from March 2009 to April 2010.
Terry Laughlin (60) President of Strategic Initiatives since April 2014; Chief Risk Officer from August 2011 to April 2014; Legacy Asset Servicing Executive from February 2011 to August 2011; Credit Loss Mitigation Strategies & Secondary Markets Executive from August 2010 to February 2011; and Chief Executive Officer and President of One West Bank, FSB from March 2009 to July 2010.
Gary
G. Lynch (64) Global General Counsel since September 2012; Head of Compliance and Regulatory Relations from September 2012 to February 2015; Global Chief of Legal, Compliance and Regulatory Relations from July 2011 to September 2012; Vice Chairman of Morgan Stanley from May 2009 to July 2011; and Chief Legal Officer of Morgan Stanley from October 2005 to September 2010.
Thomas K. Montag (58) Chief Operating Officer since September 2014; Co-chief Operating Officer from September 2011 to September 2014; and President, Global Banking and Markets from August 2009 to September
2011.
Brian T. Moynihan (55) 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 (56) President, Retail Banking, and Co-Head – Consumer Banking since September 2014; Retail Banking Executive from April 2014 to September 2014; Retail Strategy, Operations & Digital Banking Executive from September 2012 to April 2014; Global Corporate Strategy, Planning and Development Executive from November 2011 to September 2012; West Division Executive for U.S. Trust from
February 2010 to November 2011; and GCIB Business Transformation Executive from 2008 to February 2010.
Bruce R. Thompson (50) Chief Financial Officer since June 2011; and Chief Risk Officer from January 2010 to June 2011.
Information included under the following captions in the Corporation’s proxy statement relating to its 2015 annual meeting of stockholders, scheduled to be held on May 6, 2015 (the 2015 Proxy Statement), is incorporated herein by reference:
“Corporate Governance – Stock Ownership of Directors, Executive Officers and Certain Beneficial Owners.”
The table below presents information on equity compensation plans at December 31, 2014:
Plan
Category (1, 2)
Number of Shares to be Issued Under Outstanding Options
and Rights
Weighted-average Exercise Price of Outstanding
Options (3)
Number of Shares Remaining for Future Issuance Under Equity Compensation Plans (4)
Plans approved by shareholders (5)
103,496,664
$
47.66
325,450,174
Plans
not approved by shareholders
—
—
—
Total
103,496,664
$
47.66
325,450,174
(1)
This
table does not include outstanding options to purchase 3,573,160 shares of the Corporation’s common stock that were assumed by the Corporation in connection with prior acquisitions, under whose plans the options were originally granted. The weighted-average exercise price of these assumed options was $82.50 at December 31, 2014. Also, at December 31, 2014, there were 96,699 vested restricted stock units associated with these plans.
(2)
This table does not include outstanding options to purchase 5,328,026 shares of the Corporation’s
common stock that were assumed by the Corporation in connection with the Merrill Lynch acquisition, which were originally issued under certain Merrill Lynch plans. The weighted-average exercise price of these assumed options was $45.82 at December 31, 2014. Also, at December 31, 2014, there were 5,481,907 outstanding restricted stock units and 1,073,175 vested restricted stock units and stock option gain deferrals associated with such plans. These Merrill Lynch plans were frozen at the time of the acquisition and no additional awards may be granted under these plans. However, as previously approved by the Corporation’s shareholders, if any of the outstanding awards under these frozen plans subsequently are canceled, forfeited or settled in cash, the shares relating to such awards
thereafter will be available for future awards issued under the Corporation’s Key Associate Stock Plan (KASP).
(3)
Does not reflect restricted stock units included in the first column, which do not have an exercise price.
(4)
Plans approved by shareholders include 325,123,558 shares of common stock available for future issuance under the KASP (including 29,795,525 shares originally subject to awards outstanding under frozen Merrill Lynch plans at the time of the acquisition
which subsequently have been canceled, forfeited or settled in cash and become available for issuance under the KASP, as described in footnote (2) above) and 326,616 shares of common stock which are available for future issuance under the Corporation’s Directors’ Stock Plan.
(5)
Includes 24,310,796 outstanding restricted stock units.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Consolidated Statement of Changes
in Shareholders’ Equity for the years ended December 31, 2014, 2013 and 2012
Consolidated Statement of Cash Flows for the years ended December 31, 2014, 2013 and 2012
Notes to Consolidated Financial Statements
(2) Schedules:
None
(3) The exhibits filed as part of this report and exhibits incorporated herein by reference
to other documents are listed in the Index to Exhibits to this Annual Report on Form 10-K (pages E-1 through E-4).
With the exception of the information expressly incorporated herein by reference, the 2015 Proxy Statement shall not be deemed filed as part of this Annual Report on Form 10-K.
Bank of America 2014 270
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.
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.
Amended and Restated Bylaws of the Corporation, as in effect on the date hereof, incorporated by reference to Exhibit 3.1 of the Corporation’s Current Report on Form 8-K (File No. 1-6523)
filed on October 1, 2014.
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, incorporated by reference to Exhibit 4.2 of registrant’s Registration Statement on Form S-3 (Registration No. 333-07229) filed on June 28, 1996.
(c)
Agreement of Appointment and Acceptance dated as of December 29, 2006 between registrant and The Bank of New York Trust Company, N.A., incorporated by reference to Exhibit 4(aaa) of registrant’s 2006
Annual Report on Form 10-K (File No. 1-6523) filed on February 28, 2007 (the “2006 10-K”).
Form
of Global Senior Medium-Term Note, Series L, incorporated by reference to Exhibit 4.13 of registrant’s Registration Statement on Form S-3 (Registration No. 333-180488) filed on March 30, 2012.
(f)
Form of Master Global Senior Medium-Term Note, Series L, incorporated by reference to Exhibit 4.14 of registrant’s Registration Statement on Form S-3 (Registration No. 333-180488) filed on March 30,
2012.
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.
• Form of Restricted Stock Award Agreement, incorporated by reference to Exhibit 10(h) of registrant’s 2004 Annual Report on Form 10-K (File No. 1-6523) filed on March 1, 2005 (the “2004 10-K”);*
• Form of Directors Stock Plan Restricted Stock Award Agreement for Non-Employee
Chairman, incorporated by reference to Exhibit 10(b) of registrant’s Quarterly Report on Form 10-Q (File No. 1-6523) for the quarterly period ended September 30, 2009 filed on November 6, 2009;*
• Form of Directors’ Stock Plan Restricted Stock Award Agreement for Non-U.S. Director, incorporated by reference to Exhibit 10(a) of registrant’s Quarterly Report on Form 10-Q (File No. 1-6523) for the quarterly period ended March 31, 2011 filed on May
5, 2011;* and
• Form of Directors’ Stock Plan Conditional Restricted Stock Award Agreement for Non-U.S. Director, incorporated by reference to Exhibit 10(a) of registrant’s Quarterly Report on Form 10-Q (File No. 1-6523) for the quarterly period ended June 30, 2011 filed on August 4, 2011.*
E-1 Bank of America 2014
Exhibit
No.
Description
(g)
Bank of America Corporation Key Associate Stock Plan, as amended and restated effective April 28, 2010, incorporated by reference to Exhibit 10.2 of registrant’s Current Report on Form 8-K (File No. 1-6523) filed on May 3, 2010* and the following forms of award agreement under the plan:
• Form
of Stock Option Award Agreement (February 2007 grant), incorporated by reference to Exhibit 10(i) of registrant’s 2007 Annual Report on Form 10-K (File No. 1-6523) filed on February 28, 2008;*
• Form of Stock Option Award Agreement for non-executives (February 2008 grant), incorporated by reference to Exhibit 10(i) of the 2009 10-K;*
• Form of Restricted Stock Units Award Agreement for executives (February 2010 grant), incorporated by reference to Exhibit 10(i) of the 2010 10-K;*
• Form of Performance Contingent Restricted Stock Units Award Agreement,
incorporated by reference to Exhibit 10.3 of registrant’s Current Report on Form 8-K (File No. 1-6523) filed on January 31, 2011;*
• Form of Performance Contingent Restricted Stock Units Award Agreement (February 2011 grant), incorporated by reference to Exhibit 10(i) of the 2010 10-K;*
• Form of Restricted Stock Units Award Agreement for non-executives (February 2011 grant), incorporated by reference to Exhibit 10(i) of the 2010 10-K;*
• Form of Restricted Stock Units Award Agreement (February 2012 grant), incorporated
by reference to Exhibit 10(i) of registrant’s 2011 Annual Report on Form 10-K (File No. 1-6523) filed on February 25, 2012 (the “2011 10-K”);*
• Form of Performance Contingent Restricted Stock Units Award Agreement (February 2012 grant), incorporated by reference to Exhibit 10(i) of the 2011 10-K;*
• Form of Restricted Stock Units Award Agreement (February 2013 and subsequent grants), including grants to named executive officers, incorporated by reference to Exhibit 10(a) of registrant’s Quarterly Report on Form 10-Q (File No. 1-6523) for the quarterly period ended March 31, 2013 filed on May 5, 2013 (the “1Q 2013 10-Q”);* and
• Form of Performance Restricted Stock Units Award Agreement (February 2013 and subsequent grants), including
grants to named executive officers incorporated by reference to Exhibit 10(b) of the 1Q 2013 10-Q.* and
• Form of Performance Restricted Stock Units Award Agreement (February 2014 and subsequent grants), including grants to named executive officers, incorporated by reference to Exhibit 10(a) of registrant's Quarterly Report on Form 10-Q (File No. 1-6523) for the quarterly period ended March 31, 2014 filed on May 1, 2014.*
(h)
Amendment to
various plans in connection with FleetBoston Financial Corporation merger, incorporated by reference to Exhibit 10(v) of registrant’s 2003 Annual Report on Form 10-K (File No. 1-6523) filed on March 1, 2004.*
Trust Agreement for the FleetBoston Executive Deferred Compensation Plans No. 1 and 2, incorporated by reference to Exhibit 10(x) of the 2004 10-K.*
(n)
Trust Agreement
for the FleetBoston Executive Supplemental Plan, incorporated by reference to Exhibit 10(y) of the 2004 10-K.*
(o)
Trust Agreement for the FleetBoston Retirement Income Assurance Plan and the FleetBoston Supplemental Executive Retirement Plan, incorporated by reference to Exhibit 10(z) of the 2004 10-K.*
(p)
FleetBoston Directors Deferred Compensation and Stock Unit Plan, as amended by an amendment thereto effective as of July 1,
2000, a Second Amendment thereto effective as of January 1, 2003, a Third Amendment thereto dated April 14, 2003, and a Fourth Amendment thereto effective January 1, 2004, incorporated by reference to Exhibit 10(aa) of the 2004 10-K.*
(q)
BankBoston Corporation and its Subsidiaries Deferred Compensation Plan, as amended by a First Amendment thereto, a Second Amendment thereto, a Third Amendment thereto, an Instrument thereto (providing for the cessation of accruals effective December 31,
2000) and an Amendment thereto dated December 24, 2001, incorporated by reference to Exhibit 10(cc) of the 2004 10-K.*
(r)
BankBoston, N.A. Bonus Supplemental Employee Retirement Plan, as amended by a First Amendment thereto, a Second Amendment thereto, a Third Amendment thereto and a Fourth Amendment thereto, incorporated by reference to Exhibit 10(dd) of the 2004 10-K.*
(s)
Description of BankBoston Supplemental Life
Insurance Plan, incorporated by reference to Exhibit 10(ee) of the 2004 10-K.*
(t)
BankBoston, N.A. Excess Benefit Supplemental Employee Retirement Plan, as amended by a First Amendment thereto, a Second Amendment thereto, a Third Amendment thereto (assumed by FleetBoston on October 1, 1999) and an Instrument thereto, incorporated by reference to Exhibit 10(ff) of the 2004 10-K.*
(u)
Description of BankBoston Supplemental Long-Term
Disability Plan, incorporated by reference to Exhibit 10(gg) of the 2004 10-K.*
(v)
BankBoston Director Stock Award Plan, incorporated by reference to Exhibit 10(hh) of the 2004 10-K.*
(w)
BankBoston Corporation Directors’ Deferred Compensation Plan, as amended by a First Amendment thereto and a Second Amendment thereto, incorporated by reference to Exhibit 10(ii) of the 2004 10-K.*
(x)
BankBoston,
N.A. Directors’ Deferred Compensation Plan, as amended by a First Amendment thereto and a Second Amendment thereto, incorporated by reference to Exhibit 10(jj) of the 2004 10-K.*
(y)
BankBoston 1997 Stock Option Plan for Non-Employee Directors, as amended by an amendment thereto dated as of October 16, 2001, incorporated by reference to Exhibit 10(kk) of the 2004 10-K.*
(z)
Description of BankBoston Director Retirement Benefits
Exchange Program, incorporated by reference to Exhibit 10(ll) of the 2004 10-K.*
Global amendment to definition of “change in control” or “change of control,” together with a list of plans affected by such amendment, incorporated by reference to Exhibit 10(oo) of the 2004 10-K.*
Forms of Stock Unit Agreements for salary stock units awarded to certain executive officers in connection with registrant’s participation in the U.S. Department of Treasury’s
Troubled Asset Relief Program, incorporated by reference to Exhibit 10(uu) of the 2009 10-K.*
(ii)
Bank of America Corporation Equity Incentive Plan amended and restated effective as of January 1, 2008, incorporated by reference to Exhibit 10(zz) of the 2009 10-K.*
(jj)
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, incorporated by reference to Exhibit 10(aaa) of the 2009 10-K.*
(kk)
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, incorporated by reference to Exhibit 10(bbb) of the 2009 10-K.*
Settlement Agreement dated as of June 28, 2011, among The Bank of New York Mellon, registrant, BAC Home Loans Servicing, LP, Countrywide Financial Corporation, and
Countrywide Home Loans, Inc., incorporated by reference to Exhibit 99.2 of registrant’s Current Report on Form 8-K (File No. 1-6523) filed on June 29, 2011.
(rr)
Institutional Investor Agreement dated as of June 28, 2011, among The Bank of New York Mellon, registrant, BAC Home Loans Servicing, LP, Countrywide Financial Corporation, Countrywide Home Loans, Inc. and the other parties thereto, incorporated by reference to Exhibit 99.3 of registrant’s Current Report on Form 8-K (File No.
1-6523) filed on June 29, 2011.
(ss)
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), incorporated by reference to Exhibit 1.1 of registrant’s Current Report on Form 8-K (File No. 1-6523) filed on August
25, 2011.
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
(b)
Certification
of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
32(a)
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, filed herewith.
(b)
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, filed
herewith.
Exhibit is a management contract or a compensatory plan or arrangement.
**
The registrant has received confidential treatment with respect
to portions of this exhibit. Those portions have been omitted from this exhibit and filed separately with the U.S. Securities and Exchange Commission.
Bank of America 2014 E-4
Dates Referenced Herein and Documents Incorporated by Reference